<PAGE>
As filed with the Securities and Exchange Commission on July 7, 1999
Registration No. 333-79501
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MISSION CRITICAL SOFTWARE, INC.
(Exact name of Registrant as specified in its charter)
----------------
Delaware 7372 76-0509513
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
Mission Critical Software, Inc.
720 North Post Oak Road, Suite 505
Houston, Texas 77024
(713) 548-1700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Stephen E. Odom
Chief Financial Officer
Mission Critical Software, Inc.
720 North Post Oak Road, Suite 505
Houston, Texas 77024
(713) 548-1700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Robert P. Latta John S. Watson
Paul R. Tobias Brian M. Moss
Julia Reigel Vinson & Elkins L.L.P.
Matthew J. Esber First City Tower
Wilson Sonsini Goodrich & Rosati Suite 2300
Professional Corporation 1001 Fannin Street
8911 Capital of Texas Highway North Houston, Texas 77022-6760
Suite 3110 (713) 758-2222
Austin, Texas 78759
(512) 338-5400
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Aggregate
Title of Each Class of Offering Amount of
Securities to be Registered Price(1) Registration Fee(2)
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<S> <C> <C>
Common stock, $0.001 par value............ $60,375,000 $16,785
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) promulgated under the Securities
Act of 1933, as amended.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities, and it is +
+not soliciting an offer to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 7, 1999
PROSPECTUS
3,500,000 Shares
[LOGO OF MISSION CRITICAL SOFTWARE APPEARS HERE]
Common Stock
This is an initial public offering of common stock by Mission Critical
Software, Inc. Of the 3,500,000 shares of common stock being sold in this
offering, 2,500,000 shares are being sold by Mission Critical Software and
1,000,000 shares are being sold by the selling stockholders. Mission Critical
Software will not receive any of the proceeds from the sale of shares by the
selling stockholders. We estimate that the initial public offering price will
be between $14 and $16 per share.
------------
Prior to this offering, there has been no public market for our common stock.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol MCSW.
------------
<TABLE>
<CAPTION>
Per Share Total
----------- -----------
<S> <C> <C>
Initial public offering price......................... $ $
Underwriting discounts and commissions................ $ $
Proceeds to Mission Critical Software, before
expenses............................................. $ $
Proceeds to selling stockholders, before expenses..... $ $
</TABLE>
Mission Critical Software has granted the underwriters an option for a period
of 30 days to purchase up to 525,000 additional shares of common stock.
------------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 8.
------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
CHARLES SCHWAB & CO., INC.
, 1999.
<PAGE>
[Graphical depiction of the extended enterprise. Textual summary description of
our eManagement software solutions and our strategy.]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 40
Management............................................................... 54
Certain Transactions..................................................... 65
Principal and Selling Stockholders....................................... 69
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 76
Underwriting............................................................. 78
Legal Matters............................................................ 80
Experts.................................................................. 80
Where You Can Find Additional Information................................ 80
Index to Financial Statements............................................ F-1
</TABLE>
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3
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information, our
financial statements and the notes thereto and the risks of investing in our
common stock discussed under "Risk Factors" before making an investment
decision. Except as otherwise noted, all information in this prospectus assumes
the conversion of all outstanding shares of preferred stock and no exercise of
the underwriters' over-allotment option.
Mission Critical Software, Inc.
We are a leading provider of systems administration and operations management
software products for corporate and Internet-based Windows NT networks. Our
OnePoint product suite is designed to improve the reliability, performance and
security of even the most complex computing environments by simplifying and
automating key systems management functions. Our products can be deployed
quickly, are based on an open and extensible architecture and are easy to use.
In today's corporate networks, organizations are installing Windows NT
servers in greater quantities and are using these servers to address a
broadening scope of business needs. For example, Windows NT servers are
increasingly being used to run web sites and web server farms--Internet-based
networks composed of hundreds of thousands of linked Windows NT servers--and to
support electronic commerce and application hosting initiatives. In a survey of
Fortune 1000 information technology managers, Forrester Research found that, on
average, those managers expected 60% of their servers to run on Windows NT by
the year 2000.
The growing complexity of corporate and Internet-based Windows NT networks
has placed increasing pressure on systems administrators to maintain reliable
network operations. To improve both the efficiency and effectiveness of such
networks, businesses are increasingly using systems management software
solutions. International Data Corporation projects that the market for software
products that manage 32-bit Windows operating systems will grow from $1.8
billion in 1998 to $8.1 billion by 2003.
Our OnePoint product suite is designed to facilitate eManagement--the
centralized management of critical systems infrastructure and applications for
the extended enterprise. Customers can use our products to monitor, manage,
administer and secure a wide range of resources in the Windows NT environment
including web server farms, electronic commerce and corporate servers,
workstations and applications. OnePoint enables companies to automate labor-
intensive tasks, such as security monitoring and administration, and to
minimize the need for customization by incorporating widely accepted business
procedures into our software. OnePoint is also designed to ease the transition
from other operating systems, such as Novell Netware, to Windows NT by
providing systems administrators with the ability to test implementations and
convert systems incrementally.
Our primary strategic objective is to maintain and strengthen our position as
a leading provider of systems management software for corporate and Internet-
based Windows NT networks. Our product strategy focuses on expanding our
OnePoint suite and facilitating migration to and management of the Windows 2000
operating system. In addition, we intend to expand our operations management
capabilities and to increase our product's ability to administer and monitor
other operating systems. Our sales strategy focuses on selling new and existing
products to existing customers, large corporations and international
organizations. We intend to build on these selling efforts by targeting mid-
sized companies as well as e-businesses, Internet service providers, commerce
service providers and other companies for which Windows NT systems management
products are a growing operational necessity. To support these strategic
efforts, we intend to leverage and expand our extensive, existing Microsoft
relationship that includes the sharing of technology, joint marketing and sales
efforts. Microsoft also uses our OnePoint Event Manager product for its global
Internet and corporate datacenters. We believe we are well positioned to
anticipate Microsoft's evolving product strategy and to capitalize on joint
sales and marketing programs.
4
<PAGE>
As of March 31, 1999, our products had been installed by over 600 customers,
including more than 40 of the 1999 Fortune 100 companies and some of the
largest Internet data centers in the world. We market and sell our products
worldwide through a network of sales offices and distribution partners. Our
products have been adopted in a wide variety of industries, including banking
and finance, energy, healthcare, insurance and pharmaceuticals. Representative
customers include Dell Computer, Dow Chemical, DuPont, Hoffman-LaRoche, Johnson
& Johnson, LM Ericsson AB, Lockheed Martin, Microsoft, Nortel and USAA.
Mission Critical Software was incorporated in Delaware in July 1996, and we
began operations in September 1996. Since our inception in 1996, we have
incurred substantial costs to develop our technology and products, to recruit
and train personnel for our engineering, sales and marketing and technical
support departments, and to establish an administrative organization. As a
result, we incurred net losses in fiscal 1997, fiscal 1998 and the nine months
ended March 31, 1999. As of March 31, 1999, we had an accumulated deficit of
$8.8 million.
We maintain a web site at www.missioncritical.com. Information contained on
our web site does not constitute part of this prospectus. Our principal
executive offices are located at 720 North Post Oak Road, Suite 505, Houston,
Texas 77024, and our telephone number is (713) 548-1700.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by Mission Critical
Software..................................... 2,500,000 shares
Common Stock offered by the selling
stockholders................................. 1,000,000 shares
Common Stock to be outstanding after this
offering..................................... 12,414,270 shares
Use of proceeds............................... For working capital and general
corporate purposes.
Nasdaq National Market symbol................. MCSW (application pending)
</TABLE>
The number of shares of common stock outstanding after this offering is based
on 9,914,270 shares outstanding as of March 31, 1999. This number excludes
3,935,084 shares of common stock issuable upon exercise of stock options and
433,333 shares of common stock issuable upon exercise of warrants outstanding
as of March 31, 1999 with weighted average exercise prices of $1.99 and $1.38
respectively. This number also excludes 4,355,648 shares of common stock
available for future issuance under our 1997 Stock Option Plan, 250,000 shares
reserved for issuance under our 1999 Director Option Plan and 600,000 shares
reserved for sale under our 1999 Employee Stock Purchase Plan.
6
<PAGE>
Summary Financial Information
The following table sets forth summary financial data for our company. Our
total operating loss reflects amortization of stock option compensation of
$236,000 and abandoned lease costs of $1.0 million for the nine months ended
March 31, 1999 and a write-off of acquired in-process research and development
of $1.5 million in the period ended June 30, 1997.
The information under "As Adjusted" reflects the application of the net
proceeds from the sale by us of 2,500,000 shares of common stock in this
offering at an assumed initial public offering price of $15 per share and the
deduction of the underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
July 19, 1996 Nine Months
(inception) Ended March 31,
to June 30, Year Ended ----------------
1997 June 30, 1998 1998 1999
------------- ------------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................ $ 4,267 $14,376 $ 9,234 $16,901
Operating loss................. (3,500) (2,379) (2,396) (428)
Net loss....................... $(3,323) $(2,316) $(2,334) $ (222)
Basic and diluted net loss per
share......................... $ (1.44) $ (2.47) $ (2.37) $ (0.40)
Pro forma basic and diluted net
loss per share................ $ (0.53) $ (0.02)
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................ $ 9,458 $43,458
Working capital.......................................... 3,542 37,542
Total assets............................................. 15,056 49,056
Long-term debt, less current maturities.................. 148 148
Redeemable convertible preferred stock................... 13,179 --
Total stockholders' equity (deficit)..................... (8,265) 38,914
</TABLE>
7
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider the risks described below carefully and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our common stock.
Our business and prospects are difficult to evaluate because we have a limited
operating history
Our company was founded in July 1996. We have a limited operating history.
An investor in our common stock must consider the risks and difficulties we
may encounter as an early stage company in a new and rapidly evolving market.
These risks and difficulties include our:
. ability to develop competitive products;
. need to expand our sales and support organizations;
. reliance on our strategic relationship with Microsoft;
. competition;
. need to manage changing operations;
. dependence upon key personnel; and
. general economic conditions.
We cannot be certain that our business strategy will be successful or that
we will successfully manage these risks. If we fail to address adequately any
of these risks or difficulties, our business would likely suffer.
We have a history of losses and may experience losses in the future
Since our inception, we have incurred significant net losses and as of March
31, 1999 had an accumulated deficit of $8.8 million. We expect to continue to
incur significant sales and marketing, product development and administrative
expenses. As a result, we will need to generate significant revenue to
maintain profitability. We cannot be certain that we will achieve, sustain or
increase profitability in the future.
We anticipate that our expenses will increase substantially in the
foreseeable future as we:
. increase our direct sales and marketing activities, by expanding our
North American and international direct sales forces and extending our
telesales efforts;
. develop our technology, expand our OnePoint product suite and create and
market products that operate with the commercial release version of
Windows 2000;
. expand our indirect distribution channels; and
. pursue strategic relationships and acquisitions.
Any failure to significantly increase our revenue as we implement our
product and distribution strategies would materially adversely affect our
business, operating results and financial condition.
We may not be able to sustain our current revenue growth rates
Although our revenue has grown rapidly in recent years, we do not believe
that we will maintain this rate of revenue growth because of the difficulty of
maintaining high percentage increases as the base of revenue increases. In
addition, growing competition, the incremental manner in which customers
convert their networks to Windows NT and our inexperience in selling our
products to small organizations could also
8
<PAGE>
affect our revenue growth. Our efforts to expand our software product suites,
sales and marketing activities, direct and indirect distribution channels and
maintenance and support functions and to pursue strategic relationships or
acquisitions may not succeed or may prove more expensive than we currently
anticipate. As a result, we cannot predict our future operating results with
any degree of certainty and our quarterly operating results may vary
significantly from quarter to quarter.
Our ability to accurately forecast our quarterly sales is limited and our costs
are relatively fixed in the short-term, so our quarterly operating results
and our stock price may fluctuate
Our ability to accurately forecast our quarterly sales is limited, which
makes it difficult to predict the quarterly revenue that we will recognize. As
a result, we believe that quarter to quarter comparisons of our financial
results are not necessarily meaningful, and investors should not rely on them
as an indication of our future performance.
Historically, a majority of our revenue has been attributable to the licenses
of software products. Changes in the mix of our revenue, including the mix
between higher margin software products and somewhat lower margin maintenance,
could adversely affect our operating results for future quarters.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. If we have a shortfall in revenue in
relation to our expenses, we may be unable to reduce our expenses quickly
enough to avoid lower quarterly operating results. Many of our costs are fixed
in the short-term. For example, we have signed a five year lease for 70,000
square feet of new office space in Houston, Texas that will begin in August
1999. We do not know whether our business will grow rapidly enough to absorb
the costs of this facility. In either case, lower quarterly results could
adversely affect the market price of our common stock.
We have relied and expect to continue to rely on sales of licenses for our
OnePoint Administrator products for our revenue and a decline in sales of
this product could cause our revenues to fall
Historically, we have derived the substantial majority of our license revenue
from the sale of our OnePoint Administrator products. During the period from
inception to June 30, 1997, the fiscal year ended June 30, 1998 and the nine
months ended March 31, 1999, sales of OnePoint Administrator products accounted
for approximately 100%, 88% and 83% of our license revenue, respectively. We
expect that this product will continue to account for a large portion of our
license revenue for the foreseeable future. Our future operating results depend
on the continued market acceptance of our OnePoint Administrator products and
future enhancements to our OnePoint Administrator products. Any factors
adversely affecting the pricing of, demand for or market acceptance of our
OnePoint Administrator products, including competition or technological change,
could cause our revenue to decline and our business to suffer.
We introduced a new version of our OnePoint Event Manager product in June
1998. To date, this product has accounted for only a limited portion of our
revenue. However, our future growth and profitability will depend on our
ability to increase sales of our OnePoint Event Manager product.
Our revenue could decline substantially if our existing customers do not
continue to purchase new licenses from us
We rely on sales of additional licenses for our products to our existing
customers. In the nine months ended March 31, 1999, additional sales to our
existing customers represented approximately 50% of our license revenue. If we
fail to sell additional licenses for our products and maintenance to our
existing customers, we would experience a material decline in total revenue.
Even if we are successful in selling our
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<PAGE>
products to new customers, the rate of growth of our revenue could be
materially and adversely affected if our existing customers do not continue to
purchase a substantial number of additional product licenses from us.
Risks Related to Microsoft
Our business is dependent on the continued adoption of Windows NT and Windows
2000 to run corporate and Internet-based computer networks and a decrease in
their rates of adoption could cause our revenues to decline
For the foreseeable future, we expect that substantially all of our revenue
to continue to come from sales of our Windows NT systems management products.
As a result, we depend on the growing use of Windows NT for corporate and
Internet-based networks. If the role of Windows NT does not increase as we
anticipate, or if it in any way decreases, our business would suffer. In
addition, if users do not accept Windows 2000, or if there is a wide
acceptance of other existing or new operating systems that provide enhanced
capabilities, our business would likely suffer.
Windows 2000 may not gain market acceptance if its launch is delayed beyond
its expected release date. In addition, users of previous versions of Windows
NT may decide to migrate to another operating system due to the delays or to
improved functionality of some other vendor's operating system. Windows 2000
may address more of the needs of our customers for systems administration and
operations management, in which case our customers would not need to purchase
our products to perform those functions. In addition, we cannot be sure that
we will be able to successfully redevelop our products to work with Windows
2000 at the same or better levels of functionality than our products work with
the current version of Windows NT. Even if we successfully develop products
for Windows 2000, our customers may not choose our products for technical,
cost, support or other reasons. If users of large corporate and Internet-based
Windows 2000 networks do not widely adopt and purchase our products, our
revenues and business will suffer.
If our introduction of new systems management software products for Windows
2000 is not successful, our revenues could decline
We are currently expanding our OnePoint product suite to support the
commercial release version of the Windows 2000 operating system, which has
been announced by Microsoft but is not currently available. Our OnePoint
product suite currently supports the current pre-release version of Windows
2000 Server. If we do not successfully develop, market and sell products that
support the commercial release version of Windows 2000, our business and
future operating results would suffer. In addition, we must introduce new
versions of our products to support the commercial release version of Windows
2000 shortly after its release by Microsoft. If we fail to introduce our new
products within a short time after the commercial release of Windows 2000, the
delay may cause customers to forego purchases of our products and purchase
those of our competitors.
We depend on our marketing, product development and sales relationship with
Microsoft, and if this relationship suffers, our customers would likely
purchase other vendors' systems management software products
We believe that our success in penetrating our target markets depends in
part on our ability to maintain our strategic marketing, product development
and sales relationship with Microsoft. We believe our relationship with
Microsoft is important in order to validate our technology, facilitate broad
market acceptance of our products and enhance our sales, marketing and
distribution capabilities. If we are unable to maintain and enhance our
existing relationship with Microsoft or develop a similar relationship with
another major operating system vendor, we may have difficulty selling our
products.
We rely heavily on our relationship with Microsoft and attempt to coordinate
our product offerings with the future releases of Microsoft's operating
systems, particularly the commercial release version of Windows
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2000. Microsoft may not notify us of feature enhancements prior to new releases
of its operating systems in the future. In that case, we may not be able to
introduce products on a timely basis that capitalize on new operating system
releases and feature enhancements.
In 1998 and June 1999, we entered into a series of agreements with Microsoft
Corporation. Microsoft selected our technology to provide for the migration
tools for Windows 2000, and we also will work with Microsoft to provide
coordinated technical support to Microsoft's enterprise customers. Federal and
state regulatory authorities have recently initiated broad antitrust actions
against Microsoft. We cannot predict to what extent these antitrust actions may
affect our relationship with Microsoft, although these actions may narrow the
scope of Windows NT sites and applications where Microsoft may incorporate our
Windows 2000 products.
Risks Related to Our Sales Efforts
If we experience any increase in the length of our sales cycle, our quarterly
operating results could become more unpredictable and our stock price may
decline as a result
To date, our customers have taken an average of three months to evaluate our
products. Our customers tend to deploy our products by purchasing licenses for
one product at a time and for use with a small number of servers and clients.
We anticipate that the sales cycle for other OnePoint products will be similar
to the sales cycle we previously experienced for OnePoint Administrator
products and OnePoint Event Manager. If customers begin to evaluate our
products for an enterprise-wide initial deployment, our sales cycle could
lengthen and our license revenue and operating results might vary significantly
from period to period. In addition, enterprise-wide initial deployments could
also erode per-user license fees even though our average sales price might
increase.
If we are unable to expand our sales operations, we may not be able to expand
our business
In order to increase market awareness and sales of our products, we will need
to substantially expand our direct and indirect sales operations, both
domestically and internationally. To date, we have relied primarily on our
direct sales force to sell our products. Our products and maintenance require a
sophisticated sales effort targeted at several people within our prospective
customers' information technology departments. We have recently expanded our
direct sales force and plan to hire additional sales personnel. Competition for
qualified sales people is intense, and we might not be able to hire the kind
and number of sales people we are targeting.
We may not be able to expand our business if we do not successfully utilize
systems integrators or service providers in our selling efforts
To date, we have not yet significantly utilized systems integrators or
service providers in our selling efforts for our software products. We intend
to explore relationships with systems integrators but have little or no
experience negotiating agreements with systems integrators and service
providers, engaging in joint selling activities with systems integrators and
service providers or providing support to their end-user customers. Our
business and sales may suffer if we fail to enter into agreements with systems
integrators and/or service providers or if we fail to successfully and
profitably perform our obligations under those agreements. In addition, our
revenue could decline if selling our products through systems integrators and
service providers results in lower margins per license and those sales replace
a substantial portion of our direct sales.
If we are unable to expand our customer service and support organization, we
may not be able to retain our customers and attract new customers
The complexity of distributed computing systems requires highly trained
customer service and support personnel to assist the customer with installation
and deployment. We currently have a small
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customer service and support organization and will need to increase our staff
to support new customers and the expanding needs of our existing customers.
Hiring customer service and support personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the Windows NT and Windows 2000
operating environments.
Our expansion to international markets could reduce our operating margins due
to the higher costs of stationing employees abroad or commissions paid to
foreign distributors to make it profitable for them to sell our products
We must expand the number of distributors who sell our products or our
direct international sales presence to increase our international sales. We
may experience reduced operating expenses if we incur the higher costs of
stationing employees overseas without realizing corresponding improvements in
international revenues. In addition, we cannot be certain that we will be able
to attract distributors that market our products effectively or provide timely
and cost-effective customer support and service. We cannot be certain that any
distributor will continue to represent our products or that our distributors
will devote a sufficient amount of effort and resources to selling our
products in their territories. We may also experience lower operating margins
due to the different cost structure of our direct sales model versus an
indirect commission or discount based model if international revenue increases
as a percentage of our total revenue.
To date, we have entered into agreements with only a small number of
distribution partners and have only recently begun to employ direct sales
staff outside North America. We are expanding our indirect distribution
channels outside of North America. If we are unable to generate increased
international sales through an indirect distribution model, we will incur
higher personnel costs by hiring direct sales staff. We may not realize
corresponding increases in revenue from a direct international sales staff,
and our operating margins may decline. If we elect to establish more direct
sales staff outside the United States, varying employment policies and
regulations among countries may reduce our flexibility in managing headcount
and, in turn, managing personnel-related expenses.
Even if we are able to successfully expand our direct and indirect
international selling efforts, we cannot be certain that we will be able to
create or increase international market demand for our products. We also
expect that if we increase our sales in Europe substantially, our operating
results may be lower in our quarters ending September 30 due to the summer
slowdown in Europe.
Our business and prospects are difficult to evaluate, because we may close a
large number of transactions in a given quarter with the effect of reducing
selling opportunities in the following quarter or because there are fewer
selling opportunities in the summer months
In the quarter ended September 30, 1998, our revenue and operating results
were lower relative to the prior quarter. We believe this decline resulted
from the substantial number of transactions our sales staff closed in the
prior quarter, our fourth fiscal quarter, and because there were fewer selling
opportunities in the summer months. If this seasonality were to continue in
the future, our quarter-to-quarter operating results could be unpredictably
affected.
Our revenues may suffer if customers demand extensive consulting or other
support services with our software products because we do not have a
consulting staff as our products are designed to require little external
support or consulting to be installed and used successfully
Our products are designed to require little or no support from us to be
implemented quickly and effectively by our customers. Many of our competitors
offer extensive consulting services in addition to software products. If we
introduced a product that required extensive consulting services for
installation and use or if our customers wanted to purchase from a single
vendor a menu of items that includes extensive consulting services, we would
be required to change our business model. We would be required to hire and
train consultants, outsource the consulting services or enter into a joint
venture with another company that
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could provide those services. If these events were to occur, our revenues
would likely suffer because customers would choose another vendor or we would
incur the added expense of hiring and retaining consulting personnel.
Risks Related to Competition Within Our Industry
If we fail to compete successfully in our highly competitive industry,
including against some of Microsoft's products, our revenues may decline
We face competition from different sources, and we must compete effectively
against other current and future competitors to retain and expand our customer
base. If we fail to retain and expand our customer base, our revenues could
decline substantially.
We believe the principal factors that will draw end-users to a systems
management software product include depth of product functionality, ability to
work natively with Windows NT and Windows 2000, scalability, product quality
and performance, conformance to industry standards, competitive price and
customer support. To be competitive, we must respond promptly and effectively
to the challenges of technological change, evolving standards and our
competitors' innovations by continuing to enhance our products and sales
channels. Any pricing pressures or loss of market share resulting from our
failure to compete effectively could reduce our revenue.
We also believe that Microsoft, or systems management software vendors, each
of which are also currently competing with us, could enhance their products to
include the functionality that we currently provide in our products. If these
vendors include such functionality as standard features of their products, our
software solutions could become obsolete. Even if the functionality of the
standard features of these products is more limited than ours, we face a
substantial risk that a significant number of customers would elect to keep
this limited functionality rather than purchase additional software.
We may face competition in the future from established companies that have
not previously entered the Windows NT systems management software market or
from emerging software companies. Barriers to entry in the software market are
relatively low. Increased competition may negatively affect our business and
future operating results due to price reductions, higher selling expenses and
a reduction in our market share.
Our revenue could be reduced if our industry consolidates further or our
products are not competitive with larger suites
Microsoft and systems management software vendors may not only develop their
own systems management solutions, but they may also acquire or establish
cooperative relationships with our current competitors, including smaller
private companies. Because Microsoft and these vendors have significant
financial and organizational resources available, they may be able to quickly
penetrate the Windows NT systems management software market by leveraging the
technology and expertise of smaller companies and utilizing their extensive
distribution channels. We expect that the software industry and providers of
systems management solutions, in particular, will continue to consolidate. It
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
Our products may become obsolete if other vendors' products are no longer
compatible with ours or other vendors bundle their products with those of
our competitors
Our ability to sell our products also depends, in part, on the compatibility
of our products with other vendors' software and hardware products,
particularly those provided by Microsoft. Developers of these products may
change their products so that they will no longer be compatible with our
products. These other vendors may also decide to bundle their products with
other systems management products for promotional purposes. If that were to
happen, our business and future operating results may suffer as we may be
priced out of the market or no longer be able to offer commercially viable
products.
13
<PAGE>
We may not succeed in developing and marketing new products for our OnePoint
suite, and our operating margins may decline as a result
We are planning the release of additional products for our OnePoint suite
that function with Windows NT and the commercial release version of Windows
2000. Developing these capabilities and other required features for the
release of new products will require significant additional expenses and
development resources. For example, we cannot be certain that our entry into
the file administration segment of the systems management software market with
our OnePoint File Administrator product will be successful or that our
customers will widely accept and adopt this product.
Risks Related to Our Products' Dependence on Intellectual Property
Systems management software products are subject to rapid technological change
due to changing operating system software and network hardware and software
configurations, and our products could be rendered obsolete by new
technologies, such as Windows 2000
The systems management software market is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving
industry standards. Our products could be rendered obsolete if products based
on new technologies are introduced or new industry standards emerge. For
example, our products will become obsolete if we do not develop and distribute
products that operate with Windows 2000 and provide functionality beyond the
native Windows 2000 functionality.
Client/server computing environments are inherently complex. As a result, we
cannot accurately estimate the life cycles of our software products. New
products and product enhancements can require long development and testing
periods, which depend significantly on our ability to hire and retain
increasingly scarce and technically competent personnel. Significant delays in
new product releases or significant problems in installing or implementing new
product releases could seriously damage our business. We have, on occasion,
experienced delays in the scheduled introduction of new and enhanced products
and cannot be certain that we will avoid similar delays in the future.
Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner.
Our software products rely on our intellectual property, and any failure by us
to protect our intellectual property could enable our competitors to market
products with similar features that may reduce demand for our products
Our success and ability to compete are substantially dependent upon our
internally developed technology that is incorporated in the source code for
our products. We protect our intellectual property through a combination of
copyright, trade secret and trademark law. However, we have not registered any
of our trademarks under applicable law. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to our source code and other
intellectual property and the distribution of our software, documentation and
other proprietary information. We believe that such measures afford only
limited protection. Others may develop technologies that are similar or
superior to our technology or design around the copyrights and trade secrets
we own. We license our software products primarily under shrink wrap licenses,
licenses included as part of the product packaging. Shrink wrap licenses are
not negotiated with or signed by individual licensees, and purport to take
effect upon the opening of the product package. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Policing unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as
those in the United States. Our means of protecting our proprietary rights may
be inadequate.
14
<PAGE>
Our products employ technology that may infringe the proprietary rights of
others, and we may be liable for significant damages
Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. We are not aware that our products employ technology that
infringes any proprietary rights of third parties. However, third parties may
claim that we infringe their intellectual property rights. Any claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert our management's attention and resources, cause product shipment delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements may not be available on terms acceptable to us, if at
all. A successful claim of product infringement against us or our failure or
inability to license the infringed or similar technology could adversely
affect our business because we would not be able to sell the impacted product
without redeveloping it or incurring significant additional expenses.
We have experienced significant growth and change in our business and our
failure to manage this growth and any future growth could harm our business
We continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. At June 30, 1998,
we had a total of 92 full-time employees, and at March 31, 1999 we had a total
of 136 full-time employees. Our productivity and the quality of our products
may be adversely affected if we do not integrate and train our new employees
quickly and effectively. We also cannot be sure that our revenues will
continue to grow at a sufficient rate to absorb the costs associated with a
larger overall headcount, as well as recruiting-related expenses.
We face risks from our international operations due to our limited
international experience
In the nine months ended March 31, 1999, customers outside North America
accounted for 19.5% of our revenues. We plan to increase our international
sales activities, but we have no experience in developing foreign language
translations of our products and little experience marketing and distributing
our products internationally.
We conduct direct sales activities in England, France and Germany and
indirect activities in Europe, Australia and Brazil. Our international
operations are subject to other inherent risks, including:
. the impact of recessions in economies outside the United States;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences; and
. political and economic instability.
Our revenue may be exposed to exchange rate fluctuations, and our products may
not be competitive due to exchange rate instability.
Our international sales are generally denominated in the United States
dollar. We do not currently engage in currency hedging activities. Although
exposure to currency fluctuations to date has been insignificant, future
fluctuations in currency exchange rates may adversely affect our future
revenue from international sales. We may also be less competitive than a
vendor whose products are sold in the local
15
<PAGE>
currency during times of exchange rate instability. We expect that if our
international sales operations increase substantially, we will be required to
price our products and pay our expenses in foreign currencies and may be
subject to currency exchange risk.
We are in the final stages of assessing our Year 2000 readiness and any Year
2000 problems with our products or our internal systems and software could
result in third party claims
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
determine whether "00" means 1900 or 2000. This may result in software failures
or the creation of erroneous results.
We are in the final stages of assessing our Year 2000 readiness. We have
concluded a preliminary investigation and performed limited testing to
determine whether each component of our OnePoint product suite and our products
in development are Year 2000 compliant. Our software products operate in
complex system environments and directly and indirectly interact with a number
of other hardware and software systems. Despite the investigation and testing
by us and our partners, our software products and the underlying systems and
protocols running our products may contain errors or defects associated with
Year 2000 date functions. We are unable to predict to what extent our business
may be affected if our software or the systems that operate in conjunction with
our software experience a material Year 2000 failure. Known or unknown errors
or defects that affect the operation of our software could result in delay or
loss of revenue, cancellation of customer contracts, diversion of development
resources, damage to our reputation, increased maintenance and warranty costs,
and litigation costs, any of which could adversely affect our business,
financial condition and results of operations.
Despite investigation and testing by us, our internal systems and/or software
may contain errors or defects associated with Year 2000 date functions. We are
unable to predict to what extent our core business functions may be affected if
our internal systems or software experience a material Year 2000 failure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000 Readiness" for a description of our Year 2000 readiness
efforts.
We must continue to hire and retain sales and research and development staff to
sustain our revenue growth
We intend to hire a significant number of additional sales, support,
marketing and research and development personnel in calendar 1999 and 2000.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Our future success and ability to sustain our revenue growth also
depend upon the continued service of our executive officers and other key
sales, marketing and support personnel, particularly since we have experienced
disruption from the turnover of senior management in the past. In addition, our
products and technologies are complex and we are substantially dependent upon
the continued service of our existing engineering personnel, and especially
Thomas P. Bernhardt, one of our founders and our Chief Technology Officer. The
loss of any of our key employees could adversely affect our business and slow
our product development processes particularly since neither our Chief
Executive Officer nor our Chief Financial Officer is bound by a noncompetition
or nonsolicitation agreement. We do not have key person life insurance policies
covering any of our employees.
To achieve our business objectives, we may recruit and employ skilled
technical professionals from other countries to work in the United States.
Limitations imposed by federal immigration laws and the
16
<PAGE>
availability of visas could materially adversely affect our ability to attract
necessary qualified personnel. This may have a negative effect on our business
and future operating results.
Errors in our products or the failure of our products to conform to
specifications could result in our customers demanding refunds from us or
asserting claims for damages against us
Because our software products are complex, they could contain errors or bugs
that can be detected at any point in a product's life cycle. While we
continually test our products for errors and work with customers through our
customer support services to identify and correct bugs in our software, we
expect that errors in our products will continue to be found in the future.
Although many of these errors may prove to be immaterial, any of these errors
could be significant. Detection of any significant errors may result in:
. the loss of or delay in market acceptance and sales of our products;
. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
These problems could harm our business and future operating results. In the
past we have discovered errors in some of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new version and product
update releases. To date none of these delays has materially affected our
business. However, product errors or delays in the future could be material,
including any product errors or delays associated with the introduction of our
new products or the versions of our products that support Windows 2000.
Occasionally, we have warranted that our products will operate in accordance
with specified customer requirements. If our products fail to conform to these
specifications, customers could demand a refund for the software license fee
paid to us or assert claims for damages.
Moreover, because our products administer critical distributed computing
systems services, we may receive significant liability claims if our products
do not work properly. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. However, these
limitations may not preclude all potential claims. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful,
could seriously damage our reputation and our business.
We will face risks if we undertake acquisitions
We may make investments in complementary companies, products or
technologies. If we buy a company, we could have difficulty in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. If we make other types of
acquisitions, we could have difficulty in assimilating the acquired technology
or products into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses. We
also expect that we would incur substantial expenses if we acquired another
business or technologies. Furthermore, we may use the proceeds of this
offering, incur debt or issue equity securities to pay for any future
acquisitions. If we issue additional equity securities, our stockholders could
experience dilution.
17
<PAGE>
Risks Related to this Offering
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which will be beyond our control, that
may prevent our stockholders from reselling our common stock at a profit
The securities markets have experienced significant price and volume
fluctuations and the market prices of the securities of software companies
have been especially volatile. This market volatility, as well as general
economic, market or political conditions, could reduce the market price of our
common stock in spite of our operating performance. In addition, our operating
results could be below the expectations of public market analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the offering price. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs and a diversion
of management's attention and resources.
We have broad discretion in how we use the proceeds of this offering, and we
may not use such proceeds effectively
Our management could spend most of the proceeds from this offering in ways
with which our stockholders may not agree. We cannot predict that the proceeds
will be invested to yield a favorable return. Our primary purpose in
conducting this offering is to create a public market for our common stock. As
of the date of this prospectus, we plan to use the proceeds from this offering
for working capital and general corporate purposes. We may also use the
proceeds in future strategic acquisitions but do not have any acquisitions
planned. Until we need to use the proceeds of this offering, we plan to invest
the net proceeds in investment grade, interest-bearing securities.
Our officers and persons affiliated with our directors influence our business
and hold a substantial portion of our stock and could reject mergers or
other business combinations that a stockholder may believe are desirable
We anticipate that our directors, officers and individuals or entities
affiliated with our directors will beneficially own approximately 49% of our
outstanding common stock as a group after this offering closes. Acting
together, these stockholders would be able to significantly influence all
matters that our stockholders vote upon, including the election of directors
and mergers or other business combinations.
The provisions of our charter documents may inhibit potential acquisition bids
that a stockholder may believe is desirable, and the market price of our
common stock may be lower as a result
Upon completion of this offering, our board of directors will have the
authority to issue up to 5,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.
Our charter documents contain anti-takover devices including:
. only one of the three classes of directors is elected each year;
. the ability of our stockholders to remove directors without cause is
limited;
. the right of stockholders to act by written consent has been eliminated;
. the right of stockholders to call a special meeting of stockholders has
been eliminated; and
. required advance notice to nominate directors or submit proposals for
consideration at stockholder meetings.
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<PAGE>
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction, and they could have the
effect of discouraging others from making tender offers for our common stock.
As a result, these provisions may prevent the market price of our common stock
from increasing substantially in response to actual or rumored takeover
attempts. These provisions may also prevent changes in our management.
Delaware law may inhibit potential acquisition bids; this may adversely affect
the market price of our common stock, discourage merger offers and prevent
changes in our management
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to the antitakeover provisions of the Delaware General Corporation Law,
which regulates corporate acquisitions. Delaware law will prevent us from
engaging, under certain circumstances, in a "business combination" with any
"interested stockholder" for three years following the date that the interested
stockholder became an interested stockholder unless our board of directors or a
supermajority of our uninterested stockholders agree. For purposes of Delaware
law, a "business combination" includes a merger or consolidation involving us
and the interested stockholder and the sale of more than 10% of our assets. In
general, Delaware law defines an "interested stockholder" as any holder
beneficially owning 15% or more of the outstanding voting stock of a
corporation and any entity or person affiliated with or controlling or
controlled by the holder. Under Delaware law, a corporation may opt out of the
foregoing antitakeover provisions. We do not intend to opt out of the
antitakeover provisions of Delaware Law.
The substantial number of shares that will be eligible for sale in the near
future could cause our common stock price to fall
Our current stockholders hold a substantial number of shares, which they will
be able to sell in the public market in the near future. Sales of a substantial
number of shares of our common stock could cause our stock price to fall. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock. See "Shares Eligible for Future Sale" on
page 70 for information regarding the number of shares that may be sold in the
future by our existing stockholders and optionees.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform our prior
statements to actual results.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 2,500,000 shares of
common stock that we are selling in this offering will be approximately
$34,000,000 ($41,323,750 if the underwriters exercise their over-allotment
option in full) based on an assumed public offering price of $15 per share and
after deducting the estimated underwriting discount and estimated offering
expenses payable by us. We will not receive any proceeds from the sale of the
1,000,000 shares being sold by the selling stockholders.
The principal purposes of this offering are to create a public market for our
common stock and to raise working capital. We currently expect to use the net
proceeds from this offering primarily for working capital and general corporate
purposes, including increased global sales and marketing expenditures, and
increased research and development expenditures to develop additional products
for our OnePoint product suite. In addition, we may use a portion of the net
proceeds for further development of our product lines through acquisitions of
products, technologies and businesses. However, we currently have no present
commitments or agreements with respect to any acquisitions. Pending these uses,
we intend to invest the net proceeds in interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. In July
1997, we repurchased 950,000 shares of our Series A Preferred Stock from one
holder for which the excess of the redemption price over the carrying value of
the related Series A Preferred Stock is classified as a dividend for financial
reporting purposes. We currently expect to retain any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999. The as
adjusted information reflects the sale and issuance of 2,500,000 shares of our
common stock by us in this offering at an assumed public offering price of $15
per share. The pro forma information reflects the conversion of all outstanding
shares of our common stock on a 1 to 1 basis into shares of our common stock
and the deduction of the underwriting discount and estimated offering expenses.
You should read the information presented below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 25 and the financial statements and the related
notes beginning on page F-1.
The outstanding share information includes shares issued under restricted
stock agreements that are subject to our right to repurchase the shares as of
March 31, 1999. The outstanding share information excludes 8,795,000 shares of
common stock reserved for issuance under our 1997 stock option plan, of which
3,935,084 shares were subject to outstanding options as of March 31, 1999 at a
weighted average exercise price of $1.99 and 433,333 shares of common stock
issuable upon exercise of outstanding warrants at a weighted average exercise
price of $1.38. In addition, in connection with this offering, our board of
directors and stockholders have approved:
. an increase of 4,000,000 shares in the number of shares reserved under
our 1997 Stock Option Plan;
. a reserve of 250,000 shares for our 1999 Director Option Plan; and
. a reserve of 600,000 shares for our 1999 Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt, less current portion.......... $ 148 $ 148 $ 148
Redeemable convertible preferred stock, Series
A; $0.001 par value; 868,650 shares
authorized, issued and outstanding--actual;
no shares authorized, issued or
outstanding--pro forma and as adjusted..... 179 -- --
Redeemable convertible preferred stock, Series
B; $0.001 par value; 2,650,000 shares
authorized, issued and outstanding--actual;
no shares authorized, issued or
outstanding--pro forma and as adjusted..... 2,650 -- --
Redeemable convertible preferred stock, Series
C; $0.001 par value; 3,450,000 shares
authorized, issued and outstanding--actual;
no shares authorized, issued or
outstanding--pro forma and as adjusted..... 10,350 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares
authorized, issued and outstanding--actual;
5,000,000 shares authorized, no shares
issued or outstanding--pro forma and as
adjusted................................... -- -- --
Common stock, $0.001 par value; 13,083,333
shares authorized, 2,945,620 issued and
outstanding--actual; 50,000,000 shares
authorized, 9,914,270; shares issued and
outstanding--pro forma; 50,000,000 shares
authorized, 12,414,270 shares issued and
outstanding as adjusted.................... 3 10 13
Additional paid-in capital.................. 1,978 15,150 49,147
Deferred stock compensation................. (1,480) (1,480) (1,480)
Accumulated deficit......................... (8,766) (8,766) (8,766)
-------- ------- -------
Total stockholders' equity (deficit)...... (8,265) 4,914 38,914
-------- ------- -------
Total capitalization.................... $ 5,062 $ 5,062 $39,062
======== ======= =======
</TABLE>
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<PAGE>
DILUTION
Our net tangible book value as of March 31, 1999 was $4.2 million or
approximately $0.43 per share. Net tangible book value per share represents the
amount of our total tangible assets reduced by our total liabilities, divided
by the number of shares of common stock outstanding, assuming that all of our
outstanding preferred stock is converted. Dilution in net tangible book value
per share represents the difference between the amount per share paid by
investors in this offering and the net tangible book value per share of common
stock immediately after this offering is completed. After giving effect to the
receipt of the estimated proceeds from our sale of the 2,500,000 shares of
common stock at an assumed public offering price of $15 per share, our net
tangible book value at March 31, 1999 would have been $38.2 million or
approximately $3.08 per share. This represents an immediate increase in net
tangible book value of $2.65 per share to existing stockholders and an
immediate dilution of $11.92 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $15.00
Net tangible book value per share as of March 31, 1999......... $0.43
Increase per share attributable to new investors............... 2.65
-----
Net tangible book value per share after the offering............. 3.08
------
Dilution per share to new investors.............................. $11.92
======
</TABLE>
The following table sets forth as of March 31, 1999 the differences between
the amounts paid by existing stockholders and the new investors, with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by new investors before
deducting the underwriting discount and estimated offering expenses payable by
us, at an assumed public offering price of $15 per share.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
--------------------- ---------------------- Per
Number Percentage Amount Percentage Share
---------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 9,914,270 79.9% $13,444,000 24.4% $ 1.36
New investors........... 2,500,000 20.1 37,500,000 73.6 15.00
---------- ----- ----------- -----
Total................... 12,414,270 100.0% $50,944,000 100.0%
========== ===== =========== =====
</TABLE>
Sales by the selling stockholders in this offering will reduce the number of
shares of common stock held by existing stockholders to 8,914,270 or
approximately 71.8% (approximately 68.9%, if the underwriters' over-allotment
option is exercised in full) of the total number of shares of common stock
outstanding upon the closing of this offering, and the number of shares held by
new public investors will be 3,500,000 or approximately 28.2% (approximately
31.1%, if the underwriters' over-allotment option is exercised in full) of the
total number of shares of common stock outstanding after this offering. See
"Principal and Selling Stockholders" on page 65 for information regarding the
number of shares and percentage of our stock held by our largest stockholders,
officers and directors before and after this offering.
The above tables excludes 9,140,732 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 3,935,084
shares were subject to outstanding options as of March 31, 1999, and 433,333
shares of common stock were issuable upon exercise of outstanding warrants. New
investors will experience further dilution if any additional shares of our
common stock are issued upon the exercise of options or additional options are
granted or reserved for issuance under our stock plan.
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<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" beginning on page 24 and our financial statements and the notes
thereto beginning on page F-1 of this prospectus. The statement of operations
data set forth below for the period from July 19, 1996 (our inception) to June
30, 1997, the fiscal year ended June 30, 1998 and the nine months ended March
31, 1999 are derived from our audited financial statements included elsewhere
in this prospectus. The statement of operations data for the nine months ended
March 31, 1998 are derived from unaudited financial statements included
elsewhere in this prospectus. Such unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments consisting of normal recurring
adjustments necessary for a fair presentation of our financial position. These
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
Nine Months Ended
July 19, 1996 Year Ended -------------------
(inception) to June 30, March 31, March 31,
June 30, 1997 1998 1998 1999
-------------- ---------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
License................................. $ 4,087 $12,767 $ 8,159 $14,441
Maintenance............................. 180 1,609 1,075 2,460
------- ------- ------- -------
Total revenue......................... 4,267 14,376 9,234 16,901
Cost of revenue:
Cost of license......................... 206 392 294 291
Cost of maintenance..................... 142 933 680 681
------- ------- ------- -------
Total cost of revenue................. 348 1,325 974 972
------- ------- ------- -------
Gross margin.............................. 3,919 13,051 8,260 15,929
Operating expenses:
Sales and marketing..................... 3,554 9,590 6,591 8,952
Research and development................ 1,317 3,612 2,470 4,274
General and administrative.............. 973 2,228 1,595 1,861
Amortization of deferred
stock compensation..................... -- -- -- 236
Abandoned lease costs................... -- -- -- 1,034
Acquired in-process research
and development........................ 1,575 -- -- --
------- ------- ------- -------
Total operating expenses.............. 7,419 15,430 10,656 16,357
------- ------- ------- -------
Operating loss............................ (3,500) (2,379) (2,396) (428)
Other income, net......................... 2 63 62 206
------- ------- ------- -------
Loss before income taxes.................. (3,498) (2,316) (2,334) (222)
Income tax benefit........................ 175 -- -- --
------- ------- ------- -------
Net loss.................................. (3,323) (2,316) (2,334) (222)
Excess of consideration paid to redeem
preferred stock and dividends in
arrears.................................. (181) (3,714) (3,446) (791)
------- ------- ------- -------
Net loss applicable to common
stockholders............................. $(3,504) $(6,030) $(5,780) $(1,013)
======= ======= ======= =======
Basic and diluted net loss per share...... $ (1.44) $ (2.47) $ (2.37) $ (0.40)
======= ======= ======= =======
Pro forma basic and diluted net loss per
share (unaudited)........................ $ (0.53) $ (0.02)
======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1997 1998 1999
------- ------- ---------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C>
Cash and cash equivalents......................... $ 299 $ 4,575 $9,458
Working capital (deficit)......................... (2,523) 3,241 3,542
Total assets...................................... 4,595 10,958 15,056
Long-term debt, less current maturities........... 33 352 148
Redeemable convertible preferred stock............ 3,189 13,179 13,179
Total stockholders' deficit....................... (3,520) (8,516) (8,265)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the
our financial statements and the notes thereto beginning on page F-1 of this
prospectus and the Selected Financial Data above. Except for historical
information, the discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties. Such forward-looking
statements include, among others, those statements including the words
"expects," "anticipates," "intends," "believes" and similar language. Our
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include the risks discussed
in the section titled "Risk Factors" beginning on page 8 of this prospectus.
Overview
We are a leading provider of systems administration and operations management
software products for corporate and Internet-based Windows NT networks. Our
OnePoint product suite is designed to improve the reliability, performance and
security of even the most complex computing environments by simplifying and
automating key systems management functions. Our products can be deployed
quickly, are based on an open and extensible architecture and are easy to use.
We derive our revenue from the sale of software product licenses and
maintenance. Currently, all of our product license revenue is derived from our
OnePoint suite and principally our OnePoint Administrator products. In the
periods from July 19, 1996, our inception, to June 30, 1997 ("fiscal 1997"),
the fiscal year ended June 30, 1998 ("fiscal 1998") and the nine months ended
March 31, 1999, sales of OnePoint Administrator products accounted for
approximately 100%, 88% and 83% of our license revenue, respectively. We expect
that these products will continue to account for a large portion of our license
revenue for the foreseeable future.
We recognize product license revenue when persuasive evidence of an agreement
exists, customer acceptance periods, if any, have been completed, the product
and the permanent license key have been delivered, we have no remaining
significant obligations, the license fee is fixed or determinable and
collection of the fee is probable. Our products are generally priced based on
the number of users and servers managed. Our per seat licenses for our OnePoint
product suite start at $27 per managed user account, and our per server license
fees begin at $900 per server. Customization or extensive on-site
implementation services are generally not required for our customers to install
and use our products. Sales transactions generally include one year of
maintenance. Our customers typically purchase maintenance agreements annually,
and we price maintenance agreements based on a percentage of the product
license fee. Customers purchasing maintenance agreements receive unspecified
product upgrades and electronic, Internet-based technical support and telephone
support. We recognize revenue from maintenance agreements ratably over the term
of the agreement, typically one year. We record cash receipts from customers
for renewal maintenance agreements as deferred revenue. The timing and amount
of cash receipts from customers can vary significantly depending on specific
contract terms and can therefore have a significant impact on the amount of
deferred revenue in any given period.
Any factors adversely affecting the pricing of, demand for or market
acceptance of our OnePoint product suite, such as competition or technological
change, could materially adversely affect our business, operating results and
financial condition. Of particular importance is the continued acceptance of
Windows NT as a server operating system in corporate and Internet-based
networks. We believe that Windows NT and Windows 2000 Server, once released,
will continue to be an integral part of the corporate and Internet-based
client/server environments.
Cost of revenue consists of the following:
.amortization of acquired technology;
.costs to manufacture, package and ship our products;
.personnel; and
.other expenses related to providing maintenance.
24
<PAGE>
Since our inception in 1996, we have incurred substantial costs to develop
our technology and products, to recruit and train personnel for our
engineering, sales and marketing and technical support departments, and to
establish an administrative organization. As a result, we incurred net losses
in fiscal 1997, fiscal 1998 and the nine months ended March 31, 1999. As of
March 31, 1999, we had an accumulated deficit of $8.8 million. We anticipate
that our operating expenses will increase substantially in the future as we
increase our sales and marketing operations, develop new distribution channels,
fund greater levels of research and development, broaden our technical support
and improve our operational and financial systems. Accordingly, we will need to
generate significant quarterly revenues to achieve and maintain profitability.
In addition, our limited operating history makes it difficult for us to predict
future operating results and, accordingly, there can be no assurance in future
quarters that we will achieve or sustain revenue growth or profitability.
We apply Statement of Financial Accounting Standards No. 86 ("SFAS 86"),
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed" to software technologies developed internally. We include internal
development costs in research and development, and those costs are expensed as
incurred. SFAS 86 requires the capitalization of certain internal development
costs once technological feasiblity is established, which, based upon our
development process, generally occurs upon the completion of a working model.
As the time period between the completion of a working model and the general
availability of our products has not been significant, we have not capitalized
any software development costs to date.
We have grown rapidly, and our total revenue has increased from $4.3 million
in fiscal 1997 to $14.4 million in fiscal 1998 and $16.9 million in the nine
months ended March 31, 1999. Historically, our revenue has been attributable
primarily to sales in North America. In fiscal 1997, fiscal 1998 and the nine
months ended March 31, 1999, revenue attributable to sales outside of North
America accounted for approximately 15%, 18% and 20% of our total revenue,
respectively. We plan to expand our international operations significantly as
we believe international markets represent a significant growth opportunity.
Consequently, we anticipate that international revenue will increase as a
percentage of total revenue in the future. If international revenue continues
to increase as a percentage of total revenue, we may experience a corresponding
increase in cost of sales, because of higher personnel costs for overseas
locations and commission expenses related to distributions which may impact our
operating results. Our sales are generally denominated in United States dollars
and as a result our current exposure to foreign exchange fluctuations is
minimal. As our international sales and operations expand, we anticipate that
our exposure to foreign currency fluctuations will increase.
In fiscal 1997, fiscal 1998 and the nine months ended March 31, 1999,
maintenance revenue comprised 4.2%, 11.2% and 14.6% of our total revenue,
respectively. We expect maintenance revenue to continue to increase as a
percentage of total revenue if our number of customers increases and if the
number of customers entering into annual maintenance agreements increases. If
maintenance revenue increases as a percentage of total revenue, our gross
margin as a percentage of total revenue will decrease because of lower margins
on maintenance revenue due to incremental maintenance support costs.
For the nine months ended March 31, 1999, approximately 50% of our license
revenue was derived from existing customers because of lower margins on
maintenance revenue due to incremental maintenance support cost. If license
revenue from existing customers does not increase, our future revenue could be
adversely affected.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period to period comparisons of our revenue
and operating results are not necessarily meaningful and should not be relied
upon as indications of our future performance. Additionally, despite our
revenue growth for all but one quarter since inception, we do not believe that
historical growth rates are necessarily sustainable or indicative of future
growth.
25
<PAGE>
In June 1997, we acquired in-process research and development from our United
Kingdom distributor, Serverware, Ltd. The total consideration paid in
connection with the acquisition was $2.6 million. We capitalized $1.1 million
as acquired technology and recorded a one time charge of $1.5 million for the
write-off of in-process research and development. Since the beginning of fiscal
1998, we have amortized $52,500 of the acquired technology per quarter as a
cost of revenue. The remaining $630,000 will be amortized quarterly until 2002.
During the nine months ended March 31, 1999, we recorded deferred stock
compensation of $1.7 million in connection with certain stock option grants. We
amortize deferred stock compensation over the vesting period of the related
award. We record this amortization as a noncash expense in accordance with
Accounting Principles Board Opinion No. 25.
We had 136 full-time employees at March 31, 1999, a substantial increase from
92 and 50 at June 30, 1998 and 1997, respectively. This rapid growth has placed
significant demands on our management and operational resources. In order to
manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. In addition, we expect that
future expansion will continue to challenge our ability to hire, train,
motivate and manage our employees. Competition is intense for highly qualified
technical, sales and marketing and management personnel. If our total revenue
does not increase relative to our operating expenses, our management systems do
not expand to meet increasing demands, we fail to attract, assimilate and
retain qualified personnel or our management otherwise fails to manage our
expansion effectively, there would be a material adverse effect on our
business, financial condition and operating results.
Historical Results of Operations
The following table sets forth the results of our operations expressed as a
percentage of total revenues. Our historical operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Percentage of Revenue
---------------------------------------
Nine Months
July 19, 1996 Year Ended Ended
(inception) to June 30, March 31,
June 30, ---------- -------------
1997 1998 1998 1999
-------------- ---------- ----- -----
<S> <C> <C> <C> <C>
Revenue:
License............................ 95.8% 88.8% 88.4% 85.4%
Maintenance........................ 4.2 11.2 11.6 14.6
----- ----- ----- -----
Total revenue.................. 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license.................... 4.8 2.7 3.2 1.7
Cost of maintenance................ 3.3 6.5 7.3 4.0
----- ----- ----- -----
Total cost of revenue.......... 8.1 9.2 10.5 5.7
----- ----- ----- -----
Gross margin....................... 91.9 90.8 89.5 94.3
Operating expenses:
Sales and marketing................ 83.3 66.7 71.4 53.0
Research and development........... 30.9 25.1 26.7 25.3
General and administrative......... 22.8 15.5 17.3 11.0
Amortization of deferred stock
compensation...................... -- -- -- 1.4
Abandoned lease costs.............. -- -- -- 6.1
Acquired in-process research and
development....................... 36.9 -- -- --
----- ----- ----- -----
Total operating expenses....... 173.9 107.3 115.4 96.8
----- ----- ----- -----
Operating loss....................... (82.0) (16.5) (25.9) (2.5)
Other income, net.................... -- 0.4 0.6 1.2
----- ----- ----- -----
Loss before income taxes............. (82.0) (16.1) (25.3) (1.3)
Income tax benefits.................. (4.1) -- -- --
----- ----- ----- -----
Net loss............................. (77.9)% (16.1)% (25.3)% (1.3)%
===== ===== ===== =====
</TABLE>
26
<PAGE>
Comparison of Nine Months Ended March 31, 1998 and 1999
Revenue
Total revenue increased 83% from $9.2 million for the nine months ended March
31, 1998 to $16.9 million for the nine months ended March 31, 1999. This
increase was attributable to an increase in our customer base resulting in
substantial growth in product license and maintenance revenue. No single
customer accounted for more than 10% of total revenue during the nine months
ended March 31, 1998 or 1999.
License. License revenue increased 77% from $8.2 million for the nine months
ended March 31, 1998 to $14.4 million for the nine months ended March 31, 1999,
and license revenue represented 88.4% and 85.4% of total revenue in those
periods, respectively. The increase in license revenue in absolute dollars was
generally attributable to increased unit sales of our products. The decrease of
license revenue as a percentage of total revenue stemmed from the growth of
maintenance revenues as the number of customers that renewed maintenance
agreements increased.
Maintenance. Maintenance revenue increased 129% from $1.1 million for the
nine months ended March 31, 1998 to $2.5 million for the nine months ended
March 31, 1999, and maintenance revenue represented 11.6% and 14.6% of total
revenue in those periods, respectively. These increases resulted from the
growth in software license revenue, as new software licenses are generally sold
with one year of maintenance, and renewals of maintenance agreements by
existing customers.
Cost of Revenue
License. License costs consist of the amortization of acquired technology and
of the expenses we incurred to manufacture, package and ship our products.
License cost remained relatively constant and was $294,000 for the nine months
ended March 31, 1998 and $291,000 for the nine months ended March 31, 1999.
License costs as a percentage of license revenue represented 3.6% and 2.0% of
license revenue in those periods, respectively. A majority of license costs
related to the amortization of acquired technology that is being expensed over
periods ranging from three to five years. The decrease as a percentage of
license revenue was a result of increased unit sales of our products compared
to the amortization of acquired technology which was constant from period to
period. We expect license costs to increase in the future in absolute dollar
terms due to the expected increase in license revenue.
Maintenance. Maintenance costs include salary expense and other related costs
for our technical support. Maintenance costs remained relatively constant and
were $680,000 and $681,000 for the nine months ended March 31, 1998 and 1999,
respectively. The cost of maintenance as a percentage of maintenance revenue
represented 63.3% and 27.7% in those periods, respectively. The decreases
resulted from increased maintenance revenue and increased utilization of
technical support staff. We expect maintenance costs to increase in absolute
dollars in the future as we continue to add infrastructure.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries, commissions, payroll taxes and employee benefits as well as
travel, entertainment and discretionary marketing expenses. Sales and marketing
expenses increased 35.8% from $6.6 million for the nine months ended March 31,
1998 to $9.0 million for the nine months ended March 31, 1999, and sales and
marketing expenses represented 71.4% and 53.0% of total revenue in those
periods, respectively. The increase in absolute dollars resulted primarily from
the hiring of additional sales management and sales personnel and higher
commission expense as a result of our revenue growth and to a lesser extent,
increases in marketing expenditures for tradeshows, seminars and advertising.
The decline in sales and marketing expenses as a percentage of total revenue
resulted from increased productivity of the sales force. We expect sales and
marketing expenses to increase in absolute dollar terms as we continue to hire
additional sales and marketing personnel.
27
<PAGE>
Research and Development Expenses. Research and development expenses consist
primarily of salaries, bonuses, payroll taxes, employee benefits and other
costs attributable to research and development activities. Research and
development expenses increased 73.0% from $2.5 million for the nine months
ended March 31, 1998 to $4.3 million for the nine months ended March 31, 1999,
and research and development expenses represented 26.7% and 25.3% of total
revenue in those periods, respectively. The absolute dollar increase was
attributable to the recruiting costs, salaries and benefits associated with
hiring of additional research and development staff and, to a lesser extent,
related costs such as computer equipment for the new staff. We expect research
and development expenses to increase in absolute dollar terms as we continue to
hire additional research and development personnel to develop new OnePoint
products and to develop products for Windows 2000 Server.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, bonuses, payroll taxes, employee benefits and
certain non-allocable administrative costs. General and administrative expenses
increased 16.7% from $1.6 million for the nine months ended March 31, 1998 to
$1.9 million for the nine months ended March 31, 1999, and general and
administrative expenses represented 17.3% and 11.0% of total revenue in those
periods, respectively. The absolute dollar increase was primarily related to
costs associated with the expansion of our facilities and related
infrastructure and increased compensation for administrative personnel and
management. The decline in general and administrative expenses as a percentage
of total revenue reflected the absorption of certain fixed costs over a larger
revenue base. We expect general and administrative expenses to increase in
absolute dollar terms as we expand our infrastructure and incur additional
costs as a result of being a public company.
Amortization of Deferred Stock Compensation. We amortized approximately
$236,000 of deferred stock compensation in the nine-month period ended March
31, 1999. We did not have any deferred stock compensation amortization in the
nine months ended March 31, 1998. We expect to amortize the remaining $1.5
million through fiscal 2002.
Other Income, Net
Other income, net is generated primarily from the interest earned on cash and
cash equivalents. Other income, net increased from $62,000 for the nine month
period ended March 31, 1998 to $206,000 for the nine month period ended March
31, 1999. The growth in other income, net was principally the result of
increased cash and cash equivalents.
Income Taxes
We did not record a provision for federal or state income taxes in either the
nine months ended March 31, 1998 or 1999, because we generated net operating
loss carryforwards of approximately $3.2 million from inception to March 31,
1999. Our net operating loss carryforwards begin to expire in 2012. In the
future, our utilization of the net operating loss carryforwards may be subject
to substantial annual limitations due to the ownership change regulations
contained in the Internal Revenue Code of 1986 and similar state provisions.
These annual limitations may result in the expiration of the net operating loss
carryforwards and other tax credits before we are able to use them. As of March
31, 1998 and 1999, we recorded a full valuation allowance for the deferred tax
assets related to the future benefits, if any, of these net operating loss
carryforwards.
Comparison of Fiscal Years Ended June 30, 1997 and 1998
Revenue
Our total revenue increased 237% from $4.3 million for fiscal 1997 to $14.4
million for fiscal 1998. This increase was attributable to an increase in our
customer base resulting in substantial growth in product license and
maintenance unit sales. No one customer accounted for greater than 10% of total
revenue during fiscal 1998. In fiscal 1997, one customer accounted for
approximately 11% of total revenue.
28
<PAGE>
Licenses. License revenue increased 212% from $4.1 million for fiscal 1997 to
$12.8 million for fiscal 1998, and license revenue represented 95.8% and 88.8%
of total revenue in those periods, respectively. The decrease of license
revenue as a percentage of total revenue was due to an increase in the number
of customers that renewed maintenance agreements.
Maintenance. Maintenance revenue increased 794% from $180,000 for fiscal 1997
to $1.6 million for fiscal 1998, and maintenance revenue represented 4.2% and
11.2% of total revenue in those periods, respectively. These increases resulted
from the growth in software license revenue, as new licenses are generally sold
with one year of maintenance, and renewals of maintenance agreements by
existing customers.
Cost of Revenue
License. License costs increased 90.3% from $206,000 for fiscal 1997 to
$392,000 for fiscal 1998, and license costs represented 5.0% and 3.0% of
license revenue in those periods, respectively. A majority of license costs
related to the amortization of acquired technology. The increase in the
absolute dollar amount was attributable to additional amortization of newly
acquired technology. Acquired technology is amortized over three to five years.
The decrease as a percentage of revenue was a result of increased growth of
revenues relative to the growth in amortization expense for acquired
technology.
Maintenance. Maintenance costs increased 557% from $142,000 for fiscal 1997
to $933,000 for fiscal 1998, and maintenance costs represented 78.9% and 58.0%
of maintenance revenue in those periods, respectively. The increase in the
absolute dollar amount was attributable to the increase in our technical
support department headcount. The decline in maintenance costs as a percentage
of maintenance revenue related to improved productivity of our technical
support staff.
Operating Expenses
Sales and Marketing Expenses. Sales and marketing expenses increased 168%
from $3.6 million for fiscal 1997 to $9.6 million for fiscal 1998, and sales
and marketing expenses represented 83.3% and 66.7% of total revenue in those
periods, respectively. The increase in the absolute dollar level of sales and
marketing expenses was primarily due to increases in sales and marketing
personnel and commission expense as a result of our revenue growth and, to a
lesser extent, increases in marketing expenditures for tradeshows and marketing
brochures and related materials. The decrease in sales and marketing expenses
as a percentage of total revenue reflected the increased productivity of our
sales force.
Research and Development Expenses. Research and development expenses
increased 174% from $1.3 million for fiscal 1997 to $3.6 million for fiscal
1998, and research and development expenses represented 30.9% and 25.1% of
total revenue in those periods, respectively. The increase in the absolute
dollar level of research and development expenses was attributable to the
recruiting costs, salaries and benefits associated with hiring of additional
research and development staff and to a lesser extent, increases in
compensation for research and development staff and other infrastructure to
support these employees, such as new computer equipment. The decline in
research and development expense as a percentage of total revenue reflected the
increase of revenue at a faster rate relative to the increase in research and
development expenses.
General and Administrative Expenses. General and administrative expenses
increased 129% from $973,000 for fiscal 1997 to $2.2 million for fiscal 1998,
and general and administrative expenses represented 22.8% and 15.5% of total
revenue in those periods, respectively. The increase in the absolute dollar
level of general and administrative expenses was primarily related to costs
associated with the recruiting costs, salaries and benefits associated with
hiring of additional administrative personnel and other infrastructure cost to
support our increased activities. The decrease in general and administrative
expenses as a percentage of total revenue reflected increased absorption of
fixed costs over a larger revenue base.
29
<PAGE>
Other Income, Net
Other income, net increased from $2,000 for fiscal 1997 to $63,000 for fiscal
1998. The growth in other income net was principally the result of increased
cash and cash equivalent balances.
Income Taxes
In fiscal 1997, we recorded an income tax benefit of $175,000 related to the
purchase of our OnePoint Administrator product line. No tax provision or
benefit was recorded for fiscal 1998, as we recognized a net loss for income
tax purposes. As of June 30, 1997 and 1998, we recorded a full valuation
allowance for the deferred tax assets related to the future benefits, if any,
of these net operating loss carryforwards.
Write-off of Acquired In-Process Research and Development
In June 1997, we acquired in-process research and development from
Serverware, Ltd. for $2.7 million consisting of cash of $100,000, a $2.5
million note payable, a warrant to purchase 333,333 shares of our common stock
at an exercise price of $1.50 per share and $75,000 of direct costs incurred.
No value was allocated to the warrant as the amount was not significant.
We intended to utilize the acquired in-process research and development to
develop an event management product for Windows NT that we did not possess at
the time. Our intention was to develop a product that monitored and managed
Windows NT and that provided real-time event and problem detection. In order to
capitalize on the event management market, our intention was to complete the
in-process research and development as quickly as possible and sell and market
that product under the name SeNTry. From the date of acquisition to June 30,
1998, we expended approximately 80 person months, or approximately $800,000, to
complete and enhance the in-process research and development. In June 1998 we
completed SeNTry, which represented the first completed and enhanced version of
the acquired technology. We then began internal development of an entirely new
event management product, OnePoint Event Manager, the design of which was
intended to be more consistent with our long-term product strategy.
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired, which was
estimated to be 70% complete at the date of the acquisition. This was our first
attempt to develop event management technology. We were uncertain of our
ability to complete the development of a new product within a timeframe
acceptable to the market and ahead of competitors. At the time of purchase, the
in-process research and development effort, had not reached technological
feasibility as it lacked many key elements including: standardized
implementation capabilities, a scalable and extensible architecture, enhanced
user interfaces, broad functionality and extensive reporting capabilities.
We assigned values of $1.5 million to the in-process research and development
and $1.1 million to the core technology based on a discounted cash flow model.
We based the cash flow projections for revenue on the projected incremental
increase in revenue that we expected to receive from the completed acquired in-
process research and development. We expected revenue derived from the
completed in-process research and development to commence after we completed
development of the SeNTry product. We expected revenue from the in-process
research and development to continue until the release of OnePoint Event
Manager, which we expected to release in fiscal 2000. We deducted estimated
operating expenses and income taxes from estimated revenue to arrive at
estimated after-tax cash flows. Projected operating expenses included: cost of
revenue and general and administrative, customer support and sales and
marketing expenses. We estimated operating expenses as a percentage of revenue
and based our estimates primarily on projections we prepared.
The cash flow projections attributable to the core technology included 50% of
the net income before tax expense we expected to generate from the completed
in-process technology and 15% from the net income
30
<PAGE>
before tax expense we expected to generate from OnePoint Event Manager, an
entirely new and internally developed product. We estimated that we would
derive revenue from OnePoint Event Manager through 2004. We deducted estimated
operating expenses and income taxes from estimated revenue to arrive at
estimated after-tax cash flows. Projected operating expenses included: cost of
revenue and general and administrative, customer support and sales and
marketing expenses. We estimated operating expenses as a percentage of revenue
and based such estimates primarily on projections we prepared.
We used a rate to discount the net cash flows to present value based on the
weighted average cost of capital. We used a discount rate of 35% for valuing
the in-process research and development and 25% for the core technology. These
discount rates are higher than the implied weighted average cost of capital due
to the inherent uncertainties surrounding the successful development of the
acquired in-process research and development, the useful life of such in-
process research and development, the profitability levels of such in-process
research and development, and the uncertainty of technological advances that
were unknown at the time.
Quarterly Results of Operations
The following table presents our operating results for each of the seven
quarters in the period ending March 31, 1999. The information for each of these
quarters is unaudited and has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus. In our opinion,
all necessary adjustments, consisting only of normal recurring adjustments,
have been included to present fairly the unaudited quarterly results when read
in conjunction with our audited financial statements and the notes thereto
appearing beginning on page F-1 in this prospectus. These operating results are
not necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1998 1998 1998 1998 1999
--------- -------- -------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License................ $ 2,040 $2,795 $3,324 $4,608 $4,052 $4,744 $5,645
Maintenance............ 235 339 501 534 613 760 1,087
------- ------ ------ ------ ------ ------ ------
Total revenue.......... 2,275 3,134 3,825 5,142 4,665 5,504 6,732
Cost of revenue:
Cost of license........ 98 98 98 98 96 96 99
Cost of maintenance.... 155 280 245 253 226 215 240
------- ------ ------ ------ ------ ------ ------
Total cost of revenue.. 253 378 343 351 322 311 339
------- ------ ------ ------ ------ ------ ------
Gross margin........... 2,022 2,756 3,482 4,791 4,343 5,193 6,393
Operating expenses:
Sales and marketing.... 2,015 2,282 2,294 2,999 2,479 2,912 3,561
Research and
development........... 822 932 716 1,142 1,223 1,418 1,633
General and
administrative........ 598 504 493 633 576 621 664
Amortization of
deferred stock
compensation.......... -- -- -- -- 32 46 158
Abandoned lease costs.. -- -- -- -- -- -- 1,034
------- ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 3,435 3,718 3,503 4,774 4,310 4,997 7,050
------- ------ ------ ------ ------ ------ ------
Operating income
(loss)................. (1,413) (962) (21) 17 33 196 (657)
Other income (expense),
net.................... 17 38 7 1 43 80 83
------- ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (1,396) (924) (14) 18 76 276 (574)
Provision (benefit) for
income taxes........... -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------
Net income (loss)....... $(1,396) $ (924) $ (14) $ 18 $ 76 $ 276 $ (574)
======= ====== ====== ====== ====== ====== ======
</TABLE>
Our revenue has grown in each quarter, except the quarter ended September 30,
1998, as demand for our products increased. The increases in each quarter were
due to the increased unit sales of licenses for our
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products. Revenue declined in the quarter ended September 30, 1998 because our
sales staff closed a substantial number of transactions in the prior quarter,
the last quarter of fiscal 1998, and selling opportunities decreased in the
summer months.
Our cost of revenue has increased each quarter in conjunction with our
increases in total revenue. Our operating expenses have generally increased in
absolute dollars each quarter as we have increased staffing in sales and
marketing, product development and general and administrative functions. Sales
and marketing expenses increased in the quarter ended June 30, 1998 primarily
due to the sales staff achieving sales quotas for fiscal 1998, which resulted
in sales commissions and incentives being paid in the fourth quarter and
increased levels of discretionary marketing expense. Research and development
expenses increased during the quarter ended December 31, 1997 due to contract
development costs in conjunction with the purchase of in-process research and
development in fiscal 1998 and decreased in the quarter ended March 31, 1998
due to a reduction in development activity as we conducted a search for new
corporate management. We hired new management during the quarter ended June 30,
1998 and implemented a new business plan. As a result, all costs increased in
the quarter ended June 30, 1998 due to increases in headcount and increased
sales and marketing expenditures. We recorded total deferred stock compensation
of $1.7 million in connection with stock options granted during the nine months
ended March 31, 1999. We are amortizing these amounts over the vesting periods
of the applicable options, which resulted in amortization expense of $32,000,
$46,000 and $158,000 in the quarters ended September 30, 1998, December 31,
1998 and March 31, 1999, respectively.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on future revenue projections. Most of our expenses are fixed in nature, and we
may not be able to quickly reduce spending if revenue is lower than we have
projected. Our ability to forecast our quarterly sales accurately is limited
which makes it difficult to predict the quarterly revenue that we will
recognize. We expect that our business, operating results and financial
condition would be harmed if revenues do not meet projections and our operating
results are less than expected.
We expect that our revenue and operating results may vary significantly from
quarter to quarter, and we anticipate that our expenses will increase
substantially in the foreseeable future as we:
. increase our direct sales and marketing activities, including expanding
our North American and international direct sales forces and extending
our telesales efforts;
. develop our technology, expand our OnePoint product suite and create and
market products that operate with the commercial release version of
Windows 2000;
. expand our indirect distribution channels; and
. pursue strategic relationships and acquisitions.
Accordingly, we believe that quarter to quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the
results of one quarter as an indication of future performance.
Liquidity and Capital Resources
We have funded our operations primarily from license revenue received from
inception to March 31, 1999 and the proceeds of approximately $10.2 million
from the sale of common stock, preferred stock and warrants. At March 31, 1999,
we had cash and cash equivalents of $9.5 million. As of March 31, 1999, we had
an accumulated deficit of $8.8 million and working capital of $7.0 million, net
of a short-term component of deferred revenue of $3.5 million.
Our operating activities used net cash of $1.7 million in fiscal 1997 and
$439,000 in fiscal 1998 and provided net cash of $6.0 million in the nine month
period ended March 31, 1999. Net cash used by operating activities in fiscal
1997 and fiscal 1998 was due primarily to net operating losses and increases
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in accounts receivable. Our operations generated net cash in the nine months
ended March 31, 1999 primarily due to increased revenue, improved accounts
receivable collection efforts, and increased accrued liabilities. The increase
in accrued liabilities is the result of an accrual for abandoned lease costs
and expansion of our operations, including increased commissions, marketing
programs, recruiting fees, benefit costs and other infrastructure costs.
Our investing activities used net cash of $1.2 million, $492,000 and $900,000
in fiscal 1997, fiscal 1998 and the nine months ended March 31, 1999,
respectively. Our investing activities consisted primarily of net purchases of
property and equipment.
Our financing activities provided $3.1 million and $5.2 million in fiscal
1997 and fiscal 1998, respectively. In fiscal 1997 and fiscal 1998, financing
activities consisted primarily of sales of redeemable convertible preferred
stock partially offset in fiscal 1998 by the repurchase of 950,000 shares of
Series A Preferred Stock for $2,850,000 and net repayments on debt facilities.
In the nine-month period ended March 31, 1999, we used $238,000 of net cash for
financing activities as the repayments on the debt facilities exceeded the
generation of cash from the sales of our common stock to employees in
connection with the exercise of stock options.
We anticipate spending at least $1.1 million for office lease payments and
approximately $1.5 million for capital expenditures over the next 12 months.
From inception, we have made capital expenditures of $4.5 million, less
accumulated depreciation and amortization of $1.8 million, to support our
research and development, sales and marketing and administrative activities. We
expect capital expenditures to increase over the next several years as we
expand facilities and acquire equipment to support our planned expansion in
sales and marketing. We expect to utilize cash resources to purchase additional
equipment over the next 12 months.
In January 1998, we obtained a revolving credit facility of $3.0 million from
a commercial bank that we renewed in March 1999. The credit facility expires on
February 5, 2000. Borrowings under the credit facility bear interest at the
bank's prime rate. Under the terms of the loan agreement, all borrowings are
collateralized by substantially all of our assets, and we must maintain certain
financial ratios and other covenants. At March 31, 1999, we had no borrowings
outstanding under the credit facility, and the unused amount of $3.0 million is
available for drawdowns through February 5, 2000. We were in compliance with
all covenants as of March 31, 1999 but we cannot assure you that we will be
able to continue to comply with our loan covenants in the future.
We intend to continue to invest heavily in the development of new products
and enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which our existing and new products gain market
acceptance, market developments, the costs involved in maintaining and
enforcing intellectual property rights, the level and timing of license
revenue, available borrowings under line of credit arrangements and other
factors. We believe that the proceeds from this offering, together with our
current cash and investment balances and any cash generated from operations and
from available or future debt financing, will be sufficient to meet our
operating and capital requirements for at least the next 12 months. However, it
is possible that we may require additional financing within this period. We
have no current plans, and we are not currently negotiating, to obtain
additional financing following the completion of this offering. Our forecast
period of time through which our financial resources will be adequate to
support our operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The factors described in this
paragraph will affect our future capital requirements and the adequacy of our
available funds. We may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. We cannot
assure you that such funding, if needed, will be available to us on terms
attractive to us, or at all. Furthermore, any
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<PAGE>
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. Strategic
arrangements, if necessary to raise additional funds, may require us to
relinquish our rights to certain of our technologies or products. If we fail to
raise capital when needed, our failure could have a negative impact on our
operating results and financial condition.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, the
AICPA, issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Statement of
Position No. 98-1 requires us to capitalize certain costs related to internal
use software once certain criteria have been met. We expect that the adoption
of Statement of Position No. 98-1 will not have a material impact on our
financial position or results of operations. We will be required to implement
Statement of Position No. 98-1 for our fiscal year beginning July 1, 2000.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." Statement of Position No. 98-5 requires us to
expense all start-up costs related to new operations as incurred. In addition,
all start-up costs that were capitalized in the past must be written off when
we adopt Statement of Position No. 98-5. We expect that the adoption of
Statement of Position No. 98-5 will not have a material impact on our financial
position or results of operations. We will be required to implement Statement
of Position No. 98-5 for our fiscal year beginning July 1, 2000.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a
material impact on our financial position or results of operations. We will be
required to implement SFAS No. 133 for the fiscal year beginning July 1, 2001.
In December 1998, the AICPA issued Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." Statement of Position 98-9 amends Statement of Position 98-4,
"Deferral of Effective Date of SOP 97-2" to further defer the application of
certain passages of Statement of Position 97-2, "Software Revenue Recognition"
through fiscal years that begin on or before March 15, 1999. We do not believe
that the adoption of Statement of Position 98-9 will have a material effect on
our results of operations or financial condition.
Qualitative and Quantitative Disclosures About Market Risk
We develop products in the United States and sell those products primarily in
North America and Europe. In the nine months ended March 31, 1999, our revenue
for sales outside North America was 19.5% of our total revenue. As a result,
our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
of our sales are currently made in U.S. dollars, a strengthening of the dollar
could make our products less competitive in foreign markets.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
have concluded that we do not have material market risk exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
.obligations of the U.S. government and its agencies;
.investment grade state and local government obligations;
.securities of U.S. corporations rated A1 or P1 by Standard & Poors or
the Moody's equivalents; and/or
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.money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks meeting certain credit rating and net worth
requirements with maturities of less than two years.
At March 31, 1999, our cash and cash equivalents consisted primarily of demand
deposits and money market funds held by large institutions in the U.S., and our
short-term investments were invested in corporate debt maturing in less than 60
days.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
Our products. We are currently conducting a review of the current versions of
our products to determine Year 2000 compliance. We have reviewed the software
code for each of these applications and believe that we have identified all
instances where date specific information is required. We have further
investigated whether these date fields contain two or four digits, and have
initiated efforts to upgrade our software when date fields that contain only
two digits were discovered. Based on our preliminary review and the results of
limited testing, we believe that our OnePoint product suite, when configured
and used in accordance with its instruction manual, correctly recognizes date
codes after 1999 and functions with four digit date codes. We intend to conduct
further tests on all of our applications to identify areas of deficiency and to
develop action plans to correct and upgrade our software code.
We are in the final stages of assessing our Year 2000 readiness. Despite
preliminary investigation and testing by us and our partners, our software
applications and the underlying hardware systems and protocols running the
software may contain undetected errors or defects associated with Year 2000
date functions. Our software applications operate in complex network
environments and directly and indirectly interact with a number of other
hardware and software systems. We are unable to predict to what extent our
business may be affected if our software or the systems that operate in
conjunction with our software experience a material Year 2000 failure. Known or
unknown errors or defects that affect the operation of our software could
result in delay or loss of revenue, cancellation of customer contracts,
diversion of development resources, damage to our reputation, increased service
and warranty costs, and litigation costs, any of which could adversely affect
our business, financial condition and results of operation.
Our software products run on several hardware platforms and the Windows NT
and pre-release Windows 2000 operating systems. In addition, our software
operates in accordance with several external Windows NT protocols, such as http
and nntp. Our software is therefore dependent upon the correct processing of
dates by these systems and protocols. We have reviewed information made
publicly available by our hardware platform partners regarding Year 2000
compliance and researched the date handling capabilities of applicable Windows
NT protocols. Based on this research, we do not believe that the underlying
systems and protocols that operate in conjunction with our software products
contain material Year 2000 deficiencies. However, we have not conducted our own
tests to determine to what extent our software running on any of our hardware
platforms and in accordance with any of our supported Windows NT protocols
fails to properly recognize Year 2000 dates.
Our state of readiness. We use multiple software systems for internal
business purposes, including accounting, email, development, human resources,
customer service and support and sales tracking systems. All of these
applications have been purchased within the preceding 18 months. We conducted
research about the vendors of the systems and software that we believe are
critical to our business regarding their Year 2000 readiness. Each of these
vendors has indicated through publically available information and through
their web sites that the vendor believes the vendor's applications are Year
2000 compliant. We have completed operational testing on those systems which
are reported to be Year 2000 compliant, and they appear to pass all applicable
Year 2000 tests. We have scheduled updates of all systems for which we cannot
prove Year 2000 readiness, and those upgrades will be completed before October
1, 1999.
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Our business depends on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. The systems include:
. computer and communications hardware and software systems used to
deliver services;
. computer and communications hardware and software systems we use
internally to manage our business;
. communications networks such as the Internet and private intranets;
and
. non-information technology systems and services we use to manage our
business, such as telephone, security and building management
systems.
Based on an analysis of all systems potentially impacted by conducting
business in the year 2000 and beyond, we are pursuing a phased approach to
making our systems and our operations ready for the year 2000. Beyond an
awareness of the issue and scope of systems involved, we will:
. identify third party product reliance and document their use in our
Year 2000 compliance tests;
. complete a review of the third-party product for potential date
related issues; and
. validation and testing of technologically-compliant Year 2000
solutions.
The table below provides a summary of the status and timing of our internal
readiness activities:
<TABLE>
<CAPTION>
Targeted
Impacted Systems Status Implementation
---------------- ------ ---------------
<S> <C> <C>
Hardware and software Systems upgraded or replaced as October 1, 1999
systems used to deliver appropriate, conducting validation and
services testing
Hardware and software Systems upgraded or replaced as October 1, 1999
systems used to manage appropriate, conducting validation and
our business testing
Communication networks Assessment completed, conducting October 1, 1999
used to provide services validation and testing
Non-information Completed Completed
technology systems and
services
</TABLE>
Costs to Address Year 2000 Issues. To date, the costs for conducting our
assessment have not been material, and we expect total costs incurred in
connection with our Year 2000 project to be less than $100,000. We cannot be
sure that Year 2000 issues will not be discovered in our products or internal
software systems and, if any issues are discovered, we cannot be sure that the
costs of making such products and systems Year 2000 ready will not harm our
business and financial conditions. We believe that it is not possible to
determine with complete certainty that all Year 2000 problems affecting us have
been identified or corrected. The number of devices and the interactions among
these devices are simply too numerous. In addition, no one can accurately
predict how many Year 2000 problem-related failures will occur or the severity,
duration or financial consequences of these perhaps inevitable failures. As a
result, we believe the following consequences are possible:
. we or our customers or suppliers may experience a significant number of
operational inefficiencies that could divert our or their management's
time and attention or resources from ordinary business activities;
. we may become involved in disputes and claims for pricing adjustments or
penalties due to Year 2000 problems with our suppliers, customers or
original equipment manufacturers; and
. our customers or original equipment manufacturers could allege that we
failed to comply with the terms of contracts or industry standards, and
these allegations could result in the customer or original equipment
manufacturer cancelling our contract filing litigation against us.
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<PAGE>
Contingency Plans. We have not yet developed a contingency plan for handling
Year 2000 problems that are not detected and corrected prior to their
occurrence. Upon completion of testing and implementation activities, we will
be able to assess areas requiring contingency planning and we expect to
institute appropriate contingency planning at that time. Any failure to address
any unforseen Year 2000 issues could harm our business. Depending on our
systems affected, our Year 2000 contingency plans could include:
. accelerated replacement of affected equipment or software, resulting in
higher equipment expense and depreciation;
. short to medium term use of backup equipment and software;
. increased work hours for our staff, resulting in higher compensation
expense and possibly higher employee turn-over; and
. use of contract personnel to correct any Year 2000 problems that arise or
to develop manual work arounds for information systems, each on an
accelerated schedule.
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BUSINESS
The following business section contains forward-looking statements relating
to future events or the future financial performance of Mission Critical
Software, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors including those set forth in "Risk Factors" and
elsewhere in this prospectus.
Overview
We are a leading provider of systems administration and operations management
software products for corporate and Internet-based Windows NT networks. Our
OnePoint product suite is designed to improve the reliability, performance and
security of even the largest and most complex computing environments by
simplifying and automating key systems management functions. Our products can
be deployed quickly, are based on an open and extensible architecture and are
easy to use.
As of March 31, 1999, our products had been installed by over 600 customers,
including more than 40 of the 1999 Fortune 100 companies and some of the
largest Internet datacenters in the world. We market and sell our products
worldwide through a network of sales offices and distribution partners. Our
products have been adopted in a wide variety of industries, including banking
and finance, energy, healthcare, insurance and pharmaceuticals. Representative
customers include Dell Computer, Dow Chemical, DuPont, Hoffman-LaRoche, Johnson
& Johnson, LM Ericsson AB, Lockheed Martin, Microsoft, Nortel and USAA.
Industry Background
The evolution of enterprise computing from centralized, mainframe-based
computing to distributed, client/server and Internet-based computing has added
substantial complexity to the management of computer network infrastructures.
Today's information technology environments are characterized by distributed
information systems, applications and networks. Many of these environments have
been further complicated by the increasing use of the Internet as a medium for
connecting businesses with customers, suppliers and employees. In the
increasingly competitive business world, effective use of corporate and
Internet-based networks has become a necessity, particularly for companies
pursuing e-business strategies. For companies such as online retailers or
Internet service providers that generate most of their revenue through
electronic communication, systems issues such as network scalability, security,
availability and performance are critical business considerations.
In today's corporate networks, organizations are installing Windows NT
servers in greater quantities and are using these Windows NT servers to address
a broadening scope of business needs. Adoption of Windows NT has accelerated as
servers running on the Windows NT operating system are increasingly being used
to run Internet sites and web server farms -- Internet-based networks composed
of hundreds or thousands of tiered Windows NT servers -- and to support
e-business and application hosting initiatives. In a survey of Fortune 1000
information technology managers, Forrester Research found that, on average,
those managers expected 60% of their servers to run on Windows NT by the end of
2000. International Data Corporation projects that the installed base of
Windows NT servers will increase from 2.2 million in 1998 to 6.3 million in
2002.
The growing complexity of corporate and Internet-based Windows NT networks
has placed increasing pressure on systems managers to maintain reliable network
operations. These networks must be kept secure and available 24 hours per day,
7 days per week and must be able to support widely distributed global
organizations. Failure to ensure these service levels could result in heavy
penalties, including a loss of internal productivity and, with the increasing
prevalence of e-business, corporate revenue. Although Windows NT servers are
flexible and powerful operating systems, they require ongoing management
support. To keep Windows NT networks running smoothly, companies have employed
large departments of skilled systems administrators. This approach has proven
costly and ineffective as the scarcity of skilled systems administrators has
made these personnel very expensive. To improve both the efficiency and
effectiveness of corporate and Internet-based Windows NT networks, businesses
are increasingly using
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systems management software solutions. International Data Corporation projects
the size of the market for 32-bit Windows systems management software--the
market for software that manages Windows NT and other 32-bit Windows operating
systems--will grow from $1.8 billion in 1998 to $8.1 billion by 2003. To date,
these software solutions have addressed two primary functions:
. Systems Administration. The primary function of systems administration is
to create and maintain the data that directs and secures the network
operating system. Because of the volume, complexity and importance of the
data produced by the operating system, its proper management is critical.
Another key role of systems administration is to determine appropriate
policies, including those that are designed to secure access to the
network, data and applications, and to audit adherence to those policies.
The automated application of policies benefits corporate and Internet
networks by ensuring consistency in outcomes and reducing the systems
administrator hours needed to maintain the network.
. Operations Management. The primary function of systems operations
management is to identify and respond as early as possible to problems
such as breaches in security, hardware failures, software crashes and
insufficient capacity. These activities are critical to the ongoing
operation of corporate and Internet-based networks. For example, security
operations management provides mechanisms for notification and response
to unauthorized access or policy violations. Another role of systems
operation management is to continually monitor the performance,
responsiveness and availability of network services so that systems
administrators can plan and budget for the frequently needed additions,
upgrades and configuration changes.
Several systems management software companies have attempted to provide this
functionality for Windows NT and other operating systems. Their products fall
into three general categories:
. Utilities. Point applications and utilities focus on a specific systems
administration problem and attempt to amplify systems administrator
efforts. While these often are helpful in workgroup and small network
situations, many of them have not been designed and tested to scale to
larger networks. The need to evaluate and procure point applications and
utilities one by one is costly. Many of these utilities also require
substantial systems administrator time for integration with other systems
management tools used on the networks.
. Cross-platform point suites. Cross-platform point suites have broader
applications than the point product solutions or utilities because of
their ability to support multiple operating systems such as Unix, Windows
NT and MVS. However, we believe that these cross-platform point suites
typically provide a limited depth of functionality due to the demands of
functioning on multiple operating systems. In addition, these suites are
often more difficult to implement and manage than point applications or
utilities.
. Frameworks. Frameworks attempt to solve most systems management problems
on most operating systems. Although they offer the promise of a "one-
stop-shop" for all enterprise systems management needs, they are complex,
require a significant amount of knowledge and training to manage, and
require a lengthy implementation. As with cross-platform point solutions,
we believe that these framework solutions typically provide limited depth
of functionality for Windows NT systems management given their broad
scope.
We believe that products in these categories have exhibited a variety of
shortcomings in addressing Windows NT systems management requirements. They
have either proven to be too narrow in scope, limited in terms of Windows NT
functionality, overly difficult and costly to implement or some combination of
the above. We believe that companies increasingly want software solutions that
provide end-to-end integrated functionality for systems administration and
operations management, can be rapidly deployed and are easy to use. A
comprehensive systems management product offering should enable companies to
better utilize their skilled systems administrator resources and support the
security, availability and performance demands of large distributed corporate
and Internet-based networks. The solution should incorporate rules,
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<PAGE>
particularly those rules that relate to the increasing complexity of e-business
related systems management, but should be customizable to meet specific
customer needs. Finally, the solution should fully support and extend the
existing capabilities of Windows NT.
The Mission Critical Software Solution
We are a leading provider of software products that enable scalable systems
administration and operations management for corporate and Internet-based
Windows NT networks. Our OnePoint product suite is designed to improve the
reliability, performance and security of even the most complex computing
environments by simplifying and automating many key systems management
functions. Our products are based on an open and extensible architecture, can
be deployed quickly and are flexible and easy to use and enable quick
deployment, flexibility and ease of use. Our software products provide the
following features and benefits:
Integrated, end-to-end eManagement. OnePoint is designed to facilitate
eManagement -- the centralized management of critical systems
infrastructure and applications for the extended enterprise. Customers can
use OnePoint to monitor, manage, administer and secure a wide range of
resources in the Windows NT environment including web server farms,
electronic commerce and corporate servers, workstations, applications and
the Windows 2000 Active Directory. OnePoint enables companies to automate
labor-intensive tasks, such as security monitoring and administration, and
to minimize the need for customization by incorporating widely accepted
business procedures into the software. OnePoint is also designed to ease
the transition from other operating systems, such as Novell Netware, to
Windows NT by providing systems administrators with the ability to test
implementations and convert systems incrementally.
Designed to manage and enable e-business. Our software solutions enable
systems administration and management of Windows NT servers that power e-
business applications. OnePoint enables e-businesses to provide continuous,
secure systems availability (24 hours, 7 days per week) and high
transaction throughput to their customers, thereby increasing the level of
overall customer satisfaction. OnePoint permits routine systems
administration functions to be conducted without interruption of services
and reduces the cost of eManagement by establishing policies and rules
which automate specific systems management tasks. For example, OnePoint can
respond to a hacker attack while the attack is in progress by reconfiguring
the impacted web server to deny further communications from the
unauthorized intruder.
Highly scalable, extensible architecture. Each of our products is
designed to operate in complex, enterprise-scale Windows NT environments.
OnePoint centrally manages a large number of interlinked Windows NT servers
and facilitates the expansion of the number of servers under management
without time-consuming implementation. In addition, our products can be
deployed rapidly and be implemented incrementally either by product or by
department. The modular architecture of our products enables users to
customize these products to meet their networks' specific needs.
Lower total cost of ownership. We reduce the total cost of ownership by
providing a single point of systems administration and operations
management, which simplifies systems management processes and limits the
skilled systems administrator resources required. We believe that our
policy-based approach further reduces the number of required personnel by
enabling businesses to automate many systems management tasks. Unlike many
other alternatives, our software products enable systems administrators to
implement network-wide policies and rules without extensive programming or
customization. Our solutions also reduce total cost of ownership by
permitting departmental self administration for routine tasks, such as
entering changes in user profile information, and by providing products
that facilitate the transition from other operating systems without costly
consulting services or extensive customization.
Rapid and cost-effective self deployment. Our products are designed to
be easy to install and use. Their automated implementation capabilities
allow them to be installed in minutes, configured in hours
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and deployed worldwide in days. In addition, our products offer a familiar
Windows look and feel that accelerates user adoption and minimizes the need
for formal training. As a result, our products can be deployed without the
need for extensive professional services or internal implementation support
staff, thus increasing the potential return on investment for customers.
For example, systems administrators can use our ActiveKnowledge modules to
incorporate Windows NT-specific problem solving into their systems
administration tools without extensive on-site custom programming. We
believe our rules-based approach is not only many times more scalable than
simplistic script-based approaches but makes our products far easier and
faster to deploy.
The Mission Critical Software Strategy
Our objective is to maintain and strengthen our position as a leading
provider of systems management software for corporate and Internet-based
Windows server networks. Key elements of our strategy include:
Extend our OnePoint product suite. We plan to increase the functionality
of our OnePoint product suite through internal development and,
potentially, strategic acquisitions. We will continue to extend our
existing technology in systems administration and operations management and
broaden our platform migration modules. For example, we intend to
commercially release a new OnePoint product, File Administrator, in late
1999. We also intend to release products that facilitate migration from
Windows NT and Netware to the commercial release version of Windows 2000.
We have already released products that enable customers to transition from
Windows NT to the current pre-release version of Windows 2000 and from
Netware to Windows NT. We will continue to research and develop new
products, examine the use of agents for administering and monitoring other
operating platforms from a centralized Windows 2000 console and enhance
integration of our products with framework solutions.
Target companies and service providers conducting e-business. We believe
that the growth of the Internet is accelerating demand for Windows NT
servers. Our products are designed to support high volume, Internet-based
networks and are currently being used to manage web server farms and
electronic commerce sites. We intend to expand our eManagement business by
specifically targeting online retailers, Internet service providers,
commerce service providers and other companies for which Windows NT systems
management products are an operational necessity.
Increase sales to existing customer base. Our variable license fee
structure, which is based on the number of users and servers, allows
customers to try our products without committing to a full enterprise-wide
implementation. To date, a substantial portion of our revenues have come
from additional sales of the same products within an existing customer's
organization. We believe that there is a large market for selling new
licenses for the same products as well as other products to our existing
customers. We intend to continue our current incremental selling strategy.
We will also pursue enterprise-wide initial sales whenever appropriate.
Expand our customer base. Our products have been deployed by many of the
largest organizations in the world. While we intend to expand our direct
sales efforts to these large organizations, our variable license fee
structure makes our solution viable for smaller enterprises as well.
Through our ChannelOne partnership program and targeted telesales
campaigns, we intend to increase our selling efforts to mid-sized companies
that often are aggressive adopters of Windows NT because these smaller
organizations often suffer most acutely from the lack of highly skilled
systems management personnel. We believe these customers' business and
computing needs are growing rapidly due to their adoption of Internet-based
applications and other software solutions.
Leverage and expand Microsoft relationship. We are currently a leading
vendor of Windows NT-based systems management software, both in product
sales and technology. We have developed an extensive relationship with
Microsoft that includes the sharing of technology, joint marketing and
sales efforts. Microsoft uses our OnePoint Event Manager product for its
global Internet and corporate datacenters, and Microsoft has indicated its
intention to use our Windows NT 4.0 to Windows 2000
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<PAGE>
migration tools in their Windows 2000 offerings. We intend to continue to
work with Microsoft to provide and jointly market solutions that exploit
the full value, flexibility and depth of the Windows NT and Windows 2000
operating environments. Our Vice President of Strategic Alliances works
closely with Microsoft at its Redmond, Washington campus to help us manage
and expand our relationship. In addition, we have sales engineer and
developer personnel located on Microsoft's Redmond campus.
Expand global distribution channels. We believe that the international
marketplace provides a significant growth opportunity as organizations
worldwide adopt Windows NT and Windows 2000. To date, we have sold our
products domestically through our direct sales force and internationally
through a limited number of distributors. We believe that the ease of
deployment and use of our products and our pricing model make our products
well suited for resale through indirect channels such as international
distributors and strategic partners. We intend to expand indirect selling
of our products through strategic partner arrangements and to engage
international distributors with substantial market penetration in the
enterprise systems software segment. In addition, we intend to expand our
direct sales presence in key international markets.
Products and Technology
Our OnePoint product suite provides scalable systems administration and
operations management for even the largest and most complex computing
environments in a manner that is quick to deploy, flexible and easy to use.
OnePoint currently consists of the following products:
.Directory & Resource Administrator
.Domain Administrator
.Exchange Administrator
.Event Manager
.Framework Integration
The major components of the OnePoint suite are summarized below.
[Graphic showing components of One Point suite including -- Systems
Administration, Security, Operations Management; Products--Directory and
Resource Administrator, Domain Administrator, Exchange Administrator, Event
Manager, Framework Integration; Infrastructure--Active Knowledge Library,
Active Administration & Operations Engine]
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The OnePoint product suite's open and extensible architecture is designed to
provide stability, high performance and scalability. The OnePoint suite is
modular and allows organizations to add functionality as their corporate or
Internet-based Windows NT networks expand. Each generation of OnePoint products
has introduced additional functionality, such as our May 1999 Release 5.0 that
added a migration tool for the current pre-release version of Windows 2000.
Our OnePoint product suite provides rich systems administration, operations
management and security functionality along with a reduction in the total cost
of network operations by:
.Providing an out-of-the-box solution that does not require extensive
customization;
.Automating systems management functions by using policies and rules to
reduce the number of expensive systems manager hours needed to manage Windows
NT systems;
.Applying centrally determined rules to Windows NT systems throughout the
enterprise to increase system reliability and security;
.Delegating systems management tasks to business department personnel to
improve response time and limit systems administrator hours required; and
.Facilitating more rapid security audits through monitoring and logging
capabilities.
OnePoint Suite--Products
Products Features
- --------------------------------------------------------------------------------
. Central definition of security
OnePoint Directory & Resource policies and rules
Administrator . Secure distribution of
Provides unified, policy-based administrative tasks to line of
administration of directory content business departments to increase
and non-directory resources for service levels and reduce systems
increased security, data integrity administrator workload
and reduced administrative effort. . Monitoring and logging facilities
for comprehensive security audit
- --------------------------------------------------------------------------------
. Domain consolidation and
OnePoint Domain Administrator reconfiguration to simplify
Simplifies networks by reducing the systems administration, reduce
number of domains and variety of systems administrator workload
operating systems required. and reduce the amount of hardware
required to run a Windows NT-
based network
. Design, modeling, testing and
implementation of the current
pre-release version of Windows
2000 Active Directory structures
to enable flexible, efficient
responses to organizational
change
. Simplified and rapid migration
from Windows NT 4.0 to the
current pre-release version of
Windows 2000
. Simplified and rapid migration
from Novell Netware to Windows NT
4.0 and the current pre-release
version of Windows 2000
- --------------------------------------------------------------------------------
OnePoint Exchange Administrator . Unified administration of the
Enables secure, distributed and Exchange and Windows NT
synchronized administration of directories to insure data
Microsoft Exchange mailboxes and consistency and integrity
distribution lists. . Central definition of security
policies and rules for mailbox
administration
. Distribution of mailbox
administration tasks to line of
business departments to increase
service levels and reduce systems
administrator workload
. Comprehensive security audit
through monitoring and logging
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Products Features
- --------------------------------------------------------------------------------
OnePoint Event Manager . Real-time system availability and
performance monitoring
Enables operations management and . Comprehensive security monitoring
monitoring of a wide range of and intrusion detection
network components by providing . Comprehensive monitoring of
real-time event and problem operation, performance and security
detection and automated problem for web farms
resolution. . Automated problem resolution via
execution of ActiveKnowledge
modules and integration with
OnePoint administration products
. Real-time console, pager and email
alerts
. High performance, low overhead,
data collection and filtering
. Continuous monitoring of tens of
thousands of servers and
applications
- --------------------------------------------------------------------------------
OnePoint Framework Integration . Continuous monitoring of a
OnePoint-managed network through
Enables OnePoint to integrate with the Tivoli management console
existing frameworks and systems
management environments.
OnePoint Suite--Infrastructure Components
Component Features
- --------------------------------------------------------------------------------
ActiveKnowledge Library . Designed to eliminate the need for
service intensive implementations
. Pre-defined event filters,
Library of pre-built rules based on performance counters, alerts and
widely accepted Windows NT systems automated responses for a wide
management procedures that enable range of events and problem
out-of-the box automation of systems conditions
administration and operations . Over 25 modules for most Windows NT
management tasks. components and applications such as
Windows NT Security Logs and
Microsoft Internet Information
Server
. Customizable and extensible modules
- --------------------------------------------------------------------------------
Active Administration & Operations
Engine </HighRperformance>and.scalability
due to multi-level client-server
Provides common infrastructure architecture
services for all OnePoint modules. . Complete extensibility and
customization of OnePoint
products through customization
engine
. Integration with third party
products
. Comprehensive support for
Microsoft's Active Directory
Services Interface
OnePoint Architecture
OnePoint is based on a multi-level client-server architecture as illustrated
below. OnePoint exploits Microsoft's Distributed interNet Application
architecture technologies to provide increased security, simplicity and
performance in the system management arena. These technologies enable
simplified component level programming, multi-part transactions, support for
multi-level distributed components, extended security and integration with the
Internet and the web. We believe that Distributed interNet Application
architecture technologies are important in the area of securing and managing
complex systems infrastructure components and their data and that they provide
a point of differentiation between our products and those of other vendors.
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<PAGE>
[Graphic description of tools, system and application services and the three
layers that includes the presentation layer, the business logic layer and the
data layer]
Presentation Layer--provides the interfaces that systems administrators and
managers use to perform systems management functions. Multiple interfaces are
provided to meet the unique needs of specific types of users:
. Microsoft Management Console--OnePoint products are provided as snap-ins
that integrate into the Microsoft Management Console and are designed for
use by professional systems managers to provide rich functionality.
. Web client--A task-oriented thin web client, requiring no workstation
installation, provides a simple and effective tool for non systems
professionals, such as a line of business department assistant, to
perform administrative activities efficiently, securely and safely.
. Application programming and customization interfaces--These interfaces
enable professional administrators to customize or extend the
functionality of OnePoint products to meet the unique needs of a specific
organization.
Business Logic Layer--provides a layer of common services that manages the
communication between the data and presentation layers. The business logic
layer ensures that administrative and operational policies are enforced, that
transactions across multiple data stores are managed and that the integrity of
data store content is maintained.
Data Layer--dynamically manages the collection and update of data from a wide
range of Windows NT and Windows 2000 data sources including the Windows NT 4.0
Security Access Manager, Windows 2000 ActiveDirectory, Exchange, application
event logs, Windows NT system services and the Windows Registry.
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<PAGE>
Customers
Our products have been sold to over 600 corporations, governmental agencies
and other organizations worldwide including more than 40 of the 1999 Fortune
100 companies. The following table lists our customers that each accounted for
more than $100,000 in total revenue from July 1, 1997 to March 31, 1999, who
have purchased maintenance in the nine months ended March 31, 1999. These
represented an aggregate of 58% and of our license revenue in the 21 months
ended March 31, 1999.
Allstate Insurance Honeywell Republic Industries,
Company Johnson & Johnson Inc.
Anheuser-Busch LM Ericsson AB Rogers Cable TV
Bayerisch Landesbank Lockheed Martin Schering-Plough
BellSouth Cellular MCI Systemhouse Corporation
Carnival Cruise Lines Merck & Co., Inc. Shell Services
The Chubb Corporation Merrill Lynch, Pierce, International Inc.
CNF Service Company Fenner & Smith SHL Computer Innovation
Coca Cola Company Microsoft Corporation SHL System House--Amoco
Columbia Healthcare Morgan Stanley & Co., Inc. Division
Compaq Computer Motorola, Inc. Sonnenschein Nath &
Corporation Nike Rosenthal
Countrywide Home Loan Nortel Sprint Corporation
Cummins Engine Co. Novartis Argentina SA Sutter Health
Dell Computer Corporation Pacific Gas & Electric Trellis Network
Department of Foreign Public Service Electric & Services, Inc.
Affairs Gas Co. TRW Inc.
Digital Equipment Raychem Corporation USAA
Corporation Washington State
Dow Chemical Department of
DuPont Corrections
Equitable Life Insurance Wells Fargo & Company
F. Hoffman-LaRoche Ltd. Western Wireless
Weyerhauser Company
Customers often buy for a single location, department or division, and then,
based upon the initial success of the products in that location, department or
division, later expand their use of our products into other parts of the
organization. We believe we can sell our existing products more deeply within
our existing customer sites and sell new products as we expand our product
line. We will continue to pursue enterprise wide sales as appropriate. In
fiscal 1997, fiscal 1998 and the nine months ended March 31, 1999, no single
customer comprised more than 10% of our revenue.
Microsoft Relationship
Currently Microsoft is a supplier, partner and customer.
Supplier. Our products are focused on the Windows NT marketplace. We have a
relationship with Microsoft's Developer Relations Group, through which
Microsoft works with companies that are developing products that enhance
Microsoft products and operating systems. We also have a relationship with
Microsoft's Windows 2000 Product Management Group, through which Microsoft
coordinates product marketing of Windows 2000 with vendors whose products
enhance Microsoft products and operating systems. We believe that these
relationships enable us to anticipate Microsoft's evolving product strategy in
advance of the market and to create products designed to increase the value of
Microsoft's operating systems. In addition, we believe that the relationship
enables us to have early access to technologies and/or influence the
development of special requirements.
Cooperative Marketing Arrangement. We recently entered into an agreement with
Microsoft to incorporate selected components of our domain migration software
for Windows 2000 and to cooperate in marketing our products. Microsoft intends
to deliver customized components of our OnePoint Domain Administrator product
principally relating to Windows NT 4.0 to Windows 2000 domain migration to
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customers of Windows 2000 as a snap-in product. Microsoft can, but is not
obligated, to incorporate our components with Windows 2000. In addition, we
have agreed to provide two applications engineers for a period of at least two
years at Microsoft's Redmond, Washington campus. We will also engage in joint
marketing activities with Microsoft.
Partner. We are a member of numerous Microsoft program partnerships. We
participate as partners in the Microsoft Certified Solution Provider, ADSI
Partner and Security Partner programs. We also participate in Microsoft's
BackOffice program, whereby Microsoft tests and certifies our products as
BackOffice compatible. We have been chosen as one of the vendors whom Microsoft
promotes through both its internal and external marketing programs. The
objectives of these programs are to increase Windows NT server sales by
informing both Microsoft field personnel as well as potential customers about
the added value of our solutions. We also participate in numerous Microsoft
sponsored events such as COMDEX, Windows 2000 Rapid Deployment Conferences and
TechEd. At some of the tradeshows we attend, we demonstrate and/or present as a
member of the Microsoft Partner Pavilion. In addition to the above, we
participate in extensive joint field work with Microsoft account
representatives, systems engineers and consultants through a concerted program
of awareness, joint presentations, briefings and sales calls.
Customer. Microsoft's Information Technology Group became our customer in
June 1998 when Microsoft licensed our OnePoint Event Manager product. Microsoft
selected OnePoint Event Manager to perform strategic event management of its
global Internet and corporate data centers. Microsoft has five primary
datacenters, including three Internet datacenters (in Redmond, Washington, the
United Kingdom and Japan) and two main corporate data centers (in Redmond and
Ireland). The Microsoft Information Technology Group uses the OnePoint Event
Manager product to centrally monitor and provide alert notification for
proactively managing the health status of more than 3,000 critical business
systems.
Sales and Marketing
We sell our products primarily through our direct sales force and
distributors. Historically our sales efforts have focused on companies with
more than 3,000 employees. We intend to continue these efforts and to expand
our sales efforts to middle-market companies. We have relied on systems
integrators and consulting service providers for only a limited number of
sales, but we intend to explore opportunities to work with systems integrators
and consulting service providers in the future.
Direct Sales. We sell our products primarily through a direct sales force
using a team approach. We believe this approach allows us to achieve control of
the sales process and respond rapidly to customer needs. Each sales team
consists of three persons: a sales manager, an inside sales person and a sales
engineer. The sales manager is responsible for coordinating the efforts of the
sales team and for finalizing customer requirements and closing the sale. The
inside sales person is responsible for maintaining contact with existing
customers as well as prospecting for and qualifying potential new customers.
The sales engineer is a highly skilled technical employee responsible for
supporting products sales, including all technical aspects related to sales of
our products. Our typical sales cycle has averaged three months.
As of March 31, 1999, we had 43 persons in our direct sales organization
worldwide. The direct sales force for North America is distributed throughout
the United States and Toronto, Canada and accounts for substantially all of our
North American revenues. During 1999, we established direct sales activities in
Germany and France. We also have sales representatives based in London,
England. We have increased the size of our direct sales organization from 29 to
43 individuals over the past year and expect to continue hiring sales personnel
over the next 12 months, primarily in North America.
Distributors and Resellers. In addition to our direct sales strategy, we have
established indirect sales channels through distributors and other resellers.
Outside North America, we have historically relied heavily on our indirect
sales channel. We have established a network of resellers and distributors in
Europe, Australia and Brazil, with the concentration of such distributors being
located in Europe.
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<PAGE>
Our international distributors and other resellers typically perform
marketing, sales and technical support functions in their country or region.
Each one may distribute direct to the customer, via other resellers or through
a mixture of both channels. We actively train our international distributors in
both product and sales methodology.
Systems Integrators and Consulting Service Providers. To date, we have yet to
significantly utilize systems integrators or consulting service providers in
our selling efforts. We are currently evaluating opportunities for and plan to
expand joint sales with systems integrators and consulting service providers,
particularly with respect to the implementation of Windows 2000.
Marketing Programs. To support our growing sales organization and channel, we
have devoted significant resources in the past year to building and launching a
series of marketing campaigns. Our marketing efforts have included a number of
programs, such as seminars, industry trade shows, mailings, analyst and press
tours, advertising and public relations. We believe these marketing programs
have resulted in a number of sales leads.
Customer Service and Support
We believe that a high level of customer service and support is critical to
the successful marketing and sale of our products. We are developing a
comprehensive service and support organization to manage customer accounts and
expect to provide an increasing level of support as our products are deployed
across a range of customers. We provide support for our products and services
primarily from our Houston, Texas location. We plan to establish additional
service and support sites internationally commensurate with customer needs.
Our products are designed to be implemented quickly and effectively by our
customers and to require minimal support from us. We provide technical support
to our customers through maintenance and support agreements. This support
includes assistance with product installation, configuration and initial set-
up, run-time support and support during extended hours. We generally provide
our support via e-mail, the Internet, facsimile and telephone. We make software
upgrades available to customers with maintenance agreements as the upgrades are
released.
Research and Development
We believe that strong product development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications
and increasing the competitiveness of our product offerings. We have invested
significant time and resources in creating a structured process for undertaking
all product development projects. This process involves all functional groups
within our company and is designed to provide a framework for defining and
addressing the steps, tasks and activities required to bring product concepts
and development projects to market successfully. In addition, we have actively
recruited key computer engineers and software developers with expertise and
degrees in computer science. Our product development strategy emphasizes rapid
innovation and product releases. As of March 31, 1999, our research and
development staff consisted of 52 full-time employees. To date, none of our
development staff has left our company since inception.
We are currently preparing our OnePoint product suite to support the
commercial release version of Windows 2000. Our research and development
expenses totaled $1.3 million for fiscal 1997, $3.6 million for fiscal 1998 and
$4.3 million for the nine months ended March 31, 1999.
Competition
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition primarily from systems management
software vendors that provide solutions for distributed computing systems. We
have experienced and expect to continue to experience increased competition
from current and potential competitors, many of which have significantly
greater financial, technical, marketing and other resources.
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<PAGE>
Companies offering competitive products vary in scope and breadth of the
products and services offered and include:
. internal systems management departments;
. providers of point solutions for Windows NT directory administration,
domain consolidation migration and event management, such as Master,
Design & Development, Inc., Micromuse, Inc., Fastlane Technologies, Inc.,
Entevo Corporation, NetIQ Corporation, System Options Ltd. and Aelita
Software Group;
. providers of security and audit products for Windows NT such as BindView
Development Corporation and Netwise Systems Limited; and
. providers of systems management suites and/or frameworks such as Computer
Associates, Hewlett-Packard, Tivoli and BMC Software.
We believe the principal factors that will draw end-users to a systems
management software product include depth of product functionality, ability to
work natively with Windows NT, scalability, product quality and performance,
conformance to industry standards, competitive price and customer support.
We expect competition in the systems management software market to increase
significantly as new companies enter the market and current competitors expand
their product lines and services. Many of these potential competitors are
likely to enjoy substantial competitive advantages, including:
. greater resources that can be devoted to the development, promotion and
sale of their products;
. more established sales channels;
. greater software development experience; and
. greater name recognition.
Proprietary Rights
Our software products rely on our internally developed intellectual property.
We rely primarily on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
intellectual property and other proprietary rights. However, we believe that
such measures afford only limited protection. We license our software products
primarily under shrink wrap licenses that are included as part of the product
packaging. Shrink wrap licenses are not negotiated with or signed by individual
licensees, and purport to take effect upon the opening of the product package.
We believe that these measures afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult and we are
unable to determine the extent to which piracy of our software products exists.
In addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States.
We are not aware that our products employ technologies that infringe any
proprietary rights of third parties. We expect that software product developers
will increasingly be subject to infringement claims as the number of products
and competitors in our industry segment grows and the functionality of products
in different industry segments overlaps. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. These royalty or licensing
agreements may not be available on terms acceptable to us, if at all.
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<PAGE>
We use the following trademarks:
.Active Administration .OnePoint Administrator .OnePoint Exchange
Administrator
.Active Knowledge .OnePoint Directory .OnePoint File
Administrator Administrator
.Channel One
.OnePoint Domain .OnePoint Resource
.MCS Administrator Administrator
.Mission Critical
Software .OnePoint Event .OnePoint logo
Administrator
.SeNTry--
.Mission Critical the Enterprise Event Manager
Software logo
.OnePoint Event Manager
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
Employees
As of March 31, 1999, we had 136 full-time employees, 52 of whom were engaged
in research and development, 53 in sales and marketing, 10 in customer support,
and 21 in finance, administration and operations. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
Facilities
We lease approximately 32,000 square feet in a single office building located
in Houston, Texas pursuant to a lease that expires in August 2003. We have
signed a five-year lease for approximately 70,000 square feet of office space
in Houston, Texas. We also lease space in Lakewood, California; Atlanta,
Georgia; Austin, Texas; McLean, Virginia; and London, England. The term of any
one of these leases is 12 months or less.
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MANAGEMENT
Executive Officers And Directors
The following table sets forth information regarding our executive officers
and directors of and their ages as of June 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael S. Bennett...... 47 Chairman of the Board, President and Chief Executive Officer
Thomas P. Bernhardt..... 46 Chief Technology Officer and Director
Stephen E. Odom......... 47 Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary
Brian J. McGrath........ 60 Vice President of Sales
Richard J. Pleczko...... 41 Vice President of Marketing and Product Management
Stephen Kangas.......... 46 Vice President of Strategic Alliances
Olivier J. Thierry...... 43 Vice President of Marketing Communications
D. Von Jones............ 35 Vice President of Development
Michael Rovner.......... 29 Director of Business Development
Douglas L. Ayer(2)...... 62 Director
Michael J. Maples....... 56 Director
John J. Moores(1)....... 54 Director
Scott D. Sandell(2)..... 34 Director
John D. Thornton(1)..... 34 Director
</TABLE>
- ---------------------
(1) Member of audit committee
(2)Member of compensation committee
Michael S. Bennett has served as President, Chief Executive Officer, and as a
member of the board of directors of our company since May 1998. He was
appointed Chairman of the Board in February 1999. From August 1996 until April
1998, he served as President and Chief Executive Officer of Learmonth &
Burchett Management Systems plc, a provider of process management tools for
software development. Prior to joining Learmonth & Burchett in August 1996, Mr.
Bennett served as President and Chief Executive Officer of Summagraphics from
June 1993 to July 1996, until its acquisition by Lockheed Martin's CalComp
subsidiary. Prior to that time, Mr. Bennett served as a senior executive with
Dell Computer Corporation and as chief executive officer of several high
technology organizations.
Thomas P. Bernhardt is a founder of our company and has served as a director
since July 1996. Mr. Bernhardt was a consultant to our company from September
1996 to January 1997, when he joined us on a full time basis as its Chief
Technology Officer, which is his current role. From February 1998 to May 1998,
he also served as our interim President and Chief Executive Officer. From
January 1989 to December 1996, Mr. Bernhardt was a consultant with RCG
International, an information technology consulting services company. Mr.
Bernhardt holds a B.S. degree in Experimental Psychology from the University of
Notre Dame.
Stephen E. Odom has served as our Chief Financial Officer, Treasurer and
Secretary since May 1998. In January 1999, Mr. Odom was also appointed our
Chief Operating Officer. From April 1995 until April 1998, he served as Chief
Financial Officer, Senior Vice President Finance, and Secretary of Learmonth &
Burchett. From July 1988 to April 1995, Mr. Odom was a Partner with
PricewaterhouseCoopers LLP. Mr. Odom holds a B.B.A. degree in Accounting from
Georgia State University.
Brian J. McGrath joined our company as a consultant in January 1997 and has
served as our Vice President of Sales since January 1998. From June 1980 until
present, Mr. McGrath also served as a principal of McGrath & Associates, a
contract software selling firm.
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Richard Pleczko has served as our Vice President of Marketing and Product
Management since December 1998. From May 1998 to December 1998, Mr. Pleczko
served as Senior Vice President of World Wide Marketing at PLATINUM technology,
inc., a software company. From April 1985 until May 1998, Mr. Pleczko served in
various managerial positions with Learmonth & Burchett, the most recent of
which was Senior Vice President--Marketing and Product Development.
Stephen Kangas has served as our Vice President of Strategic Alliances since
February 1999. From May 1998 to February 1999, Mr. Kangas was the President,
Chief Executive Officer, and a founder at SendDocs.com, an Internet-based
services company. From August 1996 to May 1998, Mr. Kangas served as the
President, Chief Operating Officer and a founder of Exodus Technologies, Inc.,
a software company. From December 1995 to August 1996, Mr. Kangas served as the
Vice President of Marketing for Intertech Imaging, Inc., a software company.
From January 1994 to December 1995, Mr. Kangas served as the General Manager of
Wall Data, Inc., a software company.
D. Von Jones has served as our Vice President of Development since April
1997. From October 1995 to April 1997, Mr. Jones served as Manager--Systems
Management at Compaq Computer Corporation, a personal computer manufacturer.
From May 1994 to September 1995, Mr. Jones served as Senior Development Manager
at Legent Corp., a software company. Prior to that time, Mr. Jones served in
various capacities at Microsoft Corporation and Pocket Soft, Inc. Mr. Jones
holds a B.S. degree in Computer Science from Rice University.
Olivier J. Thierry has served as our Vice President of Marketing
Communications since February 1998. Mr. Thierry also served as our Vice
President of Product Management from February 1998 to December 1998. From
December 1993 until joining our company, Mr. Thierry was Vice President of
Antares Alliance Group, a provider of enterprise development tools jointly
owned by Amdahl Corporation and EDS. Mr. Thierry holds a Bachelor of Commerce
degree in Marketing and Computer Systems from McGill University.
Michael Rovner has served as our Director of Business Development since March
1999. From June 1998 to February 1999, Mr. Rovner served as the Director of
Product Management at ClearCommerce Corporation, an electronic commerce
software company. From July 1997 to June 1998, Mr. Rovner served as a
consultant to Federal Express Corporation specializing in global logistics and
electronic commerce strategies. From November 1995 to June 1997, Mr. Rovner
served as Product Manager for Data Warehousing and Online Analytical Processing
at Informix Software, Inc., a database software company. From June 1993 to
November 1995, Mr. Rovner served as a product manager for Empart, Inc., a
software company. Mr. Rovner holds B.A. degrees in English and Political
Science from the University of California at Los Angeles.
Douglas L. Ayer has served as a director of our company since September 1996.
Mr. Ayer has served as President and Managing Partner of International Capital
Partners, Inc., a venture capital firm, since 1989. Prior to joining
International Capital Partners, Mr. Ayer was the Chief Executive Officer of
Cametrics, Inc., a manufacturer of engineered metal components. Mr. Ayer also
serves as a member of the boards of directors of Biopool, Inc., a medical
diagnostic test kit company, and Coffee People, Inc., a coffee retailer and
franchise company. Mr. Ayer holds a B.S.E. degree in Aeronautical Engineering
from Princeton University and an M.B.A. degree from Harvard University.
Michael J. Maples has served as a director of our company since April 1999.
Mr. Maples manages private investments. From April 1988 to July 1995, Mr.
Maples held various management positions at Microsoft Corporation, the most
recent of which was Executive Vice President of the Worldwide Products Group
and a member of the office of the president. Prior to that, he served as a
Director of Software Strategy for IBM. He also serves as a director of J.D.
Edwards & Company, an enterprise software company, Lexmark International, Inc.,
a laser and inkjet printer company, and PSW Technologies, a software company.
Mr. Maples is also a member of the Board of Visitors for the Engineering School
at the University of Oklahoma and the College of Engineering Foundation
Advisory Council at the University of Texas at
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Austin. Mr. Maples holds a B.S. degree in electrical engineering from the
University of Oklahoma and an M.B.A. degree from Oklahoma City University.
John J. Moores has served as a director of our company since June 1997. Mr.
Moores has served as owner and Chairman of the Board of the San Diego Padres
Baseball Club, L.P. since December 1994, and since September 1991 as Chairman
of the Board of JMI Services, Inc., a private investment company. In 1980, Mr.
Moores founded BMC Software, Inc., a vendor of system software utilities, and
served as its president and Chief Executive Officer until 1986 and as its
Chairman of the Board until 1992. Mr. Moores also serves as Chairman of the
Board of Peregrine Systems, Inc., an infrastructure management software
company, and of Neon Systems, Inc., an enterprise middleware and systems
management software company, as well as numerous privately held companies. Mr.
Moores serves as a director of BindView Development Corporation, a systems
management software company. Mr. Moores is a member of the Board of Regents of
The University of California, The Carter Center of Emory University and Scripps
Research, Inc. Mr. Moores holds a B.S. degree in Economics and a J.D. degree
from University of Houston.
Scott D. Sandell has served as a director of our company since September
1996. Mr. Sandell has served as a partner of New Enterprise Associates, a
venture capital firm, and in other capacities at such firm since January 1996.
Prior to joining New Enterprise Associates, Mr. Sandell was the President of
Yankee Pacific Company, a marketing and business strategy consulting firm from
March 1994 to December 1995. He is also a member of the boards of directors of
several privately held companies. Mr. Sandell holds a B.S. degree in
Engineering Sciences from Dartmouth College and a M.B.A. degree from the
Stanford Graduate School of Business.
John D. Thornton has served as a director of our company since June 1997. Mr.
Thornton has served as a general partner of Austin Ventures, a venture capital
firm, where he has been employed since 1991. Prior to joining Austin Ventures,
Mr. Thornton was a consultant with McKinsey & Co., an international consulting
firm. Mr. Thornton also serves on the board of directors of Vignette
Corporation, an Internet relationship management software company, and is also
a member of the boards of directors of several privately held companies. Mr.
Thornton holds a B.A. degree in Economics from Trinity University and an M.B.A.
degree from the Stanford Graduate School of Business.
Prior to the closing of this offering, our board of directors will be divided
into three classes, with each director serving a three-year term and one class
being elected at each year's annual meeting of stockholders. Messrs. Bennett,
Sandell and Thornton will be in the class of directors whose term expires at
the 1999 annual meeting of stockholders. Mr. Moores will be in the class of
directors whose term expires at the 2000 annual meeting of the stockholders.
Messrs. Ayer, Bernhardt and Maples will be in the class of directors whose term
expires at the 2001 annual meeting of stockholders.
Our board of directors currently consists of seven members. At each annual
meeting of stockholders, the successors to each class of directors will be
elected to serve for three year terms from the time of election and
qualification until the next annual meeting at which such director's class
stands for election. Our bylaws provide that the authorized number of directors
may be changed by a resolution of the board of directors.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified.
Mr. Sandell is Mr. Ayer's son-in-law. There are no other family relationships
among any of our directors, officers or key employees.
Board Committees
We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent
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accountants. The compensation committee reviews and recommends to the board of
directors the compensation and benefits of all of our officers and establishes
and reviews general policies relating to compensation and benefits of our other
employees.
Compensation Committee Interlocks and Insider Participation
Our board of directors established its compensation committee in December
1997. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from our company for
their service as members of our board of directors, although they are
reimbursed for travel expenses in connection with attendance at board and
committee meetings. Under our 1997 Stock Plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board of
directors, and, after this offering is completed, all nonemployee directors
will receive stock options pursuant to the automatic option grant program in
effect under the 1999 Director Option Plan. See "--Incentive Stock Plans" for
more about the automatic grant program.
Executive Compensation
Summary Compensation Table. The following table sets forth the compensation
earned for services rendered to us in all capacities by our Chief Executive
Officer and our four next most highly compensated executive officers who earned
more than $100,000 (collectively, the "Named Executive Officers") for the
fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------ ------------
Securities
Underlying All Other
Name and Principal Positions Salary($) Bonus($) Options(#) Compensation
- ---------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Michael S. Bennett
President and Chief Executive Of-
ficer............................ $200,016 $134,167 250,000 $1,696
Thomas P. Bernhardt
Chief Technology Officer......... 129,167 30,000 160,000 1,696
Stephen E. Odom
Chief Operating Officer, Chief
Financial Officer, Treasurer and
Secretary........................ 200,016 28,000 100,000 1,696
Brian McGrath
Vice President of Sales.......... 200,016 751,299 -- 7,371
Olivier J. Thierry
Vice President of Marketing
Communications................... 175,008 46,667 -- 80,999
</TABLE>
Mr. McGrath received sales commissions of $751,299. Commissions are variable
cash-based incentive compensation that are payable as a percentage of revenue
cash collected.
All other compensation represents excess compensation associated with
premiums for life insurance with respect to $1,696 for each of Messrs. Bennett,
Bernhardt, Odom and Thierry and $7,371 for Mr. McGrath. $80,999 represents
moving expenses paid in connection with Mr. Thierry's relocation agreement.
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<PAGE>
Option Grants in Fiscal Year Ended June 30, 1999. The following table sets
forth certain information with respect to stock options granted to each of the
Named Executive Officers during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities Percent of Total Appreciation for
Underlying Options Granted Option Term
Name and Principal Options to Employees Exercise Price Expiration ---------------------
Position Granted(#) During Period ($/share) Date 5% 10%
- ------------------ ---------- ---------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Bennett
President and Chief
Executive Officer..... 250,000 11.7 15.00 06/04/09 2,358,355 5,976,634
Thomas P. Bernhardt
Chief Technology
Officer............... 160,000 7.5 2.75 08/27/03 3,469,347 5,784,982
Stephen E. Odom
Chief Operating
Officer, Chief
Financial Officer,
Treasurer and
Secretary............. 100,000 4.7 15.00 06/21/09 943,342 2,390,614
Brian McGrath
Vice President of
Sales................ -- -- -- -- -- --
Olivier J. Thierry
Vice President of
Marketing
Communications........ -- -- -- -- -- --
</TABLE>
The potential realizable value assumes an initial public offering price of
$15.00 per share over the 10 year term of the options based on assumed rates of
stock appreciation of 5% and 10%, compounding annually less the total option
exercise price.
In fiscal 1999, we granted options to purchase an aggregate of 2,131,510
shares to employees and consultants.
The exercise price of the option grant to Thomas P. Bernhardt was equal to
110% the fair market value of the common stock on the date of grant as
determined by the board of directors.
Options under the stock option plan generally vest over four years with 25%
of the shares subject to the option vesting on the first anniversary of the
grant date, and the remaining option shares vesting ratably monthly thereafter.
Option Exercises in Last Fiscal Year. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended June 30, 1999 and exercisable and
unexercisable options held as of June 30, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Value June 30, 1999 (#) June 30, 1999 ($)
Name and Principal Acquired on Realized ------------------------- -------------------------
Positions Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Bennett
President and Chief
Executive Officer..... 200,000 2,400,000 348,238 638,410 5,049,451 5,631,945
Thomas P. Bernhardt
Chief Technology
Officer............... -- -- 16,875 173,125 244,688 2,150,313
Stephen E. Odom
Chief Operating
Officer, Chief
Financial Officer,
Treasurer and
Secretary............. 50,184 602,208 8,364 242,188 121,278 2,061,726
Brian McGrath
Vice President of
Sales................ 70,623 415,314 15,002 94,375 217,529 1,368,438
Olivier J. Thierry
Vice President of
Marketing
Communications........ 69,999 839,988 10,000 160,001 145,000 2,320,015
</TABLE>
55
<PAGE>
The value realized is calculated on the basis of the fair market value of the
common stock on the date of exercise minus the exercise price. It does not
necessarily indicate that the optionee sold such stock for such amount. The
value of in-the-money options represents the positive spread between the
exercise price of the stock options and the fair market value of the common
stock on the date of exercise as determined by our board of directors. The fair
market value of the common stock was $15.00 per share as of June 30, 1999.
Incentive Stock Plans
1997 Stock Option Plan. Our 1997 stock option plan was adopted by our board
of directors in March 1997 and approved by our stockholders in July 1997. The
stock option plan was amended in May 1999. A total of 8,795,000 shares of
common stock has been reserved for issuance under our stock option plan,
together with an annual increase in the number of shares reserved thereunder
beginning on the first day of our fiscal year (commencing July 1, 2000) in an
amount equal to the lesser of:
. 750,000 shares;
. five percent of our outstanding shares of common stock on the last day of
the prior fiscal year; or
. an amount determined by our board of directors.
The 1997 stock option plan provides for grants of incentive stock options to
our employees including officers and employee directors and nonstatutory stock
options to our consultants including nonemployee directors. The purposes of our
stock option plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to our
employees and consultants and to promote the success of our business. At the
request of the board of directors, the compensation committee administers our
stock option plan and determines the optionees and the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof.
The term of an option granted under the 1997 stock option plan is stated in
the option agreement. However, the term of an incentive stock option may not
exceed ten years and, in the case of an option granted to an optionee who owns
more than 10 percent of our outstanding stock, at the time of grant, the term
of an option may not exceed five years. Options granted under the 1997 stock
option plan vest and become exercisable as set forth in each option agreement.
With respect to any optionee who owns more than 10 percent of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000. In any fiscal year, we may not grant any employee
options to purchase more than 500,000 shares or 1,000,000 shares in the case of
an employee's initial employment.
The 1997 stock option plan will terminate in March 2007, unless our board of
directors terminates it sooner.
As of June 30, 1999, we had issued 866,161 shares of common stock issued upon
the exercise of options granted under our stock option plan, we had outstanding
options to purchase 4,534,380 shares of common stock at a weighted average
exercise price of $4.77 per share and 3,394,459 shares remain available for
future option grants under our stock option plan.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan was
adopted by our board of directors in May 1999 and will become effective upon
the closing of this offering. We have reserved a total of 600,000 shares of
common stock for issuance under the 1999 employee stock purchase plan, together
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<PAGE>
with an annual increase in the number of shares reserved thereunder beginning
on the first day of our fiscal year commencing July 1, 2000 in an amount equal
to the lesser of:
. 500,000 shares;
. four percent of our outstanding common stock on the last day of the prior
fiscal year; or
. an amount determined by our board of directors.
Our employee stock purchase plan is administered by the board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code. Our
employees, including our officers and employee directors, but excluding our
five percent or greater stockholders, are eligible to participate if they are
customarily employed for at least 20 hours per week and for more than five
months in any calendar year. Our employee stock purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed the lesser of 15% of an employee's compensation, where compensation is
defined on Form W-2, or $25,000.
Our employee stock purchase plan will be implemented in a series of
overlapping 24 month offering periods, and each offering period consists of
four six month purchase periods. The initial offering period under our
employee stock purchase plan will begin on the effective date of this
offering, and the subsequent offering periods will begin on the first trading
day on or after February 1 and August 1 of each year. Each participant will be
granted an option on the first day of the offering period and the option will
be automatically exercised on the date six months later, the end of a purchase
period, throughout the offering period. If the fair market value of our common
stock on any purchase date is lower than such fair market value on the start
date of that offering period, then all participants in that offering period
will be automatically withdrawn from such offering period and re-enrolled in
the immediately following offering period. The purchase price of our common
stock under our employee stock purchase plan will be 85 percent of the lesser
of the fair market value per share on the start date of the offering period or
at the end of the purchase period. Employees may end their participation in an
offering period at any time, and their participation ends automatically on
termination of employment with our company.
Our employee stock purchase plan will terminate in May 2009, unless our
board of directors terminates it sooner.
1999 Director Option Plan. Our 1999 director option plan will become
effective upon the closing of this offering. We have reserved a total of
250,000 shares of common stock for issuance under the 1999 director option
plan, together with an annual increase in the number of shares reserved
thereunder beginning on the first day of our fiscal year commencing July 1,
2000 equal to the lesser of:
.250,000 shares;
.two percent of the outstanding shares of our common stock on the last
day of the prior fiscal year; or
.an amount determined by the board of directors.
The option grants under the 1999 director option plan are automatic and non-
discretionary, and the exercise price of the options is 100% of the fair
market value of our common stock on the grant date.
The 1999 director option plan provides for an initial grant to a nonemployee
director of an option to purchase 37,500 shares on the date on which he or she
becomes a member of the board of directors. Each nonemployee director will
thereafter automatically be granted an additional option to purchase 12,500
shares of common stock at the next meeting of the board of directors following
the annual meeting of stockholders, if on the date of the annual meeting the
director has served on the board of directors for at least six months.
The term of the options granted under the director plan is ten years, but
the options expire three months following the termination of the optionee's
status as a director or twelve months if the termination is
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<PAGE>
due to death or disability. The initial 37,500 share grants will become
exercisable at a rate of one-third of the shares on the first anniversary of
the date and at a rate of 1/36th of the shares per month thereafter. The
subsequent 12,500 share grants will become exercisable at the rate of one-half
of the shares on the first anniversary of the grant date and at a rate of
1/24th of the shares per month thereafter.
401(k) Plan. In September 1996, we adopted a Retirement Savings and
Investment Plan, the 401(k) Plan, covering our full-time employees located in
the United States. The 401(k) Plan is intended to qualify under Section 401(k)
of the Internal Revenue Code, so that contributions to the 401(k) Plan by
employees or by us and the investment earnings thereon are not taxable to the
employees until withdrawn. If our 401(k) Plan qualifies under Section 401(k) of
the Internal Revenue Code, our contributions will be deductible by us when
made. Our employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit of $10,000 in 1999 and to have those funds
contributed to the 401(k) Plan. The 401(k) Plan permits us, but does not
require us, to make additional matching contributions on behalf of all
participants. To date, we have not made any contributions to the 401(k) Plan.
Employment Agreements and Change in Control Arrangements
We have entered into the following employment, noncompete and change in
control arrangements and agreements with our current officers. For a
description of arrangements with our former officers, directors and substantial
stockholders, see "Certain Transactions" on page 62.
Michael S. Bennett, our Chairman of the Board, Chief Executive Officer and
President, entered into an offer letter with us dated April 13, 1998 under
which he is entitled to acceleration of 100% of his then unvested option grants
if after the first anniversary of his employment and prior to the fourth such
anniversary, we are acquired by another company and he is:
.terminated;
.assigned a position of lesser responsibility or compensation in the
resulting organization; or
.required to relocate.
Mr. Bennett will have twelve months following his separation from our company
or its successor, regardless of whether his termination is voluntary or
involuntary, to exercise his vested options. Mr. Bennett is also entitled to
severance payments of $200,000 in the event that he is terminated other than
for cause.
Stephen E. Odom, our Chief Operating Officer, Chief Financial Officer,
Treasurer and Secretary, entered into an offer letter with us dated April 13,
1998 under which he is entitled to acceleration of 100% of his then unvested
options if after the first anniversary of his employment and prior to the
fourth such anniversary, we are acquired by another company and he is (1)
terminated or (2) assigned a position of lesser responsibility or compensation
in the resulting organization, Mr. Odom will have twelve months following his
separation from our company or our successor regardless of whether his
termination is voluntary or involuntary, to exercise his vested options. Mr.
Odom is also entitled to severance payments of six months of his then-current
salary in the event that he is terminated other than for cause.
Thomas P. Bernhardt, our Chief Technology Officer, entered into an employment
agreement dated January 1, 1997 with us. This agreement provides that Mr.
Bernhardt is entitled to severance equal to six months salary in the event he
is terminated without cause by us. Mr. Bernhardt has agreed that for a period
of one year after his separation from our company, regardless of the reason, he
will not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the
time of his separation; or
. develop, market, sell and/or distribute products or services directly
competitive with ours. Mr. Bernhardt has also agreed to not employ any
of our employees or induce or attempt to
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<PAGE>
influence any of our employees to voluntarily terminate his or her
employment with us other than those employees not directly involved in
the development, marketing, sales and/or distribution of our products
or services during Mr. Bernhardt's employment.
Brian J. McGrath, our Vice President of Sales, entered into an employment
agreement dated August 6, 1997 with us and a letter agreement dated January
13, 1999 intended to clarify the terms of his employment agreement. These
agreements provide that Mr. McGrath is entitled to severance equal to six
months salary upon his termination by us, other than for cause. In addition,
the January 1999 amendment provides that effective July 1, 1999, Mr. McGrath's
compensation consists of a base salary of $200,000 and an additional $200,000
in commissions contingent upon meeting specified operating targets. Prior to
July 1, 1999, Mr. McGrath's commission plan depended on meeting specific
operating targets and sales to specified customers. We have agreed with Mr.
McGrath that for a six month period after his separation from our company, he
will not compete with us and will not solicit a list of customers set forth in
the January 1999 agreement as amended by us from time to time. Mr. McGrath
agreed that for a period one year not to employ any of our employees or induce
or attempt to influence any of our employees to voluntarily terminate his or
her employment with our company. In the event Mr. McGrath is terminated
without cause, his warrant to purchase shares of our common stock will
continue to vest during the notice period and severance periods set forth in
his August 6, 1997 employment agreement.
Olivier J. Thierry, our Vice President--Marketing Communications, has
entered into an employment agreement dated February 23, 1998 with us. This
agreement provides that Mr. Thierry is entitled to severance equal to six
months salary upon his termination by us, other than for cause. Mr. Thierry
has agreed that for a period of one year after his separation from our
company, regardless of the reason, he will not (1) engage in direct
competition with us or (2) develop, market, sell and/or distribute products or
services directly competitive with ours. Mr. Thierry has also agreed for a
period of two years not to employ any of our employees or induce or attempt to
influence any of our employees to voluntarily terminate his or her employment
with us. In connection with his employment with us, Mr. Thierry also received
a relocation loan that we are required to forgive in certain circumstances.
Relocation Loan Forgiveness to Olivier J. Thierry. On February 23, 1998, we
entered into an employment agreement with Olivier J. Thierry, our Vice
President--Marketing Communications, under which we agreed to grant Mr.
Thierry a relocation loan of $80,000. The noninterest bearing relocation loan
is due and payable in February 2002. We agreed to forgive the principal and
interest due on the relocation loan in the amount of 1/48th per month for each
month Mr. Thierry remains our employee. In addition, we also agreed to provide
additional payments to make Mr. Thierry whole for any taxes payable upon the
income realized from the loan forgiveness, net of any deductions Mr. Thierry
is entitled to claim for moving expenses. In the fiscal year ended June 30,
1999, we paid $80,999 to Mr. Thierry for loan forgiveness and tax
reimbursement. We also agreed to forgive the balance of the relocation loan in
the event that:
. Mr. Thierry is terminated other than for cause or he voluntarily leaves
us;
. we are acquired by another company and Mr. Thierry's position is
eliminated, downgraded, modified or geographically transferred; or
. new senior management replaces Mr. Thierry with another individual in the
same position other than for cause.
Richard Pleczko, our Vice President of Marketing and Product Management, has
entered into an employment agreement with us dated December 21, 1998. This
agreement provides that Mr. Pleczko is entitled to an advance equal to
$31,250, which will be forgiven over his first twelve months of employment
with our company, if his quarterly bonus from PLATINUM technologies inc. is
not paid to him due to Mr. Pleczko's employment with our company. Mr. Pleczko
is also entitled to (1) severance payments of six months of his then current
salary in the event he is terminated without cause and (2) acceleration of 25%
of his then unvested options in the event he is terminated without cause
during his first twelve months
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<PAGE>
employment with our company. Mr. Pleczko has agreed that for a period of two
years, in the event of any voluntary or involuntary termination or resignation,
he will not directly or indirectly compete with us. Mr. Pleczko also agreed for
a period of two years not to employ any of our employees or induce or influence
any of our employees to voluntarily terminate his or her employment with us.
Stephen Kangas, our Vice President of Strategic Alliances, entered into an
employment agreement dated February 8, 1999 with us. This agreement provides
that Mr. Kangas is entitled to acceleration of 25% of his then unvested options
to purchase shares of our common stock in the event that Mr. Kangas is
terminated without cause as a result of a merger or acquisition of our company
prior to the first anniversary of his employment with our company. Mr. Kangas
is also entitled to severance payments of six months of his then-current salary
in the event that he is terminated other than for cause. Mr. Kangas has agreed
that for a period of two years, in the event of any voluntary or involuntary
termination or resignation, he will not directly or indirectly compete with us.
Mr. Kangas has also agreed for a period of two years not to employ any of our
employees or induce or influence any of our employees to voluntarily terminate
his or her employment with us.
Leslie D. Willard, our Vice President--Finance, entered into an employment
agreement with us dated May 26, 1998. Under the agreement, Mr. Willard is
entitled to acceleration of 100% of his then unvested options if after the
first anniversary of his employment, our company is acquired by another company
and he is (1) terminated or (2) assigned to a position of lesser responsibility
or compensation in the resulting corporation.
Michael Rovner, our Director of Business Development, entered into an
employment agreement dated March 24, 1999 with us. This agreement provides that
Mr. Rovner is entitled to (1) acceleration of 25% of his then unvested options
and (2) severance payments of six months of his then current salary, in the
event he is terminated without cause as a result of a merger or acquisition of
our company during the first twelve months of his employment. Mr. Rovner has
agreed that for a period of two years, in the event of any voluntary or
involuntary termination or resignation, he will not directly or indirectly
compete with us. Mr. Rovner has also agreed for a period of two years not to
employ any of our employees or induce or influence any of our employees to
voluntarily terminate his or her employment with us.
Limitations On Directors' Liability And Indemnification
Our certificate of incorporation limits the liability of our directors and
executive officers to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
. any breach of their duty of loyalty to our company or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in our certificate of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our certificate of incorporation together with our bylaws provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf
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<PAGE>
of any officer, director, employee or other agent for any liability arising out
of his or her actions in that capacity, regardless of whether our bylaws would
permit indemnification.
Prior to the effective time of this offering we expect to enter into
agreements to indemnify our directors and executive officers. These agreements
provide for indemnification of our directors and executive officers for certain
expenses including attorneys' fees, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding. We expect the actions
and proceedings for which a claim for indemnification could be made to include
any action by or in the right of our company, arising out of such person's
services as a director or executive officer of our company, one of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as our directors and
executive officers.
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<PAGE>
CERTAIN TRANSACTIONS
All future transactions, other than compensation, stock options pursuant to
the plans and other benefits available to employees generally, including any
loans from us to our officers, directors, principal stockholders or affiliates,
will be approved by a majority of our board of directors, including a majority
of our independent and disinterested members of our board of directors. If
required by law, the future transactions will be approved by a majority of the
disinterested stockholders. These future transactions will be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
Stock Issuances and Redemptions to our Directors, Officers and Principal
Stockholders
In September 1996, we issued 2,431,350 shares of common stock to six
individuals for aggregate proceeds of $3,000. Of such shares, we issued
1,045,480 shares to Thomas P. Bernhardt and 1,045,480 shares to Louis R.
Woodhill. We acquired our OnePoint Administrator software product from Mission
Critical Software I, Inc., an entity held by James R. Woodhill, in September
1996 in exchange for 1,697,082 shares of its Series A Preferred Stock. We also
issued 121,568 shares of Series A Preferred Stock to E. Alexander Goldstein for
aggregate proceeds of $25,000. In September 1996, we also issued 2,650,000
shares of Series B Preferred Stock for aggregate proceeds of $2,650,000. We
redeemed 950,000 shares of the Series A Preferred Stock issued to Mission
Critical Software I, Inc. in July 1997 for an aggregate of $2,850,000. In July
1997, we issued 3,450,000 shares of Series C Preferred Stock for aggregate
proceeds of $10,350,000. Upon closing of this offering, all shares of
outstanding preferred stock will be automatically converted into shares of
common stock. Listed below are those persons who participated in the financings
described above who are our executive officers, directors or stockholders who
beneficially own five percent or more of our securities.
<TABLE>
<CAPTION>
Aggregate
Common Series A Series B Series C Consideration
Stockholder Stock Preferred Preferred Preferred Paid
- ----------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Austin Ventures
Entities............... -- -- -- 1,250,000 $3,750,000
Thomas P. Bernhardt..... 1,045,480 -- -- -- 1,045
E. Alexander Goldstein.. -- 121,568 -- 30,000 90,000
International Capital
Partners, Inc.......... -- -- 62,500 27,333 144,499
JMI Equity Fund III,
L.P.................... -- -- -- 666,667 2,000,001
Brian J. McGrath........ 70,625 -- 50,000 20,000 145,313
Mission Critical Soft-
ware I, Inc. (James R.
Woodhill).............. 97,254 1,697,082 -- -- 349,187
New Enterprise Associ-
ates Entities ......... -- -- 1,250,000 683,333 3,299,999
Louis R. Woodhill....... 1,045,480 -- -- -- 1,045
Zesiger Capital......... -- -- 1,140,000 656,000 3,764,000
</TABLE>
The entities listed above as Austin Ventures entities include Austin Venture
V, L.P. and Austin Ventures V Affiliates Fund, L.P. Mr. Thornton, a director of
our company, is a general partner of each of the entities. Mr. Thornton
disclaims beneficial ownership of the shares held by each entity, except to the
extent of his pecuniary interest therein.
Mr. Ayer, a director of our company, is a managing partner of International
Capital Partners, Inc. Mr. Ayer disclaims beneficial ownership of the shares
held by International Capital Partners, except to the extent of his pecuniary
interest therein.
The entities listed above as New Enterprise Associates entities include New
Enterprise Associates VII Ltd. Partnership, NEA President's Fund and NEA
Ventures 1996. Mr. Sandell, a director of our company, is
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<PAGE>
a partner of each of the entities. Mr. Sandell disclaims beneficial ownership
of the shares held by each entity, except to the extent of his pecuniary
interest therein.
Zesiger Capital has voting and dispositive power over 1,837,242 shares, but
the shares are held in the names of the individuals for whom Zesiger acts as an
investment advisor.
Employment, Severance Agreements with our Former Founders, Directors and
Officers
Our company was founded by Thomas P. Bernhardt, Louis R. Woodhill, Paul M.
Koffend, Jr. and James R. Woodhill. Of these founders, Mr. Bernhardt is still
an employee and director of Mission Critical Software. By mutual agreement,
Louis Woodhill, Paul Koffend and James Woodhill each left our company during
fiscal 1998 and fiscal 1999 because each of the former founders wanted to
participate in a start-up stage company and our company had matured to a larger
enterprise requiring management with different skill sets and experience. The
following analysis sets forth the terms of our employment and severance
agreements with each of Messrs. L. Woodhill, Koffend and J. Woodhill and
describes amounts paid to each of them in the fiscal year ended June 30, 1999.
Employment Agreement with Louis R. Woodhill. On September 4, 1996, we entered
into an employment agreement with Louis R. Woodhill, then our Chief Executive
Officer and President. Under the terms of the September 4, 1996 agreement, Mr.
Woodhill was entitled to severance payments equal to six months of his salary
in the event he was terminated without cause.
Mr. Woodhill agreed that for a period of one year after his separation from
our company, regardless of the reason, he would not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the time
Mr. Woodhill's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with ours.
This noncompetition period will expire in November 1999.
Mr. Woodhill also agreed that for a period of two years not to employ any of
our employees or induce or attempt to influence any of our employees to
voluntarily terminate his or her employment with us other than those employees
not directly involved in the development, marketing, sales and/or distribution
of our products or services during Mr. Woodhill's employment with our company.
Mr. Woodhill agreed that for a two year period after his separation from our
company he would not solicit, divert or take away or attempt to divert or take
away the business or patronage of any clients, customers or accounts, or
prospective clients, customers or accounts that were contacted, solicited or
served by Mr. Woodhill during his employment by us in connection with the
products or services that were developed or under active development,
consideration for development, marketed, sold and/or distributed by us.
On May 21, 1998, we entered into an amended and restated employment agreement
with Mr. Woodhill. The May 1998 employment agreement provided for a term of
employment of six months and required Mr. Woodhill to serve in the position of
Chairman of the Board of Directors of our company during that six month period.
Mr. Woodhill was entitled to salary payments of $13,750.00 per month during the
six month period plus customary benefits and an office rental allowance of
$1,000 per month.
In connection with the May 1998 agreement, Mr. Woodhill was also entitled to
receive a lump-sum severance payment of six months salary plus accrued and
unused vacation time and unreimbursed travel expenses upon termination of his
employment. Mr. Woodhill left our employ in November 1998 and in connection
with the May 1998 employment agreement, Mr. Woodhill received gross salary
payments of $82,500, health and dental benefits of $534 and a lump-sum
severance payment of $82,500.
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<PAGE>
We also agreed to and granted Mr. Woodhill an option to purchase 15,000
shares of our common stock at an exercise price of $0.50 per share. One-fourth
of the shares subject to such option will vest on November 28, 1999 and the
remaining shares vest as to 1/48th per month thereafter.
Mr. Woodhill is also bound by noncompetition, nonsolicitation and nonhiring
provisions similar to those set forth in the September 1996 agreement. These
noncompetition provisions terminate in November 1999 and the nonsolicitation
and nonhiring provisions terminate in November 2000.
Employment Agreement with James R. Woodhill. On September 4, 1996, we entered
into an employment agreement with James R. Woodhill, then our Vice President--
Marketing. Pursuant to the September 4, 1996 agreement, Mr. Woodhill was
entitled to severance payments equal to six months of his salary in the event
he was terminated without cause.
Mr. Woodhill agreed that for a period of one year after his separation from
our company, regardless of the reason, he would not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the time
Mr. Woodhill's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with ours.
Mr. Woodhill also agreed for a period of two years not to employ any of our
employees or induce or attempt to influence any of our employees to voluntarily
terminate his or her employment with us other than those employees not directly
involved in the development, marketing, sales and/or distribution of our
products or services during Mr. Woodhill's employment. Mr. Woodhill agreed that
for a two year period after his separation from our company, he would not
solicit, divert or take away or attempt to divert or take away the business or
patronage of any clients, customers or accounts, or prospective clients,
customers or accounts that were contacted, solicited or served by Mr. Woodhill
during his employment with us in connection with the products or services that
were developed or under active development, consideration for development,
marketed, sold and/or distributed by us.
Mr. Woodhill left our employ on May 15, 1998, and we paid him severance and
related payments of $50,000. Mr. Woodhill's noncompetition, nonsolicitation and
nonhiring provisions will terminate in May 2000.
Employment Agreement with Paul F. Koffend, Jr. On September 4, 1996, we
entered into an employment agreement with Paul F. Koffend, Jr., then our Chief
Financial Officer. Mr. Koffend agreed that for a period of one year after his
separation from our company, regardless of the reason, he would not:
. engage in direct competition with us;
. conduct a business of the type or character engaged in by us at the time
Mr. Koffend's employment ceased; or
. develop, market, sell and/or distribute products or services directly
competitive with ours.
Mr. Koffend also agreed for a period of two years not to employ any of our
employees or induce or attempt to influence any of our employees to voluntarily
terminate his or her employment with us other than those employees not directly
involved in the development, marketing, sales and/or distribution of our
products or services during Mr. Koffend's employment. Mr. Koffend agreed that
for a two year period after his separation from our company, he would not
solicit, divert or take away or attempt to divert or take away the business or
patronage of any clients, customers or accounts, or prospective clients,
customers or accounts that were contacted, solicited or served by Mr. Koffend
during his employment by us in connection with the products or services that
were developed or under active development, consideration for development,
marketed, sold and/or distributed by us.
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<PAGE>
Mr. Koffend left our employ effective June 30, 1998, and we paid him
severance and related payments of $60,000.
Consulting Agreements with Former Directors. Effective April 16, 1999, May
21, 1999 and May 21, 1999, Paul F. Koffend, Jr., Louis R. Woodhill and E.
Alexander Goldstein resigned as directors of our company. Each of Messrs.
Koffend, Woodhill and Goldstein entered into a consulting agreement with us
that provides for the former director to provide continued services as
requested from time to time by our Board of Directors or Chief Executive
Officer to us for a period of two years for Mr. Koffend, one year for Mr.
Woodhill and one year for Mr. Goldstein. There is no minimum number of hours of
service required. During the term of the consulting agreements, each former
director's stock options will continue to vest on the schedule as originally
set forth in their respective option agreements but will receive no other
compensation for these services.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our Common Stock as of June 30, 1999, and as adjusted
to reflect the sale of common stock offered hereby by:
. each stockholder known by us to own beneficially more than five percent
of our common stock,
. each of the executive officers listed in our Summary Compensation Table
on page 54,
. each director of our company,
. all directors and executive officers as a group and
. all other selling stockholders.
Except as otherwise noted below, the address of each person listed on the
table is 720 North Post Oak Rd. Suite 505, Houston, Texas 77024-3835.
As of June 30, 1999, 10,276,161 shares of our common stock was outstanding,
assuming that each share of preferred stock was converted on a one-for-one
basis to common stock. The columns regarding the number of shares being offered
and beneficial ownership after the offering assume that the underwriters' over-
allotment option is not exercised. If the over-allotment option is exercised in
full, we will sell an aggregate of 1,501,186 shares of our common stock.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person, we
have included the shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become exercisable within 60
days after June 30, 1999 but we have not included those shares for purposes of
computing percentage ownership of any other person. We have assumed unless
otherwise indicated below, that the persons and entities named in the table
have sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Owned Number Shares Beneficially
Prior to Offering of Shares Owned After Offering
Name of Beneficial ----------------------------- Being --------------------
Owner Number Percentage Offered Number Percentage
- ------------------ -------------- ---------------------- --------- ----------
<S> <C> <C> <C> <C> <C>
New Enterprise
Associates Entities... 2,024,108 19.7 -- 2,024,108 15.4
2490 Sand Hill Rd.
Menlo Park, California
94025
Austin Ventures
Entities.............. 1,314,786 12.8 -- 1,314,786 10.3
114 W. 7th St.,
Suite 1300,
Austin, Texas 78701
JMI Equity Fund III,
L.P................... 710,906 6.9 -- 710,906 5.6
12680 High Bluff Drive
San Diego, California
92130
International Capital
Partners, Inc......... 135,851 1.3 -- 135,851 1.1
300 First Stamford
Place
Stamford, Connecticut
06902
Zesiger Capital Group
LLC................... 1,889,770 18.4 -- 1,889,770 14.8
320 Park Avenue
New York, New York
10022
Mission Critical
Software I, Inc....... 1,003,085 9.8 253,085 750,000 5.9
Louis R. Woodhill...... 568,294 5.5 250,000 318,294 2.5
Paul F. Koffend, Jr.... 84,741 72,941
E. Alexander
Goldstein............. 193,426 1.9 50,000 143,426 1.1
Serverware Group plc... 333,333 3.2 143,333 190,000 1.5
Denton House
40-44 Wicklow Street
London WCIX 9HL
England
Michael S. Bennett..... 474,653 4.5 -- 474,653 3.6
Thomas P. Bernhardt.... 1,119,438 10.8 101,186 1,018,252 7.9
Stephen E. Odom........ 111,977 1.1 -- 111,977 *
Oliver J. Thierry...... 110,000 1.1 -- 110,000 *
Brian J. McGrath....... 281,125 2.7 -- 281,125 2.1
Scott D. Sandell....... 2,027,233 19.7 -- 2,027,233 15.8
John D. Thornton....... 1,313,001 12.8 -- 1,313,001 10.3
Douglas L. Ayer........ 138,976 1.3 -- 138,976 1.1
Michael J. Maples...... -- -- -- -- --
John J. Moores......... 714,031 6.9 -- 714,031 5.6
All executive officers
and directors as a
group (14) persons.... 6,392,309 58.7 101,186 6,291,123 47.0
Other Selling
Stockholders who
individually own less
than 1%............... 305,451 3.0 202,396 103,655 *
</TABLE>
- ---------------------
* Less than 1% of the outstanding shares of common stock.
The beneficial ownership reported for New Enterprise Associates entities and
Mr. Sandell includes 1,913,455 shares held by New Enterprise Associates VII
Ltd. Partnership, 82,691 shares held by NEA President's Fund, L.P. and 5,306
shares held by NEA Ventures 1996, L.P. Mr. Sandell disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest. New
Enterprise Associates VII Ltd. Partnership has one general partner, NEA
Partners VII, L.P. The general partners of NEA Partners VII, L.P. are Peter J.
Barris, Nancy L. Dorman, Ronald H. Kase, C. Richard Kramlich, Arthur C. Marks,
Thomas C. McConnell, Peter T. Morris, Charles W. Newhall, John M. Niera and
Mark W. Perry. The general partner of NEA Presidents Fund, L.P. is NEA General
Partners, L.P. The general partners of NEA General Partners, L.P. are Peter J.
Barris, Frank A. Bonsol, Jr., Nancy L. Dorman, Ronald H. Kase, C. Richard
Kramlich, Arthur C. Marks, Thomas C. McConnell, Charles W. Newhall, John M.
Niera and Mark W. Perry. These numbers and percentages also include 22,656
shares subject to options exercisable within 60 days from June 30, 1999 held by
Mr. Sandell.
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<PAGE>
The beneficial ownership reported for Austin Ventures entities and Mr.
Thornton includes 1,233,654 shares held by Austin Venture V, L.P. and 61,691
shares held by Austin Ventures V Affiliates Fund, L.P. Mr. Thornton disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest. Austin Ventures V, L.P. and Austin Ventures V Affiliates Fund, L.P.
have one general partner, Austin Ventures Partners V, L.P. The general partners
of Austin Ventures Partners V, L.P. are Joseph Aragona, Kenneth P. DeAngelis,
John D. Thornton, Blaine F. Wesner and Jeff Garvey. These numbers and
percentages also include 19,531 shares subject to options exercisable within 60
days from June 30, 1999 held by Mr. Thornton.
Mr. Moores disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest. The general partners of JMI Equity Fund III,
L.P. are Charles E. Noell, Harry S. Gruner, Norris Van der Berg, Paul Barber
and Robert Sywolski. These numbers and percentages also include 19,531 shares
subject to options exercisable within 60 days of June 30, 1999 held by
Mr. Moores.
The managing partners of International Capital Partners, Inc. are Douglas L.
Ayer, president and managing partner, Ajit G. Hutheesing, Chairman and managing
partner and Nicholas E. Sinacori, managing partner. Mr. Ayers disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest. These numbers and percentages also include 22,656 shares subject to
options exercisable within 60 days from June 30, 1999 held by Mr. Ayers.
The beneficial ownership reported for Zesiger Capital includes 1,837,242
shares over which Zesiger has voting and dispositive power, but the shares are
held in the names of the individuals for whom Zesiger acts as an investment
advisor.
The beneficial ownership for Mission Critical Software I, Inc. includes
897,082 shares held by Mission Critical Software I, Inc. James R. Woodhill is
the sole stockholder of Mission Critical Software I, Inc.
The beneficial ownership of Mr. Koffend includes 20,625 shares issuable upon
exercise of an option held by Mr. Koffend within 60 days of June 30, 1999.
The beneficial ownership of Mr. Goldstein includes 10,937 shares issuable
upon exercise of an option held by Mr. Goldstein within 60 days of June 30,
1999.
The beneficial ownership of Serverware plc includes a warrant to purchase
333,333 shares of our common stock that may be exercised in full at the
discretion of its holder. See "Description of Capital Stock--Warrants" on page
73 for more information about this warrant.
The beneficial ownership of each officer and director set forth in the
preceding table includes the following options or warrants to purchase our
common stock that may be exercised by such person within 60 days of June 30,
1999:
Securities Exercisable Within 60 Days of June 30, 1999
<TABLE>
<CAPTION>
Options Warrants
------- --------
<S> <C> <C>
Michael S. Bennett....................................... 255,648 --
Thomas P. Bernhardt...................................... 73,958 --
Stephen E. Odom.......................................... 41,789 --
Olivier J. Thierry....................................... 40,001 --
Brian J. McGrath......................................... 37,502 100,000
Scott D. Sandell......................................... 25,781 --
John D. Thornton......................................... 22,656 --
Douglas L. Ayer.......................................... 25,781 --
Michael J. Maples........................................ -- --
John J. Moores........................................... 22,656 --
All directors and officers............................... 612,647 100,000
</TABLE>
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of common stock, $0.001 par
value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value.
Common Stock
As of June 30, 1999, we had 10,276,161 shares of common stock outstanding
that were held of record by approximately 130 stockholders.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued upon
the closing of this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, our board of directors will have the
authority, without action by our stockholders, to designate and issue preferred
stock in one or more series. The board of directors may also designate the
rights, preferences and privileges of each series of preferred stock; any or
all of which may be greater than the rights of the common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of the common stock until the board of
directors determines the specific rights of the holders of the preferred stock.
However, these effects might include:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in control of our company without further
action by the stockholders.
We have no present plans to issue any shares of preferred stock.
Warrants
As of June 30, 1999, we had outstanding warrants to purchase:
. 333,333 shares of common stock issued to Serverware Group plc at an
exercise price of $1.50 per share that will expire on June 26, 2007 and
. 100,000 shares of common stock issued to Brian McGrath, our Vice
President of Sales, at an exercise price of $1.00 per share that will
expire on August 6, 2000.
Registration Rights
The holders of 6,100,000 shares of common stock and the holder of warrants to
purchase 333,333 shares of common stock or their permitted transferees are
entitled to certain rights with respect to
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<PAGE>
registration of such shares under the Securities Act of 1933, as amended. These
rights are provided under the terms of our agreement with the holders of
registrable securities. Under these registration rights, holders of at least a
majority of the then outstanding registrable securities may require on two
occasions that we register their shares for public resale. We are obligated to
register these shares if the holders of a majority of the eligible shares
request registration and only if the shares to be registered have an
anticipated public offering price of at least $1,000,000. In addition, holders
of registrable securities may require on three separate occasions that we
register their shares for public resale on Form S-3 or similar short-form
registration, if we are eligible to use Form S-3 or similar short-form
registration, and the value of the securities to be registered is at least
$1,000,000. If we elect to register any of our shares of common stock for any
public offering, the holders of registrable securities are entitled to include
shares of common stock in the registration. However we may reduce the number of
shares proposed to be registered in view of market conditions. We will pay all
expenses in connection with any registration, other than underwriting discounts
and commissions.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the acquisition of our company by means of a tender offer, a
proxy contest or otherwise more difficult or to make the removal of incumbent
officers and directors more difficult. We expect these provisions to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of our company to first
negotiate with our board of directors. We believe that the benefits provided by
our ability to negotiate with the proponent of an unfriendly or unsolicited
proposal outweigh the disadvantages of discouraging such proposals. We believe
the negotiation of an unfriendly or unsolicited proposal could result in an
improvement of its terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless the business combination or the transaction
in which the person became an interested stockholder is approved in the manner
set forth in the statute. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns or within three years prior
to the determination of interested stockholder status, did own 15% or more of a
corporation's voting stock. We expect the existence of this provision to have
an anti-takeover effect with respect to transactions our board of directors
does not approve in advance. We also anticipate that Section 203 may also
discourage attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
Certain Provisions of the Certificate of Incorporation and Bylaws
Our certificate of incorporation provides for our board to be divided into
three classes serving staggered terms. Approximately one-third of the board
will be elected each year. The provision for a classified board could prevent a
party who acquires control of a majority of the outstanding voting stock from
obtaining control of the board of directors until the second annual
stockholders meeting following the date the acquiror obtains the controlling
stock interest. The classified board provision could discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control
of our company and could increase the likelihood that incumbent directors will
retain their positions. Our certificate of incorporation provides that
directors may be removed:
. with cause by the affirmative vote of the holders of at least a majority
of the outstanding shares of voting stock; or
. without cause by the affirmative vote of the holders of at least 66 2/3%
of the then-outstanding shares of the voting stock.
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<PAGE>
Our bylaws establish an advance notice procedure for stockholder proposals to
be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors. At an annual
meeting stockholders may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the direction of
the board of directors. Stockholders may also consider a proposal or nomination
by a person who was a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has given to our Secretary
timely written notice, in proper form, of his or her intention to bring that
business before the meeting. The bylaws do not give the board of directors the
power to approve or disapprove stockholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting of the stockholders. However, our bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper
procedures are not followed. These provisions may also discourage or defer a
potential acquiror from conducting a solicitation of proxies to elect the
acquiror's own slate of directors or otherwise attempting to obtain control of
our company.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Our bylaws authorize a majority of
our board of directors, the chairman of the board or the chief executive
officer to call a special meeting of stockholders. Because our stockholders do
not have the right to call a special meeting, a stockholder could not force
stockholder consideration of a proposal over the opposition of the board of
directors by calling a special meeting of stockholders prior to such time as a
majority of the board of directors believed or the chief executive officer
believe the matter should be considered or until the next annual meeting
provided that the requestor met the notice requirements. The restriction on the
ability of stockholders to call a special meeting means that a proposal to
replace the board also could be delayed until the next annual meeting.
Delaware law provides that stockholders may execute an action by written
consent in lieu of a stockholder meeting. However, Delaware law also allows us
to eliminate stockholder actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time required to take
stockholder actions since actions by written consent are not subject to the
minimum notice requirement of a stockholder's meeting. However, we believe that
the elimination of stockholders' written consents may deter hostile takeover
attempts. Without the availability of stockholder's actions by written consent,
a holder controlling a majority of our capital stock would not be able to amend
the our bylaws or remove directors without holding a stockholders meeting. The
holder would have to obtain the consent of a majority of the board of
directors, the chairman of the board or the chief executive officer to call a
stockholders' meeting and satisfy the notice periods determined by the board of
directors. Our certificate of incorporation provides for the elimination of
actions by written consent of stockholders upon the closing of this offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
BankBoston, N.A. is located at 150 Royall Street, Canton, Massachusetts 02021,
and its telephone number is (508) 575-3120.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect prevailing market prices for our common stock or could impair
our ability to raise capital through an offering of equity securities.
After this offering, we will have outstanding 12,776,161 shares of common
stock (based upon shares outstanding as of June 30, 1999), assuming no exercise
of the underwriters' over-allotment option and no exercise of outstanding
options or warrants after June 30, 1999. All of the shares sold in this
offering will be freely tradable without restriction under the Securities Act
except for any shares purchased by our
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<PAGE>
"affiliates" as that term is defined in Rule 144 under the Securities Act. The
remaining 9,420,680 shares of common stock held by existing stockholders are
"restricted" shares as that term is defined in Rule 144 under the Securities
Act. We issued and sold the restricted shares in private transactions in
reliance upon exemptions from registration under the Securities Act.
Restricted shares may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from
registration, such as Rule 144 or 701 under the Securities Act, which are
summarized below.
Our officers, directors, employees the selling stockholders and certain
other stockholders, who collectively hold an aggregate of 9,420,680 restricted
shares, and the underwriters entered into lock-up agreements in connection
with this offering. These lock-up agreements provide that, with certain
limited exceptions, our officers, directors, employees, selling stockholders
and such other stockholders have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of our shares for a
period of 180 days after the effective date of this offering. Hambrecht &
Quist LLC may, in its sole discretion and at any time without prior notice,
release all or any portion of the shares subject to these lock-up agreements.
We have also entered into an agreement with Hambrecht & Quist LLC that we will
not offer, sell or otherwise dispose of our common stock until 180 days after
the effective date of this offering.
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701 will be as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ---------
<S> <C>
At various times between June 30, 1999 and the date 180 days
after the effective date of this offering.................... 0
At various times thereafter upon the expiration of applicable
holding periods.............................................. 9,420,680
</TABLE>
Following the expiration of the lock-up period, shares issued upon exercise
of options granted by us prior to the completion of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act unless those shares are held by one of our affiliates,
directors or officers.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. In general, under Rule 144 as currently in effect, a
person, or persons whose shares are aggregated, who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner except an affiliate, would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of our company at any time during the three months preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years including the holding period of any prior owner except an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
We intend to file a registration statement on Form S-8 under the Securities
Act covering shares of common stock reserved for issuance under the stock
plans and subject to outstanding options under our 1997 stock option plan. See
"Management--Stock Plans." We expect this registration statement to be filed
and become effective as soon as practicable after the effective date of this
offering. Shares of common stock issued upon exercise of options under the
Form S-8 will be available for sale in the public market, subject to
71
<PAGE>
Rule 144 volume limitations applicable to affiliates and subject to the
contractual restrictions described above. At June 30, 1999, options to purchase
4,534,380 shares of common stock were outstanding of which options
approximately 618,219 shares were then vested and exercisable. Beginning 180
days after the effective date of this offering, approximately 1,221,608 shares
issuable upon the exercise of vested stock options will become eligible for
sale in the public market, if such options are exercised.
Following this offering, the holders of an aggregate of 7,056,254 shares of
outstanding common stock will have the right to require us to register their
shares for sale upon meeting certain requirements. See "Description of Capital
Stock--Registration Rights" for additional information regarding registration
rights.
72
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, Hambrecht & Quist LLC, BancBoston Robertson Stephens
Inc., SoundView Technology Group, Inc. and Charles Schwab & Co., Inc. have
severally agreed to purchase from us the following respective number of shares
of Mission Critical Software common stock:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC...........................................
BancBoston Robertson Stephens Inc...............................
SoundView Technology Group, Inc.................................
Charles Schwab & Co., Inc.......................................
---------
Total........................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to the conditions precedent set forth therein, including the
absence of any material adverse change in our business and the receipt of
certificates, opinions and letters from us, our counsel and independent
auditors. The nature of the underwriters' obligation requires that they
purchase all shares of common stock offered in this offering if they purchase
any of the shares in this offering.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may
be changed by the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of the effective date of this offering to purchase up to
525,000 additional shares of common stock at the public offering price, less
the underwriting discount, set forth on the cover page of this prospectus. To
the extent that the underwriters exercise this option, each underwriter will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of common stock to be purchased by it shown in the
above table bears to the total number of shares of common stock offered in this
offering. We will be obligated to sell shares to the underwriters to the extent
the option is exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of common stock offered in
this prospectus.
The following table summarizes the compensation that we and the selling
stockholders will pay to the underwriters in connection with this offering:
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Mission Critical Software..........................
Underwriting discounts and commissions paid by sell-
ing stockholders...................................
</TABLE>
73
<PAGE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities connected to this offering, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
A majority of our stockholders, including all executive officers and
directors and the selling stockholders, who own in the aggregate 9,420,680
shares of common stock have agreed that they will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell, or otherwise dispose of
any shares of common stock, options or warrants to acquire shares of common
stock or securities exchangeable for or convertible into shares of common stock
owned by them until the date 180 days after the offering is effective. We have
agreed that we will not, without the prior written consent of Hambrecht & Quist
LLC, offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock until the date 180 days following the
date after this offering is effective, except that we may issue shares upon the
exercise of options granted prior to the date hereof, and may grant additional
options under our stock option plans, provided that without the prior written
consent of Hambrecht & Quist LLC the additional options shall not be
exercisable during such period.
Prior to this offering, there has been no public market for our shares. The
initial public offering price has been negotiated among our company and the
underwriters. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be our historical performance, estimates of our business
potential and earnings, prospects, an assessment of management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol MCSW.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over the counter market or otherwise.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $875,000.
74
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California and Austin, Texas. Legal matters related solely to this offering
will be passed upon for the underwriters by Vinson & Elkins L.L.P., Houston,
Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at June 30, 1997, June 30, 1998 and March 31, 1999, and for the
period from July 19, 1996 (date of inception) to June 30, 1997, the year ended
June 30, 1998 and the nine months ended March 31, 1999, as set forth in their
report, which is included in this prospectus. Our financial statements are
included in this prospectus and in reliance on their report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Mission Critical Software has filed with the Securities and Exchange
Commission a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to our
company and our common stock, reference is made to the registration statement
and to the exhibits and schedules filed therewith. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed
fees. The Commission maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
75
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mission Critical Software, Inc.
We have audited the accompanying balance sheets of Mission Critical Software,
Inc. (the "Company") as of March 31, 1999, June 30, 1998 and June 30, 1997, and
the related statements of operations, stockholders' equity (deficit), and cash
flows for the nine months ended March 31, 1999, the year ended June 30, 1998,
and the period from July 19, 1996 (date of inception) to June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mission Critical Software,
Inc. at March 31, 1999, June 30, 1998 and June 30, 1997, and the results of its
operations and its cash flows for the nine months ended March 31, 1999, the
year ended June 30, 1998, and the period from July 19, 1996 (date of inception)
to June 30, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
May 21, 1999
F-2
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
June 30, Equity at
---------------- March 31, March 31,
1997 1998 1999 1999
------- ------- --------- -------------
(unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 299 $ 4,575 $ 9,458
Accounts receivable, net of
allowance of nil, $150 and $395,
respectively....................... 1,613 3,912 2,845
Prepaid and other current assets.... 74 202 304
------- ------- -------
Total current assets.............. 1,986 8,689 12,607
Note receivable from stockholder.... 350 -- --
Property and equipment, net......... 843 1,199 1,744
Acquired technology, net of
accumulated amortization of $206,
$598, and $887, respectively....... 1,360 968 678
Other assets........................ 56 102 27
------- ------- -------
Total assets...................... $ 4,595 $10,958 $15,056
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Revolving line of credit and current
maturities of long-term-debt....... $ 507 $ 536 $ 265
Note payable........................ 2,450 -- --
Accounts payable.................... 506 288 651
Accrued liabilities................. 422 2,154 4,685
Deferred revenue.................... 624 2,470 3,464
------- ------- -------
Total current liabilities......... 4,509 5,448 9,065
Long-term debt, less current
maturities......................... 33 352 148
Deferred revenue, less current
portion............................ 384 495 929
------- ------- -------
Total liabilities................. 4,926 6,295 10,142
Redeemable convertible preferred
stock, Series A, $0.001 par value,
authorized and outstanding--
1,818,650, 868,650 and 868,650,
respectively; no shares outstanding
on a pro forma basis at March 31,
1999 ($.205647 per share
liquidation preference)............ 374 179 179 $ --
Redeemable convertible preferred
stock, Series B, $0.001 par value,
authorized and outstanding--
2,650,000 shares; no shares
outstanding on a pro forma basis at
March 31, 1999 ($1 per share
liquidation preference)............ 2,650 2,650 2,650 --
Redeemable convertible preferred
stock, Series C, $0.001 par value,
authorized 3,450,000 shares,
outstanding--55,000, 3,450,000 and
3,450,000 shares, respectively; no
shares outstanding on a pro forma
basis at March 31, 1999 ($3 per
share liquidation preference)...... 165 10,350 10,350 --
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized--13,083,333 shares,
outstanding 2,431,350, 2,484,971
and 2,945,620 shares, respectively;
9,914,270 shares outstanding on a
pro forma basis at March 31, 1999.. 2 2 3 10
Additional paid-in capital.......... 1 26 1,978 15,150
Deferred stock compensation......... -- -- (1,480) (1,480)
Accumulated deficit................. (3,523) (8,544) (8,766) (8,766)
------- ------- ------- -------
Total stockholders' equity
(deficit)........................ (3,520) (8,516) (8,265) $ 4,914
------- ------- ------- =======
Total liabilities and
stockholders' equity (deficit)... $ 4,595 $10,958 $15,056
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period From Year Nine Months Ended
July 19, 1996 Ended March 31
(date of inception) June 30, -------------------
to June 30, 1997 1998 1998 1999
------------------- -------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
License.................... $ 4,087 $12,767 $ 8,159 $14,441
Maintenance................ 180 1,609 1,075 2,460
------- ------- ------- -------
Total revenue.............. 4,267 14,376 9,234 16,901
Cost of revenue:
Cost of license............ 206 392 294 291
Cost of maintenance........ 142 933 680 681
------- ------- ------- -------
Total cost of revenue...... 348 1,325 974 972
------- ------- ------- -------
Gross margin............. 3,919 13,051 8,260 15,929
------- ------- ------- -------
Operating expenses:
Sales and marketing........ 3,554 9,590 6,591 8,952
Research and development... 1,317 3,612 2,470 4,274
General and
administrative............ 973 2,228 1,595 1,861
Amortization of deferred
stock compensation........ -- -- -- 236
Abandoned lease costs...... -- -- -- 1,034
Acquired in-process
research and development.. 1,575 -- -- --
------- ------- ------- -------
Total operating expenses... 7,419 15,430 10,656 16,357
------- ------- ------- -------
Operating loss........... (3,500) (2,379) (2,396) (428)
------- ------- ------- -------
Interest income.............. 35 149 98 261
Interest expense............. (6) (59) (33) (42)
Other expense, net........... (27) (27) (3) (13)
------- ------- ------- -------
Loss before income taxes... (3,498) (2,316) (2,334) (222)
Income tax benefit........... 175 -- -- --
------- ------- ------- -------
Net loss................. (3,323) (2,316) (2,334) (222)
Excess of consideration paid
to redeem preferred stock
and dividends in arrears.... (181) (3,714) (3,446) (791)
------- ------- ------- -------
Net loss applicable to common
stockholders (Note 8)....... $(3,504) $(6,030) $(5,780) $(1,013)
======= ======= ======= =======
Basic and diluted net loss
per share................... $ (1.44) $ (2.47) $ (2.37) $ (0.40)
======= ======= ======= =======
Pro forma basic and diluted
net loss per share
(unaudited)................. $ (0.53) $ (0.02)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------- Paid-in Stock Accumulated
Number Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued
for cash............. 2,431,350 $ 2 $ 1 $ -- $ -- $ 3
Effect of deferred tax
liability recorded
for acquired technol-
ogy.................. -- -- -- -- (175) (175)
Cost of issuance of
Series B Preferred
Stock................ -- -- -- -- (25) (25)
Net loss.............. -- -- -- -- (3,323) (3,323)
--------- --- ------- ------- ------- -------
Balance at June 30,
1997................... 2,431,350 2 1 -- (3,523) (3,520)
--------- --- ------- ------- ------- -------
Common stock issued
upon exercise of
stock options........ 53,621 -- 25 -- -- 25
Redemption of Series A
Preferred Stock in
excess of issue
price................ -- -- -- -- (2,655) (2,655)
Cost of issuance of
Series C Preferred
Stock................ -- -- -- -- (50) (50)
Net loss.............. -- -- -- -- (2,316) (2,316)
--------- --- ------- ------- ------- -------
Balance at June 30,
1998................... 2,484,971 2 26 -- (8,544) (8,516)
--------- --- ------- ------- ------- -------
Common stock issued
upon exercise of
stock options........ 460,649 1 236 -- -- 237
Deferred stock compen-
sation relating to
stock options........ -- -- 1,716 (1,716) -- --
Amortization of de-
ferred compensation.. -- -- -- 236 -- 236
Net loss.............. -- -- -- -- (222) (222)
--------- --- ------- ------- ------- -------
Balance at March 31,
1999................... 2,945,620 $ 3 $ 1,978 $(1,480) $(8,766) $(8,265)
========= === ======= ======= ======= =======
Pro forma stockholders'
equity at March 31,
1999 (unaudited)....... 9,914,270 $10 $15,150 $(1,480) $(8,766) $ 4,914
========= === ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period From Nine Months Ended
July 19, 1996 Year Ended March 31,
(date of inception) June 30, ------------------
to June 30, 1997 1998 1998 1999
------------------- ---------- ----------- ------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(3,323) $(2,316) $(2,334) $ (222)
Adjustments to reconcile
net loss to net cash
provided by (used in) op-
erating activities:
Depreciation and amortiza-
tion..................... 332 860 627 651
Deferred tax benefit...... (175) -- -- --
Noncash compensation ex-
pense.................... -- -- -- 236
Acquired in-process re-
search and development... 1,400 -- -- --
(Gain) loss on disposal of
assets................... 3 18 -- (5)
Changes in operating as-
sets and liabilities:
Accounts receivable...... (1,613) (2,298) (1,715) 1,067
Prepaid and other current
assets.................. (37) (128) (127) (102)
Other assets............. (55) (46) (45) 75
Accounts payable and ac-
crued liabilities....... 786 1,514 270 2,894
Deferred revenue......... 1,008 1,957 796 1,427
------- ------- ------- ------
Net cash provided by (used
in) operating activities... (1,674) (439) (2,528) 6,021
Cash flows from investing
activities:
Proceeds from sale of prop-
erty and equipment........ 5 18 -- 50
Purchase of property and
equipment................. (821) (860) (732) (950)
Payment from (loan to)
stockholder under promis-
sory note................. (350) 350 350 --
------- ------- ------- ------
Net cash used in investing
activities................. (1,166) (492) (382) (900)
Cash flows from financing
activities:
Net payments (borrowings)
on revolving line
of credit................. 500 275 1,300 (275)
Borrowings on long-term
debt...................... -- 642 681 --
Payments on long-term
debt...................... (4) (3,020) (2,972) (200)
Redemption of Series A pre-
ferred stock.............. -- (2,850) (2,850) --
Issuance of common stock,
net of cost............... 3 25 25 237
Issuance of Series B pre-
ferred stock, net of
cost...................... 2,475 -- -- --
Issuance of Series C pre-
ferred stock, net of
cost...................... -- 10,135 10,135 --
Subscription of Series C
preferred stock........... 165 -- -- --
------- ------- ------- ------
Net cash provided by (used
in) financing activities:.. 3,139 5,207 6,319 (238)
------- ------- ------- ------
Net increase in cash and
cash equivalents........... 299 4,276 3,409 4,883
------- ------- ------- ------
Beginning cash and cash
equivalents................ -- 299 299 4,575
------- ------- ------- ------
Ending cash and cash equiva-
lents...................... $ 299 $ 4,575 $ 3,708 $9,458
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
1. Description of Business and Summary of Significant Accounting Policies
Mission Critical Software, Inc. (the "Company") is a leading provider of
systems administration and operations management software products for
corporate and Internet-based Windows NT networks. The Company was incorporated
on July 19, 1996, as a Delaware corporation, and commenced operations on
September 4, 1996.
Revenue Recognition
The Company derives revenue from the sale of product licenses and
maintenance.
The Company recognizes product license revenue when persuasive evidence of an
agreement exists, the product and the permanent license key have been
delivered, the Company has no remaining significant obligations, customer
acceptance periods, if any, have been completed, the license fee is fixed or
determinable and collection of the fee is probable.
The Company recognizes revenue from maintenance agreements ratably over the
term of the agreement, typically one year. Customers purchasing maintenance
agreements receive unspecified product upgrades and electronic, Internet-based
technical support and telephone support. Maintenance agreements are purchased
separately by customers at their discretion.
The Company adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition, as of July 1, 1997. Prior to July 1, 1997,
the Company recognized revenue in accordance with SOP 91-1, Software Revenue
Recognition. The adoption of SOP 97-2 and SOP 98-4 did not have a material
impact on the Company's financial results.
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All
other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company believes that the
adoption of SOP 98-9 will not have a material effect on the Company's results
of operations or financial condition.
Cash and Cash Equivalents
The Company considers instruments with an original maturity date of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line method over the shorter of the
estimated useful life or the lease term. The cost of ordinary maintenance and
repairs is charged to expense as incurred.
Research and Development
Research and development expenditures are expensed as incurred. Statement of
Financial Accounting Standards ("SFAS") 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software development costs subsequent to the
establishment of
F-7
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
technological feasibility. Based on the Company's product development process,
technological feasibility is established upon completion of a working model.
Costs incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant. Through March 31, 1999, all software development costs have been
expensed as incurred.
Acquired Technology
Acquired technology is recorded at cost and amortized on the straight-line
method over the products' estimated useful lives, generally three to five
years.
Stock-Based Compensation
SFAS 123, Accounting for Stock-Based Compensation, prescribes accounting and
reporting standards for all stock-based compensation plans, including employee
stock options. As allowed by SFAS 123, the Company has elected to continue to
account for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25).
Pro-Forma Stockholder's Equity (Unaudited)
If the offering contemplated by this prospectus is closed, all of the
redeemable convertible preferred stock outstanding will automatically be
converted into common stock. Pro forma stockholders' equity (unaudited) at
March 31, 1999, as adjusted for the assumed conversion of redeemable
convertible preferred stock based on the shares of redeemable convertible
preferred stock outstanding at March 31, 1999, is disclosed on the balance
sheet.
Income Taxes
Income taxes have been provided in accordance with the liability method of
accounting for income taxes. Accordingly, deferred income taxes are recorded to
reflect the tax consequences on future years of temporary differences between
the tax basis of assets and liabilities and their financial amounts. A
valuation allowance is provided, if necessary, to reduce deferred tax assets to
their estimated net realizable value.
Comprehensive Loss
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, Reporting Comprehensive Income. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components. For the
periods ended June 30, 1997, June 30, 1998, and March 31, 1999, comprehensive
loss was the same as net loss.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $181,000,
$613,000, and $707,000 for the periods ended June 30, 1997, June 30, 1998, and
March 31, 1999, respectively.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash
and cash equivalents and accounts receivable. The Company's investment policy
limits its exposure to credit risk for cash and cash equivalents. The Company
licenses its software products primarily to major corporations in a number of
industries. Collateral or deposits generally are not required from customers
who demonstrate
F-8
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
creditworthiness. Credit risk is considered limited for accounts receivable.
The following table summarizes the changes in allowance for doubtful amounts
for accounts receivable (in thousands):
<TABLE>
<S> <C>
Balance at July 19, 1996 (inception)................................ $ --
Additions charged to costs and expenses............................. --
Write-off of uncollectible accounts................................. --
----
Balance at June 30, 1997............................................ --
Additions charged to costs and expenses............................. 150
Write-off of uncollectible accounts................................. --
----
Balance at June 30, 1998............................................ 150
Additions charged to costs and expenses............................. 290
Write-off of uncollectible accounts................................. (45)
----
Balance at March 31, 1999........................................... $395
====
</TABLE>
The Company's products are sold through a network of sales offices and
distribution partners. Approximately 15%, 18%, and 20% of the Company's
revenues in the periods ended June 30, 1997, June 30, 1998, and March 31, 1999,
respectively, were represented by customers outside of North America. During
the period ended June 30, 1997, one customer accounted for approximately 11% of
total revenue. No one customer accounted for greater than 10% of total revenue
during the periods ended June 30, 1998 and March 31, 1999.
The Company maintains cash demand deposits with major financial institutions.
Balances exceed the $100,000 level covered by federal depository insurance;
however, the Company has experienced no losses.
Net Loss Per Share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128). Basic net loss per share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Securities that
could potentially dilute basic earnings per share in the future were not
included in the diluted computation as they were antidilutive to the Company's
net loss total 1,764,600, 3,906,000 and 4,368,000 for the period ended June 30,
1997, June 30, 1998 and March 31, 1999, respectively. Accordingly, basic and
diluted net loss per share are the same for all periods presented. Such shares,
had they been dilutive, would have been included in the computation of diluted
net loss per share using the treasury stock method.
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
redeemable convertible preferred stock into common stock concurrent with the
closing of the Company's anticipated initial public offering. Accordingly, a
pro forma calculation for the periods ended June 30, 1998 and March 31, 1999
assuming the conversion of all outstanding shares of redeemable convertible
preferred stock into common stock upon the Company's initial public offering
using the if-converted method from their respective dates of issuance is
presented.
F-9
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Period From July Year Nine Months Ended
19, 1996 Ended March 31
(date of inception) June 30, -------------------
to June 30, 1997 1998 1998 1999
------------------- -------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C>
Net loss..................... $(3,323) $(2,316) $(2,334) $ (222)
Excess of consideration paid
to redeem preferred stock
over carrying amount........ -- (2,655) (2,655) --
Increase in cumulative
dividends in arrears on
redeemable convertible
preferred stock............. (181) (1,059) (791) (791)
------- ------- ------- -------
Net loss applicable to common
stockholders................ $(3,504) $(6,030) $(5,780) $(1,013)
======= ======= ======= =======
Pro forma net loss applicable
to common stockholders...... $(4,971) $ (222)
======= =======
Shares used in computing
basic and diluted:
Net loss per share......... 2,431 2,440 2,435 2,563
======= ======= ======= =======
Pro forma net loss per
share (unaudited)......... 9,409 9,532
======= =======
Computation of basic and and
diluted:
Net loss per share......... $ (1.44) $ (2.47) $ (2.37) $ (0.40)
======= ======= ======= =======
Pro forma net loss per
share (unaudited)......... $ (0.53) $ (0.02)
======= =======
</TABLE>
Financial Instruments
The Company records all financial instruments at cost. The fair values of
accounts receivable, accounts payable, accrued liabilities and indebtedness
approximate cost due to their short-term nature or adjustable interest rates.
Segments
Effective July 1, 1998, the Company adopted SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. The adoption of SFAS 131 did
not have a significant effect on the disclosure of segment information as the
Company continues to consider its business activities to be in a single
segment.
Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Interim Financial Information
The financial information for the nine months ended March 31, 1998 are
unaudited but include all adjustments, consisting only of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
the financial position, operating results and cash flows for the period.
Results for the nine months ended March 31, 1999 are not necessarily indicative
of the results for the entire year.
Recent Pronouncements
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
entities to capitalize certain costs related to internal-use
F-10
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
software once certain criteria have been met. The Company expects that the
adoption of SOP 98-1 will not have a material impact on its financial position
or results of operations. The Company will adopt SOP 98-1 for its fiscal year
beginning July 1, 2000.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that all start-up costs related to new operations
must be expensed as incurred. In addition, all start-up costs that were
capitalized in the past must be written off when SOP 98-5 is adopted. The
Company expects that the adoption of SOP 98-5 will not have a material impact
on its financial position or results of operations. The Company will be
required to implement SOP 98-5 for its fiscal year beginning July 1, 2000.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 establishes methods 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, it expects
that the adoption of SFAS 133 will not have a material impact on its financial
position or results of operations. The Company will adopt SFAS 133 for its
fiscal year beginning July 1, 2001.
2. Note Receivable From Shareholder
At June 30, 1997, the Company held a note receivable of $350,000 from a
shareholder which earned interest at 6% per year. The promissory note and all
remaining accrued interest were collected on July 28, 1997. The Company
recognized interest income of approximately $15,000 and $3,000 for the periods
ended June 30, 1997 and June 30, 1998, respectively.
3. Technology Acquisitions
On September 4, 1996, the Company acquired various assets and liabilities
from a related party through the issuance of 1,697,082 shares of Series A
Preferred Stock. The related party was a company wholly-owned by a brother of
the individual then serving as the Company's president. The related party had
approximately a 4% ownership interest in the Company prior to the transaction.
The most significant asset acquired was a developed software product which had
reached technological feasibility. Accordingly, the assets acquired and
liabilities assumed were recorded at their fair values as follows (in
thousands):
<TABLE>
<S> <C>
Property and equipment.............................................. $113
Acquired technology................................................. 515
Other assets........................................................ 37
----
Total assets acquired............................................... 665
Notes payable....................................................... 175
Other liabilities................................................... 141
----
Total liabilities assumed........................................... 316
----
Net assets acquired................................................. $349
====
</TABLE>
On June 27, 1997, the Company purchased in-process research and development
for $2,625,000, consisting of cash of $100,000, issuance of a note payable in
the principal amount of $2,450,000, other direct costs of $75,000 and a warrant
to purchase 333,333 shares of the Company's common stock at $1.50 per share.
The warrant may be exercised at any time up until June 26, 2007. No value was
assigned to the warrant in determining the total purchase price since the
estimated fair value of the warrant at the purchase date was insignificant, as
determined using the Black-Scholes Model with a volatility factor of .6, a
risk-free interest rate of 6%, a dividend yield of 0%, an expected life of 3
years and a fair value of the Company's common stock at the time of the
transaction of $.50 per share. The Company allocated $1,050,000 to
F-11
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
acquired technology which was capitalized and the remaining $1,575,000 was
allocated to acquired in-process research and development. See Note 10 for
further discussion of Acquired In-Process Research and Development.
4. Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful June 30
Life in ------------ March 31
Years 1997 1998 1999
--------- ---- ------ --------
<S> <C> <C> <C> <C>
Computer software and equipment............... 3 $769 $1,427 $2,229
Furniture and fixtures........................ 7 40 84 150
Leasehold improvements........................ 5 58 152 165
Office and telephone equipment................ 5 102 118 129
---- ------ ------
969 1,781 2,673
Accumulated depreciation and amortization..... (126) (582) (929)
---- ------ ------
Property and equipment, net................... $843 $1,199 $1,744
==== ====== ======
</TABLE>
See also Note 12.
5. Accrued Liabilities
Accrued liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30
----------- March 31
1997 1998 1999
---- ------ --------
<S> <C> <C> <C>
Accrued sales and use and other taxes...................... $ 32 $ 424 $ 548
Accrued compensation and related cost...................... 174 1,080 1,333
Accrued abandoned lease cost............................... -- -- 1,034
Other accrued expenses..................................... 216 650 1,770
---- ------ ------
$422 $2,154 $4,685
==== ====== ======
</TABLE>
6. Indebtedness
Indebtedness consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30
------------ March 31
1997 1998 1999
----- ----- --------
<S> <C> <C> <C>
Revolving line of credit facility with a bank ($750,
$3,000, and $3,000,
respectively) which matures in January 2000, interest
payable monthly at prime (7.75% at March 31, 1999)
collateralized by all assets of the Company........... $ 500 $ 275 $ --
Note payable to a bank, monthly principal installment
of $21, interest payable monthly at prime (7.75% at
March 31, 1999), maturing in September 2000, collater-
alized by all assets of the Company................... -- 579 386
Note payable to a finance company, monthly principal
and interest of $1, interest rate of 13%, maturing in
November 2001, collateralized by certain
equipment............................................. 40 34 27
----- ----- -----
540 888 413
Less current maturities................................ (507) (536) (265)
----- ----- -----
$ 33 $ 352 $ 148
===== ===== =====
</TABLE>
F-12
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The revolving line of credit facility subjects the Company to certain
restrictive and financial covenants including limitations of dividends and
maintenance of certain financial ratios. The Company was in compliance with all
the restrictive and financial covenants at March 31, 1999.
Future principal payments of indebtedness for the fiscal years ending June 30
are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................. $ 66
2000................................................................. 266
2001................................................................. 75
2002................................................................. 6
----
$413
====
</TABLE>
The future principal payments for the fiscal year ending June 30, 1999 of
$66,000 represents the remaining principal payments due from the March 31, 1999
balance sheet date to June 30, 1999. Total interest paid for the periods ended
June 30, 1997, June 30, 1998, and March 31, 1999 was $6,000, $59,000 and
$42,000, respectively.
As described in Note 3, the Company issued a note payable in the principal
amount of $2,450,000 to finance the purchase of in-process research and
development. The note bore interest at 10.5% per year and matured on December
31, 1997. The Company retired the note on July 11, 1997.
7. Income Taxes
At March 31, 1999, the Company had net operating loss carryforwards of
approximately $3.2 million available to offset future taxable income and which
begin expiring in 2012, if not utilized. Special limitations exist under the
tax law related to cumulative changes in ownership that may restrict the
utilization of the regular tax net operating loss carryforwards.
The components of deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
June 30
---------------- March 31
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Acquired in-process technology................ $ 583 $ 389 $ 243
Net operating loss carryforward............... 626 1,263 1,166
Accrued liabilities........................... 11 324 457
Allowance for doubtful accounts............... -- 55 146
------- ------- -------
Gross deferred tax assets..................... 1,220 2,031 2,012
Purchased software costs...................... (115) (99) (91)
Property and equipment........................ (12) (11) (27)
------- ------- -------
Gross deferred tax liabilities................ (127) (110) (118)
Valuation allowance........................... (1,093) (1,921) (1,894)
------- ------- -------
Net deferred tax asset........................ $ -- $ -- $ --
======= ======= =======
</TABLE>
A valuation allowance has been recorded to completely offset the carrying
value of the deferred tax asset due to the uncertainty surrounding its
realization, including a lack of earnings history and the variability of
operating results. The valuation allowance was increased by $1,093,000 and
$828,000 during the periods ended June 30, 1997 and June 30, 1998,
respectively, and decreased by 27,000 for the period ended March 31, 1999.
F-13
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The difference between the Company's effective tax rate and the statutory
rate of 34% was as follows:
<TABLE>
<CAPTION>
June 30
----------- March 31
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Statutory tax rate................................. (34)% (34)% (34)%
State taxes, net of federal benefit................ (3)% (3)% (3)%
Nondeductible expenses............................. 1 % 1 % 9 %
Amortization of deferred stock compensation ....... -- -- 36%
Valuation allowance................................ 31 % 36 % (8)%
--- --- ---
(5)% -- % -- %
=== === ===
</TABLE>
In connection with the acquisition of various assets and liabilities from a
related party on September 4, 1996 (see Note 3), the Company recorded a
deferred tax liability of approximately $175,000 for the tax effect of the
difference in the recorded basis for book and tax purposes. Consequently,
during the period ended June 30, 1997, the Company was able to recognize a
$175,000 tax benefit for deferred tax assets generated subsequent to the
acquisition to the extent of such deferred tax liability.
8. Redeemable Convertible Preferred Stock
On September 4, 1996, the Company's board of directors authorized the
issuance of 1,818,650 shares of Series A Redeemable Convertible Preferred Stock
(Series A Preferred Stock), $.001 par value, of which 121,568 shares were
issued to a member of the board of directors as satisfaction of a note payable
to the board member in the principal amount of $25,000, and 1,697,082 shares
were issued to a related party in exchange for assets and liabilities as
described in Note 3.
On July 2, 1997, the Company entered into an agreement to redeem 950,000
shares of Series A Preferred Stock at $3 per share in cash for a total
redemption price of $2,850,000. The excess of the redemption price over the
carrying amount of the redeemed shares of preferred stock, in the amount of
$2,655,000, has been subtracted from net loss to arrive at net loss applicable
to common stockholders. The redeemed shares were subsequently canceled.
On September 4, 1996, the Company's board of directors authorized the
issuance of 2,650,000 shares of Series B Redeemable Convertible Preferred Stock
(Series B Preferred Stock), $.001 par value, of which 150,000 shares were
issued as satisfaction of a note payable in the principal amount of $150,000,
and 2,500,000 shares were issued for cash of $2,475,000, net of issuance costs
of $25,000.
On July 2, 1997, the Company sold 3,450,000 shares of Series C Redeemable
Convertible Preferred Stock (Series C Preferred Stock) at $3 per share,
resulting in cash proceeds of $10,300,000, after issuance costs of
approximately $50,000. The Company received $165,000 prior to June 30, 1997, as
a cash subscription to 55,000 shares of the stock issued.
Series A, B and C Preferred Stock (the "Preferred Stock") are convertible
into shares of common stock at the option of the holder or in the event the
Company completes an initial public offering of common stock. The conversion
rate is initially one to one and is subject to adjustment if the Company issues
additional shares of common stock.
The holders of the Preferred Stock are entitled to vote upon any matter
submitted to the common stockholders for a vote as though the common stock and
the Preferred Stock constituted a single class of
F-14
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
stock. The holders of Preferred Stock have the number of votes per share which
equals the number of shares of common stock into which each such share of
preferred stock held by such holder is then convertible.
The holders of the Preferred Stock are entitled to receive, when and as
declared by the board of directors, cumulative dividends at the annual rate of
$.01645, $.08 and $.24 per share for Series A, B and C, respectively. Such
dividends accrue on a quarterly basis commencing with the first calendar
quarter ending after the issuance of the preferred stock. No dividends were
declared or paid on the Company's preferred stock during the periods ended June
30, 1997, June 30, 1998, or March 31, 1999, and dividends in arrears totaled
$181,000, $1,240,000 and $2,031,000 as of June 30, 1997, June 30, 1998 and
March 31, 1999, respectively.
On July 2, 2002, the Company is required to redeem all outstanding shares of
Series A, B and C Preferred Stock at a per share price of $.205647, $1 and $3
per share, respectively, plus cumulative dividends in arrears if not previously
converted into common stock.
9. Stock Option Plan
Effective March 20, 1997, the board of directors adopted the Company's 1997
Stock Option Plan. The 1997 Stock Option Plan provides for the granting of
options to purchase the Company's common stock to officers, employees or
consultants of the Company upon the terms determined by a committee of the
board of directors (the "Committee"). The number of shares of common stock
authorized under the 1997 Stock Option Plan at March 31, 1999 was 4,795,000.
Options generally have a ten year term and generally vest over four years.
Additionally, in January 1998, in connection with an employment agreement, the
Company granted a warrant to purchase 100,000 shares of the Company's Common
Stock at an exercise price of $1 per share. No amount was allocated to the
value of the warrant as the amount was not significant (as determined using the
Black-Scholes model with a volatility factor of .6, a risk-free interest rate
of 6%, a dividend yield of 0%, an expected life of 3 years and a fair value of
the Company's common stock at the time of the transaction of $.50 per share).
In connection with the grant of certain stock options to employees through
March 31, 1999, the Company recorded deferred stock compensation of $1,716,000
for the aggregate differences between the exercise prices of options at their
date of grant and the deemed fair value for accounting purposes of the common
stock subject to such options. The amortization of deferred compensation cost
of $236,000 for the nine months ended March 31, 1999 relates to options awarded
to employees in all operating expense categories. This amount has not been
separately allocated to these categories.
F-15
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the stock option plan for the
periods ended March 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Range of
Exercise Exercise
Options Price Prices
--------- -------- ------------
<S> <C> <C> <C>
Options granted............................. 1,495,000 $0.50 $ 0.50
Options forfeited........................... (64,000) 0.50 0.50
Options exercised........................... -- -- --
--------- ----- ------------
Options outstanding, June 30, 1997............ 1,431,000 0.50 0.50
Options granted............................. 2,361,934 0.50 0.50
Options forfeited........................... (266,502) 0.50 0.50
Options exercised........................... (53,621) 0.50 0.50
--------- ----- ------------
Options outstanding, June 30, 1998............ 3,472,811 0.50 0.50
Options granted............................. 1,148,010 5.60 2.50-12.50
Options forfeited........................... (235,090) 0.54 0.50-2.50
Options exercised........................... (450,647) 0.50 0.50
--------- ----- ------------
Options outstanding, March 31, 1999........... 3,935,084 1.99 $0.50-$12.50
========= ===== ============
Exercisable at:
June 30, 1997............................... -- $ --
========= =====
June 30, 1998............................... 338,620 $0.50
========= =====
March 31, 1999.............................. 778,508 $0.50
========= =====
</TABLE>
The following tables summarize information concerning outstanding options as
of March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------- ------------------------
Range of Weighted-Average
Exercise Remaining Weighted-Average Weighted-Average
Prices Number Contractual Life Exercise Price Number Exercise Price
- -------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.50 2,791,574 8.6 years $ 0.50 778,508 $0.50
$2.50--
$3.50 798,510 9.5 years $ 2.64 -- --
$12.50 345,000 9.9 years $12.50 -- --
</TABLE>
<TABLE>
<CAPTION>
For the period ended
---------------------------
June 30, June 30, March 31,
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Weighted-average deemed fair value of stock op-
tions granted during the year:
Exercise price equal to fair value of stock on
date of grant.................................. $-- $0.18 $3.68
Exercise price less than fair value of stock on
date of grant.................................. -- -- 2.42
</TABLE>
F-16
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of stock based compensation was calculated in accordance with
SFAS 123, Accounting for Stock-Based Compensation, utilizing the minimum value
option pricing model with the following assumptions:
<TABLE>
<CAPTION>
For the period
ended
---------------
June June March
30, 30, 31,
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Expected life (in years).................................. 8 8 8
Risk free interest rate 5.0% 5.8% 5.5%
Volatility................................................ 0% 0% 0%
Dividend yield............................................ 0% 0% 0%
</TABLE>
The Company's pro-forma stock based compensation is as follows (in
thousands):
<TABLE>
<CAPTION>
For the period ended
-------------------------
June June March
30, 30, 31,
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Pro-forma stock based compensation expense... $ -- $ 60 $ 718
Pro-forma net loss applicable to common
stockholders................................ $(3,504) $(6,090) $(1,731)
Pro-forma basic and diluted net loss per
share....................................... $ (1.44) $ (2.50) $ (0.68)
</TABLE>
Because options vest over several years and additional option grants are
expected, the above pro-forma effects of FAS 123 are not likely to be
representative of the effects of reported net income (loss) for future periods.
10. Acquired In-Process Research and Development
In June 1997, the Company acquired from Serverware, Ltd. in-process research
and development for $2.7 million consisting of cash of $100,000, a $2.5 million
note payable, a warrant to purchase 333,333 shares of common stock at an
exercise price of $1.50 per share and $75,000 of direct costs incurred. No
value was allocated to the warrant as such amount was not significant.
The Company intended to utilize the acquired in-process research and
development to develop an event management product for Windows NT that it did
not possess at the time. In order to capitalize on the event management market,
the Company intended to complete the in-process research and development as
quickly as possible and sell and market that product under the name SeNTry.
From the date of acquisition to June 30, 1998, the Company expended
approximately 80 person months, or approximately $800,000, to complete and
enhance the in-process research and development. In June 1998, the Company
completed SeNTry, which represented the first completed and enhanced version of
the acquired technology. The Company then began internal development of an
entirely new event management product, OnePoint Event Manager, the design of
which was to be more consistent with its long-term product strategy.
A significant amount of uncertainty existed surrounding the successful
development and completion of the research and development acquired, which was
estimated to be 70% complete at the date of the acquisition. This was the
Company's first attempt to develop event management technology. The Company was
uncertain of its ability to complete the development of a new product within a
timeframe acceptable to the market and ahead of competitors. The in-process
research and development effort, at the time of purchase, had not reached
technological feasibility as it lacked many key elements including:
standardized implementation capabilities, a scalable and extensible
architecture, enhanced user interfaces, broad functionality and extensive
reporting capabilities.
F-17
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company assigned a value to the in-process research and development of
$1.5 million and to the core technology of $1.1 million based on a discounted
cash flow model. The Company based the cash flow projections for revenue on the
projected incremental increase in revenue that it expected to receive from the
completed acquired in-process research and development. Revenue derived from
the completed in-process research and development was expected to commence
after completion of the SeNTry product. The Company expected revenue from the
in-process research and development to continue until the release of OnePoint
Event Manager, which was expected to be released in fiscal 2000. The Company
deducted estimated operating expenses and income taxes from estimated revenue
to arrive at estimated after-tax cash flows. Projected operating expenses
included: cost of revenue and general and administrative, customer support and
sales and marketing expenses. The Company estimated operating expenses as a
percentage of revenue and based such estimates primarily on projections it
prepared.
The cash flow projections attributable to the core technology included 50% of
the net income before tax expense anticipated to be generated from the
completed in-process technology and 15% from the net income before tax expense
anticipated to be generated from OnePoint Event Manager, an entirely new and
internally developed product. Revenue derived from OnePoint Event Manager was
estimated through 2004. The Company deducted estimated operating expenses and
income taxes from estimated revenue to arrive at estimated after-tax cash
flows. Projected operating expenses included: cost of revenue and general and
administrative, customer support and sales and marketing expenses. The Company
estimated operating expenses as a percentage of revenue and based such
estimates primarily on projections it prepared.
The rate used to discount the net cash flows to present value was based on
the weighted average cost of capital ("WACC"). The Company used a discount rate
of 35% for valuing the in-process research and development and 25% for the core
technology. These discount rates are higher than the implied WACC due to the
inherent uncertainties surrounding the successful development of the acquired
in-process research and development, the useful life of such in-process
research and development, the profitability levels of such in-process research
and development, and the uncertainty of technological advances that were
unknown at the time.
11. Employee Benefit Plan
The Company sponsors a defined contribution 401(k) plan to provide
substantially all U.S. employees an opportunity to accumulate personal funds
for their retirement. Under the terms of the plan, employees may make pre-tax
contributions to the plan of up to 20% of their annual salary, subject to
annual limitations imposed by the Internal Revenue Code. The Company, in the
sole discretion of the board of directors, may make contributions to the plan.
The Company made no contributions to the plan during the periods ended June 30,
1997, June 30, 1998 and March 31, 1999.
12. Commitments and Contingencies
The Company has entered into certain noncancelable operating leases for
office space with terms through 2003. Rent expense totaled $104,000, $434,000
and $418,000 for the periods ended June 30, 1997, June 30, 1998, and March 31,
1999, respectively. Remaining future minimum lease commitments related to these
lease agreements for the fiscal years ended June 30 are as follows (in
thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 165
2000.............................................................. 410
2001.............................................................. 408
2002.............................................................. 423
2003.............................................................. 258
------
$1,664
======
</TABLE>
F-18
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In February 1999, the board of directors approved the relocation of the
Company's corporate offices. As a result, the Company gave notification of its
intent to abandon the related office space lease effective August 1, 1999 in
accordance with a cancellation option in the lease agreement. During the period
ended March 31, 1999, the Company recorded a nonrecurring charge of $1,034,000
for lease abandonment, which represents the required payment for cancellation
of the lease.
The Company is subject to litigation claims and assessments arising in the
ordinary course of business. In the opinion of management, the ultimate outcome
of these claims is not expected to have a material adverse effect on the
financial statements.
13. Segments of Business and Geographic Area Information
The Company considers its business activities to constitute a single segment.
The Company determined that it operates in a single segment based upon
management's decision to organize and operate the Company based its total
product suite rather than around differences in products and services. Also,
the Company has not organized its business by geographic areas. A summary of
the Company's operations by geographic area follows (in thousands):
<TABLE>
<CAPTION>
Periods ended Nine months ended
June 30 March 31
-------------- -------------------
1997 1998 1998 1999
------ ------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
Domestic customers........................ $3,609 $11,857 $7,672 $13,599
Customers outside North America........... 658 2,519 1,562 3,302
------ ------- ------ -------
$4,267 $14,376 $9,234 $16,901
====== ======= ====== =======
</TABLE>
14. Subsequent Events
On May 21, 1999, the board of directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its Common Stock and shares held by
existing stockholders to the public (the "Offering"). If the Offering is
consummated under the terms presently anticipated, all of the currently
outstanding redeemable convertible preferred stock will convert to 6,968,650
shares of Common Stock. Pro forma stockholders' equity at March 31, 1999
(unaudited) as adjusted for the conversion of the redeemable convertible
preferred stock is set forth in the accompanying Balance Sheets and Statements
of Stockholders' Equity (Deficit).
1999 Employee Stock Purchase Plan
On May 21, 1999, the board of directors approved the adoption of the
Company's 1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"), subject
to stockholder approval and the closing of the Offering. A total of 600,000
shares of common stock has been reserved for issuance under the 1999 Purchase
Plan, plus, commencing on July 1, 2000, annual increases equal to the lesser of
(i) 500,000 shares, (ii) 4% of the outstanding common shares on the last day of
the prior fiscal year or (iii) such amount as determined by the board of
directors. The 1999 Purchase Plan permits eligible employees to acquire shares
of the Company's common stock through periodic payroll deductions, which may
not exceed the lesser of 15% of an employee's compensation or $25,000, where
compensation is defined on Form W-2. Each offering period will have a maximum
duration of 24 months, comprising four purchase periods of six months each. The
price at which the common stock may be purchased is 85% of the lesser of the
fair market value of the Company's common stock on the first day of the
applicable offering period or on the last day of the respective purchase
period. The initial offering period will commence on the effectiveness of the
initial public offering and will end on July 31, 2001.
F-19
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1997 Stock Option Plan
On May 21, 1999, the board of directors approved an amendment to the
Company's 1997 Stock Option Plan, subject to stockholder approval. A total of
4,000,000 shares of common stock have been added to the 1997 Stock Option Plan
for issuance to eligible participants under the 1997 Stock Option Plan, plus,
commencing on July 1, 2000, annual increases equal to the lesser of (i) 750,000
shares, (ii) 5% of the outstanding common shares on the last day of the prior
fiscal year or (iii) such amount as determined by the board of directors. The
types of awards that may be made under the 1997 Stock Option Plan are incentive
and nonqualified options to purchase shares of common stock. The exercise price
for incentive stock options may not be less than 100% of the fair market value
of the Company's common stock on the date of grant or 85% of fair market value
for nonstatutory options. In the event of a change in control of the Company,
an option or award under the 1997 Stock Option Plan will become fully
exercisable and fully vested if the option or award is not assumed by the
surviving corporation or the surviving corporation does not substitute
comparable awards for the awards granted under the 1997 Stock Option Plan.
1999 Director Option Plan
On May 21, 1999, the board of directors approved the adoption of the
Company's 1999 Director Option Plan, subject to stockholder approval and the
closing of the Offering. A total of 250,000 shares of common stock have been
reserved for issuance to non-employee members of the board of directors, plus,
commencing on July 1, 2000, annual increases equal to the lesser of (i) 250,000
shares, (ii) 2% of the outstanding common shares on the last day of the prior
fiscal year or (iii) such amount as determined by the board of directors.
F-20
<PAGE>
[Graphic showing components of One Point suite including -- Systems
Administration, Security, Operations Management; Products--Directory and
Resource Administrator, Domain Administrator, Exchange Administrator, Event
Manager, Framework Integration; Infrastructure--Active Knowledge Library,
Active Administration & Operations Engine]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 Shares
[Mission Critical Software Logo]
Common Stock
------------
PROSPECTUS
------------
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
SOUNDVIEW TECHNOLOGY GROUP
Charles Schwab & Co., Inc.
------------
, 1999
------------
You should rely only on information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. We are offering to sell, and seeking offers to buy, shares
of common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Until , 1999, all dealers that buy, sell or trade in our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Mission Critical Software in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,785
NASD filing fee................................................. 7,860
Nasdaq National Market listing fee.............................. 100,000
Printing and engraving costs.................................... 175,000
Legal fees and expenses......................................... 350,000
Accounting fees and expenses.................................... 179,000
Blue Sky fees and expenses...................................... 10,000
Transfer Agent and Registrar fees............................... 10,000
Miscellaneous expenses.......................................... 26,355
--------
Total........................................................... $875,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law. Articles Nine and Ten of
the Registrant's Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law. Article 8 of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the Registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful. The Registrant has entered into
indemnification agreements with its directors and executive officers, in
addition to indemnification provided for in the Registrant's Bylaws, and
intends to enter into indemnification agreements with any new directors and
executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons, as described below. None of these
transactions involved any underwriters, underwriting discounts or commissions,
or any public offering, and the Registrant believes that each transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant
to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
Since July 1996, (inception), the Registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:
1. On September 4, 1996, the Registrant issued and sold pursuant to
Section 4(2) of the Securities Act:
. 2,431,350 shares of Common Stock to employees for $3,000,
. 1,818,650 shares of Series A Preferred Stock to one investor and
one director in exchange for our OnePoint Administrator Software,
and $25,000 and
. 2,650,000 shares of Series B Preferred Stock to seven investors
for an aggregate purchase price of $2,650,000.
II-1
<PAGE>
2. On July 2, 1997, the Registrant issued and sold 3,450,000 shares of
Series C Preferred Stock to twelve investors for an aggregate purchase
price of $10,350,000 pursuant to Section 4(2), promulgated under the
Securities Act.
3. Pursuant to Rule 701 promulgated under the Securiites Act, from
March 1997 to June 30, 1999, the Registrant issued and sold 866,161 shares
of Common Stock to employees and consultants for aggregate consideration of
$0.50, upon exercise of stock options, pursuant to the Registrant's 1997
Stock Option Plan.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1*** Form of Underwriting Agreement
3.1.1** Amended and Restated Certificate of Incorporation of the Registrant
3.1.2** Form of Certificate of Incorporation of the Registrant to be filed
after the closing of the offering made under this Registration
Statement
3.2.1** Amended and Restated Bylaws of the Registrant
3.2.2** Form of Bylaws of the Registrant to be in effect after the closing
of the offering made under this Registration Statement
4.1* Specimen common stock certificate
4.2* Amended and Restated Investors Rights Agreement, dated as of July 2,
1997, by and among the Registrant and certain stockholders of the
Registrant
4.3** Amended and Restated Stockholders' Agreement, dated as of July 2,
1997, by and among the Registrant and certain stockholders of the
Registrant
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2** Amended and Restated 1997 Stock Option Plan
10.2.1** Form of Option Agreement under the 1997 Stock Option Plan
10.3** 1999 Employee Stock Purchase Plan
10.3.1** Form of Subscription Agreement under the 1999 Employee Stock
Purchase Plan
10.4** 1999 Director Option Plan
10.4.1* Form of Option Agreement under 1999 Director Option Plan
10.5** Lease Agreement dated October 22, 1996 between Soaring Eagles
Orchard, Inc. and the Registrant for the premises located at 720
North Post Oak Road, Houston, Texas 77024
10.5.1** First Amendment dated February 13, 1997 to Lease Agreement between
Soaring Eagles Orchards, Inc. and the Registrant
10.5.2** Second Amendment dated April 1, 1997 to Lease Agreement between
Soaring Eagles Orchards, Inc. and the Registrant
10.5.3** Third Amendment dated July 22, 1997 to Lease Agreement between
Soaring Eagles Orchards, Inc. and the Registrant
10.6* Quickstart Loan and Security Agreement dated February 7, 1997
between the Registrant and Silicon Valley Bank
10.6.1** Amendment dated January 23, 1998 to Quickstart Loan Agreement
between Silicon Valley Bank and the Registrant
10.6.2** Loan and Security Agreement dated January 26, 1998 between the
Registrant and Silicon Valley Bank
10.6.3* First Amendment dated March 19, 1999 to Loan and Security Agreement
between the Registrant and Silicon Valley Bank
10.7** Employment Agreement dated September 4, 1996 between the Registrant
and Paul F. Koffend, Jr.
10.8** Employment Agreement dated September 4, 1996 between the Registrant
and Louis R. Woodhill
10.8.1** Amended and Restated Employment Agreement dated May 21, 1998 between
the Registrant and Louis R. Woodhill
10.9** Employment Agreement dated September 4, 1996 between the Registrant
and James R. Woodhill
10.10** Employment Agreement dated January 1, 1997 between the Registrant
and Thomas P. Bernhardt
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.10.1** Consulting Agreement dated September 4, 1996 between the Registrant
and Thomas P. Bernhardt
10.11** Employment Agreement dated August 6, 1997 between the Registrant and
Brian McGrath
10.11.1** Letter Agreement dated January 13, 1999 between the Registrant and
Brian McGrath
10.12** Employment Agreement dated February 23, 1998 between the Registrant
and Olivier Thierry
10.12.1** Relocation Agreement dated February 23, 1998 between the Registrant
and Olivier Thierry
10.13** Offer Letter dated April 13, 1998 between the Registrant and Michael
S. Bennett
10.14** Offer Letter dated April 13, 1998 between the Registrant and Stephen
E. Odom
10.15** Offer Letter dated May 28, 1998 between the Registrant and Leslie D.
Willard
10.15.1** Letter Agreement dated May 26, 1999 between the Registrant and
Leslie D. Willard
10.16** Employment Agreement dated December 21, 1998 between the Registrant
and Richard Pleczko
10.16.1** Offer Letter dated December 2, 1998 between Registrant and Richard
Pleczko
10.17* Sub-Lease Agreement between Learmonth & Burchett Management Systems
and the Registrant regarding the premises located at 9009 Mountain
Ridge Drive, Suite 250, Austin, Texas 78759
10.18** Offer Letter dated February 8, 1999 between the Registrant and
Richard Kangas
10.18.1** Employment Agreement dated February 8, 1999 between the Registrant
and Richard Kangas
10.19** Offer Letter dated March 1, 1999 between the Registrant and Michael
J. Rovner
10.19.1** Employment Agreement dated March 24, 1999 between the Registrant and
Michael J. Rovner
10.20** Form of Consulting Agreement
10.21* Lease Agreement dated April 8, 1999 between the Registrant and
EnergyCorp Group LC for the premises located at 13939 Northwest
Freeway, Houston, Texas
23.1* Consent of Independent Auditors
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1** Power of Attorney
</TABLE>
- --------
*Filed herewith.
**Previously filed.
***To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 7th day of July 1999.
MISSION CRITICAL SOFTWARE, INC.
By: /s/ Michael S. Bennett
----------------------------------
Michael S. Bennett
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael S. Bennett President, Chief
- ----------------------------------- Executive Officer and July 7, 1999
(Michael S. Bennett) Director (Principal
Executive Officer)
/s/ Stephen E. Odom Chief Operating Officer,
- ----------------------------------- Chief Financial Officer, July 7, 1999
(Stephen E. Odom) Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Thomas P. Bernhardt* Chief Technology July 7, 1999
- ----------------------------------- Officer and
(Thomas P. Bernhardt) Director
/s/ Douglas L. Ayer* Director July 7, 1999
- -----------------------------------
(Douglas L. Ayer)
/s/ Michael J. Maples* Director July 7, 1999
- -----------------------------------
(Michael J. Maples)
/s/ John J. Moores* Director July 7, 1999
- -----------------------------------
(John J. Moores)
/s/ Scott D. Sandell* Director July 7, 1999
- -----------------------------------
(Scott D. Sandell)
/s/ John D. Thornton* Director July 7, 1999
- -----------------------------------
(John D. Thornton)
*By: /s/ Stephen E. Odom
- -----------------------------------
Stephen E. Odom
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT 4.1
[LOGO OF MCS APPEARS HERE]
Number Shares
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 605047 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT
AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SHARES
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE PER
SHARE, OF
MISSION CRITICAL SOFTWARE, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
CHIEF FINANCIAL OFFICER [SEAL OF MCS PRESIDENT AND
AND SECRETARY APPEARS HERE] CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
MISSION CRITICAL SOFTWARE, INC.
A statement of the rights, preferences, privileges and restrictions granted to
or imposed upon the respective classes or series of shares of stock of the
Corporation, and upon the holders thereof as established by the Certificate of
Incorporation or by any certificate of determination of preferences, and the
number of shares constituting each class or series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT.........................Custodian ............................
(Cust) (Minor)
under Uniform Gifts to Minors Act
................................................................................
(State)
UNIF TRF MIN ACT..........................Custodian (until age ......)..........
(Cust)
............................ under Uniform Transfers
(Minor)
to Minors Act
..............................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- ----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
---------------------------
X
------------------------------------
X
------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
-----------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.2
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT dated as of July 2, 1997 is among Mission
Critical Software, Inc., a Delaware corporation (the "COMPANY"), and the
investors listed on EXHIBIT A to this Agreement (the "INVESTORS").
WHEREAS, the Investors owning shares of the Company's Series B Convertible
Preferred Stock, $0.001 par value per share ("SERIES B STOCK"), and the Company
are parties to a Series B Preferred Stock Purchase Agreement, dated September 4,
1996 (the "SERIES B AGREEMENT"); and
WHEREAS, the Investors purchasing shares of the Company's Series C
Convertible Preferred Stock, $0.001 par value per share (the "SERIES C STOCK"),
pursuant to that certain Series C Convertible Preferred Stock Purchase Agreement
dated as of the date hereof (the "SERIES C AGREEMENT"), have agreed to purchase
an aggregate of 3,450,000 shares of Series C Stock, and it is a condition
precedent to the closing of such purchase and sale that the Company and the
Investors enter into this Agreement, superseding certain sections of the Series
B Agreement.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and other consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. CERTAIN COVENANTS OF THE COMPANY. The Company hereby covenants and
agrees, so long as any Investor owns any Series B Stock or Series C Stock (the
Series B Stock and the Series C Stock, collectively, the "INVESTOR STOCK") or
any shares of the Company's Common Stock (the "COMMON STOCK") issued upon
conversion of the Investor Stock as follows:
1.1 FINANCIAL STATEMENTS. The Company will maintain books of account in
accordance with generally accepted accounting principles applied on a consistent
basis, keep full and complete financial records and furnish to each of the
Investors the following reports and information:
(a) within 90 days after the end of each fiscal year beginning
with the fiscal year ending December 31, 1997, a copy of the financial statement
of the Company as at the end of such year, together with statements of
operations, stockholders' equity and cash flows of the Company for such year,
audited and certified by Coopers & Lybrand LLP, of Houston, TX, or other
independent public accountants of recognized national standing reasonably
satisfactory to the Investors and prepared in accordance with generally accepted
accounting principles and practices consistently applied;
1
<PAGE>
(b) within 30 days after the end of each month, an unaudited
financial statement of the Company as at the end of such month, including income
statements, balance sheets, and statements of changes of cash flows of the
Company for such period and for the current fiscal year to the end of such
month, and comparisons to forecasts and to corresponding periods in prior years;
and
(c) such other financial information as the Investors may
reasonably request, including, without limitation, certificates of the principal
financial officer of the Company concerning compliance with the covenants of the
Company under this SECTION 1.1, other customary information and materials,
including, without limitation, reports of adverse developments, management
letters, communications with stockholders or directors, press releases,
registration statements and any other reports filed by the Company, or by any of
its officers and directors with respect to the Company, with a securities
exchange or with the Securities and Exchange Commission.
1.2 OPERATING PLAN. The Company will prepare and deliver to each
Investor at least 30 days prior to the start of each fiscal year, an annual
operating plan and budget prepared on a monthly basis and, promptly after
preparation, any revisions to such operating plan.
1.3 PAYMENT OF TAXES, COMPLIANCE WITH LAWS, ETC. The Company will pay
and discharge all lawful taxes, assessments and governmental charges or levies
imposed upon it or upon its income or property before the same shall become in
default, as well as all lawful claims for labor, materials and supplies which,
if not paid when due, might become a lien or charge upon its property or any
part thereof; PROVIDED, HOWEVER, that the Company shall not be required to pay
and discharge any such tax, assessment, charge, levy, or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established on its books.
The Company will use its best efforts to comply with all applicable laws and
regulations in the conduct of its business including, without limitation, all
federal, state, and local environmental and health and safety laws, rules,
regulations, ordinances, and by-laws.
1.4 INSURANCE. The Company will keep its insurable properties insured,
upon reasonable business terms, by financially sound and reputable insurers
against liability, and the perils of casualty, fire and extended coverage in
amounts of coverage sufficient in the reasonable business judgment of the
Company to protect the Company. The Company will also maintain with such
insurers insurance against other hazards and risks and liability to persons and
property which, in the reasonable business judgment of the Company, is customary
in the industry in which the Company operates for companies of comparable size.
1.5 KEY MAN LIFE INSURANCE. The Company will maintain term life
insurance upon the life of each of Thomas P. Bernhardt, Louis R. Woodhill and
James R. Woodhill in the amount of $1,000,000 each, with the proceeds payable to
the Company, free and clear of any lien or encumbrance.
2
<PAGE>
1.6 MAINTENANCE OF PROPERTIES. The Company will maintain all properties
used or useful in the conduct of its business in good repair, working order and
condition as is reasonably necessary to permit such business to be properly
and advantageously conducted.
1.7 AFFILIATED TRANSACTIONS. Except with respect to compensation
arrangements with, and the reimbursement of expenses of, employees of the
Company in the ordinary course of business, all transactions by and between the
Company and any director, officer, employee or stockholder of the Company or
persons controlled by or affiliated with such director, officer, employee or
stockholder, shall be conducted on an arms-length basis, shall be on terms and
conditions no less favorable to the Company than could be obtained from
nonrelated persons and shall be approved by the Board of Directors after full
disclosure of the terms thereof, for which purpose the interested party, if a
director, and any affiliate of the interested party who is a director, shall not
be entitled to vote.
1.8 INSPECTION RIGHTS. At any time during normal business hours and upon
reasonable prior notice to the Company, the holders of 100,000 shares or more of
the Investor Stock or their designated representatives or agents may (a)
visit and inspect the premises and any of the properties of the Company
including its records and books of account (and make copies thereof and take
extracts therefrom), and (b) discuss the affairs, finances and accounts of the
Company with its officers, directors, employees and accountants, all at the
expense of such Investors, unless the Company is then in material breach or
default under any provision of the Financing Documents, in which case such
Investors' out-of-pocket expenses relating to such activities shall be at the
expense of the Company.
1.9 LITIGATION. The Company promptly (and, in any event, not later than
the date of release of such information to the public generally) shall notify
the Investors or their transferees of any litigation or governmental proceeding
or investigation pending (or, to the best knowledge of the Company, threatened)
against the Company or against any officer, director, key employee, or principal
stockholder of the Company, that materially adversely affects (or if adversely
determined, could materially adversely affect) its present or proposed business,
properties, assets, or condition (financial or otherwise) taken as a whole.
1.10 EMPLOYEE CONFIDENTIALITY AND INVENTION AND NON-COMPETITION
AGREEMENTS. The Company shall require (a) all employees of the Company engaged
after the date hereof to enter into a confidentiality and inventions agreement
in substantially the form attached hereto as EXHIBIT B-1, and (b) all future
employees designated by the Board of Directors, as Key Employees to also enter
into an employment and non-competition agreement in substantially the form
attached hereto as EXHIBIT B-2.
1.11 INTEGRATION. The Company will not offer, sell or solicit offers
to buy or otherwise negotiate in respect of any security (as defined in the
Securities Act) that will be integrated with the sale of the Series C Stock in a
manner that would require the registration of the Series C Stock under the
Securities Act.
1.12 RESERVATION OF CONVERSION STOCK. The Company will, upon any increase
in the number of shares of Common Stock issuable upon conversion or exercise of
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the Preferred Stock, reserve additional shares of Common Stock for issuance upon
such conversion, so that the number of shares of Common Stock so issued will not
at any time be less than the number of such shares issuable upon such conversion
or exercise.
1.13 PARTICIPATION RIGHTS.
(a) Each of the Investors shall be entitled to a participation
right to purchase such Investor's pro rata share of New Securities (as defined
below) which the Company may, from time to time, propose to sell and issue,
subject to the terms and conditions set forth below. An Investor's pro rata
share shall equal a fraction, the numerator of which is the number of shares of
Common Stock then held by the Investor, assuming full conversion of the Investor
Stock and exercise of any then exercisable options or warrants then held by the
Investor, and the denominator of which is the total number of shares of Common
Stock then outstanding, assuming full conversion of then outstanding shares of
Series A Convertible Preferred Stock, $0.001 par value per share of the Company
(the "SERIES A STOCK"), Series B Stock and Series C Stock (the Series A Stock,
Series B Stock and Series C Stock collectively, the "PREFERRED STOCK") and any
other convertible securities issued by the Company and exercise of all then
outstanding rights, options and warrants to acquire Common Stock of the Company.
(b) "NEW SECURITIES" shall mean any capital stock of the Company
whether now authorized or not, and rights, options or warrants to purchase
capital stock, and securities of any type whatsoever which are, or may become,
convertible into capital stock; PROVIDED, HOWEVER, that the term "New
Securities" shall not include (i) shares of Common Stock issuable upon the
conversion of the Preferred Stock; (ii) securities offered to the public
pursuant to a registration statement filed with the Securities and Exchange
Commission; (iii) securities issued as a result of any stock split, stock
dividend or reclassification of Common Stock, distributable on a pro rata basis
to all holders of Common Stock; (iv) securities issued in a merger or
acquisition approved by the Board of Directors; (v) securities and/or options
issued to employees, consultants and directors of the Company and shares of
stock granted upon exercise of such securities and/or options, under a stock
option or other plan approved by the Board of Directors; and (vi) up to 345,000
shares of Common Stock of the Company or other securities representing the right
to acquire such shares issued to banks or leasing companies to obtain financing
or equipment leases.
(c) If the Company intends to issue New Securities, it shall give
the Investors written notice of such intention, describing the type of New
Securities to be issued, the price thereof and the general terms upon which the
Company proposes to effect such issuance. Each of the Investors shall have 15
days from the date of any such notice to agree to purchase all or part of its
pro rata share of such New Securities for the price and upon the general terms
and conditions specified in the Company's notice by giving written notice to the
Company stating the quantity of New Securities to be so purchased. If for any
reason, an Investor fails to exercise its participation right provided herein,
its pro rata share may be purchased by the other Investors exercising such
right, in proportion (as nearly as practicable) to the ratio of the number of
shares of Investor Stock held by each participating Investor to the number of
shares of Investor Stock held by all participating Investors.
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(d) If an Investor fails to exercise the foregoing participation
right with respect to any New Securities within such 30-day period, the Company
may within 120 days thereafter sell any or all of such New Securities not agreed
to be purchased by the Investors, at a price and upon general terms no more
favorable to the purchasers thereof than specified in the notice given to the
Investors pursuant to paragraph (c) above. In the event the Company has not sold
such New Securities within such 120-day period, the Company shall not thereafter
issue or sell any New Securities without first offering such New Securities to
the Investors in the manner provided above.
(e) For purposes of this Section, "Investor" shall include the
general partners, officers or other affiliates of each Investor and each
Investor may apportion its pro rata share among itself and such general
partners, officers and other affiliates in such proportions as it deems
appropriate.
1.14 EXCHANGE ACT REGISTRATION. Unless required by applicable law, the
Company will not register its Common Stock or any other security under the
Securities Exchange Act of 1934, as then in effect, or any comparable similar
federal statute then in effect, other than in connection with an initial public
offering of the Company's Common Stock.
1.15 EQUITY INCENTIVE OPTIONS. The Company shall not award to any officer,
employee or consultant any shares of the Company's stock or options to purchase
shares of the Company's stock except pursuant to a plan providing for the
reservation for issuance of up to 2,325,000 shares of Common Stock, unaimously
approved by the members of the Compensation Committee of the Board of Directors
and duly adopted by the Board of Directors and stockholders of the Company.
1.16 TERMINATION. Without the consent of at least eighty percent of the
members of the Compensation Committee of the Board of Directors, no person who
is an ancestor, descendant, sibling, sibling's descendant, spouse or spouse's
sibling of any officer or employee of the Company may be hired by or continued
in the employ of the Company; PROVIDED that this SECTION 1.16 shall not apply to
the employment of the Company's Chief Executive Officer.
1.17 U.S. REAL PROPERTY INTEREST STATEMENT. The Company shall provide
prompt written notice to each Investor following any "determination date" (as
defined in Treasury Regulation Section 1.897-2(c)(i)) on which the Company
becomes a United States real property holding corporation. In addition, upon a
written request by any Investor, the Company shall provide such Investor with a
written statement informing the Investor whether such Investor's interest in the
Company constitutes a U.S. real property interest. The Company's determination
shall comply with the requirements of Treasury Regulation Section 1.897-2(h)(1)
or any successor regulation, and the Company shall provide timely notice to the
Internal Revenue Service, in accordance with and to the extend required by
Treasury Regulation Section 1.897-2(h)(2) or any successor regulation, that such
statement has been made. The Company's written statement to any Investor shall
be delivered to such Investor within ten (10) days of such Investor's written
request therefor. The Company's obligation furnish a written statement pursuant
to this SECTION 1.17 shall continue notwithstanding the
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fact that a class of the Company's stock may be regularly traded on an
established securities market.
2. REGISTRATION RIGHTS.
2.1 CERTAIN DEFINITIONS. As used in this Section, the following terms
shall have the following respective meanings:
(a) "COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
(b) "FORM S-1" shall mean Form S-1 issued by the Commission or any
substantially similar form then in effect.
(c) "FORM S-2" shall mean Form S-2 issued by the Commission or any
substantially similar form then in effect.
(d) "FORM S-3" shall mean Form S-3 issued by the Commission or any
substantially similar form then in effect.
(e) "MATERIAL ADVERSE EVENT" shall mean an occurrence having a
consequence that either (a) is materially adverse as to the business,
properties, prospects or financial condition of the Company or (b) is reasonably
foreseeable, has a reasonable likelihood of occurring, and if it were to occur
would materially adversely affect the business, properties, prospects or
financial condition of the Company.
(f) The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act ("REGISTRATION STATEMENT"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(g) "REGISTRABLE SECURITIES" shall mean all Common Stock not
previously sold to the public (i) issued or issuable upon conversion of the
Company's Investor Stock or (ii) Common Stock issued pursuant to stock splits,
stock dividends and similar distributions with respect to such shares; PROVIDED,
HOWEVER, that shares of Common Stock which are Registrable Securities shall
cease to be Registrable Securities at such time, and for so long as, such shares
are eligible for sale pursuant to Rule 144(k) under the Securities Act.
(h) "REGISTRATION EXPENSES" shall mean all expenses incurred by
the Company in complying with SECTIONS 2.2 or 2.3 of this Agreement, including,
without limitation, all federal and state registration, qualification and filing
fees, printing expenses, fees and disbursements of counsel for the Company, fees
and disbursements of one counsel for the Investors, blue sky fees and expenses,
and the expense of any special audits incident to or required by any such
registration, but shall not include Selling Expenses.
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(i) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(j) "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities pursuant to
this Agreement.
2.2 DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION ON FORM OTHER THAN FORM S-3. In the
event that the Company shall receive from holders of at least a majority of the
Registrable Securities then outstanding, at any time after the earlier of (i)
five years from the date hereof or (ii) six months after the closing of the
Company's first underwritten public offering of shares of Common Stock, a
written request that the Company effect any Registration with respect to all or
a part of such holders' Registrable Securities on Form S-1, the Company shall,
as soon as practicable, use its best efforts to effect Registration of the
Registrable Securities specified in such request, provided that the aggregate
offering price to the public of such Registrable Securities equals or exceeds
$1,000,000. Upon receipt of any such request, the Company shall notify all
holders of Registrable Securities from whom such notice was not received (which
notice shall be delivered by the Company within fifteen days of the Company's
receipt of such request) and shall include in a Registration Statement any
Registrable Securities requested for inclusion under such Registration Statement
by such other holders. The Company shall not be obligated to effect more than
two registrations pursuant to this subsection 2.2(a), provided that a
Registration shall not be counted for this purpose if (i) the Company elects to
sell stock pursuant to a Registration at the same time as the Registration
requested hereunder and less than all the Registrable Securities for which
Registration was requested are included, (ii) the Registration Statement does
not become effective or (iii) the requesting holders are not able to sell at
least 75% of the Registrable Securities requested to be included in such
Registration Statement.
(b) REQUEST FOR REGISTRATION ON FORM S-3. Subject to the terms
of this Agreement, in the event that the Company receives from the holders of
Registrable Securities a written request that the Company effect any
Registration on Form S-3 (or any successor form to Form S-3 regardless of its
designation) at a time when the Company is eligible to register securities on
Form S-3 (or any successor form to Form S-3 regardless of its designation) for
an offering of Registrable Securities, the Company will as soon as practicable
use its best efforts to effect Registration of the Registrable Securities
specified in such request provided that the aggregate offering price to the
public of such Registrable Securities equals or exceeds $1,000,000. The Company
shall be obligated to effect Registration under this Section 2.2(b) on no more
than three (3) occasions.
(c) REGISTRATION OF OTHER SECURITIES IN DEMAND REGISTRATION. A
Registration pursuant to Section 2.2(a) or (b) may include securities other than
Registrable Securities included in such Registration only with the prior written
consent of the holders of a majority of the Registrable Securities.
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(d) UNDERWRITING IN DEMAND REGISTRATION.
(i) NOTICE OF UNDERWRITING. If the Investors intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 2.2.
(ii) SELECTION OF UNDERWRITER IN DEMAND REGISTRATION. The
Company shall, together with the Investors engaged in a Registration, enter into
an underwriting agreement with the representative ("Underwriter's
Representative") of the underwriter or underwriters selected for such
underwriting by the Investors engaged in the Registration and agreed to by the
Company, which agreement shall not be unreasonably withheld provided such
underwriter is experienced and reputable.
(iii) RIGHT OF WITHDRAWAL IN DEMAND REGISTRATION. If an
Investor disapproves of the terms of the underwriting, it may elect to withdraw
therefrom by written notice to the Company and the underwriter delivered at
least seven days prior to the effective date of the Registration Statement. The
securities so withdrawn shall also be withdrawn from the Registration Statement.
(e) Blue Sky in Demand Registration. In the event of any
Registration pursuant to this SECTION 2.2, the Company will exercise its best
efforts to Register and qualify the securities covered by the Registration
Statement under such other securities or Blue Sky laws of such jurisdictions as
the Investors shall reasonably request and as shall be reasonably appropriate
for the distribution of such securities; PROVIDED, HOWEVER, that (i) the Company
shall not be required to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, and (ii) notwithstanding
anything in this Agreement to the contrary, in the event any jurisdiction in
which the securities shall be waivable requirement that expenses incurred in
connection with the qualification of the securities be borne by selling
shareholders, such expenses shall be payable pro rata by selling shareholders.
(f) The Investors agree that, in exercising their rights under this
SECTION 2.2, they will permit the Registration of the Registrable Securities on
such forms issued by the Commission as will minimize the Company's time and
expense in effecting such Registration without affecting the liquidity afforded
by such Registration or otherwise adversely affecting the Investors. If, for
example, the Investors wish to register Registrable Securities pursuant to
SECTION 2.2(a) at a time when the Company is eligible to use Form S-3 for
purposes of registering such Registrable Securities, the Investors will permit
the Company to fulfill its obligations under SECTION 2.2(a) by effecting such
Registration on Form S-3; PROVIDED, HOWEVER, that nothing in this SECTION 2.2(f)
will permit the Company to fulfill such obligation by using Form SB-1, SB-2 or
similar forms limited to "Small Business Issuers," without the consent of the
holders of at least 50% of the Registrable Securities.
2.3 PIGGYBACK REGISTRATION.
(a) NOTICE OF PIGGYBACK REGISTRATION AND INCLUSION OF REGISTRABLE
SECURITIES. Subject to the terms of this Agreement, in the event the Company
decides to Register any of its Common Stock (either for its own account or the
account of an Investor or
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other securityholder exercising demand registration rights), other than (i) a
Registration Statement which exclusively relates to the Registration of
securities under an employee stock option, purchase, bonus or other benefit
plan, or (ii) a Registration relating solely to a transaction under Rule 145
promulgated by the Commission, the Company will: (1) promptly give the Investors
written notice thereof (which shall include a list of the jurisdictions in which
the Company intends to attempt to qualify such securities under the applicable
Blue Sky or other state securities laws), and (2) include in such Registration
(and any related qualification under Blue Sky laws or other compliance), and in
any underwriting involved therein, all the Registrable Securities specified in a
written request delivered to the Company by the Investors within 15 days after
delivery of such written notice from the Company.
(b) UNDERWRITING IN PIGGYBACK REGISTRATION.
(i) If the Registration of which the Company gives notice is a
Registered public offering involving an underwriting, the Company shall so
advise the Investors as a part of the written notice given pursuant to SECTION
2.3(a). In such event the right of the Investors to Registration shall be
conditioned upon such underwriting and the inclusion of an Investor's
Registrable Securities in such underwriting to the extent provided in this
SECTION 2.3. The Investors shall, together with the Company, enter into an
underwriting agreement with the Underwriter's Representative for such offering.
The Investors shall have no right to participate in the selection of the
underwriters for an offering pursuant to this SECTION 2.3.
(ii) MARKETING LIMITATION IN PIGGYBACK REGISTRATION. In the
event the Underwriter's Representative advises the Company and the Investors
engaged in a Registration under SECTION 2.3(a) in writing that market factors
(including, without limitation, the aggregate number of shares of Common Stock
requested to be Registered, the general condition of the market, and the status
of the persons proposing to sell securities pursuant to the Registration)
require a limitation of the number of shares to be underwritten, the
Underwriter's Representative (subject to the allocation priority set forth in
clause (iii) below) may exclude some or all of the Registrable Securities from
such registration and underwriting.
(iii) ALLOCATION OF SHARES IN PIGGYBACK REGISTRATION. In the
event that the Underwriter's Representative limits the number of shares to be
included in a Registration pursuant to SECTION 2.3(a), each Investor requesting
Registration shall be entitled to include a portion of the Registrable
Securities requested to be included in such registration pro rata (based on the
number of shares requested to be included) with all other requesting Investors
and other persons currently holding similar written piggyback registration
rights requesting registration. Unless all Registrable Securities and such other
piggybacking shares requested to be included in such Registration are so
included, no other securities may be included in the Registration Statement
other than for the account of the Company.
(iv) WITHDRAWAL IN PIGGYBACK REGISTRATION. If any Investor
disapproves of the terms of any such underwriting, it may elect to withdraw
therefrom by written notice to the Company and the underwriter delivered at
least seven (7) days prior to the effective date of the Registration Statement.
Any Registrable Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such Registration.
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(c) BLUE SKY IN PIGGYBACK REGISTRATION. In the event of any
Registration of Registrable Securities pursuant to SECTION 2.3(a), the Company
will exercise its best efforts to Register and qualify the securities covered by
the Registration Statement under such other securities or Blue Sky laws of such
jurisdictions as the Investors shall reasonably request and as shall be
reasonably appropriate for the distribution of such securities; PROVIDED,
HOWEVER, that (i) the Company shall not be required to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions, and (ii) notwithstanding anything in this Agreement to the
contrary, in the event any jurisdiction in which the securities shall be
qualified imposes a non-waivable requirement that expenses incurred in
connection with the qualification of the securities be born by selling
shareholders, such expenses shall be payable pro rata by selling shareholders.
2.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with the Registration pursuant to SECTION 2.2(a), all Registrations
on Form S-3 pursuant to SECTION 2.2(b), and all Registrations pursuant to
SECTION 2.3 shall be borne by the Company. Notwithstanding the above, the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to SECTION 2.2(a) if the registration request is
subsequently withdrawn at the request of the Investors requesting such
Registration (whereafter such Investors shall bear such expenses); PROVIDED,
FURTHER, that if at the time of such withdrawal, the Investors have learned of a
Material Adverse Event with respect to the condition, business or prospects of
the Company not known to the Investors at the time of their request, then the
Investors, shall not be required to pay any of such expenses and shall retain
their rights pursuant to SECTION 2.2(a). Selling Expenses to be borne by the
holders of the Registrable Securities Registered shall be borne pro rata on the
basis of the number of Registrable Securities included in the Registration.
2.5 REGISTRATION PROCEDURES. The Company will keep the registering
Investors advised as to the initiation and completion of such Registration. At
its expense the Company will: (a) use its best efforts to keep such
Registration effective for a period of 180 days or until the registering
Investors have completed the distribution described in the Registration
Statement relating thereto, whichever first occurs; and (b) furnish such number
of prospectuses (including preliminary prospectuses) and other documents as the
registering Investors from time to time may reasonably request.
2.6 INFORMATION FURNISHED BY INVESTOR. It shall be a condition precedent
of the Company's obligations under this Agreement that the Investors furnish to
the Company such information regarding the Investors and the distribution
proposed by the Investors as the Company may reasonably request.
2.7 INDEMNIFICATION.
(a) COMPANY'S INDEMNIFICATION OF THE INVESTORS. To the extent
permitted by law, the Company will indemnify each of the Investors, each of its
directors, officers, stockholders, partners or other beneficial owners and legal
counsel, and each person controlling such Investor, with respect to which
Registration, qualification or compliance of Registrable Securities has been
effected pursuant to this Agreement, and each underwriter, if any, and each
person who controls any underwriter against all claims, losses, damages or
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liabilities (or actions in respect thereof) to the extent such claims, losses,
damages or liabilities arise out of or are based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus or
other document (including any related Registration Statement) incident to any
such Registration, qualification or compliance, or are based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to action or inaction required of the
Company in connection with any such Registration, qualification or compliance;
and the Company will reimburse each Investor, each of such Investor's directors,
officers, stockholders, partners or other beneficial owners, each such
underwriter and each person who controls any such Investor or underwriter, for
any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
PROVIDED, HOWEVER, that the indemnity contained in this SECTION 2.7(a) shall not
apply to amounts paid in settlement of any such claim, loss, damage, liability
or action if settlement is effected without the consent of the Company (which
consent shall not unreasonably be withheld); and PROVIDED, FURTHER, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based upon any untrue
statement or omission based upon written information furnished to the Company by
any Investor, underwriter, or controlling person and stated to be for use in
connection with the offering of securities of the Company.
(b) INVESTOR'S INDEMNIFICATION OF COMPANY. To the extent permitted
by law, each Investor will, if Registrable Securities held by such Investor are
included in the securities as to which such Registration, qualification or
compliance is being effected pursuant to this Agreement, indemnify the Company,
each of its directors and officers, each legal counsel and independent
accountant of the Company, each underwriter, if any, of the Company's securities
covered by such a Registration Statement, each person who controls the Company
or such underwriter within the meaning of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based upon any untrue statement (or alleged untrue statement) of a
material fact contained in any such Registration Statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by such Investor of any rule
or regulation promulgated under the Securities Act applicable to such Investor
and relating to action or inaction required of such Investor in connection with
any such Registration, qualification or compliance; and will reimburse the
Company, such directors, officers, partners, persons, law and accounting firms,
underwriters or control persons for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue omission) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Investor and stated to be specifically for use
in connection with the offering of securities of the Company, provided, however,
that each Investor's liability under this SECTION 2.7 shall not exceed such
Investor's net proceeds from the offering of securities made in connection with
such Registration.
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(c) INDEMNIFICATION PROCEDURE. Promptly after receipt by an
indemnified party under this SECTION 2.7 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under this SECTION 2.7, notify the indemnifying
party in writing of the commencement thereof and generally summarize such
action. The indemnifying party shall have the right to participate in and to
assume the defense of such claim; PROVIDED, HOWEVER, that the indemnifying party
shall be entitled to select counsel for the defense of such claim with the
approval of any parties entitled to indemnification, which approval shall not be
unreasonably withheld; PROVIDED, FURTHER, that if any party reasonably
determines that there may be a conflict between the position of the Company and
the Investors in conducting the defense of such action, suit or proceeding by
reason of recognized claims for indemnity under this SECTION 2.7, then counsel
for such party shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interest of such
party. The failure to notify an indemnifying party promptly of the commencement
of any such action, if prejudicial to the ability of the indemnifying party to
defend such action, shall relieve such indemnifying party, to the extent so
prejudiced, of any liability to the indemnified party under this SECTION 2.7,
but the omission so to notify the indemnifying party will not relieve such party
of any liability that such party may have to any indemnified party otherwise
other than under this SECTION 2.7.
2.8 LIMITATIONS ON ADDITIONAL REGISTRATION RIGHTS. The Company shall not,
without the prior written consent of the holders of two-thirds of the then-
outstanding Registrable Securities, enter into any agreement with any holder or
prospective holder of any securities of the Company providing for the granting
to such holder of any right to Register or cause the Registration of any
securities of the Company, unless such rights are in all respects subordinate to
those of the holders of Registrable Securities.
2.9 MARKET STAND-OFF. Each Investor hereby agrees that, if so requested by
the Company and the Underwriter's Representative (if any), such Investor shall
agree not to sell or otherwise transfer any Registrable Securities or other
securities of the Company during the 90-day period following the effective date
of a Registration Statement of the Company filed under the Securities Act;
provided that all Investors holding not less than one percent (1%) of the
aggregate number of shares of Common Stock outstanding (including shares of
Common Stock issuable upon the conversion of the Investor Stock and any
convertible securities or upon the exercise of options, warrants or other
rights) and all officers and directors of the Company enter into similar
agreements.
2.10 CURRENT PUBLIC INFORMATION. At all times after the Company has filed
a registration statement pursuant to the Securities Act, the Company will file
all reports required under the Securities Act or the Securities Exchange Act of
1934 and the rules and regulations thereunder, and will take such further action
as may be reasonably required to enable any holder of "restricted securities"
(as defined in Rule 144 adopted by the Commission under the Securities Act) to
sell such securities pursuant to Rule 144, as amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission.
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3. MISCELLANEOUS.
3.1 TRANSFER OF RIGHTS. The rights granted to any Investor under
SECTIONS 1 and 2 may be transferred to any person or entity acquiring or which
would own after such transfer, the lesser of all securities owned by such
Investor or at least 100,000 shares of Preferred Stock or Common Stock;
PROVIDED, HOWEVER, that the Company must receive written notice of said
transfer, stating the name and address of said transferee or assignee and
identifying the securities with respect to which such rights are being assigned.
3.2 Transferees. Any transferee (other than an Investor) to whom rights
under SECTIONS 1 and 2 are transferred shall, as a condition to such transfer,
deliver to the Company a written instrument by which such transferee agrees to
be bound by the obligations imposed by SECTIONS 1 and 2 hereof, to the same
extent as if such transferee were an Investor hereunder. Upon the execution of
such instrument, such transferee shall become an Investor for all purposes
hereunder.
3.3 SUBSEQUENT TRANSFEREES. A transferee to whom rights are transferred
pursuant to this SECTION 3.3 may not again transfer such rights to any other
person or entity, other than as provided in SECTION 3.1 or 3.2.
3.4 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power
or remedy accruing to any holder of any Investor Stock or any shares of Common
Stock issuable upon conversion of the Investor Stock, upon any breach or default
of the Company under this Agreement, shall impair any such right, power or
remedy of such holder nor shall it be construed to be a waiver of any such
breach or default or of any similar breach or default theretofore or thereafter
occurring, or an acquiescence therein. Any waiver, permit, consent or approval
of any kind or character on the part of any holder of any breach or default
under this Agreement, or any waiver on the part of any holder of any provisions
or conditions of this Agreement must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
3.5 RIGHTS. Unless otherwise expressly provided herein, an Investor's
rights hereunder are several rights, not rights jointly held with any of the
other Investors.
3.6 ADJUSTMENTS. Except as otherwise specifically provided, all
applicable provisions of this Agreement shall be automatically adjusted to
reflect any stock dividend, stock split or combination or other such
recapitalization.
3.7 CONFIDENTIALITY. The Investors shall keep confidential and shall not
disclose, divulge, use or otherwise take advantage of (except as contemplated
hereunder) any confidential, proprietary, or secret information that it may
obtain from the Company pursuant to financial statements, reports, and other
materials and information transmitted by the Company to the Investors pursuant
to this Agreement, or pursuant to any visitation or inspection rights granted
hereunder, unless and until such information is known to the public through no
fault of the Investors.
13
<PAGE>
3.8 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions of this Agreement shall bind and inure to the benefit of
the respective successors, assigns, heirs, executors, and administrators of the
parties hereto.
3.9 NOTICES. All notices, requests, consents and other communications
under this Agreement shall be in writing and shall be delivered by hand, by
telecopier, by overnight mail or mailed by first class certified or registered
mail, return receipt requested, postage prepaid:
(a) If to the Company:
Mission Critical Software, Inc.
Suite 505
720 North Oak Post Road
Houston, TX 77024
Attn: Louis Woodhill, President
(or at such other address as may have been furnished in writing by the Company
to the Investors)
with a copy to:
Baker & Hostetler
1000 Louisiana, Suite 2000
Houston, TX 77002-5009
Attn: Richard C. Yount, Jr., Esq.
(b) If to the Investors at the respective
addresses set forth on Exhibit A hereto, or at
such other address as may have been furnished
to the Company in writing by the Investors.
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
Attn: Lynnette C. Fallon, Esq.
14
<PAGE>
Notices provided in accordance with this SECTION 3.9 shall be deemed delivered
upon personal delivery, receipt by telecopy or overnight mail, or 48 hours after
deposit in the mail in accordance with the above.
3.10 NO CONDITIONS TO EFFECTIVENESS; ENTIRE AGREEMENT. There are no
conditions to the effectiveness of this Agreement. This Agreement, together
with the instruments and other documents contemplated to be executed and
delivered in connection herewith, contains the entire agreement and
understanding of the parties hereto, and supersedes any prior agreements or
understandings between or among them, with respect to the subject matter hereof.
3.11 AMENDMENTS AND WAIVERS. Except as otherwise expressly set forth in
this Agreement, any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of at least a majority of the shares of
Common Stock issued or issuable upon conversion of the Investor Stock. No
waivers of or exceptions to any term, condition or provision of this Agreement,
in any one or more instances, shall be deemed to be, or construed as, a further
or continuing waiver of any such term, condition or provision.
3.12 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.13 CAPTIONS. The captions of the sections, subsections and
paragraphs of this Agreement have been added for convenience only and shall not
be deemed to be a part of this Agreement.
3.14 GOVERNING LAW. This Agreement shall be governed by and interpreted
and construed in accordance with the laws of the State of Delaware.
3.15 SUPERSESSION. This Agreement replaces and supersedes SECTIONS 7
and 8 of the Series B Agreement which in all other respects shall remain in full
force and effect from the date hereof.
3.16 WAIVER OF PARTICIPATION RIGHTS. Each of the Investors holding
Series B Stock and entitled to exercise certain rights to acquire shares of
Series C Stock pursuant to Section 1.13 of the Series B Agreement hereby waives
all of such Investors rights in connection with the sale of Series C Stock
pursuant to the Series C Agreement other than as specifically set forth therein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as an instrument as of the date first above written.
MISSION CRITICAL SOFTWARE, INC.
By: /s/ Louis R. Woodhill
_________________________________
Name: Louis R. Woodhill
Title: President
INTERNATIONAL CAPITAL PARTNERS, INC.
By: /s/ Douglas Ayer
____________________________________
Title: President and Managing Partner
NEW ENTERPRISE ASSOCIATES VI, LIMITED
PARTNERSHIP
By: NEA Partners VI, Limited Partnership
its general partner
By: ___________________________________
General Partner
NEW ENTERPRISE ASSOCIATES VII, LIMITED
16
<PAGE>
PARTNERSHIP
By: NEA Partners VII, Limited Partnership
its general partner
By: /s/ Thomas C. McConnell
__________________________________________
General Partner
NEA PRESIDENTS' FUND, L.P.
By: NEA General Partners, L.P.
its general partner
By: /s/ Thomas C. McConnell
_________________________________________
General Partner
NEA VENTURES 1996, L.P.
By: /s/ Lynn S. Walker
__________________________________________
Title: Vice President
17
<PAGE>
AUSTIN VENTURES V, L.P.
By: AV Partners V, L.Title:
its general partner
By: /s/ John D. Thornton
__________________________________________
John D. Thornton, General Partner
ZESIGER CAPITAL GROUP LLC, as agent and
attorney-in-fact for certain of the investors
as indicated on Exhibit A
By: /s/ Andrew D. Zacks
__________________________________________
Name: Andrew D. Zacks
Title: Principal
COMMERCE FUNDING CORPORATION
18
<PAGE>
COMMERCE FUNDING CORPORATION
By: /s/ Randall C. Elkins
__________________________________________
Randall C. Elkins
President
19
<PAGE>
/s/ E. Alexander Goldstein
______________________________________
E. Alexander Goldstein
/s/ Brian J. McGrath
______________________________________
Brian J. McGrath
/s/ Gregg Swensen
______________________________________
Gregg Swensen
/s/ Lisa Swensen
______________________________________
Lisa Swensen
/s/ Robert W. Cox
______________________________________
Robert W. Cox
/s/ Courtney L.G. Parker
______________________________________
Courtney L.G. Parker
20
<PAGE>
/s/ Marc Geller
______________________________________
Marc Geller
______________________________________
Randall C. Elkins
/s/ Goran Lars Rynger by R. C. Yount
______________________________________
Goran Lars Rynger
/s/ Peter D. Schaeffer by R. C. Yount
______________________________________
Peter D. Schaeffer
JMI EQUITY III, L.P.
By: JMI Associates III, L.L.C.
its general partner
By: /s/ Charles E. Noels
___________________________________
Managing Member
21
<PAGE>
JMI EQUITY FUND III, L.P.
By: JM
Exhibit A
E. Alexander Goldstein
1755 Churchview Lane
Columbus, OH 43220
Brian J. McGrath
2 Oak Street, Box 2797
Kennebunkport, ME 04046
Peter D. Schaeffer
2918 E. Autumn Run Circle
Sugarland, TX 77479
Goran Lars Rynger
Torpvagen IA
S-18352 Taby
Sweden
Courtney Parker
402 East Gaywood Drive
Houston, TX 77079
Robert Cox
3918 Oak Gardens Drive
Kingwood, TX 77339
22
<PAGE>
Gregg Swensen & Lisa Swensen
207 Bird Song Terrace
Franklin Lakes, NJ 07417
Marc Geller
3501 Nottingham
Houston, TX 77005
International Capital Partners, Inc.
300 First Stamford Place
Stamford, CT 06902
Attn: Douglas L. Ayer, Managing Partner
(Notices copied to:
Lynnette C. Fallon, Esq.
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108)
Austin Ventures V, L.P.
114 W. 7th Street, Suite 300
Austin, TX 78701
Attn: John D. Thornton
(Notices copied to:
S. Michael Dunn, P.C.
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, TX 78701)
23
<PAGE>
JMI Equity Fund
119 St. Paul Street
Baltimore, MD 21202
Attn: Brad Woloson
(Notices copied to:
Mark H. Burnett, Esq.
Testa, Hurwitz & Thibeault LLP
High Street Tower
125 High Street
Boston, MA 02110)
New Enterprise Associates VI, L.P.
2490 Sand Hill Road
Menlo Park, CA 94205
Attn: Scott Sandell
New Enterprise Associates VII, L.P.
2490 Sand Hill Road
Menlo Park, CA 94205
Attn: Scott Sandell
NEA Ventures 1996, L.P.
2490 Sand Hill Road
Menlo Park, CA 94205
Attn: Scott Sandell
NEA President's Fund, L.P.
2490 Sand Hill Road
Menlo Park, CA 94205
Attn: Scott Sandell
24
<PAGE>
Commerce Funding Corporation
* A. Carey Zesiger
* Albert L. Zesiger
* Alexa L. Zesiger
* Alza Corporation Retirement Plan
* Barrie Ramsay Zesiger
* Brearley School General Investment Fund
* Chapin School Ltd. - Endowment Fund
* State of Oregon PERS/ZCG
* David Zesiger
* Dean Witter Foundation
* Elizabeth Heller Mandell Trust
* Harold & Grace Willens JTWROS
25
<PAGE>
* Leonard Kingsley
* Lisa W. Hess
* Mary Ann S. Hamilton Trust for Self
* Mary Van Schulyer Raiser
* Morgan Trust Co. of the Bahamas Ltd.
* Nicola L. Zesiger
* Planned Parenthood of NY
* Psychology Associates
* Tab Products Co. Pension Plan
* The Ferris Hamilton Family Trust
* The Jenifer Altman Foundation
* The Meehan Investment Partnership I, L.P.
* Van Loben Sels Foundation
* Warren Investment Group Ltd.
26
<PAGE>
* Public Employees Retirement System of Idaho
* Wells Family LLC
* The Trustees of Amherst College
* An asterisk next to a stockholders name indicates that the stockholder has
designated Zesiger Capital Group LLC as his, her or its agent and attorney-in-
fact. A copy of the Limited Power of Attorney signed by the Stockholder has
been provided to Mission Critical Software, Inc. The address of all such
stockholders is c/o Zesiger Capital Group LLC, 320 Park Avenue, New York, NY
10022.
27
<PAGE>
AMENDMENT TO
INVESTOR RIGHTS AGREEMENT
This Amendment (the "Amendment") to the Investor Rights Agreement dated as
of July 2, 1997, is made and entered into as of May 24, 1999 by and among
Mission Critical Software, Inc. (the "Company"), the holders of a majority of
the outstanding Investor Stock (as defined in the foregoing Investor Rights
Agreement, the "Agreement") of the Company. This Amendment shall become
effective as to the Company and all Investors as of the date hereof. All
capitalized terms used, but not defined, herein shall have the same meanings
ascribed to them in the Agreement.
RECITALS
A. The Company is currently contemplating the registration of shares of
its Common Stock for sale to the public.
B. In connection with such registration, the underwriters have advised the
Company that the provisions of the Agreement with respect to covenants by the
Company and registration rights held by the Investors will need to be amended
and that current market conditions require the lock up of shares held by the
Investors be extended until 180 days after the effective date of the
Registration Statement rather than 90 days as set forth in the Agreement.
C. The Company wishes to obtain the consent of the Investors of a majority
of the shares of Investor Stock currently outstanding to add Section 1.18, amend
Section 2.9 and to add Section 2.11 with respect to such provisions.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree as follows:
1. Section 1of the Agreement is hereby amended to add Section 1.18 as
follows:
"1.18 TERMINATION OF COVENANTS. The covenants set forth in this
Section 1 shall terminate on and be of no further force or effect upon the
earlier of (i) the consummation of the Company's sale of its Common Stock
in an underwritten public offering pursuant to an effective registration
statement filed under the Securities Act immediately subsequent to which
the Company shall be obligated to file annual and quarterly reports with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act or (ii)
the registration by the Company of a class of its equity securities under
Section 12(b) or 12(g) of the Exchange Act."
2. Section 2.9 of the of the Agreement is hereby amended to read in its
entirety as follows, with the changes thereto underlined:
<PAGE>
"2.9 MARKET STAND-OFF. Each Investor hereby agrees that, if so
requested by the Company and the Underwriters' Representatives (if any),
such Investor shall agree not to sell or otherwise transfer any Registrable
Securities or other securities of the Company during the 180-day period
following the effective date of a Registration Statement of the Company
filed under the Securities Act; provided that all Investors holding not
less than one percent (1%) of the aggregate number of shares of Common
Stock outstanding (including shares of Common Stock issuable upon the
conversion of the Investor Stock and any convertible securities or upon the
exercise of options, warrants or other rights) and all officers and
directors of the Company enter into similar agreements."
3. Section 2 of the Agreement is hereby amended to add subsection 2.11 as
follows:
"2.11 TERMINATION OF RIGHTS. No Holder shall be entitled to exercise
any right provided for in this Section 2 on or after the closing of a
public offering of the Common Stock of the Company, initiated by the
Company, when all shares of the Holder's Registrable Securities may be sold
under Rule 144 during any 90-day period."
4. Except as amended as set forth in this Amendment, the Agreement shall
continue in full force and effect. This Amendment may be executed in
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
MISSION CRITICAL SOFTWARE, INC.
By:
__________________________
Title:
__________________________
INTERNATIONAL CAPITAL PARTNERS, INC.
By:
__________________________
Title: __________________________
-2-
<PAGE>
NEW ENTERPRISE ASSOCIATES VII, LIMITED
PARTNERSHIP
By: NEA Partners VII, Limited Partnership
its general partner
By:
_____________________________
General Partner
NEA PRESIDENTS' FUND, L.P.
By: NEA General Partners, L.P.
its general partner
By:
_____________________________
General Partner
NEA VENTURES 1996, L.P.
By:
___________________________
Title:
___________________________
AUSTIN VENTURES V, L.P.
By: AV Partners V, L.P.
its general partner
By:
____________________________
General Partner
-3-
<PAGE>
ZESIGER CAPITAL GROUP LLC, as agent and
attorney-in-fact for certain of the
investors as indicated on Exhibit A
By:
____________________________
Title:
____________________________
COMMERCE FUNDING CORPORATION
By:
____________________________
Title:
____________________________
__________________________________
E. Alexander Goldstein
__________________________________
Brian J. McGrath
__________________________________
Gregg Swensen
__________________________________
Lisa Swensen
__________________________________
Robert W. Cox
__________________________________
Courtney L.G. Parker
-4-
<PAGE>
__________________________________
Marc Geller
__________________________________
Randall C. Elkins
__________________________________
Goran Lars Rynger
__________________________________
Peter D. Schaeffer
__________________________________
E. Alexander Goldstein
JMI EQUITY FUND III, L.P.
By: JMI Associates III, L.L.C.
its general partner
By: _______________________________
Managing Partner
__________________________________
Mary Van Schuyler Raiser
-5-
<PAGE>
Exhibit A
Westcoast & Co.
Mellon Bank N.A., Custodian for Public Employee Retirement System of Idaho
Kane & Co.
Wells Family LLC
Dean Witter Foundation
Alza Corporation Retirement Plan
Albert L. Zesiger
Dengel & Co.
BT Alex Brown & Sons Incorporated as custodian for FBO Warren Investment Group
LLC
Cudd & Co.
Dengel & Co. 13-6066948
Hare & Co.
Mary Ann S. Hamilton Trust for Self
Morgan Trust of the Bahamas Ltd.
The Ferris Hamilton Family Trust
The Jennifer Altman Foundation
The Meehan Investment Partnership I, L.P.
Barrie Ramsey Zesiger
Wolfson Investment Partners, L.P.
Leonard Kingsley
Planned Parenthood of NY
Psychology Associates
Harold & Grace Willens JTWROS
A. Carey Zesiger
Alexa L. Zesiger
David Zesiger
Nicola L. Zesiger
-6-
<PAGE>
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
8911 CAPITAL OF TEXAS HIGHWAY, SUITE 3350
AUSTIN, TEXAS 78759
TELEPHONE 512-338-5400 FACSIMILE 512-338-5499
WWW.WSGR.COM
July 7, 1999
Mission Critical Software, Inc.
720 North Post Oak Road
Houston, Texas 77024
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Amendment No. 1 to the Registration Statement on Form S-
1 (File No. 333-79501) to be filed by you with the Securities and Exchange
Commission on July 7, 1999 (the "Registration Statement") in connection with the
registration under the Securities Act of 1933, as amended, of 4,025,000 shares
(including shares issuable upon exercise of the underwriters' over-allotment
option) of Common Stock of Mission Critical Software, Inc.(the "Shares"). As
your counsel in connection with this transaction, we have examined the
proceedings proposed to be taken in connection with such sale and issuance of
the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
various states, where required, the Shares when issued and sold in the manner
referred to in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.4.1
MISSION CRITICAL SOFTWARE, INC.
1999 DIRECTOR OPTION PLAN
DIRECTOR OPTION AGREEMENT
Mission Critical Software, Inc., a Delaware corporation (the "Company"),
has granted to _________________ (the "Optionee"), an option to purchase a total
of ________________ (______) shares of the Company's Common Stock (the "Optioned
Stock"), at the price determined as provided herein, and in all respects subject
to the terms, definitions and provisions of the Company's 1999 Director Option
Plan (the "Plan") adopted by the Company which is incorporated herein by
reference. The terms defined in the Plan shall have the same defined meanings
herein.
1. Nature of the Option. This Option is a nonstatutory option and is not
intended to qualify for any special tax benefits to the Optionee.
2. Exercise Price. The exercise price is $_____ for each share of Common
Stock.
3. Exercise of Option. This Option shall be exercisable during its term in
accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
(a) This Option shall become exercisable in installments
cumulatively with respect to [one third (1/3) of the Optioned Stock shall be
exercisable one year after the date of grant and one thirty-sixth (1/36th) of
the Option Stock on each monthly anniversary of the date of grant, so that one
hundred percent (100%) of the Optioned Stock shall be exercisable three years
after the date of grant] OR FOR SECOND GRANTS [one-half (1/2) of the Optioned
Stock shall be exercisable one year after the date of grant and
one-twenty-fourth (1/24th) of the Optioned Stock on each monthly anniversary of
the date of grant, so that one hundred percent (100%) of the Optioned Stock
shall be exercisable two years after the date of grant].
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option is
governed by Section 8 of the Plan.
(ii) Method of Exercise. This Option shall be exercisable by written
notice which shall state the election to exercise the Option and the number of
Shares in respect of which the Option is being exercised. Such written notice,
in the form attached hereto as Exhibit A, shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price.
4. Method of Payment. Payment of the exercise price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(i) cash;
(ii) check;
<PAGE>
(iii) surrender of other shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Option shall be exercised; or
(iv) delivery of a properly executed exercise notice together with
such other documentation as the Company and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price.
5. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
7. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
period only in accordance with the Plan and the terms of this Option.
8. Taxation Upon Exercise of Option. Optionee understands that, upon
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then Fair Market Value of the Shares purchased
over the exercise price paid for such Shares. Since the Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain
limited circumstances the measurement and timing of such income (and the
commencement of any capital gain holding period) may be deferred, and the
Optionee is advised to contact a tax advisor concerning the application of
Section 83 in general and the availability a Section 83(b) election in
particular in connection with the exercise of the Option. Upon a resale of such
Shares by the Optionee, any difference between the sale price and the Fair
Market Value of the Shares on the date of exercise of the Option, to the extent
not included in income as described above, will be treated as capital gain or
loss.
DATE OF GRANT: ______________________ MISSION CRITICAL SOFTWARE, INC.
a Delaware corporation
By:__________________________________
<PAGE>
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
attached hereto, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under the Plan.
Dated: ________________________ ________________________________
Optionee
-3-
<PAGE>
EXHIBIT A
DIRECTOR OPTION EXERCISE NOTICE
Mission Critical Software, Inc.
720 North Post Oak Road, Suite 505
Houston, TX 77024
Attention: Corporate Secretary
1. Exercise of Option. The undersigned ("Optionee") hereby elects to
exercise Optionee's option to purchase shares of Common Stock (the "Shares")
of Mission Critical Software, Inc. (the "Company") under and pursuant to the
Company's 1999 Director Option Plan and the Director Option Agreement dated
(the "Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Agreement.
3. Federal Restrictions on Transfer. Optionee understands that the Shares
must be held indefinitely unless they are registered under the Securities Act of
1933, as amended (the "1933 Act"), or unless an exemption from such registraton
is available, and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available or
may not permit Optionee to transfer Shares in the amounts or at the times
proposed by the Optionee.
4. Tax Consequences. Optionee understands that Optionee may suffer adverse
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. Delivery of Payment. Optionee herewith delivers to the Company the
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding taxes
required to be paid or withheld by the Company.
6. Entire Agreement. The Agreement is incorporated herein by reference.
This Exercise Notice and the Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the subject matter
-4-
<PAGE>
hereof. This Exercise Notice and the Agreement are governed by California law
except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: MISSION CRITICAL SOFTWARE, INC.
By: _______________________________
Its:_______________________________
Address: ____________________________
____________________________
Dated: ______________________________ Dated: ____________________________
-5-
<PAGE>
EXHIBIT 10.6
[LOGO] SILICON VALLEY BANK
QUICKSTART LOAN AND SECURITY AGREEMENT
Borrower: Mission Critical Software, Inc. Address: 720 North Post Oak Road
------------------------------- -----------------------
Suite 505
-----------------------
Date: February 7, 1997 Houston, TX 77024
------------------------------- -----------------------
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, a California chartered bank ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and with a loan production
office located at 9442 Capital of Texas Highway North, Arboretum Plaza One,
Austin, TX 78759 and the borrower named above, (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address").
1. Loans. Silicon will make loans to Borrower (the "Loans") in amounts
determined by Silicon in its reasonable business judgment up to the amount (the
"Credit Limit") shown on the Schedule to this Agreement (the "Schedule"),
provided no Event of Default and no event which, with notice or passage of time
or both, would constitute an Event of Default has occurred. All Loans and other
monetary Obligations will bear interest at the rate shown on the Schedule.
Interest will be payable monthly, on the date shown on the monthly billing from
Silicon. Silicon may, in its discretion, charge interest to Borrower's deposit
accounts maintained with Silicon.
2. Security Interest. As security for all present and future indebtedness,
guarantees, liabilities, and other obligations, of Borrower to Silicon
(collectively, the "Obligations"), Borrower hereby grants Silicon a continuing
security interest in all of Borrower's interest in the following types of
property, whether now owned or hereafter acquired, and wherever located
(collectively, the "Collateral"): All "accounts," "general intangibles,"
"chattel paper," "documents," "letters of credit," "instruments," "deposit
accounts," "inventory," "farm products," "fixtures" and "equipment," as such
terms are defined in the Texas Uniform Commercial Code in effect on the date
hereof, and all products, proceeds and insurance proceeds of the foregoing.
3. Representations And Agreements Of Borrower. Borrower represents to Silicon
as follows, and Borrower agrees that the following representations will continue
to be true, and that Borrower will comply with all of the following agreements
throughout the term of this Agreement:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly authorized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. The execution, delivery
and performance by Borrower of this Agreement, and all other documents
contemplated hereby have been duly and validly authorized, and do not violate
any law or any provision of, and are not grounds for acceleration under, any
agreement or instrument which is binding upon Borrower.
3.2 Name; Places of Business. The name of Borrower set forth in this
Agreement is its correct name. Borrower shall give Silicon 15 days' prior
written notice before changing its name. The address set forth in the heading to
this Agreement is Borrower's chief executive office. In addition, Borrower has
places of business and Collateral is located only at the locations set forth on
the Schedule. Borrower will give Silicon at least 15 days prior written notice
before changing its chief executive office or locating the Collateral at any
other location.
3.3 Collateral. Silicon has and will at all times continue to have a
first-priority perfected security interest in all of the Collateral other than
specific equipment. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.4 Financial Condition and Statements. All financial statements now or in
the future delivered to Silicon have been, and will be, prepared in conformity
with generally accepted accounting principles. Since the last date covered by
any such statement, there has been no material adverse change in the financial
condition or business of Borrower. Borrower will provide Silicon: (i) within 30
days after the end of each month, a monthly financial statement prepared by
Borrower, and such other information as Silicon shall reasonably request; (ii)
within 120 days following the end of Borrower's fiscal year, complete annual
financial statements, certified by independent certified public accountants
acceptable to Silicon and accompanied by the unqualified report thereon by said
independent certified public accountants; and (iii) other financial information
reasonably requested by Silicon from time to time.
3.5 Taxes; Compliance with Law. Borrower has filed, and will file, when
due, all tax returns and reports required by applicable law, and Borrower has
paid, and will pay, when due, all taxes, assessments, deposits and contributions
now or in the future owed by Borrower. Borrower has complied, and will comply,
in all material respects, with all applicable laws, rules and regulations.
3.6 Insurance. Borrower shall at all times insure all of the tangible
personal property Collateral and carry such other business insurance as is
customary in Borrower's industry.
3.7 Access to Collateral and Books and Records. At reasonable times, on
one business day notice, Silicon, or its
-1-
<PAGE>
SILICON VALLEY BANK QUICKSTART LOAN AND SECURITY AGREEMENT
------------------------------------------------------------------------
agents, shall have the right to inspect the Collateral, and the right to audit
and copy Borrower's books and records.
3.8 Additional Agreements. Borrower shall not, without Silicon's prior
written consent, do any of the following: (i) enter into any transaction outside
the ordinary course of business except for the sale of capital stock to venture
investors, provided that Borrower promptly delivers written notification to
Silicon of any such sale; (ii) sell or transfer any Collateral, except for the
sale of finished inventory or non-exclusive software licenses in the ordinary
course of Borrower's business, and the sale of obsolete or unneeded equipment in
the ordinary course of business; (iii) grant a security interest in intellectual
property to any third party (excluding Borrower's venture investors); (iv) pay
or declare any dividends on Borrower's stock (except for dividends payable
solely in stock of Borrower); or (v) redeem, retire, purchase or otherwise
acquire, directly or indirectly, any of Borrower's stock other than the
repurchase of up to five percent (5%) of Borrower's then issued stock in any
fiscal year from Borrower's employees or directors pursuant to written agreement
with Borrower.
4. Term. This Agreement shall continue in effect until the maturity date set
forth on the Schedule (the "Maturity Date"). This Agreement may be terminated,
without penalty, prior to the Maturity Date as follows: (i) by Borrower,
effective three business days after written notice of termination is given to
Silicon; or (ii) by Silicon at any time after the occurrence of an Event of
Default, without notice, effective immediately. On the Maturity Date or on any
earlier effective date of termination, Borrower shall pay all Obligations in
full, whether or not such Obligations are otherwise then due and payable. No
termination shall in any way affect or impair any security interest or other
right or remedy of Silicon, nor shall any such termination relieve Borrower of
any Obligation to Silicon, until all of the Obligations have been paid and
performed in full.
5. Events of Default and Remedies. The occurrence of any of the following
events shall constitute an "Event of Default" under this Agreement: (a) Any
representation, statement, report or certificate given to Silicon by Borrower or
any of its officers, employees or agents, now or in the future, is untrue or
misleading in a material respect; or (b) Borrower fails to pay when due any Loan
or any interest thereon or any other monetary Obligation; or (c) the total
Obligations outstanding at any time exceed the Credit Limit; or (d) Borrower
fails to perform any other non-monetary Obligation, which failure is not cured
within 5 business days after the date due; or (e) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by or against Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (f) a material
change in the ownership of Borrower, without the prior written consent of
Silicon except for the sale of capital stock to venture investors, provided that
Borrower promptly delivers written notification to Silicon of any such sale; or
(g) a material adverse change in the business, operations, or financial or other
condition of Borrower. If an Event of Default occurs, Silicon, shall have the
right to accelerate and declare all of the Obligations to be immediately due and
payable, increase the interest rate by an additional four percent per annum, and
exercise all rights and remedies accorded it by applicable law.
6. General. If any provision of this Agreement is held to be unenforceable, the
remainder of this Agreement shall still continue in full force and effect. This
Agreement and any other written agreements, documents and instruments executed
in connection herewith are the complete agreement between Borrower and Silicon
and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in this
Agreement. There are no oral understandings, representations or agreements
between the parties which are not in this Agreement or in other written
agreements signed by the parties in connection this Agreement. The failure of
Silicon at any time to require Borrower to comply strictly with any of the
provisions of this Agreement shall not waive Silicon's right later to demand and
receive strict compliance. Any waiver of a default shall not waive any other
default. None of the provisions of this Agreement may be waived except by a
specific written waiver signed by an officer of Silicon and delivered to
Borrower. The provisions of this Agreement may not be amended, except in a
writing signed by Borrower and Silicon. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all other reasonable costs incurred by Silicon,
in connection with this Agreement (whether or not a lawsuit is filed). If
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party shall be entitled to recover its
reasonable costs and attorneys' fees from the non-prevailing party. Borrower may
not assign any rights under this Agreement without Silicon's prior written
consent. This Agreement shall be governed by the laws of the State of Texas.
7. Arbitration. Silicon and Borrower agree that all disputes, claims and
controversies between them, whether individual or joint, or class in nature,
arising from this agreement or otherwise, including, without limitation,
contract or tort disputes, shall be arbitrated pursuant to the rules of the
american arbitration association, upon request of either party.
Borrower:
Mission Critical Software, Inc.
-------------------------------
By /s/ Louis Woodhill (President)
-----------------------------------
President or Vice President 2/7/97
Silicon:
SILICON VALLEY BANK
By /s/ Signature Illegible
-----------------------------------
Title Senior Vice President
--------------------------------
-2-
<PAGE>
[LOGO] SILICON VALLEY BANK
CERTIFIED RESOLUTION
BORROWER: Mission Critical Software Inc., A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE
DATE:
I, the undersigned, corporate officer of the above-named borrower, a
corporation organized under the laws of the state set forth above, do hereby
certify that the following is a full, true and correct copy of resolutions duly
and regularly adopted by the Board of Directors of said corporation as required
by law, and by the by-laws of said corporation, and that said resolutions are
still in full force and effect and have not been in any way modified, repealed,
rescinded, amended or revoked.
RESOLVED, that this corporation borrow from Silicon Valley Bank & California
chartered bank ("Silicon"), from time to time, such sum or sums of money as, in
the judgment of the officer or officers authorized hereby, this corporation may
require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, in the name of this corporation, to execute and deliver to
Silicon the loan agreements, security agreements, notes, financing statements,
and other documents and instruments providing for such loans and evidencing or
securing such loans, and said authorized officers are authorized from time to
time to execute renewals, extensions and/or amendments of said loan agreements,
security agreements, and other documents and instruments.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, as security for any and all indebtedness of this corporation to
Silicon, whether arising pursuant to this resolution or otherwise, to grant, to
Silicon, or deed in trust for its benefit, any property of any and every kind,
belonging to this corporation, including, but not limited to, any and all real
property, accounts, inventory, equipment, general intangibles, instruments,
documents, chattel paper, notes, money, deposit accounts, furniture, fixtures,
goods, and other property of every kind, and to execute and deliver to Silicon
any and all pledge agreements, mortgages, deeds of trust, financing statements,
security agreements and other agreements, which said instruments and the note or
notes and other instruments referred to in the preceding paragraph may contain
such provisions, covenants, recitals and agreements as Silicon may require, and
said authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized to issue warrants to purchase this corporation's capital stock, for
such class, series and number, and on such terms, as said officers shall deem
appropriate
RESOLVED FURTHER, that Silicon may conclusively rely on a certified copy of
these resolutions and a certificate of the corporate officer of this corporation
as to the officers of this corporation and their officers and signatures, and
continue to conclusively rely on such certified copy of these resolutions and
said certificate for all past, present and future transactions until written
notice of any change hereto or thereto is given to Silicon by this corporation
by certified mail, return receipt requested.
The undersigned further hereby certifies that the following persons are the
duly elected and acting officers of the corporation named above as borrower and
that the following are their actual signatures:
NAMES OFFICE(S) ACTUAL SIGNATURES
- ----- -------- -----------------
Louis R. Woodhill President x /s/ Louis R. Woodhill
- -------------------------- ------------------- --------------------------
Paul F. Koffend, Jr. Secretary x /s/ Paul F. Koffend, Jr.
- -------------------------- ------------------- --------------------------
- -------------------------- ------------------- x --------------------------
IN WITNESS WHEREOF, I have hereunto set my hand as such corporate officer on the
date set forth above
By /s/ Paul F. Koffend, Jr.
---------------------------
Its SECRETARY
---------------------------
<PAGE>
<TABLE>
<CAPTION>
FINANCING STATEMENT -- FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement is presented for filing pursuant to the Uniform Commercial Code
and will remain effective, with certain exceptions, for 5 years from date of filing.
- ----------------------------------------------------------------------------------------------------------------------------
A. NAME & TEL. # OF CONTACT AT FILER (optional) | B. FILING OFFICE ACCT. # (OPTIONAL)
|
- ----------------------------------------------------------------------------------------------------------------------------
C. RETURN COPY TO: (Name and Mailing Address)
---- ----
| Silicon Valley Bank |
3003 Tasman Drive
Santa Clara, CA 95054
NC661
| |
---- ----
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (if applicable): [_] LESSOR/LESSEE [_] CONSIGNOR/CONSIGNEE [_] NON-UCC FILING
- ----------------------------------------------------------------------------------------------------------------------------
1. DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name (1a or 1b)
------------------------------------------------------------------------------------------------------------------------
| 1a. ENTITY'S NAME
| Mission Critical Software, Inc.
OR ------------------------------------------------------------------------------------------------------------------------
| 1b. INDIVIDUAL'S LAST NAME |FIRST NAME |MIDDLE NAME |SUFFIX
| | | |
- ----------------------------------------------------------------------------------------------------------------------------
1c. MAILING ADDRESS |CITY |STATE |COUNTRY |POSTAL CODE
720 North Post Oak Rd., Ste. 505 | Houston | TX | US | 77024
- ----------------------------------------------------------------------------------------------------------------------------
1d. S.S. OR TAX I.D. # | OPTIONAL |1e. TYPE OF ENTITY |1f. ENTITY'S STATE |1g. ENTITY'S ORGANIZATIONAL I.D.S, IF ANY
|ADD'NL INFO FOR | |OR COUNTRY OF |
| ENTITY DEBTOR | |ORGANIZATION | [_] NONE
- ----------------------------------------------------------------------------------------------------------------------------
2a. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - Insert only one debtor name (2a or 2b)
------------------------------------------------------------------------------------------------------------------------
| 2a. ENTITY'S NAME
|
OR ------------------------------------------------------------------------------------------------------------------------
| 2b. INDIVIDUAL'S LAST NAME |FIRST NAME |MIDDLE NAME |SUFFIX
| | | |
- ----------------------------------------------------------------------------------------------------------------------------
2c. MAILING ADDRESS |CITY |STATE |COUNTRY |POSTAL CODE
| | | |
- ----------------------------------------------------------------------------------------------------------------------------
2d. S.S. OR TAX I.D. # | OPTIONAL |2e. TYPE OF ENTITY |2f. ENTITY'S STATE |2g. ENTITY'S ORGANIZATIONAL I.D.S, IF ANY
|ADD'NL INFO FOR | |OR COUNTRY OF |
| ENTITY DEBTOR | |ORGANIZATION | [_] NONE
- ----------------------------------------------------------------------------------------------------------------------------
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME - Insert only one secured party name (3a or 3b)
------------------------------------------------------------------------------------------------------------------------
| 3a. ENTITY'S NAME
| Silicon Valley Bank
OR ------------------------------------------------------------------------------------------------------------------------
| 3b. INDIVIDUAL'S LAST NAME |FIRST NAME |MIDDLE NAME |SUFFIX
| | | |
- ----------------------------------------------------------------------------------------------------------------------------
3c. MAILING ADDRESS |CITY |STATE |COUNTRY |POSTAL CODE
3003 Tasman Dr. | Santa Clara | CA | US | 95054
- ----------------------------------------------------------------------------------------------------------------------------
3d. S.S. OR TAX I.D. # | OPTIONAL |3e. TYPE OF ENTITY |1f. ENTITY'S STATE |3g. ENTITY'S ORGANIZATIONAL I.D.S, IF ANY
|ADD'NL INFO FOR | |OR COUNTRY OF |
| ENTITY DEBTOR | |ORGANIZATION | [_] NONE
- ----------------------------------------------------------------------------------------------------------------------------
4. THIS financing statement covers the following type or items of property:
See attached Exhibit "a"
- ----------------------------------------------------------------------------------------------------------------------------
5. CHECK [_] This FINANCING STATEMENT is signed by the Secured Party instead of the |7. If filed in Florida (check stmt)
Box Debtor to protect a security interest (a) in collateral already subject |[_] Documentary [_] Documentary stamp
(if applicable) to a maturity judgement in another jurisdiction when it was brought into| stamp tax paid tax not applicable
this state, or when the debtor's location was changed to this state or |
(b) in accordance with other statutory provisions (additional date may |
be required)
- ----------------------------------------------------------------------------------------------------------------------------
6. REQUIRED SIGNATURE Mission Critical Software, Inc. |8. [_] This FINANCING STATEMENT is to be filed (for record)
| (or amendment) in the REAL ESTATE RECORDS
/S/ [SIGNATURE] 2/7/97 | Attach Addendum (if applicable)
- ----------------------------------------------------------------------------------------------------------------------------
Silicon Valley Bank |9. Check if REQUEST SEARCH CERTIFICATE(s) on Debtor(s)
|[ADDITIONAL FEE]
/S/ [SIGNATURE] |(withdrawal) [_] All Debtors [_] Debtor 1 [_] Debtor 2
- ----------------------------------------------------------------------------------------------------------------------------
(2) ACKNOWLEDGMENT COPY -- NATIONAL FINANCING STATEMENT (FORM UCC1) (TRANS) (REV. 12/18/95)
============================================================================================================================
</TABLE>
<PAGE>
EXHIBIT "A" TO UCC-FINANCING STATEMENT
Debtor hereby grants Secured Party a security interest in all of the following,
whether now owned or hereafter acquired, and wherever located, as collateral for
the payment and performance of all present and future indebtedness, liabilities,
guarantees and obligations of Debtor to Secured Party: All "accounts," "general
intangibles," "chattel paper," "documents," "letters of credit," "instruments,"
"deposit accounts," "inventory," "farm products," "fixtures" and "equipment," as
such terms are defined in the Texas Uniform Commercial Code in effect on the
date hereof, and all products, proceeds and insurance proceeds of any or all of
the foregoing.
<PAGE>
[LOGO] Silicon Valley Bank
SCHEDULE TO
QUICKSTART LOAN AND SECURITY AGREEMENT (EQUIPMENT ADVANCES)
BORROWER: Mission Critical Software, Inc.
-------------------------------
DATE: February 7, 1997
-------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank, a California chartered bank ("Silicon") and the
above-named borrower ("Borrower") of even date.
Credit Limit (Equipment)
(Section 1): $ 750,000 (such amount to be funded under the
aggregate Credit Limit). Equipment Advances will be
made only on or prior to August 7, 1997 (the "Last
Advance Date") and only for the purpose of
purchasing equipment reasonably acceptable to
Silicon. Borrower must provide invoices for the
equipment to Silicon on or before the Last Advance
Date.
Interest Rate (Section 1): A rate equal to the "Prime Rate" in effect from
time to time, plus 1% per annum. Interest shall be
calculated on the basis of a 360-day year for the
actual number of days elapsed. "Prime Rate" means
the rate announced from time to time by Silicon as
its "prime rate;" it is a base rate upon which
other rates charged by Silicon are based, and it is
not necessarily the best rate available at Silicon.
The interest rate applicable to the Obligations
shall change on each date there is a change in the
Prime Rate.
Maturity Date (Section 4): After the Last Advance Date, the unpaid principal
balance of the Equipment Advances shall be repaid
in 36 equal monthly installments of principal plus
interest commencing on September 7, 1997 and
continuing on the same day of each month thereafter
until the entire unpaid principal balance and all
accrued unpaid interest of the Equipment Advances
have been paid (subject to Silicon's right to
accelerate the Equipment Advances on an Event of
Default).
BORROWER: SILICON:
Mission Critical Software, Inc. SILICON VALLEY BANK
- --------------------------------
By /s/ Louis Woodhill BY /s/ Signature Illegible
----------------------------- ----------------------------
President or Vice President Title Senior Vice President
------------------------
<PAGE>
[LOGO] SILICON VALLEY BANK
SCHEDULE TO
QUICKSTART LOAN AND SECURITY AGREEMENT (MASTER)
BORROWER: Mission Critical Software, Inc.
-------------------------------
DATE: February 7, 1997
-------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank, a California chartered bank ("Silicon") and the
above-named borrower ("Borrower") of even date.
Credit Limit (Aggregate)
(Section 1): $750,000 (includes, without limitation, Equipment
Advances and the Merchant Services Reserve and
Business Visa Reserve, if any)
Interest Rate (Section 1): A rate equal to the "Prime Rate" in effect from
time to time, plus 1% per annum. Interest shall be
calculated on the basis of a 360-day year for the
actual number of days elapsed. "Prime Rate" means
the rate announced from time to time by Silicon as
its "prime rate;" it is a base rate upon which
other rates charged by Silicon are based, and it is
not necessarily the best rate available at Silicon.
The interest rate applicable to the Obligations
shall change on each date there is a change in the
Prime Rate.
Maturity Date (Section 4): June 7, 1998
------------
Other Locations and Addresses
(Section 3.2): N/A
------------
Other Agreements: Borrower also agrees as follows:
1. Loan Fee. Borrower shall concurrently pay
Silicon a non-refundable Loan Fee in the amount of
$3,750.00
2. Banking Relationship. Borrower shall at all
times maintain its primary banking relationship
with Silicon.
BORROWER: SILICON:
Mission Critical Software, Inc. SILICON VALLEY BANK
- --------------------------------
By /s/ Louis Woodhill By /s/ [SIGNATURE]
----------------------------- ----------------------------
President or Vice President Title Senior Vice President
------------------------
<PAGE>
[LOGO] SILICON VALLEY BANK
SCHEDULE TO QUICKSTART LOAN AND SECURITY AGREEMENT (MERCHANT SERVICES/BUSINESS
CREDIT CARD SUBLIMIT)
BORROWER: Mission Critical Software, Inc.
-------------------------------
DATE: February 11, 1997
-------------------------------
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
MERCHANT SERVICES/
BUSINESS CREDIT CARD
Sublimit (Section 1): The aggregate Credit Limit shall be reduced by an
amount equal to the sum of (a) $N/A (the "Merchant
Service Reserve") and (b) $30,000.00 (the "Business
Credit Card Reserve"). Silicon may, in its sole
discretion, charge as Loans, any amounts that may
become due or owing to Silicon in connection with
merchant credit card processing services and/or
business credit card services furnished to Borrower
by or through Silicon, collectively, the "Credit
Card Services." Borrower shall execute all standard
form applications and agreements, including without
limitation, the Indemnification and Pledge
Agreement, of Silicon in connection with the Credit
Card Services and, without limiting any of the
terms of such applications and agreements, Borrower
will pay all standard fees and charges of Silicon
in connection with the Credit Card Services and,
without limiting any of the terms of such
applications and agreements, Borrower will pay all
standard fees and charges of Silicon in connection
with the Credit Card Services.
MATURITY DATE (Section 4): June 7, 1998
------------
BORROWER: SILICON:
Mission Critical Software, Inc. SILICON VALLEY BANK
- --------------------------------
By /s/ Paul F. Koffend, Jr. BY
----------------------------- ----------------------------
President or Vice President Title
------------------------
-2-
<PAGE>
EXHIBIT 10.6.1
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of January 23, 1998, by
and between Mission Critical Software, Inc. ("Borrower") whose address is 720
North Post Oak Road, Suite 505, Houston, TX 77024 and Silicon Valley Bank a
California-chartered bank ("Silicon") with its principal place of business at
3003 Tasman Drive, Santa Clara, CA 95054 with a loan production office located
at 9442 Capital of Texas Highway North, Arboretum Plaza One, Austin, TX 78759.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Silicon, Borrower is indebted to Silicon pursuant to, among
other documents, a QuickStart Loan and Security Agreement, (and Schedules
thereto) dated February 7, 1997, as may be amended from time to time, (the "Loan
Agreement"). The Loan Agreement provided for, among other things, a Credit Limit
the original principal amount of Seven Hundred Fifty Thousand and 00/100 Dollars
($750,000.00). Defined terms used but not otherwise defined herein shall have
the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Silicon shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement.
1. Subparagraph (h) is hereby incorporated into Section 5 entitled
"Events of Default and Remedies" to read as follows:
(h) Borrower's failure to comply with or to perform any other
term, obligation, covenant or condition contained in any other
agreement between Silicon and Borrower.
B. Modification(s) to Schedule (Equipment Advances).
1. The paragraph entitled "Credit Limit (Equipment)" is hereby
amended in its entirety to read as follows:
$750,000.00 (such amount to be funded under the aggregate Credit
Limit). Equipment Advances will be made only on or prior to March
7, 1998 (the "Last Advance Date") and only for the purpose of
purchasing equipment reasonably acceptable to Silicon. Borrower
must provide invoices for the equipment to Silicon on or before
the Last Advance Date. Equipment Advances shall be allowed up to
85% of eligible existing equipment and 100% of new equipment
purchases excluding taxes, shipping, software and installation
expenses. Eligible equipment shall consist of invoices dated
after July 1, 1997.
<PAGE>
2. The first sentence of the paragraph entitled "Interest Rate" is
hereby amended in its entirety to read as follows:
A rate equal to the "Prime Rate" in effect from time to time.
2. The paragraph entitled "Maturity Date" is hereby amended in its
entirety to read as follows:
After the Last Advance Date, the unpaid principal balance of the
Equipment Advances shall be repaid in thirty (30) equal monthly
installments of principal plus interest commencing on April 7,
1998 and continuing on the same day of each month thereafter
until the entire unpaid principal balance and all accrued unpaid
interest of the Equipment Advances have been paid (subject to
Silicon's right to accelerate the Equipment Advances on an Event
of Default).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Silicon is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Silicon's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Silicon to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Silicon and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Silicon in writing. No maker,
endorser, or guarantor will be released by virtue of this Loan Modification
Agreement. The terms of this paragraph apply not only to this Loan Modification
Agreement, but also to all subsequent loan modification agreements.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: SILICON:
MISSION CRITICAL SOFTWARE, INC. SILICON VALLEY BANK
By /s/ Louis R. Woodhill BY
----------------------------- ----------------------------
Name: Louis R. Woodhill Name:
-------------------------- --------------------------
Title: President Title
-------------------------- --------------------------
2
<PAGE>
EXHIBIT 10.6.3
CORPORATE MODIFICATION RESOLUTIONS
<TABLE>
<CAPTION>
<S> <C>
BORROWER: MISSION CRITICAL SOFTWARE, INC. BANK: SILICON VALLEY BANK
720 N. Post Oak Road 9020 Capital of Texas Highway North
Suite 505 Building 1, Suite 350
Houston, Texas 77024 Austin, Texas 78759
</TABLE>
I, THE UNDERSIGNED SECRETARY OF MISSION CRITICAL SOFTWARE, INC. ("BORROWER"),
HEREBY CERTIFY that Borrower is a corporation duly organized and existing under
and by virtue of the laws of the State of Delaware and is duly authorized to do
business and in good standing in the State of Texas.
I FURTHER CERTIFY that the Articles of Incorporation and Bylaws previously
delivered to Silicon Valley Bank ("Bank") remain in full force and effect and
have not been amended, restated or modified in any way.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held, at
which a quorum was present and voting, the following resolutions were adopted.
BE IT RESOLVED that ANY ONE (1) of the following named officers, employees, or
agents of Borrower, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
- ----- --------- -----------------
Michael Bennett CEO /s/ Michael Bennett
- ----------------- --------------- ----------------------
Steve Odom CFO /s/ Steve Odom
- ----------------- --------------- ----------------------
Leslie Willard V.P. of Finance /s/ Leslie Willard
- ----------------- --------------- ----------------------
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Bank, on such terms as may be
agreed upon between the officers of Borrower and Bank, such sum or sums of money
as in their judgment should be borrowed.
EXECUTE MODIFICATIONS. To execute and deliver to Bank that certain First
Amendment to Loan and Security Agreement dated as of March 19, 1999 ("First
Amendment") and also, to execute and deliver to Bank one or more renewals,
extensions, modifications, refinancings, consolidations, or substitutions for
one or more of the loan documents, or any portion of the loan documents.
<PAGE>
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable to or
belonging to Borrower or in which Borrower may have an interest, and either to
receive cash for the same or to cause such proceeds to be credited to the
account of Borrower with Bank, or to cause such other disposition of the
proceeds derived therefrom as they may deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements,
INCLUDING AGREEMENTS WAIVING THE RIGHT TO A TRIAL BY JURY, as they may in their
discretion deem reasonably necessary, proper, desirable or convenient in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Corporation and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that they are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on March 30, 1999 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ Steve Odom
---------------------------------
*Secretary or Assistant Secretary
X /s/ Micheal Bennett
---------------------------------
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution must also
be signed by a second Officer or Director of Borrower.
2
<PAGE>
FIRST AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This First Amendment to Loan and Security Agreement (this "Amendment") is
entered into as of March 19, 1999 by and between Silicon Valley Bank ("Bank")
and Mission Critical Software, Inc. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of January 26, 1998 (the "Agreement"). Bank and Borrower desire to
make certain changes to the terms and conditions of the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The term of the Agreement has been extended to February 5, 2000 and
therefore the definition of the Revolving Maturity Date in the Agreement is
deleted in its entirety and replaced with the following:
"Revolving Maturity Date" means February 5, 2000.
2. The following definition is added to the Agreement:
"Net Income" means, as to Borrower and its Subsidiaries on a
consolidated basis and for any period, the net income (or loss) after
tax for such period without giving effect to any extraordinary gain or
gains or loss or losses on the sale of non-current assets owned by
Borrower and its Subsidiaries, as determined in accordance with GAAP.
For purposes of the foregoing sentence and notwithstanding anything
herein to the contrary, non-current assets shall not include, in any
event, long term notes or receivables.
3. Subsection (d) of the definition of Eligible Accounts shall be deleted
in its entirety and replaced with the following:
(d) Accounts with respect to which the account debtor does not have
its principal place of business in the United States; provided Bank will
allow, as part of the Borrowing Base, an amount that, in the aggregate and
from time to time, does not exceed the lesser of (i) eighty percent (80%)
of the total of all Foreign Accounts and (ii) twenty percent (20%) of the
total Borrowing Base and (iii) Seven Hundred Fifty Thousand and No/100
Dollars ($750,000.00) (the lesser of (i), (ii) and (iii) to be the "Foreign
Amount Add-Back").
<PAGE>
4. Section 6.7 of the Agreement is deleted in its entirety and replaced
with the following:
6.7 Quick Ratio. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities less deferred
maintenance revenue of at least 1.65 to 1.0.
5. Section 6.9 of the Agreement is deleted in its entirety and replaced
with the following:
6.9 Tangible Net Worth. Borrower shall maintain, as of the last day
of each calendar month, a Tangible Net Worth of not less than Three Million
and No/100 Dollars ($3,000,000.00), plus fifty percent (50%) of all year-
to-date Net Income (without regard to net losses), such increase to be
calculated as of the last day of each of Borrower's fiscal quarters
commencing with Borrower's quarter ending March 31, 1999.
6. The text of Section 6.8 of the Agreement is hereby deleted in its
entirety.
7. The form of Borrowing Base Certificate attached to the Agreement as
Exhibit C is hereby deleted in its entirety and replaced with the revised form
of Borrowing Base Certificate attached to this Amendment as Exhibit A.
8. The form of Compliance Certificate attached to the Agreement as Exhibit
D is hereby deleted in its entirety and replaced with the revised form of
Compliance Certificate attached to this Amendment as Exhibit B.
9. Unless otherwise defined, all capitalized terms in this Amendment shall
be as defined in the Agreement. As amended hereby, the Agreement remains in
full force and effect.
10. Borrower represents and warrants that the representations and
warranties contained in the Agreement are true and correct as of the date of
this Amendment.
11. As a condition to the effectiveness of this Amendment, Borrower shall
(i) pay Bank a facility fee equal to Ten Thousand and No/100 Dollars
($10,000.00), which fee shall be due on the date hereof and shall be fully
earned and non-refundable and (ii) reimburse Bank for all Bank Expenses incurred
in connection with this Amendment.
12. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
MISSION CRITICAL SOFTWARE, INC.
By: /s/ Steve Odom
------------------------------
Name: Steve Odom
---------------------------
Title: CFO
---------------------------
SILICON VALLEY BANK
By:
------------------------------
Stuart Edwards, Vice President
Exhibit A - Revised Form of Borrowing Base Certificate
Exhibit B - Revised Form of Compliance Certificate
3
<PAGE>
EXHIBIT A
REVISED FORM OF BORROWING BASE CERTIFICATE
Borrower: Mission Critical Software, Inc. Bank: Silicon Valley Bank
Commitment Amount: $3,000,000.00
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
5. Balance of 50% over 90 day accounts $
6. Concentration Limits $
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (#3 minus #13) $
15. LOAN VALUE OF ELIGIBLE ACCOUNTS (80% of #14) $
16. Foreign Amount Add-Back [Lesser of
(80% of #7) and (20% of #15) and $750,000.00] $
17. BORROWING BASE (#15 plus #16) $
18. Maximum Loan Amount $
19. Total Funds Available [Lesser of #18 and #17] $
20. Present balance owing on Line of Credit $
21. Outstanding under Merchant Card
Sublimit ($60,000.00 maximum) $
22. RESERVE POSITION (#19 minus (#20 plus #21)) $
The undersigned represents and warrants that the foregoing is true,
complete and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representations and warranties set forth in the
Loan and Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS: ===================================
BANK USE ONLY
RECEIVED BY: __________________
DATE: _________________________
REVIEWED BY: __________________
COMPLIANCE STATUS: YES/NO
===================================
Mission Critical Software, Inc.
By:
----------------------------
Authorized Signer
A-1
<PAGE>
EXHIBIT B
REVISED FORM OF COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: MISSION CRITICAL SOFTWARE, INC.
The undersigned authorized officer of Mission Critical Software, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank, as amended (the "Agreement"),
(i) Borrower is in complete compliance for the period ending _____________ with
all required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes. The Officer expressly
acknowledges that no borrowings may be requested by the Borrower at any time or
date of determination that Borrower is not in compliance with any of the terms
of the Agreement, and that such compliance is determined not just at the date
this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
10Q and 10K Within 5 days after filing
with the SEC Yes No
A/R & A/P Agings Monthly within 30 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.65:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $3,000,000.00 $________ Yes No
(To be increased by 50%
of year-to-date Net Income
on a quarterly basis-see
Section 6.9 of Loan and Security
Agreement, as amended by the First Amendment)
B-1
<PAGE>
COMMENTS REGARDING EXCEPTIONS:
Sincerely,
_________________________ Date:_______________
SIGNATURE
_________________________
TITLE
B-2
<PAGE>
EXHIBIT 10.17
OFFICE LEASE
AUSTIN BUILDING
---------------
This is a Lease Agreement made and entered into between 360 Austin Building LP
DBA: Austin Building, as "Lessor", and MISSION CRITICAL SOFTWARE, INC., as
"Lessee", whether one or more.
1.1. THE LEASED PREMISES. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor the "Leased Premises" which consists of "Lessee's Office
Space" and "Common Areas" as defined below.
(a) Lessee's Office Space. "Lessee's Office Space", to which Lessee shall have
exclusive use rights, consists of suite(s) 250, representing the office
space outlined and shaded on the floor plan contained in Exhibit A. Such
space is located in the building on a tract of land, legally described by
lot and block or metes and bounds in Exhibit B. The street address of the
building is 9009 Mountain Ridge Drive, Austin, Texas 78759.
(b) Common Areas. The "common area", to which Lessee shall have non-exclusive
use rights, consists of (1) the interior common area located in the above
described building, i.e., areas normally accessible to tenants such as the
hallways, stairwells, elevators, lobby, restrooms, and snack bar areas, and
(2) the exterior common area located outside the building on the above
described land, i.e., loading areas, sidewalks, driveways, parking garage,
parking areas, and other open areas (if any), subject to paragraph 10.1 on
parking.
1.2. USE. Lessee's office space may be used only for GENERAL OFFICE. The name
of Lessee's business will be MISSION CRITICAL SOFTWARE, INC.
1.3. USABLE AREA. Lessee's "usable area" is approximately 1,057 square feet.
It is the office space outlined and shaded in Exhibit A. Such area is measured
from the interior of the exterior walls and the exterior glass lines of the
building to the middle of the remaining perimeter walls of the office space.
This is in accordance with the BOMA International Standard of Floor Measurement.
1.4. RENTABLE AREA. Lessee's "rentable area" is approximately 1,226 square
feet, that being 3% of the building's total rentable area. It consists of
Lessee's "usable area" as defined above, plus Lessee's pro rata share of the
building common areas as set forth below. The common area "add on" factor is
16% of Lessee's usable area. Building common areas are defined as all
corridors, restrooms, snack bars, building equipment rooms, telephone closets,
janitor closets, enclosed lobby, entrance areas, and other public areas in the
building, excluding elevator shafts, stairwells, vertical chases, and enclosed
parking areas. This is in accordance with the BOMA International Standard of
Floor Measurement.
Page 1
Lessor /s/ GKJ Lessee /s/ MSB
_______ _______
<PAGE>
2.1. BASE RENT AND ADDITIONAL RENTS WITH EXPENSE STOP. Lessee shall pay to
Lessor a "base rent" of $26,972.00 per calendar year, which amounts to $2,247.67
per calendar month. Such base rent is equivalent to $22.00 per square foot per
year for Lessee's rentable area. The base rent is subject to adjustment as
provided in paragraph 32.1. Additional rent (representing Lessee's pro rata
share of building operating expenses over the N/A expense stop shall be paid in
accordance with paragraph 32.1. Building operating expenses up to such expense
stop amount shall be paid by Lessor. Base rent is subject to the annual base
rent increase referred to in paragraph 32.2.
3.1. DATE AND PLACE OF PAYMENT. The monthly rent and, at Lessor's option, one-
twelfth of Lessee's share of estimated building operating expenses under
paragraph 32.1 (i.e., expenses in excess of the expense stop) shall be due on
the first day of each calendar month without demand. Partial months shall be
prorated. All rent and other sums are due in the county where the building is
located at the address designated by Lessor from time to time. All sums due by
Lessee are without right of setoff or deduction. Monies mailed are considered
timely paid only if received by Lessor by the due date; however rents postmarked
one or more days before due date and received after the due date shall be
considered as timely received by Lessor. Rent and late payment charges shall be
paid without notice or demand. All other sums shall be due upon delivery of
written notice in accordance with paragraph 29.1.
3.2. LATE PAYMENTS. If any rent payment or other sum due by Lessee to Lessor is
received and accepted by Lessor later than 10 days after its due date, Lessee
shall pay a late charge of 5% of such rent payment or other sum plus 1% thereof
for each day thereafter (for up to 15 days) until such rent or other sum is
paid. Lessor's acceptance of late rent or other sum shall not constitute
permission for Lessee to pay the rent or other sum late thereafter and shall not
constitute a waiver of Lessor's remedies for subsequent late payments. Late
payment charges are due immediately upon notice or demand. All payments shall
be by check or money order on a local bank, not cash. For each returned check,
Lessee shall pay all applicable bank charges incurred by Lessor plus $25.00.
Payments of any kind received by Lessor on behalf of Lessee may be applied at
Lessor's option to nonrent items first, then to rent. Payment of rent by Lessee
shall be an independent covenant. If Lessee has not timely paid rentals and
other sums due on two or more occasions, or if a check from Lessee is returned
for insufficient funds or no account, Lessor may for the next 12 months require
that all rent and other sums due be paid by cashier's check, certified check, or
money order, without prior notice.
Page 2
Lessor /s/ GKJ Lessee /s/ MSB
_______ _______
<PAGE>
3.3. SECURITY DEPOSIT. At the time of execution of this lease, Lessee shall
deposit with Lessor $4,035.60 cash to secure performance of Lessee's obligations
under this lease. If Lessee fails to pay rent or other sums when due under this
lease, Lessor may apply any cash security deposit toward amounts due and unpaid
by Lessee. Lessee shall immediately restore the security deposit to its
original amount after any portion of it is applied to amounts due and unpaid by
Lessee.
4.1. TERM, COMMENCEMENT, AND ANNIVERSARY. The initial lease term shall be for
12 full calendar months from commencement date, plus the remainder of the last
month. The lease commencement date shall be JUNE 1, 1998 or the date Lessee
occupies all or any part of Lessee's office space, whichever occurs first. The
annual anniversary date of this lease shall be the first day of the first full
month following commencement of the lease, unless the lease commencement date is
the first day of the month. The date rent commences shall be the same day as
the above lease commencement date.
4.2. ACKNOWLEDGMENT OF LEASE. Upon commencement of this lease, Lessor and
Lessee shall execute a recordable acknowledgment of this lease which is attached
as Exhibit D and which will confirm the commencement date, ending date, annual
anniversary date of the lease, and square footage in Lessee's office space.
4.3. DELIVERY OF POSSESSION. Lessor shall deliver keys and possession of
Lessee's office space to Lessee on the lease commencement date stated in
paragraph 4.1 unless otherwise agreed in writing by the parties. Lessee shall
not be liable for rent until Lessor delivers possession of the leased premises
to Lessee. If there is a delay in delivery of possession, rent shall be abated
until Lessee's office space is ready for occupancy; and neither Lessor nor
Lessor's agents shall otherwise be liable for any damages; and the lease shall
not terminate.
5.1. TENANT FINISH-OUT. N/A
6.1. QUIET POSSESSION. If Lessee is current and in compliance with all of
Lessee's obligations under this lease, Lessee shall be entitled to peaceful and
quiet possession and enjoyment of Lessee's office space, subject to the terms
and conditions of this lease. Lessee shall have access to the common parking
areas at all times, subject to the rules referred to in paragraphs 9.2 and 23.1.
Lessor shall make diligent efforts to have all other tenants in the building
comply with building rules. Otherwise, failure of other tenants to comply with
such rules shall not be considered a default by Lessor. Construction noise or
vibrations shall not be considered a default by Lessor.
7.1. UTILITIES AND SERVICES BY LESSOR. Except where otherwise stated in this
lease, Lessor shall pay for and furnish in a timely and diligent manner to
Lessee the following utilities and services
Page 3
Lessor /s/ GKJ Lessee /s/ MSB
_______ _______
<PAGE>
and no others, subject to paragraph 32.1 regarding Lessee's payment of Lessee's
pro rata share of building operating expenses.
(a) air conditioning and heating as reasonably required for comfortable use
and occupancy under normal office conditions from 8:00 a.m. to 6:00 p.m.
on Monday through Friday and from 9:00 a.m. to 1:00 p.m. on Saturday (but
not on New Year's Day, President's Day, Memorial Day, July 4th, Veteran's
Day, Labor Day, Thanksgiving or Christmas and after 12:00 p.m. on
Christmas Eve and New Year's Eve) so long as these times and dates comply
with present and future governmental laws or guidelines, including
utilities such as electricity, gas, and water necessary for operation of
same;
(b) water and waste water services for common areas;
(c) janitorial and cleaning services, as needed, for the
building;
(d) electricity for standard office equipment and lighting;
(e) trash collection services (dumpster or garbage cans);
(f) pest control services as needed in the reasonable judgment
of Lessor;
(g) landscaping and parking lot maintenance services;
(h) repair and maintenance services pursuant to paragraph 8.1;
(i) elevator service.
7.2. UTILITIES AND SERVICES BY LESSEE. Lessee shall pay for all utilities and
services not expressly furnished by Lessor under paragraph 7.1. Lessee shall
pay for all electricity consumed through any individual electrical meter(s) or
submeter(s), serving Lessee's office space, if any. Costs of such utilities are
considered building operating expenses to be allocated among all tenants under
paragraph 32.1. Service through individual electrical meters, if any, which
exclusively serve Lessee's office space shall be in the name of Lessee. Lessor
reserves the right to submeter electricity and/or water to monitor consumption
by Lessee.
7.3. INTERRUPTION OF UTILITIES OR SERVICES. Temporary interruption or
malfunction of utilities, services, and/or telephones shall not render Lessor
liable for damages, rent abatements, or release of any Lessee obligation. Lessor
shall use diligent efforts to have such utilities and services restored as soon
as reasonably possible.
7.4. EXTRA ELECTRICITY. There shall be no extra electricity charges for
typewriters, word processors, dictating equipment, adding machines, desk top
calculators, lamps, or other standard 110 volt office equipment. However,
Lessee shall pay Lessor monthly, as billed, for charges which are separately
metered or which Lessor may reasonably compute for electricity utilized by
Lessee for the following purposes: x-ray machines, hot plates, electric heaters,
220 volt equipment, computers (other than desktop or word processor computers),
or other electrical service not standard for the building.
Page 4
Lessor /s/ GKJ Lessee /s/ MSB
_______ _______
<PAGE>
7.5. EXTRA HEATING OR AIR CONDITIONING. If Lessee requests air conditioning or
heating after the hours as set forth in paragraph 7.1(a), Lessor may charge
Lessee the same extra hourly fee charged by Lessor for after-hour air
conditioning or heating to other tenants in the building.
8.1. MAINTENANCE AND REPAIRS. Lessor shall use diligence to provide for the
reasonable cleaning, maintenance, repair, reconnection of interrupted utilities
or services, and landscaping of common areas, subject to any reimbursement
obligations of Lessee. Lessor may rekey at any time. Lessor may temporarily
close any part of the common facilities if reasonably necessary for repairs or
construction. Repairs and maintenance shall be in accordance with applicable
governmental requirements.
8.2. REPAIRS. Except for customary cleaning and trash removal provided by
Lessor under paragraph 7.1, and damage covered under paragraph 16.1, Lessee
shall keep its Leased Premises in good and sanitary condition, working order and
repair (including without limitation, carpet, wall-covering, doors, plumbing and
other fixtures, equipment, alterations and improvements whether installed by
Lessor or Lessee). In the event that any repairs, maintenance or replacements
are required, Lessee shall promptly arrange for the same either through Lessor
for such reasonable charges as Lessor may from time to time establish, or such
contractors as Lessor generally uses at the Property or such other contractors
as Lessor shall first approve in writing, and in a first class, workmanlike
manner approved by Lessor in advance in writing. If Lessee does not promptly
make such arrangements, Lessor may, but need not, make such repairs, maintenance
and replacements, and the costs paid or incurred by Lessor therefor shall be
reimbursed by Lessee promptly after request by Lessor. Lessee shall indemnify
Lessor and pay for any repairs, maintenance and replacements to areas of the
Property outside the Premises, caused, in whole or in part, as a result of
moving any furniture, fixtures, or other property to or from the Premises, or by
Lessee or its employees, agents, contractors, or visitors (notwithstanding
anything to the contrary contained in this Lease). If Lessor or Lessee's workmen
or contractors are permitted to repair, alter, or modify Lessee's office space,
Lessee shall warrant that no mechanic or materialman's lien shall be filed
against the leased premises. All such work shall be in accordance with
applicable governmental requirements.
8.3. TELECOMMUNICATIONS EQUIPMENT. All telecommunications equipment necessary
to serve Lessee shall be located in Lessee's office space and paid for by
Lessee, or, at Lessor's option and at Lessee's expense, in a lockable enclosure
in a common area location designated by Lessor.
Page 5
Lessor /s/ GKJ Lessee /s/ MSB
_______ _______
<PAGE>
9.1. ACCESS, KEYS, LOCKS, AND SECURITY. (a) Access. Lessee shall have access
to Lessee's office space at all times. Lessor shall have access to Lessee's
office space at reasonable times for reasonable business purposes.
(b) Keys/cards. Lessor shall furnish Lessee 4 keys for Lessee's office space,
4 cards for the main exterior entry doors of the building if such door is
locked after hours, and 1 keys to Lessee's mailbox in the building. A
deposit of $ 10.00 shall be charged for each additionsl card. Additional
keys/cards shall be furnished at the same deposit charged to all other
tenants in the building at the time of Lessee's request. Lessor shall not
be liable for risk of loss resulting from Lessee's keys being lost or used
by unauthorized persons. Lessor reserves the right to rekey or change
locks for security reasons if new keys are timely furnished to Lessee.
(c) Locks. Lessee may not add locks, change locks, or rekey locks without
written permission of Lessor. Locks may be changed at Lessee's request and
expense. If locks to the office space are changed, Lessor may specify kind
and brand of locks, placement, installation, master key compatibility, etc.
(d) Security. Lessor shall have no duty to provide any security services of
any kind unless expressly provided in this lease. Lessor shall not be
liable to Lessee or Lessee's employees, family, customers, invitees,
contractors, or agents for injury, damage, or loss to person or property
caused by criminal conduct of other persons, including theft, burglary,
assault, vandalism or other crimes. Lessee shall lock its office space
doors when the last person leaves such office space for the day.
9.2. PARKING. Lessor shall have sole control over parking. If vehicles are
parked in violation of Lessor parking rules or in violation of state statutes,
Lessor may exercise vehicle removal remedies under Articles of the Texas Civil
Statutes upon compliance with statutory notice. There shall be no reserved
parking spaces unless agreed in writing by Lessor.
10.1. OCCUPANCY, NUISANCE, AND HAZARDS. Lessee's office space shall be occupied
only by Lessee or Lessee's employees and shall not be left entirely vacant or
used exclusively for storage. Lessee and Lessee's agents, employees, family,
licensees, invitees, visitors, and contractors shall comply with all federal,
state, and local laws relating to occupancy or to criminal conduct while such
persons are on the leased premises. Lessee and the persons listed above shall
not (1) use, occupy, or permit the use or occupancy of the leased premises for
any purpose which is directly or indirectly forbidden by such laws or which may
be dangerous to life or property, (2) permit any public or private nuisance, (3)
disturb the quiet enjoyment of other tenants, (4) do anything which might emit
offensive odors or fumes, (5) make undue noise or vibrations, (6) permit
anything which would cancel insurance coverage or increase the insurance rate on
the building or contents, or (7) otherwise damage the leased premises.
Page 6
Lessor /s/ GKJ Lessee /s/ MSB
_______ _______
<PAGE>
11.1. TAXES. Lessor shall be responsible for payment of all taxes and
assessments against the building subject to Lessee's obligation to pay Lessor
for Lessee's share thereof, on a pro rata square foot basis, as additional rent
pursuant to paragraph 32.1. Lessee shall timely pay all taxes assessed against
Lessee's furniture, equipment, fixtures, or other personal property in Lessee's
office space.
12.1. INSURANCE. Lessor and Lessee shall comply with the respective insurance
obligations as set forth below:
(a) Lessor. Lessor shall maintain (1) fire and extended coverage insurance,
including vandalism and malicious mischief, on the office building, and (2)
comprehensive general liability insurance. The amounts shall be as
required by Lessor's mortgagee or as Lessor may deem reasonably
appropriate, whichever is greater. Lessor shall have no responsibility to
maintain fire and extended coverage insurance on Lessee's contents. The
portion of Lessor's insurance premiums reasonably due to Lessee's acts or
omissions or Lessee's special use, improvements, or tenant finish-out (over
and above Lessee's normal use as contemplated in paragraph 1.1(a)) shall be
paid for by Lessee, if applicable.
(b) Lessee. Lessee shall provide Lessee's own public liability insurance for
its operations on the leased premises in the minimum amount of $1,000,000
per occurrence. Upon written notice by Lessor to Lessee, such dollar
amount of Lessee's liability policy shall be increased by the amount of any
increase required under Texas law for "primary coverage" under an umbrella
liability policy. Lessee is encouraged to maintain fire and extended
coverage insurance (including vandalism and malicious mischief) on the
contents in Lessee's office space, including fixtures, furniture,
equipment, supplies, inventory, and other personal property. Such property
is not covered by Lessor's insurance. (c) Insurance certificates. Lessee
shall provide Lessor with a certificate of Lessee's insurance or a copy
thereof as required above within 7 days after Lessee initially occupies
Lessee's office space or any portion thereof. Lessor and Lessor's managing
agent (if any) shall be named as additional insureds on Lessee's liability
insurance policy. Upon written request by Lessor, changes in the name of
Lessor or Lessor's managing agent shall be reflected on such certificate.
(d) Notice from Lessee's Insurance Carrier. All policies of insurance to be
provided by Lessee shall contain a provision (to the extent legally
permitted) that the insurance company shall give Lessor 10 days' written
notice to Lessor, in advance of (1) any cancellation or non-renewal of the
policy, (2) any reduction in the policy amount, and (3) any deletion of
additional insureds.
12.2. MUTUAL RELEASES AND WAIVER OF SUBROGATION. (a) To the extent that the
coverage of their respective insurance policies are not adversely affected,
Lessor and Lessee release each other and their respective officers, directors,
employees, and agents from any claims for loss or damage to any person or
property on the leased premises which is caused by or which results from risks
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insured against under insurance policies carried by Lessor or Lessee and in
force at the time of any such loss or damage. The foregoing release shall not
apply to property losses or damages in excess of policy limits or to losses or
damages not covered by insurance due to a deductible clause in the policy.
(b) Upon written request after signing this lease, but before any loss or damage
occurs, Lessor or Lessee may request that the other party's respective
fire/casualty and liability insurance policy provide a waiver for all right of
recovery by way of subrogation in connection with any loss or damage covered by
such insurance policies.
(c) Notwithstanding the foregoing, if such waiver of subrogation is not
incorporated into the policy and cannot be procured or if it can be
procured only with an additional premium charge, such party shall furnish
to the other party written evidence from the insurance company or insurance
agent, verifying that such waiver is (1) not obtainable, or (2) not
obtainable without extra charge. Thereafter, within a reasonable time after
receiving such notice, the party for whose benefit the waiver is sought may
(1) agree to pay any additional charge necessary to obtain the waiver of
subrogation, or (2) place the insurance with a company which is reasonably
satisfactory to the other party and to such party's mortgagees with a
policy of the same terms and coverage, the extra cost of which will be
entirely borne by the party for whose benefit the waiver of subrogation is
sought.
(d) Upon written request, Lessor and Lessee shall furnish to each other copies
of the policies of insurance referred to in this lease, including any
waivers of subrogation, or satisfactory evidence of same.
12.3. HOLD HARMLESS. Lessee shall indemnify Lessor for and shall hold Lessor
harmless from all fines, claims, liabilities, and suits (including costs and
expenses of defending against same) resulting from any breach or nonperformance
of the lease by Lessee or Lessee's agents, employees, family, licensees, or
invitees. Lessor shall indemnify Lessee for and shall hold Lessee harmless from
all fines, claims, liabilities, and suits (including costs and expenses of
defending against same) resulting from any breach or nonperformance of the lease
by Lessor or Lessor's agents, employees, family, licensees, or invitees. Lessor
and Lessee shall not be liable to the other or the other's agents, employees, or
family for any damage to personal property resulting from any act, omission, or
negligence of any other tenant or occupant of the office building.
13.1. ALTERATIONS BY LESSEE. Lessee may not make any alterations, improvements,
door lock changes, or other modifications of any kind to the leased premises
without Lessor's written consent. "Alterations" include but are not limited to
improvements glued, screwed, nailed, or otherwise permanently attached to the
building, structural changes, roof and wall penetrations, and all plumbing,
electrical, and HVAC changes. Requests for Lessor's approval shall be in
writing and shall be detailed to Lessor's
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reasonable satisfaction. The foregoing shall be done only by Lessor's
contractors or employees or by third parties approved by Lessor in writing.
Lessee shall pay in advance for any requested alterations, improvements, lock
changes, or other modifications which are approved and performed by Lessor. If
same are performed by Lessee with Lessor's permission, Lessee shall not allow
any liens to be placed against the buildings as a result of such additions or
alterations. Alterations, improvements, and modifications done at Lessee's
request shall comply with all applicable laws. Changes in Lessee's alterations
or improvements which may be later required by governmental action shall also be
paid for by Lessee.
13.2. AMERICANS WITH DISABILITIES ACT. Lessor shall be responsible for any
requirements under the Americans with Disabilities Act or similar state or local
laws as they relate to any common area entrance and exit doorways and elevators
and any doors into Lessee's office space and to structural building items that
Lessor is required to maintain under the terms of this lease. Lessor agrees to
indemnify Lessee for any liability Lessee shall incur as a result of Lessor's
failure to comply with the provisions of this paragraph. Lessee agrees to
cooperate fully with Lessor to enable Lessor to timely comply with the
provisions of this paragraph and to immediately forward to Lessor any notice
Lessee receives regarding complaints, injuries, or claims by anyone claiming
that those items which are the responsibility of Lessor do not comply with the
provisions of the Americans with Disabilities Act. Lessee shall be responsible
for any requirements under such architectural barrier laws as they relate to
Lessee's use of Lessee's office space, including, but not limited to, the
positioning of Lessee's furnishings within the office space. Lessee agrees to
indemnify Lessor for any liability Lessor shall incur as a result of Lessee's
failure to comply with the provisions of this paragraph.
14.1. REMOVAL OF PROPERTY BY LESSEE. Lessee may remove it's trade fixtures,
furniture, and equipment only if (1) such removal is made at the end of the
lease term, (2) Lessee is not in default under this lease at time of removal,
and (3) such removal is not in anticipation of an early moveout prior to the end
of the lease term. Lessee shall pay all costs of removal. Lessee shall have no
rights to property remaining on the leased premises after moveout. Lessee may
not remove any alterations as defined in paragraph 13.1 or improvements such as
wall-to-wall carpeting, book shelves, window coverings, drapes, cabinets,
paneling, counters, kitchen or break room built-ins, shelving, wall covering,
and anything else attached to the floor, walls, or ceilings. If Lessor requests
in writing, Lessee shall, immediately prior to moving out, remove any
alterations, fixtures, equipment, and other property installed by Lessee.
Lessee shall pay for cleaning or repairing damage caused by Lessee's removal of
any property.
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15.1. SUBLETTING AND ASSIGNMENT. Lessee shall not, without the prior written
consent of Lessor, which consent shall not be unreasonably withheld, as further
described below: (i) assign, mortgage, pledge, hypothecate, encumber, or permit
any lien to attach to, or otherwise transfer, this Lease or any interest
hereunder, by operation of law or otherwise, (ii) sublet the Premises or any
part thereof, or (iii) permit the use of the Premises by any Persons other than
Lessee and its employees (all of the foregoing are hereinafter sometimes
referred to collectively as "Transfers" and any Person to whom any Transfer is
made or sought to be made is hereinafter sometimes referred to as a
"Transferee"). If Lessee shall desire Lessor's consent to any Transfer, Lessee
shall notify Lessor in writing, which notice shall include: (a) the proposed
effective date (which shall not be less than 30 nor more than 180 days after
Lessee's notice), (b) the portion of the Premises to be Transferred (herein
called the "Subject Space"), (c) the terms of the proposed Transfer and the
consideration therefor, the name and address of the proposed Transferee, and a
copy of all documentation pertaining to the proposed Transfer, and (d) current
financial statements of the proposed Transferee certified by an officer,
partner, or owner thereof, and any other information to enable Lessor to
determine the financial responsibility, character, and reputation of the
proposed Transferee, nature of such Transferee's business and proposed use of
the Subject Space, and such other information as Lessor may reasonably require.
Any Transfer made without complying with this paragraph shall, at Lessor's
option, be null, void and of no effect, or shall constitute a Default under this
Lease. Lessee shall pay reasonable legal fees incurred by Lessor, within thirty
(30) days after written request by Lessor.
15.2. APPROVAL. Lessor will not unreasonably withhold its consent (as provided
in paragraph 36.2) to any proposed Transfer of the Subject Space to the
Transferee on the terms specified in Lessee's notice. The parties hereby agree
that it shall be reasonable under this Lease and under any applicable Law for
Lessor to withhold consent to any proposed Transfer where one or more of the
following applies (without limitation as to other reasonable grounds for
withholding consent): (i) the Transferee is of a character or reputation or
engaged in a business which is not consistent with the quality of the Property,
or would be a significantly less prestigious occupant of the Property than
Lessee, (ii) the Transferee intends to use the Subject Space for purposes which
are not permitted under this Lease, (iii) the Subject Space is not regular in
shape with appropriate means of ingress and egress suitable for normal renting
purposes, (iv) the Transferee is either a government (or agency or
instrumentality thereof) or an occupant of the Property, (v) the proposed
Transferee does not have a reasonable financial condition in relation to the
obligations to be assumed in connection with the Transfer, or (vi) Lessee has
committed and failed to cure a Default at the time Lessee requests consent to
the proposed Transfer.
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15.3. TRANSFER PREMIUM. If Lessor consents to a Transfer, and as a condition
thereto which the parties hereby agree is reasonable, Lessee shall pay Lessor
one hundred percent (100%) of any Transfer Premium derived by Lessee from such
Transfer. "Transfer Premium" shall mean any consideration over and above the
amount then payable by Lessee under this Lease (on a monthly basis during the
Term, and on a per rentable square foot basis, if less than all of the Premises
is transferred), after deducting the reasonable expenses incurred by Lessee for
any changes, alterations and improvements to the Premises, any other economic
concessions or services provided to the Transferee, and any customary brokerage
commissions paid in connection with the Transfer. If part of the consideration
for such Transfer shall be payable other than in cash, Lessor's share of such
non-cash consideration shall be in such form as is reasonably satisfactory to
Lessor. The percentage of the Transfer Premium due Lessor hereunder shall be
paid within ten (10) days after Lessee receives any Transfer Premium from the
Transferee.
15.4. RECAPTURE. Notwithstanding anything to the contrary contained in this
paragraph, Lessor shall have the option, by giving written notice to Tenant
within thirty (30) days after receipt of Lessee's notice of any proposed
Transfer, to recapture the Subject Space. Such recapture notice shall cancel
and terminate this Lease with respect to the Subject Space as of the date stated
in Lessee's notice as the effective date of the proposed Transfer (or at
Lessor's option shall cause the Transfer to be made to Lessor or its agent, in
which case the parties shall execute the Transfer documentation promptly
thereafter). If this Lease shall be canceled with respect to less than the
entire Premises, the Rent reserved herein shall be prorated on the basis of the
number of rentable square feet retained by Lessee in proportion to the number of
rentable square feet contained in the Premises, this Lease as so amended shall
continue thereafter in full force and effect, and upon request of either party,
the parties shall execute written confirmation of the same.
15.5. TERMS OF CONSENT. If Lessor consents to a Transfer: (a) the terms and
conditions of this Lease, including among other things, Lessee's liability for
the Subject Space, shall in no way be deemed to have been waived or modified,
(b) such consent shall not be deemed consent to any further Transfer by either
Lessee or a Transferee, (c) no Transferee shall succeed to any rights provided
in this Lease or any amendment hereto to extend the Term of this Lease, expand
the Premises, or lease additional space, any such rights being deemed personal
to Lessee, (d) Lessee shall deliver to Lessor promptly after execution, an
original executed copy of all documentation pertaining to the Transfer in form
reasonably acceptable to Lessor, and (e) Lessee shall furnish upon Lessor's
request a complete statement, certified by an independent certified public
accountant, or Lessee's chief financial officer, setting forth in detail the
computation of any Transfer Premium
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Lessee has derived and shall derive from such Transfer. Lessor or its authorized
representatives shall have the right at all reasonable times to audit the books,
records and papers of Lessee relating to any Transfer, and shall have the right
to make copies thereof. If the Transfer Premium respecting any Transfer shall be
found understated, Lessee shall within thirty (30) days after demand pay the
deficiency, and if understated by more than 2%, Lessee shall pay Lessor's costs
of such audit. Any sublease hereunder shall be subordinate and subject to the
provisions of this Lease, and if this Lease shall be terminated during the term
of any sublease, Lessor shall have the right to: (i) treat such sublease as
canceled and repossess the Subject Space by any lawful means, or (ii) require
that such subtenant attorn to and recognize Lessor as its landlord under any
such sublease. If Lessee shall Default and fail to cure within the time
permitted for cure, Lessor is hereby irrevocably authorized, as Tenant's agent
and attorney in-fact, to direct any Transferee to make all payments under or in
connection with the Transfer directly to Lessor (which Lessor shall apply
towards Lessee's obligations under this Lease) until such Default is cured.
15.6. CERTAIN TRANSFERS. For purposes of this Lease, the term "Transfer" shall
also include (a) if Lessee is a partnership, the withdrawal or change,
voluntary, involuntary or by operation of law, of a majority of the partners, or
a transfer of a majority of partnership interests, within a twelve month period,
or the dissolution of the partnership, and (b) if Lessee is a closely held
corporation (i.e., whose stock is not publicly held and not traded through an
exchange or over the counter), the dissolution, merger, consolidation or other
reorganization of Lessee, or within a twelve month period; (i) the sale or other
transfer of more than an aggregate of 50% of the voting shares of Lessee (other
than to immediate family members by reason of gift or death) or (ii) the sale
mortgage hypothecation or pledge of more than an aggregate of 50% of Tenant's
net assets.
16.1. DESTRUCTION BY FIRE OR OTHER CASUALTY. (a) Total destruction, rent
abatement, and restoration. If Lessee's office space is totally damaged by fire
or other casualty so that it cannot reasonably be used by Lessee and if this
lease is not terminated as provided in subparagraph (d) below, there shall be a
total abatement of Lessee's rent and Lessee's obligation to pay office building
operating expenses until Lessee's office space is restored by Lessor.
(b) Partial destruction, rent abatement, and restoration. If Lessee's office
space is partially destroyed or damaged by fire or other hazard so that it can
be only partially used by Lessee for the purposes allowed in this lease and if
this lease is not terminated as provided in subparagraph (d) below, there shall
be a partial abatement of Lessee's rent and Lessee's obligation to pay office
building operating expenses which fairly and reasonably corresponds to the time
and extent to which Lessee's office space cannot reasonably be used by Lessee.
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(c) Restoration. Lessor's obligation to restore shall be limited to the
condition of the leased premises existing prior to the casualty. Lessor shall
proceed with diligence to restore. During restoration, Lessee shall continue
business to the extent practical in Lessee's reasonable judgment.
(d) Lease termination. If Lessee's office space or the office center is so badly
damaged that restoration and repairs cannot be completed within 3 months after
the fire or casualty, then this lease may be terminated as of the date of the
destruction by either Lessor or Lessee by serving written notice upon the other.
Termination notice must be delivered within 30 days after the
casualty.
17.1. CONDEMNATION. If any part of Lessee's office space is taken by
condemnation or by deed in lieu of condemnation by any governmental authority,
this lease shall terminate one day prior to such taking. If any part of the
office building's parking lot is so taken, Lessee's right to use such portion
shall terminate one day prior to such taking; and Lessee's rent shall be reduced
only to the extent that such partial taking reduces the fair market value of
Lessee's office space. Lessor shall pay all costs associated with construction
reasonably necessary to render the leased premises usable for Lessee's permitted
purposes after such partial taking. All compensation awarded for any partial or
total taking of the office building shall be the property of Lessor. If Lessor
has received written notice of intent to condemn, Lessee shall upon 10 days
written request by Lessor execute an acknowledgment that the lease terminates
one day prior to the condemnation of deed in lieu of condemnation and that
Lessee claims no interest in the condemnation award. Lessor shall have no
interest in any monies paid by the condemning authorities to Lessee for moving
costs or for the other personal property within the leased premises (excluding
leasehold improvements) if a separate award for such items is made to Lessee.
18.1. DEFAULT BY LESSOR. Lessee shall be entitled to recover actual damages and
terminate this lease if (1) Lessor fails to pay any sum due and owing to Lessee
within 7 days after written demand from Lessee, or (2) Lessor remains in default
on any other obligation for 7 days after Lessee's written demand for
performance. However, Lessor shall not be in default if Lessor promptly
commences to cure such noncompliance and diligently proceeds in good faith to
cure same after receiving written notice of such default. If taxes and
utilities are not timely paid, Lessee may pay same to the extent that it is
necessary to avert foreclosure or cutoff.
19.1. DEFAULT BY LESSEE. If Lessee defaults, Lessor shall have any or all
remedies set forth below.
(a) Definition of default. The occurrence of any of the following shall
constitute a default by Lessee: (1) failure to pay rent or any other sum due by
Lessee under this lease within 7 days
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after written demand therefor by Lessor; (2) failure to vacate on or before the
last day of the lease term, renewal term, or extension period; (3) failure to
pay rent in advance on a daily basis in the event of unlawful holdover by
Lessee; (4) unauthorized early move-out or notice of same as set forth below;
(5) acquisition of Lessee's interest in the lease by a third party by judicial
or non-judicial process; or (6) failure to comply with any other provision of
the lease (including rules) if such failure to comply is not cured as soon as
possible after delivery of written notice by Lessor to Lessee. However, Lessee
shall not be in default under subclause (6) above if Lessee promptly commences
to cure such noncompliance and diligently proceeds in good faith to cure same
after receiving written notice of such default. Lessee's election to move out
prior to the end of the lease term or renewal or extension period shall not
constitute an unauthorized early move out or abandonment, provided that Lessee
has paid in full the rent for the remainder of the applicable term.
(b) Door Locks. If Lessee is in default for nonpayment of rent or other sums due
and if Lessee fails to pay same in full within 7 days after Lessor hand delivers
to Lessee or to Lessee's office space written demand or notice of nonpayment,
then Lessor shall be entitled to change or modify door locks on all entry doors
of Lessee's office space until all such sums are paid in full; provided,
however, Lessor shall immediately thereafter post a notice on the primary entry
door to Lessee's office space, stating that Lessor has expressed such lockout
rights. No other notice requirements or lockout laws shall apply. Lessor's right
to modify or change locks shall occur automatically and without notice if
Lessee's rent is accelerated under subparagraph (e) below, relating to unlawful
early move-out. If Lessee moves out or abandons Lessee's office space, Lessor
may permanently change the locks without notice to Lessee, and Lessee shall not
be entitled to a key or to reentry.
(c) Utilities and services. If Lessee is in default for nonpayment of rent or
other sums due and if Lessee fails to pay same in full within 3 days after
Lessor hand delivers to Lessee or to Lessee's representative written notice of
Lessor's intent to terminate utilities or services which are furnished by
Lessor, then Lessor may terminate such utilities or services after such 3-day
notice period, without further notice. Lessor's right to terminate such
utilities or services shall occur automatically and without notice if Lessee's
rent is accelerated under subparagraph (e) below, relating to unlawful early
move-out.
(d) Acceleration after notice of rental delinquency. If Lessee is in default for
nonpayment of rent or other sums due and if Lessee fails to pay same in full
within 3 days after Lessor delivers to Lessee or to Lessee's office space a
written notice of Lessor's intent to accelerate, then all rent for the remainder
of the lease term shall be accelerated, due, and delinquent at the end of such
3-day notice period without further demand or notice. Such acceleration rights
are in consideration of the rentals for the entire term being payable in monthly
installments rather than
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in one lump sum at the beginning of the lease term. If Lessee has already
vacated the leased premises, notice of acceleration may be delivered to Lessee
pursuant to paragraph 29.1. Liability for additional rents accruing in the
future (over and above any base rents) shall not be waived by such acceleration.
(e) Acceleration upon early move-out. If Lessee is lawfully evicted, or if
Lessee moves out or gives verbal or written notice (in person or by an
authorized employee or agent) of intent to move-out prior to the end of the
lease term without the rent being paid in full for the entire remainder of the
lease term or renewal or extension period or without prior written consent of
Lessor, all remaining rents for the remainder of the lease term shall be
accelerated immediately and automatically, without demand or notice. Such
accelerated rents shall be due and delinquent without notice before or after
such acceleration. Such acceleration shall occur even if the rent for the
current month has been paid in full.
(f) Termination of possession. If Lessee is in default as defined in
subparagraph (a) above and if Lessee remains in default for 3 days after Lessor
gives notice of such default to Lessee, or if Lessee abandons the leased
premises, Lessor may (with or without demand for performance) terminate Lessee's
right of possession by giving one day's written notice to vacate; and Lessor
shall be entitled to immediate possession without termination of Lessee's
obligations under the lease. Lessor's repossession shall not be considered an
election to terminate this lease unless written notice of such intention to
terminate is given to Lessee by Lessor. Repossession may be by voluntary
agreement or by eviction lawsuit. Commencement of an eviction lawsuit shall not
preclude other Lessor remedies under this lease or other laws.
(g) Reletting costs. If Lessee is in default as defined in subparagraph (a)
above and if Lessor terminates Lessee's right of possession without terminating
this lease, Lessee shall pay upon Lessor's demand the following: (1) all costs
of reletting (which in no event shall be less than one month's rent), including
leasing commissions, rent concessions (whether in the form of assuming or buying
out lease remainders elsewhere, free rent for a period of time, or reduced
rental rates), utilities during the vacancy, advertising costs, administrative
overhead, and all costs of repair, remodeling, or redecorating for replacement
tenants in Lessee's office space, (2) all rent and other indebtedness due from
Lessee to Lessor through the date of termination of Lessee's right of
possession, and (3) all rent and other sums required to be paid by Lessee during
the remainder of the entire lease term, subject to the acceleration paragraphs
above.
(h) Mitigation by Lessor. Upon eviction or voluntary vacation of the leased
premises by Lessee without the lease being terminated by Lessor, Lessor shall
make reasonable efforts to relet the leased premises. After deduction of
reasonable expenses incurred by Lessor, Lessee shall receive credit for any
rentals received by Lessor through reletting the leased premises during the
remainder of the lease term or renewal or extension period.
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Such deductible expenses may include real estate commissions, attorney's fees,
and all other expenses in connection with reletting. Lawsuit to collect amounts
due by Lessee under this lease may be brought from time to time on one or more
occasions without the necessity of Lessor's waiting until the expiration of the
lease term. If judgment for accelerated rents is recovered, Lessor shall give
credit against such judgment for subsequent payments made by Lessee and
subsequent rentals received by Lessor from other tenants of Lessee's office
space, less lawful deductions and expenses of reletting.
(i) Termination of lease. Lessor may terminate this lease (as contrasted to
termination of possession rights only) upon default by Lessee or at any time
after Lessor's lawful re-entry or repossession following default by Lessee.
Lessor's agents have authority to terminate the lease only by written notice
given by owner.
(j) Damages. In addition to other remedies, Lessor may recover actual damages
incurred.
20.1. LIEN FOR RENT. (a) Notwithstanding anything to the contrary in this
lease, Lessor's landlord lien shall be subordinate to any existing security
interest and any future purchase money security interests on Lessee's personal
property if such security interest is properly perfected and timely recorded as
required by the Texas Business Code. Lessor shall cooperate in signing lien
subordinations in accordance with the foregoing. Any lien subordination shall
be on forms reasonably acceptable to Lessor.
(b) Subject to the limitations of subparagraph (a) above, Lessee gives to
Lessor a contractual lien on all of Lessee's property which may be found on the
leased premises to secure payment of all monies and damages owed by Lessee under
the lease. Such lien also covers all insurance proceeds on such property.
Lessee shall not remove such property while rent or other sums remain due and
unpaid to Lessor and such property shall not be removed until all Lessee's
obligations under the lease have been complied with. This lien is in addition
to Lessor's statutory lien under Section 54.021 of the Texas Property Code. If
Lessee is in default for nonpayment of rent or any other sums due by Lessee,
Lessor's representatives may peacefully enter the leased premises and remove and
store all property. If Lessor removes any property under this lien, Lessor
shall leave the following information in a conspicuous place inside Lessee's
office space: (1) written notice of exercise of lien, (2) a list of items
removed, (3) the name of Lessor's representative who removed such items, and (4)
the date of such removal. Lessor shall be entitled to reasonable charges for
packing, removing, or storing abandoned or seized property, and may sell same at
public or private sale (subject to any properly recorded chattel mortgage or
recorded financing statement) after 30 days' written notice of time and place of
sale is given to Lessee by certified mail, return receipt requested. Upon
request by Lessor, Lessee shall acknowledge the above lien rights by executing a
UCC-1 form or similar form reflecting same.
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21.1. ATTORNEY'S FEES, INTEREST, AND OTHER EXPENSES. If Lessee or Lessor is in
default and if the non defaulting party places the lease in the hands of an
attorney in order to enforce lease rights or remedies, the non defaulting party
may recover reasonable attorney's fees from the defaulting party even if suit
has not been filed. In any lawsuit enforcing lease rights, the prevailing party
shall be entitled to recover reasonable attorney's fees from the non prevailing
party, plus all out-of-pocket expenses. Trial shall be to court only; and all
parties waive jury trial. All delinquent sums due by Lessor or Lessee shall
bear interest at the maximum lawful rate of interest, compounded annually, from
date of default until paid, plus any late payment fees. Late payment fees as
set forth in paragraph 3.2 shall be considered reasonable liquidated damages for
the time, trouble, inconvenience, and administrative overhead expense incurred
by Lessor in collecting late rentals, such elements of damages being uncertain
and difficult to ascertain. Late payment fees shall not be liquidated damages
for attorney's fees or for Lessor's loss of use of such funds during the time of
delinquency.
22.1. NON WAIVER. The acceptance of monies past due or the failure to complain
of any action, nonaction, delayed payment, or default, whether singular or
repetitive, shall not constitute a waiver of rights or obligations under the
lease. Lessor's or Lessee's waiver of any right or any default shall not
constitute waiver of other rights, violations, defaults, or subsequent rights,
violations, or defaults under this lease. No act or omission by Lessor or
Lessor's agents shall be deemed an acceptance or surrender of the leased
premises, and no agreement by Lessor to accept a surrender of the leased
premises shall be valid unless it is in writing and signed by a duly authorized
agent of Lessor.
23.1. BUILDING RULES. Lessor's rules for the office building are attached as
Exhibit F-2 and are subject to reasonable change if the changes are applicable
to all tenants of the office building. Separate parking rules are contained in
Exhibit F-1.
24.1. TRANSFER OF OWNERSHIP BY LESSOR. If Lessor transfers ownership of the
office building (other than as security for a mortgage) and if Lessor has
delivered to the transferee all of Lessee's security deposits and any prepaid
rents, Lessor shall be released from all liability under the lease; and such
transferee shall become liable as Lessor. Such right to be released of
liability shall accrue to subsequent owners only if such transfer is in good
faith and for consideration.
25.1. MORTGAGES. Unless otherwise provided in this lease, Lessee shall
subordinate and attorn to mortgage liens now or hereafter on the office
building. Lessee agrees to execute, from time to time, documentation therefor
which is necessary in the reasonable judgment of Lessor. Other than the
provisions already set forth
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in this lease, there are no special lease provisions which are required by lien
holders of the office building. This lease shall be subordinate to all existing
and future mortgages. However, such mortgagees may at any time subordinate their
lien to this lease by filing a subordination notice in the county real property
records without necessity of notice to Lessee.
26.1. SURRENDER OF PREMISES. When Lessee moves out, Lessee shall surrender
Lessee's office space in the same condition as on the date of lease commencement
by Lessee (as changed or improved from time to time in accordance with this
lease), less ordinary wear. Removal of property from the leased premises is
subject to paragraph 14.1.
27.1. HOLDING OVER. If Lessee remains in possession of the leased premises
after the expiration or mutually-agreed termination date of the lease, without
the execution by Lessor and Lessee of a new lease or a renewal or extension of
the lease, then (1) Lessee shall be deemed to be occupying the leased premises
as a tenant-at-sufferance on a daily basis, subject to all obligations of the
lease, (2) Lessee shall pay 200% of the amount of rent then applicable for the
entire holdover period, (3) Lessee shall be subject to all other remedies of
Lessor as provided in paragraph 19.1, (4) Lessee shall indemnify Lessor and/or
prospective tenants for damages, including lost rentals, storage expenses, and
attorney's fees, and (5) at Lessor's sole option, Lessee may extend the lease
term for a period of one month at the then current rental rates for the office
building, as reasonably determined by Lessor, by hand delivering written notice
to Lessee or to Lessee's office space while Lessee is holding over. Holdover
rents shall be immediately due on a daily basis and delinquent without notice or
demand; and the prior written notice and waiting period requirements of this
lease shall not be necessary in order for Lessor to exercise remedies
thereunder.
28.1. SIGNS AND BUILDING NAME. Except for standard suite signage and building
directory listings, there shall be no signs, symbols, or identifying marks on or
in the building, halls, elevators, staircases, entrances, parking areas,
landscape areas, doors, walls, or windows without prior written approval of
Lessor. All signs or lettering shall conform to the sign and lettering criteria
established by Lessor. Unless otherwise stated in the rules, suite signage and
building directory changes shall be done exclusively by Lessor and at Lessee's
expense. Lessor may remove all unapproved signs without prior notice to Lessee
and at Lessee's expense. Lessor may change the name of the building upon six
months' written notice to Lessee.
28.2. RELOCATION OF LESSEE. Upon at least 60 days' notice to Lessee, Lessor
shall have the right to relocate Lessee within the building in lease space which
is the same size or larger and reasonably configured and suited to Lessee's use.
Such relocation shall be made at Lessor's sole expense. Rent shall not be
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increased if the relocation office space is larger or better quality.
Relocation date shall be contained in the relocation notice referred to above.
Lessor shall not be liable to Lessee in connection with such relocation except
for undue delay or property damages caused by Lessor or Lessor's employees,
agents, or contractors.
29.1. NOTICES. Whenever written notice is required or permitted under this
lease, such notice shall be in writing and shall be either (a) hand delivered
personally to the party being notified, (b) hand delivered to or inside such
party's mailing address, or (c) delivered at such party's mailing address by
nationally recognized express delivery service or certified mail, return receipt
requested, postage prepaid. The mailing address of Lessor shall be the address
to which Lessee normally mails or delivers the monthly rent unless Lessor
notifies Lessee of a different address in writing. The mailing address of
Lessee shall be Lessee's office space under this lease. However, if Lessee
moves out, it shall be Lessee's last address known by Lessor. Hand delivered
notice is required only when expressly required in the lease. Notice by non
certified mail is sufficient if actually received by the addressee or an
employee or agent of addressee. The term "notice" shall be inclusive of notices,
billings, requests, and demands.
30.1. ESTOPPEL CERTIFICATES. From time to time, upon 7 days' prior written
request from Lessor, Lessee shall execute and deliver to Lessor the estoppel
certificate attached as Exhibit G. The form in Exhibit G may be changed as
reasonably required by a prospective purchaser or lender. If any statement in
the estoppel certificate form is contrary to the facts existing at the time of
execution of such form, Lessee may correct same before signing. Reasonable
modifications in the form may be made as requested by a prospective lien holder
or purchaser. The estoppel certificate may be conclusively relied upon by
Lessor and by any prospective lien holder or purchaser of the leased premises.
If Lessee fails to comply with the foregoing by the end of such 7-day period, it
shall be conclusively presumed that (1) this lease is in full force and effect
without any subleases or assignments and is unamended or modified except for
amendments verified by affidavit of Lessor to the prospective lien holder or
purchaser, (2) no rents, security deposits, or other charges have been prepaid,
(3) the statements contained in the estoppel certificate form (Exhibit G) are
correct, (4) there are no uncured defaults by Lessor, (5) Lessee has no right of
offset or rescission, and (6) any prospective purchaser or lien holder may
conclusively rely on such silence or noncompliance by Lessee and may
conclusively assume no Lessor defaults within the 120 days following Lessee's
receipt of Lessor's request for an estoppel certificate.
31.1. SUCCESSORS. This lease shall bind and inure to the benefit of the
parties, any guarantors of this lease, and their respective successors and
assigns.
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31.2. LEASING AGENT COMMISSIONS. No leasing commission shall be due by Lessor
to any leasing agent unless in writing. Commission agreements executed by
Lessor shall be binding on subsequent building owners if the tenant of the lease
in question is in possession at the time of transfer of building ownership.
KVA, Inc., Kevin Kimball, as exclusive agent for Lessor, shall be paid in
accordance to commission agreement attached as Exhibit L-1.
32.1. BUILDING OPERATING EXPENSE. In addition to the monthly base rent in
paragraph 2.1, Lessee shall pay additional rent on a monthly basis, equivalent
to Lessee's pro rata share of actual building operating expenses as per Exhibit
C. Lessee's responsibility for payment of building operating costs shall be
subject to the expense stop referred to in paragraph 2.1.
32.2. BASE RENT ADJUSTMENT. At each annual anniversary date of this lease, the
annual base rent shall increase as follows:__
N/A
33.1. REPRESENTATIONS AND WARRANTIES BY LESSOR. Lessor warrants that Lessor is
the sole owner of the land and improvements comprising the office building and
that Lessor has full right to enter into this lease. Lessor's duties and
warranties are limited to those expressly stated in this lease and shall not
include any implied duties or implied warranties, now or in the future. No
representations or warranties have been made by Lessor other than those
expressly contained in this lease.
34.1. REPRESENTATIONS AND WARRANTIES BY LESSEE. Lessee warrants to Lessor that
(1) the financial statements of Lessee heretofore furnished to Lessor are true
and correct to the best of Lessee's knowledge, (2) there has been no significant
adverse change in Lessee's financial condition since the date of the financial
statements, (3) the financial statements fairly represent the financial
condition of Lessee upon those dates and at the time of execution hereof, (4)
there are no delinquent taxes due and unpaid by Lessee, and (5) Lessee and none
of the officers or partners of Lessee (if Lessee is a corporation or
partnership) have ever declared bankruptcy. Lessee warrants that Lessee has
disclosed in writing to Lessor all lawsuits pending or threatened against
Lessee, and Lessee has made no material misrepresentation or material omission
of facts regarding Lessee's financial condition or business operations. All
financial statements must be dated and signed by Lessee. Lessee acknowledges
that Lessor has relied on the above information furnished by Lessee to Lessor
and that Lessor would not have entered into this lease otherwise.
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35.1. PLACE OF PERFORMANCE. Unless otherwise expressly stated in this lease,
all obligations under this lease, including payment of rent and other sums due,
shall be performed in the county where the office building is located, at the
address designated from time to time by Lessor.
36.1. MISCELLANEOUS. This lease contains the entire agreement of the parties.
No other written or oral promises or representations have been made, and none
shall be binding. This lease supersedes and replaces any previous lease between
the parties on Lessee's office space, including any renewals or extensions
thereunder. Except for reasonable changes in written rules, this lease shall not
be amended or changed except by written instrument, signed by both Lessor and
Lessee. Lessor's agents do not and will not have authority to (1) make
exceptions, changes or amendments to this lease, or factual representations not
expressly contained in this lease, (2) waive any right, requirement, or
provision of this lease, or (3) release Lessee from all or part of this lease,
unless such action is in writing. Multiple lessees shall be jointly and
severally liable under this lease. Notices, requests, or agreements to, from,
or with one of multiple lessees shall be deemed to be to, from, or with all such
Lessees. Under no circumstances shall Lessor or Lessee be considered an agent
of the other. Non substantial errors in space footage calculations shall
entitle the parties to correct the rental figures in the lease and adjust
previously paid rentals accordingly, but not to terminate the lease. The lease
shall not be construed against either party more or less favorably by reason of
authorship or origin of language. Texas law applies. If any date of
performance or exercise of a right ends on a Saturday, Sunday, or state holiday,
such date shall be automatically extended through the next business day. Time
is of the essence; and all performance dates, time schedules, and conditions
precedent to exercising a right shall be strictly adhered to without delay
except where otherwise expressly provided. If any provision of this lease is
invalid under present or future laws, the remainder of this lease shall
not be affected.
36.2. REASONABLE APPROVALS. Whenever Lessor's approval or consent is expressly
required under this Lease or any other agreement between the parties, Lessor
shall not unreasonably withhold or delay such approval or consent
(reasonableness shall be a condition to Lessor's enforcement of such consent or
approval requirement, and not a covenant), Lessor has total discretion in
matters affecting the structure, safety or security of the Property, or the
appearance of the Property from any common or public areas.
37.1. GUARANTY. This lease IS NOT guaranteed by others. The names and titles of
any guarantors are shown on the signature page(s) at the end of this lease. The
specific obligations of such guarantors, if any, shall be pursuant to attached
Exhibit H entitled "Lease Guaranty". Such guaranty shall continue and shall
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be unaffected by any modification or amendment to this lease or any renewal or
extension thereof. The signature requirements and corporate resolution
requirements for any guarantors shall conform to the requirements for Lessees in
paragraph 39.1 below.
37.2. SPECIAL CONDITIONS. Additional provisions of this lease are set forth in
Exhibit J.
37.3. ENVIRONMENTAL MATTERS. (a) Compliance with Environmental Laws. Lessee
shall at all times and in all respects comply with all federal, state and local
laws, ordinances and regulations ("Hazardous Materials Laws") relating to
industrial hygiene, environmental protection or the use, analysis, generation,
manufacture, storage, disposal or transportation of any oil, flammable
explosives, asbestos, urea formaldehyde, radioactive materials or waste, or
other hazardous, toxic, contaminated or polluting materials, substances or
wastes, including, without limitation, any "hazardous substances", "hazardous
wastes", "hazardous materials" or "toxic substances" under any such laws,
ordinances or regulations (collectively, "Hazardous Materials").
(b) Hazardous Materials Handling. Lessee shall at its own expense procure,
maintain in effect and comply with all conditions of any and all permits,
licenses and other governmental and regulatory approvals required for Lessee's
use of the premises, including, without limitation, discharge of (appropriately
treated) materials or wastes into or through any sanitary sewer serving the
premises. Except as discharged into the sanitary sewer in strict accordance and
conformity with all applicable Hazardous Materials Laws, Lessee shall cause any
and all hazardous materials removed from the premises to be removed and
transported solely by duly licensed haulers to duly licensed facilities for
final disposal of such materials and wastes. Lessee shall in all respects
handle, treat, deal with and manage any and all hazardous materials in, on,
under or about the premises in total conformity with all applicable Hazardous
Materials Laws and prudent industry practices regarding management of such
hazardous materials. Upon expiration or earlier termination of the term of the
lease, Lessee shall cause all hazardous materials to be removed from the
premises and transported for use, storage or disposal in accordance and
compliance with all applicable Hazardous Materials Laws. Lessee shall not take
any remedial action in response to the presence of any hazardous materials in or
about the premises or any building, nor enter into any settlement agreement,
consent decree or other compromise in respect to any claims relating to any
hazardous materials in any way connected with the premises or either building,
without first notifying Lessor of Lessee's intention to do so and affording
Lessor ample opportunity to appear, intervene or otherwise appropriately assert
and protect Lessor's interest with respect thereto.
(c) Notices. Lessee shall immediately notify Lessor in writing of: (i) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Laws;
(ii) any claim made or threatened
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by any person against Lessee, the premises or either building relating to
damage, contribution, cost recovery compensation, loss or injury resulting from
or claimed to result from any hazardous materials; and (iii) any reports made to
any environmental agency arising out of or in connection with any hazardous
materials in or removed from the premises or either building, including any
complaints, notices, warnings or asserted violations in connection therewith.
Lessee shall also supply to Lessor as promptly as possible, and in any event
within five (5) business days after Lessee first receives or sends the same,
with copies of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to the premises, either building or Lessee's use
thereof. Lessee shall promptly deliver to Lessor copies of hazardous waste
manifests reflecting the legal and proper disposal of all hazardous materials
removed from the premises.
37.4 INDEMNIFICATION OF LESSOR. Lessee shall indemnify, defend (by counsel
reasonably acceptable to Lessor), protect, and hold Lessor, and each of Lessor's
partners, employees, agents, attorneys, successors and assigns, free and
harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) or death of or
injury to any person or damage to any property whatsoever, arising from or
caused in whole or in part, directly or indirectly, by (1) the presence in, on,
under or about the Leased Premises or discharge in or from the Leased Premises
or the land building is situated on any hazardous materials caused directly by
Lessee's use, analysis, storage, transportation, disposal, release, threatened
release, discharge or generation of hazardous materials to, in, on, under, about
or from the premises or either building, or (2) Lessee's failure to comply with
any Hazardous Materials Laws. Lessee's obligations hereunder shall include,
without limitation, and whether foreseeable or unforeseeable, all costs of any
required or necessary repair, cleanup or detoxification or decontamination of
the premises or land under building, and the preparation and implementation of
any closure, remedial action or other required plans in connection therewith,
and shall survive the expiration or earlier termination of the term of the
lease. For purposes of the release and indemnity provisions hereof, any acts or
omissions of Lessee, or by employees, agents, assignees, contractors or
subcontractors of Lessee or others acting for or on behalf of Lessee (whether or
not they are negligent, intentional, willful or unlawful) shall be strictly
attributable to Lessee.
37.5 ADDITIONAL INSURANCE OR FINANCIAL CAPACITY. If at any time it reasonably
appears to Lessor that Lessee is not maintaining sufficient insurance or other
means of financial capacity to enable Lessee to fulfill its obligations to
Lessor hereunder, whether or not then accrued, liquidated, conditional or
contingent, Lessee, with 5 days prior written notice by Lessor, shall procure
and thereafter maintain in full force and effect such insurance or other form of
financial assurance, with or from
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companies or persons and in forms reasonably acceptable to Lessor, as Lessor may
from time to time reasonably request.
38.1. EXHIBIT LIST. The exhibits attached to this lease are listed below. All
exhibits are a part of this lease except for those which have been lined out or
which have been shown below as omitted.
Exhibit A Floor Plan of Lessee's Office Space (paragraph 1.1)
Exhibit B Legal Description of Office Building (paragraph 1.1)
Exhibit C DELETED
Exhibit D Acknowledgment of Lease (paragraph 4.2)
Exhibit E DELETED
Exhibit F-1 Parking Rules (paragraphs 9.2 and 23.1)
Exhibit F-2 Building Rules (paragraph 23.1)
Exhibit G Estoppel Certificate (paragraph 30.1)
Exhibit H DELETED
Exhibit I Corporate Resolution Authorizing Lease or Guaranty (paragraphs
37.1 and 39.1)
Exhibit J Special Conditions (paragraph 37.2)
Exhibit K DELETED
Exhibit L-1 Commission Agreement (paragraph 31.2)
39.1. LESSEE SIGNATURE REQUIREMENTS. Lessee is a corporation.
Such corporation is organized or chartered under the laws of the State of Texas.
Lessee's name stated at the beginning of this lease is not an assumed name. If
Lessee is a corporation, corporate resolutions shall be executed on the form in
Exhibit I.
39.2. LEASE DATES AND AUTHORITY TO SIGN. The "identification" date of this
lease is the June 1, 1998. The "effective date" on which this lease becomes
binding is the date on which the lease has been signed by Lessor, Lessee, and
any guarantors. The names and signatures of all parties are shown below; and
all persons signing have been duly authorized to sign. If Lessee is a
corporation, a corporate resolution authorizing Lessee to execute this lease is
attached as Exhibit I.
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LESSOR:
360 Austin Building LP
DBA: Austin Building
/s/ Glenn K. Jackson
_________________________________
By: Glenn K. Jackson
4-16-98
_________________________________
Date signed
/s/ Elsie K. Jackson
_________________________________
By: Elsie K. Jackson
4-16-98
_________________________________
Date signed
LESSEE:
MISSSION CRITICAL
SOFTWARE, INC.
/s/ Michael S. Bennett
_________________________________
Michael S. Bennett
By: _____________________________
4-14-98
_________________________________
Date signed
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EXHIBIT A
FLOOR PLAN OF LESSEE'S OFFICE SPACE
(See paragraph 1.1 of Lease)
The parties agree that the floor plan below is a true and correct diagram of
Lessee's office space referred to in paragraph 1.1.
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EXHIBIT B
LEGAL DESCRIPTION OF OFFICE BUILDING
(See paragraph 1.1 of Lease)
Lot 3, Mountain Ridge II, Travis County, Texas.
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EXHIBIT C
DELETED
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EXHIBIT D
ACKNOWLEDGMENT OF LEASE
(See paragraph 4.2 of Lease)
The undersigned parties acknowledge that the lease described below is in full
force and effect and that Lessee has taken possession of the space.
Date of lease: JUNE 1, 1998
Lessor: 360 Austin Building LP,
DBA: Austin Building
Lessee: MISSION CRITICAL SOFTWARE, INC.
Guarantor: N/A
Building name: Austin Building
Suite No.: 250
Building address: 9009 Mountain Ridge Drive
City/County/State/Zip: Austin, Travis, Texas, 78759
Legal description of property: Lot 3, Mountain Ridge II,
Travis County, Texas.
The commencement date, annual anniversary date, and ending date of the initial
lease term as defined in paragraph 4.1 of above lease are as follows:
Commencement date: JUNE 1, 1998
Annual Anniversary date: JUNE 1
Ending date: MAY 31, 1999
The parties acknowledge that the lease has not been amended or modified and that
this acknowledgment may be filed of record with the Texas Secretary of State or
the county where the building is located in order to record (1) Lessee's
possession rights to the leased premises, and (2) Lessor's contractual landlord
lien rights over all personal property therein. The entire lease is hereby
affirmed and incorporated herein. The lease will cease to be an encumbrance to
Lessor's title if Lessor files an affidavit of record, stating that Lessee no
longer occupies the premises and that Lessee's right of possession has been
lawfully terminated.
LESSEE LESSOR
(To be signed at move-in) (To be signed at move-in)
MISSION CRITICAL 360 Austin Building LP
SOFTWARE, INC. DBA: Austin Building
____________________________ __________________________
By: By: Kevin Kimball
Property Manager
____________________________ ___________________________
Date Signed Date Signed
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EXHIBIT E
DELETED
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EXHIBIT F-1
OFFICE BUILDING
PARKING RULES
(See paragraph 9.2 of Lease)
It is the desire of Lessor to maintain and operate the parking garage and
parking areas in an orderly manner. The following rules and regulations apply
to all tenants in the building and their agents, employees, family, licensees,
invitees, visitors, and contractors unless otherwise stated. Lessor reserves
the right to rescind these rules, make reasonable changes, or make other
reasonable rules and regulations for the safety, care, and cleanliness of the
parking garage and parking areas and for the preservation of good order.
1. TRAFFIC SIGNS. All persons parking in the parking areas and parking garage
shall observe posted signs and markings regarding speed, stop signs, traffic
lanes, reserved parking, no parking, parking stripes, etc.
2. LESSEE EMPLOYEE AND CUSTOMER PARKING. Lessees and their employees and
customers may park without charge.
3. TRASH. All persons parking in the parking garage or parking areas shall
refrain from throwing trash, ashtray contents, or other debris on the garage
floor or parking areas.
4. FLAT TIRES. All vehicle owners and all persons parking in the parking
garage or parking areas shall be responsible for promptly repairing flat tires
or other conditions of the vehicle which cause unsightliness in the reasonable
judgment of Lessor.
5. REMOVAL OF UNAUTHORIZED VEHICLES. If vehicles are blocking driveways or
passageways or parked in violation of these rules and regulations or state
statutes, Lessor may exercise vehicle removal remedies under Article 6701g-1 and
6701g-2 upon compliance with statutory notice.
6. SECURITY. Lessor shall use reasonable diligence in the maintenance of
existing lighting in the parking garage or parking areas. Lessor shall have no
duty for additional lighting or further security measures in the parking areas.
7. PARKING OF EMPLOYEE VEHICLES. Lessor may from time to time designate
specific areas in which vehicles owned by Lessee and Lessee's employees,
sublessees, assignees, licensees, and concessionaires shall be parked. Lessee
shall use best efforts to see that such vehicles are parked in such areas. Upon
request by Lessor, Lessee shall furnish Lessor a complete list of license
numbers of all vehicles operated by Lessee and the above listed persons. Lessor
may charge reasonable parking fees for such vehicles not parked in the
designated areas.
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8. PARKING OF TRUCKS AND DELIVERY VEHICLES. Without Lessor's prior written
approval, no trailers or large trucks may be parked in the parking areas except
for temporary loading or unloading. Service and delivery vehicles may be parked
in loading zones only when necessary.
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EXHIBIT F-2
OFFICE BUILDING RULES
(See paragraphs 9.2 and 23.1 of Lease)
It is the desire of Lessor to maintain in the building the highest standard of
dignity and good taste consistent with comfort and convenience for all tenants.
Any action or condition not meeting this high standard should be reported
directly to the building manager. Cooperation by all tenants will be sincerely
appreciated. The following rules and regulations apply to all tenants in the
building and their agents, employees, family, licensees, invitees, visitors, and
contractors unless otherwise stated. Pursuant to paragraph 23.1 of the lease,
Lessor reserves the right to rescind these rules, make reasonable modification
thereto, and make other reasonable rules and regulations for the safety, care,
and cleanliness of the building and for the preservation of good order.
1. DELIVERIES AND MOVEMENT OF FURNITURE. Movement into or out of the building
of furniture, equipment shall be restricted to hours, stairways, and elevators
designated by Lessor. Unless Lessor notifies Lessee otherwise, only the freight
elevator may be used for such purposes, and such elevator may be used only
during regular business hours without prior approval of Lessor. All such
movement and delivery shall be under the supervision of the building manager and
carried out in a manner agreed between Lessee and the building manager, by pre-
arrangement. Pre-arrangement shall include time, method, routing, and any
limitations imposed for reasons of safety or non disturbance of others. The
hold harmless and indemnification provisions of paragraph 12.2 shall apply to
the foregoing. Lessor may require that movement of furniture or equipment which
interferes with normal building traffic shall be made at hours other than normal
business hours.
2. OBSTRUCTION OF PASSAGEWAYS. None of the passageways, outside entries,
exterior doors, elevators, hallways, or stairways shall be locked or obstructed.
No rubbish, trash, litter, or materials of any nature may be emptied or thrown
into these areas. These areas may be used only for ingress and egress.
3. DOORS AND DOOR LOCKS. When Lessee's corridor doors are not in use, Lessee
shall use its best efforts to keep them closed on all floors where Lessee is a
partial tenant on the floor. No additional locks shall be placed on any doors
in Lessee's office space without written consent of Lessor. Lessee shall not
change, alter, or replace locks provided by Lessor on doors in the building,
except with written permission of the building manager. All necessary keys
shall be furnished by Lessor, and Lessor shall be entitled to have a key for
every door in Lessee's office space.
Lessee shall surrender all keys upon termination of Lessee's right of occupancy;
and at such time, Lessee shall give Lessor the combination to all vaults or
combination locks remaining in Lessee's office space after surrender by Lessee.
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Lessee's office space after surrender by Lessee.
4. SAFES. Safes and other heavy articles shall be carried onto the leased
premises only at such times and in such manner as prescribed by Lessor. Lessor
shall have the right to specify weight limitations and positioning of safes or
other heavy articles. Any damage done to the building by installation,
presence, or removal of a safe or other article owned or controlled by Lessee on
the leased premises, shall be paid for by Lessee.
5. REMOVAL OF FURNITURE. Removal of furniture or equipment from Lessee's office
space shall require presentation of written authorization by an authorized
representative of Lessor. Security guards, watchmen, janitors, and other
building employees will have the right to challenge all persons leaving the
building with such items.
6. INSTALLATION AND REPAIR WORK. Lessee shall refer all contractors,
contractors' representatives, and installation technicians who render any
service on or to Lessee's office space, to the building manager for approval and
supervision before performance of any service. This provision shall apply to
all work performed in the building, including installation of telephones,
electrical lines, and other electrical devices where such installation affects
the floors, walls, woodwork, trim, windows, ceilings, mechanical equipment, or
any other part of the building. If Lessee desires telephone or other electronic
connections, Lessee shall notify Lessor; and Lessor shall then direct
installation servicemen as to where and how wires may be introduced. Without
such directions, no such installations shall be permitted.
7. HAZARDOUS MATERIALS. Lessee shall not place or install, on the leased
premises or any part of the building, any explosive, gasoline, kerosene, oil,
acids, caustics, or any other inflammable, explosive, or hazardous materials
without written consent of the building manager. Lessee shall not operate
electric space heaters, stoves, engines, or other equipment not typical of an
office building without written consent of the building manager.
8. ENTRY BY LESSOR. Lessor shall have the right to enter for the purposes set
forth in paragraph 9.1 of the lease at all times.
9. PLUMBING. Plumbing fixtures and appliances shall be used only for the
purposes for which they were constructed. No sweeping, rubbish, rags, or other
unsuitable materials may be thrown or placed in plumbing fixtures or appliances.
The cost of any stoppage or damage resulting from negligence or improper use of
these fixtures and appliances by Lessee or Lessee's agents, employees, family,
invitees, licensees, or visitors shall be paid for by the Lessee.
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10. WINDOWS. Lessee shall not allow windows within Lessee's office space to be
opened at any time, except in emergencies. Nothing shall be thrown out of the
windows of the building or down the stairwells or other passages. Lessor
reserves the right to cause any or all windows of the building to be locked,
sealed, closed, or otherwise made inoperable, or to install permanent or
temporary screens thereon, and to include the cost thereof with the operating
expenses of the building.
11. THEFT AND DAMAGES. Lessor shall not be responsible for lost or stolen
personal property, equipment, money, or jewelry from Lessee's office space or
from the public areas of the building, regardless of whether such loss occurs
when the area is locked against entry. Lessor will not be liable to Lessee, or
Lessee's employees, customers, or invitees for any damages or losses to persons
or property caused by other Lessees in the building or for damages or losses
caused by theft, burglary, assault, vandalism, or other crimes. Owner shall not
be liable for personal injury or loss of Lessee's property from fire, flood,
water leaks, rain, hail, ice, snow, smoke, lightning, wind, explosions, or
interruption of utilities unless such injury or damage is caused by negligence
of Lessor. Lessor strongly recommends that Lessee secure Lessee's own insurance
to protect against the above occurrences.
12. ANIMALS. No birds, fowl, or animals (except guide dogs for handicapped
persons) shall be brought into or kept in or about the building or common areas.
13. BICYCLES AND OTHER VEHICLES. No bicycles, motorcycles, or similar vehicles
shall be allowed in the building. No trailers or large trucks may be parked in
the building parking areas except for temporary loading or unloading.
14. RESIDENTIAL USE. No sleeping, cooking, clothes cleaning, or laundering is
permitted on the leased premises without written consent of Lessor.
15. INTOXICATION. Lessor reserves the right to exclude or expel from the
building any person who in the reasonable judgment of Lessor, is intoxicated or
under the influence of liquor or drugs, or who shall in any manner do any act in
violation of any rules of the building.
16. DISTURBANCES. Lessee shall not obstruct, disturb, or interfere with the
rights of other Lessees or occupants or in any way injure or annoy them. Lessee
shall not make any noises by any means which, in the reasonable judgment of
Lessor, are likely to disturb other Lessees or occupants of the building.
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17. COMPLIANCE WITH SAFETY AND SANITATION LAWS. Lessee shall comply with all
laws relating to fire, safety, and sanitation, and shall comply with any
requirements of Lessor's insurance company with respect to fire prevention,
safety standards, and sanitation.
18. CLEANING. Lessee shall not employ any person or persons without written
consent of Lessor, for the purpose of cleaning or maintaining of the leased
premises. Lessee shall cooperate with Lessor's employees, agents, and cleaning
personnel in keeping Lessee's premises neat and clean. Any special cleaning
requested by Lessee and performed by Lessor or Lessor's employees, agents, or
contractors shall be paid for by Lessee.
19. SOLICITING. Canvassing, soliciting, or peddling in the building is
prohibited without written permission of Lessor, and Lessee shall cooperate to
prevent same.
20. SIGNS. No signs, fixtures, or notices of any kind may be displayed except
by written consent of Lessor. All signs shall conform to the requirements of
paragraph 28.1 of the lease.
21. NOTICE OF PERSONAL INJURIES OR UTILITY OR MECHANICAL PROBLEMS. Lessee
shall give prompt notice to the building manager, to the best of Lessee's
knowledge, of any significant accidents involving injury to persons or property,
including plumbing, electrical, heating, air conditioning, stairwell, corridor,
and elevator problems and/or personal injury and property damage caused thereby.
22. REQUESTS BY LESSEE. Except in emergencies, requests by Lessee shall be
attended to only after written request by Lessee to the building management.
Lessor's employees are not allowed to perform or do anything outside their
regular duties unless pursuant to special orders from Lessor. Lessee may not
contract with Lessor's employees for the performance of paid or free services to
Lessee. If, at the request of Lessee, Lessor or Lessor's agents furnish
services, goods, labor, or material to Lessee which are not required to be
furnished by Lessor under this lease, Lessee shall pay for same upon delivery of
a written statement therefor to Lessee.
23. BUILDING ACCESS. Anyone who does not reasonably satisfy a building
security guard (if any) that he has a right to enter the building may be
excluded by the guard. Lessor shall not be liable for damages for any good
faith error with regard to admission or exclusion from the building of any
person. In case of fire, destruction, invasion, mob, riot, or other commotion,
Lessor reserves the right to prevent access to the building by closing the doors
or otherwise.
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24. REQUEST FOR EXTRA AIR CONDITIONING. Requests for heating or air
conditioning before or after the hours of operation stated in paragraph 7.1 of
the lease must be received at the management office at least 24 hours in
advance.
25. LEASE PROVISIONS REGARDING LESSEE'S CONDUCT. Lessee shall comply with all
the provisions of paragraph 9.2 regarding parking and paragraph 10.1 regarding
occupancy, nuisance, and hazards.
26. ELEVATORS. Lessor shall not be liable for damages from stoppage of
elevators for repair, service, or improvements. Nor shall Lessor be liable for
delays of any duration in connection with elevator repair, service, or
improvements.
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EXHIBIT G
THIS FORM IS NOT TO BE EXECUTED AT TIME OF LEASE EXECUTION.
---
ESTOPPEL CERTIFICATE
(See paragraph 30.1 of Lease)
The purpose of this certificate is to confirm the current status of matters
relating to the lease described below. It is for the benefit of the owner or
prospective purchaser or mortgagee of the building in which the leased premises
are located.
1. The undersigned is the Lessee under a lease between 360 Austin Building LP,
DBA: Austin Building, as Lessor, and MISSION CRITICAL SOFTWARE, INC., as
Lessee, dated JUNE 1, 1998 on leased premises locally known as the Austin
Building and located at 9009 Mountain Ridge Drive, in Austin, Texas. A copy of
the fully executed lease and any amendments or modifications thereto are
attached. There are no other modifications or amendments to the above described
lease. The dates of any amendments or modifications are: (put "none" if
inapplicable)__________________.
2. There are no unfulfilled written or verbal promises, representations, or
warranties by Lessor.
3. There are no subleases of the leased premises or any portions thereof.
4. The lease (together with any amendments or modifications referred to above)
is in good standing and in full force and effect. Lessor is not in default.
Lessee agrees to give notice of any Lessor default to any purchaser or lender
making written requests to Lessee for same.
5. Except for rents (if any) which may be due under the lease for the current
month, there are no rents or other charges which have been prepaid by the
undersigned Lessee to Lessor under the lease other than the following:
__________________________________
6. The amount of security deposit currently posted by Lessee with Lessor is
$______________________ in the form of ( ) cash or ( ) an irrevocable,
unconditional letter of credit issued by _____________________________ in favor
of Lessor which is still valid.
7. Lessee acknowledges that the space being leased consists of rentable
square feet according to the lease, that the improvements to be constructed by
Lessor have been satisfactorily completed, that the lease space has been
accepted by Lessee, that Lessee now occupies the lease space, and that the
commencement date for the lease term was ___________.
8. There are no rentals which are due and unpaid. Rentals are
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fully paid (if required by the lease) through the last day of the month in which
this estoppel certificate has been executed.
9. There are no known offsets or credits against rentals except as expressly
provided by the terms of the lease. There is no known right of rescission and
no known defense to Lessee's future obligations to pay the specified rentals at
the times and in accordance with the lease terms. Lessee has not received any
concession (rental or otherwise) or similar compensation not expressed in the
lease which is presently in effect.
10. Lessee has no options or rights of refusal regarding the leased premises or
additional rental space other than as set out in the lease.
11. Lessee has not: (a) made a general assignment for the benefit of creditors;
and (b) commenced any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution, or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization, or
relief of debtors; or (c) had any involuntary case, proceeding, or other action
commenced against it which seeks to have an order for relief entered against it,
as debtor, or seeks reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization, or relief of debtors; or (d) concealed,
removed, or permitted to be concealed or removed, any part of its property, with
intent to hinder, delay, or defraud its creditors or any of them, or made or
suffered a transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance, or similar law; or made any transfer of its
property to or for the benefit of a creditor at a time when other creditors
similarly situated have not been paid; or (e) had a trustee, receiver, custodian
or other similar official appointed for or take possession of all or any part of
its property or had any court take jurisdiction of any other of its property.
12. Lessee agrees to furnish Lessor with estoppel letters on this form within
10 days (stating the then-current facts) after written request by Lessor or
subsequent owners of the building.
13. Lessee acknowledges that, upon 10 days' prior written request of Lessor's
mortgagee at any time after foreclosure proceedings or a deed in lieu of
foreclosure, Lessee shall attorn to the mortgage or foreclosure purchaser by
recognizing such new owner as Lessor under the lease provided that such
purchaser shall recognize the rights of tenant under the lease as long as tenant
is not in default. The agreement of Lessee to attorn shall survive any
foreclosure sale or deed in lieu of foreclosure. Lessee shall, upon 10 days'
written notice from Lessor's mortgagee anytime before or after foreclosure sale,
execute, acknowledge, and deliver to Lessor's mortgagee all instruments and
certificates that in the reasonable judgment of Lessor's mortgagee may be
necessary or proper to confirm such attornment.
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14. Lessee acknowledges that this estoppel certificate and the statements
therein may be conclusively relied upon by Lessor and by any prospective
purchaser or lien holder of the leased premises.
15. The form of this estoppel certificate may vary, depending on lender or
purchaser requirements. It is agreed that this certificate may be modified to
conform to reasonable requests by lenders or purchasers.
16. This agreement shall be binding upon and shall inure to the benefit of the
Lessor, any present or future mortgagee, any prospective buyer or master Lessee
of the property, and their successors and assigns.
Dated this ________________ day of ___________________, 19____.
LESSEE:
MISSION CRITICAL SOFTWARE, INC.
______________________________
By:
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EXHIBIT H
DELETED
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EXHIBIT I
CERTIFICATE OF CORPORATE RESOLUTION
AUTHORIZING LEASE OR GUARANTY
(See paragraphs 37.1 and 39.1 of Lease)
The undersigned, as secretary of the corporation named below, certifies that at
a special meeting of the board of directors of the corporation, duly called and
held on the 13th day of April, 1998, at which a quorum of the directors were
present and acting throughout, the following resolutions were unanimously
adopted and are still in force and effect:
RESOLVED that the president or the vice president of the corporation shall be
authorized to execute a lease for office space on behalf of the corporation
and/or to guarantee performance of a lease for office space, described below:
Date of lease: JUNE 1, 1998
Lessor: 360 Austin Building LP,
DBA: Austin Building
Lessee: MISSION CRITICAL SOFTWARE, INC.
Guarantor: N/A
Building name: Austin Building
Suite No.: 250
Building address: 9009 Mountain Ridge Drive
City/County/State/Zip: Austin, Travis, Texas, 78759
Legal description of property: Lot 3, Mountain Ridge II,
Travis County, Texas.
RESOLVED FURTHER, that the president or vice president is authorized on behalf
of the Corporation to execute and deliver to the Lessor all instruments
reasonably necessary for the lease. Lessor is entitled to rely upon the above
resolutions until the board of directors of the corporation revokes or alters
same in written form, certified by the secretary of the corporation, and
delivers same, certified mail, return receipt requested, to the Lessor. The
corporation is duly organized and is in good standing under the laws of the
State of TEXAS. The undersigned further certifies that on the meeting date
referred to above, the names and respective titles of the officers of the
corporation were as follows:
WITNESS MY HAND this _________ day of ________________, 19_______
Mission Critical Software, Inc.
__________________________________
Typed name of corporation
/s/ Michael S. Bennett
__________________________________
Signature of secretary of corporation
Michael S. Bennett
__________________________________
Printed name of secretary
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EXHIBIT J
SPECIAL CONDITIONS
(See paragraph 37.2 of Lease)
The following special conditions shall apply to this lease and shall prevail on
any other provisions to the contrary.
FINANCIAL STATEMENTS. Prior to execution of this lease and thereafter from time
to time, Lessee shall, upon written request, furnish to Lessor a financial
statement of Lessee's condition in a reasonably satisfactory form. All
financial statements shall be originally signed and dated by Lessee or Lessee's
agent.
MANDATORY MEDIATION. Prior to the initiation or commencement of any legal
proceedings based upon, or any "self help" remedies for, any alleged breach of
this lease by either Lessee or Lessor which is disputed by the other party, both
Lessee and Lessor hereby agree to submit the dispute to mediation before a
mutually agreeable mediator generally in accordance with the provisions of
Chapter 154 of the Texas Civil Practice and Remedies Code. In the event that
the parties cannot agree upon a mediator, after a reasonable period of time, the
parties agree to request the appointment of a qualified mediator by the duly
qualified and acting Judge of the 126th District Court of Travis County, Texas.
Unless otherwise agreed by the parties, the mediation provided for hereunder
shall be conducted within thirty (30) days after the delivery by either Lessor
or Lessee to the other party by a written request or demand therefore.
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EXHIBIT K
DELETED
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EXHIBIT L-1
KVA, INC.
STANDARD COMMISSION AGREEMENT
This document will confirm the agreement between KVA, Inc. ("Agent") and 360
Austin Building LP ("LESSOR) that in the event a lease is consummated between
LESSOR and MISSION CRITICAL SOFTWARE, INC. ("LESSEE"), at the Austin Building
located at 9009 Mountain Ridge Drive, Austin, Texas, LESSOR shall pay to KVA,
Inc. in consideration for brokerage services rendered, a brokerage commission
calculated in accordance with the terms below:
1) Amount: LESSOR agrees to pay Agent a cash commission equal to four percent
(4%) of the monthly rental payable to LESSOR during the term of the lease,
including renewals, extensions and/or expansions for additional space. Agent
agrees to assist LESSOR in expansions and/or renewals where LESSOR deems
necessary.
2) Time of Payment: Commission shall be payable monthly in cash to agent
beginning the commencement of the term under the lease. All commissions due
under renewals, extensions, and/or expansions shall be due and payable
monthly in cash on the effective date of the renewal, extension and/or
expansion agreement.
3) Computation of Rental: Commission due Agent shall be based on the monthly
rental set forth in the lease between LESSOR and LESSEE including payments
made to LESSOR from LESSEE for parking charges set forth in the lease.
4) Assignment/Sale of Property: If LESSOR assigns, sells or otherwise transfers
the lease on property for which commissions are payable, LESSOR shall remain
liable for commissions due Agent as stated above unless LESSOR obtains a
written recordable agreement under which the assignee, purchaser or grantee
of the property agrees to assume payment to Agent for commissions stated
above on the same terms as provided in this schedule or balance of
commission due is paid at the time of transfer. Agent is to be named in the
lease as the Agent entitled to a commission and the obligation to pay and
the right to receive any commissions stated above shall inure to the benefit
of the respective heirs, successor and/or assigns of LESSOR or Broker.
If the above accurately sets forth the agreement between LESSOR and Agent,
sign and date below.
LESSOR: AGENT:
KVA, INC.
/s/ Glenn K. Jackson /s/ Elsie K. Jackson /s/ Kevin Kimball
___________________________ ___________________________
Signature Signature
Glenn K. Jackson
Elsie K. Jackson Kevin Kimball
___________________________ ____________________________
Printed Name Printed Name
4-16-98 4-16-98 4/14/98
___________________________ ____________________________
Date Date
Texas Broker #: 286962
(KVA, Inc.)
Federal Tax ID #: 74-2185396 (Incorporated)
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EXHIBIT 10.21
LEASE AGREEMENT
THIS LEASE AGREEMENT (the "Lease") is made and entered into as of April 8,
1999 by and between ENERGYCORP GROUP LC a Texas limited liability company
("Landlord"), whose address for purposes hereof is 2900 Wilcrest Drive, Suite
205, Houston, Texas 77042, and MISSION CRITICAL SOFTWARE, INC., a Delaware
corporation, as ("Tenant"), whose address for purposes hereof is 720 North Post
Oak Road, Suite 505, Houston, Texas 77024-3835 until the Commencement Date (as
defined below) and the address of the Premises (as defined below) thereafter.
WITNESSETH:
I.
1.1 LEASED PREMISES.
1.1.1 DEFINITION OF LEASED PREMISES. Subject to and upon the terms, provisions
and conditions hereinafter set forth, Landlord does hereby lease to Tenant and
Tenant does hereby lease from Landlord approximately 69,440 square feet of Net
Rentable Area (as defined below) consisting of the entire first (1st) and second
(2nd) floor of the building (the "Building"), located at 13939 Northwest
Freeway, Houston, Texas (the "Land"). The Building, together with the land, the
parking area within the Building, all other improvements situated on the Land or
directly benefitting the Building, and all additional facilities directly
benefitting the Building that may be constructed in subsequent years, shall
collectively be referred to herein as the "Project." The area leased in the
Building under this Lease is hereinafter called the "Leased Premises" and is
shown on the floor plan(s) set forth on Exhibit A and Exhibit A-1 attached
hereto and made a part hereof for all purposes.
1.1.2 NET RENTABLE AREA. "Net Rentable Area" refers to the square footage area
or areas within the Building which shall be determined in accordance with
current BOMA measurement standards.
1.1.3 USABLE AREA. "Usable Area" means the sum of (a) the square footage of
the areas within the Leased Premises measured from the inside surface of the
dominant portion of the permanent outer wall of the Building enclosing the
Leased Premises to the inside surface of the dominant portion of the opposite
permanent outer wall, or to the mid-point of the demising walls separating the
Leased Premises from (i) areas leased to or held for lease to other tenants,
(ii) Building Common Areas, (iii) Core Areas, (iv) Penetrations (as defined
below) and (v) Lobby and Corridor Areas, as the case may be; plus (b) in the
case of a floor leased to only one tenant, the Lobby and Corridor Areas. No
deductions from Usable Area shall be made for columns or projections necessary
to the Building.
1.1.4 PENETRATIONS. "Penetrations" means the square footage of the areas
within (and measured from the mid-point of the walls enclosing) the Building
stairs, fire towers, elevator shafts, flues, vents, stacks, pipe shafts,
vertical ducts and other vertical penetrations. Areas for the specific use of
Tenant and installed at the request of Tenant such as special stairs or
elevators are not included within the definition of Penetrations and, such areas
will be included in the relevant Useable Area.
1.1.5 BUILDING COMMON AREAS. "Building Common Areas" means the square footage
of the areas within (and measured from the mid-point of the walls enclosing) the
Building elevator machine rooms, main mechanical and electrical rooms, public
lobbies and other areas not leased or held for lease within the Building but
which are necessary or desirable for the proper utilization of the Building or
to provide customary services to the Building. The allocation to the Leased
Premises of the Building Common Areas shall be done by multiplying the Usable
Area by the Building Common Areas Factor (as defined below) for inclusion in the
calculation of Net Rentable Area of the Leased Premises. "Building Common Areas
Factor" means (i) in the case where the Leased Premises are located on a floor
leased to more than one tenant, or (ii) in the case where the Leased Premises
are located on a floor leased to only the Tenant (1.1.6, 1.1.7)
Tenant Initials /s/ SEO
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1.1.6 CORE AREAS. "Core Areas" means the square footage of the areas within
(and measured from the mid-point of the walls enclosing) rest rooms, mechanical
rooms, janitor closets, telephone and equipment rooms and other similar
facilities (other than the Lobby and Corridor Areas for the use of all tenants
on the floor on which the Leased Premises are located. In the case of a floor
leased to more than one tenant, the allocation to the Leased Premises of the
Core Areas on said floor shall be equal to the total Core Areas on said floor
multiplied by a fraction, the numerator of which is the Useable Area of the
Leased Premises located on said floor and the denominator of which is the
Useable Area of mid floor.
1.1.7 LOBBY AND CORRIDOR AREAS. "Lobby and Corridor Areas" means the square
footage of the areas within (and measured from the mid-point of the walls
enclosing) public corridors, elevator foyers and lobbies for the use of all
tenants on the floor on which the Leased Premises are located. In the case of a
floor leased to more than one tenant, the allocation to the Leased Premises of
the Lobby and Corridor Areas on said floor shall be equal to the total Lobby and
Corridor Areas on said floor multiplied by a fraction, the numerator which is
the Usable Area of the Premises located on said floor and the denominator of
which is the Usable Area of said floor. In the case of a floor leased to only
one tenant, Lobby and Corridor Areas shall be included in such tenant's Usable
Area.
1.1.8 AMOUNT OF NET RENTABLE AREA. Landlord and Tenant hereby agree that the
Net Rentable Area of the Leased Premises has been calculated on the basis of the
foregoing definitions to be 69,440 square feet, and that the total Net Rentable
Area in the Building is 69,440 square feet.
1.1.9 OBJECTIONS TO CALCULATION. Each party has the right to object to the
calculation of the Net Rentable Area of the Leased Premises, provided the
objecting party notifies the other party in writing within ten days after the
Commencement Date and states in such notice the Net Rentable Area within the
Leased Premises the objecting party reasonably believes exists and provides data
to support its assertion. Landlord and Tenant shall use their reasonable efforts
to resolve any differences regarding this matter within (30) days after the
Commencement Date. In the event of an objection to the calculation of the Net
Rentable Area of the Leased Premises, Landlord and Tenant shall select a
mutually acceptable Architect who will determine the Net Rentable Area of the
Leased Premises using current BOMA measurement standards.
1.1.10 REMOVAL OF CURRENT TENANT. Landlord shall use its best efforts to cause
the existing tenant occupying suite 195 of the Building to be relocated from the
Building as soon as possible. Notwithstanding the foregoing, Landlord shall
have the absolute obligation to cause such existing tenant to vacate the
Building prior to November 31, 1999.
1.2 TERM.
Subject to and upon the terms and conditions set forth herein, the term of this
Lease (the "Term") shall commence on the earlier of (a) the day after the date
that Landlord substantially completes the Initial Improvements (as such term is
defined in Section 5.3 hereof and in Exhibit "E" attached hereto) so that the
Leased Premises may be occupied by Tenant for their intended purposes, (b) the
date the Tenant first occupies the Leased Premises for their intended purpose
(the "Commencement Date") or (c), subject to extension by one (1) day for every
day of Landlord Delay (as defined in Exhibit E hereto), August 1, 1999, and
shall expire sixty-two (62) months after the Commencement Date. Promptly after
the Commencement Date, Landlord and Tenant shall execute a Certificate of Leased
Premises Acceptance and Commencement Date in substantially the form of Exhibit B
attached hereto and made a part hereof for all purposes.
1.3 USE.
1.3.1 USE. The Leased Premises shall be used and occupied only for general
business, design and/or sales offices and any other legally permitted uses
consistent with the character of comparable office buildings in the surrounding
area, and for no other purpose without Landlord's consent. Tenant shall occupy
the Leased Premises, conduct its business and control its officers, agents,
employees, invitees and visitors in such a manner as is lawful, reputable and
will not create a nuisance. Tenant shall not
-2-
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permit any operation which emits any odor or matter which intrudes into other
portions of the Building, or use any apparatus or machine which makes undue
noise or causes vibration in any portion of the Building or permit any conduct
or operation which unreasonably interferes with, unreasonably annoys or
unreasonably disturbs (a) any other tenant in such other tenant's normal
business operations or (b) Landlord in its management of the Building. Tenant
shall neither permit any waste on the Leased Premises nor allow the Leased
Premises to be used in any way which would, in the reasonable opinion of
Landlord, be extra hazardous on account of fire, in any way increase or render
void the fire insurance on the Building or tend to lower the quality or
character of the Project.
1.3.2 SIGNS.
During the Term, Tenant shall be entitled to exclusive monument identity in
front of the Building, subject to the exact location, design, size, coloring,
materials and lighting for such identification to be mutually agreed upon by
Landlord and Tenant. Tenant shall also be allowed to rename the Building to
"Mission Critical Software Building" or "MCS Building". Tenant shall have the
right, if Tenant so elects, to utilize the existing monument sign in front of
the Building (the "Existing Sign"). The modification of the Existing Sign or
the construction of a new monument sign shall be performed by Tenant, at
Tenant's sole cost and expense; provided, however, that Tenant shall be
permitted to use a portion of the Tenant Improvement Allowance (as such term is
defined in Section 5.3 hereof) to modify the Existing Sign or to construct a new
sign. If Tenant elects not to use the Existing Sign, Tenant shall have the
right, but not the obligation, to remove the Existing Sign at Tenant's sole cost
and expense. No other signs of any character, whether for another tenant or
otherwise, shall be permitted in front of or on the building during the Term.
If Tenant elects to rename the Building to "Mission Critical Software Building"
or "MCS Building" in which event Landlord shall so rename the Building /s/ SEO
/s/ AN. Nothing herein shall be deemed to preclude Landlord from installing next
to the front door of the Building a plaque identifying the Building as being
under the management of Landlord's manager.
1.3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Except as set forth below,
Tenant, at Tenant's sole cost and expense, shall comply with all laws,
ordinances, orders, rules and regulations of state, federal, municipal or other
agencies or bodies having jurisdiction over the use, condition, or occupancy of
the Leased Premises. Tenant will comply with the rules and regulations of the
Building adopted by Landlord which are set forth on Exhibit C attached hereto
and made a part hereof for all purposes. Landlord shall have the right at all
times to change and amend the rules and regulations in any reasonable manner as
may be deemed advisable for the safety, care, cleanliness, preservation of good
order, and operation or use of the Building or the Leased Premises. All
reasonable changes and amendments to the rules and regulations of the Building
will be sent by Landlord to Tenant in writing and shall thereafter be observed
by Tenant. Except as expressly set forth below, in no event shall Tenant be
required to make any capital improvements or other alterations or improvements
to the Building or the Project (other than the Leased Premises). Any additions
or improvements to the Building or the Project, including, without limitation,
the restrooms, required by any existing law, ordinance, order, rule or
regulation shall be performed by Landlord, prior to Tenant's occupancy of the
Leased Premises and at Landlord's sole cost and expense, unless such alteration
or improvement is necessitated as a result of a specific activity of Tenant in
the Leased Premises (and not as a result of occupancy in general or occupancy
for general office space).
1.3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and
authority to execute this Lease, and Tenant, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Leased Premises during the full Term of this
Lease as well as any extension or renewal thereof. Landlord shall not be
responsible for the negligent or wrongful acts or omissions of any other tenant
or third party that may interfere with Tenant's use and enjoyment of the Leased
Premises.
1.3.5 INSPECTION. Landlord or its authorized agents shall at any and all
reasonable times upon reasonable advance notice (except in the case of a bona
fide emergency or as required to supply janitorial services or any other
services provided by Landlord pursuant to this Lease, in which event no advance
notice shall be necessary) have the right to enter the Leased Premises to
inspect
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the same, to supply janitorial service or any other service to be provided by
Landlord, to show the Leased Premises to prospective purchasers, and to alter,
improve, or repair the Leased Premises or any other portion of the Building.
Landlord's authorized agents shall during Tenant's regular business hours (upon
reasonable advance notice) have the right to enter the Leased Premises to show
the Leased Premises to prospective tenants during the last six (6) months of the
Term, or any renewal thereof. Tenant hereby waives any claim for damages for
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or use of the Leased Premises, and any other loss occasioned thereby,
except to the extent such damage or injury is caused by the gross negligence or
willful misconduct of Landlord, Landlord's agents, employees or contractors or
any other person permitted by Landlord to enter the Leased Premises pursuant to
this Section 1.3.5. Landlord shall at all times have and retain a key with which
to unlock all of the doors in, upon, and about the Leased Premises. Tenant shall
not in any manner prevent Landlord from entering the Leased Premises. Landlord
shall have the right to use any and all means which Landlord may deem proper to
open any door in an emergency without liability therefor.
II.
2.1 RENTAL PAYMENTS.
2.1.1 PAYMENT. Commencing on the Commencement Date and continuing thereafter
throughout the Term, Tenant shall pay the Base Rental, as described in Section
2.2, plus Tenant's Additional Rental, as described in Section 2.3. (The Base
Rental, Tenant's Additional Rental and all other amounts payable to Landlord
hereunder are sometimes hereinafter collectively referred to as "Rent.") The
Base Rental shall be due and payable in sixty-two (62) installments on or before
the first (1st) business day of each calendar month during the Term, and Tenant
shall so pay the Base Rental to Landlord at Landlord's address (or such other
address as may be designated by Landlord from time to time) monthly in advance.
2.1.2 PRORATION. If the Commencement Date is other than the first day of a
calendar month or if this Lease terminates on other than the last day of a
calendar month, then the Rent for such month or months shall be prorated and the
installment or installments so prorated shall be paid in advance. The payment
for such prorated month shall be calculated by multiplying the Rent by a
fraction, the numerator of which shall be the number of days during said
commencement or termination month, as the case may be, and the denominator of
which shall be the number of days in said month.
2.1.3 NO OFFSET. Tenant shall pay all Rent that becomes payable by Tenant to
Landlord under this Lease at the times and in the manner provided in this Lease,
without demand, set-off or counterclaim.
2.1.4 RETURN CHECK POLICY: If Landlord receives a rent check from Tenant that
is NSF or Not Sufficient Funds or for any other reason dishonored on two (2)
separate occasions, Tenant shall make all subsequent payments to provide
Landlord with Cashiers Checks; if requested to do so in writing by Landlord.
2.2 BASE RENTAL.
2.2.1 DEFINITION. Throughout the Term, Tenant shall pay a base annual rental
equal to the product of (i) the Base Rate set forth below multiplied by (ii) the
Net Rentable Area of the Leased Premises, ("Base Rental").
2.2.2 BASE RATE. The "Base Rate" is as follows:
Rental Period/Base Rental:
Months 1-2 (35,343 sq.ft.) Free
Months 3-7 (35,343 sq.ft.) @ $14.50 per sq.ft. per annum ($42,706.13 per month)
Months 8-10 (47,343 sq.ft.) @ $14.50 per sq.ft. per annum ($57,206.13 per month)
Months 11-13 (59,343 sq.ft.) @ $14.50 per sq.ft. per annum ($71,706.13 per
month)
Months 14-24 (69,440 sq.ft.) @ $14.50 per sq.ft. per annum ($83,906.67 per
month)
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Months 25-36 (69,440 sq.ft.) @ $15.00 per sq.ft. per annum ($86,800.00 per
month)
Months 37-62 (69,440 sq.ft.) @ $15.25 per sq.ft. per annum ($88,246.67 per
month)
Additionally, Tenant shall pay a base rental rate of $2.00 per sq.ft. per annum
for the "Must Take" premises on the first (1st) floor of the Building in
accordance with the following schedule:
Months 1-7 : $5,833.00 per month
Months 8-10 : $3,833.00 per month
Months 11-13: $1,833.00 per month
2.3 TENANT'S ADDITIONAL RENTAL.
Landlord shall have the right to estimate in good faith and collect monthly in
advance from Tenant the escalations of Base Operating Expense Amount owed or to
be owed by Tenant, said monthly payments (the "Monthly Escalation Payments") to
be in such amounts as are estimated in good faith by Landlord in its sole
discretion. The Monthly Escalation Payments shall be due and payable at the
same time as the Base Rental is due and payable.
Landlord shall, within the period of one hundred twenty (120) days after the
close of each calendar year and after the termination of this Lease (Landlord
and Tenant agree that the provisions of this Section 2.3 shall survive the
termination of this Lease), for which Additional Rent may be due, give written
notice thereof to Tenant, which notice shall also contain or be accompanied by a
statement of the actual operating cost of Landlord's operation of the Project
during the preceding calendar year and by a computation of such Additional Rent.
Failure of Landlord to give Tenant said notice within such time period shall not
constitute a waiver of Landlord's right to collect said Additional Rent;
provided, however, that failure of Landlord to give Tenant said notice within
two hundred seventy (270) days after the close of the calendar year in question
shall constitute a waiver of Landlord's right to collect such Additional Rent.
When Landlord presents Tenant with the statements of amounts due from Tenant for
any escalation, Tenant shall pay Landlord within sixty (60) days the difference
between proportionate share of Tenant's such escalation and the amount of
Monthly Escalation Payments actually made by Tenant during the preceding
calendar year, attributable to said escalation; or Tenant shall receive a credit
therefor if Tenant's proportionate share is less than the amount of Monthly
Escalation Payments actually collected by Landlord during the preceding calendar
year, said credit to be applied to future Monthly Escalations Payments. If
Tenant is due a credit under the preceding sentence for the last year of the
Term, Landlord shall, within sixty (60) days after the amount of actual
Operating Expenses are known or readily ascertainable, deliver a sum of money
equal to such credit to Tenant in lieu of such credit.
Tenant's Additional Rental for each calendar year shall equal the product of the
Excess Operating Expense Amount (as defined below) for such year multiplied by
the Useable Area within the Leased Premises.
"Excess Operating Expense Amount" means an amount equal to (i) minus (ii),
where:
(i) equals the amount of Operating Expenses for the current year of operation
divided by the total Net Rentable Area in the Building; and
(ii) the amount of Operating Expenses for the for the first twelve (12) months
of the Term, grossed up to 100%, calculated as if the Building was fully
assessed at 100% occupancy and calculated in the same manner that Operating
Expenses will be calculated for subsequent years, shall be the Operating
Expenses for the base year. Any increase over the base year in Operating
Expenses between the first anniversary of the Commencement Date and January
1, 2001, shall be billed to Tenant for the period from the first
anniversary of the Commencement Date through December 31, 2000.
The Excess Operating Expense Amount, however, shall under no circumstance ever
be less than zero. All expense items will be calculated on a 100% gross-up
basis to the extent such items were similarly grossed-up and included during the
base year.
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Notwithstanding the foregoing, for purposes of determining the Operating
Expenses during the base year, Landlord's insurance costs, as described in
Article VI of this Lease, shall be determined using the twelve (12) month period
preceding the Commencement Date.
2.4 DEFINITION. Subject to Section 2.4.2 hereof, "Operating Expenses" means
all expenses, costs, and disbursements of every kind and nature relating to or
incurred or paid in connection with the ownership and operation of the Project,
computed on an accrual basis and determined in accordance with generally
accepted accounting principles consistently applied, including, but not limited
to, the following:
(i) wages and salaries of all persons engaged in the operation, maintenance,
or access control of the Project, including all taxes, insurance, and
benefits relating thereto; provided, however, that in the event that such
persons provide services to properties other than the Project, only a
reasonable pro rata portion of such expenses shall be included in the
calculation of Operating Expenses;
(ii) the cost of all supplies, tools, equipment, and materials used in the
operation and maintenance of the Project;
(iii) the cost of all utilities for the Project, including, but not limited to,
the cost of water and power for heating, lighting, air conditioning and
ventilating the Project;
(iv) the cost of all maintenance and service agreements for the Project and
the equipment therein, including but not limited to access control,
window cleaning, elevator maintenance, and janitorial service;
(v) the cost of repairs and general maintenance, excluding (a) repairs and
general maintenance paid by proceeds of insurance, by Tenant or by third
parties, and (b) alterations attributable solely to tenants of the
Project other than Tenant;
(vi) amortization (together with reasonable financing charges) of the cost of
capital investment items that are installed primarily for the purpose of
reducing Operating Expenses (but only if the reduction in Operating
Expenses actually realized for any lease year is greater than the cost of
the amortization for such lease year), promoting safety, complying with
governmental requirements, or maintaining the quality of the Project;
(vii) the cost of all insurance relating to the Project, including, but not
limited to, the cost of casualty, rental loss, and liability insurance
applicable to the Project and Landlord's personal property used in
connection therewith and the cost of deductibles paid on claims made by
Landlord;
(viii) all taxes, assessments and governmental charges, whether directly paid
by Landlord, whether federal, state, county or municipal and whether
imposed by taxing districts or authorities presently taxing the Project
or by others subsequently created or otherwise, and any other taxes and
assessments attributable to the Project or its operation, excluding,
however, federal and state taxes on income, death taxes, franchise taxes,
and any taxes imposed or measured on or by the income of Landlord from
the operation of the Project (excluding ad valorem taxes on the Project
determined by reference to Landlord's income from the Project) or imposed
in connection with any change of ownership of the Project; provided,
however, that if at any time during the Term, the present method of
taxation or assessment shall be so changed that the whole or any part of
the taxes, assessments, levies, impositions, or charges now levied,
assessed, or imposed on real estate and the improvements thereof shall be
changed and as a substitute therefor, or in lieu of or in addition
thereto, taxes, assessments, levies, impositions or charges shall be
levied, assessed or imposed wholly or partially as a capital levy or
otherwise on the rents received from the Project or the Rent reserved
herein or any part thereof, then such substitute or additional taxes,
assessments, levies, impositions, or charges, to the extent so levied,
assessed or imposed, shall be deemed to be included within the Operating
Expenses to the extent that such substitute or additional tax would be
payable if the Project were the only property of the Landlord subject to
such tax;
(ix) all landscape maintenance costs for the Project;
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(x) any lease payments made by Landlord for any equipment use in the operation
or maintenance of the Project, excluding, however, any part of such lease
payments that constitutes capital expenditures under generally accepted
principles, except as provided in clause (vi) of this Section 2.4.1; and
(xi) Landlord's (or Landlord's managing agent's) management fees amounting to
4% of the total base rental plus accrued escalation charges exclusive of
the management fee component, accounting and audit costs and attorneys'
fees applicable to the Project.
Notwithstanding anything to the contrary contained in this Lease, Operating
Expenses for any calendar year, excluding non-controllable expenses such as
taxes, insurances and utilities, or prior period refunds, shall not increase by
more than 6% over the Operating Expenses of the prior calendar year.
2.4.2 EXCLUSIONS. Notwithstanding the foregoing, Operating Expenses shall not
include the following:
(i) Except as permitted by Section 2.4.1(v), costs incurred by Landlord for
alterations, additions, and replacements which are considered capital
expenditures under generally accepted accounting principles, consistently
applied, except to the extent that they are incurred primarily to effect a
reduction in operating expenses of the Project and only to the extent of
actual or best estimated annual cost savings.
(ii) Depreciation and amortization, except that a reasonable amortization
charge, not to exceed the amount of actual or best estimated annual cost
savings, may be taken on account of capital expenditures incurred
primarily to effect a reduction in Operating Expenses.
(iii) All other costs of a capital nature, including, without limitation,
capital improvements, capital repairs, capital equipment and capital
tools, all in conformity with generally accepted accounting principles
consistently applied, except to the extent that they are incurred
primarily to effect a reduction in operating expenses of the Project and
only to the extent of such actual or best estimated annual cost savings.
(iv) Costs of correcting latent defects in the Project, the common areas
adjacent thereto and the parking area and other facilities used in
connection therewith, or the equipment used therein and the replacement of
defective equipment to the extent such costs are covered by warranties of
manufacturers, suppliers, or contractors, or are otherwise borne by
parties other than Landlord, except that conditions resulting from
ordinary wear and tear will not be deemed defects for the purpose of this
category.
(v) Costs of bringing the Project (excluding the Leased Premises), the common
areas adjacent thereto and the parking area and other facilities used in
connection therewith into compliance with building codes, laws, rules,
regulations, ordinances, or any other governmental rules or requirements,
including, without limitation, the Americans With Disabilities Act of 1990
and the Texas Architectural Barriers Act.
(vi) Costs of repairs or other work occasioned by fire, windstorm, or other
casualty of an insurable nature, whether or not Landlord carries such
insurance, and costs reimbursable to Landlord by governmental authorities
in eminent domain or condemnation proceedings.
(vii) Rental and other related expenses, if any, incurred in leasing air
conditioning systems, elevators, or other equipment ordinarily considered
to be of a capital nature, except equipment used in providing janitorial
services and which is not affixed to the Project and temporary leases
necessitated by unusual circumstances with a term of less than twenty (20)
days.
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(viii) Any other expenses or costs that, under generally accepted accounting
principles, consistently applied, would not be considered a normal maintenance
or operating expense of the Project including, without limitation, losses due to
uncollected rent or fees or reserves for bad debts.
(ix) Any expenses that are or should be separately metered or billed
directly to or separately paid by another lessee or other third party.
(x) Costs of preparation of space, including buildout, renovating, or
otherwise improving, changing, decorating, or redecorating space, for
new lessees, prospective lessees, or other occupants in the Project, or
vacant space in the Project except for routine, periodic repair, and
replacement not considered to be capital items under generally accepted
accounting principles, consistently applied.
(xi) Costs incurred in removing the property or improvements of former
lessees or other occupants of the Project.
(xii) Architectural fees, leasing commissions, attorneys' fees, costs and
disbursements, and other expenses incurred in connection with
negotiations or disputes with lessees, prospective lessees, or other
occupants of the Project and any such expenses incurred in connection
with this Lease.
(xiii) Specific costs incurred for third parties (including other lessees),
including without limitation, above the Project standard electrical
and/or janitorial services, and other services above the Project
standard.
(xiv) All utility costs for which Tenant directly contracts with local utility
companies; provided, however, that indirect contracts between Tenant and
local utility companies providing utilities currently provided by
Landlord shall require Landlord's prior written consent.
(xv) Costs incurred due to acts of Landlord causing an increase in the rate
of insurance on the Project or its contents.
(xvi) Costs, fines, interest penalties, attorneys' fees, and costs of
litigation incurred due to late payment of taxes (except for penalties
associated with Landlord's good faith contest of real estate taxes),
utility bills, ground rentals, or mortgage debt, and other such costs
incurred by Landlord's failure to make such payments when due.
(xvii) Penalties, fines, and other costs incurred due to violations or alleged
violations by Landlord, any other lessee, or any third party of any
laws, rules, regulations, codes, or ordinances.
(xviii) Costs incurred due to violations or alleged violations by Landlord, any
other lessee, or other occupant of the Project of the terms and
conditions of any lease or other rental arrangement covering space in
the Project.
(xix) Overhead and profit increments paid to subsidiaries or affiliates of
Landlord for services on or to the Project (or any portion thereof), to
the extent such overhead and profit increments exceed that which would
have been earned by or paid to an independent, third-party provider of
the same or similar services.
(xx) More than a pro-rata portion (determined on a square footage basis) of
any overhead, administrative, and general office expenses other than the
management fee specifically provided for above.
(xxi) More than a pro-rata portion (determined on a square footage basis) of
any overhead, administrative, and general office expenses for off-
premises managers or owners and any such
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expenses for services not specifically performed for the Project.
(xxii) More than a pro-rata portion (determined on a square footage basis) of
any wages, salaries, and other compensation of any kind or nature paid
to any executive employees above the grade of building manager, so long
as such items are included in the base year calculation.
(xxiii) Costs exceeding those obtainable for demonstrably competitive prices.
(xxiv) Costs incurred in the operation of any concession serving the Project,
including, without limitation, parking facilities.
(xxv) Compensation paid to clerks, attendants, and other persons in any
concessions operated by Landlord.
(xxvi) Ground rentals, payment of principal and interest on debt (and other
debt costs), amortization payments on any mortgage or mortgages
executed by Landlord covering the Project or the Land (or any portion
thereof) (except to the extent that any of the foregoing may include
payments or prepayments of insurance premiums or taxes that would be
included in operating expenses if paid directly by Landlord), rental
concessions, and negative cash flow guarantees.
(xxvii) Costs incurred in connection with the sale, refinancing, mortgaging, or
selling, or change of ownership of the Project or the Land, including,
without limitation, brokerage commissions, attorneys' and accountants'
fees, loan brokerage fees, closing costs, interest charges, and taxes.
(xxviii) State, local, federal, personal, and corporate income taxes measured
by the income of Lessor from all sources or from sources other than
rent alone; estate and inheritance taxes; franchise, succession and
transfer taxes.
(xxix) All costs incurred by Landlord in connection with any dispute relating
to the Landlord's title to or ownership of the Project or the Land.
(xxx) Advertising and promotional expenditures.
(xxxi) Costs and expenses for owning, leasing, and maintaining sculpture,
painting, and other works of art installed in and/or on the Project or
the Land.
(xxxii) Contributions to charitable organizations.
(xxxiii) Expenses and costs relating in any way whatsoever to the
identification, testing, monitoring and control, encapsulation,
removal, replacement, repair, or abatement of any hazardous materials
within the Project or the Land (which hazardous materials were not
introduced by Tenant or as a result of Tenant's occupancy of the Leased
Premises).
2.4.3 AUDIT. Provided Tenant is not in default under the terms of this Lease
(including, the payment by Tenant of Tenant's Additional Rental within the time
period specified in Section 2.3), Tenant, at its sole expense, shall have the
right once per calendar year to audit Landlord's books and records relating to
the Operating Expenses for the immediately preceding calendar year for the sole
purpose of determining whether Landlord's calculation of Operating Expenses and
Tenant's Additional Rental are correct. This audit must take place during
reasonable business hours at Landlord's office at the address stated above and
only after Tenant has given Landlord at least three (3) business days' prior
written notice of the date and time Tenant desires to commence such audit. If
Tenant elects to exercise this right, Tenant must do so within ninety (90) days
after the date Landlord delivers to Tenant the statements described in Section
2.3 or Tenant shall be deemed to
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have accepted the Operating Expenses as presented by Landlord. In the event that
such audit determines that Landlord's computations were erroneous, appropriate
cash adjustments shall be made by Landlord and Tenant within thirty (30) days
following the determination of such error or errors. In addition, in the event
such audit determines that Tenant was overcharged by more than ten percent
(10%), Landlord shall immediately upon demand reimburse Tenant for all
reasonable out-of-pocket expenses incurred by Tenant in connection with such
audit.
2.5 LATE PAYMENT CHARGES. All Rent owed by Tenant to Landlord under this
Lease shall bear interest from the date due until paid at the lesser of (i) two
percent (2%) above the base rate on corporate loans as published in the "Wall
Street Journal" as the prime rate or (ii) the maximum non-usurious contract rate
permitted by applicable law. Other remedies for nonpayment of Rent
notwithstanding, including interest due under this section 2.5; a monthly late
payment charge of 6% percent of the monthly rental amount will be assessed for
each month the rent is not received on the date stipulated in the lease.
2.6 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums
paid by Landlord for the Project is caused by Tenant's use of the Leased
Premises, or if Tenant vacates the Leased Premises and causes an increase in
such premiums, then Tenant shall pay as Additional Rent the amount of such
increase to Landlord.
2.7 SECURITY DEPOSIT
2.7.1 AMOUNT. Tenant shall pay to Landlord, during the thirty-seventh (37th)
month of the Term, a security deposit equal to the Base Rental for the last
month of the Term ($88,246.67). Upon the occurrence of any default by Tenant,
Landlord may, from time to time, without prejudice to any other remedy, use the
security deposit to the extent necessary to make good any arrears of Rent, or to
pay any sums owed to Landlord under this Lease, or any damage, injury, expense
or liability caused to Landlord by any Tenant default. The security deposit
shall not be considered an advance payment of Rent or a measure of Landlord's
damages in case of default by Tenant. Tenant shall not be entitled to receive
any interest on the security deposit, and Landlord may commingle the same with
other monies of Landlord. If Landlord shall ever use the security deposit to pay
the sums described above, and if this Lease has not terminated, Tenant shall
immediately deposit with Landlord an additional security deposit equal to the
amount so used. Tenant shall not assign or encumber the security deposit in any
manner, and Landlord shall not be bound by any such assignment or encumbrance.
2.7.2 RETURN. If Tenant shall fully and faithfully comply with all of the
terms, provisions, covenants and conditions of this Lease including the payment
of any damages, or any cost or expense to restore the Leased Premises pursuant
to Section 4.1.4, then the security deposit shall be returned to Tenant (without
regard to any assignment or encumbrance of the same) within thirty (30) days
after the later of (i) the expiration or termination of this Lease (provided
such termination is not the result of a default by Tenant), (ii) delivery of
possession of the Leased Premises to Landlord or (iii) payment of all sums due
to Landlord including sums due under Section 4.1.4. Upon sale or lease of the
Building, Landlord shall transfer the security deposit to the vendee or lessee,
notify Tenant in writing of such transfer, and Landlord shall be released by
Tenant upon said transfer from all liability for the return of such security
deposit; and Tenant agrees to look solely to the new landlord for the return of
the security deposit. It is agreed that the provisions hereof shall apply to
every transfer or assignment made of the security deposit to a new landlord.
2.8 HOLDING OVER. In the event that Tenant does not vacate the Leased
Premises upon the expiration or termination of this Lease, Tenant shall be a
tenant at will for the holdover period and terms and provisions of this Lease
shall be applicable during that period, except that Tenant shall pay Landlord as
Base Rental for the period of such holdover an amount equal to one and one-half
(1 1/2) times the Base Rental which would have been payable by Tenant had the
holdover period been a part of the original Term of this Lease. Upon the
expiration or termination of this Lease, Tenant agrees to vacate and deliver the
Leased Premises to Landlord upon Tenant's receipt of notice from Landlord
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to vacate. The Rent payable during the holdover period shall be payable to
Landlord on demand. No holding over by Tenant, whether with or without the
consent of Landlord, shall operate to extend the Term of this Lease.
2.9 PARKING. Landlord shall make available to Tenant, for the duration of the
Term, the entire parking area at the Project at no charge to Tenant. Tenant,
its employees and all persons using the drive and parking areas do so at their
own risk and Landlord shall not be responsible for, or in any way have any
obligation or liability for, any damage, loss, theft, or injury to any vehicle
or other equipment, any contents thereof, or any other personal property or for
the death or injury to any person while located in or entering or exiting any
portion of the drive and parking areas, except to the extent such damage, loss,
theft or injury is caused by the gross negligence or willful misconduct of
Landlord or Landlord's agents, employees or contractors.
III.
3.1 SERVICES.
3.1.1 BUILDING SERVICES. Landlord shall provide electricity for Tenant during
the Term of this Lease in an amount equal to 8 watts per square foot of Net
Rentable Area on an annualized basis. In addition to the Tenant Improvement
Allowance (as such term is defined in Section 5.3 hereof), Landlord agrees to
expend up to an additional $12,500.00 of the cost of bringing electrical service
to the Leased Premises up to 8 watts per square foot of Net Rentable Area. Any
cost in excess of such amount necessary to bring the electrical service to the
Leased Premises up to such standard shall be borne by Tenant. Tenant shall pay
all telephone charges. Landlord shall furnish Tenant hot and cold water at
those points of supply provided for general use of other tenants in the
Building, elevator service, central heating and air conditioning in season (at
times, and at temperatures set forth in Exhibit D attached hereto and made a
part hereof for all purposes). Landlord shall also provide routine maintenance,
painting, electric lighting service (including light bulb and ballast
replacement), window and Building Common Areas cleaning (with window cleaning to
occur at least once every six (6) months), the maintenance of existing card key
access system and security patrol in accordance with the following paragraph.
During the Term, Landlord shall provide patrol procedures which shall in no
event be less than the procedures currently employed by Landlord for the
Building and/or the Project.
In addition, Tenant shall have the right to install, at Tenant's sole cost
and expense, a card-key access system regulating entry into the Leased Premises,
which shall be connected with Landlord's card-key system into the Building for
all public areas and special service areas of the Building in the manner and to
the extent standard for comparable office buildings in the surrounding area.
Landlord may, in its sole discretion, provide additional services not enumerated
herein. Failure by Landlord to any extent to provide these defined services or
any other services not enumerated, or any cessation thereof, shall not render
eviction of Tenant, work an abatement of Rent or relieve Tenant from fulfillment
of any covenant in this Lease. Should any of the equipment or machinery break
down, or for any cause cease to function properly, Landlord shall use its best
efforts to repair the same and cause a resumption of such services as quickly as
reasonably possible. In the event there is interruption of HVAC, electricity,
water or elevator service which has a material adverse effect on Tenant's use
and enjoyment of the Leased Premises and such interruption continues for a
period of four (4) consecutive business days after Landlord receives written
notice of such interruption, all Base Rental, Additional Rental and other sums
payable by Tenant to Landlord hereunder shall abate in full until such time as
such services are fully resumed. In addition, in the event such interruption
continues for a period of thirty (30) consecutive days, Tenant shall have the
right, but not the obligation, to terminate this Lease upon written notice to
Landlord delivered at any time prior to the full resumption of such services.
If Tenant terminates this Lease pursuant to the preceding sentence, Tenant shall
be entitled to occupy the Leased Premises for a period of twenty (20) days
thereafter to
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allow for the acquisition by Tenant of alternate space and the relocation of
Tenant's property to such space, without the payment of Base Rent, Additional
Rental or any other sums.
3.1.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts of anyone,
including, without limitation, other tenants, or entry by unauthorized persons
into the Leased Premises or the Building except to the extent such loss or
injury is caused by the gross negligence or willful misconduct of Landlord or
its agents, employees or contractors.
3.1.3 JANITORIAL SERVICE. Landlord shall furnish janitorial services to the
Leased Premises and public areas of the Building five times per week during the
term of this Lease, excluding Holidays ( as defined on Exhibit D). Landlord
shall not provide janitorial service to kitchens or storage areas included in
the Leased Premises.
3.1.4 EXCESSIVE UTILITY CONSUMPTION. Landlord covenants and agrees that the
Leased Premises shall be provided with a net electrical capacity of eight (8)
watts on a connected load basis per square foot of Net Rentable Area in the
Leased Premises ("8 Watts CLB") provided at the mechanical closet on each floor
of the Building. Further, notwithstanding anything contained herein to the
contrary, it is expressly understood and agreed that Landlord shall provide in
accordance with Section 3.1.1 hereof, and not otherwise drawn from the Tenant
Improvement Allowance, all of the necessary risers, panels, transformers and
distribution systems to provide such 8 Watts CLB to the mechanical closet on
each floor of the Building. Tenant's use of electric energy in the Leased
Premises shall not at any time exceed such capacity. Should Tenant's use of
electricity exceeds 8 Watts CLB, all additional risers or other equipment
required therefor shall be provided by Landlord and the cost thereof shall be
paid by Tenant to Landlord within thirty (30) days after written demand therefor
by Landlord as Additional facilities in the Leased Premises, except to the
extent such facilities are identified in the Construction Documents for the
Initial Improvements (as such term is defined in Section 5.3 hereof).
3.1.5 WINDOW COVERING. Landlord has furnished and installed window coverings
on all exterior windows to maintain a uniform exterior appearance. Tenant shall
not remove or replace these window coverings or install any other window
covering which would affect the exterior appearance of the Building. Tenant may
install lined or unlined draperies on the interior sides of the Landlord
furnished window coverings for interior appearance or to reduce light
transmission, provided such over draperies do not affect the exterior appearance
of the Building, or affect the operation of the Building's heating, ventilating
and air-conditioning systems.
3.1.6 CHARGE FOR SERVICE. Subject to Section 2.4.2, all costs of Landlord for
providing the services set forth in Section 3.1 (except those charges paid by
Tenant pursuant to Section 3.1.4) shall be subject to the Tenant's Additional
Rental provisions in Section 2.3.
3.2 KEYS AND LOCKS.
Landlord shall initially furnish Tenant with 2 keys per door for the Building
standard corridor doors serving the Leased Premises, as well as 250 access
cards. Additional keys and/or access cards will be furnished by Landlord upon
Tenant's request at a cost of $2.00 per key or $15.00 per access card. No
additional locks shall be allowed on any door of the Leased Premises without
Landlord's prior written consent, and Tenant shall not, without Landlord's prior
written consent, make or permit to be made any duplicate keys, except those
furnished by Landlord. Upon termination of this Lease, Tenant shall surrender to
Landlord all keys to any locks on doors entering or within the Leased Premises,
and shall give to Landlord the explanation of the combination of all locks for
safes, safe cabinets, and vault doors, if any, in the Leased Premises. Landlord
and Tenant shall consult from time to time with regard to the services provided
by the company or companies providing monitoring services in connection with the
security system at the Project. If Landlord and Tenant determine that the
monitoring company is not performing adequately, Landlord shall select and
retain a new company to replace the unsatisfactory monitoring company.
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3.3 GRAPHICS AND BUILDING DIRECTORY.
Landlord shall initially provide and install all signage, letters or numerals at
the entrance to the Leased Premises and a strip or strips for the existing
Building directory board containing a listing of Tenant's name on the Building
directory board to be placed in the main lobby of the Building. Additional
graphics will be furnished by Landlord upon an order signed by Tenant and at
Tenant's expense.
All such letters and numerals shall be in the Building standard graphics.
Landlord shall not be liable for any inconvenience or damage occurring as a
result of any error or omission in any directory or graphics. No signs,
numerals, letters or other graphics shall be used or permitted on the exterior
of, or which may be visible from outside, the Leased Premises, unless approved
in writing by Landlord.
IV.
4.1 REPAIRS AND MAINTENANCE.
4.1.1 LANDLORD REPAIRS. Landlord shall not be required to make any
improvements, replacements or repairs of any kind or character to the Leased
Premises or the Project during the Term of this Lease except as are set forth in
this section. Landlord shall maintain only the roof, foundation, parking, and
common areas, and the structural soundness of the exterior walls, in addition to
doors, corridors, windows, and other structures or equipment serving the
Building Common Areas in a manner consistent with comparable office buildings in
the surrounding area.
Subject to Section 2.4.2, Landlord's cost of maintaining and repairing the items
set forth in this section are subject to the Tenant's Additional Rental
provisions in Section 2.3. Landlord shall not be liable to Tenant, except as
expressly provided in this Lease, for any damage or inconvenience, and Tenant
shall not be entitled to any abatement or reduction of Rent by reason of any
repairs, alterations, or additions made by Landlord under this Lease except to
the extent such damage is caused by the gross negligence or willful misconduct
of Landlord or its agents, employees or contractors.
4.1.2 TENANT REPAIRS. Tenant shall, at Tenant's own cost and expense, repair
or replace any damage or injury to all or any part of the Leased Premises caused
by any act or omission of Tenant or Tenant's officers, agents, employees,
invitees, licensees or visitors; provided, however, if Tenant fails to make the
repairs or replacements within fifteen (15) days after written notice from
Landlord, Landlord may, at its option, make the repairs or replacements, and the
costs of such repairs or replacements shall be charged to Tenant as Additional
Rent and shall become payable by Tenant with the payment of the Rent next due
hereunder. Notwithstanding anything to the contrary contained in this
paragraph, the provisions of this Section 4.1.2 shall not apply to damage or
destruction by fire or other casualty, and the repair of the Premises in those
instances shall be controlled by Article 6 of this Lease.
4.1.3 REQUEST FOR REPAIRS. All requests for repairs or maintenance that are
the responsibility of Landlord pursuant to any provision of this Lease must be
made in writing to Landlord at the Landlord's address heretofore mentioned in
this Lease.
4.1.4 TENANT DAMAGES. Tenant shall not allow any damage to be committed on any
portion of the Project, and at the expiration or termination of this Lease, by
lapse of time or otherwise, Tenant shall deliver the Leased Premises to Landlord
in as good condition as existed at the Commencement Date of this Lease, normal
wear and tear, casualty loss and condemnation excepted. The cost and expense of
any repairs necessary to restore the condition of the Leased Premises to its
original condition less normal wear and tear, casualty loss and condemnation,
shall be borne by Tenant.
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V.
5.1 IMPROVEMENTS BY LANDLORD. If construction to the Leased Premises is to be
performed by Landlord prior to or during the Term, Landlord will complete the
construction of the Initial Improvements to the Leased Premises in accordance
with all applicable law and pursuant to plans and specifications agreed to by
Landlord and Tenant, which plans and specifications are made a part of this
Lease by reference.
Any changes or modifications to the approved plans and specifications shall be
made and accepted by written change order or agreement signed by Landlord and
Tenant and shall constitute an amendment to this Lease.
5.2 IMPROVEMENTS BY TENANT.
5.2.1 IMPROVEMENTS. Tenant shall not make or allow to be made any alterations
or physical additions in or to the Leased Premises without first obtaining the
written consent of Landlord. Any permanently attached alterations, physical
additions or improvements to the Leased Premises made by Tenant shall at once
become the property of Landlord and shall be surrendered to Landlord upon the
expiration or termination of this Lease; provided, however, Landlord, at its
option and, pursuant to written notice given to Tenant before the installation
of such improvements, may require Tenant to remove any physical additions and/or
repair any alterations in order to restore the Leased Premises to the condition
existing at the time Tenant took possession, all costs of removal and/or
alterations to be borne by Tenant. This clause shall not apply to moveable or
removable equipment or furniture owned by Tenant, which may be removed by Tenant
at the end of the Term if Tenant is not then in default.
With respect to the construction work (not related to the tenant improvement
work of Landlord) to be performed in the Leased Premises, Tenant shall be
allowed to undertake both "building standard" and "non-building standard"
leasehold improvements within the Leased Premises (except where the same relate
to base building structural and/or mechanical work) through outside contractors
of its own choosing, subject to Landlord's approval, and subject to Tenant
providing to Landlord the necessary proof of the insurances reasonably required
to be carried by such outside contractors, provided the entry and work on the
part of such outside contractors (i) shall be in harmony with Landlord's
contractors and their subcontractors and (ii) shall not unreasonably interfere
with or delay completion of the work to be performed by Landlord in the Leased
Premises or elsewhere in the Building.
Tenant shall indemnify and hold harmless Landlord, its agents, officers,
directors, employees, contractors, and any mortgagee of Landlord from and
against any and all losses, damages, costs (including costs of suit and
attorney's fees), liabilities or causes of action for injury to or death of any
person, for damage to any property, and for mechanic's, materialmen's or other
liens or claims arising out of or in connection with the work done by the
Tenant.
5.2.2 INSURANCE FOR CONSTRUCTION OF IMPROVEMENTS. Tenant shall procure and
maintain throughout the construction of the Improvements by Tenant a policy or
policies of builder's risk insurance, at its sole cost and expense, covering the
entire Building and insuring both Landlord and Tenant against all claims,
demands or actions arising out of or in connection with Tenant's construction of
the Improvements, with such limits and upon such terms and conditions as are
more fully described in Section 6.6.
5.3 TENANT IMPROVEMENTS. Landlord shall make available on July 1, 1999 certain
allowances (the "Tenant Improvements Allowance") for leasehold improvements,
plus space planning/interior architect and engineering costs (collectively, the
"Initial Improvements"), as per the following schedule:
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Initial: 35,000 RSF at $11.50 per RSF
Expansion: 12,000 RSF at $10.15 per RSF
12,000 RSF at $ 9.58 per RSF
10,440 RSF at $ 9.01 per RSF
The Tenant Improvements Allowance shall be applied directly against the costs of
the work, outlined hereinabove, to be undertaken by Landlord and/or Landlord's
contractors/vendors on Tenant's behalf. All construction work shall be bid
competitively with Landlord having the right to submit two or more reputable
contractors to be included in the bid process. Landlord shall manage the
initial construction at no charge to Tenant. Landlord shall not be obligated to
take the low bidder; however, Tenant will be involved in the selection of
contractors for the tenant improvements to be completed within the Leased
Premises. Tenant may submit up to two contractors to be included in the bid
process. The Initial Improvements shall be performed in accordance with the
Work Letter set forth on Exhibit E attached hereto and made a part hereof for
all purposes.
With respect to the construction work to be performed in the Leased Premises
(other than the Initial Improvements), Tenant shall have the right to undertake
both "building standard" and "non-building standard" leasehold improvements in
the Leased Premises (except where the same relate to base building structural)
through outside contractors of its own choosing, subject to Landlord's approval,
provided the entry and work on the part of such outside contractors (a) shall be
in harmony with Landlord's contractors and their subcontractors, and (b) shall
not unreasonably interfere with or delay completion of the work to be performed
by Landlord in the Leased Premises or elsewhere in the Building.
Landlord shall manage the construction of the Initial Improvements at no charge
to Tenant.
5.4 TAXES. Tenant shall be responsible for ad valorem taxes on its personal
property and on the value of the leasehold improvements in the Leased Premises
to the extent that the same exceed Building standard allowances (and if the
taxing authorities do not separately assess Tenant's leasehold improvements,
Landlord may make a reasonable allocation of the ad valorem taxes assessed on
the Project to give effect to this Section 5.4).
VI.
6.1 SUBSTANTIAL DESTRUCTION. If the Leased Premises or any other portion of
the Project, the loss of which would have a material adverse effect on Tenant's
use and enjoyment of the Leased Premises, should be totally destroyed by fire or
other casualty, or if the Leased Premises should be damaged so that rebuilding
cannot reasonably be completed within one hundred eighty (180) working days
after the date of the destruction, this Lease shall terminate and the Rent shall
be abated for the unexpired portion of the Lease, effective as of the date of
the written notification.
Neither Landlord nor any mortgagee shall be liable or responsible to Tenant, its
agents, contractors, customers, employees, invitees, licensees, servants or
visitors for any loss or damage to any property or person occasioned by theft,
fire, act of God, public enemy, injunction, riot, strike, insurrection, war,
court order, requisition or order of governmental body or authority, or any
cause beyond Landlord's control, or for any damage or inconvenience which may
arise through repair or alteration of any part of the Project.
6.2 PARTIAL DESTRUCTION. If the Leased Premises or any other portion of the
Project, the loss of which would have a material adverse effect on Tenant's use
and enjoyment of the Leased Premises, should be partially damaged by fire or
other casualty, and rebuilding or repairs can reasonably be completed within one
hundred eighty (180) working days from the date of written notification by
Tenant to Landlord of the destruction, this Lease shall not terminate, and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the
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Leased Premises and/or any other portion of the Project that is material to
Tenant's use and enjoyment of the Leased Premises are to be rebuilt or repaired
and are unfit for use by Tenant for the operation of Tenant's business in whole
or in part following the damage, the Rent (including Base Rental, Additional
Rent and all other sums payable by Tenant to Landlord pursuant to this Lease)
payable under this Lease during the period for which the Leased Premises are
untenantable shall be adjusted to such an extent as may be fair and reasonable
under the circumstances. In the event that Landlord fails to complete the
necessary repairs or rebuilding within one hundred eighty (180) working days
from the date of written notification by Tenant to Landlord of the destruction,
Tenant may at its option terminate this Lease by delivering written notice of
termination to Landlord, whereupon all rights and obligations under this Lease
shall cease to exist.
6.3 INTENTIONALLY DELETED.
6.4 PROPERTY INSURANCE. Landlord shall at all times during the Term of this
Lease maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon some solvent insurance company having a
Best's rating of at least A, authorized to do business in Texas insuring the
Building, and all Building standard leasehold improvements against all risk of
direct physical loss in an amount equal to at least ninety percent of the full
replacement cost of the Building structure and its improvements as of the date
of the loss; provided, Landlord shall not be obligated in any way or manner to
insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Tenant upon or within the Leased Premises, any
fixtures installed or paid for by Tenant upon or within the Leased Premises, or
any improvements which Tenant may construct on the Leased Premises. Tenant
shall have no right in or claim to the proceeds of any policy of insurance
maintained by Landlord even though the cost of such insurance is borne by Tenant
as set forth in Section 2.4.1 (vii).
6.5 LIABILITY INSURANCE. Landlord (with respect to the Building) and Tenant
(with respect to the Leased Premises), shall each, at their respective expense,
maintain a policy or policies of commercial general liability insurance with the
premiums thereon fully paid on or before the due dates, issued by and binding
upon a solvent insurance company having a Best's rating of at least A,
authorized to do business in Texas, and providing that no endorsements,
reductions of coverage, cancellations or other modifications shall be made,
regarding coverage required under the terms of this Lease, without
contemporaneous notice of such change being given to Landlord.
Such insurance shall afford minimum protection (which may be affected by primary
and excess coverage) of not less than One Million Dollars ($1,000,000.00)
combined single limited, bodily injury or property damage in any one occurrence,
provided Tenant shall carry such greater limits of coverage as Landlord may
reasonably request on from time to time; provided, however, that Tenant shall
never be required to carry insurance that exceeds the industry standard or that
is in excess of that which would be acceptable to a reasonable and prudent
landlord. Tenant shall regularly provide Landlord with a certificate of
insurance evidencing the coverage required under this Lease.
6.6 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Leased Premises, improvements to the Building of which the
Leased Premises are a part, or personal property within the Building, by reason
of fire or the elements which is either covered by insurance carried by the
party suffering such loss or would have been covered had the party suffering
such loss carried the insurance required to be carried by it pursuant to this
Lease, regardless of cause or origin, including negligence of Landlord, Tenant
and their respective agents, officers and employees. IT IS THE EXPRESS
INTENTION OF LANDLORD AND TENANT THAT THE WAIVER CONTAINED IN THIS PARAGRAPH
APPLY TO ALL MATTERS DESCRIBED IN THIS LEASE, INCLUDING, WITHOUT LIMITATION, ANY
OF THE SAME THAT ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE
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OF LANDLORD, TENANT OR THEIR RESPECTIVE AGENTS, OFFICERS, EMPLOYEES OR
CONTRACTORS.
Landlord and Tenant agree immediately to give their respective insurance
companies which have issued policies of insurance covering all risk of direct
physical loss, written notice of the terms of the mutual waivers contained in
this section, and to have insurance policies properly endorsed, if necessary, to
prevent the invalidation of the insurance coverage's by reason of the mutual
waivers.
6.7 HOLD HARMLESS. Subject to the provisions of Section 6.6 hereof, Tenant
agrees to indemnify, defend and hold Landlord harmless from and against any and
all loss, cost, damage, claim, cause of action, expense (including, without
limitation, reasonable attorneys' fees, accountants' fees, consultants' fees,
court costs and interest) and liability to the extent caused by the negligence
or willful misconduct of Tenant or its agents, employees or contractors.
Subject to the provisions of Section 6.6 hereof, Landlord agrees to indemnify,
defend and hold Tenant harmless from and against any and all loss, cost, damage,
claim, cause of action, expense (including, without limitation, reasonable
attorneys' fees, accountants' fees, consultants' fees, court costs and interest)
and liability to the extent caused by the negligence or willful misconduct of
Landlord or its agents, employees or contractors.
6.8 TENANT'S INSURANCE. Tenant shall procure and maintain throughout the Term
of this Lease a policy of commercial general liability insurance, at its sole
cost and expense, insuring Tenant against all claims, demands or actions arising
out of or in connection with Tenant's use or occupancy of the premises, in
accordance with Paragraph 6.5 hereof, and to be written by insurance companies
qualified to do business in the state in which the premises are located, with a
general policyholder rating of at least A- and a financial rating of at least
VIII in the most current Best Insurance Report available at the time of
execution of this Lease. Landlord and Landlord's managing agent, if any and if
requested by Landlord in writing, shall be listed as an additional insured on
such insurance policy.
Tenant shall provide Landlord with a certificate of Tenant's insurance or a copy
thereof as required above. Upon written request by Landlord, changes in the
name of Landlord (or Landlord's managing agent) shall be reflected on such
certificate. Such duly executed certificate of insurance shall be promptly
delivered to Landlord on the date on which Tenant occupies the Leased Premises
or any portion thereof and renewal thereof as required shall be delivered to
Landlord at least seven (7) days prior to the expiration of the respective
policy terms. If Tenant fails to procure and provide to Landlord the
certificate of insurance within the period specified hereinabove, Landlord shall
have the option to procure the required insurances at the sole cost and expense
of Tenant and Tenant shall reimburse to Landlord the reasonable cost of such
insurances within thirty (30) days of the date of procurement thereof.
Nothing in this Section 6.8 is or shall be deemed to constitute a release or
waiver by Landlord of any claim(s) which Landlord might otherwise have against
Tenant arising from the negligent or wrongful acts or omissions of Tenant or any
officer, director, employee, agent, representative, contractor, invitee,
licensee, or visitor of Tenant, it being the sole and exclusive responsibility
of Tenant, hereby acknowledged, to secure sufficient insurance to safeguard
Tenant against any and all such claims.
VII.
7.1 SUBSTANTIAL TAKING. If all or a substantial part of the Leased Premises or
any other portion of the Project, the loss of which would have a material
adverse effect on Tenant's use and enjoyment of the Leased Premises, are taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
the taking would prevent or materially interfere with the use of the Leased
Premises or any other portion of the Project, the loss of which would have a
material adverse effect on Tenant's use and enjoyment of the Leased Premises,
for the purpose for which it is then being used, this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical
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possession is taken by the condemning authority. Tenant shall have no claim to
the condemnation award or proceeds in lieu thereof.
7.2 PARTIAL TAKING. If a portion of the Leased Premises or any other portion
of the Project, the loss of which would have a material adverse effect on
Tenant's use and enjoyment of the Leased Premises, shall be taken for any public
or quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain or by purchase in lieu thereof, and this Lease is not
terminated as provided in Section 7. 1 above, Landlord shall at Landlord's sole
risk and expense, restore and reconstruct the Building and other improvements on
the Leased Premises to the extent necessary to make it reasonably tenantable.
The rent payable under this Lease during the unexpired portion of the Term shall
be adjusted to such an extent as may be fair and reasonable under the
circumstances. Tenant shall have no claim to the condemnation award for the
Premises or the Project or proceeds in lieu thereof.
VIII.
8.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building. Any such sale, transfer or assignment to a bona fide third party
who assumes Landlord's obligations under this Lease in writing shall operate to
release Landlord from any and all liabilities under this Lease arising after the
date of such sale, assignment or transfer. No such transfer or assignment shall
relieve Landlord for any of its obligations or liabilities that accrue prior to
the date of such transfer or assignment.
8.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise or mortgage or pledge the same, or sublet the Leased Premises, in
whole or in part, without the prior written consent of Landlord.
During the Term, Tenant shall be allowed to sublease all or any portion of the
Leased Premises, or assign all of the Leased Premises, to any affiliate,
successor entity, or person by merger, consolidation, reorganization or
otherwise, or the sale to any entity or person of all or substantially all of
the assets of Tenant, whether or not there may be a change in Tenant's name.
During the Term, Landlord shall be entitled to fifty percent (50%) of the gross
profits, if any, from any subleasing of all or any portion of the Leased
Premises, or the assignment of all of the Leased Premises, as the case may be.
In no event shall any such assignment or sublease ever release Tenant or any
guarantor from any obligation or liability hereunder. No assignee or sublessee
of the Leased Premises or any portion thereof, as permitted by this paragraph
8.2, may assign or sublet the Leased Premises or any portion thereof
8.3 CONDITION OF ASSIGNMENT. If Tenant desires to assign or sublet all or any
part of the Leased Premises pursuant to a transaction that requires Landlord's
consent pursuant to Section 8.2 of this Lease, it shall so notify Landlord at
least thirty days in advance of the date on which Tenant desires to make such
assignment or sublease. Tenant shall provide Landlord with a copy of the
proposed assignment or sublease and such information as Landlord might
reasonably request concerning the proposed sublessee or assignee to allow
Landlord to make informed judgments as to the financial condition, reputation,
operations, and general desirability of the proposed sublessee or assignee.
Within fifteen days after Landlord's receipt of Tenant's proposed assignment or
sublease and all required information concerning the proposed sublessee or
assignee, Landlord shall have the following options: (1) consent to the
proposed assignment or sublease, and, if the Rent due and payable by any
assignee or sublessee under any such permitted assignment or sublease (or a
combination of the Rent payable under such assignment or sublease plus any bonus
or any other
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consideration or any payment incident thereto) exceeds the Rent payable under
this Lease for such space, Tenant shall pay to Landlord fifty percent (50%) of
such excess Rent and other excess consideration within ten days following
receipt thereof by Tenant; or (2) refuse, if it is reasonable to do so, to
consent to the proposed assignment or sublease, which refusal shall be deemed to
have been exercised unless Landlord gives Tenant written notice providing
otherwise. Upon the occurrence of an event of default, if all or any part of the
Leased Premises are then assigned or sublet, Landlord, in addition to any other
remedies provided by this Lease or provided by law, may, at its option, collect
directly from the assignee or sublessee all Rents becoming due to Tenant by
reason of the assignment or sublease. Any collection directly by Landlord from
the assignee or sublessee shall not be construed to constitute a novation or a
release of Tenant or any guarantor from the further performance of its
obligations under this Lease.
8.4 RIGHTS OF MORTGAGEE. Tenant accepts this Lease subject and subordinate to
any recorded mortgage or deed of trust lien presently existing or hereafter
created upon the Building or Project and to all existing recorded restrictions,
covenants, casements and agreements with respect to the Building or Project;
provided, however, that contemporaneously with the execution of this Lease
Landlord shall deliver to Tenant a Non-Disturbance Agreement from the holder or
holders of all such mortgages, and deeds of trust in substantially the form of
Exhibit F attached hereto and made a part hereof for all purposes (the "Non-
Disturbance Agreement"). Tenant agrees upon demand to execute additional
instruments subordinating this Lease as Landlord may reasonably require. If the
interest of Landlord under this Lease shall be transferred by reason of
foreclosure or other proceedings for enforcement of any first mortgage or deed
of trust on the Leased Premises, Tenant shall be bound to the transferee
(sometimes called the "Purchaser"), under the terms, covenants and conditions of
this Lease for the balance of the Term remaining, including any extensions or
renewals, with the same force and effect as if the Purchaser were Landlord under
this Lease, and, Tenant agrees to attorn to the Purchaser, including the first
mortgagee under any such mortgage if it be the Purchaser, as its Landlord.
8.5 ESTOPPEL CERTIFICATES. Tenant agrees to furnish, from time to time, within
ten business days after receipt of a request from Landlord or Landlord's
mortgagee, a statement certifying, if applicable and accurate, the following:
Tenant is in possession of the Leased Premises; the Leased Premises are
acceptable; the Lease is in full force and effect; the Lease is unmodified;
Tenant claims no present charge, lien or claim of offset against Rent; the Rent
is paid for the current month, but is not prepaid for more than one month and
will not be prepaid for more than one month in advance to Tenant's knowledge;
there is no existing default by reason of some act or omission by Landlord; and
such other matters as may be reasonably required by Landlord or Landlord's
mortgagee. Tenant's failure to deliver such statement within ten days after
receipt of the request, in addition to being a default under this Lease, shall
be deemed to establish conclusively that this Lease is in full force and effect
except as declared by Landlord, that Landlord is not in default of any of its
obligations under this Lease, and that Landlord has not received more than one
month's Rent in advance.
IX.
9.1 LANDLORD'S LIEN. Landlord irrevocably and unconditionally waives any and
all liens that would or might otherwise serve to secure the performance by
Tenant of its obligations under this Lease, including, without limitation, any
express liens, implied liens or contractual liens. Landlord agrees to promptly
execute any and all further documentation reasonably required by Tenant to
evidence the waiver contained in this paragraph.
X.
10.1 DEFAULT BY TENANT. The following shall be deemed to be events of default
by Tenant under this Lease: (1) Tenant shall fail to pay when due any
installments of Rent or any other payment
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required pursuant to this Lease, which failure continues for a period of five
(5) days after written notice from Landlord to Tenant specifying such failure in
reasonable detail (provided, however, that Landlord shall not be required to
provide such notice more than twice during any calendar year); (2) Tenant shall
abandon all or any substantial portion of the Leased Premises while in default
in the payment of Rent; (3) Tenant shall fail to comply with any term, provision
or covenant of this Lease, other than the payment of Rent, and the failure is
not cured within ten (10) days following written notice from Landlord to Tenant
specifying such failure in reasonable detail and Tenant has not initiated and
diligently pursued all reasonable measures to cure such default; provided,
however, that such period of time shall be extended by whatever period of time
is reasonably necessary to cure such default so long as Tenant commences efforts
to cure such default within such ten (10) day period and thereafter exercises
diligent and continuous efforts to prosecute such cure to completion; (4) Tenant
shall file a petition or be adjudged bankrupt or insolvent under any applicable
federal or state bankruptcy or insolvency law which proceeding is not dismissed
or set aside within sixty (60) days after its commencement; or a receiver or
trustee shall be appointed for all or substantially all of the assets of Tenant
which proceeding is not dismissed or set aside within sixty (60) days after its
commencement; or Tenant shall make a transfer in fraud of creditors or shall
make an assignment for the benefit of creditors; or (5) Tenant shall do or
permit to be done any act which results in a lien being filed against the Leased
Premises or the Building and/or Project of which the Leased Premises are a part,
by, through or under Tenant and which lien is not released, bonded around, or
otherwise secured in a manner reasonably acceptable to Landlord within thirty
(30) days after written notice from Landlord to Tenant specifying such lien in
reasonable detail; provided, however, that such period of time shall be extended
by whatever period of time is reasonably necessary to cause such lien to be
released, bonded around or otherwise secured to the reasonable satisfaction of
Landlord, so long and only so long as Tenant is paying all Rent and Additional
Rent when due and is in compliance with all of Tenant's other obligations under
this Lease and neither the building nor the Project is in risk of execution or
foreclosure and Tenant commences such efforts within such thirty (30) day period
and thereafter exercises diligent and continuous efforts to pursue such matter
to conclusion.
10.2 REMEDIES UPON TENANT'S DEFAULT. Upon the occurrence of any event of
default set forth in this Lease, Landlord may, at Landlord's option and in
addition to all other rights, remedies and recourses afforded Landlord hereunder
or by law or equity, do any one or more of the following:
(A) Terminate this Lease by giving written notice to Tenant, in which event
Tenant shall (i) immediately surrender the Leased Premises to Landlord, and
if Tenant fails to do so, Landlord may, without prejudice to any other
remedy which it may have for such default, enter upon and take possession
of the Leased Premises and lock out Tenant and any other person who may be
occupying the Leased Premises or any part thereof, without being liable for
prosecution or any claim of damages therefor; and (ii) pay to Landlord the
sum of (a) all Rent and other amounts accrued hereunder to the date of
termination; (b) all other amounts due to Landlord under the terms of the
Lease; and (c) liquidated damages in an amount equal to (x) the total Rent
that Tenant would have been required to pay for the remainder of the Term
discounted to present value at the rate of 6% per ANNUM MINUS (y) the then
present fair rental value of the Leased Premises for such period, similarly
discounted. For the purpose of clause (A)(ii)(c)(y), "fair rental value"
shall not exceed 100% of the amount determined under clause (A)(ii)(c)(x).
(B) Terminate Tenant's right to possession of the Leased Premises, without
terminating the lease, by entering upon and taking possession of the Leased
Premises and locking out Tenant and any other person who may be occupying
the Leased Premises or any part thereof, without being liable for
prosecution or any claim of damages therefor, in which event Tenant shall
pay to Landlord (i) all Rent and other amounts accrued hereunder to the
date of termination of possession, and (ii) all Rent and other sums
required hereunder to be paid by Tenant during the remainder of the Term,
diminished by any net sums thereafter received by Landlord through
reletting the Leased Premises during said period. At Landlord's option,
the amount described in (ii) shall be paid by Tenant in monthly
installments on the first day of each month of the remainder of the Term.
Reentry by Landlord in the Leased Premises will not affect the obligations
of Tenant hereunder for the unexpired portion of the Term. Landlord may
bring action against Tenant to collect amounts due by Tenant on one or more
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occasions, without the necessity of Landlord's waiting until expiration of
the Term. If Landlord elects to proceed under this Section 10.2(B), it may
at any time elect to terminate this Lease pursuant to Section 10.2(A). To
the fullest extent permissible under present and future applicable law,
Tenant hereby releases Landlord from any duty to relet the Leased Premises.
Any reletting of the Leased Premises by Landlord shall be on such terms and
conditions as Landlord in its sole discretion may determine (including a
term different than the Term, rental concessions, alterations and repair of
the Leased Premises). Landlord shall not be liable, nor shall Tenant's
obligations hereunder be diminished because of, Landlord's failure to relet
the leased Premises, leasing of other portions of the Building prior to
reletting the Leased Premises, or failure to collect rent due in respect of
such reletting. Tenant shall not be entitled to any excess rents received
by Landlord.
(C) Without terminating this Lease, enter upon and take possession of the
Leased Premises and lock out or expel or remove Tenant and any other person
who may be occupying all or any part of the Leased Premises without being
liable for the prosecution or any claim for damage therefor, and do
whatever Tenant is obligated to do under the terms of this Lease; and
Tenant agrees (i) to reimburse Landlord on demand for any expense which
Landlord incurs as a result of such entry and repossession, and (ii) that
Landlord shall not be liable for any damages resulting to Tenant from such
action, whether caused by the negligence of Landlord or otherwise.
Pursuit by Landlord of any of the foregoing remedies shall not preclude pursuit
of any of the other remedies herein provided or any other remedies provided by
law, nor shall pursuit of any remedy herein provided constitute a forfeiture or
waiver of any Rent due to Landlord hereunder or of any damages accruing to
Landlord by reason of the violation of any of the terms, provisions and
covenants of this Lease. Forbearance by Landlord to enforce one or more of the
remedies herein provided upon and event of default shall not be deemed or
construed to constitute a waiver of such default.
The following provisions shall override and control any conflicting provisions
of the Texas Property Code, as well as any other statute governing the right of
a Landlord to change the door locks of commercial Tenants. If Landlord elects
to exclude Tenant from the Leased Premises until such time as all delinquent
Rent and other amounts due under this Lease have been paid in full and all other
defaults, if any, have been completely cured to Landlord's satisfaction.
Landlord will, during Landlord's normal Building hours and at Landlord's
convenience, upon receipt of written request from Tenant (accompanied by such
written waivers and releases as Landlord may require) received prior to the
permanent repossession of the Leased Premises, escort Tenant or its employees as
may then be at the Leased Premises, to remove personal belongings and other
property of Tenant. All personal belongings and other property of Tenant which
are not claimed by Tenant by the earlier to occur of (i) permanent repossession
of the Leased Premises: or (ii) thirty (30) from the date of Tenant's possession
of the Leases Premises is terminated shall be deemed to have been abandoned.
Tenant does hereby expressly acknowledge that the Leased Premises constitute
"Commercial Rental Property", as such term is defined in Section 93.001 of the
Texas Property Code. Tenant further acknowledges that the Landlord's remedies
set forth herein supersedes any and all limitations set forth in Section 93.002
on Landlord's rights in the event of a default by Tenant.
XI.
11.1 CONSENT AND APPROVAL. In each and every instance in which the consent or
approval of Landlord or Tenant is required, expressly or impliedly, pursuant to
this Lease, each of Landlord and Tenant hereby agrees that such consent or
approval shall not be unreasonably withheld or delayed.
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XII.
12.1 WAIVER. Failure of Landlord or Tenant to declare an event of default
immediately upon its occurrence, delay in taking any action in connection with
an event of default, or acceptance of Rent by Landlord shall not constitute a
waiver of the default, but such party shall have the right to declare the
default at any time and take such action as is lawful or authorized under this
Lease.
Pursuit of any one or more of the remedies set forth in Section 10.2 above shall
not preclude pursuit of any one or more of the other remedies provided elsewhere
in this Lease or provided by law, nor shall pursuit of any remedy constitute
forfeiture or waiver of any Rent or damages accruing to Landlord or Tenant by
reason of the violation of any of the terms, provisions, or covenants of this
Lease.
Failure by Landlord or Tenant to enforce one or more of the remedies provided
upon an event of default shall not be deemed or construed to constitute a waiver
of the default or of any other violation or breach of any of the terms,
provisions and covenants contained in this Lease.
12.2 ACT OF GOD OR FORCE MAJEURE. An "act of God" or "force majeure" is defined
for purposes of this Lease as strikes, lockouts, sitdowns, material or labor
restrictions by any governmental authority, unusual transportation delays,
riots, floods, washouts, explosions, earthquakes, fire, storms, weather
(including wet grounds or inclement weather which prevents construction), acts
of the public enemy, wars, insurrections and any other cause not reasonably
within the control of Landlord and which by the exercise of due diligence
Landlord is unable, wholly or in part, to prevent or overcome. Neither Landlord
nor Tenant shall be required to perform any covenant or obligation in this
Lease, or be liable in damages, so long as the performance or nonperformance of
the covenant or obligation is delayed, caused or prevented by an act of God,
force majeure or by the other party.
12.3 ATTORNEY'S FEES. In the event Tenant/Landlord defaults in the performance
of any of the terms, covenants, agreements or conditions contained in this Lease
and Tenant/Landlord places in the hands of an attorney the enforcement of all or
any part of this Lease, or recovery of the possession of the Leased Premises,
Tenant/Landlord agrees to pay the other party's costs, including reasonable
attorney's fees for the services of such attorney, whether suit is actually
filed or not.
12.4 SUCCESSORS. This Lease shall be binding upon and inure to the benefit of
Landlord and Tenant and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should
Landlord's interest in the Leased Premises cease to exist for any reason during
the Term, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect, and Tenant
hereunder agrees to attorn to the then owner of the Leased Premises.
12.5 RENT TAX. If applicable in the jurisdiction where the Leased Premises are
situated, Tenant shall pay and be liable for all rental, sales, and use taxes or
other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Landlord by Tenant under the terms of this
Lease. Any such payment shall be paid concurrently with the payment of the
Rent, Additional Rent, operating expenses or other charge upon which the tax is
based as set forth above.
12.6 CAPTIONS. The captions appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or intent of any section.
12.7 NOTICE. All Rent and other payments required to be made by Tenant shall be
payable to Landlord at the address set forth in the Introduction to the Lease.
All payments required to be made by Landlord to Tenant shall be payable to
Tenant at the address set forth in the Introduction to the Lease, or at any
other address within the United States as Tenant may specify from time to time
by
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written notice Any notice or document required or permitted to be delivered by
the terms of this Lease shall be deemed to be delivered (whether or not actually
received) three business days after being deposited in the United States Mail,
postage prepaid, certified mail, return receipt requested, addressed to the
parties at the respective addresses set forth in the Introduction to this Lease.
12.8 SUBMISSION OF LEASE. Submission of this Form of Lease to Tenant for
signature does not constitute a reservation of space or any option to lease.
This Lease is not effective until execution by and delivery to both Landlord and
Tenant.
12.9 AUTHORITY. Each party represents and warrants that all consents or
approvals required of third parties (including, but not limited to, its Board of
Directors or partners) for the execution, delivery and performance of this
Lease, have been obtained and that each party has the right and authority to
enter into and perform covenants contained in this Lease.
12.10 SEVERABILITY. If any provision of this Lease or the application thereof
to any person or circumstance shall be invalid or unenforceable to any extent,
the remainder of this Lease and the application of such provisions to other
persons or circumstances shall not be affected thereby and shall be enforced to
the greatest extent permitted by law.
12.11 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease
and, if as a consequence of such default, Tenant shall recover a money judgment
against Landlord, such judgment shall be satisfied only out of the right, title
and interest of Landlord in the Building as the same may then be encumbered
and/or out of the proceeds of any insurance then carried by Landlord and neither
Landlord nor any person or entity comprising Landlord shall be liable for any
deficiency. In no event shall Tenant have the right to levy execution against
any property of Landlord nor any person or entity comprising Landlord other than
its interest in the Building and to the extent of applicable insurance, as
herein expressly provided.
12.12 BROKERS. Neither party has utilized the services of any real estate
broker other than Cushman Realty Corporation & CB/Richard Ellis (together, the
"Brokers"). The Brokers' commissions shall be paid by Landlord pursuant to a
separate written agreement between Landlord and Brokers. Landlord agrees to
indemnify and hold harmless Tenant from and against any liability or claim,
whether meritorious or not, arising with respect to any broker, other than the
Brokers, whose claim arises by, through or on behalf of Landlord. Tenant agrees
to indemnity and hold harmless Landlord from and against any liability or claim,
whether meritorious or not, arising with respect to any broker whose claim
arises by, through or on behalf of Tenant.
12.13 REMEDIES CUMULATIVE. All rights and remedies of Landlord and Tenant
under this Lease shall be cumulative and none shall exclude any other rights or
remedies allowed by law; and this Lease is declared to be a Texas contract and
all the terms thereof shall be construed according to the laws of the State of
Texas.
12.14 EXHIBITS. The terms and provisions of Exhibits A through G, inclusive,
attached hereto are hereby made a part hereof for all purposes.
12.15 DAYS. All references to days in this Lease and any exhibits or riders
hereto mean calendar days, not working or business days unless otherwise stated.
12.16 TIME OF ESSENCE. In all instances where Landlord or Tenant is required
hereunder to pay any sum or do any act at a particular time or within any
indicated period, it is understood that time is of the essence.
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12.17 ENTIRE AGREEMENT. It is expressly agreed by Tenant, as a material
consideration for the execution of this Lease, that this Lease, with the
specific references to written extrinsic documents, is the entire agreement of
the parties; that there are, and were, no verbal representations, warranties,
understandings, stipulations, agreements, or promises pertaining to this Lease
or to the expressly mentioned written extrinsic documents not incorporated in
writing in this Lease.
12.18 AMENDMENT. This Lease may not be altered, waived, amended or extended
except by an instrument in writing signed by Landlord and Tenant.
12.19 LIMITATION OF WARRANTIES. Landlord and Tenant expressly agree that there
are and shall be no implied warranties of merchantability, habitability, fitness
of a particular purpose or of any other kind arising out of this Lease, and
there are no warranties which extend beyond those expressly set forth in this
Lease.
XIII.
13.1 COMMUNICATIONS EQUIPMENT.
13.2 MICROWAVE/SATELLITE DISHES. Landlord hereby grants Tenant a non-exclusive
license to use all or any portion of the roof of the Building for the purpose of
installing, operating and maintaining 2 microwave dishes/earth satellite disks
and up to two whip antennae and related equipment solely and exclusively for use
by Tenant for Tenant's normal business (collectively, the "Communications
Equipment"), together with the necessary conduit sleeving or wiring extending
from such equipment through the interior of the Building to connection points
within the Premises. To the extent Tenant exercises this license, Tenant shall
not be obligated to pay any roof rent or additional sums to Landlord.
13.3 ACCESS. Tenant shall have continuous access to the roof for the purposes
permitted hereunder. Landlord reserves the right to enter upon the roof,
without notice, at any time for the purpose of inspecting the same, or making
repairs, additions or alterations to the Building, or to exhibit the roof to
prospective tenants, purchasers or others, or for any other reason not
inconsistent with Tenant's rights hereunder. In connection with exercising such
rights, Landlord may temporarily disconnect and/or move the Communications
Equipment, if necessary following reasonable advance written notice to Tenant.
The exercise by Landlord of any of its rights under this paragraph shall not be
deemed an eviction or disturbance of Tenant's use of the roof.
13.4 ALTERATIONS AND ADDITIONS. After the initial installation of the
Communications Equipment, Tenant shall not make any alterations, additions or
improvements to the roof or the Communications Equipment without Landlord's
prior written consent. Landlord shall approve or reject the proposed
installation of the Items within fifteen (15) days after Tenant submits (a)
plans and specifications for the installation of the Communications Equipment,
(b) copies of all required governmental and quasi-governmental permits,
licenses, and authorizations which Tenant will obtain at its own expense, and
(c) a certificate of insurance evidencing the coverage required under this
Lease. If Landlord fails to respond within such fifteen (15) day period,
Landlord shall be conclusively deemed to have approved the alterations,
additions or improvements set forth in the documentation submitted to Landlord.
Landlord may withhold approval if the installation or operation of the Items may
damage the structural integrity of the Building, reduce the amount of leasable
space in the Building, detract from the appearance of the Building, or for any
other reasonable ground. Tenant may utilize contractor(s) of its choice for the
installation of, and repairs to the Communications Equipment (subject to
Landlord's approval). Landlord may require that any installation or other work
be done under the supervision of Landlord's employees or agents, and in a manner
so as to avoid damage to the Building. All installation work shall be performed
in a good and workmanlike manner, in accordance with all governmental
requirements. Nothing herein shall be deemed to make Landlord liable for the
safety, effectiveness or reliability of such Communications Equipment and,
subject to Section 6.6 of
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this Lease, Tenant shall indemnify and hold Landlord harmless from and against
any claim or liability arising from or related to the adequacy of such plans,
specifications and installation.
13.5 REMOVAL. Upon termination of this Lease, by expiration or otherwise,
Tenant shall disconnect and remove the Communications Equipment and fully repair
and restore the roof and the affected portions of the Premises and the Building
to the same or better condition than prior to installation of the Items,
ordinary wear and tear, and damage from casualty or condemnation excepted.
Tenant shall promptly and properly repair (or at Landlord's option, pay
Landlord's reasonable charges for repairing) during the Term and upon
termination of this Lease, any roof leaks or other damage or injury to the roof,
or the Building (or contents thereof) caused by Tenant's use of the roof or its
installation, use, maintenance, or removal of the Communications Equipment.
13.6 NO INTERFERENCE. Tenant shall not use the roof or the Communications
Equipment so as to interfere in any way with the ability of Landlord or its
tenants and occupants of the Building and neighboring properties to receive
radio, television, telephone, microwave, short-wave, long-wave or other signals
of any sort that are transmitted through the air or atmosphere, nor so as to
interfere with the use of electric, electronic or other facilities, appliances,
personal property and fixtures, nor so as to interfere in any way with the use
of any antennas, satellite dishes or other electronic or electric equipment or
facilities currently or hereafter located on the roof or any floor or area of
the Building.
13.7 NON-REVOCABLE. The provisions of this Article XIII creates a license
coupled with an interest. Landlord shall not have the right to revoke this
license until the term of this Lease (including renewals or extensions) expires
or is sooner terminated.
XIV.
ARBITRATION.
14.1 AMICABLE RESOLUTION. The parties shall attempt to settle any dispute
between them amicably. To this end, a senior executive from each party
shall consult and negotiate to reach a solution. However, nothing in this
clause shall preclude any party from commencing arbitration if said
negotiations do not reach a resolution within ten (10) business days after
written notice that the negotiations have commenced.
14.2 ARBITRATION. Any dispute, controversy, or claim arising out of or
relating to this Lease, or the breach, termination or invalidity thereof,
including claims for tortious interference or other tortious or statutory
claims arising before, during or after termination, providing only that
such claim touches upon matters covered by this Lease, shall be finally
settled by arbitration administered by the American Arbitration
Association pursuant to the Commercial Arbitration Rules as presently in
force, except as modified by the specific provisions of this Lease.
14.3 FORUM SELECTION. The parties agree that the state courts located in the
State of Texas shall have exclusive jurisdiction over an action brought to
enforce the rights and obligations created in or arising from this Lease
to arbitrate, and each of the parties hereto irrevocably submits to the
jurisdiction of said courts. Notwithstanding the above, application may be
made by a party to any court of competent jurisdiction wherever situated
for enforcement of any judgment and the entry of whatever orders are
necessary for such enforcement.
14.4. THREE ARBITRATORS. The arbitration shall be conducted before a tribunal
composed of three neutral arbitrators each of whom shall sign an oath
agreeing to be bound by the Code of Ethics for Arbitrators in Commercial
Disputes promulgated by the AAA for Neutral Arbitrators regardless of the
manner of any arbitrator's appointment.
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14.5. APPOINTMENT OF PARTY ARBITRATOR. Each party shall appoint an arbitrator,
obtain its appointee's acceptance of such appointment, and deliver written
notification of such appointment and acceptance to the other party within
ten (10) days after delivery of the Notice of Arbitration.
14.6. APPOINTMENT OF CHAIRMAN. The two party appointed arbitrators shall
jointly appoint the third arbitrator, obtain the appointee's acceptance of
such appointment and notify the parties in writing of such appointment and
acceptance within 30 days after their appointment and acceptance.
14.7 FAILURE TO AGREE ON CHAIRMAN. If the appointment and acceptance of the
third arbitrator are not effected within the 30 day period, then, upon the
joint request of the parties or the request of either of them, the
appointing authority shall appoint the third arbitrator, obtain acceptance
of such appointment and notify the parties and both arbitrators in writing
of such appointment and acceptance. The third arbitrator shall serve as
the Chairman of the Tribunal.
14.8 VACANCY. If at any time a vacancy occurs on the tribunal, the vacancy
shall be filled in the same manner and subject to the same requirements as
are provided for the original appointment to that position. If the vacancy
is not filled within 45 days after its occurrence, either party may
request the appointing authority to make the appointment and obtain
acceptance. Upon the filling of a vacancy, and after allowing the newly
appointed arbitrator sufficient time to familiarize himself or herself
with the submissions and proceedings, the proceedings shall be continued
without rehearing from the point at which the vacancy occurred, unless the
parties agree otherwise or the Chairman directs otherwise.
14.9 QUALIFICATIONS OF CHAIRMAN. The Chairman shall be a lawyer admitted to
the Bar of the State of Texas who shall have practiced for at least 15
years, shall speak, read and write the English language fluently, shall
have significant expertise in commercial real estate, and be either a
former judicial officer or a licensed attorney.
14.10 QUALIFICATIONS OF ARBITRATORS OTHER THAN THE CHAIRMAN. Each arbitrator
must be a lawyer admitted to the Bar of the State of Texas, having
practiced for at least 10 years.
14.11 APPOINTING AUTHORITY. In the event of the failure to appoint an
arbitrator within the time limits specified herein, the President of the
Association of the Bar of the City of Houston or in the event of his or
her failure timely to act, the senior judge of the United States District
Court for the Southern District of Texas will appoint the arbitrator. The
parties hereby agree to and acquiesce in any appointment of an arbitrator
that may be made by such appointing authority.
14.12 IMPARTIALITY. It is the intent of the parties to avoid the appearance of
impropriety due to bias or partiality on the part of any arbitrator. Prior
to his or her formal appointment, each arbitrator shall disclose to the
parties and to the other members of the tribunal, any financial,
fiduciary, kinship or other relationship between that arbitrator and any
party or its counsel, or between that arbitrator and any individual or
entity with any financial, fiduciary, kinship or other relationship with
any party. For the purpose of this Lease, "appearance of impropriety"
shall be defined as such relationship or behavior as would cause a
reasonable person to believe that bias or partiality on the part of the
arbitrator may exist in favor of any party.
14.13 GOVERNING SUBSTANTIVE LAW. The arbitrators shall determine the rights
and obligations of the parties according to the substantive laws of the
State of Texas (excluding conflicts of laws principles) as though acting
as a court of the State of Texas.
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14.14 WRITTEN OPINION. Any award or portion thereof, whether preliminary or
final, shall be in a written opinion containing findings of fact and
conclusions of law signed by each arbitrator. The arbitrator dissenting
from an award or portion thereof may issue a dissent from the award or
portion thereof in writing, stating the reasons for his dissent.
14.15 GOVERNING ARBITRATION LAW. The law applicable to the validity of the
arbitration clause, the conduct of the arbitration, including any resort
to a court for provisional remedies, the enforcement of any award and any
other question of arbitration law or procedure shall be the Texas
Arbitration Act.
14.16 PROVISIONAL RELIEF. The parties expressly agree that prior to the
formation of the arbitral panel, nothing in this Lease shall prevent the
parties from applying to a court that would otherwise have jurisdiction
for provisional or interim measures. After the arbitration panel is
empaneled, it shall have sole jurisdiction to hear such applications,
except that the parties agree that any measures ordered by the arbitrator
may be immediately and specifically enforced by a court otherwise having
jurisdiction over the parties.
14.17 LIMITATIONS AND LACHES. The arbitrators are directed to consider any
defense that all or part of the claim is not timely by reason of laches
or statute of limitations as a preliminary issue and to render an award
determining the merits of such claim before considering the substantive
merits of the arbitration claim, unless the arbitrators determine that
the merits of such claim of laches or statute of limitations is so
intertwined with the substantive merits of the arbitration claim as to
make impractical the determination of the claim of laches or limitations
as a preliminary matter.
14.18 PRELIMINARY ISSUES OF LAW. The arbitrators shall hear and determine any
preliminary issue of law asserted by a party to be dispositive of any
claim, in whole or part, in the manner of a court hearing a motion to
dismiss for failure to state a claim or for summary judgment, pursuant to
such terms and procedures as the arbitrators deem appropriate.
14.19 CONFIDENTIALITY. The parties and arbitrators shall treat all aspects of
the arbitration proceedings, including without limitation discovery,
testimony and other evidence, briefs and the award, as strictly
confidential.
14.20 PLACE OF ARBITRATION. The place of arbitration shall be [Houston, Texas,
USA] unless otherwise agreed by the parties.
14.21 LANGUAGE. The arbitration shall be conducted in the English language.
All submissions shall be made in English or with an English translation.
Witnesses may provide testimony in a language other than English,
provided that a simultaneous English translation is provided. Each party
shall bear its own translation costs.
14.22 DISCOVERY. The parties shall be entitled to engage in reasonable
discovery, including requests for the production of relevant documents.
Depositions may be ordered by the arbitrators upon a showing of need.
14.23 PUNITIVE DAMAGES PROHIBITED. The parties hereby waive any claim to any
damages in the nature of punitive, exemplary, or statutory damages in
excess of compensatory damages, or any form of damages in excess of
compensatory damages, and the arbitration tribunal is specially divested
of any power to award any damages in the nature of punitive, exemplary,
or statutory damages in excess of compensatory damages, or any form of
damages in excess of compensatory damages.
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14.24 COSTS. The party prevailing on substantially all of its claims shall be
entitled to recover its costs, including attorneys' fees, for the
arbitration proceedings, as well as for any ancillary proceeding,
including a proceeding to compel or enjoin arbitration, to request
interim measures or to confirm or set aside an award.
XV.
ADDITIONAL PROVISIONS.
15.1 Subject to Tenant not being in violation of any of the terms of this Lease,
Tenant shall have the option to renew this Lease for up to two (2) five (5) year
periods at 95% of the then prevailing Fair Market Rate (hereinafter defined),
provided Tenant notifies Landlord in writing about Tenant's intention to renew,
no later than three hundred and sixty-five (365) days prior to the expiration
date of the initial term or the first renewal term, as the case may be.
The Fair Market Rate shall be the rate charged for space of comparable size and
condition in comparable buildings in the immediately surrounding area, taking
into consideration the location, quality, and age of the Building, floor level,
extent of leasehold improvements (existing or to be provided), rental
abatements, moving expenses, and other concessions, term of lease, extent of
services to be provided, distinction between "gross" and "net" lease, base year
or amount allowed by Landlord for payment of building operating expenses
(expense stop), and the time the particular rental rate under consideration
became or is to become effective, or any other relevant term or condition.
15.2 With reference to Paragraph 2.7.1 hereof, Tenant shall provide Landlord,
within seven (7) days of the date hereof, an irrevocable letter of credit in
substantially the form of Exhibit F, attached hereto and made a part hereof for
all purposes, in the amount of $1,035,000.00 valid through the 36th month of the
term of this Lease. The amount of such letter of credit shall be reduced
straight-line over a thirty-six month term
IN TESTIMONY WHEREOF, the parties hereto have executed this Lease as of
this _____DAY OF MAY, 1999. This Lease may be executed in multiple
counterparts, all of which when taken together shall constitute one and the same
instrument.
LANDLORD: TENANT:
EnergyCorp Group LC Mission Critical Software, Inc.
By: Zenith Real Estate Services, Inc.
Agent For EnergyCorp Group LC
By: /s/ Ayaz I. Nasser By: /s/ S. E. Odom
------------------------ -----------------------
Ayaz I. Nasser Name: S. E. Odom
President ---------------------
Designation: CFO
--------------
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Exhibit A
SECOND FLOOR
See attached drawing
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Exhibit A-1
FIRST FLOOR
See attached drawing
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Exhibit B
CERTIFICATE OF LEASED PREMISES ACCEPTANCE
AND COMMENCEMENT DATE
___________, _______
Landlord: EnergyCorp Group LC
Tenant: Mission Critical Software, Inc.
Please refer to that certain Lease Agreement (the Lease) dated the day of May,
1999 by and between EnergyCorp Group LC. ("Landlord") and the undersigned
("Tenant"), covering office space (the "Leased Premises") in the Building
located at 13939 Northwest Freeway, Houston, Harris County, Texas. Capitalized
terms not defined herein shall have the meaning given to such terms in the
Lease. The undersigned hereby certifies, acknowledges and represents the
following to you, all as of the date hereto:
1. The initial term of the Lease commenced on ____________, _____ and will
expire on ________, 2004.
2. Landlord and Tenant are not in default in the performance of their
obligations under the Lease, and each has performed all obligations to be
performed by it under the Lease through the date hereof, including its
obligations under Exhibit E of the Lease.
3. Tenant is in occupancy of the Leased Premises and acknowledges that it has
accepted the same.
4. The Lease has not been amended except as may be set forth at the end of
this letter.
The undersigned hereby agrees that this certificate may be relied upon by
Landlord and it's lenders and partners, as well as their respective successors
and assigns.
LANDLORD:
ENERGYCORP GROUP LC, a Texas limited liability
company
Executed by Landlord this By:____________________________________
____ day of ____________, 1999. Name:__________________________________
Title:_________________________________
TENANT:
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MISSION CRITICAL SOFTWARE, INC.,
a Delaware corporation
Executed by Tenant this By:_____________________________
____ day of ____________, 1999. Name:___________________________
Title:__________________________
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Exhibit C
BUILDING RULES AND REGULATIONS
This Exhibit is attached to and made a part of that certain Lease Agreement
between Energycorp Group LC as "Landlord", and Mission Critical Software, Inc.
as "Tenant". All terms used herein and not otherwise defined shall have the
meanings given to them in the Lease Agreement.
1. Landlord has already furnished Tenant a certain number of door keys, card
keys, men's and women's restroom keys without charge. Additional door keys will
be furnished at a nominal charge. Additional card keys will be furnished to
Tenant at a rate of $15.00 each. Neither Tenant shall change locks or install
additional locks on doors without the prior written consent of Landlord. Tenant
shall not make or cause to be made, duplicates of keys procured from Landlord
without prior approval of Landlord. All keys to the Leased Premises shall be
surrendered to Landlord upon termination of this Lease.
2. Tenant shall refer all contractors, contractor's representatives and
installation technicians rendering any service on or to the Leased Premises for
Tenant to Landlord for Landlord's approval before performance of any contractual
service. Tenant's contractors and installation technicians shall comply with
Landlord's rules and regulations pertaining to construction and installation.
This provision shall apply to all work performed on or about the Leased Premises
or Project, including installation of telephones, electrical devices and
attachments, and installations of any nature affecting floors, walls, woodwork,
trim, windows, ceilings, equipment, or any other physical portion of the Leased
Premises or Project.
3. Neither Tenant nor any other party shall at any time use or occupy any part
of the Leased Premises or Project as sleeping or lodging quarters.
4. Tenant shall not place, install, or operate on the Leased Premises or in
any part of the Building any engine, stove excepting microwave ovens, or
machinery, or conduct mechanical operations or cook thereon or therein, or place
or use in or about the Leased Premises or Project any explosives, gasoline,
kerosene, oil, acids, caustics, or any flammable, explosive, or hazardous
material without the prior written consent of Landlord.
5. Landlord will not be responsible for personal property, equipment, money or
jewelry lost in or stolen from the Leased Premises or elsewhere in the Project
regardless of whether such loss occurs when the area is locked against entry or
not.
6. No birds or animals shall be brought into or kept in or about the Leased
Premises or Project.
7. Employees of Landlord shall not receive or carry messages for or to any
tenant or other person or contract with or render free or paid services to any
Tenant or to any of Tenant's agents, employees, or invitees.
8. None of the parking, plaza, recreation or lawn areas, entries, passages,
doors, elevators, hallways, or stairways shall be blocked or obstructed or any
rubbish, litter, trash, or material of any nature placed, emptied, or thrown
into these areas by Tenant. No such area will be used by Tenant at any time for
purposes inconsistent with its designation by Landlord.
9. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed, and any damage
resulting in them from misuse or by the defacing or damage to any part of the
Project shall be borne by the person who shall occasion it.
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No person shall waste water.
10. Neither Tenant nor Tenant's invitees shall disturb occupants of the
Building by the use of radios, record players, tape recorders, or musical
instruments, or the making of unseemly noises.
11. Nothing shall be thrown down stairways or other passages and the breakdown
of crates or card board boxes for removal to the dumpster shall be the
responsibility of Tenant.
12. Tenant and Tenant's invitees shall park their vehicles only in those
parking areas designated by Landlord. Tenant shall furnish Landlord with
automobile license numbers of Tenant's vehicles within five days after taking
possession of the Leased Premises and shall notify Landlord of any changes
within five days after such change occurs. Tenant shall not leave any vehicle
in a state of disrepair (including without limitation, flat tires, out of date
inspection stickers, or license plates) on premises of Project. If Tenant or
Tenant's invitees park their vehicles in areas other than the designated parking
areas or leave any vehicle in a state of disrepair, Landlord, after giving
written notice to Tenant of such violation, shall have the right to remove such
vehicle at Tenant's expense.
13. Parking in a parking garage or areas shall be in compliance with all
parking rules and regulations including any sticker or other identification
system established by Landlord. Vehicles must be parked entirely within the
stall lines and all directional signs, arrows, and posted speed limits must be
observed. Parking is prohibited in areas not striped for parking, in aisles,
and where "No Parking" are posted. Only vehicles with handicapped certification
prominently displayed may park in a handicapped designated parking space.
Parking stickers or other forms of identification supplied by Landlord shall
remain the property of Landlord and not the property of Tenant and are not
transferable. Every person is required to park and lock his vehicle. All
responsibility for damage to vehicles or persons is assumed by the owner of the
vehicle or its driver.
14. Subject to the provisions of Section 3.1.1 of this Lease, Landlord shall
not be liable for any damages from (a) the stoppage of elevators for necessary
or desirable maintenance, repairs, or improvements, or (b) delays of any sort or
duration in connection with the elevator service.
15. Tenant shall not lay floor covering within the Leased Premises without
prior written approval of Landlord. The use of cement, or other similar
adhesive materials not easily removed with water, is expressly prohibited.
16. Tenant shall co-operate and assist Landlord in the prevention of
canvassing, soliciting and peddling within the Building or Project.
17. Landlord reserves the right to exclude from the Building or Project,
between the hours of 7:00 p.m. and 7:00 a.m. on weekdays and at all hours on
Saturday, Sunday, and legal holidays, all persons who are not known to the
Building or Project security personnel and who do not present a pass to the
Building signed by Tenant. Tenant shall be responsible for all persons for whom
Tenant supplies a pass.
18. It is Landlord's desire to maintain in the Building or Project the highest
standard of dignity and good taste consistent with comfort and convenience for
Tenants. Any action or condition not meeting this standard should be reported
directly to Landlord. Tenant's cooperation will be mutually beneficial and
sincerely appreciated.
19. Tenant will not distribute any alcoholic beverages from the Leased Premises
or any other part of the Project; provided, however, that this provision shall
not prohibit Tenant from serving alcoholic beverages at its office parties and
other customary social events.
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20. Landlord reserves the right to make such other and further reasonable rules
and regulations as in Landlord's judgment may from time to time be necessary,
for the safety, care, and cleanliness of the Project, Building, and for the
preservation of good order therein, the operation thereof, and the protection
and comfort of the tenants and their respective agents, employees, and invitees.
Such further rules and regulations, when made and notified in writing to Tenant,
shall be binding upon Tenant.
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Exhibit D
AIR CONDITIONING AND HEATING SERVICES
Subject to the provisions of Section 3.1.1, Landlord will furnish Building
standard air conditioning and heating between 7.00 a.m. and 7.00 p.m. from
MONDAY THROUGH FRIDAY and, between 8.00a.m. and 2.00 p.m. on SATURDAYS, all
exclusive of Holidays (as defined below). Upon request of Tenant, made in
accordance with the rules and regulations for the Building, Landlord will
furnish air conditioning and heating at other times (that is, at times other
than the times specified above), in which event Tenant shall reimburse Landlord
for the cost of furnishing such services. Said costs shall be $15.00 per hour
per floor without offset. Landlord agrees to maintain (subject to events of
force majeure or curtailment as required by governmental laws, rules, or
regulations) the condition of the Leased Premises during the above described
hours between the temperature of 72 and 75 degrees Fahrenheit.
The following dates shall constitute "Holidays" as said term is used in this
Lease:
1. New Year's Day
2. Memorial Day
3. Independence Day
4. Labor Day
5. Thanksgiving Day
6. Friday following Thanksgiving Day
7. Christmas
If, in the case of any holiday described in (1) through (7) above, a day shall
be observed other than the respective day described above, then that day which
constitutes the day observed by national banks in Houston, Texas on account of
such holiday shall constitute the holiday under this Lease.
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Exhibit E
OFFICE LEASE BETWEEN
ENERGYCORP GROUP LC,
AS LANDLORD,
AND
MISSION CRITICAL SOFTWARE, INC.,
AS TENANT
WORKLETTER
1. SPACE PLANNING.
(a) Preliminary Plans. Pursuant to Tenant's request for Tenant
Improvements to be constructed within the Premises, Tenant has retained a
Architect, Scott Architects, Inc. (the "Architect"), and the Architect will
prepare certain plans, drawings, final working drawings and specifications on or
before June 15, 1999 (the "Preliminary Plans") for the Tenant Improvements to be
installed in the Premises by a general contractor selected by Landlord pursuant
to this Work Letter.
(b) Submission by Tenant. Landlord shall respond to Tenant within five (5)
business days after receipt of the Preliminary Plans with respect to its
approval of the Preliminary Plans. If Landlord does not approve of the
Preliminary Plans as heretofore submitted, then on each further occasion that
Preliminary Plans are submitted to Landlord, Landlord shall have a period of
five (5) business days after delivery to approve or disapprove the Preliminary
Plans by giving written notice thereof to Tenant. Failure by Landlord to
approve or disapprove the Preliminary Plans within such period shall be deemed
to be an approval. Landlord's written notice of disapproval, if any, shall
specify in detail the nature of Landlord's objections, and Landlord agrees, if
necessary, to meet promptly with the Architect to review Landlord's objections.
If Landlord timely disapproves, then the Preliminary Plans shall be revised by
the Architect to address Landlord's objections and resubmitted to Landlord with
two (2) business days after receipt of such disapproval for its approval.
(c) Plans Complete. The Preliminary Plans shall be the complete and final
layout, plans and specifications of the Premises showing all doors, light
fixtures, electrical outlets, telephone outlets, wall coverings, plumbing
improvements (if any), HVAC systems, floor coverings, wall coverings, painting,
any other improvements to the Premises beyond the shell and core improvements
provided by Tenant and any demolition of existing improvements in the Premises
(the Preliminary Plans, after approval by Tenant and Landlord, are referred to
herein as the "Plans"). The improvements shown in the Plans shall (i) utilize
Landlord's building standard materials and methods of construction, (ii) be
compatible with the shell and core improvements and the design, construction and
equipment of the Premises, (iii) comply with all applicable laws, rules,
regulations, codes and ordinances and (iv) be subject to the approval of
Landlord, which approval shall not be unreasonably withheld.
2. TENANT IMPROVEMENT COSTS.
(a) Cost Estimate. As soon as practicable after receipt of Landlord's
approval of the Plans, Landlord along with architect shall arrange to obtain
competitive bids for the work to be done (Tenant may submit up to two (2)
contractors to be included in the bid process). All construction work shall be
bid competitively, with Landlord having the right to include two or more
reputable contractors in the bid process. Landlord shall manage the initial
construction at no charge to Tenant. Landlord shall not be obligated to take
the low bidder. If Landlord so elects, Landlord shall submit to Tenant a
written description of those matters and items shown in the Plans which Landlord
believes may result in any Tenant Delay (as defined below) together with a
description of the estimated period
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of such Tenant Delay; provided, however, that Tenant will be charged with all
actual Tenant Delays that occur, notwithstanding the failure of Landlord to give
a description of estimated Tenant Delays at all or as to any particular item of
Tenant Delay or any inaccuracy in the estimates of Tenant Delay given to Tenant.
If Landlord disapproves any portion of the work to be performed in accordance
with the Plans, Landlord and Tenant shall promptly take all such action as may
be reasonably required to modify any aspect of the Plans so as to be reasonably
satisfactory to Landlord and Tenant.
(b) Final Approval by Tenant. Within five (5) days after receipt of the
written nonbinding cost estimates prepared by the contractors and any
description of any Tenant Delay which Landlord elects to provide to Tenant,
Tenant shall either (i) give its written approval thereof and authorization to
proceed with construction or (ii) immediately request the architect to modify or
revise the Plans in any manner desired by Tenant to decrease the cost of the
Tenant Improvements or minimize the amount of the Tenant Delay.
(c) Revised Costs. If the Plans are revised pursuant to Paragraph 2(b),
Landlord shall request that the contractors provide revised cost estimates based
upon the revisions to the Plans. Such notifications and revisions shall be in
accordance with the standards set forth in Paragraph 1 of this Work Letter.
Within five (5) days after receipt of the contractor's original written cost
estimate and the description, if any, of Tenant Delay, Tenant shall give its
final approval of the Plans to Landlord which shall constitute authorization to
commence the construction of the Tenant Improvements in accordance with the
Plans, as modified or revised. Tenant shall signify its final approval by
signing a copy of each sheet or page of the Plans and delivering such signed
copy to Landlord.
(d) Payment for Tenant Improvements. If the contractor's cost estimates
for the Tenant Improvements exceeds the Landlord's Construction Allowance as set
forth in the Basic Lease Provisions, then Tenant shall deliver at the time of
its approval its check payable to Landlord in an amount equal to such excess
together with delivery of the approved copy of the Plans.
(e) Failure to Approve. If Tenant does not approve the Plans and authorize
Landlord to proceed with the construction of the Tenant Improvements within the
time periods specified herein, then Tenant shall be charged with all costs
incurred by reason of any delay in completion of the construction of Tenant
Improvements and such delay shall be an element of Tenant Delay. If Tenant
delays final approval and authorization to commence with construction of Tenant
Improvements for a period of ten (10) days beyond the period of time specified
herein, then such delays shall be an event of default by Tenant under the Lease
and Landlord may, in addition to all of the other remedies which it may have
under the Lease, terminate the Lease.
(f) Cost Estimate Not Binding. Tenant acknowledges that any cost estimates
are prepared by the contractors and Landlord shall not be liable to Tenant for
any inaccuracy in any such estimate.
3. COMPLETION OF TENANT IMPROVEMENTS.
(a) Permits. As soon as practicable following receipt of Tenant's final
approval of the Plans and authorization to proceed with construction, the Plans
shall be submitted to the appropriate governmental agency for issuance of a
building permit or other required governmental approval prerequisite to
construction.
(b) Commencement of Construction. Following approval of the Plans by
governmental authorities and receipt of all required permits, Landlord shall
obtain a fixed price bid from the general contractors selected by Landlord and
authorize the general contractor to commence construction of the Tenant
Improvements and proceed to complete such construction in a workmanlike manner.
(c) Completion of Construction. Subject to Tenant Delay, Landlord shall
ensure that the Tenant Improvements are completed within 45 days after the
Preliminary Plans are prepared in accordance with Paragraph 1(a) of this
Exhibit E.
4. TENANT DELAY.
(a) Definition. "Tenant Delay" shall include, without limitation, any delay
in the completion of construction of Tenant Improvements resulting from (i)
Tenant's failure to comply with the provisions of this Work Letter, (ii) any
additional time as reasonably determined by Landlord to
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be required for ordering, receiving, fabricating and/or installing items or
materials or other non-building standard components of the construction of
Tenant Improvements, including, without limitation, mill work, as specified in a
notice provided by Landlord to Tenant pursuant to Paragraph 2(a) above, (iii)
delay in work caused by submission by Tenant of a request for any Change Order
(defined below) following Tenant's approval of the Plans or (iv) any additional
time, as reasonably determined by Landlord, required for implementation of any
Change Order.
(b) Consequence of Tenant Delay. If there shall be any Tenant Delay, then
Tenant shall be required to commence the payment of rent under the Lease based
upon the Commencement Date that would have occurred but for the Tenant Delay.
5. LANDLORD DELAY
(a) Definition. "Landlord Delay" shall include, without limitation, any
delay in the completion of construction of Tenant Improvements resulting from
Landlord's failure to comply with the provisions of this Work Letter.
(b) Consequent of Landlord Delay. If there shall be any Landlord Delay,
then the Commencement Date shall be extended by one (1) day for each day of
Landlord Delay.
6. COST OF WORK.
(a) Tenant Improvement Allowance. Landlord shall provide Tenant with Tenant
Improvement Allowance as set forth in the Lease to be utilized for mutually
agreed upon building standard leasehold improvements, architectural and
engineering services. Leasehold improvement costs exceeding Landlord's
allowance shall be the sole responsibility of Tenant. Landlord shall pay the
cost of work to construct all Tenant Improvements to the extent such cost of
work does not exceed the Tenant Improvement Allowance. If the actual cost of
work exceeds the Tenant Improvement Allowance, Tenant shall bear the cost of
such excess and shall pay the cost of such excess to Landlord pursuant to
Paragraph 5(c) below to the extent not previously paid to Landlord. The cost of
permits, working drawings, mechanical and electrical planning, fees, permits,
general contract overhead, shall be included in the cost of work and shall be
payable out of the Tenant Improvement Allowance. The cost of the Tenant
Improvements shall not include any other fees payable to Landlord.
(b) Costs of Tenant Delay or Change Orders. Tenant shall bear the net
increase in the cost of work for the construction of Tenant Improvements
incurred by reason of any Tenant Delay or any Change Order requested by Tenant
irrespective of whether the actual cost of work exceeds the amount of the Tenant
Improvement Allowance.
(c) Payments to Landlord. Tenant shall pay any sums due to Landlord under
this Section 3. The amount of any excess of the cost of work over the Tenant
Improvement Allowance shall be paid to Landlord at the time of final approval of
the Plans by Tenant in accordance with Paragraph 2(d) above, and
7. CHANGE ORDERS.
(a) Request by Tenant. Tenant may request a change, addition or alteration
in the Tenant Improvements as shown by the Plans after its final approval of
such Plans (a "Change Order") by delivery of a written request to Landlord. If
Landlord approves Tenant's requested change, addition or alteration, the
Architect shall complete all working drawings necessary to show the change,
addition or alteration.
(b) Tenant Approval. Landlord shall promptly give Tenant a written
description of the costs of any changes requested by Tenant incorporated in a
Change Order, for approval by Tenant, together with an estimate of the Tenant
Delay, if any, caused by such Change Order and an estimate of the net cost of
work to implement the Change Order. Following receipt of the description of the
Change Order and the estimate, Tenant shall deliver to Landlord Tenant's written
approval of the Change Order and authorization to proceed with the work as shown
by the Change Order.
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(c) Work Stoppage. Landlord may, but shall not be obligated to, order the
contractor to stop work until after approval of a Change Order by Tenant if
Landlord reasonably determines that such delay is necessary or desirable to
incorporate the Change Order. Any delay caused by such work stoppage shall
constitute Tenant Delay.
8. SUBSTANTIAL COMPLETION AND PUNCH LIST ITEMS.
(a) Date of Substantial Completion. "Substantial Completion" of
construction of Tenant Improvements shall be defined as the earlier of (i) the
date of issuance of a certificate of occupancy or other approval of occupancy of
the Premises by the appropriate governmental authority or (ii) the date upon
which the Landlord furnishes Tenant with a certificate stating that the Tenant
Improvements have been substantially completed in accordance with the Plans,
except for such items that constitute minor defects or adjustments which can be
completed after occupancy without causing any material interferences with
Tenant's use of the Premises (so called "Punch List" items).
(b) Completion of Punch List Items. Within fifteen (15) days after receipt
of the certificate of substantial completion, Tenant shall supply to Landlord a
written Punch List setting forth all corrective work to the Tenant Improvements
which Tenant believes is required to be performed. Landlord shall perform all
such corrective work to the extent necessary to complete construction of the
Tenant Improvements in accordance with the Plans within thirty (30) days after
receipt of the Punch List.
(c) Deemed Approval. If Tenant does not deliver a Punch List within such
fifteen (15) day period, Tenant shall be deemed to have accepted the Premises in
their entirety, and Landlord shall have no further obligation with respect to
completion of any construction of Tenant Improvements or any other alteration,
modification or change of the Premises.
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Exhibit F
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
THE STATE OF TEXAS (S)
(S) KNOW ALL PERSONS BY THESE PRESENTS:
COUNTY OF _________ (S)
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") is by and between ______________________ ("Tenant") and
_______________________________ ("Lender"). For and in consideration of the
mutual agreements contained herein and other good and valuable consideration,
the receipt and sufficiency of which are mutually acknowledged and confessed,
Tenant and Lender hereby agree as follows:
1. On _______________________, 19___, __________________________
("Landlord") entered into that certain ______________________________ (the
"Lease") with Tenant. Under the terms of the Lease, Landlord leased to Tenant
that certain tract or parcel of real property (the "Leased Premises"), as more
fully described on Exhibit A attached hereto and made a part hereof for all
purposes. Landlord has previously executed and delivered that certain
_________________________ dated _______________________, 19___ (the "Deed of
Trust"), filed for record in [Volume ___, Page ____ of the _________________
Records of _______________ County, Texas/the Official Public Records of Real
Property of Harris County, Texas under Clerk's File No. ______ and recorded
under Film Code Reference No. _______] to secure the payment of that certain
[Promissory Note] dated __________________, 19___, in the original principal
amount of _____________________________________ and ___/100 Dollars ($______),
the Deed of Trust covering and describing that certain tract or parcel of real
property (the "Property") described on Exhibit B attached hereto and made a part
hereof for all purposes. The Leased Premises are a part of the Property.
Tenant has agreed to subordinate its interest under the Lease to the Deed of
Trust and Lender has agreed to recognize the Lease under the terms and
conditions set forth in this Agreement.
2. Tenant hereby subordinates all of its right, title, and interest in and
to the Lease, the Leased Premises and the Property to the Deed of Trust.
3. As long as Tenant is not in default in the payment of rent or in the
performance of any of the terms, covenants, and conditions of the Lease,
Tenant's possession of the Leased Premises and its rights and privileges under
the Lease, or any renewal or extension of the Lease, shall not be diminished or
interfered with by Lender and Lender will not join Tenant as a party defendant
in any action or proceeding for the purpose of terminating, diminishing or
modifying Tenant's interest under the Lease.
4. If Lender forecloses the liens created by the Deed of Trust and
succeeds to the interest of Landlord under the Lease, Tenant shall be bound to
Lender under all of the terms, covenants, and conditions of the Lease with the
Lender as its landlord, the attornment to be effective and self-operative,
without the execution of any other instruments on the part of any of the parties
to this Agreement, immediately upon Lender succeeding to the interest of the
Landlord under the Lease. Tenant shall have no obligation to pay rent to Lender
until Tenant receives written notice and adequate evidence from Lender that it
has succeeded to the interest of the Landlord under the Lease.
5. If Lender forecloses the liens created by the Deed of Trust and Lender
succeeds to the interest of Landlord under the Lease, Lender shall be bound to
Tenant under all the terms, covenants, and conditions of the Lease; provided,
however, Lender shall not be (a) liable for any act or omission of the Landlord
or any prior landlord, [(b) subject to any offsets or defenses that Tenant may
have against Landlord or any prior landlord,] or (c) bound by any rent that
Tenant may have paid more than one (1) month in advance to Landlord or any prior
landlord.
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6. Tenant represents and warrants that the Lease has not been modified or
altered [and covenants that the Lease shall not, without the prior written
consent of Lender, be modified or altered hereinafter] in such a manner that (a)
decreases the amount of rent or other sums payable by Tenant pursuant to the
Lease, or (b) diminishes or reduces the term of the Lease.
7. Tenant agrees that it will notify Lender in writing, by certified mail,
of any default by Landlord under the such Lease and shall not cancel or
terminate the Lease without providing Lender thirty (30) days from the date of
such notice within which to cure such default. If Lender elects within such
thirty (30) days to foreclose the liens created by the Deed of Trust, such time
period shall be extended so that Lender shall have a reasonable period of time,
not to exceed sixty (60) days, within which to foreclose the liens created by
the Deed of Trust and acquire title to the Property and, if the foreclosure
occurs during such period, Lender shall have an additional thirty (30) days from
the time it becomes owner of the Property through foreclosure within which to
cure such default. If any default by Landlord is cured within the time periods
described above, Tenant shall have no right to cancel or terminate the Lease by
virtue of such default.
8. This Agreement shall be binding upon the parties and their respective
successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement in multiple
counterparts, each of which shall be deemed an original, on the dates of the
acknowledgements set forth below, to be effective for all purposes as of the
____ day of ___________________, 19___.
_____________________________
By__________________________
Name: ______________________
Title: _______________________
"Tenant"
_____________________________
By__________________________
Name: ______________________
Title: _______________________
"Lender"
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THE STATE OF TEXAS (S)
(S)
COUNTY OF __________ (S)
This instrument was acknowledged before me on the ______________ day
of ___________________, 19__ by [______________________, [_______________ of
[___________________________, a [_________________________ corporation, on
behalf of said corporation.
(SEAL)
_______________________________________
Notary Public in and for
the State of Texas
_______________________________________
(Printed Name of Notary)
My commission expires:__________________
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THE STATE OF TEXAS (S)
(S)
COUNTY OF ____________ (S)
This instrument was acknowledged before me on the ______________ day
of _____________, 19__ by [________________, [________________ of [___________
_____, a [___________ corporation, on behalf of said corporation.
(SEAL)
_____________________________________________
Notary Public in and for
the State of Texas
_____________________________________________
(Printed Name of Notary)
My commission expires:_______________________
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Exhibit G
FROM: _______________ BANK
TO: ZENITH REAL ESTATE SERVICES, INC.
AGENT FOR ENERGYCORP GROUP LC
2900 WILCREST DRIVE - SUITE 205
HOUSTON, TEXAS 77042
AMOUNT: $1,035,000.00 (ONE MILLION AND THIRTY-FIVE
THOUSAND DOLLARS)
GENTLEMEN:
WE HEREBY ESTABLISH OUR IRREVOCABLE LETTER OF CREDIT NO. ____ IN YOUR FAVOR AT
THE REQUEST FOR THE ACCOUNT OF MISSION CRITICAL SOFTWARE, INC. FOR AN AMOUNT NOT
EXCEEDING $1,035,000.00 (ONE MILLION AND THIRTY-FIVE THOUSAND DOLLARS). THIS
AMOUNT WILL BE REDUCED BY $28,750.00 (TWENTY-EIGHT THOUSAND SEVEN HUNDRED AND
FIFTY DOLLARS) AT THE END OF EACH MONTH AFTER THE DATE HEREOF.
THIS LETTER OF CREDIT IS AVAILABLE BY YOUR DRAFT DRAWN AT SIGHT ON
______________________ BANK DULY SIGNED, ENDORSED AND MARKED: "DRAWN UNDER
_______________ BANK LETTER OF CREDIT NO. _________ DATED ___________"
ACCOMPANIED BY EITHER OF THE FOLLOWING DOCUMENTS:
BENEFICIARY'S STATEMENT, PURPORTEDLY SIGNED BY ANY OFFICER OF ZENITH REAL ESTATE
SERVICES, INC., STATING THE FOLLOWING:
"MISSION CRITICAL SOFTWARE, INC. (TENANT) IS IN DEFAULT OF THE LEASE AGREEMENT
DATED _________________ BETWEEN TENANT AND ENERGY CORP GROUP LC (LANDLORD)".
PARTIAL DRAWINGS ARE ALLOWED.
THIS LETTER OF CREDIT EXPIRES AT OUR COUNTERS ON JUNE 30, 2002.
ALL BANKING CHARGES OTHER THAN OURS ARE FOR THE BENEFICIARY'S ACCOUNT.
SIGNED
___________________ BANK
AUTHORIZED SIGNATORY
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 21, 1999, in Amendment No. 1 to the Registration
Statement (Form S-1) and related Prospectus of Mission Critical Software, Inc.
for the registration of shares of its common stock.
/s/ ERNST & YOUNG LLP
Austin, Texas
July 6, 1999
