<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1999
REGISTRATION NO. 333-90103
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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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THE LIGHTSPAN PARTNERSHIP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 8299 33-0585210
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
10140 CAMPUS POINT DRIVE
SAN DIEGO, CA 92121
(858) 824-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN T. KERNAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE LIGHTSPAN PARTNERSHIP, INC.
10140 CAMPUS POINT DRIVE
SAN DIEGO, CA 92121
(858) 824-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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M. WAINWRIGHT FISHBURN, JR., ESQ. KAREN K. DREYFUS, ESQ.
CHRISTOPHER J. KEARNS, ESQ. CHRISTOPHER A. WHYTOCK, ESQ.
MATTHEW T. BROWNE, ESQ. SHANNON K. RUST, ESQ.
COOLEY GODWARD LLP O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1100 610 NEWPORT CENTER DRIVE, 17TH FLOOR
SAN DIEGO, CA 92121 NEWPORT BEACH, CA 92660-6429
(858) 550-6000 (949) 760-9600
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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.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial 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. [ ]
------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS 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 PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 15, 1999
7,500,000 Shares
[LIGHTSPAN LOGO]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of the common stock is expected to be
between $10.00 and $12.00 per share. We have applied to list the common stock on
The Nasdaq Stock Market's National Market under the symbol "LSPN."
The underwriters have an option to purchase a maximum of 1,125,000
additional shares to cover over-allotments of shares.
In connection with and conditioned upon the sale of the shares in the
initial public offering, we will sell to CINAR Corporation in a concurrent
private placement an additional $10 million of shares of common stock at the
initial public offering price.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS LIGHTSPAN
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 2000.
<PAGE> 3
[Photo of three smiling children with "How smart can a kid get?"]
[Photos of Lightspan Achieve Now products]
LIGHTSPAN ACHIEVE NOW
A series of media-rich, interactive software programs for K-8 students that
covers the core curriculum - language arts, reading and math. Used in
classrooms and at home, Lightspan Achieve Now adds critical learning time to
every day, gets families involved in their children's learning, and is highly
motivating to students. The availability of a very low cost delivery platform
lets schools provide this learning opportunity to all students.
ACADEMIC SYSTEMS
Interactive, comprehensive curriculum in Mathematics and English which addresses
the needs of under-prepared college students. The courses are designed to adapt
to each student's academic needs and learning style. Faculty members orchestrate
the instruction and receive reports on student performance on the Internet or
the college's local area network.
[Photo of Academic Systems Web site home page]
LIGHTSPAN YOUR SCHOOL ONLINE
A free homepage builder for schools. It integrates with Lightspan PageOne's
classroom homepages and includes the ability to organize weblinks, a calendar
to keep students and families informed about school events, and web usage
statistics.
THE LIGHTSPAN NETWORK(R)
An online subscription service that offers a wide variety of curriculum content
for students in grades K-8 to use in school or at home. Includes learning
activities, over 115,000 education oriented Web sites, email, Comptons
Encyclopedia Online and customer support.
LIGHTSPAN PAGEONE
Lets teachers easily build a classroom homepage with the online educational
resources they need: access to 115,000 reviewed Web sites, learning activities,
lesson plans, tools to post homework, online dictionary, thesaurus and
encyclopedias, and the ability to share these features with students' families.
[Photo of Lightspan.com home page]
LIGHTSPAN.COM
The portal for K-12 education. This site is the gateway to all the learning
services Lightspan provides: Lightspan PageOne, Global Schoolhouse, Study Web,
The Lightspan Network, The Lightspan Learning Store, and Your School Online.
GLOBAL SCHOOLHOUSE
An online community of educators who share ideas and projects for online
education. Global Schoolhouse facilitates collaborative learning projects among
classrooms, community organizations, businesses and individuals around the
world.
THE LIGHTSPAN LEARNING STORE
An online store developed in partnership with Smarterkids.com. The Lightspan
Learning Store offers educational products to teachers and families.
STUDY WEB
An online "homework helper" categorized by subject matter and including grade
level recommendations and content descriptions. Study Web helps students easily
find research resources on the Web without encountering inappropriate materials.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
FORWARD-LOOKING STATEMENTS............ 15
USE OF PROCEEDS....................... 16
DIVIDEND POLICY....................... 16
CAPITALIZATION........................ 17
DILUTION.............................. 19
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA...................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING
RESULTS............................. 23
BUSINESS.............................. 36
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PAGE
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MANAGEMENT............................ 56
RELATED-PARTY TRANSACTIONS............ 63
PRINCIPAL STOCKHOLDERS................ 65
DESCRIPTION OF CAPITAL STOCK.......... 68
SHARES ELIGIBLE FOR FUTURE SALE....... 70
UNDERWRITING.......................... 72
NOTICE TO CANADIAN RESIDENTS.......... 75
LEGAL MATTERS......................... 76
EXPERTS............................... 76
ADDITIONAL INFORMATION................ 76
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU WHEN YOU ARE CONSIDERING THE INFORMATION IN THIS
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. You should read the entire prospectus carefully.
THE LIGHTSPAN PARTNERSHIP, INC.
The Lightspan Partnership, Inc. provides curriculum-based educational
software and Internet products and services used both in school and at home. Our
technology, delivery systems and content help increase student interest in
learning, parental involvement in their children's education, and productive
interaction among teachers, parents and students. Over 340 studies by schools
that use our products and services show that our products improve overall
student performance.
Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts for use in both the classroom and at
home. The Lightspan Achieve Now curriculum has already been purchased by over
435 school districts in 46 states and implemented in over 2,250 schools and
11,075 classrooms. Our Academic Systems products provide a series of
curriculum-based software that addresses the math and writing needs of under-
prepared college students. These products are currently used in over 225
colleges and universities across the United States.
We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:
- The Lightspan Network, a curriculum-based online subscription service
marketed to schools for classroom and home use;
- Lightspan PageOne, a service that enables teachers to easily create
customized home pages for their classrooms;
- Global Schoolhouse, a leading education Web site where teachers can
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site that helps parents, teachers and
students find educational information and resources on the Web;
- The Lightspan Learning Store, a Web site that sells educational products
online; and
- selected additional content for teachers, parents and students.
The need to improve student achievement is a top priority in American
education, and educators are increasingly using educational technology to help
accomplish this objective. According to the Department of Education, the United
States spent an estimated $351 billion on kindergarten through twelfth grade, or
K-12, education in the 1997 - 1998 school year, and industry sources project
that spending on educational technology will increase from an estimated $7
billion during 1998 - 1999 to approximately $10 billion by the 2001 - 2002
school year. This growth has created a significant market opportunity for
educational technology providers whose products and services help educators
provide students with the tools they need to improve achievement. By increasing
students' time spent on the core curriculum, their motivation to learn, and
their families' involvement with their learning, our curriculum-based
educational software and Internet products and services provide a unique and
powerful solution for improving student achievement.
Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. To achieve this objective, we expect to
draw on the educational technology and Internet experience of our management,
sales and marketing and Internet teams to pursue the following strategies:
- capitalize on our current market position;
- continue to develop and enhance Lightspan.com;
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- enhance our Lightspan Achieve Now curriculum with content delivery
available through new Internet and broadband technologies;
- create additional Internet-based revenue streams; and
- pursue strategic acquisitions and relationships.
We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. Through June 1996, our
activities consisted primarily of designing and developing Lightspan Achieve
Now. To supplement our product offerings, we introduced The Lightspan Network in
January 1997 and launched Lightspan PageOne in June 1999. We acquired Academic
Systems and Global Schoolhouse in September 1999 and StudyWeb in October 1999.
Our principal executive offices are located at 10140 Campus Point Drive, San
Diego, CA 92121, where our telephone number is (858) 824-8000. We maintain Web
sites at www.lightspan.com and www.academic.com. Information on our Web sites is
not part of this prospectus.
THE OFFERING
Common stock offered.................... 7,500,000 shares
Common stock to be outstanding after the
offering................................ 40,158,611 shares
Use of proceeds......................... For general corporate purposes,
including expanding our sales and
marketing activities and continued
development of our products and
services, particularly our Internet
offerings. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.................................. LSPN
SHARES OUTSTANDING AFTER THE OFFERING
The number of shares of common stock to be outstanding after the offering
is based upon the actual number of shares outstanding as of November 30, 1999,
giving effect to the conversion of all of our outstanding preferred stock into
27,087,825 shares of common stock in connection with the offering. It also
includes 909,091 shares (assuming an initial public offering price of $11 per
share) to be issued to CINAR Corporation in a private placement concurrently
with the closing of this offering. However, it does not include, as of November
30, 1999, 4,043,987 shares of common stock reserved for issuance under our stock
benefit plans, 3,755,558 of which were covered by outstanding options with a
weighted average exercise price of $3.82 per share and 288,393 of which were
available for future grants. It also does not include an additional 1,250,000
and 500,000 shares of common stock that will be reserved for issuance as of the
closing of this offering under our 2000 Equity Incentive Plan and our 2000
Employee Stock Purchase Plan, respectively. It also does not include warrants
outstanding as of November 30, 1999 to purchase a total of:
- 749,605 shares of preferred stock, which will become warrants to purchase
403,591 shares of common stock at a weighted average exercise price of
$6.64 per share upon completion of this offering; and
- approximately 489,846 shares of common stock (assuming an initial public
offering price of $11.00 per share), which will be exercised for $0.02
per share upon completion of this offering.
RECENT DEVELOPMENT
In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators worldwide. CINAR is an international supplier of animated and
live-action children's and family programming that it markets and distributes to
broadcast, cable and other media outlets. As part of our agreement, CINAR
purchased 2,500,000 shares of our Series E preferred stock (which will convert
into
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1,250,000 shares of common stock at the close of this offering) at $5.00 per
share. CINAR also agreed to purchase $10 million of our common stock (909,091
shares, assuming an initial public offering price of $11 per share) at the
initial public offering price in a private placement that will occur
concurrently with our initial public offering. We also granted CINAR a warrant
to purchase 500,000 shares of our Series E preferred stock (which will become a
warrant to purchase 250,000 shares of common stock at the close of this
offering) that will vest upon the achievement of various agreed-to strategic
goals.
SUMMARY FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
The following financial information should be read together with the
"Selected Historical and Pro Forma Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Operating Results" included elsewhere in
this prospectus.
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YEAR ENDED NINE MONTH PERIOD ENDED
JANUARY 31, 1999 OCTOBER 31, 1999
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ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
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<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 30,831 $ 37,208 $ 31,051 $ 36,779
Gross profit..................................... 19,323 23,561 20,201 24,343
Loss from operations............................. (16,947) (36,762) (19,002) (29,255)
Net loss......................................... (16,529) (36,232) (18,771) (29,149)
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AT OCTOBER 31, 1999
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ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 22,672 $108,397
Working capital............................................. 10,967 96,692
Total assets................................................ 91,674 177,399
Capital lease obligations, less current portion............. 526 526
Total shareholders' equity.................................. 64,907 150,632
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(1) The pro forma statement of operations data for the year ended January 31,
1999 and the nine months ended October 31, 1999 assumes that we purchased
Academic Systems as of the beginning of each of these periods and is based
on our historical operating results and those of Academic Systems for the
periods presented, giving effect to the amortization of intangibles related
to the acquisition and decreased interest income representing foregone
interest income at an assumed 3% rate of return.
(2) The As Adjusted column gives effect to the conversion of all of our
outstanding shares of preferred stock into shares of common stock upon the
closing of this offering and reflects our receipt of the net proceeds from
our private sale of common stock to CINAR and from this offering (at an
assumed initial public offering price of $11.00 per share), after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
-----------------------
Except as otherwise indicated, all information in this prospectus assumes:
- the underwriters' over-allotment option will not be exercised;
- a one-for-two reverse stock split of our common stock that will become
effective prior to the effectiveness of this registration statement;
- the conversion of all of our outstanding shares of preferred stock into
shares of common stock upon the closing of this offering; and
- our reincorporation in Delaware and the filing, upon approval of our
stockholders, of an amended and restated certificate of incorporation.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also refer to the other information in this prospectus, including our financial
statements and the related notes.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.
We began selling our Lightspan Achieve Now educational software in January
1996 and entered the Internet market by launching The Lightspan Network in
January 1997. Academic Systems began selling its educational software in April
1994. Since early 1999, we have significantly increased our efforts to expand
our Internet businesses. As a result, both our curriculum-based educational
software and Internet businesses have only a limited operating history on which
you can base your evaluation of our business and prospects. Before investing,
you should evaluate the risks, uncertainties, expenses and difficulties
frequently encountered by early stage companies, particularly companies that are
seeking to significantly increase their presence in new and rapidly evolving
Internet markets.
OUR QUARTERLY REVENUES ARE VOLATILE AND DIFFICULT TO FORECAST, WHICH COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE.
Our quarterly revenues ranged between $6.6 million and $12.9 million and
our quarterly net loss ranged between $3.7 million and $9.8 million over the
four quarters ended October 31, 1999. We expect significant fluctuations in our
quarterly revenues and operating results to continue. One reason for these
fluctuations is that demand for our products and services is subject to seasonal
influences based on school calendars, budget cycles and the timing of school
districts' funding sources. Moreover, our sales could be delayed from quarter to
quarter due partly to our need to educate school district decision makers
regarding the uses and benefits of our software, and the lengthy multiple
approval process that typically accompanies significant capital expenditures by
school districts. If a significant sale that we expect to occur in a particular
quarter is delayed and does not occur until a future quarter, or does not occur
at all, our quarterly performance may be worse than expected. Further, our
recently expanded Internet efforts may contribute to fluctuations in our
quarterly operating results because the sales cycles of our Internet businesses
are different than those of our curriculum-based educational software. If our
financial results for one or more quarters fall below the expectations of
analysts and investors, the trading price of our common stock may decline.
WE EXPECT A SUBSTANTIAL INCREASE IN EXPENSES AND NET LOSSES IN THE FUTURE AND
MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY, WHICH MAY CAUSE OUR STOCK PRICE TO
FALL.
Since our inception, we have incurred significant losses. As of October 31,
1999, we had an accumulated deficit of $125.0 million. We incurred net losses of
$16.5 million for the fiscal year ended January 31, 1999 and $18.8 million for
the nine months ended October 31, 1999. We expect our operating losses and
negative cash flow to continue and increase for the foreseeable future as we
incur additional costs and expenses related to:
- brand maintenance, advertising, marketing and promotional activities;
- continued development and expansion of our Internet offerings and
content;
- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel;
- acquisition of additional office space and other necessary facilities;
and
- amortization of intangible assets and goodwill recorded in connection
with our acquisitions of Academic Systems, Global Schoolhouse and
StudyWeb.
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Our ability to become profitable depends on our ability to generate and
sustain substantially higher revenues while maintaining reasonable expense
levels. Although we intend to increase our spending on the activities listed
above, these efforts may not result in increased revenues. We conduct operations
using estimates as to future expense levels based on our expectations of future
revenues. We cannot guarantee that we will be able to predict our future
revenues accurately or that we will be able to adjust spending to compensate for
any unexpected revenue shortfall. If we achieve profitability, we cannot be
certain that we will be able to sustain or increase profitability in the future.
WE MAY NEED ADDITIONAL FINANCING TO MEET OUR STRATEGIC BUSINESS OBJECTIVES,
WHICH MAY NOT BE AVAILABLE AND, IF AVAILABLE, MIGHT HURT OUR EXISTING
STOCKHOLDERS.
As we enter into new areas of business, like Internet businesses, we will
incur substantially increased expenses for which we do not expect returns for
months or years in the future. We currently anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 18 months. However, we may need to raise additional funds prior to or
after that period. If we raise additional funds through the issuance of equity
or debt securities that have rights senior to those of our stockholders, our
stockholders may experience additional dilution or may lose other rights. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. If we cannot raise funds on acceptable terms, if
and when needed, we may not be able to take advantage of future opportunities,
grow our business or respond to competitive pressures or unanticipated
developments.
OUR CONTINUED GROWTH WILL STRAIN OUR RESOURCES, AND FAILURE TO MANAGE THIS
GROWTH EFFECTIVELY COULD DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING
THE REVENUES WE EXPECT.
We expect that significant expansion of our operations will be required to
successfully implement our business strategy. For example, the development of
our Internet businesses continues to require increased sales, marketing and
promotion expenditures as well as increased development efforts. This expansion
will strain our management, operational, financial and technological resources,
as well as the infrastructure for our Web sites and services. The growth of our
Lightspan Achieve Now educational software business may strain the resources of
our professional development staff during periods of heavy implementation in
purchasing school districts. Our growth depends on our ability to attract and
retain qualified employees (including employees of businesses that we acquire),
particularly Internet systems, sales and marketing, and product development
personnel. Our failure to manage our growth in a manner that minimizes these
strains on our resources could disrupt our operations and ultimately prevent us
from generating the revenues we expect.
OUR CURRICULUM-BASED EDUCATIONAL SOFTWARE MAY BE UNABLE TO ACHIEVE OR MAINTAIN
BROADER MARKET ACCEPTANCE, WHICH WOULD CAUSE OUR FUTURE REVENUE GROWTH AND
PROFITABILITY TO SUFFER.
Revenue from sales of our educational software constituted nearly all of
our total revenues in the nine months ended October 31, 1999 and the fiscal year
ended January 31, 1999. We expect to continue to generate a substantial portion
of our revenues from software licenses, and will need to increase these revenues
in order to more effectively grow in other areas of our business. Revenues from
licenses of our curriculum-based educational software will depend principally on
broadening market acceptance of that software, which may not occur due to a
number of factors, including:
- teacher, parent and student preferences for interactive educational
technology are subject to changes in popular entertainment and
educational theory;
- some teachers may be reluctant to use interactive educational technology
to supplement their customary teaching practices;
- we may be unable to continue to demonstrate improvements in academic
performance at schools or colleges that use our educational software; and
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- our failure to detect bugs in our software could result in product
failures or poor product performance.
If market acceptance of our curriculum-based educational software is not
broadened, our future revenue growth will suffer and we may never become
profitable.
THE SUCCESS OF OUR BUSINESS MODEL REQUIRES US TO INCREASE OUR REVENUES FROM OUR
INTERNET BUSINESSES, AND WE MAY NEVER BECOME PROFITABLE IF WE ARE UNABLE TO DO
SO.
In order to grow as currently contemplated, we will need to derive an
increasing portion of our revenues from our Internet businesses, including
sponsorship of our Web sites, subscriptions to The Lightspan Network and
electronic commerce. Some of these methods of generating revenues are relatively
new to us and largely untested. Our ability to increase revenues from these
sources depends on:
- improvement of the accessibility and ease of use of our Web sites;
- development of Web sites that are sufficiently engaging to increase and
retain our number of teacher, student and parent visitors;
- purchase by parents and teachers of the products being offered at our
electronic commerce Web sites;
- initiation and growth of sponsorships and banner advertisement sales; and
- our ability to increase the subscriber base of The Lightspan Network
while maintaining a subscription fee.
If we are unable to substantially increase our revenues from our Internet
businesses, we will be unable to execute our current business model and we may
never become profitable.
WE ARE HEAVILY DEPENDENT UPON OUR RELATIONSHIP WITH SONY COMPUTER ENTERTAINMENT,
AND TERMINATION OF THAT RELATIONSHIP, SUPPLY SHORTAGES OF SONY PLAYSTATION GAME
CONSOLES FROM SONY COMPUTER ENTERTAINMENT OR UNANTICIPATED CHANGES IN THE GAME
CONSOLES COULD REDUCE OUR LIGHTSPAN ACHIEVE NOW SALES OR INCREASE RELATED
EXPENSES.
We are heavily dependent upon our relationship with Sony Computer
Entertainment, which supplies the Sony PlayStation game console used by the
students who use our Lightspan Achieve Now educational software at home. Without
incurring significant additional expense, there currently is no readily
available operating platform for broad implementation of Lightspan Achieve Now
in the home other than the PlayStation game console. Sony Computer Entertainment
has rights to terminate their agreement with us in various circumstances,
including if it elects to stop producing the PlayStation game console. If our
agreement is terminated, if the PlayStation game console loses popular appeal or
if we are unable to obtain an adequate supply of PlayStation game consoles on a
timely basis, our ability to sell our Lightspan Achieve Now curriculum will be
reduced and we could incur significant additional expenses or lose substantial
revenues.
The next version of the PlayStation game console, the recently-announced
PlayStation 2 game console, is expected to be available in the United States in
late 2000. If we are unable to enter into agreements to distribute the
PlayStation 2 game console, our Lightspan Achieve Now operations will be
disrupted and we could lose substantial revenues. Certain schools that are
potential purchasers of Lightspan Achieve Now educational software may not want
or be able to afford the PlayStation 2 game console if it is priced
significantly higher than the original PlayStation game console. While we expect
Lightspan Achieve Now to run on the PlayStation 2 game console, we may have to
adapt our software to any changes in or new versions of the PlayStation game
console that occur, which may require us to redirect significant financial and
personnel resources from other development efforts.
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<PAGE> 11
WE RELY ON STATISTICAL STUDIES TO DEMONSTRATE THE EFFECTIVENESS OF OUR PRODUCTS,
AND OUR REPUTATION AND SALES AND MARKETING EFFORTS COULD BE HARMED IF THE
RESULTS OF THESE STUDIES ARE NOT REPRESENTATIVE OR IF THEIR INTEGRITY IS
QUESTIONED, WHICH COULD LEAD TO LOWER THAN EXPECTED REVENUES.
We rely heavily on statistical studies, including those cited in this
prospectus, to demonstrate that our curriculum-based educational software
increases student achievement. We believe that these studies accurately reflect
the performance of our products. However, these studies involve the following
risks:
- the limited sample sizes used in our studies may yield results that are
not representative of the general population of students who use our
products;
- the methods used to gather the information upon which these studies are
based depend on cooperation from students and other participants and
inaccurate or incomplete responses could distort results; and
- schools studying the effectiveness of our Lightspan Achieve Now
curriculum administer different tests, and colleges and universities
studying the effectiveness of our Academic Systems curriculum apply
different methodologies and data collection techniques, making results
difficult to aggregate and compare.
We are involved in the Lightspan Achieve Now studies in the following ways:
- we facilitate the collection and analysis of data for these studies; and
- we select and pay researchers to aggregate and present the results of
these studies and, in some cases, to conduct the studies.
Our sales and marketing efforts, as well as our reputation, could be harmed
if the public, including our existing and potential customers, perceives these
studies to be biased due to our involvement, or if the results of these studies
are not representative, which could lead to lower than expected revenues.
CHANGES IN FUNDING FOR PUBLIC SCHOOL SYSTEMS COULD REDUCE OUR REVENUES AND
IMPEDE THE GROWTH OF OUR INTERNET BUSINESSES.
We derive a substantial portion of our revenues from public school funding,
which is heavily dependent on support from federal, state and local governments.
Government budget deficits may adversely affect the availability of this
funding. In addition, the government appropriations process is often slow,
unpredictable and subject to factors outside of our control. Curtailments,
delays or reductions in the funding of schools or colleges, for example a
reduction of funds allocated to schools under Title I of the Elementary and
Secondary Education Act of 1965, could delay or reduce our revenues, in part
because schools may not have sufficient capital to purchase our products or
services. Funding difficulties experienced by schools or colleges could also
cause those institutions to be more resistant to price increases in our
products, compared to other businesses that might better be able to pass on
price increases to their customers. The growth of our Internet businesses
depends on continued investment by public school systems in interactive
educational technology and products. Changes to funding of public school systems
could slow this kind of investment.
IF WE FAIL TO ENHANCE OUR INTERNET PRODUCTS AND SERVICES WITHOUT SYSTEMS
INTERRUPTIONS AND ADAPT THOSE PRODUCTS AND SERVICES TO CHANGES IN TECHNOLOGY,
OUR FUTURE REVENUE GROWTH AND PROFITABILITY COULD BE LESS THAN WE EXPECT.
We believe that our future revenue growth will depend in large part on
whether we are able to enhance and improve our Web sites and services as
planned. Enhancements and improvements to our Web sites are currently scheduled
for commercial launch, but we cannot assure you that those enhancements and
improvements will gain market acceptance or be launched on schedule and without
systems interruptions. In addition, the Internet is rapidly changing, and we
expect that we will continually need to adapt our Web sites and their related
technology to emerging Internet standards and practices, technological advances
developed by our competition, and changing subscriber, user and sponsor
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<PAGE> 12
preferences. Ongoing adaptation of our Web sites and their related technology
will entail significant expense and technical risk, and we may use new
technologies ineffectively or fail to adapt our Web sites and their related
technology on a timely and cost-effective basis. If our enhancements,
improvements and adaptations of our Web sites and their related technology are
delayed or result in systems interruptions or do not gain market acceptance, our
future revenue growth will suffer and we may never become profitable.
WE MAY NOT BE ABLE TO EXECUTE PART OF OUR BUSINESS STRATEGY IF BROADBAND
TECHNOLOGY DOES NOT BECOME MORE PREVALENT OR IF WE CANNOT REACH AGREEMENTS TO
DISTRIBUTE OUR PRODUCTS AND SERVICES USING BROADBAND TECHNOLOGY.
We intend to offer Lightspan Achieve Now and our Internet products and
services as educational channels on a digital set-top box once broadband
technology becomes widely available to cable television subscribers. We cannot
predict that it will ever be economically practical or technologically feasible
for either ourselves or cable television operators to deliver these products
using broadband technology to cable television subscribers. In addition, we may
not be able to reach commercially acceptable agreements with cable operators to
distribute our products and services using broadband technology. If we are
unable to offer Lightspan Achieve Now and our Internet products and services as
educational channels on a digital set-top box, whether because of economic or
technological limitations or a failure to reach commercially acceptable
agreements with cable television operators, we will not be able to execute part
of our business strategy and our growth and revenues will suffer.
OUR SPONSORSHIP REVENUES MAY BE LESS THAN WE EXPECT BECAUSE ADVERTISING OVER THE
INTERNET IN EDUCATIONAL SETTINGS MAY BE UNPOPULAR WITH SPONSORS, THE PUBLIC OR
GOVERNMENT ENTITIES.
We expect to generate revenues from the sale of sponsorships and banner
advertisements on our Web sites. Advertisements in educational settings may not
be accepted by the educational community or by parents and others. Sales of
sponsorships on our Web sites may therefore prove controversial and lead to
negative publicity and action by the government or private interests to
discourage companies from advertising on our Web sites. Third parties that
oppose corporate sponsorships in schools have engaged in publicity campaigns to
encourage boycotts of businesses that advertise in schools, and have sought
legislation to curb advertising in schools. If government or private action
discourages or prevents businesses from advertising in schools or we are not
able to offer potential sponsors access to our Web sites that are primarily
intended for school use, our sponsorship revenues will be significantly less
than we expect and our revenues could suffer.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE, WHICH COULD
PREVENT US FROM SUCCESSFULLY IMPLEMENTING OUR BUSINESS STRATEGY.
The educational technology market is intensely competitive and subject to
increasing commercial attention. Barriers to entering Internet markets are
relatively low, and we expect competition to intensify in the future, as more
businesses use the Internet to enter the student, parent and teacher markets for
education-oriented products and services. Competition among Internet companies
is also intensifying for Web site sponsorships. We also may be adversely
affected by pricing and other operational decisions, like the recent decision of
several of our competitors that offer educational content on the Internet to
offer a free service rather than charge a fee, which could hurt our subscription
revenues.
Our competitors include:
- software publishers that market educational curriculum products to
schools and homes;
- on-line education-related content and electronic commerce providers
(including Internet content providers that license education-oriented
content from third parties and Internet retailers that may enter the
education electronic commerce market); and
- programs that enable remote learning, assume management of schools, or
provide concentrated tutoring services.
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<PAGE> 13
Many of our current and potential competitors have longer operating histories,
larger customer or user bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. Many of these
current and potential competitors can devote substantially greater resources
than we can to product development, marketing and promotional campaigns and Web
site and systems development.
OUR ACQUISITIONS OF OTHER BUSINESSES AND INVOLVEMENT IN STRATEGIC RELATIONSHIPS
MAY NOT BE SUCCESSFUL, WHICH COULD DISTRACT OUR MANAGEMENT OR CAUSE US TO INCUR
ADDITIONAL EXPENSES.
We have acquired businesses and may continue to do so in the future. We are
currently in the process of integrating the operations, systems and personnel of
Academic Systems, Global Schoolhouse and StudyWeb, all of which we acquired in
the second half of 1999. Our integration of these acquisitions or any future
acquisitions could distract our management or cause us to incur additional
expenses, and could cause our business and operations to suffer. We also may
enter into strategic relationships with complementary businesses. For example,
we have agreed to pursue several potential strategic initiatives with CINAR
Corporation. We cannot assure you that we will implement these initiatives. If
implemented, these initiatives, or any other strategic relationships we may
enter into, may increase our expenses or divert efforts of our management and
may not be successful.
THE OPERATIONS OF ACADEMIC SYSTEMS WILL BE SUBSTANTIALLY IMPACTED IF DATABASE
SOFTWARE WE LICENSE FROM ORACLE CORPORATION CEASES TO BE AVAILABLE TO ACADEMIC
SYSTEMS FOR ANY REASON.
Academic Systems is heavily dependent upon its relationship with Oracle
Corporation, which provides a database that Academic Systems uses to accumulate
data on students' progress in its math and writing courses. If Oracle
Corporation terminates its relationship with Academic Systems or its database
fails to function properly for any reason, a portion of our operations could be
interrupted and we could lose revenues.
IF WE DO NOT SUCCESSFULLY ANTICIPATE AND ADAPT TO CHANGES IN COMPUTER PLATFORMS
AND OTHER EVOLVING TECHNOLOGIES, OUR OPERATING RESULTS RELATING TO SALES OF OUR
SOFTWARE PRODUCTS COULD SUFFER.
We must manage our software development efforts to anticipate and adapt to
changes in popular computer operating environments and other evolving
technologies. For example, we are currently reviewing possibilities for
migrating Academic Systems' CD-ROM-based educational software to an
Internet-based product, and expect to devote significant financial resources to
do so. Our curriculum-based educational software is currently delivered in
CD-ROM format on Sony PlayStation game consoles and on Windows-based personal
computers. We will continue to evaluate other operating environments and
computer platforms for our software products as they become available. We may
decide from time to time to make our software products available in other
operating environments or on other computer platforms and our efforts to do so
may involve substantial costs that may not be offset by additional revenues or
may delay our realization of revenues from these activities. Market acceptance
of our software products and our operating results relating to their sale could
also be worse than we expect if we are unable to anticipate and adapt to changes
in computer platforms and other evolving technologies on a timely and
cost-effective basis.
WE WILL NOT BE ABLE TO GROW OUR INTERNET BUSINESSES IF THE MARKET FOR THOSE
BUSINESSES DOES NOT DEVELOP.
The success of our Internet businesses will depend in large part on the
continued emergence and growth of a market for Internet-based educational
technology products. The market for educational technology is characterized by
rapid technological change and product innovation, unpredictable product life
cycles and unpredictable preferences among students, teachers and parents.
Internet commercial businesses and services are evolving markets as well, and it
is difficult to estimate how and when growth or other changes in those markets
will occur. We therefore cannot predict that the market for Internet-based
educational technology products will continue to grow.
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<PAGE> 14
OUR BUSINESS MAY NOT SUCCEED WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE
OF THE INTERNET.
Without the continued development and maintenance of the Internet
infrastructure, we could fail to generate the Internet traffic and revenues we
need for our business to succeed. In addition, our Lightspan Achieve Now and
Academic Systems curricula are very media-rich and are not currently delivered
over the Internet, given bandwidth limitations. The continued development of the
Internet includes maintenance of a reliable network with the necessary speed,
data capacity and security, as well as timely development of complementary
products for providing reliable Internet access and services. Because the online
exchange of information and global commerce on the Internet is new and evolving,
we cannot predict whether the Internet will prove to be an effective vehicle for
delivering commercial content or will provide a viable marketplace for
electronic commerce in the long term.
As the Internet continues to experience increased numbers of users,
increased frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increased users or bandwidth requirements may harm the performance of the
Internet.
UNLESS WE MAINTAIN A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT GROW AND OUR
FINANCIAL RESULTS MAY SUFFER.
We believe that maintaining and enhancing the value of our Lightspan and
Academic Systems brands is critical to attracting purchasers for our
curriculum-based educational software and sponsors, subscribers and users of our
Internet businesses. Our success in maintaining brand awareness will depend on
our ability to continuously provide educational technology that students enjoy
using and teachers and parents consider beneficial to the learning process. We
cannot assure you that we will be successful in maintaining our brand equity. In
addition, to attract and retain online sponsors, subscribers and users and to
promote and maintain the Lightspan brand, we have spent and intend to continue
spending significant amounts on an aggressive brand-enhancement strategy, which
includes advertising, promotional programs and efforts by our field sales force
and professional development staffs. We may also need to spend significant
amounts in the future to maintain the value of our Lightspan and Academic
Systems brands as they relate to our curriculum-based educational software
business. Revenues from these activities may not be sufficient to offset
associated costs.
CLAIMS RELATING TO DATA COLLECTION FROM OUR USER BASE AND CONTENT AVAILABLE ON
OR ACCESSIBLE FROM OUR WEB SITES MAY SUBJECT US TO LIABILITIES AND ADDITIONAL
EXPENSE AND DECREASE TRAFFIC TO OUR WEB SITES.
We currently collect only the names of teachers who are registering for our
Internet products. However, we may in the future collect names and other
personal information relating to students, teachers and parents, and may sell
our user information on an aggregated, non-individual basis, though we do not
intend to sell information relating to children under 13. We could be subject to
liability claims for misuses of information collected from our users, such as
for unauthorized marketing purposes, and could face additional expenses to
analyze and comply with increasing regulation in this area. The Federal Trade
Commission, for example, has announced regulations governing collection of
personal information from children under 13 and is expected to issue and enforce
additional regulations in this area. We could also be subject to liability based
on claims relating to content that is published on our Web sites or that is
accessible from our network through links to other Web sites. In addition to
subjecting us to potential liability, claims of this type could require us to
change our Web sites in a manner that could be less attractive to our customers
and divert our financial and development resources.
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO PROPERLY INTEGRATE, OUR MANAGEMENT TEAM.
Our success depends on the continued contributions of the principal members
of our sales and marketing, product development, Internet services, and
management departments. The loss of the services of any of our officers or
senior managers would disrupt operations in their respective departments and
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<PAGE> 15
could cause our overall financial results to suffer. We do not maintain any "key
person" life insurance policies other than on John T. Kernan, our Chairman and
Chief Executive Officer, and Carl Zeiger, our President and Chief Operating
Officer.
Many of our existing senior management personnel joined us during 1999,
including critical members of our Internet team. Some of these individuals have
not previously worked together and are currently being integrated as a
management team. If our senior managers are unable to work effectively as a
team, our business operations could be significantly disrupted.
YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, AND PREVENT US FROM RUNNING OUR BUSINESS.
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, we may be
temporarily prevented from operating any and all aspects of our business in the
ordinary course. In a worst case scenario, we may be unable to make or receive
phone calls at our facilities, process or ship orders, make payments due to
third parties and our employees, or operate our Internet businesses.
WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TRADEMARKS, COPYRIGHTS,
SOFTWARE, CHARACTERS AND OTHER INTELLECTUAL PROPERTY ASSETS. IF OTHERS DO USE
THESE ASSETS, THEIR VALUE TO US, AND OUR ABILITY TO USE THEM TO GENERATE
REVENUES, MAY DECREASE.
Our intellectual property includes our trademarks and copyrights,
proprietary software, characters and other proprietary rights. We believe that
our intellectual property is important to our success and our competitive
position, and we try to protect it. However, our efforts may be inadequate. In
addition, our ability to conduct our business may be harmed if others claim we
violate their intellectual property rights. If successful, claims of this nature
could seriously harm our business by requiring us to cease using important
intellectual property or pay monetary damages. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to incur
legal costs and diverting management's attention away from our business.
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our stock.
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL 57.3% OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering, executive officers, directors and holders of 5% or
more of our outstanding common stock will, in the aggregate, beneficially own
57.3% of our outstanding common stock. These stockholders will be able to
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of corporate transactions. This
concentration of ownership may also delay, deter or prevent a change in control
of our company and may make some transactions more difficult or impossible to
complete without the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could
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<PAGE> 16
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and take other corporate actions. As a result,
these provisions could limit the price that investors are willing to pay in the
future for shares of our common stock. These provisions:
- authorize us to issue preferred stock that can be created and issued by
the board of directors without prior stockholder approval, with rights
senior to those of common stock;
- provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
THERE IS NO PRIOR MARKET FOR OUR SECURITIES, AND OUR STOCK PRICE MAY DECLINE
AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock. After the offering, the market price of our common stock may decline
below the initial public offering price. The initial public offering price has
been determined by negotiations between us and representatives of the
underwriters. In addition, an active public market for our common stock may not
develop or be sustained after this offering.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES AND, IF A LIQUIDATION WERE TO OCCUR, YOU MAY
RECEIVE SIGNIFICANTLY LESS THAN THE PURCHASE PRICE FOR YOUR SHARES.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of our common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since the price per share in this offering will be substantially
higher than it was for our existing stockholders. The dilution will be $8.54 per
share in the net tangible book value of the common stock from the initial public
offering price. If the underwriters exercise their over-allotment option, or if
outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution. As a result of this dilution, in the
event of a liquidation, common stockholders who purchase stock in this offering
may receive significantly less than the purchase price for the shares they
purchased in this offering.
APPROXIMATELY 32.7 MILLION, OR 81.3%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. WE WILL ALSO ISSUE ADDITIONAL STOCK FOLLOWING THIS OFFERING. THIS WILL
INCREASE THE SUPPLY OF COMMON STOCK AVAILABLE FOR RESALE, AND COULD INCREASE
TRADING ACTIVITY AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After completion of our private sale of common stock to CINAR and
this offering, assuming a public offering price of $11.00 per share, we will
have 40,158,611 shares of common stock outstanding, based on the number of our
outstanding shares on November 30, 1999. The shares offered for sale through the
underwriters will be freely tradable unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters. Of the remaining
32,658,611 shares of common stock outstanding after this offering, 26,993,927
shares will be eligible for sale in the public market beginning 181 days after
the date of this prospectus. The remaining 5,664,684 shares will become
available at various times thereafter upon the expiration of one-year holding
periods. We also intend to register up to approximately 5,793,987 additional
shares of our common stock after this offering for issuance under our equity
plans and may issue additional stock in connection with acquisitions or
strategic relationships and to some of our existing stockholders.
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<PAGE> 17
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue"
or "opportunity," 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 described above and in other parts of this
prospectus. 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. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
actual results or to changes in our expectations.
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<PAGE> 18
USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately
$75.7 million (based upon an assumed initial public offering price of $11.00 per
share) after deducting the underwriting discount and commissions and estimated
offering expenses ($87.2 million if the over-allotment option is exercised in
full). We also expect to receive an additional $10 million as a result of our
sale to CINAR Corporation of common stock in a private placement concurrent with
the closing of the initial public offering.
We expect to use the net proceeds for general corporate purposes, including
expansion of our sales and marketing activities and continued development of our
products and services, particularly our Internet offerings. Our management will
retain broad discretion in the allocation of the net proceeds of this offering.
The amounts we actually spend will depend on a number of factors, including the
amount of our future revenues and other factors described elsewhere in this
prospectus. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses, technologies, product lines or products. Pending
such uses, the net proceeds of this offering will be invested in short term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999:
- On an actual basis after giving effect to 2,600,000 shares of Series E
preferred stock subscribed to in October 1999 and issued in November
1999;
- On a pro forma basis after giving effect to the conversion of all of our
outstanding shares of preferred stock into 27,087,825 shares of common
stock upon the closing of the offering; and
- On a pro forma as adjusted basis, giving effect to our issuance of common
stock in the offering at an assumed price of $11.00 per share and our
receipt of the proceeds from our private sale of common stock to CINAR.
This information should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Capital lease obligations, less current portion... $ 526,458 $ 526,458 $ 526,458
Shareholders' equity(1):
Series A preferred stock, $.001 par value;
7,615,500 shares authorized and 7,467,500 shares
issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 7,467 -- --
Series B preferred stock, $.001 par value;
11,816,664 shares authorized and 11,666,664
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 11,667 -- --
Series C preferred stock, $.001 par value;
3,360,910 shares authorized and 3,264,285 shares
issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 3,264 -- --
Series D preferred stock, $.001 par value;
17,000,000 shares authorized and 13,129,444
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 13,129 -- --
Series E preferred stock, $.001 par value;
22,000,000 shares authorized and 16,703,022
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 16,703 -- --
Common Stock, $.001 par value; 75,000,000 shares
authorized and 4,625,389 shares issued and
outstanding, actual; 31,713,214 shares issued
and outstanding, pro forma (unaudited);
250,000,000 shares authorized, 40,122,305 shares
issued and outstanding, pro forma as adjusted... 4,625 31,713 40,122
Additional paid-in capital........................ 209,464,854 209,489,996 295,206,587
Stock subscriptions receivable.................... (13,000,000) -- --
Deferred advertising expense...................... (400,000) (400,000) (400,000)
Deferred compensation............................. (6,236,490) (6,236,490) (6,236,490)
Accumulated deficit............................... (124,977,948) (124,977,948) (124,977,948)
------------- ------------- -------------
Total shareholders' equity.............. 64,907,271 77,907,271 163,632,271
------------- ------------- -------------
Total capitalization.................... $ 65,433,729 $ 78,433,729 $ 164,158,729
============= ============= =============
</TABLE>
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- ---------------
(1) Share numbers in the table do not include issuances subsequent to October
31, 1999, or the following shares:
- 5,153,941 shares of common stock reserved for issuance under our stock
benefit plans, of which 3,714,076 shares were covered by outstanding
options with a weighted average exercise price of $3.64 per share and
366,361 shares remain available for grant;
- 489,846 shares of common stock (assuming a price of $11.00 per share in
this offering) issuable upon exercise of outstanding warrants at an
exercise price of $0.02 per share;
- 150,000 shares of Series A preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $1.00 per share (which will
become a warrant to purchase 75,000 shares of common stock at an
exercise price of $2.00 per share upon the closing of this offering);
- 150,000 shares of Series B preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.00 per share (which will
become a warrant to purchase 75,000 shares of common stock at an
exercise price of $6.00 per share upon the closing of this offering);
- 154,189 shares of Series C preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.76 per share (which will
become a warrant to purchase 77,096 shares of common stock at an
exercise price of $7.52 per share upon the closing of this offering);
- 183,105 shares of Series D preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.76 per share (which will
become a warrant to purchase 91,556 shares of common stock at an
exercise price of $7.52 per share upon the closing of this offering);
and
- 127,659 shares of Series D preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $4.70 per share (which will
become a warrant to purchase 63,830 shares of common stock at an
exercise price of $9.40 per share upon the closing of this offering).
- 42,216 shares of Series E preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $5.00 per share (which will
become a warrant to purchase 21,109 shares of common stock at an
exercise price of $10.00 per share upon the closing of this offering).
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DILUTION
As of October 31, 1999, our pro forma net tangible book value, after giving
effect to conversion of all of our preferred stock then outstanding, was
approximately $12.8 million, or $.40 per share of common stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding. After giving effect to our sale of common stock offered hereby at
an assumed initial public offering price of $11.00 per share, our private sale
of common stock to CINAR, and our receipt of the estimated net proceeds from
both, our pro forma net tangible book value as of October 31, 1999 would have
been approximately $98.5 million, or $2.46 per share. This represents an
immediate increase in net tangible book value of $2.06 per share to existing
stockholders and an immediate dilution of $8.54 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before the
offering.................................................... $ .40
Increase per share attributable to new investors.......... 2.06
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.46
------
Dilution per share to new investors......................... $ 8.54
======
</TABLE>
The following table summarizes, on a pro forma basis as of October 31,
1999, the differences between 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 before deducting the
underwriting discounts and commissions for this offering and our estimated
offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 31,713,214(1) 79% $158,648 63% $ 5.00
New investors.......................... 8,409,091(2) 21% 92,500 37% $11.00
---------- --- -------- ----
Total................................ 40,122,305 100% $251,148 100% $ 6.26
========== === ======== ====
</TABLE>
- ---------------
(1) Gives effect to the conversion of all of our outstanding preferred stock
into 27,087,825 shares of common stock in connection with the offering, and
assumes no exercise of stock options or warrants outstanding as of October
31, 1999. As of October 31, 1999, there were options outstanding to purchase
a total of 3,714,076 shares of common stock, with a weighted average
exercise price of $3.64 per share. As of October 31, 1999, there were also
749,605 warrants outstanding to purchase a total of 807,169 shares of
preferred stock (which will become warrants to purchase 403,591 shares of
common stock at a weighted average exercise price of $6.63 per share upon
completion of this offering), as well as warrants outstanding to purchase a
total of approximately 489,846 shares of common stock (assuming a price of
$11.00 per share in this offering) which will be exercised for $0.02 per
share upon completion of this offering. To the extent that any of these
options or warrants are exercised, there will be further dilution to new
investors. See "Management -- Equity Plans," "Description of Capital Stock"
and Note 5 to the Lightspan financial statements.
(2) Includes 909,091 shares of common stock (assuming an initial public offering
price of $11.00 per share) that CINAR Corporation has agreed to purchase
upon the close of this offering.
19
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Lightspan and Academic Systems financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Operating Results" included elsewhere in this prospectus. The pro forma
statement of operations data for the year ended January 31, 1999 and the nine
months ended October 31, 1999 should be read in conjunction with the unaudited
pro forma financial statements included elsewhere in this prospectus. That data
assumes that we purchased Academic Systems as of the beginning of each of these
periods and is based on our historical operating results and those of Academic
Systems for the periods presented, giving effect to the amortization of
intangibles related to the acquisition, decreased interest income representing
foregone interest income at an assumed 3% rate of return, our issuance of shares
of common and preferred stock to complete the acquisition as if such issuance
had occurred at the beginning of each of the periods presented, and the
conversion of all of our outstanding shares of preferred stock as of their
original dates of issuance. Our statement of operations data for the years ended
January 31, 1995, 1996, 1997, 1998 and 1999 and balance sheet data as of January
31, 1995, 1996, 1997, 1998 and 1999 are derived from our audited financial
statements, which are included elsewhere in this prospectus for the years ended
January 31, 1997, 1998 and 1999 and as of January 31, 1998 and 1999. Academic
Systems' statement of operations data for the years ended September 30, 1997 and
1998 are derived from Academic Systems' audited financial statements included
elsewhere in this prospectus. Our statement of operations data for the nine
months ended October 31, 1999 and our balance sheet data as of October 31, 1999
are derived from our audited financial statements included elsewhere in this
prospectus. Our statement of operations data for the nine months ended October
31, 1998 are derived from our unaudited financial statements included elsewhere
in this prospectus. Academic Systems' statement of operations data for the nine
months ended June 30, 1998 and 1999 are derived from its unaudited financial
statements included elsewhere in this prospectus. The unaudited financial
statements have been prepared on substantially the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of the
financial position and results of operations for the periods presented.
Historical results are not necessarily indicative of the results that may be
expected in the future, and the results of interim periods are not necessarily
indicative of results that may be expected for the entire year. The following
financial information is in thousands, except per share data.
20
<PAGE> 23
THE LIGHTSPAN PARTNERSHIP, INC.
<TABLE>
<CAPTION>
NINE MONTH PERIOD
YEAR ENDED JANUARY 31, ENDED OCTOBER 31,
---------------------------------------------------------------- --------------------------------
1995 1996 1997 1998 1999 1999 1998 1999 1999
------- -------- -------- -------- -------- -------- -------- -------- --------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses.................. $ -- $ -- $ 5,592 $ 15,042 $ 20,985 $ 27,362 $ 15,753 $ 21,504 $ 27,232
Services.................. -- -- 554 1,973 3,742 3,742 2,960 4,718 4,718
Hardware.................. -- -- 2,419 5,294 6,104 6,104 4,867 4,829 4,829
------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues...... -- -- 8,565 22,309 30,831 37,208 23,580 31,051 36,779
Cost of revenues:
Licenses.................. -- -- 2,964 6,409 4,150 6,289 2,971 4,640 6,226
Services.................. -- -- 563 1,753 2,385 2,385 1,753 2,226 2,226
Hardware.................. -- -- 2,315 4,745 4,973 4,973 3,986 3,984 3,984
------- -------- -------- -------- -------- -------- -------- -------- --------
Total cost of
revenues.......... -- -- 5,842 12,907 11,508 13,647 8,710 10,850 12,436
------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............... -- -- 2,723 9,402 19,323 23,561 14,871 20,201 24,343
Operating expenses:
Technology and
development............. 4,907 12,152 18,953 14,816 10,594 13,876 8,466 7,526 8,997
Sales and marketing....... 2,177 6,831 13,773 20,296 22,066 28,814 16,469 23,474 27,553
General and
administrative.......... 1,231 1,460 2,473 2,715 3,590 5,780 1,792 4,083 5,533
Stock-based
compensation............ -- -- -- -- 20 20 -- 2,503 2,503
Amortization of
intangibles............. -- -- -- -- -- 11,833 -- 1,615 9,012
------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses.......... 8,315 20,443 35,199 37,827 36,270 60,323 26,727 39,202 53,598
------- -------- -------- -------- -------- -------- -------- -------- --------
Loss from operations....... (8,315) (20,443) (32,476) (28,425) (16,947) (36,762) (11,856) (19,002) (29,255)
Interest income (expense),
net....................... 86 876 (113) (528) 418 529 350 231 106
------- -------- -------- -------- -------- -------- -------- -------- --------
Net loss................... $(8,229) $(19,567) $(32,589) $(28,953) $(16,529) $(36,233) (11,506) (18,771) (29,149)
======= ======== ======== ======== ======== ======== ======== ======== ========
Historical net loss per
share(1) -- basic and
diluted................... $ (2.72) $ (6.47) $ (10.72) $ (9.11) $ (4.88) $ (3.45) $ (4.82) $ (7.49)
======= ======== ======== ======== ======== ======== ======== ========
Historical weighted average
shares -- basic and
diluted................... 3,024 3,024 3,039 3,177 3,388 3,331 3,892 3,892
======= ======== ======== ======== ======== ======== ======== ========
Pro forma net loss per
share -- basic and
diluted................... $ (0.76)(2) $ (1.40)(3) $ (0.77) $ (1.04)(3)
======== ======== ======== ========
Pro forma weighted average
shares -- basic and
diluted................... 21,801(2) 25,968(3) 24,445 27,940(3)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------------------------- OCTOBER 31,
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $17,300 $14,733 $ 1,884 $ 4,422 $ 7,143 $22,672
Working capital (deficit)................................... 15,795 14,037 (287) (1,020) 3,331 10,967
Total assets................................................ 19,824 18,259 12,852 14,080 19,010 91,674
Capital lease obligations, less current portion............. 1,379 1,460 1,702 775 393 526
Total shareholders' equity.................................. $16,379 $14,537 $ 1,614 $ 208 $ 4,314 $64,907
</TABLE>
- ---------------
(1) See Note 1 to the Lightspan financial statements for a description of the
computation of the historical net loss per share and the number of shares
used in the historical per share calculation.
(2) Assumes the conversion of all of our outstanding preferred stock as of their
original dates of issuance. See Note 1 to the Lightspan financial statements
for a description of the computation of pro forma net loss per share and the
number of shares used in the pro forma per share calculation.
(3) In addition to the assumption described in (2) above, assumes the issuance
of our shares of common and preferred stock used to complete the acquisition
of Academic Systems as if such issuance had occurred at the beginning of
each of the periods presented.
21
<PAGE> 24
ACADEMIC SYSTEMS CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
------------------ -----------------
1997 1998 1998 1999
-------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 4,399 $ 5,939 $ 2,947 $ 4,870
Cost of revenues......................................... 1,920 2,064 1,183 1,378
-------- ------- ------- -------
Gross profit............................................. 2,479 3,875 1,764 3,492
Operating expenses....................................... 12,737 12,893 10,013 8,003
-------- ------- ------- -------
Loss from operations..................................... (10,259) (9,018) (8,249) (4,511)
Interest income (expense), net........................... 151 347 310 (50)
-------- ------- ------- -------
Net loss................................................. $(10,108) $(8,671) $(7,939) $(4,561)
======== ======= ======= =======
</TABLE>
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
OVERVIEW
We develop, market and sell curriculum-based educational software and
Internet products and services used both in school and at home. Our
curriculum-based educational software consists of our Lightspan Achieve Now and
Academic Systems software. Lightspan Achieve Now is our media-rich, interactive
CD-ROM-based software for students in kindergarten through eighth grade that
covers the core curriculum of language arts, reading and math. Its technology,
delivery system and content help increase student interest in learning, parental
involvement in their children's education, and productive interaction among
teachers, parents and students. Our Academic Systems software is also
CD-ROM-based and serves the college market with an English and mathematics
curriculum designed to meet the needs of under-prepared students. We offer the
following integrated family of Internet products and services through our Web
site, Lightspan.com:
- The Lightspan Network, an online subscription service marketed to schools
for classroom and home use;
- Lightspan PageOne, an online service developed with Yahoo! that enables
teachers to easily create customized home pages for their classrooms;
- Global Schoolhouse, a leading education Web site that helps teachers
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site that helps parents, teachers and
students find on the Web the educational information and resources they
want;
- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents; and
- selected additional content for teachers, parents and students.
We charge an annual subscription fee of $2,500 for The Lightspan Network to
subscribing schools. We also plan to generate revenues for our free Internet
products and services, like Lightspan PageOne and Global Schoolhouse, through
sponsorships, advertising and electronic commerce.
Our products and services are sold to school districts by a direct field
sales force and supported by our professional development team who assists in
implementing our curricula in schools.
We commenced operations in September 1993, and through June 1996 our
activities consisted primarily of designing and developing Lightspan Achieve
Now. In January 1996, we released our Lightspan Achieve Now curriculum for use
on Windows-based personal computers. In the fall of that year, we released the
product for use on the Sony PlayStation game console. In January 1997, we
introduced The Lightspan Network to supplement our product offerings. In June
1999, we launched Lightspan PageOne. We acquired Academic Systems and Global
Schoolhouse in September 1999, and StudyWeb in October 1999. We also introduced
the Lightspan Learning Store in October 1999.
RESULTS OF OPERATIONS
Revenues
Our revenues from sales of Lightspan Achieve Now consist of license,
service and hardware revenues, and our revenues from sales of The Lightspan
Network consist of subscription fees. Since inception, revenues associated with
our Lightspan Achieve Now curriculum have represented approximately 97% of total
revenues.
In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, Lightspan allocates the total
23
<PAGE> 26
fee to each component of the arrangement based on objective evidence of its fair
value, which is specific to Lightspan. The objective evidence for each element
is based on the respective list prices of each element when sold or offered for
sale separately.
Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.
License Revenues. We derive license revenues from the sale of Lightspan
Achieve Now licenses and subscriptions for The Lightspan Network. We recognize
revenue from Lightspan Achieve Now licenses after:
- a license agreement has been executed or a definitive purchase order has
been received;
- the product has been shipped;
- the license fee has become fixed and determinable;
- the collection of the fee is considered probable; and
- the related hardware, if applicable, has been shipped.
Our revenue recognition for Lightspan Achieve Now licenses is in accordance
with standards published by the American Institute of Certified Public
Accountants. As a result of changes in those standards, in February 1998 we
adopted the percentage of completion method for recognizing revenue from
Lightspan Achieve Now licenses. Under this method, we recognize the full sale
value of completed Lightspan Achieve Now titles upon shipment as well as a
portion of the sale value of as-yet uncompleted titles based on the percentage
of completion of those uncompleted titles. As previously uncompleted Lightspan
Achieve Now titles are completed, we recognize a corresponding amount of
revenue. We believe that the package of Lightspan Achieve Now titles initially
shipped to our customers is adequate to fulfill the academic objectives of our
Lightspan Achieve Now curriculum. However, we intend to deliver to our Lightspan
Achieve Now customers several as-yet-uncompleted titles to round out that
curriculum. As of October 31, 1999, 5 of our 77 titles were still under
development for the Sony platform and 9 of our 75 titles were still under
development for the Windows platform. Most of these titles were substantially
complete at October 31, 1999 and are expected to be shipped by early 2000. We
may elect to produce additional Lightspan Achieve Now titles beyond those
currently contemplated. These titles would be sold separately to existing
Lightspan Achieve Now users for an additional license fee.
We believe that we can reasonably estimate the percentage of completion for
each as-yet uncompleted title based on its stage within a predefined development
and production process, and that this methodology best approximates progress to
completion. Lightspan develops its titles in seven separate and distinct phases.
Each phase has milestone criteria that must be met before the CD moves into the
next phase of development and production. Each phase has a specific
percentage-of-completion assigned to it, which is used to determine revenue
recognition and related cost of revenues for as-yet uncompleted titles.
The net impact to license revenues of the accounting change described in
the preceding paragraphs was a decrease in license revenues of $0.8 million
during the year ended January 31, 1999, and an increase in license revenues of
$.3 million for the nine months ended October 31, 1999.
The ultimate composition of the complete collection of Lightspan Achieve
Now titles was evolving throughout fiscal 1997, 1998 and 1999, and changed
numerous times as a number of planned titles were dropped and as others were
modified, or, in a limited number of cases, added. Our decision to modify,
delete or add titles has not had an impact on our revenues; however, these
revisions have, from time to time, resulted in reductions to our recorded
liabilities for cost of sales on as-yet uncompleted titles.
We recognize revenue from subscriptions to The Lightspan Network ratably
over the term of the subscription agreement. Subscription licenses are for a
one-year term, and are paid in advance.
Amounts received in excess of revenue that is recognized are recorded as
deferred revenue.
Service Revenues. We derive service revenues from implementation services
and training for our Lightspan Achieve Now curriculum that is provided by our
professional development team and, to a lesser
24
<PAGE> 27
extent, from telephone support and maintenance. All customers that purchase our
Lightspan Achieve Now curriculum also purchase service and support. This service
and support are paid for in advance and initially recorded as deferred revenues.
Service revenues are recognized when services are performed, in accordance with
the standard implementation, training, service, and evaluation plans that we
establish for the customer. Revenues from telephone support and maintenance
arrangements are recognized ratably over the one-year term of the support and
maintenance agreement.
Hardware Revenues. We derive hardware revenues from the sale of Sony
PlayStation game consoles and accessories. We recognize hardware revenues after
a definitive purchase order has been received, the product has been shipped and
collection of the sales price is considered probable. Substantially all of our
Lightspan Achieve Now customers also purchase Sony PlayStation game consoles.
Our future hardware revenues will vary based on the cost to us of Sony
PlayStation game consoles and accessories.
Future Revenue Sources. We anticipate that the sources of our revenues will
change over time. In the future, we plan to generate revenues from other sources
such as:
- sponsorship of, and advertising on, our Web sites;
- electronic commerce; and
- new titles that may be developed to expand Lightspan Achieve Now.
As broadband technology becomes more prevalent and cable operators provide
more of their customers with digital set-top boxes, we also intend to offer both
Lightspan Achieve Now and all of our Internet products and services as
educational channels on digital cable television systems.
COST OF REVENUES
Our cost of revenues consists of:
- costs for assembly, distribution and materials for CD-ROMs, and packaging
and print material costs;
- labor costs and overhead related to professional development personnel;
- costs for Sony PlayStation game consoles and related accessories;
- costs for third-party royalties and third-party content; and
- costs for server and network fees.
OPERATING EXPENSES
During the years ended January 31, 1998 and 1999, our technology and
development and sales and marketing expenses related primarily to the
development, release, marketing, sale and distribution of Lightspan Achieve Now.
During the nine months ended October 31, 1999, our expenses relating to the
development, sale and marketing of our Internet products and services increased.
We expect that we will continue to make investments in product development,
sales and marketing to enhance our Lightspan Achieve Now and Academic Systems
curricula and expand our existing customer base. However, an increasingly
important part of our strategy and spending will focus on building our
technology and development and sales and marketing teams to support our Internet
products and services.
Technology and Development. Our technology and development costs consist
primarily of payroll and related costs for design, art, production, development,
maintenance and testing of our Lightspan Achieve Now curriculum and for
performing Web site design, development and testing. We believe that continued
investment in Web site development is critical to attain our strategic
objectives and therefore anticipate that Web site development expenses will
increase significantly in future periods.
Sales and Marketing. Our sales and marketing expenses consist primarily of
salaries, commissions, bonuses, related payroll and travel costs, advertising,
promotional activities, customer incentive programs and research and evaluation
of our current customers and markets. We expect that sales and marketing
25
<PAGE> 28
expenses will increase significantly in future periods and we intend to continue
to pursue aggressive branding and marketing campaigns to retain and increase
sales to current customers, attract new customers, and broaden our markets. We
expect that most of these activities will be directed toward the target users
and markets for our Internet products and services.
General and Administrative. Our general and administrative expenses consist
primarily of payroll and related costs for executive and administrative
personnel, professional services expenses and other general corporate expenses.
We expect that general and administrative expenses will increase as our business
grows and we expand our staff, increase our infrastructure, and incur costs
associated with being a public company.
Stock-Based Compensation. We have recorded deferred stock-based
compensation as a result of our granting of stock options to employees with
exercise prices per share deemed to be below the fair values per share for our
common stock on the dates those options were granted. The deferred stock-based
compensation is being amortized to expense on an accelerated basis over the
vesting period of the individual options, generally four years. As of October
31, 1999, there was approximately $6.2 million to be amortized in future
periods.
Amortization of Intangible Assets. In connection with the acquisitions of
Academic Systems, Global Schoolhouse and StudyWeb, we recorded intangible assets
totaling an aggregate of approximately $53.7 million, including goodwill of
$27.9 million. We amortize intangible assets over their respective useful lives,
ranging from three to ten years.
Operating Losses
We have incurred significant losses since our inception and, as of October
31, 1999, had an accumulated deficit of approximately $125.0 million. We expect
to continue to incur substantial operating losses for the foreseeable future.
COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
Our revenues increased to $31.1 million in the nine months ended October
31, 1999 from $23.6 million for the comparable period of 1998, an increase of
32%. No one customer accounted for more than 10% of total revenues for the nine
month periods ended October 31, 1999 or 1998.
License Revenues. Our license revenues grew to $21.5 million from $15.8
million, an increase of 37%.
Lightspan Achieve Now license revenues were $19.8 million compared to $15.1
million, an increase of 31%, and represented 92% and 96% of total license
revenues in the nine months ended October 31, 1999 and 1998, respectively. This
increase was due primarily to increased sales and marketing efforts, continued
market acceptance of our products and expansion of our customer base. The
increase was also attributable to license revenue recognized under the
percentage of completion method upon further development, completion and release
to existing customers of additional Lightspan Achieve Now titles during the nine
months ended October 31, 1999.
Our revenues from subscription fees for The Lightspan Network increased to
$1.2 million from $0.7 million, an increase of 95%. This increase was due
primarily to an increase in the number of subscribers to The Lightspan Network.
Academic Systems license revenues were $0.5 million from the date of
acquisition (September 20, 1999) through October 31, 1999.
Service Revenues. Our service revenues increased to $4.7 million from $3.0
million, an increase of 59%. This increase was due primarily to an increase in
sales of Lightspan Achieve Now licenses. All customers that purchase our
Lightspan Achieve Now curriculum also purchase professional service and support.
26
<PAGE> 29
Hardware Revenues. Our hardware revenues declined to $4.8 million from $4.9
million, a decrease of 1%. This decrease was due to a decrease in the average
selling price of the Sony PlayStation game console, offset in part by an
increase in the number of units we shipped.
Cost of Revenues
Our cost of revenues increased to $10.9 million for the nine months ended
October 31, 1999 from $8.7 million for the comparable period in 1998, an
increase of 25%. Gross margin as a percentage of total revenues was 65% and 63%
for the nine months ended October 31, 1999 and 1998, respectively.
Cost of License Revenues. Our cost of license revenues increased to $4.6
million from $3.0 million, an increase of 56%. Gross margin as a percentage of
license revenues decreased to 78% from 81%.
Our cost of revenues for Lightspan Achieve Now licenses was $4.1 million
compared to $2.8 million, an increase of 48%. Gross margin as a percentage of
Lightspan Achieve Now license revenues decreased to 79% from 82%. In the nine
months ended October 31, 1998, we elected to discontinue the development of
certain as-yet-uncompleted Lightspan Achieve Now titles and reduced our
estimates of the cost to complete other Lightspan Achieve Now titles, both of
which reduced our cost of license revenues and favorably impacted our gross
margin in that period. We accrued the cost of revenues related to as-yet
uncompleted titles as the corresponding revenue on these titles was recognized.
The ultimate composition of the complete collection of Lightspan Achieve Now
titles was evolving throughout fiscal 1997, 1998 and 1999, and changed numerous
times as a number of planned titles were dropped and as others were modified,
or, in a limited number of cases, added. These revisions resulted in reductions
to the liability for cost of revenues on as-yet uncompleted titles during the
nine months ended October 31, 1998. In addition, our cost of license revenues
for the nine months ended October 31, 1998 was favorably impacted when we
revised our estimate of the costs to convert our existing customer base for our
Lightspan Achieve Now curriculum to a new software Motion Picture Experts Group,
or MPEG, format and Sony PlayStation game consoles. As the development of
Lightspan Achieve Now evolved, we determined that, in order to remain
competitive in the market, we would be required to release our products in
formats compatible with less expensive and more easily transportable hardware.
As a result, in fiscal 1998, we recorded a liability for the estimated costs of
converting our current customers to these new formats. During fiscal 1999, we
revised our cost estimates of this conversion and reduced our liability
accordingly. Our gross margin in the nine months ended October 31, 1999 was
favorably impacted by a reduction in material and packaging costs and
third-party royalty rates.
Our cost of revenues for subscriptions to The Lightspan Network increased
to $0.4 million from $0.2 million, an increase of 100%. This growth was due
primarily to an increase in third-party content fees driven by an increase in
subscriptions. Gross margin as a percentage of subscription fee revenues from
The Lightspan Network decreased to 70% from 71%. This decrease was primarily due
to additional network and server costs and, to a lesser extent, additional
support personnel costs required to support a larger subscription base.
Our cost of revenues for Academic Systems licenses was $0.1 million from
the date of acquisition (September 20, 1999) through October 31, 1999. Gross
margin as a percentage of license revenues was 70%.
Cost of Service Revenues. Our cost of service revenues increased to $2.2
million from $1.8 million, an increase of 27%. This increase was primarily due
to an increase in professional services and support personnel to accommodate the
growth in sales of Lightspan Achieve Now licenses and related services. Gross
margin as a percentage of service revenues increased to 53% from 41%. This
increase was primarily due to our service revenues increasing at a greater rate
than our fixed professional development costs.
Cost of Hardware Revenues. Our cost of hardware revenues remained steady at
$4.0 million. Gross margin as a percentage of hardware revenues remained
relatively constant. We expect that gross margins as a percentage of hardware
revenue may fluctuate from period-to-period based on variations in the product
mix of hardware accessories.
27
<PAGE> 30
Technology and Development
Our technology and development expenses decreased to $7.5 million for the
nine months ended October 31, 1999 from $8.5 million for the comparable period
of 1998, a decrease of 11%. This decrease was due to a reduction in development
personnel and related costs that occurred in the second half of the prior fiscal
year. The reduction occurred following completion of initial design and
development of substantially all of our Lightspan Achieve Now titles. This
reduction was partially offset by our hiring of additional personnel for Web
site design and development and a shift of some existing development personnel
and related costs to our Internet business as we expanded our Internet
offerings.
Sales and Marketing
Our sales and marketing expenses increased to $23.5 million for the nine
months ended October 31, 1999 from $16.5 million for the comparable period in
1998, an increase of 43%. This increase was attributable to an increase in
marketing personnel and marketing and promotional activities, particularly in
connection with the launch of Lightspan PageOne.
General and Administrative
Our general and administrative expenses increased to $4.1 million for the
nine months ended October 31, 1999 from $1.8 million for the comparable period
in 1998, an increase of 128%. This increase was due primarily to increased
personnel and related costs, particularly in our finance and management
information systems departments. The increase was also due to legal fees
associated with a lawsuit brought by a former employee, which was settled in
September 1999, in addition to an increase in our allowance for doubtful
accounts.
Stock-Based Compensation
During the year ended January 31, 1999 and the nine months ended October
31, 1999, we granted stock options with exercise prices that were less than the
deemed fair value of the underlying shares of common stock on the date of grant.
As a result, we have recorded and will continue to record deferred stock-based
compensation expense over the period that these options vest. The deferred
stock-based compensation expense was approximately $2.5 million for the nine
months ended October 31, 1999.
Amortization of Intangible Assets
Our amortization of intangible assets totaled $1.6 million for the nine
months ended October 31, 1999 and represents amortization related to Academic
Systems since September 20, 1999, Global Schoolhouse since September 2, 1999,
and StudyWeb since October 28, 1999.
Interest Income (Expense)
Our net interest income decreased to $0.2 million for the nine months ended
October 31, 1999 from $0.4 million for the comparable period in 1998, a decrease
of 34%. This decrease was due to higher average cash balances in the prior
comparable period.
COMPARISON OF YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Revenues
Our revenues increased to $30.8 million during the year ended January 31,
1999, or fiscal 1999, from $22.3 million during the year ended January 31, 1998,
or fiscal 1998, and $8.6 million during the year ended January 31, 1997, or
fiscal 1997. Revenues grew by 38% in fiscal 1999 and 160% in fiscal 1998.
Our license revenues increased to $21.0 million from $15.0 million and $5.6
million in fiscal 1998 and fiscal 1997, respectively. The 40% and 169% increases
were due to increases in the sales of Lightspan
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Achieve Now licenses, primarily as a result of increased sales and marketing
efforts, continued market acceptance of our products, expansion of our customer
base and availability and release of additional Lightspan Achieve Now titles.
The increases were also due, to a lesser extent, to increases in the number of
subscriptions to The Lightspan Network.
Our service revenues were $3.7 million, $2.0 million, and $0.6 million in
fiscal 1999, fiscal 1998, and fiscal 1997, respectively, and grew by 90% in
fiscal 1999 and 256% in fiscal 1998. These increases were due primarily to
increases in sales of Lightspan Achieve Now licenses. All customers that
purchase our Lightspan Achieve Now curriculum also purchase professional service
and support.
Our hardware revenues increased to $6.1 million in fiscal 1999 from $5.3
million in fiscal 1998 and $2.4 million in fiscal 1997. These 15% and 119%
increases were due to increased sales of Lightspan Achieve Now licenses and
hardware, partially offset by reductions in the cost of Sony PlayStation game
consoles to us that we passed through to our customers.
Cost of Revenues
Our cost of revenues decreased to $11.5 million in fiscal 1999 from $12.9
million in fiscal 1998, or 11%, and increased in fiscal 1998 from $5.8 million
in fiscal 1997, or 121%. Gross margin as a percentage of revenues increased to
63% in fiscal 1999 from 42% in fiscal 1998 and 32% in fiscal 1997.
Our cost of license revenues decreased to $4.1 million in fiscal 1999 from
$6.4 million in fiscal 1998, a decrease of 35%. Our cost of license revenues
increased in fiscal 1998 from $3.0 million in fiscal 1997, or by 116%. Gross
margin as a percentage of license revenues increased to 80% in fiscal 1999 from
57% in fiscal 1998 and 47% in fiscal 1997. The improvements in gross margin each
year reflected reductions in material and packaging costs, reductions in
third-party royalty rates and an increase in the selling price of Lightspan
Achieve Now licenses. In addition, our cost of license revenues in fiscal 1998
was negatively impacted by a charge for estimated costs to convert our existing
customer base to a new software MPEG format and Sony PlayStation game console
platforms. In fiscal 1999, we revised our estimate of the cost of the
conversion, and our cost of license revenues was favorably impacted. Our cost of
license revenues in fiscal 1999 was also favorably impacted by a reduction in
our estimates of the cost to complete certain Lightspan Achieve Now titles.
Our cost of service revenues grew to $2.4 million in fiscal 1999 from $1.8
million in fiscal 1998 and $0.6 million in fiscal 1997. These increases were due
to increases in professional development services and support personnel to
accommodate the growth in sales of Lightspan Achieve Now licenses and related
services. Gross margin as a percentage of service revenue increased to 36% in
fiscal 1999 from 11% in fiscal 1998 and from (2%) in fiscal 1997. These
increases were due to increased utilization of our professional development
staff, an increase in the average number of days of service sold per license,
improved billing of customers for services provided beyond the scope of the
original license agreement, and, in general, our service revenues increasing at
a greater rate than our fixed professional development costs.
Our cost of hardware revenues increased to $5.0 million in fiscal 1999 from
$4.7 million in fiscal 1998 and $2.3 million in fiscal 1997. These increases
were due to increased Lightspan Achieve Now license sales, offset in large part
by our transition to the Sony PlayStation game console, a less expensive
hardware platform than the hardware platforms that we had previously provided to
our Lightspan Achieve Now customers, often at low or negative margins. Gross
margin as a percentage of hardware revenues increased to 19% in fiscal 1999 from
10% in fiscal 1998 and 4% in fiscal 1997. These increases were due to the
transition to the higher-margin Sony PlayStation game console platform.
Technology and Development
Our technology and development expenses decreased to $10.6 million in
fiscal 1999 from $14.8 million in fiscal 1998, a 28% decrease, and by 22% in
fiscal 1998 from $19.0 million in fiscal 1997. These decreases were due to
reductions in development personnel and related costs associated with
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completion of most of our Lightspan Achieve Now titles. By the end of fiscal
1999, substantially all design, development and testing had been completed on
our Lightspan Achieve Now product line.
Sales and Marketing
Our sales and marketing expenses increased to $22.1 million in fiscal 1999
from $20.3 million in fiscal 1998 and $13.8 million in fiscal 1997. These 9% and
47% increases are the result of increased personnel in marketing, increased
commissions and bonuses as the result of growing sales, and additional marketing
and promotional activities. The increase from fiscal 1998 to fiscal 1999 was
partially offset by a decrease in personnel and related costs in the sales and
professional development organizations due to a reduction in headcount during
the last half of fiscal 1999.
General and Administrative
Our general and administrative expenses increased to $3.6 million in fiscal
1999 from $2.7 million in fiscal 1998 and $2.5 million in fiscal 1997. The 32%
increase in general and administrative expenses in fiscal 1999 compared to
fiscal 1998 was caused primarily by legal fees associated with a lawsuit brought
by a former employee, which was settled in September 1999, and an increase in
personnel and other costs related to our growth, partially offset by decreases
in bad debt expense in fiscal 1999 as compared to fiscal 1998. The 10% increase
in general and administrative expenses in fiscal 1998 compared to fiscal 1997
was caused primarily by an increase in bad debt and rent expenses.
Interest Income (Expense)
We earned net interest income of $0.4 million in fiscal 1999, as compared
to net interest expense of $0.5 million and $0.1 million in fiscal 1998 and
fiscal 1997, respectively. Our net interest income in fiscal 1999 compared to
our net interest expense in fiscal 1998 was due to higher average cash balances
in the six months ended July 31, 1998, when we received proceeds of a Series D
preferred stock financing. Our interest expense for fiscal 1999, fiscal 1998 and
fiscal 1997 is attributable to the utilization of our equipment lease lines and
borrowings against our revolving line of credit.
QUARTERLY RESULTS
The following table sets forth certain statement of operations data for us
for each of the seven quarters ended October 31, 1999. This information has been
derived from our audited financial statements. You should read this information
in conjunction with our audited and unaudited financial statements and related
notes appearing elsewhere in this prospectus. Our quarterly operating results
are expected to vary significantly because of seasonal influences on demand for
our Lightspan Achieve Now and Academic Systems curricula and our services based
on school calendars, budget cycles and timing of school districts' funding
sources. Our revenues have historically been highest in our second fiscal
quarter, and lowest in our first fiscal quarter. In light of these factors, our
limited operating history and the rapidly evolving nature of our business, we
believe that period-to-period comparisons of our results are not meaningful and
should not be relied upon as indicators of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1998 1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 4,853 $11,186 $ 7,542 $ 7,250 $ 6,562 $12,938 $11,551
Cost of revenues................ 1,969 3,961 2,781 2,797 2,468 4,654 3,728
------- ------- ------- ------- ------- ------- -------
Gross profit.................... 2,884 7,225 4,761 4,453 4,094 8,284 7,823
Operating expenses.............. 9,252 9,081 8,394 9,543 9,328 12,026 17,848
------- ------- ------- ------- ------- ------- -------
Loss from operations............ (6,368) (1,856) (3,633) (5,090) (5,234) (3,742) (10,026)
Interest income (expense)....... 93 150 108 67 4 3 224
------- ------- ------- ------- ------- ------- -------
Net loss........................ $(6,275) $(1,706) $(3,525) $(5,023) $(5,230) $(3,739) $(9,802)
======= ======= ======= ======= ======= ======= =======
</TABLE>
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ACADEMIC SYSTEMS ACQUISITION
We acquired Academic Systems in September 1999. Academic Systems develops,
markets and sells curriculum-based educational software to colleges and
universities for use by under-prepared college students. Academic Systems offers
five course programs -- four in mathematics covering elementary algebra to
college algebra, and one in English covering remedial writing and freshman
composition. Academic Systems' products also include a student management system
that can be run on the Internet or the college's own network.
Revenues consist primarily of fees for licenses and implementation of
Academic Systems' software, customer training, books and materials, upgrades and
support. Academic Systems enters into license agreements under which software,
support and other services are provided to a customer for a fixed fee for a
specified period of time. License revenues are recognized upon contract signing
and delivery of the software, provided the related fee is fixed and determinable
and collection of the fee is probable. The revenues associated with books and
materials are recognized upon shipment and revenues for services are recognized
when the services are performed.
The cost of license revenues consists of costs related to materials for
CD-ROMs, assembly and distribution of CD-ROMs, print materials and third-party
royalties.
Comparison of Nine Months Ended June 30, 1999 and 1998
Academic Systems' revenues increased to $4.9 million for the nine months
ended June 30, 1999 from $2.9 million for the comparable period in 1998, an
increase of 65%. This increase was due to increases in sales of licenses,
primarily as a result of expansion of Academic Systems' customer base. Cost of
license revenues increased to $1.4 million from $1.2 million, an increase of
16%. Gross margin as a percentage of revenues increased to 72% from 60% due to
decreases in the cost of materials and third-party royalties and increased
utilization of Academic Systems' support and operations personnel. Operating
expenses declined to $8.0 million from $10.0 million, a decrease of 20%. This
decrease was due to reductions in technology and development expense, as
Academic Systems completed the development of its product line, and sales and
marketing, as staffing and marketing programs were reduced.
Comparison of Years Ended September 30, 1998 and 1997
Academic Systems' revenues increased to $5.9 million in the year ended
September 30, 1998 from $4.4 million in the year ended September 30, 1997. The
35% increase was due to increases in sales of licenses, as a result of increased
sales and marketing efforts, continued market acceptance of the Academic Systems
curriculum, expansion of the customer base, and the availability of additional
titles. The cost of licenses increased to $2.1 million from $1.9 million. Gross
margin improved to 65% from 56% due to the decreasing cost of materials and
improved utilization of support and operations staffs. Operating expenses
increased to $12.9 million from $12.7 million. Technology and development
expense decreased each year as Academic Systems completed the development of its
product line. Sales and marketing expense increases accounted for the majority
of the growth in operating expenses as Academic Systems increased its sales and
marketing staffs, increased commissions and bonuses as a result of growing
sales, and added marketing and promotional activities.
BUSINESS COMBINATIONS AND PURCHASE ACCOUNTING
The acquisition of Academic Systems, Global Schoolhouse and StudyWeb were
accounted for as purchases. During the nine months ended October 31, 1999, we
paid net cash of $4.3 million for these acquisitions.
The purchase price of Academic Systems was allocated to the assets
acquired, consisting principally of goodwill and intangible assets which are
being amortized over useful lives ranging from 4 to 10 years. The purchase
prices of Global Schoolhouse and StudyWeb were allocated to the assets acquired,
primarily intangibles related to the Web sites acquired, which are being
amortized over useful lives of three years.
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Amortization of intangibles and goodwill for the nine months ended October
31, 1999 was $1.6 million. We expect to record annual amortization expense
related to these acquisitions of approximately $5.0 million for the year ending
January 31, 2000, $13.4 million for each of fiscal years 2001 and 2002, $12.8
million for fiscal 2003, 7.5 million for fiscal 2004, and approximately $0.3
million for each fiscal year from 2005 through 2009.
STRATEGIC RELATIONSHIP WITH CINAR CORPORATION
In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators. CINAR markets and distributes its animated and live-action children's
and family programming to broadcast, cable and other media outlets worldwide.
CINAR's productions include the two-time Emmy award-winning Arthur, the
top-rated children's television program in the United States, as well as Are You
Afraid of the Dark?, Wimzie's House, Lassie, The Busy World of Richard Scarry
and The Adventures of Paddington Bear. CINAR also publishes and distributes
approximately 2,000 supplemental education products for pre-kindergarten through
eighth grade that enhance classroom curricula and foster continued learning in
the home. CINAR's products are sold each year to more than 1.6 million teachers
and 370,000 daycare providers in North America.
As part of our agreement, CINAR purchased 2,500,000 shares of our Series E
preferred stock (convertible into 1,250,000 shares of common stock) at $5.00 per
share. CINAR also agreed to purchase $10 million of our common stock (909,091
shares, assuming an initial public offering price of $11.00 per share) in a
private placement that will occur concurrently with our initial public offering
at the initial public offering price. We also granted CINAR warrants to purchase
500,000 shares of our Series E preferred stock (which will convert into a
warrant to purchase 250,000 shares of common stock at the closing of this
offering) that will vest upon the achievement of various agreed-to strategic
goals. The planned strategic initiatives include such projects as a convergence
educational television series (the combination of broadband interactive
offerings and standard television), the co-development of a pre-kindergarten
educational portal featuring CINAR's subsidiary HighReach Learning, and a series
of other co-marketing and distribution arrangements such as the international
distribution of Lightspan products.
As part of our agreement with CINAR, Ronald A. Weinberg, CINAR's President
and co-CEO, joined our board.
LIQUIDITY AND CAPITAL RESOURCES
From inception through October 31, 1999, we financed our operations and met
our capital expenditure requirements primarily with the net proceeds from
private sales of equity securities totaling approximately $158.6 million. At
October 31, 1999, we had $22.7 million of cash and cash equivalents. The
expansion of our business will require significant additional capital to fund
operating losses, capital expenditures and working capital needs. We expect our
operating losses to continue and increase for the foreseeable future.
Our working capital has fluctuated significantly since our inception. This
is due, in large part, to the timing of cash payments to vendors, cash
collections from customers, varying resources required for development efforts
on Lightspan Achieve Now, as well as receipt of cash from our preferred stock
and other financings. We expect that our working capital requirements and cash
position will fluctuate significantly from period to period for the foreseeable
future. These fluctuations may be caused by increased spending to support our
growth in operations, strategic investments, or acquisitions.
Net cash used in operating activities was $11.6 million for the nine months
ended October 31, 1999, $16.5 million for fiscal 1999, $22.5 million for fiscal
1998 and $31.5 million for fiscal 1997. Net cash used during these periods was
primarily to fund technology and development, sales and marketing and general
and administrative costs associated with the development and deployment of our
Lightspan Achieve Now curriculum and Internet products and services. We expect
our negative operating cash flow to continue and increase for the foreseeable
future.
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Net cash used in investing activities was $5.9 million for the nine months
ended October 31, 1999, $0.7 million for fiscal 1999 and insignificant in fiscal
1998. The increase in cash used during this period relates primarily to net cash
paid for the acquisitions of Academic Systems, Global Schoolhouse and StudyWeb.
Net cash used during these periods was primarily for the acquisition of property
and equipment. Net cash provided by investing activities was $2.6 million for
fiscal 1997, due to maturities on our short-term investments.
Net cash provided by financing activities was $33.0 million for the nine
months ended October 31, 1999, $19.9 million for fiscal 1999, $25.4 million for
fiscal 1998 and $21.5 million for fiscal 1997. Our cash provided by financing
activities during these periods was raised by issuing our Series C, D and E
preferred stock to various strategic and financial investors.
In February 1999, we extended our line of credit with a financial
institution. The line of credit bears interest at the bank's prime rate plus
1.5% and expires in April 2000. The amount available under the line of credit
was increased to the lesser of $10 million or 75% of eligible accounts
receivable, and is collateralized by substantially all of our assets.
We entered into a $1.0 million capital leasing line with a financial
institution in April 1999. Under the agreement, which expires in March 2000, we
finance the purchase of capital equipment at an 8.8% interest rate over a 42
month period with a purchase option.
We have also entered into various purchase order commitments with a number
of vendors, primarily for the purchase of hardware, marketing services,
promotional activities and development activities. As of October 31, 1999, our
outstanding purchase order commitments were approximately $0.4 million.
Our future capital requirements will depend on a variety of factors,
including market acceptance of our products and services and the resources we
devote to developing, marketing, selling and supporting our products. We expect
to devote substantial capital resources in connection with:
- brand maintenance, advertising, marketing and promotional activities;
- continued development and expansion of our Internet offerings and
content;
- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel; and
- acquiring additional office space and other necessary facilities.
In addition, we may devote substantial capital resources to strategic
acquisitions and relationships.
In September 1999 we completed our acquisition of Academic Systems,
pursuant to which we issued 7,191,839 shares of our Series E preferred stock
(which will convert into 3,595,920 shares of common stock upon completion of
this offering) pursuant to various exchange ratios applied to the various
classes and series of capital stock of Academic Systems. However, we believe a
small number of former Academic Systems stockholders may have rights to
additional shares of our stock, or other compensation in lieu of issuing such
shares. As a result, we intend to issue 1,068,015 shares of Series E preferred
stock (which would convert into 534,008 shares of common stock upon completion
of this offering), subject to regulatory approval, to those stockholders.
Alternatively, we may pay them cash or some other form of consideration.
We believe that our cash and cash equivalents and the net proceeds from
this offering will be sufficient to fund our operations for at least the next 18
months. Despite our expectations, we may need to raise additional capital before
the end of the next 18 months.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
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Our risk associated with fluctuating interest expense is limited, however, to
our line of credit, the interest rates under which are tied to market rates, and
our investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments at January 31 or October 31, 1999.
Declines in interest rates over time will, however, reduce our interest income
while increases in interest rates over time will increase our interest expense.
YEAR 2000 READINESS DISCLOSURE
Many existing computer programs cannot distinguish between a year beginning
with "20" and a year beginning with "19" because they use only the last two
digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. As a result, these programs
may malfunction or fail completely. If we or any third parties with whom we have
a material relationship fail to achieve year 2000 readiness, our business may be
seriously harmed. In particular, year 2000 problems could temporarily prevent us
from offering our products and services.
Our State of Readiness
We have made an assessment of the year 2000 readiness of our information
technology systems, including our telecommunications, order processing, data
collection, and Internet-related systems. Our assessment plan consists of:
- evaluating our date-dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally developed software and
systems; and
- obtaining assurances or warranties regarding the year 2000 readiness of
third parties with whom we have material relationships, such as vendors
and licensors of material hardware, software and services that are
related to the delivery of our products and services.
As part of our effort to assess our year 2000 readiness, we requested year
2000 readiness statements from our significant suppliers and vendors.
Our critical systems fall into six categories: transaction processing, call
management, telecommunications, fulfillment, finance and interactive
applications. The core transaction processing and infrastructure systems are
internally maintained and hosted. To date, our assessment has determined that
these critical business systems are all year 2000 ready.
Based on our testing or representations from manufacturers, we believe our
non-critical and non-information technology systems, which include security and
mailing systems, are year 2000 ready.
All material commercial software and hardware that we depend on is either
year 2000 ready or will be upgraded to be ready in the normal course of business
through the installation of upgrades or replacements. Our material hardware,
software and service vendors have informed us that the products we use, or will
be using as upgrades or replacements, are year 2000 ready.
We also have assessed our software products and concluded that they are
year 2000 ready.
Costs to Address Our Year 2000 Issues
To date, we have not incurred any significant costs attributable to year
2000 compliance. Our recent information technology investments have been in
support of our expanding operating and decision support requirements and also
facilitated year 2000 readiness to the extent they involved a replacement of an
existing system. We are not currently aware of any material operational issues
or costs associated with preparing our systems for the year 2000. Nonetheless,
we may experience material unexpected costs
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caused by undetected errors or defects in the technology used in our systems or
because of the failure of a material vendor to be year 2000 ready.
Risks of Year 2000 Issues
Notwithstanding our year 2000 readiness efforts, the failure of a material
system or vendor, or the Internet generally, to be year 2000 ready could harm
our operations or have other unforeseen, material adverse consequences for us.
We may also experience external year 2000-related failures or disruptions that
might generally affect industry and commerce, such as utility or transportation
company year 2000 readiness failures and related service interruptions. If any
of these risks occur, our business could be materially harmed. In a worst-case
scenario, we may be unable to make or receive phone calls at our facilities,
process or ship orders, make payments due to third parties and our employees, or
operate our Internet businesses.
Our Contingency Plan
Our contingency plan is focused on those activities and functions
specifically related to processing customer orders and maintaining our
operations. It addresses only those types of failures for which contingency
operation is possible. Our contingency plan does not address any types of
failures for which contingency operations would be impossible, such as
disruption of the Internet.
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BUSINESS
OVERVIEW
The Lightspan Partnership, Inc. provides curriculum-based educational
software and Internet products and services used both in school and at home. Our
technology, delivery systems and content help increase student interest in
learning, parental involvement in their children's education, and productive
interaction among teachers, parents and students. Over 340 studies by schools
that use our products and services show that our products improve overall
student performance.
Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts, and it is used by teachers,
students and parents. We typically sell the Lightspan Achieve Now software with
a Sony PlayStation game console that the student uses to run the program at home
throughout the school year. We also provide a series of curriculum-based
software that addresses the math and writing needs of under-prepared college
students through our subsidiary, Academic Systems Corporation.
We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:
- The Lightspan Network, an online subscription service marketed to schools
for classroom and home use, introduced in January 1997 and redesigned in
September 1999;
- Lightspan PageOne, an online service developed with Yahoo! and launched
in June 1999 that enables teachers to easily create customized home pages
for their classrooms;
- Global Schoolhouse, a leading education Web site that helps teachers
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site started in 1995 that helps parents,
teachers and students find educational information and resources on the
Web;
- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents, introduced in October 1999; and
- selected additional content for teachers, parents and students.
We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. Over 435 school
districts in 46 states have purchased our Lightspan Achieve Now curriculum and
implemented it in over 2,250 schools and 11,075 classrooms, representing a total
of 120,750 student and teacher licenses. Students in over 225 colleges and
universities across the United States are currently using Academic Systems'
products. Our Internet K-12 products and services are used in over 6,400
schools, of which over 1,100 schools are using the Lightspan Network.
Lightspan.com is currently being used by over 228,000 unique visitors monthly.
MARKET OPPORTUNITY
Education is the second largest sector of the United States economy, behind
health care. According to the Department of Education, the United States spent
an estimated $351 billion on kindergarten through twelfth grade, or K-12,
education in the 1997 - 1998 school year, which represented over 4% of the
United States gross domestic product. During the 1997 - 1998 school year, an
estimated 52.2 million students were enrolled in K-12 in 110,473 public and
private schools in over 16,400 school districts.
Comparative studies among industrialized countries show that American
students rank near the bottom in educational performance. Thirty-eight percent
of American fourth graders read below the basic reading level and American
eighth graders recently ranked 28th in a study comparing their mathematical
performance to that of students from 40 other countries. In addition, a recent
federal study found that
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approximately 30% of incoming college freshmen in the United States enrolled in
at least one remedial education course.
The need to improve student achievement is a top priority in American
education. Growing concerns about this issue have resulted in educators and
school districts being held increasingly accountable for their students'
educational progress. Educators have responded by seeking alternatives for more
effective K-12 education and have identified key elements that are important for
educational reform. These key elements include:
- students spending more time on core curriculum;
- students being motivated to learn;
- families becoming more actively involved in their children's schooling;
and
- educational resources being accessible to all students, families and
schools, regardless of socioeconomic status.
Educators today are challenged to effectively access and implement educational
technology that addresses key educational reform elements and improves student
performance. Industry sources estimate that spending on educational technology
was approximately $7 billion during the 1998-1999 school year, and this figure
is expected to increase to approximately $10 billion by the 2001 - 2002 school
year.
The Internet is becoming an increasingly important part of American
education, with teachers viewing the Internet as a powerful learning,
communication and information resource for use in both schools and in homes. In
a recent survey, 90% of teachers said they considered Internet access in their
classroom valuable or essential, and over 51% of classrooms had Internet access
in 1998. The number of five through twelve year-old children with Internet
access is expected to grow 155% to 21.9 million between 1998 and 2002. Teachers
are seeking ways to effectively harness the resources available on the Internet
and offer their students safe and appropriate materials.
Increased spending on educational technology, a growing commitment to
improving student achievement, and rising demand for educational reform programs
that are built around or include educational technology has created a
significant market opportunity for providers of software- and Internet-based
educational products and services.
THE LIGHTSPAN SOLUTION
Lightspan offers curriculum-based educational software featuring digital
video technology and entertainment industry production quality. Our software is
used by students in an interactive setting in schools, colleges and homes. We
combine our software offerings with Internet products and services to provide
teachers, students and families with educational tools and resources to help
students learn and succeed. We believe that our competitive advantages include
the following:
We Improve Student Achievement. We have developed curriculum-based
educational software that improves student achievement. Over 340 studies by
schools that use our products and services show that our products improve
student performance in reading or mathematics or in both subjects. A composite
analysis of studies conducted by schools at 36 sites and covering 4,650 students
shows that, on average, 24% more Lightspan Achieve Now students were successful
in reading and 46% more Lightspan Achieve Now students were successful in
mathematics than their peers who did not use the Lightspan Achieve Now
curriculum, as measured by performance on standardized tests. In part because of
its demonstrated impact on student achievement, our Lightspan Achieve Now
curriculum has been included as a skill-and-content-based reform model eligible
for funding by the U.S. Department of Education's Comprehensive School Reform
Demonstration program. Several independent studies conducted by colleges that
use our Academic Systems products have shown that these products, compared to
traditional lecture taught courses, increase pass rates, keep more students
enrolled in the courses covered and increase students' performance in follow-on
course work.
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We Increase Student Motivation. We believe that the engaging Lightspan
Achieve Now interactive learning experience, and the increased involvement of
parents when students use the curriculum at home, motivate K-8 students to focus
more effectively on core curriculum study. Approximately 60% of teachers using
our Lightspan Achieve Now program reported to us in a survey that the program
had a positive impact on student attitude and motivation in their classrooms. We
also believe that the Academic Systems interactive learning experience, which
links writing or math lessons with immediate practice and feedback and allows
students to choose the learning style that works best for them, is a unique
motivational tool for students in remediation courses.
We Extend Learning Beyond Traditional Classroom Time. In addition to their
use in the classroom, our products and services are used both in the home and in
structured after-school and summer-school programs designed to increase the
amount of time students spend learning. Schools that have implemented the
Lightspan Achieve Now curriculum report that 84% of students spend approximately
one half hour or more, and that 41% spend approximately an hour or more, at home
on core curriculum study daily. Moreover, when our products are used in the
home, parents can take a more active role in their child's learning.
Additionally, the learning resources offered through our Internet products and
services can be accessed at any time by teachers, parents and students to
further a broad range of out-of-classroom educational objectives.
We Facilitate Widespread Use of Our Products and Services. We seek to
provide schools with cost-effective ways to give access to enhanced learning
through educational technology to all students, regardless of socioeconomic
status. A school that implements Lightspan Achieve Now generally provides to
students, at no cost to the family, a Sony PlayStation game console to run the
program on a home television. Our Academic Systems software products cost
approximately as much as a textbook, which makes these learning tools accessible
to most students, either in a computer lab or in their residence. For K-12
students that have access to the Internet, we provide free or
paid-for-by-the-school Internet tools that are either customized by their
teacher or correlated to their curriculum. We believe our ability to reach
students will be enhanced as more students get Internet access at home. Also, as
broadband technology becomes more widespread among cable television subscribers,
our products may become available on a digital set-up box provided by cable
operators, and be accessible to all students with cable service whose school
districts use our products and services.
We Have Experienced Staff to Reach the Nation's Educators. We currently
employ 91 direct salespeople and 74 professional development staff members for
our Lightspan and Academic Systems products and services. They are experienced
in selling to and training educators and have established strong relationships
with key decision makers in the education community. We generally hire current
or former education professionals to serve the territories that encompass their
local education communities. As a team, our sales and professional development
staff guides educators through the decision making process for purchasing
educational technology and ease their transition to its use, thereby making
educational technology more accessible to educators and available to more
students. We believe that our ability to successfully transition educators to
the use of our curricula manifests itself in our large number of repeat
customers. For example, during our fiscal year ended January 31, 1999, 74% of
school districts that were using our Lightspan Achieve Now curriculum at the
beginning of the year bought additional products.
We Offer High-Quality, Curriculum-Based Content. We have developed and own
the rights to nearly all of the content on the 77 titles in our Lightspan
Achieve Now curriculum, which aggregate over 1,200 hours of learning-intensive
programs correlated to state academic standards. We have also developed The
Lightspan Network, an online subscription service for classroom and home use
that provides subscribers with a rich array of curriculum-based content that is
correlated to state academic standards. In addition, we have developed and own
the rights to all 5 titles in our Academic Systems curriculum, which aggregate
over 420 hours. We intend to enhance our current content-based products and
services, particularly in connection with our planned expansion of
Lightspan.com.
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STRATEGY
Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. In order to achieve this objective, we
intend to pursue the following strategies:
Capitalize on Our Current Market Position. We intend to capitalize on the
relationships that we have established with educators and the strength of our
products and services and Lightspan and Academic Systems brands to increase our
market penetration. We have established our market position to date by directing
our marketing efforts toward becoming the educational technology provider of
choice among teachers. We believe that our established market position will
enable us to do the following:
- migrate our existing installed user base to our Internet offerings;
- sell The Lightspan Network and Lightspan Achieve Now to schools that use
our free Internet services;
- increase the number of schools, colleges, classrooms and college sections
that use our curriculum-based software; and
- extend the use of our Academic Systems curriculum to more high schools
that participate in outreach programs with community colleges that
currently use that curriculum.
Continue to Develop and Enhance Lightspan.com. We intend to continue to
develop and enhance our Lightspan.com Web site to make it the premier online
education destination for teachers, parents and students. To increase
connectivity between schools and homes, we plan to introduce Your School Online,
a free home page builder for schools, at our Lightspan.com Web site in early
2000. Also in early 2000, we plan to increase the offerings for teachers,
parents and students at Lightspan.com, and to further enhance Lightspan.com by
entering into strategic relationships to sell teaching supplies and other
products online. Accordingly, we will seek to ensure that our Lightspan.com Web
site will offer teachers, parents and students:
- tools to enhance communication between classroom, school and home;
- access to curriculum-based interactive K-8 educational content;
- proprietary search capabilities tailored to classroom use; and
- the opportunity to purchase a broad range of educational products and
teaching supplies.
While Lightspan.com's content is currently focused on K-8 students and their
parents and teachers, we intend to later expand its selected educational content
to address the needs of high school students.
Enhance our Lightspan Achieve Now Curriculum With Content Delivery
Available Through New Internet and Broadband Technologies. As technology
evolves, we intend to migrate our customers to new delivery platforms that will
extend our reach. Our Lightspan Achieve Now and Academic Systems curricula are
very media-rich and are not currently delivered over the Internet, given
bandwidth limitations. However, we recently began to manage some of the Academic
Systems curriculum through our Academic Systems Web site, which enables teachers
to efficiently compile information about time-on-task and performance for
students who use that curriculum. We plan to implement use of an Internet
compatible game console or other delivery platform that will provide direct
access from the home to our Internet products and services. We anticipate this
will enable us to enhance future releases of our Lightspan Achieve Now
curriculum with content available through our Internet products and services. As
broadband technology becomes more prevalent and cable operators provide more of
their customers with digital set-top boxes, we intend to offer both Lightspan
Achieve Now and all of our Internet products and services on digital cable
television systems. We expect that, while we will continue to enable these
products and services to be used on Sony PlayStation game consoles and personal
computers, they will also be able to be used on digital set-top boxes and other
new broadband devices.
Create Additional Internet-Based Revenue Streams. We believe that the
complementary nature of our product lines will allow us to cross-promote and
cross-sell our products and services, and to generate and
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sustain multiple revenue streams in the future. With the introduction of our
first Internet service, The Lightspan Network, we gained a renewable stream of
subscription revenue to augment our revenues from software licenses. We expect
to continue to generate a subscription revenue stream with sales of The
Lightspan Network, and ultimately to sell subscriptions for Lightspan Achieve
Now to be delivered using broadband technology. In addition, we plan to focus on
the sale of "Olympic-style" sponsorships, supplemented by sales of banner
advertisements where appropriate, to fund the further development of
Lightspan.com and our other free Internet offerings. We also intend to sell an
increasing array of educational products online. The Lightspan Learning Store, a
Web site where SmarterKids.com sells educational products under the Lightspan
brand to families, was introduced in early October 1999, and we intend to
increase our offerings on that site. We also intend to develop other Web sites
that will sell teaching supplies and other products beginning in early 2000.
Capitalize on the Experience of the Lightspan Team. We have a management
team with extensive educational technology and Internet experience. Both John
Kernan, our Chairman and Chief Executive Officer, and Carl Zeiger, our President
and Chief Operating Officer, started educational technology companies before
they founded Lightspan. Our sales and marketing organizations are headed by
people with extensive experience in educational technology sales at Apple
Computer, Inc. Our sales and marketing personnel also have extensive contacts in
school districts or colleges within their territories and frequently can
leverage their existing relationships with school district and school decision
makers. Our Lightspan Achieve Now product development team is comprised of
former classroom teachers and experienced instructional designers, animators,
and multimedia computer programmers. Our Internet team includes several key
individuals who previously contributed to the development and management of
Disney Online and Disney.com while working at The Walt Disney Company.
Pursue Strategic Acquisitions and Relationships. We have pursued and
entered into strategic acquisitions and relationships to facilitate the growth
of our business, such as our acquisitions of Academic Systems, Global
Schoolhouse and StudyWeb and our relationships with Sony Computer Entertainment
and SmarterKids.com. We intend to continue to pursue strategic acquisitions and
relationships as we attempt to diversify our revenue sources and the delivery
platforms for our curriculum-based content. For example, in October 1999, we
agreed to pursue several potential strategic initiatives with CINAR Corporation.
PRODUCTS
Our products and services are technology-based educational tools and
resources that can be used by teachers, students and families to increase
student performance.
K-8
Lightspan Achieve Now is a series of media-rich, interactive software
programs that covers the core curriculum of language arts, reading and math, and
is designed to enhance learning in both the classroom and at home. Lightspan
Achieve Now is a supplement to textbooks and other materials used in K-8 schools
and covers more than 80% of the typical K-8 reading, language arts and
mathematics curricula. Lightspan Achieve Now incorporates a variety of
interactive formats and varying levels of difficulty to cover a specific set of
educational objectives and to address a diverse range of learning styles, making
it possible to reach each student in a class more effectively. The Lightspan
Achieve Now curriculum features stories and original characters designed around
an active learning approach, which is intended to provide the learner with the
following essential components of an effective learning environment:
- motivation to master a skill or concept;
- learning by doing;
- practice; and
- application of the skill or concept to another situation.
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The Lightspan Achieve Now curriculum was developed using entertainment industry
production techniques and features full motion digital video and 3-D animation.
We deliver our reading and language arts and mathematics curricula in
imaginary "worlds" -- episodic, interactive series with a consistent set of
characters that are designed to cover a broad range of curriculum objectives.
Generally, each world is contained on a series of CD-ROMs, or titles, which are
divided into multiple "Adventures." Our Adventures are developed with the
assistance of an advisory board of reading, language arts and mathematics
educators, an advisory board of video game developers, television writers and
commercial animators. Various characters from our Lightspan worlds are depicted
below.
[A collection of Lightspan characters from various Lightspan Worlds and
Adventures]
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Our Lightspan Achieve Now language arts and reading curriculum provides a
variety of learning paths, all with a single objective -- improving literacy and
communication -- and is designed to ensure that all students succeed in
listening, speaking, reading, writing, viewing and producing. The Adventures
that comprise our Lightspan Achieve Now reading and language arts curriculum
address vocabulary comprehension, critical thinking skills, study skills, the
writing process, print and text recognition, phonics, decoding, and many other
areas covered by the typical K-8 reading and language arts curriculum. These
Adventures currently include the following:
LIGHTSPAN ACHIEVE NOW LANGUAGE ARTS AND READING CURRICULUM
<TABLE>
<CAPTION>
ADVENTURE SERIES GRADES FOCUS
---------------- ------ -----
<S> <C> <C>
Calamity 3-4 Reading informational text
Cosmic Cookoff K-2 Reducing test-taking anxiety
Cosmic Quest K-2 Motivation in learning
Faire Games K-2 Practicing test-taking skills
K9.5 3-4 Strategies for written and oral communication
KazMania 3-4 Literary appreciation and comprehension
Liquid Books K-6 Reading with fluency
Mona & Moki 3-4 Developing vocabulary
Road Writer K-6 Steps in writing process
Stay & Play K-2 Applying skills in everyday experiences
str.at.e.s 5-8 Confidence in reading informational text
WalkAbout K-2 Theme-based activities for literacy
</TABLE>
Our Lightspan Achieve Now math curriculum is designed to provide a set of
experiences that increase student confidence and encourage students to solve
problems, think mathematically and apply and communicate their thinking. The
Adventures that comprise our Lightspan Achieve Now mathematics curriculum
address number sense, critical thinking, number theory, estimation, geometry and
many other areas covered by the typical K-8 mathematics curriculum. These
Adventures currently include the following:
LIGHTSPAN ACHIEVE NOW MATH CURRICULUM
<TABLE>
<CAPTION>
ADVENTURE SERIES GRADES FOCUS
---------------- ------ -----
<S> <C> <C>
Cali's Geo Tools K-2 Mastery of basic math concepts
Cosmic Cookoff 3-4 Reducing test-taking anxiety
Creative Tools 3-4 Interactive scenarios
Faire Games K-2 Practicing test-taking skills
Math Gallery K-6 Understanding math problems
Math on the Move! 3-6 Mental math strategies
P.K.'s Math Studio 3-4 Mastery of basic math by solving word problems
P.K.'s Place 3-4 Practicing math skills
The Quaddle Family Mysteries 3-4 Practicing active math problem solving
The Secret of Googol K-2 Developing strong math foundations
Timeless Math 5-8 Broadening students' awareness of other cultures
through math challenges
</TABLE>
The Lightspan Achieve Now curriculum is divided into grade clusters for
K-2, 3-4, and 5-6. The 5-6 materials are also used in middle schools for poorer
performing grade 7-8 students. Lightspan Achieve Now licenses are sold on a
perpetual license basis for approximately $600 per student license including the
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teacher license and materials. A complete Lightspan Achieve Now program consists
of teacher licenses containing approximately 35 CD-ROM titles appropriate to
each grade level, instructional materials, student licenses for each student
containing the same CD-ROM titles as those included with the teacher licenses,
student pre-tests, post-tests and progress checks, parenting and other
materials, professional development visits, and evaluation criteria to meet
accountability standards.
Lightspan Achieve Now's curriculum runs on both Sony PlayStation game
consoles and MPEG-capable, Windows-based personal computers, though use at home
is currently almost always on Sony PlayStation game consoles. We plan to
continue development of new titles to meet changing education trends and to
refresh the product over time.
Our revenues from sales of our Lightspan Achieve Now curriculum were $29.8
million, $22.0 million and $8.5 million for our fiscal years ended January 31,
1999, 1998 and 1997, respectively.
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K-12 INTERNET
Our family of Internet products and services provides teachers, students
and parents with a wide array of online learning resources.
Lightspan.com
All of our Internet products and services can be found at
www.lightspan.com, including Lightspan PageOne, Global Schoolhouse, The
Lightspan Network, The Lightspan Learning Store and StudyWeb. (The information
found on our Web site is not a part of this prospectus, except for the
information we have included in the prospectus.) We intend to significantly
expand and enhance the products and services offered through Lightspan.com in
early 2000, including the addition of specific content for teachers, students
and parents. Our current Lightspan.com Web site home page screen is depicted
below.
[Lightspan.com Home Page Screen Shot]
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Lightspan PageOne
Developed with Yahoo!, Lightspan PageOne helps teachers quickly and easily
build customized classroom home pages and assemble the best educational
resources available on the Internet to support their classroom instruction. With
over 35,800 registered users, Lightspan PageOne allows teachers to:
- access a database of over 115,000 educational Web sites, activities and
lesson plans which have been reviewed by educators;
- bookmark favorite sites;
- post homework assignments;
- create class albums, like collections of student artwork or projects;
- access on-line reference resources such as a dictionary, thesaurus, and
encyclopedia;
- use a variety of curriculum-based interactive learning activities in
their classrooms; and
- share these features in a password-protected environment with students'
families.
[Lightspan PageOne Home Page Screen Shot]
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Global Schoolhouse
We recently acquired Global Schoolhouse, a Web site which has over 28,900
registered users. It enables classroom to classroom collaboration by allowing
educators to share ideas and create projects together online. Global Schoolhouse
began as a pilot project of the National Science Foundation. Global Schoolhouse
has teamed with individuals, schools, businesses, and community organizations to
design, develop and manage hundreds of collaborative online learning projects
each year. Global Schoolhouse offers:
- Cyberfair, an annual global Internet competition for children in grades
K-12, who showcase their local communities by designing their own Web
sites;
- CU-Schools Videoconferencing, a real-time, community-building
conferencing system that lets students and their teachers learn and
collaborate online; and
- Internet Projects Registry, a registry of classroom projects from
teachers all over the world.
[Global Schoolhouse Home Page Screen Shot]
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StudyWeb
We recently acquired StudyWeb, a "homework helper" Web site. StudyWeb was
started approximately four years ago to specifically address one of the needs
most frequently cited by parents, teachers and students seeking to use the Web
for educational purposes -- finding research resources as easily as possible on
the Web without encountering inappropriate materials. StudyWeb has developed a
sophisticated system for identifying and reviewing Web sites, and has built a
database with more than 115,000 Web site reviews. Reviews are categorized by
subject matter and include grade level recommendations, content descriptions and
other useful information.
[StudyWeb Home Page Screen Shot]
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The Lightspan Network
The Lightspan Network is our premium online subscription service for
classroom and home use. It provides a rich array of curriculum-based K-8 content
correlated to state academic standards in an advertising-free environment. We
charge a subscription fee of $2,500 annually to each subscribing school for The
Lightspan Network. The Lightspan Network:
- provides Internet activities and lesson plans;
- offers approximately 100 interactive, adventure-filled learning
activities developed by educators that cover reading, mathematics,
writing, vocabulary development, and Web literacy;
- provides access to a database of over 115,000 educational Web sites,
activities and lesson plans that have been reviewed by educators and
correlated to state standards;
- offers teachers and students Ed-mail, a personal e-mail account featuring
special security measures created specifically for use in schools;
- provides tools to enhance Internet research and student learning with a
subscription to Compton's Encyclopedia Online, a leading online reference
tool for K-12 schools; and
- offers customer support through our professional development staff and
access to our telephone help line.
[The Lightspan Network Home Page Screen Shot]
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The Lightspan Learning Store
We developed The Lightspan Learning Store in partnership with
SmarterKids.com to offer educational products online to teachers and families.
As we expand and enhance Lightspan.com, we plan to include links from products
that SmarterKids.com recommends to specific Lightspan learning activities found
on Lightspan.com. We also expect that our Lightspan learning activities will be
linked to the Lightspan Learning Store, allowing users to make an immediate
purchase of educational products related to the learning activity.
[The Lightspan Learning Store Home Page Screen Shot]
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Your School Online
We plan to launch Your School Online, currently in beta test, in early 2000
as a free home page builder for schools. We expect Your School Online to allow
teachers to automatically integrate their classrooms' Lightspan PageOne home
pages with their school's home page. We also expect that Your School Online will
work with many other Web publishing tools that a school might have in place. Its
features include:
- the ability to organize and compile Web links;
- a calendar of events that makes it easy for parents and students to find
out what events or activities are happening at school;
- a simple way for users to connect to Lightspan PageOne home pages for
particular classrooms within a given school;
- a site for teachers to post notes and announcements and receive feedback;
- a school contact page which allows parents to easily send e-mail to a
school representative; and
- easy access to Web site usage statistics to help administrators
understand what is popular on their site.
[Your School Online Home Page Screen Shot]
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Financial information about our Lightspan Achieve Now educational software
and our Internet products and services is included in Note 8 to the Lightspan
financial statements that are included elsewhere in this prospectus.
HIGHER EDUCATION
Academic Systems' products address the needs of under-prepared college
students, and consist of:
- Interactive Mathematics -- Elementary Algebra, which covers whole
numbers, proportional reasoning, signed numbers and introductory geometry
and algebra;
- Interactive Mathematics -- Algebra, which covers polynomials, rational
expressions, linear equations and graphing;
- Interactive Mathematics -- Intermediate Algebra, which covers rational
exponents, quadratic equations, functions, exponential and logarithmic
functions, and non-linear equations and inequalities;
- Interactive Mathematics -- College Algebra, which includes non-linear
functions, equations, conic sections, matrices, determinants, induction,
sequences and counting; and
- Interactive English, which prepares students for academic writing,
including narrative writing, data analysis, text interpretation, and
persuasive writing, and contains concise grammar instructions on common
college writing errors and related reading and comprehension activities.
Academic Systems' products are media-rich with extensive graphics and video
components and are grounded in teaching techniques that focus on students as
individuals. Students take the courses in a computer lab or on a Windows-based
personal computer in their residence, at their own pace. Students review lessons
and then practice the concepts learned. Depending upon the student's performance
in the practice session, the program prompts further review or moves the student
onto the next lesson. Wrong answers will prompt an explanation of how to solve
the question. In the Elementary Algebra course, there is a special help function
featuring video characters. Each character represents a different learning style
and offers multiple approaches to solving the problem, ranging from showing the
method that can be used to solve the problem, to explaining the solution with a
picture or graph, to providing the solution from a theoretical perspective. This
often provides the help that under-prepared college students need to pass the
course and succeed in school. Academic Systems also offers printed practice
materials.
Academic Systems provides management services to educators who use its
curriculum, typically by compiling and communicating information about student
time-on-task and performance while using the curriculum. These management
services can be accessed on the Internet at academic.com or a college's Web
site, and also on a college's local area network.
Academic Systems curriculum products are licensed to colleges and then sold
by the licensing colleges to students on a student-by-student basis for use with
each class, instead of a textbook. The licensing fee to colleges of $60 to $80
per student is approximately equal to an equivalent textbook.
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[ACADEMIC SYSTEMS HOME PAGE SCREEN SHOT]
PRODUCT DESIGN AND DEVELOPMENT
We consider successful product development to be essential to maintaining
and growing our market position. We expect to continue enhancing our Lightspan
Achieve Now and Academic Systems curricula while significantly increasing our
efforts to further develop our Internet products and services.
Lightspan Achieve Now products include a diverse mix of media, formats, and
visual presentations. Every Lightspan Adventure is built according to the
following fundamental design principles, which we believe differentiate our
products from competitive products:
- we correlate each title to state and national academic standards;
- we create interesting characters in engaging stories that unfold with the
help of full-screen, full-motion video and music, and with sophisticated
interactivity representing many of the techniques of the latest video
games; and
- we develop assessment components for the teacher to monitor students'
progress for each of the titles.
All Lightspan Achieve Now programs are designed so they can be used on a
television as well as on a computer screen. Text elements are rendered on the
screen for clear visibility from across the room. Live action video and
animation segments are converted from original footage to the MPEG software
format, and then digitally optimized for a sharp television picture. We believe
these design features offer a unique opportunity to move our Lightspan Achieve
Now curriculum to a digital set-top box once broadband technology becomes widely
available to cable television subscribers. We also believe that our competitors
who have designed their educational technology for use only on a computer screen
will experience difficulties in converting their computer interfaces to
television interfaces, and that we are better positioned to move our products to
a digital set-top box platform.
We are pursuing a broad range of product development efforts to expand and
enhance our Lightspan.com Web site. These product development efforts include
developing new collaborative learning applications for Global Schoolhouse and
enhancing its existing content, developing new content for teachers, parents and
students on Lightspan.com, and expanding our electronic commerce offerings.
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Academic Systems' math and writing products combine media-rich video and
graphics with teaching techniques that focus on students as individuals and
offer extensive help and reinforcement examples. The Academic Systems curriculum
is reviewed each school year based on input from user groups made up of faculty
from across the country, and updated when appropriate.
SALES AND MARKETING
We sell our Lightspan Achieve Now curriculum and The Lightspan Network
directly to school districts. We have identified and are targeting school
districts that routinely implement new and innovative programs. Our programs are
generally sold "top down," with the first presentations made to a school
district's key decision maker, who is often the superintendent or assistant
superintendent in charge of curriculum or technology. Schools are becoming more
involved in the decision process as site-based management is implemented within
school districts. The sales cycle for the initial purchase of our Lightspan
Achieve Now curriculum is typically six to twelve months, with shorter periods
for The Lightspan Network.
A school district will typically purchase the Lightspan Achieve Now
curriculum for a few classrooms in one school. Upon the successful
implementation of the Lightspan Achieve Now curriculum, the school district will
typically add the curriculum in other schools within the district. For example,
during our fiscal year ended January 31, 1999, 74% of school districts that were
using our Lightspan Achieve Now curriculum at the beginning of the year bought
additional products. The product is also often sold deeper into individual
schools, either in additional classrooms in a given grade or in additional grade
levels.
We currently employ 73 direct salespeople for grades K-12. This sales force
is supported by a 69 person professional development team that provides pre- and
post-sales support and works with current Lightspan schools to identify
additional sales opportunities. While our sales force and professional
development team are focused on selling into new accounts and increasing our
presence in current accounts, they also act as partners with implementing
schools in identifying funding sources. Each member of our sales force has
substantial experience in educational technology sales, is generally working in
his or her home territory and has extensive contacts in school districts within
their territory.
Our marketing efforts include:
- hosting policy forums for education policy makers at industry events;
- giving keynote speeches and presentations at major education conventions;
- participating on the advisory boards of key organizations in education;
- presenting at education trade shows and customer conferences; and
- pursuing focused media relations activities in the education trade press
and in local media in communities that are implementing our Lightspan
Achieve Now curriculum.
Sales of our Internet products and services are supported by our Lightspan
field sales force, including a dedicated team of eight Internet sales people
that focus on driving state-wide sales of our Internet products and services. We
offer customized versions of The Lightspan Network to states having large
contracts, and currently have contracts with the states of Illinois, North
Carolina, Pennsylvania, Oklahoma, Texas, Delaware, and Hawaii. To date, most of
the marketing focus for our Internet products and services has been on the
educational community. For example, a very active campaign of direct mail,
telemarketing and advertising focused on the educational community, along with
participation by our field sales and professional development staffs at the
school district and school site levels and appearances at trade shows, has
resulted in the registration of over 35,800 teachers for Lightspan PageOne since
its launch in June 1999.
In the future, our focus will expand to include marketing directly to
families. Print advertising will be supplemented with a variety of online
strategies. A series of promotions will be directed at encouraging usage and may
include sweepstakes, user points affinity programs, and referral programs.
Public relations efforts will focus on educational, consumer and business press.
We have formed an advisory board of educators to assist us with the design and
development of our Internet products and services. Direct marketing will
concentrate on teachers and parents. We expect the results of these marketing
efforts will
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be an increase in the number of teachers, students and parents accessing the
content and tools provided by Lightspan.com. We believe that the marketing of
Lightspan.com and our Internet products and services will contribute to sales of
The Lightspan Network and sales of our Lightspan Achieve Now curriculum.
Academic Systems currently employs 18 direct sales people in a separate
sales organization. Academic Systems' sales and marketing efforts focus on
statewide, system-wide and district sales, and specifically target potential
purchasers that offer opportunities for sales of the Academic Systems curriculum
to multiple college class sections. A typical initial sale of the Academic
Systems curriculum will be for several sections in a college course. As the
faculty becomes familiar with the Academic Systems curriculum and witnesses
improved results from sections that are using the curriculum, Academic Systems'
contracts tend to be renewed and increased. Over 90% of the institutions that
have installed any portion of the Academic Systems curriculum since it was first
offered remain as installed users. In addition, over 70% of institutions that
have renewed their contracts with Academic Systems over its last four fiscal
years have signed larger contracts. Academic Systems' marketing efforts include
print advertising in periodicals directed at the higher education market, direct
marketing, participation at trade shows, and user conferences.
PROFESSIONAL DEVELOPMENT AND SUPPORT SERVICES
We believe that successfully implementing our products and services in
schools and extending them to the home is necessary to realize potential
improvements in student achievement. We also believe that improvements in
student achievement differentiate the Lightspan Achieve Now curriculum from
products offered by our competitors and generate further support at the school
level for expanded sales. Our goal is to become the partner of schools that
implement our products and services. Given the comprehensive nature of the
Lightspan Achieve Now curriculum, its connection of schools to homes, the rapid
technological changes brought about by the Internet, and educators' needs for
ongoing technical training and mentoring, we commit substantial resources to
train educators in the use of our products and services.
We maintain a staff of 69 trained professionals, most of whom are former
educators, to provide pre-sale planning and post-sale implementation, customer
support, training services and motivation for teachers, administrators and
parents in Lightspan schools. We also operate a toll-free, five-day per week
technical and curriculum support telephone help line called Partner Line that is
accessible to both teachers and parents. We include professional development and
Partner Line services with the initial purchase of Lightspan Achieve Now.
Schools may purchase additional professional development or support services. We
believe that the on-site training provided by our professional development staff
is a key factor in encouraging school districts to implement Lightspan products
in more schools within the district and in additional classrooms within an
individual school.
We provide pre-sale and post-sale support for college campuses that use our
Academic Systems curriculum in a manner similar to that provided for our
Lightspan Achieve Now curriculum, with a greater emphasis on technical support
and installation related to the Web-based or local area networked student
management system. Installation and support are included with the software
license and additional services may be purchased.
COMPETITION
The market for educational technology content and services is highly
fragmented and competitive, with no company having significant market
penetration. We generally compete for school instructional dollars with textbook
publishers, software publishers, supplemental print publishers, Internet content
and service providers, and training services, among others. We believe our
solution is unique and competes favorably with existing products in these
categories on a price and performance basis.
In the instructional technology segment of this market, we believe our
existing and prospective competitors may be divided into the following groups:
- comprehensive curriculum software publishers which offer various
school-based computer-based learning systems, including Jostens Learning
Corporation and Computer Curriculum Corporation;
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<PAGE> 57
- "edutainment" software vendors, which principally target the consumer
market but also sell to schools;
- education-oriented Internet services and the educational segments of
general on-line service providers;
- distance learning providers; and
- programs that take over management of the school or provide substantial
tutoring help, such as those provided by Edison Schools, Inc. and Sylvan
Learning Systems, Inc.
As Internet and broadband services become more widely deployed in K-12 and
colleges, we believe new and as yet unidentified competition will enter the
market. Traditional media companies and rapidly expanding Internet companies are
likely to present new competition. Many of our current and potential competitors
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. In addition, many of these current and potential competitors can
devote substantially greater resources to product development, marketing and
promotional campaigns and Web site and systems development than we can.
RIGHTS TO CONTENT
We rely principally upon a combination of copyright, trademark and trade
secret laws and contractual restrictions to protect our proprietary rights.
We developed and own the rights to nearly all of the content within the
Lightspan Achieve Now curriculum, including the worlds, characters, stories,
educational content, and games. We hold trademarks to all of our Lightspan
Achieve Now worlds, our individual CD-ROM titles, and many of our characters.
SEASONALITY
Our operating results are expected to vary significantly from quarter to
quarter because of seasonal influences on demand for our Lightspan Achieve Now
and Academic Systems curricula and our services based on school calendars,
budget cycles and timing of school districts' funding sources. Our revenues have
historically been highest in our second fiscal quarter, and lowest in our first
fiscal quarter.
EMPLOYEES
As of October 31, 1999, we employed 413 persons, including 132 in
technology and development, 49 in general and administrative, 145 in sales and
marketing and 87 in professional development. We expect that our headcount will
increase, particularly in sales and professional development and Internet
marketing and product development. None of our employees is represented by a
labor union and we consider our employee relations to be excellent.
FACILITIES
Our headquarters are located in San Diego, California, where we currently
lease approximately 47,000 square feet under a lease expiring in 2003. Warehouse
facilities are located in Carlsbad, California, where we currently lease
approximately 9,000 square feet under a lease expiring in 2002. Additional
facilities for the Internet group are located in Santa Monica, California, where
approximately 6,900 square feet are under a lease expiring in 2002, and, for
Academic Systems, in Mountain View, California, where approximately 15,500
square feet are under a lease expiring in 2001. While we consider our current
facilities adequate for our current operations, we expect that we will need to
lease additional facilities as our operations expand.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
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<PAGE> 58
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information about our executive
officers, key employees and directors as of November 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ----------------------------------------------
<S> <C> <C>
John T. Kernan.................... 53 Chief Executive Officer and Chairman
Carl Zeiger....................... 57 President, Chief Operating Officer and
Director
Kathleen R. McElwee............... 44 Vice President of Finance, Chief Financial
Officer
John H. Brandon................... 43 Executive Vice President, President of
Academic Systems and Director
Winifred B. Wechsler.............. 42 Executive Vice President and General Manager
of Internet and Broadband Services
Merritt D. Farren................. 39 Senior Vice President of Corporate Development
Sandra K. Fivecoat................ 50 Senior Vice President of Sales
Bernice Stafford.................. 57 Vice President of School Marketing and
Evaluation
Dr. Larry R. Vaughn............... 61 Senior Vice President of School Reform
James W. Breyer................... 38 Director(2)
L. John Doerr..................... 48 Director(2)
Bradley P. Dusto.................. 46 Director
David D. Hiller................... 46 Director(1)
Bruce W. Ravenel.................. 49 Director
Jeffrey P. Sanderson.............. 40 Director(1)
Barry J. Schiffman................ 54 Director(1)
Ronald A. Weinberg................ 48 Director
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John T. Kernan co-founded Lightspan and has served as our Chairman and
Chief Executive Officer since September 1993. Prior to founding Lightspan, Mr.
Kernan served as Chairman and Chief Executive Officer of Jostens Learning
Corporation, an educational software company. Mr. Kernan developed Jostens
Learning from a start-up company in 1985 (then named Education Systems
Technology Corporation) to one of the largest educational software businesses in
the United States. Under Mr. Kernan's leadership, Jostens Learning was a leading
supplier of pre-kindergarten through adult educational software. Prior to
founding Jostens Learning, Mr. Kernan was an executive with Gill Cable
Corporation, a Northern California cable TV operator. He also was Vice President
of Product Development for DELTAK, Inc. (now NETg), then the nation's largest
provider of video-based training for technical professionals. Mr. Kernan was the
President of the Software Publishers Association, has been named "Educator of
the Decade" by Electronic Learning Magazine and regional "Entrepreneur of the
Year" by Inc. Magazine, among other distinctions. Mr. Kernan helped found
Academic Systems, which has since been acquired by Lightspan, and Elemental
Software, which has since been acquired by Macromedia. Mr. Kernan sits on the
boards of Teach.com and TechNet. Mr. Kernan holds a Bachelor of Science from
Loyola College.
Carl Zeiger co-founded Lightspan and has served as our President and Chief
Operating Officer and as one of our directors since September 1993. Prior to
founding Lightspan, Mr. Zeiger served as the President and Chief Operating
Officer of Jostens Learning Corporation. Along with Mr. Kernan, Mr. Zeiger
developed Jostens Learning into a leading supplier of pre-kindergarten through
adult educational software. Prior to joining Jostens Learning, Mr. Zeiger served
as Senior Vice President of Finance for Integrated Software Systems Corporation,
a leading provider of presentation graphics software, and managed its initial
and secondary public offerings and its eventual sale to Computer Associates.
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<PAGE> 59
Mr. Zeiger is a certified public accountant in the State of California and holds
a Bachelor of Science from the University of Denver.
Kathleen R. McElwee has served as our Vice President of Finance and Chief
Financial Officer since January 1999. From November 1997 to January 1999, she
served as Vice President of Finance and Chief Financial Officer of Galoob Toys,
Inc., a developer and marketer of toys. From December 1995 to November 1997, she
served as Vice President of Planning for Galoob. From September 1993 to December
1995, she served as Assistant Controller of Nissan Motor Corporation in USA, an
automobile company. Ms. McElwee holds a Bachelor in Business Administration from
Pennsylvania State University and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.
John H. Brandon has served as our Executive Vice President and President of
Academic Systems since we acquired Academic Systems in September 1999. From June
1997 to September 1999, he served as President and Chief Executive Officer of
Academic Systems. From 1987 to May 1997, Mr. Brandon held various management
positions at Adobe Systems, a provider of Web and print publishing software, and
most recently was Vice President and General Manager of Adobe North America. Mr.
Brandon holds a Bachelor of Arts from the University of California at Davis.
Winifred B. Wechsler joined Lightspan in February 1999 and is our Executive
Vice President and General Manager of Internet and Broadband Services. From 1985
to January 1999, Ms. Wechsler served in various management positions at The Walt
Disney Company, a media and entertainment company, and most recently as Senior
Vice President of Buena Vista Internet Group, or BVIG. One of the founders of
Disney Online, Ms. Wechsler launched and managed Disney.com, directing all
operations, including design, production, electronic commerce, advertising and
marketing. In addition, Ms. Wechsler oversaw Disney's investment in Infoseek and
the launch of Go Network and set policy and direction for BVIG. Prior to joining
BVIG, Ms. Wechsler held a variety of positions at the Disney Channel, including
Senior Vice President of New Business Development. Ms. Wechsler holds a Bachelor
of Arts from Wellesley College and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.
Merritt D. Farren has served as our Senior Vice President of Corporate
Development since April 1999. From May 1988 to April 1999, Mr. Farren held
various management positions at The Walt Disney Company, a media and
entertainment company, and most recently was Senior Vice President and General
Counsel of The Disneyland Resort, Anaheim, California. Mr. Farren holds a
Bachelor of Arts from Stanford University and a Juris Doctor from the University
of California at Berkeley.
Sandra K. Fivecoat has served as our Senior Vice President of Sales since
February 1999. From April 1998 to January 1999, she served as Regional Vice
President for our South Central Region. From 1987 to April 1998, Ms. Fivecoat
held various sales management positions at Apple Computer, a manufacturer of
computers and software. Ms. Fivecoat holds a Bachelor of Science and a Masters
in Education from the University of Texas at Austin.
Bernice Stafford co-founded Lightspan and has served as our Vice President
of School Marketing and Evaluation since October 1993. From 1989 to 1993, she
served as Director of Sales Programs at Jostens Learning Corporation. Ms.
Stafford holds a Bachelor of Arts and a Master of Arts from the University of
California at Berkeley.
Dr. Larry R. Vaughn, Ed.D. has served as our Senior Vice President of
School Reform since January 1999. From January 1993 to July 1998, he served as
superintendent of Wichita Public Schools in Wichita, Kansas. Dr. Vaughn holds a
Bachelor of Arts from Mississippi State University and a Doctorate in Education
from the University of Houston.
James W. Breyer has served as one of our directors since December 1993.
Since 1990, Mr. Breyer has been a partner at Accel Partners, a venture capital
firm. He is responsible for Accel's involvement in more than twenty companies
that have completed public offerings or successful mergers. Mr. Breyer currently
serves on the boards of directors of Actuate, a provider of electronic business
services, HearMe, a provider of real-time Internet communication tools,
RealNetworks, a provider of streaming media technology on the
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Internet, and several private companies. Mr. Breyer holds a Bachelor of Science
degree from Stanford University and a Masters in Business Administration from
the Harvard Business School.
L. John Doerr has served as one of our directors since December 1993. Since
1980, Mr. Doerr has been a partner at Kleiner Perkins Caufield & Byers, a
venture capital firm. Mr. Doerr was the founding Chief Executive Officer of
Silicon Compilers. Mr. Doerr currently serves on the boards of directors of
Intuit, a producer of electronic finance software, Amazon.com, an online
retailer, Macromedia, a provider of Web publishing software, and Sun
Microsystems, a provider of network computing products and services, as well as
several privately held companies. Mr. Doerr co-manages the Technology Network,
the high-technology community's political action organization. He holds a
Bachelor of Science and Master of Science from Rice University and a Masters in
Business Administration from the Harvard Business School.
Bradley P. Dusto has served as one of our directors since May 1999. Mr.
Dusto is Chief Technology Officer and Executive Vice President for Comcast Cable
Communications, a media company, and is responsible for engineering, product
development and new product operations. Prior to joining Comcast in 1992, Mr.
Dusto held management positions with several companies in the cable television
and satellite industries. He received a Bachelor of Science from Cornell
University and a Masters in Business Administration from New York University.
David D. Hiller has served as one of our directors since September 1996.
Since October 1993, Mr. Hiller has served as Senior Vice President of
Development at Tribune Company, a media company. He is responsible for strategic
planning and acquisitions for all Tribune businesses. Mr. Hiller currently
serves on the boards of directors of several private companies. He holds a
Bachelor of Arts from Harvard College and a Juris Doctor from Harvard Law
School.
Bruce W. Ravenel has served as one of our directors since 1994. Since June
1999 he has served as a director and Executive Vice President of Liberty
Digital, Inc., a new media investment company. From September 1998 to June 1999
he was employed by Liberty Media Corporation in connection with the formation of
Liberty Digital. From April 1998 to September 1998, Mr. Ravenel was Executive
Vice President -- Interactive Ventures of TCI Communications, Inc., a former
subsidiary of Tele-Communications, Inc. Mr. Ravenel also served as President and
Chief Executive Officer of TCI.Net, Inc. and Senior Vice President -- Internet
Services of TCI Communications, Inc. from January 1996 to April 1998. Mr.
Ravenel also served as Senior Vice President and Chief Operating Officer of TCI
Technology Ventures, Inc. from March 1994 to January 1996. Mr. Ravenel was a
founder and served on the board of directors of At Home Corporation, a media
company, from March 1995 until March 1999. He serves on the boards of directors
of several private companies. Mr. Ravenel holds a Bachelor of Arts from the
University of Colorado, where he also studied in the doctoral program in
computer science.
Jeffrey P. Sanderson has served as one of our directors since December
1998. Since June 1984, Mr. Sanderson has served as General Manager of Business
Development for the Consumer and Commerce Group of Microsoft Corporation, a
software company. Mr. Sanderson holds a Bachelor of Arts from Princeton
University and attended the Harvard Business School.
Barry J. Schiffman has served as one of our directors since August 1997.
Since 1996, Mr. Schiffman has served as President, Chief Investment Officer and
a director of JAFCO America Ventures, Inc., a venture capital firm. Prior to
JAFCO, he was a general partner at Weiss, Peck & Greer Venture Partners, a
venture capital firm. Mr. Schiffman is currently chairman of AirGate PCS, Inc.
(PCSA), an affiliate of Sprint, and member of the board of several private
companies. Mr. Schiffman holds a Bachelor of Science from Georgia Institute of
Technology and a Masters in Business Administration from the Stanford Graduate
School of Business.
Ronald A. Weinberg joined our board of directors in October 1999. Mr.
Weinberg serves as President and co-CEO of CINAR Corporation, an integrated
entertainment and education company, which he founded in 1976. Mr. Weinberg is
the producer on all CINAR productions including some of its most successful
current series, such as Arthur, Are You Afraid of the Dark?, The Busy World of
Richard Scarry,
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Wimzie's House, and Lassie. Mr. Weinberg currently serves on the boards of
directors of Cossette Communications Group Inc., a communications and marketing
concern, and several private companies and institutions. Mr. Weinberg holds a
Bachelor of Science from Tulane University.
BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee. The audit committee consists of David D. Hiller, Jeffrey
P. Sanderson and Barry J. Schiffman. The audit committee makes recommendations
to the board of directors regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by our
independent auditors and reviews and evaluates our audit and control functions.
The compensation committee consists of James W. Breyer and L. John Doerr.
The compensation committee makes recommendations regarding our 1992 Stock Option
Plan and our 2000 Equity Incentive Plan and makes general decisions concerning
salaries and incentive compensation for our employees and consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1999, James W. Breyer and L. John
Doerr served as members of our compensation committee. During that fiscal year,
none of our executive officers or employees served as a director or as a member
of the compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. In addition, all directors are eligible to participate in
our 2000 Equity Incentive Plan.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all capacities
during the fiscal year ended January 31, 1999 by our Chief Executive Officer and
two other executive officers. The compensation described in this table does not
include medical, group life insurance or other benefits which are available
generally to all of our salaried employees and certain perquisites and other
personal benefits received which do not exceed the lesser of $50,000 or 10% of
his or her salary and bonus as disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
--------------------------- --------- --------
<S> <C> <C>
John T. Kernan.............................................. $192,500 --
Chairman and Chief Executive Officer
Carl Zeiger................................................. $192,500 --
President and Chief Operating Officer
Michelle M. Hays(1)......................................... $124,290 $6,000
Former Vice President of Finance and Administration
</TABLE>
- ---------------
(1) Ms. Hays resigned from Lightspan in September 1998.
No options were granted to our executive officers during the fiscal year
ended January 31, 1999.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information as of January 31, 1999 regarding
options held by the executive officers listed. No stock appreciation rights were
outstanding at January 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 31, 1999 JANUARY 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John T. Kernan................................... 0 0 0 0
Carl Zeiger...................................... 0 0 0 0
Michelle M. Hays................................. 82,498 27,502 $66,749 $17,251
</TABLE>
Dollar values in the table above are calculated by taking the fair market
value of our common stock on January 31, 1999, as determined by our board of
directors, subtracting the per share exercise price of the options, and
multiplying the result by the number of shares. Options were granted at an
exercise price equal to the fair market value of our common stock, as determined
by the board of directors on the date of grant.
Ms. Hays resigned from Lightspan in September 1998. On March 15, 1999, her
options stopped vesting, and in April 1999 all of her unexercised options were
cancelled.
EQUITY PLANS
2000 Equity Incentive Plan
A total of 4,890,272 shares of common stock are currently reserved for
issuance pursuant to our 2000 Equity Incentive Plan. This share reserve shall
automatically increase each year, based upon a formula, by an amount not to
exceed 3% of our total outstanding common stock at the time of the automatic
increases. The 2000 Plan provides for the grant of options to our directors,
officers, employees, consultants and certain of our advisors. As of November 30,
1999, options to purchase 3,502,240 shares under the 2000 Plan were outstanding,
and 288,393 shares remained available for issuance pursuant to the 2000 Plan. We
have also reserved an additional 1,250,000 shares of common stock to become
available for grants beginning at the close of this offering.
The 2000 Plan permits the granting of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 2000 Plan permits the granting of stock bonuses and rights to
purchase restricted stock. No person is eligible to be granted options covering
more than one million shares of common stock in any calendar year.
The 2000 Plan is administered by the board or a committee appointed by the
board. Subject to the limitations set forth in the 2000 Plan, the board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each stock award, to determine whether an
option is to be an incentive stock option or a nonstatutory stock option, to
establish vesting schedules, to specify the option exercise price and the type
of consideration to be paid upon exercise and, subject to certain restrictions,
to specify other terms of stock awards.
The maximum term of options granted under the 2000 Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under all of our
incentive plans) may not exceed $100,000 or the options or portion thereof which
exceed such limit (according to the order in which they are granted) shall be
treated as nonstatutory stock options. Stock options granted under the 2000 Plan
generally are non-transferable. Options expire three months after the
termination of an optionee's service.
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The exercise price of options granted under the 2000 Plan is determined by
the board of directors in accordance with the guidelines set forth in the 2000
Plan. The exercise price of an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant. Options granted
under the 2000 Plan vest at the rate specified in the option agreement. The
exercise price of incentive stock options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of our capital stock must be at least 110% of the fair
market value of such stock on the date of grant and the term of such incentive
stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
2000 Plan shall be in such form and will contain such terms and conditions as
the board deems appropriate. The purchase price under any restricted stock
purchase agreement will not be less than 85% of the fair market value of our
common stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the 2000 Plan are generally transferable.
Pursuant to the 2000 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but exercised shares repurchased by us pursuant to a right
of repurchase will not again become available for grant.
Upon certain changes in control, all outstanding stock awards under the
2000 Plan must either be assumed or substituted for by the surviving entity. In
the event the surviving entity does not assume or substitute for such stock
awards, such stock awards will be accelerated and then terminated to the extent
not exercised prior to such change in control.
The board has the authority to amend or terminate the 2000 Plan. The
existence of the 2000 Plan does not affect the board's ability to grant other
incentives or compensation under other authority that it has.
2000 Employee Stock Purchase Plan
In October 1999, we adopted the 2000 Employee Stock Purchase Plan. A total
of 500,000 shares of common stock has been reserved for issuance under the
Purchase Plan. This share reserve shall automatically increase each year, based
upon a formula, by an amount not to exceed 1% of our total outstanding common
stock at the time of the automatic increases. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code. Under the Purchase Plan, the board may authorize
participation by eligible employees, including officers, in periodic offerings
following the commencement of the Purchase Plan.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board for at
least 5 months per calendar year. Employees who participate in an offering may
have up to 15% of their earnings withheld pursuant to the Purchase Plan. The
amount withheld is then used to purchase shares of the common stock on specified
dates determined by the board. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
common stock at the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on termination
of employment.
In the event of a merger, reorganization, consolidation or liquidation, the
board has discretion to provide that each right to purchase common stock will be
assumed or an equivalent right substituted by the successor corporation or the
board may provide for all sums collected by payroll deductions to be applied to
purchase stock immediately prior to such merger or other transaction. The board
has the authority to amend or terminate the Purchase Plan, provided, however,
that no such action may adversely affect any outstanding rights to purchase
common stock.
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401(k) Plan
We have established a tax-qualified employee savings and retirement plan.
Our 401(k) Plan provides that each participant may contribute up to 20% of his
or her pre-tax gross compensation (up to a statutorily prescribed annual limit
of $10,000 in 1999). Employees must be twenty-one years old to participate and
are eligible on the first day of the quarter following six months as our
employee. All amounts contributed by employee participants and earnings on these
contributions are fully vested at all times. Employee participants may elect to
invest their contributions in various established funds.
1992 Stock Option Plan
Upon the closing of our acquisition of Academic Systems, we assumed
Academic Systems' 1992 Stock Option Plan, under which outstanding options to
purchase shares of common stock of Academic Systems became exercisable for
263,669 shares of Lightspan common stock. As of November 30, 1999, options to
purchase 253,318 shares of common stock were outstanding under the 1992 Stock
Option Plan. We no longer grant options under the 1992 Stock Option Plan.
EMPLOYMENT AGREEMENTS
We have no employment agreements with any of our officers or employees.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION ON LIABILITY
Our bylaws provide that we must indemnify our directors and officers and
may indemnify our employees and other agents to the fullest extent permitted by
Delaware law, except with respect to certain proceedings initiated by these
persons. Our bylaws also allow us to enter into indemnification contracts with
our directors and officers and to purchase insurance on behalf of any person we
are required or permitted to indemnify. Pursuant to this provision, we have
entered into indemnification agreements with each of our directors and executive
officers.
In addition, our restated certificate provides that our directors will not
be personally liable to us or our stockholders for monetary damages for any
breach of their fiduciary duties as a director, except for liability (i) for any
breach of the director's duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derives an
improper personal benefit. The restated certificate also provides that if the
Delaware General Corporation Law is amended after our stockholders' approval of
the restated certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
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RELATED-PARTY TRANSACTIONS
The following is a description of transactions occurring after February 1,
1996 to which we have been a party, in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of our
capital stock had or will have a direct or indirect material interest, other
than compensation arrangements which are described under "Management."
The following affiliates of our directors purchased securities in the
amounts set forth in the chart below. Certain additional issuances are discussed
in more detail in the paragraphs below.
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED
PURCHASER(1) STOCK STOCK STOCK WARRANTS
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Entities Affiliated with Directors
Entities affiliated with Accel
Partners(2)............................. 327,381 475,410 1,224,902 38,021
Comcast Cable Corporation(3)............ 297,619 -- 1,000,000 --
Entities affiliated with JAFCO America
Ventures, Inc.(4)..................... -- 2,127,658 -- --
Entities affiliated with Kleiner,
Perkins, Caufield & Byers(5).......... 166,666 475,414 1,235,593 38,023
Entities affiliated with Liberty
Digital, Inc.(6)...................... 297,619 207,174 3,661,951 23,546
Microsoft Corporation(7)................ 297,619 475,415 1,203,243 33,313
Tribune Company(8)...................... 1,666,667 741,373 200,000 30,718
Price Per Share:........................ $6.00 $3.76 $5.00 $3.76 - $5.00
</TABLE>
- -------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Mr. James W. Breyer, one of our directors, is a partner of Accel Partners.
(3) Mr. Bradley P. Dusto, one of our directors, is the Chief Technology Officer
and Executive Vice President of Comcast Cable Communications, Inc.
(4) Mr. Barry J. Schiffman, one of our directors, is President and Chief
Investment Officer of JAFCO America Ventures, Inc.
(5) Mr. L. John Doerr, one of our directors, is a partner of Kleiner, Perkins,
Caufield & Byers.
(6) Mr. Bruce W. Ravenel, one of our directors, is an Executive Vice President
of Liberty Digital, Inc.
(7) Mr. Jeffrey P. Sanderson, one of our directors, is General Manager of
Business Development of Microsoft Corporation.
(8) Mr. David D. Hiller, one of our directors, is Senior Vice President of
Development of Tribune Company.
In September 1999, we acquired Academic Systems. John Brandon and funds
associated with four of our other directors, Messrs. Breyer, Doerr, Ravenel and
Sanderson, were shareholders of Academic Systems and received shares of our
common stock and Series E preferred stock in the acquisition.
In October 1999, CINAR Corporation purchased 2.5 million shares of our
Series E preferred stock (which will convert into 1.25 million shares of common
stock at the close of this offering) at $5.00 per share. CINAR also agreed to
purchase $10 million of our common stock (909,091 shares, assuming an initial
public offering price of $11.00 per share) in a private placement that will
occur concurrently with our initial public offering at the initial public
offering price. We also granted CINAR warrants to purchase 500,000 shares of our
Series E preferred stock (which will become a warrant to purchase 250,000 shares
of common stock at the close of this offering) that will vest upon the
achievement of various agreed-to strategic goals. As part of our agreement with
CINAR, Ronald A. Weinberg, CINAR's President and co-CEO, joined our board.
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<PAGE> 66
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal shareholders will be approved by a majority of
the independent and disinterested members of the board of directors, will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties and will be in connection with our bona fide business purposes.
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<PAGE> 67
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:
- each person who beneficially owns more than five percent of the common
stock;
- each of our directors;
- each of our executive officers listed in the Summary Compensation Table
under "Management"; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each person or entity named
below is c/o The Lightspan Partnership, Inc., 10140 Campus Point Drive, San
Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 31,749,520 shares of common stock outstanding as of
November 30, 1999, as adjusted to reflect the conversion of all outstanding
shares of preferred stock upon the closing of this offering.
The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of 1,125,000 additional shares of our common stock, and up to
41,283,611 shares of common stock will be outstanding after the completion of
this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
John T. Kernan(1)......................................... 1,301,580 4.1% 3.2%
Carl Zeiger............................................... 1,288,500 4.1% 3.2%
John H. Brandon(2)........................................ 156,561 * *
Michelle M. Hays(3)....................................... 25,000 * *
James W. Breyer(4)........................................ 3,115,472 9.8% 7.7%
Accel Partners
L. John Doerr(5).......................................... 2,992,588 9.4% 7.4%
Kleiner, Perkins, Caufield & Byers
Jeffrey P. Sanderson(6)................................... 2,796,891 8.8% 7.0%
Microsoft Corporation
David D. Hiller(7)........................................ 1,855,795 5.8% 4.6%
Tribune Company
Bradley P. Dusto(8)....................................... 2,404,130 7.6% 6.0%
Comcast Cable Corporation
Bruce W. Ravenel(9)....................................... 3,944,391 12.4% 9.8%
Liberty Digital, Inc.
Barry J. Schiffman(10).................................... 1,247,592 3.9% 3.1%
JAFCO America Ventures, Inc.
Ronald A. Weinberg(11).................................... 1,250,000 3.9% 5.4%
CINAR Corporation
All directors and officers as a group (11 persons)(12).... 22,353,500 69.5% 57.3%
</TABLE>
- ---------------
(1) Includes 1,009 shares issuable under options exercisable by January 29,
2000.
(2) Includes 35,351 shares issuable under options exercisable by January 29,
2000.
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<PAGE> 68
(3) Michelle M. Hays resigned from Lightspan in September 1998.
(4) Mr. Breyer's business address is 428 University Avenue, Palo Alto, CA
94301.
Includes:
- 2,227,941 shares and 46,564 shares issuable under warrants exercisable
by January 29, 2000 held by Accel IV L.P., which represents 7.2% and
5.7%, respectively, of the total number of shares outstanding before and
after this offering;
- 89,993 shares and 1,880 shares issuable under warrants exercisable by
January 19, 2000 held by Accel Investors '93 L.P., which represents less
than 1% of the total number of shares outstanding before and after this
offering;
- 53,511 shares and 1,118 shares issuable under warrants exercisable by
January 29, 2000 held by Ellmore C. Patterson Partners, which represents
less than 1% of the total number of shares outstanding before and after
this offering;
- 46,213 shares and 966 shares issuable under warrants exercisable by
January 29, 2000 held by Accel Keiretsu L.P., which represents less than
1% of the total number of shares outstanding before and after this
offering;
- 14,592 shares and 305 shares issuable under warrants exercisable by
January 29, 2000 held by Prosper Partners, which represents less than 1%
of the total number of shares outstanding before and after this
offering;
- 540,713 shares and 3,142 shares issuable under warrants exercisable by
January 29, 2000 held by Accel III L.P., which represents 1.7% and 1.4%,
respectively, of the total number of shares outstanding before and after
this offering;
- 37,724 shares and 219 shares issuable under warrants exercisable by
January 29, 2000 held by Accel Investors '92 L.P., which represents less
than 1% of the total number of shares outstanding before and after this
offering; and
- 50,299 shares and 292 shares issuable under warrants exercisable by
January 29, 2000 held by Accel Japan L.P., which represents less than 1%
of the total number of shares outstanding before and after this
offering.
(5) Mr. Doerr's business address is 2750 Sand Hill Road, Menlo Park, CA 94025.
Includes:
- 2,662,653 shares and 49,768 shares issuable under warrants exercisable
by January 29, 2000 held by Kleiner, Perkins, Caufield & Byers VI, which
represents 8.5% and 6.7%, respectively, of the total number of shares
outstanding before and after this offering; and
- 275,449 shares and 4,718 shares issuable under warrants exercisable by
January 29, 2000 held by KPCB VI Founders Fund, which represents less
than 1% of the total number of shares outstanding before and after this
offering.
(6) Mr. Sanderson's business address is One Microsoft Way, Redmond, WA 98052.
(7) Mr. Hiller's business address is 435 North Michigan Avenue, Chicago, IL
60611.
(8) Mr. Dusto's business address is 1500 Market Street, Philadelphia, PA 19102
(9) Mr. Ravenel's business address is 9197 South Peoria Street, Englewood, CO
80112
(10) Mr. Schiffman's business address is 505 Hamilton Avenue, Palo Alto, CA
94301.
Includes:
- 425,531 shares and 63,505 shares issuable under warrants exercisable by
January 29, 2000 held by U.S. Information Technology Investment
Enterprise Partnership, which represents 1.5% and 1.2%, respectively, of
the total number of shares outstanding before and after this offering;
- 445,531 shares and 63,505 shares issuable under warrants exercisable by
January 29, 2000 held by U.S. Information Technology #2 Investment
Enterprise Partnership, which represents 1.6% and 1.3%, respectively, of
the total number of shares outstanding before and after this offering;
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<PAGE> 69
- 44,524 shares and 6,644 shares issuable under warrants exercisable by
January 29, 2000 held by JAFCO G-7 (B) Investment Enterprise
Partnership, which represents less than 1% of the total number of shares
outstanding before this offering;
- 44,524 shares and 6,644 shares issuable under warrants exercisable by
January 29, 2000 held by JAFCO G-7 (A) Investment Enterprise
Partnership, which represents less than 1% of the total number of shares
outstanding before this offering;
- 38,101 shares and 5,686 shares issuable under warrants exercisable by
January 29, 2000 held by JAFCO R-2 Investment Enterprise Partnership,
which represents less than 1% of the total number of shares outstanding
before this offering;
- 43,064 shares and 6,427 shares issuable under warrants exercisable by
January 29, 2000 held by JAFCO JS -2 Investment Enterprise Partnership,
which represents less than 1% of the total number of shares outstanding
before this offering; and
- 47,556 shares and 6,351 shares issuable under warrants exercisable by
January 29, 2000 held by Japan Associated Finance Co., Ltd., which
represents less than 1% of the total number of shares outstanding before
this offering.
(11) Mr. Weinberg's business address is: 1055, boul. Rene-Levesque Est,
Montreal, Quebec H2L 4S5, Canada. Percentage of shares beneficially owned
after the offering includes 909,091 shares of common stock (at an assumed
initial public offering price of $11 per share) that will be issued to
CINAR Corporation in a private placement concurrent with the closing of
this offering.
(12) Includes 36,360 shares issuable under options exercisable by November 30,
1999 and 399,584 shares issuable under warrants exercisable by January 29,
2000. Percentage of shares beneficially owned after the offering includes
909,091 shares of common stock (at an assumed initial public offering price
of $11 per share) that will be issued to CINAR Corporation in a private
placement concurrent with the closing of this offering.
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<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 250,000,000 shares of common stock, $0.001 par value per
share, and 20,000,000 shares of preferred stock, $0.001 par value per share. As
of November 30, 1999, and assuming the conversion of all outstanding preferred
stock into common stock upon the closing of this offering, there were
outstanding 31,749,520 shares of common stock held of record by 346
stockholders, options to purchase 3,755,558 shares of common stock and warrants
to purchase 403,591 shares of common stock.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
As of November 30, 1999, assuming the closing of this offering, all
outstanding shares of preferred stock would have been converted into 27,087,825
shares of common stock. See Note 5 to the Lightspan financial statements for a
description of the currently outstanding preferred stock. Following the
conversion, our certificate of incorporation will be amended and restated to
delete all references to such shares of preferred stock. The certificate, as
restated, gives to the board the authority, without further action by
stockholders, to issue up to 20,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon such preferred stock, including dividend
rights, conversion rights, voting rights, rights and terms of redemption,
liquidation preference and sinking fund terms, any or all of which may be
greater than the rights of the common stock. The issuance of preferred stock
could:
- adversely affect the voting power of holders of common stock and reduce
the likelihood that such holders will receive dividend payments and
payments upon liquidation;
- decrease the market price of the common stock; or
- delay, deter or prevent a change in our control.
We have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Investor Rights Agreement, as amended,
between us and some of our investors, the investors, holding an aggregate of
27,087,825 shares of our common stock issuable upon conversion of our
outstanding preferred stock and upon exercise of outstanding warrants to
purchase common stock, have registration rights pertaining to the securities
they hold, exercisable any time following 180 days after the effective date of
this offering. If we propose to register any of our securities under the
Securities Act for our own account or the account of any of our stockholders
other than these holders of registrable shares, holders of such registrable
shares are entitled to notice of the registration and are entitled to include
registrable shares therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. In addition, commencing 180 days after the
effective date of the registration statement of which this prospectus is a part,
we may be required to prepare and file a registration statement under the
Securities Act at our expense if requested to do so by the holders of at least
30% of the registrable shares, or by holders who
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<PAGE> 71
propose to register securities, the aggregate offering price of which, net of
underwriting discounts and commissions, equals or exceeds $10,000,000. We are
required to use our best efforts to effect such registration, subject to certain
conditions and limitations. We are not obligated to effect more than three of
such stockholder-initiated registrations. Further, holders of registrable
securities may require us to file additional registration statements on Form
S-3, subject to certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for us
and adversely affect any future equity offerings.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sale or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in our control.
Certificate of Incorporation and Bylaw Provisions
Our restated certificate, which will become effective upon the closing of
the offering, provides that the board of directors will be divided into three
classes of directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of us and
may maintain the composition of the board of directors, as the classification of
the board of directors generally increases the difficulty of replacing a
majority of directors. Our restated certificate provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, our bylaws provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors, our
President, our Chief Executive Officer, or by the board of directors pursuant to
a resolution adopted by a majority of the total number of authorized directors.
Our restated certificate also specifies that the authorized number of directors
may be changed only by resolution of the board of directors and does not include
a provision for cumulative voting for directors. Under cumulative voting, a
minority stockholder holding a sufficient percentage of a class of shares may be
able to ensure the election of one or more directors. These and other provisions
contained in our restated certificate and bylaws could delay or discourage
certain types of transactions involving an actual or potential change in control
of us or our management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current prices) and may
limit the ability of stockholders to remove current management or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Harris Trust
Company of California.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET
We have applied to list our common stock on the Nasdaq Stock Market's
National Market under the trading symbol "LSPN."
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<PAGE> 72
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 40,158,611
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the shares
offered for sale through the underwriters will be freely tradable without
restriction under the Securities Act unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters.
The remaining 32,658,611 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- 26,993,927 shares will have been held long enough to be sold under Rule
144 or Rule 701 beginning 181 days after the date of this prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
Lock-Up Agreements. We and our officers, directors and stockholders have
agreed not to transfer or dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock, for a period of 180 days after the date of this
prospectus. Transfers or dispositions can be made sooner with the prior written
consent of Credit Suisse First Boston Corporation.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately 401,586 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also limited by manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 3 months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the date of this prospectus. Non-
affiliates will be able to sell their shares subject only to the manner-of-sale
provisions of Rule 144.
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<PAGE> 73
Affiliates will be able to sell their shares without compliance with the holding
period requirements of Rule 144.
Registration Rights. Upon completion of this offering, the holders of
27,087,825 shares of our common stock have rights to have their shares
registered under the Securities Act. Except for shares purchased by affiliates
or covered by lock-up agreements, registration of their shares under the
Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the
registration.
Stock Options and other Potential Share Issuances. Immediately after this
offering, we intend to file a registration statement under the Securities Act
covering the shares of common stock reserved for issuance upon exercise of
outstanding options. The registration statement is expected to be filed and
become effective as soon as practicable after the closing of this offering.
Accordingly, shares registered under the registration statement will be
available for resale in the open market beginning 180 days after the effective
date of the registration statement of which this prospectus is a part, except
with respect to Rule 144 volume limitations that apply to our affiliates. In
addition, we may issue additional securities in connection with acquisitions or
strategic relationships and to some of our existing stockholders.
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<PAGE> 74
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation......................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
----------
Total............................................. 7,500,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,125,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
Per Share Total
--------------------------------- ---------------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has acted as lead or co-manager on numerous public
offerings of equity securities. Thomas Weisel Partners does not
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<PAGE> 75
have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us pursuant to the underwriting agreement entered into in connection with
this offering.
We and our officers, directors and stockholders have agreed that we will
not offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 relating to, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any of
our common stock, or publicly disclose the intention to make any such offer,
sale, pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation, for a period of 180 days after the date of this
prospectus, except, in our case, issuances pursuant to the exercise of employee
stock options outstanding on the date hereof.
The underwriters have reserved for sale, at the initial public offering
price, less than 5% of the 7,500,000 shares of the common stock offered by the
underwriters in this offering for employees, directors and certain other persons
associated with us who have expressed an interest in purchasing common stock in
the offering. The number of shares available for sale to the general public in
the offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the trading symbol "LSPN."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history of, and the prospects for, the industry in which we will
compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly-traded common
stock of companies that are generally comparable to us.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to
cover syndicate short positions.
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- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the securities originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE> 77
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
75
<PAGE> 78
LEGAL MATTERS
Cooley Godward LLP, San Diego, California will pass upon the validity of
the shares of common stock offered by this prospectus for us. As of the date of
this prospectus, an investment fund created by Cooley Godward LLP owns an
aggregate of 70,000 shares of Series E preferred stock (convertible into 70,000
shares of common stock). O'Melveny & Myers LLP, Newport Beach, California will
pass upon certain legal matters in connection with this offering for the
underwriters.
EXPERTS
Ernst & Young LLP have audited our financial statements as of January 31,
1998 and 1999 and October 31, 1999 and for the years ended January 31, 1997,
1998 and 1999 and the nine months ended October 31, 1999 and the financial
statements of Academic Systems as of September 30, 1997 and 1998 and for the
years then ended, as set forth in their reports. We have included our financial
statements (including those of Academic Systems) in this prospectus and
elsewhere in the registration statement in reliance on their reports, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement,
omits certain information, exhibits, schedules and undertakings set forth in the
registration statement. For further information pertaining to us and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document referred to herein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or
any part of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, including
our registration statement and all exhibits and amendments to our registration
statements, are publicly available through the Commission's Web site at
http://www.sec.gov.
The following are trademarks or service marks of The Lightspan Partnership,
Inc.:
- - The Lightspan Network(R)
- - Global Schoolhouse(R)
- - StudyWeb(R)
- - Cosmic Cookoff(R)
- - Faire Games(R)
- - Liquid Books(R)
- - Mona & Moki(R)
- - Math on the Move!(R)
- - P.K.'s Math Studio(R)
- - The Quaddle Family Mysteries(R)
- - The Secret of Googol(R)
- - Timeless Math(R)
- - Lightspan Partnership
- - Lightspan
- - Lightspan Achieve Now
- - Lightspan PageOne
- - Lightspan Adventures
- - Learning Search
- - Calamity
- - K9.5
- - Math Gallery
- - P.K's Place
All other trade names, trademarks and service marks appearing in this prospectus
are the property of their holders.
76
<PAGE> 79
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE LIGHTSPAN PARTNERSHIP, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of January 31, 1998 and 1999 and October
31, 1999.................................................. F-3
Statements of Operations for the years ended January 31,
1997, 1998 and 1999 and the nine months ended October 31,
1998 (unaudited) and 1999................................. F-4
Statements of Shareholders' Equity for the years ended
January 31, 1997, 1998 and 1999 and the nine months ended
October 31, 1999.......................................... F-5
Statements of Cash Flows for the years ended January 31,
1997, 1998 and 1999 and the nine months ended October 31,
1998 (unaudited) and 1999................................. F-7
Notes to Financial Statements............................... F-8
ACADEMIC SYSTEMS CORPORATION
Report of Ernst & Young LLP, Independent Auditors........... F-24
Balance Sheets as of September 30, 1997 and 1998 and June
30, 1999 (unaudited)...................................... F-25
Statements of Operations for the years ended September 30,
1997 and 1998 and the nine months ended June 30, 1998 and
1999 (unaudited).......................................... F-26
Statements of Shareholders' Equity for the years ended
September 30, 1997 and 1998 and the nine months ended June
30, 1998 and 1999 (unaudited)............................. F-27
Statements of Cash Flows for the years ended September 30,
1997 and 1998 and the nine months ended June 30, 1998 and
1999 (unaudited).......................................... F-28
Notes to Financial Statements............................... F-29
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended January 31, 1999............ F-37
Unaudited Pro Forma Combined Condensed Statement of
Operations for the nine months ended October 31, 1999..... F-38
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements................................................ F-39
</TABLE>
F-1
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
The Lightspan Partnership, Inc.
We have audited the accompanying balance sheets of The Lightspan
Partnership, Inc. as of January 31, 1998 and 1999 and October 31, 1999, and the
related statements of operations, shareholders' equity, and cash flows for each
of the three years in the period ended January 31, 1999 and the nine months
ended October 31, 1999. These financial statements are the responsibility of
Lightspan'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 The Lightspan Partnership,
Inc. at January 31, 1998 and 1999 and October 31, 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1999 and the nine months ended October 31, 1999, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
The foregoing report is in the form that will be signed upon the completion of
the stock split described in Note 5 to the financial statements.
San Diego, California
December 14, 1999
/s/ Ernst & Young LLP
F-2
<PAGE> 81
THE LIGHTSPAN PARTNERSHIP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, PRO FORMA
----------------------------- OCTOBER 31, SHAREHOLDERS'
1998 1999 1999 EQUITY
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,421,617 $ 7,142,938 $ 22,671,611
Accounts receivable, less allowance for doubtful
accounts of $533,168, $400,000 and $827,472 at January
31, 1998 and 1999 and October 31, 1999,
respectively.......................................... 5,243,838 7,794,981 10,798,303
Finished goods inventory................................ 919,142 1,267,237 1,710,104
Other current assets.................................... 1,086,017 1,045,997 1,719,265
------------- ------------- -------------
Total current assets............................. 11,670,614 17,251,153 36,899,283
Property and equipment, net............................... 2,241,784 1,637,886 2,565,740
Deposits and other assets................................. 167,494 121,178 146,777
Intangible assets, less accumulated amortization of
$1,615,839.............................................. -- -- 52,062,682
------------- ------------- -------------
Total assets..................................... $ 14,079,892 $ 19,010,217 $ 91,674,482
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 3,285,340 $ 3,069,280 $ 5,015,616
Accrued liabilities..................................... 5,677,311 5,721,065 8,219,349
Acquisition consideration payable....................... -- -- 5,341,609
Deferred revenue........................................ 2,494,072 4,199,589 6,500,531
Current portion of note payable......................... -- -- 224,086
Current portion of capital lease obligations............ 1,234,358 930,040 606,575
------------- ------------- -------------
Total current liabilities........................ 12,691,081 13,919,974 25,907,766
Deferred rent............................................. 406,281 382,486 332,987
Capital lease obligations, less current portion........... 774,889 393,480 526,458
Commitments
Shareholders' equity:
Convertible preferred stock, par value $0.001:
Authorized shares -- 61,793,074
Issued and outstanding shares -- 30,049,176 and
35,527,893 at January 31, 1998 and 1999,
respectively, and 52,230,915 at October 31, 1999; no
shares pro forma....................................
Aggregate liquidation preference -- $90,819,936 and
$111,419,912 at January 31, 1998 and 1999,
respectively, and $194,935,047 at October 31,
1999................................................ 30,049 35,527 52,230 $ --
Common stock, par value $0.001:
Authorized shares -- 75,000,000
Issued and outstanding shares -- 3,275,618 and
3,540,578 at January 31, 1998 and 1999,
respectively, and 4,625,389 at October 31, 1999;
31,713,214 shares pro forma......................... 3,276 3,541 4,625 31,713
Additional paid-in capital.............................. 89,852,909 110,674,833 209,464,854 209,489,996
Stock subscriptions receivable.......................... -- -- (13,000,000) --
Deferred advertising expense............................ -- -- (400,000) (400,000)
Deferred compensation................................... -- (192,196) (6,236,490) (6,236,490)
Accumulated deficit..................................... (89,678,593) (106,207,428) (124,977,948) (124,977,948)
------------- ------------- ------------- -------------
Total shareholders' equity....................... 207,641 4,314,277 64,907,271 $ 77,907,271
------------- ------------- ------------- =============
Total liabilities and shareholders' equity....... $ 14,079,892 $ 19,010,217 $ 91,674,482
============= ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 82
THE LIGHTSPAN PARTNERSHIP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED OCTOBER 31,
------------------------------------------ -----------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses............................ $ 5,591,769 $ 15,041,742 $ 20,985,230 $ 15,752,938 $ 21,503,992
Services.......................... 553,912 1,973,595 3,742,237 2,960,750 4,718,495
Hardware.......................... 2,419,360 5,293,671 6,103,957 4,866,768 4,828,535
------------ ------------ ------------ ------------ ------------
Total revenues............ 8,565,041 22,309,008 30,831,424 23,580,456 31,051,022
Cost of revenues:
Licenses.......................... 2,963,848 6,408,733 4,149,915 2,970,681 4,640,162
Services.......................... 563,403 1,753,808 2,385,056 1,753,404 2,226,190
Hardware.......................... 2,314,844 4,744,887 4,973,166 3,985,868 3,983,925
------------ ------------ ------------ ------------ ------------
Total cost of revenues.... 5,842,095 12,907,428 11,508,137 8,709,953 10,850,277
------------ ------------ ------------ ------------ ------------
Gross profit........................ 2,722,946 9,401,580 19,323,287 14,870,503 20,200,745
Operating expenses:
Technology and development........ 18,953,329 14,816,050 10,593,735 8,465,760 7,525,997
Sales and marketing............... 13,773,048 20,295,916 22,066,261 16,468,824 23,474,445
General and administrative........ 2,472,717 2,714,544 3,590,159 1,792,138 4,082,508
Stock-based compensation.......... -- -- 19,680 -- 2,503,458
Amortization of intangible
assets......................... -- -- -- -- 1,615,839
------------ ------------ ------------ ------------ ------------
35,199,094 37,826,510 36,269,835 26,726,722 39,202,247
------------ ------------ ------------ ------------ ------------
Loss from operations................ (32,476,148) (28,424,930) (16,946,548) (11,856,219) (19,001,502)
Interest income (expense), net...... (112,559) (527,659) 417,713 350,066 230,982
------------ ------------ ------------ ------------ ------------
Net loss............................ $(32,588,707) $(28,952,589) $(16,528,835) $(11,506,153) $(18,770,520)
============ ============ ============ ============ ============
Historical net loss per share:
Basic and diluted................. $ (10.72) $ (9.11) $ (4.88) $ (3.45) $ (4.82)
============ ============ ============ ============ ============
Weighted average shares -- basic
and diluted.................... 3,038,824 3,177,315 3,387,772 3,330,546 3,891,940
============ ============ ============ ============ ============
Pro forma net loss per share:
Basic and diluted................. $ (0.76) $ (0.77)
============ ============
Weighted average shares -- basic
and diluted.................... 21,801,339 24,445,397
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 83
THE LIGHTSPAN PARTNERSHIP, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
-------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- --------- ------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997........... 22,398,449 $22,398 3,068,864 $3,069 $ 62,315,020 $ -- $ --
Issuance of Series D convertible
preferred stock at $3.76 per share
for cash, net of offering costs of
$1,405,286........................ 5,984,038 5,984 -- -- 21,088,712 -- --
Issuance of Series D convertible
preferred stock at $3.76 per share
in exchange for bridge loans from
shareholders...................... 1,666,689 1,667 -- -- 6,265,085 -- --
Issuance of warrants to purchase
convertible
preferred stock................... -- -- -- -- 102,536 -- --
Exercise of stock options........... -- -- 244,775 245 83,024 -- --
Repurchase of common stock for
cash.............................. -- -- (38,021) (38) (1,468) -- --
Net loss............................ -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ -------- -----------
Balance at January 31, 1998........... 30,049,176 30,049 3,275,618 3,276 89,852,909 -- --
Issuance of Series D convertible
preferred stock at $3.76 per share
for cash, net of offering costs of
$127,132.......................... 5,478,717 5,478 -- -- 20,467,364 -- --
Exercise of stock options........... -- -- 264,960 265 142,684 -- --
Deferred compensation related to
stock options..................... -- -- -- -- 211,876 -- (211,876)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 19,680
Net loss............................ -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ -------- -----------
Balance at January 31, 1999........... 35,527,893 35,527 3,540,578 3,541 110,674,833 -- (192,196)
<CAPTION>
DEFERRED TOTAL
ADVERTISING ACCUMULATED SHAREHOLDERS'
EXPENSE DEFICIT EQUITY
----------- ------------- -------------
<S> <C> <C> <C>
Balance at January 31, 1997........... $ -- $ (60,726,004) $ 1,614,483
Issuance of Series D convertible
preferred stock at $3.76 per share
for cash, net of offering costs of
$1,405,286........................ -- -- 21,094,696
Issuance of Series D convertible
preferred stock at $3.76 per share
in exchange for bridge loans from
shareholders...................... -- -- 6,266,752
Issuance of warrants to purchase
convertible
preferred stock................... -- -- 102,536
Exercise of stock options........... -- -- 83,269
Repurchase of common stock for
cash.............................. -- -- (1,506)
Net loss............................ -- (28,952,589) (28,952,589)
-------- ------------- ------------
Balance at January 31, 1998........... -- (89,678,593) 207,641
Issuance of Series D convertible
preferred stock at $3.76 per share
for cash, net of offering costs of
$127,132.......................... -- -- 20,472,842
Exercise of stock options........... -- -- 142,949
Deferred compensation related to
stock options..................... -- -- --
Amortization of deferred
compensation...................... -- -- 19,680
Net loss............................ -- (16,528,835) (16,528,835)
-------- ------------- ------------
Balance at January 31, 1999........... -- (106,207,428) 4,314,277
</TABLE>
F-5
<PAGE> 84
THE LIGHTSPAN PARTNERSHIP, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
-------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series E convertible
preferred stock at $5.00 per
share, net of offering costs of
$45,559.......................... 6,614,183 $ 6,614 -- $ -- $ 33,018,742 $ -- $ --
Issuance of Series E
convertible preferred stock
in exchange for future
advertising.................. 80,000 80 -- -- 399,920 -- --
Series E convertible preferred
stock issued or issuable in
connection with the
acquisition of Academic
Systems...................... 7,191,839 7,192 -- -- 35,952,003 -- --
Series E convertible preferred
stock issued in connection
with the acquisition of
StudyWeb..................... 217,000 217 -- -- 1,084,783 -- --
Common stock issued in
connection with the
acquisition of Academic
Systems...................... -- -- 570,356 570 4,710,571 -- --
Options and warrants issued in
connection with the
acquisition of Academic
Systems...................... -- -- -- -- 1,817,707 -- --
Subscriptions to purchase
Series E convertible
preferred stock at $5.00 per
share........................ 2,600,000 2,600 -- -- 12,997,400 (13,000,000) --
Exercise of stock options...... -- -- 514,455 514 261,143 -- --
Deferred compensation related
to stock options............. -- -- -- -- 8,547,752 -- (8,547,752)
Amortization of deferred
compensation................. -- -- -- -- -- -- 2,503,458
Net loss....................... -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ ------------ -----------
Balance at October 31, 1999...... 52,230,915 $52,230 4,625,389 $4,625 $209,464,854 $(13,000,000) $(6,236,490)
========== ======= ========= ====== ============ ============ ===========
<CAPTION>
DEFERRED TOTAL
ADVERTISING ACCUMULATED SHAREHOLDERS'
EXPENSE DEFICIT EQUITY
----------- ------------- ---------------
<S> <C> <C> <C>
Issuance of Series E convertible
preferred stock at $5.00 per
share, net of offering costs of
$45,559.......................... $ -- $ -- $ 33,025,356
Issuance of Series E
convertible preferred stock
in exchange for future
advertising.................. (400,000) -- --
Series E convertible preferred
stock issued or issuable in
connection with the
acquisition of Academic
Systems...................... -- -- 35,959,195
Series E convertible preferred
stock issued in connection
with the acquisition of
StudyWeb..................... -- -- 1,085,000
Common stock issued in
connection with the
acquisition of Academic
Systems...................... -- -- 4,711,141
Options and warrants issued in
connection with the
acquisition of Academic
Systems...................... -- -- 1,817,707
Subscriptions to purchase
Series E convertible
preferred stock at $5.00 per
share........................ -- -- --
Exercise of stock options...... -- -- 261,657
Deferred compensation related
to stock options............. -- -- --
Amortization of deferred
compensation................. -- -- 2,503,458
Net loss....................... -- (18,770,520) (18,770,520)
--------- ------------- ---------------
Balance at October 31, 1999...... $(400,000) $(124,977,948) $ 64,907,271
========= ============= ===============
</TABLE>
See accompanying notes.
F-6
<PAGE> 85
THE LIGHTSPAN PARTNERSHIP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER
YEARS ENDED JANUARY 31, 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $(32,588,707) $(28,952,589) $(16,528,835) $(11,506,153) $(18,770,520)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 982,665 1,637,485 1,310,498 1,005,836 865,116
(Gain) loss on disposal of assets.................. (64,827) 37,774 (5,060) 6,175 (1,219)
Provision for doubtful accounts.................... 235,991 297,177 (133,168) 15,776 363,748
Amortization of intangible assets.................. -- -- -- -- 1,615,839
Amortization of deferred stock-based
compensation..................................... -- -- 19,680 -- 2,503,458
Amortization of interest expense issued in
connection with debt............................. 61,509 140,151 -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (5,620,093) (156,913) (2,417,975) (909,623) (1,391,488)
Inventory...................................... (284,871) 174,579 (348,095) (758,537) (160,032)
Deposits and other assets...................... 160,654 (288,659) 86,336 (76,110) (638,713)
Accounts payable............................... 2,136,259 (149,262) (216,060) (531,903) 1,556,782
Deferred revenue............................... 1,769,315 724,757 1,705,517 1,442,099 814,093
Accrued liabilities............................ 1,732,330 4,055,077 19,959 (1,584,288) 1,416,457
------------ ------------ ------------ ------------ ------------
Net cash flows used in operating activities............ (31,479,775) (22,480,423) (16,507,203) (12,896,728) (11,826,479)
INVESTING ACTIVITIES:
Decrease in short-term investments..................... 5,423,307 414,000 -- -- --
Purchase of property and equipment..................... (2,850,709) (422,808) (725,707) (620,234) (1,335,968)
Proceeds from sale of fixed assets..................... -- 30,816 24,167 -- 4,978
Net cash paid for purchase of Academic Systems......... -- -- -- -- (801,698)
Net cash paid for purchase of GlobalSchoolhouse........ -- -- -- -- (2,500,000)
Net cash paid for purchase of StudyWeb................. -- -- -- -- (1,000,000)
------------ ------------ ------------ ------------ ------------
Net cash flows provided by (used in) investing
activities........................................... 2,572,598 22,008 (701,540) (620,234) (5,632,688)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock.............. 19,554,716 21,094,696 20,472,842 20,480,369 33,025,356
Proceeds from convertible bridge notes................. -- 6,266,752 -- -- --
Proceeds from lessor from capital leases............... 2,287,118 339,112 699,538 739,405 587,782
Principal repayments on capital leases................. (1,216,743) (1,527,864) (1,385,265) (1,071,032) (886,955)
Proceeds from notes payable............................ 1,600,000 -- -- -- --
Principal repayments on notes payable.................. (755,152) (844,848) -- -- --
Proceeds from exercise of stock options................ 12,009 83,269 142,949 88,863 261,657
Repurchase of common stock............................. -- (1,506) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash flows provided by financing activities........ 21,481,948 25,409,611 19,930,064 20,237,605 32,987,840
Increase (decrease) in cash and cash equivalents....... (7,425,229) 2,951,196 2,721,321 6,720,643 15,528,673
Cash and cash equivalents at beginning of period....... 8,895,650 1,470,421 4,421,617 4,421,617 7,142,938
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period............. $ 1,470,421 $ 4,421,617 $ 7,142,938 $ 11,142,260 $ 22,671,611
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 495,966 $ 584,035 $ 193,058 $ 149,744 $ 140,428
============ ============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of bridge notes into Series D convertible
preferred stock...................................... $ -- $ 6,266,752 $ -- $ -- $ --
============ ============ ============ ============ ============
Deferred stock-based compensation...................... $ -- $ -- $ 211,876 $ -- $ 8,547,752
============ ============ ============ ============ ============
Series E preferred stock issued in connection with the
purchase of Academic Systems......................... $ -- $ -- $ -- $ -- $ 35,959,195
============ ============ ============ ============ ============
Common stock issued in connection with the purchase of
Academic Systems..................................... $ -- $ -- $ -- $ -- $ 4,711,141
============ ============ ============ ============ ============
Valuation of options and warrants issued in connection
with the purchase of Academic Systems................ $ -- $ -- $ -- $ -- $ 1,817,707
============ ============ ============ ============ ============
Additional consideration related to the acquisition of
Academic Systems..................................... $ -- $ -- $ -- $ -- $ 5,341,609
============ ============ ============ ============ ============
Series E preferred stock issued for future
advertising.......................................... $ -- $ -- $ -- $ -- $ 400,000
============ ============ ============ ============ ============
Series E preferred stock issued for subscriptions
receivable........................................... $ -- $ -- $ -- $ -- $ 13,000,000
============ ============ ============ ============ ============
Series E preferred stock issued in connection with
purchase of StudyWeb................................. $ -- $ -- $ -- $ -- $ 1,085,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 86
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
The Lightspan Partnership ("Lightspan") was founded in 1993. Lightspan
provides curriculum-based educational software and Internet products and
services to schools and school districts that are used both in school and at
home. Lightspan Achieve Now is an interactive CD-ROM-based software product for
kindergarten through eighth grade, or K-8, that covers the core curriculum of
language arts, reading and math. The Lightspan Achieve Now program typically
includes the Lightspan Achieve Now software and a Sony PlayStation(R) game
console that the student uses to run the program at home throughout the school
year. The Lightspan Network is an online subscription service that provides
curriculum-based content for classroom and home use.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of Lightspan's accounts receivable are from school
districts located throughout the United States. Lightspan provides for estimated
losses from uncollectible accounts and such losses have historically not
exceeded management's expectations.
INVENTORY
Inventory consists primarily of software for resale and is stated at the
lower of cost (first in, first out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated or amortized over
the shorter of the estimated useful life of the related asset (two to five
years) or the term of the lease, using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Lightspan regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. Lightspan has not identified any such impairment
losses to date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and capital lease
obligations, are carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments.
F-8
<PAGE> 87
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED RENT
Rent expense is recorded on a straight-line basis over the term of the
lease. The difference between rent expense accrued and amounts paid under the
lease agreements is recorded as deferred rent in the accompanying balance sheet.
REVENUE RECOGNITION
Lightspan derives its revenues from the licensing of software, product
implementation and training services, customer support services, Internet
subscriptions and the sale of PlayStation game consoles and accessories.
In software arrangements that include multiple elements, such as those that
include rights to software products, customer support and product implementation
and training services, Lightspan allocates the total fee to each component of
the arrangement based on objective evidence of its fair value, which is specific
to Lightspan. The objective evidence for each element is based on the sale price
of each element when sold or offered for sale separately.
Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.
Software Licenses
Prior to fiscal year 1999, Lightspan recognized revenue under AICPA
Statement of Position, or SOP, 91-1, Software Revenue Recognition. Under SOP
91-1, Lightspan recognized the full sales value of Lightspan Achieve Now
software licenses, including both completed and as-yet uncompleted titles, upon
shipment of the then-completed titles provided that there were no contractual
performance obligations to deliver the uncompleted titles and the collection of
the related receivable was deemed probable. Lightspan accrued the production
costs associated with the undelivered titles in the period in which the revenue
was recognized, and included these costs in the cost of software license
revenues and on the balance sheet as accrued cost of revenues.
On February 1, 1998, Lightspan adopted the provisions of SOP 97-2,
"Software Revenue Recognition," as amended by SOP 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP 97-2." Under SOP 97-2, Lightspan
recognizes software license revenue when (a) an agreement has been executed or a
definitive purchase order has been received; (b) the product has been shipped or
services have been performed; (c) the fee has become fixed and determinable; (d)
the collection of the fee is considered probable; and (e) the related hardware,
if applicable, has been shipped. Under SOP 97-2, Lightspan changed its method of
revenue recognition for licenses containing as-yet uncompleted titles and began
recognizing revenue using the percentage of completion method of accounting
based on the actual titles delivered and the estimated progress to completion on
as-yet uncompleted titles.
Management believes that it can reasonably estimate the percentage of
completion for each as-yet uncompleted title based on each title's stage within
a predefined development/production process, and that this methodology best
approximates progress to completion. Lightspan develops its titles in seven
separate and distinct phases. Each phase has milestone criteria that must be met
before the CD moves into the next phase of development/production. Each phase
has a specific percentage-of-completion assigned to it, which is used to
determine revenue recognition and related cost of revenues for as-yet
uncompleted titles.
F-9
<PAGE> 88
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Customer Support
Revenue derived from telephone support and maintenance arrangements
provided by the professional development organization is recognized ratably over
the one-year term of the support and maintenance period.
Product Implementation and Training Services
Revenue derived from product implementation and customer training provided
by the professional development organization is recognized when services are
performed, in accordance with the standard implementation, training, service,
and evaluation plans that Lightspan establishes for its customers.
Internet Subscriptions
Revenue derived from Internet subscriptions is recognized on a
straight-line basis over the term of the agreement (generally one year).
PlayStation Game Consoles and Related Accessories
Revenue derived from the sale of PlayStation game consoles and related
accessories is recognized upon delivery of the console and the related software
product.
Deferred Revenue
Payments received in advance of amounts earned are recorded as deferred
revenue in the accompanying financial statements.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred until technological
feasibility has been established and a definitive decision has been made to
proceed with the commercial launch of the title. To date, these factors have
been met upon substantial completion of the title, and therefore software
development costs subsequent to technological feasibility have been
insignificant.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Lightspan has elected to follow Accounting Principles Board Opinion, or APB, No.
25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for stock-based employee compensation. Under APB No. 25, if the
exercise price of Lightspan's employee and director stock options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expense is recognized. When the exercise price of the employee or
director stock options is less than the fair value of the underlying stock on
the grant date, Lightspan records deferred stock compensation for the difference
and amortizes this amount to expense in accordance with FASB Interpretation No.
28, or FIN 28, over the vesting period of the options. Options or stock awards
issued to non-employees are recorded at their fair value as determined in
accordance with SFAS No. 123 and recognized over the related service period.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from
F-10
<PAGE> 89
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
transactions and other events and circumstances from non-owner sources. Net
income (loss) and other comprehensive income (loss), including unrealized gains
and losses on investments, are reported net of their related tax effect, to
arrive at comprehensive income (loss). For the years ended January 31, 1997,
1998 and 1999 and the nine month periods ended October 31, 1998 and 1999,
comprehensive loss equals the net loss as reported.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Lightspan management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified
to conform with the current period presentation.
NET LOSS PER SHARE AND UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
Lightspan computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98. Under the
provisions of SFAS No. 128, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Potentially dilutive securities composed of incremental common shares
issuable upon the exercise of stock options and warrants, and common shares
issuable on conversion of preferred stock, were excluded from historical diluted
loss per share because of their anti-dilutive effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
The following table sets forth the computation of historical net loss per
share, basic and diluted:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $(32,588,707) $(28,952,589) $(16,528,835) $(11,506,153) $(18,770,520)
============ ============ ============ ============ ============
Denominator for
historical basic and
diluted calculations:
Weighted average
common shares
outstanding........ 3,038,824 3,177,315 3,387,772 3,330,546 3,891,940
============ ============ ============ ============ ============
Historical net loss per
share:
Basic and diluted..... $ (10.72) $ (9.11) $ (4.88) $ (3.45) $ (4.82)
============ ============ ============ ============ ============
</TABLE>
F-11
<PAGE> 90
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that will
automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance).
Unaudited pro forma shareholders' equity at October 31, 1999, as adjusted
for the conversion of the convertible preferred stock into common stock, is
disclosed on the balance sheet.
2. BALANCE SHEET DETAILS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash............................................ $ 1,608,794 $ 723,190 $ 2,915,486
U.S. Corporate master notes..................... 1,825,000 3,425,000 --
U.S. Corporate repurchase agreements............ 262,000 1,741,000 --
Money market accounts........................... 25,823 27,748 19,716,125
U.S. Government repurchase agreements........... 700,000 1,226,000 --
Certificates of deposit......................... -- -- 40,000
----------- ----------- -----------
$ 4,421,617 $ 7,142,938 $22,671,611
=========== =========== ===========
</TABLE>
Other current assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Prepaid royalties............................... $ 594,883 $ 450,983 $ 427,919
Other receivables............................... 147,587 284,832 140,201
Short-term deposits............................. 221,946 235,578 372,113
Other current assets............................ 121,601 74,604 779,032
----------- ----------- -----------
$ 1,086,017 $ 1,045,997 $ 1,719,265
=========== =========== ===========
</TABLE>
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Customer base................................... $ -- $ -- $16,200,000
Core technology................................. -- -- 5,600,000
Trademark and trade name........................ -- -- 3,000,000
Assembled workforce............................. -- -- 1,000,000
Goodwill........................................ -- -- 27,878,521
----------- ----------- -----------
-- -- 53,678,521
Less accumulated amortization................... -- -- (1,615,839)
----------- ----------- -----------
$ -- $ -- $52,062,682
=========== =========== ===========
</TABLE>
F-12
<PAGE> 91
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. BALANCE SHEET DETAILS (CONTINUED)
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment......................... $ 3,978,385 $ 4,339,758 $ 5,370,702
Software........................................ 140,719 244,455 690,192
Office furniture and equipment.................. 1,163,078 1,186,394 1,453,391
----------- ----------- -----------
5,282,182 5,770,607 7,514,285
Less accumulated depreciation and
amortization.................................. (3,040,398) (4,132,721) (4,948,545)
----------- ----------- -----------
$ 2,241,784 $ 1,637,886 $ 2,565,740
=========== =========== ===========
</TABLE>
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Other accrued liabilities....................... $ 1,337,516 $ 2,341,934 $ 2,895,864
Accrued bonuses and commissions................. 1,130,438 1,669,737 3,351,611
Accrued vacation................................ 572,857 533,157 826,661
Accrued cost of revenues........................ 2,636,500 1,176,237 1,145,213
----------- ----------- -----------
$ 5,677,311 $ 5,721,065 $ 8,219,349
=========== =========== ===========
</TABLE>
3. LINE OF CREDIT AND LEASE FINANCING
Lightspan has a revolving line of credit with a bank which allows Lightspan
to borrow up to a maximum of the lesser of (a) 75% of eligible accounts
receivable (as defined) or (b) $10,000,000. The line of credit was renewed in
February 1999 and expires in April 2000 and bears interest at the bank's prime
rate plus 1.5% (10.0% at October 31, 1999), payable monthly. The line of credit
is collateralized by substantially all of Lightspan's assets. The loan agreement
with the bank contains various covenants. As of January 31, 1999 and October 31,
1999, there were no amounts outstanding under the line of credit.
In April 1999, Lightspan entered into a $1.0 million capital lease with a
financial institution. Under the agreement, which expires March 2000, Lightspan
finances the purchase of substantially all capital equipment at an 8.8% interest
rate, with payments due over a 42-month period and a purchase option at the end
of the lease term. At October 31, 1999, $499,039 was available for future
borrowing under this agreement.
In connection with the acquisition of Academic Systems, Lightspan assumed a
note payable under a loan agreement with a bank. The note bears interest at the
bank's prime rate plus 0.5%. The principal balance due under the agreement at
October 31, 1999 was $224,086, which Lightspan intends to pay in full within the
next twelve months.
4. COMMITMENTS
Lightspan leases its facilities under an operating lease agreement. The
facilities lease is subject to annual escalation provisions based upon the
Consumer Price Index.
Cost of equipment acquired under capital leases totaled $3,697,293 and
$1,634,993 (and accumulated amortization totaled $2,647,881 and $1,076,727) at
January 31, 1999 and October 31, 1999, respectively. Facilities rent and
operating lease expenses were $1,302,815 and $729,570 for the year ended January
31, 1999 and the nine months ended October 31, 1999, respectively.
F-13
<PAGE> 92
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS (CONTINUED)
In addition, Lightspan subleases a portion of their facility for a period
of one year subject to one-year renewal options. Sublease income was $0,
$125,323, $213,123 and $272,979 for the years ended January 31, 1997, 1998 and
1999, and the nine months ended October 31, 1999, respectively.
At October 31, 1999, future minimum lease payments for all leases with
initial terms of one year or more are as follows at for each fiscal year ending
January 31:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
2000........................................................ $ 417,387 $ 233,135
2001........................................................ 1,781,144 540,258
2002........................................................ 1,720,968 306,965
2003........................................................ 1,459,963 164,929
2004........................................................ 1,013,153 9,294
---------- ----------
Total minimum lease payments................................ $6,392,615 1,254,581
==========
Less amounts representing interest.......................... 121,548
----------
Present value of future minimum lease payments.............. 1,133,033
Less current portion of capital lease obligations........... 606,575
----------
Long-term capital lease obligations......................... $ 526,458
==========
</TABLE>
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At October 31, 1999, convertible preferred stock outstanding is as follows:
<TABLE>
<CAPTION>
DATE ISSUED SERIES PRICE PER SHARE NUMBER OF SHARES LIQUIDATION VALUE
----------- ------ --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
December 1993......................... A $1.00 7,135,000 $ 7,135,000
March 1994............................ A $1.00 332,500 332,500
February 1995......................... B $3.00 5,833,336 17,500,008
June 1995............................. B $3.00 5,833,328 17,499,984
September 1996........................ C $6.00 3,264,285 19,585,710
June 1997............................. D $3.76 5,984,038 22,499,983
March 1997............................ D $3.76 1,666,689 6,266,751
March 1998............................ D $3.76 5,478,717 20,599,976
July 1999............................. E $5.00 5,294,183 26,470,915
September 1999........................ E $5.00 7,191,839 35,959,220
October 1999.......................... E $5.00 4,217,000 21,085,000
---------- ------------
52,230,915 $194,935,047
========== ============
</TABLE>
In March 1997, in connection with and prior to the Series D convertible
stock financing, Lightspan obtained $6,180,000 in convertible bridge notes from
certain investors. The notes bore interest at a rate of 9.25% per annum. In June
1997, the bridge notes and accrued interest of $86,752 converted into 1,666,689
shares of Series D convertible preferred stock.
The preferred stock will automatically be converted into shares of common
stock at the then effective conversion price upon the closing of the initial
public offering contemplated by this prospectus as long as the initial public
offering price and aggregate proceeds meet minimum requirements, as defined by
the agreements. As of October 31, 1999, the Series A, B, C, D and E preferred
stock are convertible, at the
F-14
<PAGE> 93
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
option of the holder, into 3,733,750, 5,833,332, 2,604,510, 6,564,722 and
8,351,511 shares of common stock, respectively, which has been reserved for
issuance upon conversion of the preferred stock, subject to certain antidilution
adjustments.
Holders of the Series A, B, C, D and E preferred stock are entitled to
receive dividends at a rate of $0.10, $0.30, $0.60, $0.376 and $0.50 per share
per annum, whenever funds are legally available and as declared by Lightspan's
board of directors. The holder of each share of preferred stock is entitled to
the number of votes equal to the number of shares of common stock into which the
preferred stock could be converted. Lightspan is subject to certain covenants
under the agreements that require the vote or written consent by a majority of
the then outstanding preferred shares regarding certain changes in the rights
and interests of the preferred shares.
In the event of any liquidation, dissolution or winding up of Lightspan,
the holders of preferred stock are entitled to receive their liquidation value
prior to and in preference to any distribution of the assets or surplus funds of
Lightspan to the holders of common stock. If, upon the occurrence of such event,
the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of Lightspan
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of
shares owned by each such holder.
All series of preferred stock have redemption features, at the option of
Lightspan, which are subject to approval and written consent of a majority of
the shareholders for Series A, C, D and E, voting separately as a single class,
and 57% of the shareholders for Series B, voting separately as single class. The
right of redemption cannot be exercised with respect to any series of preferred
stock prior to the fifth anniversary of the original issue date of the Series D
preferred stock, but may be exercised at any time and from time to time
thereafter.
Upon the sale of Lightspan's common stock in a qualified public offering
within 24 months of the second date on which Series D preferred stock was
issued, and subject to certain criteria being met, additional warrants to
purchase up to 3,326,112 shares of common stock at $.01 per share could be
issued. These "springing warrants" will be issued only if on the measurement
date, which is defined as a) the closing date of a qualified public offering; or
b) the six month anniversary of such offering (whichever is elected by
Lightspan), the fair market value of Lightspan's common stock (the "measurement
price") is less than the defined return benchmark. The return benchmark is
calculated as the number of Series D preferred shares multiplied by the
liquidation preference of such shares, and adjusted for the number of years
elapsed from the original warrant date. In the event that the return benchmark
exceeds the fair market value at the measurement date (the "wealth shortfall"),
warrants to purchase shares will become exercisable. The number of shares
issuable upon exercise of the warrants will be equal to the wealth shortfall
divided by the measurement price. If the offering contemplated by this
prospectus is completed under the terms set forth on the cover, warrants to
purchase an additional approximately 979,691 shares of common stock would be
issued.
Lightspan will account for the "springing warrants" in accordance with EITF
98-5. As such, on the measurement date the Company will account for the value of
these warrants as a dividend by charging retained earnings and increasing the
carrying amount of preferred stock by a corresponding amount. The amount of such
change will increase the loss applicable to common stockholders.
STOCK OPTION PLAN
In 1993, Lightspan adopted its 1993 Stock Option Plan, which will be
renamed the 2000 Equity Incentive Plan upon the close of this offering (the
"Plan"). Options for common stock may be incentive
F-15
<PAGE> 94
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
stock options or non-statutory stock options and are granted at the discretion
of the Board of Directors. The Plan permits immediate exercise of options with
the unvested portion subject to repurchase by Lightspan at the original exercise
price, in the event of termination of employment or engagement. Non-statutory
stock options may be granted to employees, directors and consultants whereas
incentive stock options may be granted to employees and directors only. The
option price for incentive stock options shall not be less than 100% of the fair
value on the date of grant, and the option price of non-statutory options shall
not be less than 85% of the fair value on the date of grant. The maximum term of
options granted under the Plan is ten years. Incentive stock options granted
under the Plan are immediately exercisable in full and generally vest at the
rate of 25% after one year from the vesting commencement date and 1/36 of the
remaining shares every month thereafter. Non-statutory stock options are
immediately exercisable in full and generally vest at the rate of 50% after one
year from the vesting commencement date and the remaining 50% after two years
from such date.
At October 31, 1999, Lightspan was authorized to issue 5,153,941 shares of
common stock to eligible employees, officers, directors and consultants under
the Plan, of which options to purchase 366,361 shares were available for future
grant at October 31, 1999.
1992 STOCK OPTION PLAN
Upon the closing of its acquisition of Academic Systems, Lightspan assumed
Academic Systems' 1992 Stock Option Plan. All options outstanding under the 1992
Stock Option Plan at the date of acquisition were converted into options to
purchase shares of Lightspan common stock, and are included in the summary
below. Lightspan no longer grants options under this plan.
A summary of Lightspan's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------------------------------------- NINE MONTHS ENDED
1997 1998 1999 OCTOBER 31, 1999
---------------------- --------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year............................. 1,144,500 $ .36 1,858,750 $ .54 1,951,083 $ .60 1,782,687 $ .78
Granted........................ 893,000 $ .76 858,500 $ .86 517,438 $1.36 2,722,404 $5.00
Exercised...................... (44,427) $ .28 (244,775) $ .34 (264,960) $ .54 (514,455) $ .50
Forfeited...................... (134,323) $ .54 (521,392) $ .94 (420,874) $ .80 (276,560) $1.20
---------- ---------- ---------- ----------
Outstanding -- end of year....... 1,858,750 $ .54 1,951,083 $ .60 1,782,687 $ .78 3,714,076 $3.80
========== ========== ========== ==========
Exercisable at end of year....... 622,617 968,387 1,031,005 784,678
========== ========== ========== ==========
Weighted average fair value of
options granted during the
year........................... $ .14 $ .20 $ .30 $ 3.92
========== ========== ========== ==========
</TABLE>
F-16
<PAGE> 95
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of October 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
RANGE OF AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ----------- ----------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ .0000 - $ 1.0000 817,983 2.2 $ .7056 593,052 $ .6782
$1.0001 - $ 2.0000 976,130 3.8 $ 1.8902 133,715 $ 1.7312
$2.0001 - $ 3.0000 243,500 4.5 $ 3.0000 770 $ 3.0000
$3.0001 - $ 4.0000 893,580 6.8 $ 4.0000 5,391 $ 4.0000
$8.0001 - $ 9.0000 592,010 5.2 $ 8.2600 50,000 $ 8.2600
$9.0001 - $10.0000 190,873 5.6 $10.0000 1,750 $10.0000
--------- -------
3,714,076 4.6 $ 3.6416 784,678 $ 1.3866
========= =======
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if Lightspan had accounted for its employee stock options
under the fair value method of that statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing model
with the following weighted average assumptions for each of the years ended
January 31, 1997, 1998 and 1999 and the nine months ended October 31, 1999,
respectively: risk-free interest rates of 6.00%, 5.13%, 5.00% and 5.19%,
respectively; dividend yields of 0%; and a weighted-average expected life of the
options of four to five years.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because Lightspan's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options.
Lightspan's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED
------------------------------------------ OCTOBER 31,
1997 1998 1999 1999
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Pro forma net loss................. $(32,615,453) $(29,020,517) $(16,587,899) $(21,510,935)
============ ============ ============ ============
Pro forma historical net loss per
share, basic and diluted........... $ (10.73) $ (9.13) $ (4.90) $ (5.53)
------------ ------------ ------------ ------------
</TABLE>
WARRANTS
In connection with debt and equipment lease financing agreements entered
into at various dates, Lightspan issued a total of 749,605 warrants to purchase:
up to 150,000 shares of Series A preferred stock at $1.00 per share, up to
150,000 shares of Series B preferred stock at $3.00 per share, up to 96,625
shares and 57,564 shares of Series C preferred stock at $6.00 per share and
$0.01 per share, respectively, up to 183,105 shares and 127,659 shares of Series
D preferred stock at $3.76 and $4.70 per share, respectively, and up to 42,216
shares of Series E preferred stock at $5.00 per share. The warrants expire on
various dates commencing in 2002 through 2006.
F-17
<PAGE> 96
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The warrants to purchase Series A through D preferred stock were valued at
an aggregate of $201,660, which was recorded as debt discounts and accreted into
interest expense over the life of the applicable financing agreements. The fair
value of the warrants were estimated at the dates of grant using the minimum
value method with the following assumptions: risk free interest rate of 6.00%;
an expected warrant life of two years; and no annual dividends. Interest expense
related to the accretion of the debt discounts totaled $61,509 and $140,151 for
the years ended January 31, 1997 and 1998, respectively. There were no such
amounts included in interest expense for the year ended January 31, 1999 or the
six month periods ended October 31, 1998 and 1999.
In connection with the acquisition of Academic Systems Corporation
("Academic") (see Note 9), Lightspan converted 50,000 warrants to purchase
Academic Series C preferred stock originally issued in connection with lease
financing into 8,000 warrants to purchase Lightspan Series E preferred stock;
and 34,216 warrants to purchase Academic Series F preferred stock originally
issued in connection with debt financing into 34,216 warrants to purchase
Lightspan Series E preferred stock. These warrants were valued at $1.25 per
share and $.33 per share, respectively, in accordance with APB 16, using the
minimum value method, and were accounted for as a part of the purchase price of
Academic.
AGREEMENT WITH CINAR CORPORATION
On October 29, 1999, Lightspan entered into an agreement with CINAR
Corporation (CINAR) pursuant to which CINAR purchased 2.5 million shares of
Lightspan's Series E Preferred Stock (convertible into 1.25 million shares of
common stock) at $5.00 per share and agreed to purchase $10 million of Lightspan
common stock in a private placement that will occur concurrently with the
initial public offering contemplated by this prospectus and at the same price
per share. Lightspan also granted CINAR a warrant to purchase 500,000 shares of
Lightspan's Series E Preferred Stock at an exercise price of $5.00 per share
(which will become a warrant to purchase 250,000 shares of common stock at an
exercise price of $10.00 per share) that will vest upon the achievement of
various agreed-to strategic goals.
Lightspan has accounted for the warrants in accordance with EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services. Specifically, the
shares that could be issued pursuant to the warrant will be valued the earlier
of a) the date at which a commitment for performance is reached or b) the date
at which CINAR's performance is complete (the "measurement date").
Lightspan believes that it is unlikely that a performance commitment, as
described in EITF 96-18, will be reached until performance is complete.
Therefore, the measurement date will be the date of completion of performance
and accordingly no expense had been recorded through October 31, 1999.
DEFERRED ADVERTISING EXPENSE
On October 29, 1999, Lightspan issued 160,000 shares of Series E
convertible preferred stock to Liberty Digital Corporation in exchange for
$400,000 in cash and $800,000 in future Internet advertising credits. Lightspan
determined that the fair value of the shares issued ($5.00 per share) was more
readily determinable than the fair value of the advertising credits.
As a result, Lightspan recorded the 160,000 shares issued at $800,000 and
recorded deferred advertising expense of $400,000. Lightspan will remeasure, and
expense, such amount as the advertising credits are utilized, in accordance with
EITF 96-18.
F-18
<PAGE> 97
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION
Lightspan has recorded deferred compensation of $211,876 and $8,547,752 for
the year ended January 31, 1999 and the nine months ended October 31, 1999,
respectively, in connection with the grants of certain stock options to
employees and consultants. Amortization of deferred stock compensation was
$19,680 and $2,503,458 during the year ended January 31, 1999 and the nine
months ended October 31, 1999, respectively.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
The following table summarizes common shares reserved for future issuance:
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
<S> <C>
Convertible preferred stock................................. 27,087,825
Convertible preferred stock warrants........................ 403,591
Common stock options........................................ 3,714,076
----------
Total common shares reserved for issuance................... 31,205,492
==========
</TABLE>
REVERSE STOCK SPLIT
In , 1999, the Company approved a one for two reverse stock
split of its common stock. In addition, immediately following the closing of the
initial public offering, the certificate of incorporation will be amended to
authorize the issuance of up to 250,000,000 shares of common stock and
20,000,000 shares of preferred stock. Consequently, the common stock and stock
option data throughout the financial statements and notes to the financial
statements have been restated to reflect the stock split.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of
Lightspan's deferred tax assets are shown below:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------- OCTOBER 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $ 29,993,000 $ 35,586,000 $ 41,719,000
Capitalized research expenses.......... 2,111,000 2,119,000 2,514,000
Research and development credits....... 2,608,000 3,257,000 4,062,000
Other.................................. 1,989,000 1,467,000 1,119,000
------------ ------------ ------------
Total deferred tax assets................ 36,701,000 42,429,000 49,414,000
Valuation allowance for deferred tax
assets.............................. (36,701,000) (42,429,000) (39,207,000)
------------ ------------ ------------
Net deferred tax assets.................. -- -- 10,207,000
------------ ------------ ------------
Deferred tax liabilities:
Acquired intangibles................... -- -- 10,207,000
------------ ------------ ------------
Net deferred tax assets.................. $ -- $ -- $ --
============ ============ ============
</TABLE>
F-19
<PAGE> 98
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate
to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JANUARY 31, ENDED
---------------------------------------- OCTOBER 31,
1997 1998 1999 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. federal taxes at statutory rate.... $(11,080,000) $(9,844,000) $(5,620,000) $(6,303,000)
State taxes, net of federal benefit..... (1,955,000) (1,737,000) (992,000) (1,112,000)
Change in valuation allowance........... 12,783,000 12,753,000 5,728,000 6,990,000
Other nondeductible expenses and
expiration of net operating loss
carryforwards, net.................... 252,000 (1,172,000) 884,000 425,000
------------ ----------- ----------- -----------
$ -- $ -- $ -- $ --
============ =========== =========== ===========
</TABLE>
A valuation allowance has been recognized to offset the deferred tax assets
because management cannot conclude that it is more likely than not that the
deferred tax assets will be realized.
At October 31, 1999, Lightspan had federal and California net operating
loss carryforwards of approximately $114,796,000 and $26,788,000, respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to capitalization of research expenses and limitations on
net operating losses for California tax purposes. The federal tax loss
carryforwards will begin expiring in 2008 unless previously utilized. Through
October 31, 1999, California tax loss carryforwards of $2,150,000 have expired,
and additional loss carryforwards will continue to expire in fiscal 2000.
Lightspan also has federal and California research and development tax credit
carryforwards of $3,077,000 and $1,515,000, respectively, which will begin
expiring in 2008 unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, the use of
Lightspan's net operating loss and credit carryforwards could be limited in the
event of a cumulative change in ownership of more than 50%.
7. RETIREMENT PLAN
Lightspan has a 401(k) defined contribution savings and retirement plan
(the "Retirement Plan"). The Retirement Plan is for the benefit of all
qualifying employees and permits employees voluntary contributions up to 20% of
base salary limited by the IRS imposed maximum. On January 1, 1999, Lightspan
began matching 10% of employee contributions up to 4% of eligible compensation.
Employer contributions were $3,459 for the year ended January 31, 1999 and $0
for the nine months ended October 31, 1999.
8. REPORTABLE SEGMENTS
DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES
Lightspan has three reportable segments: Lightspan Achieve Now, K-12
Internet and Higher Education. Revenues derived from the Lightspan Achieve Now
segment typically include the sale of Lightspan Achieve Now software licenses,
Sony PlayStation game consoles and related accessories, and implementation,
training and support services. Revenues derived from the K-12 Internet segment
primarily include subscription fees for The Lightspan Network.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
Lightspan evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
FACTORS MANAGEMENT USED TO IDENTIFY LIGHTSPAN'S REPORTABLE SEGMENTS
Lightspan's reportable segments are business units that offer different
products and services.
F-20
<PAGE> 99
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. REPORTABLE SEGMENTS (CONTINUED)
FINANCIAL INFORMATION FOR LIGHTSPAN'S SEGMENTS
The following information is for the Lightspan Achieve Now, K-12 Internet,
and Higher Education segments:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 8,487,916 $ 77,125 $ -- $ 8,565,041
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. (107,184) (5,375) -- (112,559)
Depreciation and amortization.............. 977,752 4,913 -- 982,665
Segment loss from operations............... (30,925,268) (1,550,880) -- (32,476,148)
Segment assets............................. 12,773,740 78,407 -- 12,852,147
Other significant non cash items:
Deferred stock compensation.............. -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 22,020,363 $ 288,645 $ -- $ 22,309,008
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. (504,087) (23,572) -- (527,659)
Depreciation and amortization.............. 1,629,299 8,186 -- 1,637,485
Segment loss from operations............... (27,155,113) (1,269,817) -- (28,424,930)
Segment assets............................. 13,925,617 154,275 -- 14,079,892
Other significant non cash items:
Deferred stock compensation.............. -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 29,807,710 $ 1,023,714 $ -- $ 30,831,424
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. 359,654 58,059 -- 417,713
Depreciation and amortization.............. 1,297,390 13,108 -- 1,310,498
Segment loss from operations............... $(14,591,248) (2,355,300) -- (16,946,548)
Segment assets............................. 18,541,785 468,432 -- 19,010,217
Other significant non cash items:
Deferred stock compensation.............. 211,876 -- -- 211,876
Amortization of deferred stock
compensation.......................... 19,680 -- -- 19,680
</TABLE>
F-21
<PAGE> 100
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. REPORTABLE SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31, 1999
----------------------------------------------------------------------
LIGHTSPAN
ACHIEVE K-12 HIGHER
NOW INTERNET EDUCATION ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers..................... $29,316,124 $ 1,246,100 $ 488,798 $ -- $31,051,022
Inter segment revenues.......... -- -- -- -- --
Interest income (expense),
net........................... 217,905 16,769 (3,692) -- 230,982
Depreciation and amortization... 816,188 23,670 25,258 -- 865,116
Segment loss from operations.... (7,559,889) (9,288,756) (2,152,857) -- (19,001,502)
Segment assets.................. 89,837,536 766,096 51,003,928 (49,933,078 ) 91,674,482
Other significant non cash
items:
Deferred stock compensation... 5,236,905 3,107,200 203,647 -- 8,547,752
Amortization of deferred stock
compensation............... 1,569,255 922,258 11,945 -- 2,503,458
Amortization of intangible
assets..................... -- 136,642 1,479,197 -- 1,615,839
</TABLE>
NOTE 9. BUSINESS COMBINATIONS
ACQUISITION OF ACADEMIC SYSTEMS CORPORATION
On May 10, 1999, Lightspan entered into a merger agreement with Academic,
which sells and supports interactive multimedia learning systems, principally to
colleges and universities. In connection with the merger agreement which was
consummated on September 20, 1999, Lightspan issued 7,191,839 shares of Series E
convertible preferred stock, 570,356 shares of common stock, options to purchase
263,404 shares of common stock, and warrants to purchase 42,216 shares of Series
E convertible preferred stock, and agreed to pay $1,735,840 cash, in exchange
for all of the outstanding common and preferred shares of Academic and all
outstanding Academic options and warrants. The acquisition was accounted for as
a purchase.
The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right."). The 263,404 options to purchase Lightspan common stock that were
issued to Academic optionholders were recorded at their fair value of $6.82 per
share in accordance with APB 16 with the fair value determined by the minimum
value method.
Subsequent to September 20, 1999, the date the acquisition was consummated,
Lightspan determined that it will issue additional consideration in the amount
of $5,340,075 in early 2000 to certain Academic stockholders. Lightspan intends
to issue 1,068,015 shares of Series E preferred stock, subject to regulatory
approval, to such stockholders. If regulatory approval is not obtained,
Lightspan intends to issue cash or some other form of additional consideration.
F-22
<PAGE> 101
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. BUSINESS COMBINATIONS (CONTINUED)
The aggregate purchase price totalled $49,933,078, as follows:
<TABLE>
<S> <C>
Valuation of Series E convertible preferred stock
issuable.................................................. $35,959,195
Valuation of common stock issued or issuable................ 4,711,141
Issuance of cash pursuant to exercise of "put right"........ 1,734,306
Valuation of options and warrants exchanged for Academic
options and warrants...................................... 1,817,707
Acquisition costs........................................... 369,120
Additional consideration issuable in Series E convertible
preferred stock or cash................................... 5,341,609
-----------
Aggregate purchase price.................................... $49,933,078
===========
</TABLE>
The purchase price was allocated to the assets acquired, consisting
principally of intangible assets and goodwill, which are being amortized over
useful lives ranging from four to ten years.
The accompanying consolidated financial statements include the results of
operations of Academic since September 20, 1999, the date the acquisition was
consummated.
ACQUISITION OF GLOBAL SCHOOLHOUSE
On September 2, 1999, Lightspan acquired certain assets of The Global
SchoolNet Foundation, principally consisting of the Web site
GlobalSchoolhouse.com, an education Web site designed to help teachers develop
and manage collaborative learning projects online, and related intellectual
property, for $2.5 million in cash. The acquisition was accounted for as a
purchase. The purchase price was allocated to the assets acquired, principally
intangible assets related to the Web site, which are being amortized over a
three-year useful life.
The accompanying consolidated financial statements include the results of
operations of Global Schoolhouse since September 2, 1999.
ACQUISITION OF STUDYWEB
On October 28, 1999 Lightspan acquired certain assets of American Computer
Resource, principally consisting of the Web site StudyWeb.com, a research
website designed to help parents, teachers and students find online educational
resources, and related intellectual property, for consideration of $1,000,000 in
cash and 217,000 shares of Series E convertible preferred stock, valued at $5.00
per share. The aggregate purchase price was $2,085,000. The acquisition was
accounted for as a purchase. The purchase price was allocated to the assets
acquired, principally intangible assets related to the Web site, which are being
amortized over a three-year useful life.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information assumes the
acquisitions of Academic, Global Schoolhouse and StudyWeb were consummated on
February 1, 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31, 1999
-----------------
<S> <C>
Revenues.................................................... $ 36,778,640
Net loss.................................................... $(30,653,960)
Historical net loss per share, basic and diluted............ $ (7.88)
============
Pro forma net loss per share, basic and diluted............. $ (1.09)
============
</TABLE>
F-23
<PAGE> 102
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Academic Systems Corporation
We have audited the accompanying balance sheets of Academic Systems
Corporation as of September 30, 1997 and 1998, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. 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 Academic Systems Corporation
as of September 30, 1997 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
October 28, 1999
F-24
<PAGE> 103
ACADEMIC SYSTEMS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 13,157,705 $ 4,521,895 $ 2,341,984
Accounts receivable, less allowance for
doubtful accounts of $0, $63,724 and $63,724
at September 30, 1997 and 1998 and June 30,
1999, respectively.......................... 1,142,576 828,931 2,603,255
Other current assets........................... 514,629 582,822 170,622
------------ ------------ ------------
Total current assets............................. 14,814,910 5,933,648 5,115,861
Property and equipment, net...................... 1,131,684 932,918 670,975
------------ ------------ ------------
Total assets........................... $ 15,946,594 $ 6,866,566 $ 5,786,836
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 231,733 $ 849,162 $ 304,864
Accrued liabilities............................ 635,439 790,115 1,340,758
Deferred revenue............................... 2,392,049 2,155,423 2,349,934
Current portion of long-term debt.............. 93,731 206,849 3,503,020
Current portion of capital lease obligations... 189,443 140,794 98,769
------------ ------------ ------------
Total current liabilities........................ 3,542,395 4,142,343 7,597,345
Long-term debt, less current portion............. 388,316 241,323 86,187
Capital lease obligations, less current
portion........................................ 242,703 120,768 --
Commitments
Shareholders' equity (deficit):
Convertible preferred stock, no par value:
Authorized shares -- 54,000,000
Issued and outstanding shares -- 29,535,529
and 27,504,693 at September 30, 1997 and
1998, and at June 30, 1999,
respectively..............................
Aggregate liquidation
preference -- $43,197,149 and $41,715,227
at September 30, 1997 and 1998, and June
30, 1999, respectively.................... 42,895,034 42,115,864 42,115,864
Common stock, no par value:
Authorized shares -- 34,761,460
Issued and outstanding shares -- 4,353,339
and 4,715,454 at September 30, 1997 and
1998, respectively, and 8,111,713 at June
30, 1999.................................. 62,681 102,032 404,520
Accumulated deficit............................ (31,184,535) (39,855,764) (44,417,080)
------------ ------------ ------------
Total shareholders' equity (deficit)... 11,773,180 2,362,132 (1,896,696)
------------ ------------ ------------
Total liabilities and shareholders'
equity (deficit)..................... $ 15,946,594 $ 6,866,566 $ 5,786,836
============ ============ ============
</TABLE>
See accompanying notes.
F-25
<PAGE> 104
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. $ 4,398,994 $ 5,938,618 $ 2,946,885 $ 4,869,613
Cost of revenue.......................... 1,920,439 2,063,800 1,183,409 1,377,878
------------ ------------ ------------ -----------
Gross profit............................. 2,478,555 3,874,818 1,763,476 3,491,735
------------ ------------ ------------ -----------
Operating expenses:
Technology and development............. 4,321,114 3,863,785 3,072,660 1,965,752
Sales and marketing.................... 6,088,928 7,175,302 5,696,939 4,675,330
General and administrative............. 2,327,203 1,853,968 1,243,126 1,362,097
------------ ------------ ------------ -----------
12,737,245 12,893,055 10,012,725 8,003,179
------------ ------------ ------------ -----------
Loss from operations..................... (10,258,690) (9,018,237) (8,249,249) (4,511,444)
Interest income (expense), net........... 150,490 347,008 310,187 (49,872)
------------ ------------ ------------ -----------
Net loss................................. $(10,108,200) $ (8,671,229) $ (7,939,062) $(4,561,316)
============ ============ ============ ===========
</TABLE>
See accompanying notes.
F-26
<PAGE> 105
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
------------------------ -------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
---------- ----------- --------- -------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996........................ 14,720,720 $26,943,956 4,024,052 $ 45,865 $(21,076,335) $ 5,913,486
Sale of Series F convertible
preferred stock, net of
issuance costs of $48,932..... 12,962,998 13,951,078 -- -- -- 13,951,078
Conversion of bridge loans
into Series F convertible
preferred stock.......... 1,851,811 2,000,000 -- -- -- 2,000,000
Exercise of stock options... -- -- 329,287 16,816 -- 16,816
Net loss.................... -- -- -- -- (10,108,200) (10,108,200)
---------- ----------- --------- -------- ------------ ------------
Balance at September 30,
1997........................ 29,535,529 42,895,034 4,353,339 62,681 (31,184,535) 11,773,180
Repurchase of convertible
preferred stock.......... (2,116,484) (871,670) -- -- -- (871,670)
Issuance of Series F
convertible preferred
stock for services....... 85,648 92,500 -- -- -- 92,500
Exercise of stock options... -- -- 362,115 39,351 -- 39,351
Net loss.................... -- -- -- -- (8,671,229) (8,671,229)
---------- ----------- --------- -------- ------------ ------------
Balance at September 30,
1998........................ 27,504,693 42,115,864 4,715,454 102,032 (39,855,764) 2,362,132
Exercise of stock options
(unaudited)................. -- -- 3,396,259 302,488 -- 302,488
Net loss (unaudited).......... -- -- -- -- (4,561,316) (4,561,316)
---------- ----------- --------- -------- ------------ ------------
Balance at June 30, 1999
(unaudited)................. 27,504,693 $42,115,864 8,111,713 $404,520 $(44,417,080) $ (1,896,696)
========== =========== ========= ======== ============ ============
</TABLE>
See accompanying notes.
F-27
<PAGE> 106
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------- -------------------------
1997 1998 1998 1999
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $(10,108,200) $(8,671,229) $(7,939,062) $(4,561,316)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 533,494 597,810 407,728 436,544
Loss on sale of property and equipment.............. 17,209 70,451 -- --
Preferred stock issued for services................. -- 92,500 92,500 --
Changes in operating assets and liabilities:
Accounts receivable............................... (686,029) (558,025) (1,979,909) (1,774,324)
Other assets...................................... (192,839) (68,193) 265,701 412,200
Accounts payable.................................. (122,449) 617,429 281,087 (544,298)
Accrued liabilities............................... 280,733 (236,626) 528,927 550,643
Deferred revenue.................................. 1,409,355 154,676 1,251,260 194,511
------------ ----------- ----------- -----------
Net cash flows used in operating activities........... (8,868,726) (8,001,207) (7,091,768) (5,286,040)
INVESTING ACTIVITIES:
Purchase of property and equipment.................... (474,927) (474,332) (363,352) (174,601)
Proceeds from sale of property and equipment.......... 7,572 4,837 -- --
------------ ----------- ----------- -----------
Net cash flows used in investing activities........... (467,355) (469,495) (363,352) (174,601)
------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of convertible preferred
stock............................................... 13,951,078 -- -- --
Exercise of stock options............................. 16,816 39,351 25,877 302,488
Proceeds from debt.................................... 482,048 138,000 138,000 --
Repayment of debt..................................... -- (171,875) (120,163) (158,965)
Proceeds from convertible bridge notes................ 2,000,000 -- -- 3,300,000
Principal payments under capital lease obligations.... (215,034) (170,584) (133,699) (162,793)
------------ ----------- ----------- -----------
Net cash flows provided by (used in) financing
activities.......................................... 16,234,908 (165,108) (89,985) 3,280,730
------------ ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...... 6,898,827 (8,635,810) (7,545,105) (2,179,911)
Cash and cash equivalents at beginning of period...... 6,258,878 13,157,705 13,157,705 4,521,895
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 13,157,705 $ 4,521,895 $ 5,612,600 $ 2,341,984
============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid....................................... $ 130,804 $ 108,774 $ 85,197 $ 49,168
============ =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Return of convertible preferred stock in
satisfaction of accounts receivable............... $ -- $ 871,670 $ 871,670 $ --
============ =========== =========== ===========
Conversion of bridge notes into Series F
convertible preferred stock....................... $ 2,000,000 $ -- $ -- $ --
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 107
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Academic Systems Corporation ("Academic") was founded in 1992. Academic
sells and supports interactive multimedia learning systems, principally to
colleges and universities that install Academic's software systems on campus
servers to deliver instruction, assessment and support to students and faculty.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of Academic's accounts receivable are from colleges and
universities located throughout the United States. Academic provides for
estimated losses from uncollectible accounts and such losses have historically
not exceeded management's expectations.
For the years ended September 30, 1997 and 1998, one customer represented
26% and 13% of Academic's revenues, respectively. Accounts receivable from this
customer was $270,000 and $0 at September 30, 1997 and 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated and amortized over
the shorter of the estimated useful life of the assets (three to five years) or
the term of the lease using the straight line method.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Academic regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. Academic has not identified any such impairment
losses to date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities, and capital lease
obligations, are carried at cost, which management believes approximates fair
value because of the short-term maturity of these instruments.
REVENUE RECOGNITION
Revenue consists primarily of fees for licenses and implementation of
Academic's software products and for customer training, books and materials,
upgrades and support.
Through September 30, 1997, Academic recognized revenue in accordance with
American Institute of Certified Public Accountants Statement of Position (SOP)
91-1, Software Revenue Recognition. Effective
F-29
<PAGE> 108
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 1, 1997, Academic adopted the provisions of SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4.
Academic enters into software license agreements under which software,
support and other services are provided to a customer for a fixed fee for a
specified period of time. The arrangement fee is allocated to the various
elements of the arrangements based upon vendor-specific objective evidence of
the fair value of each of the elements. Software license revenues are recognized
upon contract signing and delivery of the software provided the related fee is
fixed and determinable, and collectability of the fee is probable. The fee for
implementation services is recognized upon completion of the services. The
Company defers revenue related to specified upgrades based upon the established
fair value of the upgrade, until the upgrade has been delivered. The revenue
relating to books and materials is recognized upon shipment. Revenue for
training is recognized when the services are performed.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with the establishment of technological
feasibility and, accordingly, no costs have been capitalized.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Academic has elected to follow Accounting Principles Board Opinion, or APB, No.
25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for stock-based employee compensation. Under APB 25, if the exercise
price of Academic's employee stock options equals or exceeds the fair value of
the underlying stock on the date of grant, no compensation expense is
recognized. When the exercise price of the employee stock options is less than
the fair value of the underlying stock on the grant date, Academic records
deferred stock compensation for the difference and amortizes the difference to
expense in accordance with FASB Interpretation No. 28 over the vesting period of
the individual options. Options or stock awards issued to non-employees are
recorded at their fair value and recognized over the related service period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, are reported net of their related tax effect, to arrive at
comprehensive income (loss). For the years ended September 30, 1997
F-30
<PAGE> 109
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 1998 and the nine month periods ended June 30, 1998 and 1999, comprehensive
loss equals the net loss as reported.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- JUNE 30,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment....................................... $1,708,512 $1,738,579 $1,415,837
Software................................................. 428,566 500,873 511,577
Furniture and fixtures................................... 281,517 306,483 793,124
---------- ---------- ----------
2,418,595 2,545,935 2,720,538
Less accumulated depreciation and amortization........... 1,286,911 1,613,017 2,049,563
---------- ---------- ----------
$1,131,684 $ 932,918 $ 670,975
========== ========== ==========
</TABLE>
Equipment and furniture and fixtures under capital leases aggregated
$1,077,491 and $508,939 as of September 30, 1997 and 1998, respectively, and the
related accumulated amortization was $744,623 and $371,800, respectively.
3. DEBT
Academic has entered into a loan agreement with a bank whereby Academic can
borrow up to $1,000,000 with interest payable monthly at prime plus 0.50 percent
per annum. As of September 30, 1997 and 1998, principal of $482,047 and
$448,172, respectively, was outstanding. Amounts drawn against the loan
agreement are payable in 36 equal monthly installments.
4. LEASE COMMITMENTS
The Company leases its facility under an operating lease and certain
equipment and furniture and fixtures under capital leases. These leases expire
at various dates through fiscal 2001.
Future minimum lease payments for all leases with initial terms of one year
or more are as follows at September 30, 1998:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING SEPTEMBER 30 LEASES LEASES
------------------------- ---------- --------
<S> <C> <C>
1999........................................................ $ 413,162 $172,172
2000........................................................ 417,843 39,745
2001........................................................ 312,672 81,039
---------- --------
Future minimum lease payments............................... $1,143,677 292,956
==========
Less amount representing interest........................... 31,394
--------
Present value of future minimum lease....................... 261,562
Less current portion........................................ 140,794
--------
Long-term portion........................................... $120,768
========
</TABLE>
F-31
<PAGE> 110
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
4. LEASE COMMITMENTS (CONTINUED)
Rent expense was $429,592 and $440,640 for the years ended September 30,
1997 and 1998, respectively.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At September 30, 1998, convertible preferred stock outstanding is as
follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PRICE PER SHARES SHARES LIQUIDATION
DATE ISSUED SERIES SHARE AUTHORIZED OUTSTANDING VALUE
----------- ------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
February 1993.............................. A $ 0.40 1,173,107 653,382 $ 261,353
February 1993.............................. B $ 0.75 435,000 217,500 163,125
February 1993.............................. C $ 0.80 5,995,741 3,995,741 3,196,593
August 1994................................ D $2.725 4,404,280 4,404,280 12,001,663
August 1996................................ E $ 3.00 5,478,717 3,333,333 9,999,999
July 1997.................................. F $ 1.08 15,740,740 14,900,457 16,092,494
---------- -----------
27,504,693 $41,715,227
========== ===========
</TABLE>
The preferred stock will automatically be converted into shares of common
stock at the then effective conversion price upon the closing of a sale of
Academic common stock in a public offering registered under the Securities Act
of 1933 which meets certain minimum requirements, as defined by the agreements.
The shares of preferred stock are convertible, at the option of the holder, into
an aggregate of 27,504,693 shares of common stock, which have been reserved for
issuance upon conversion of the preferred stock, subject to certain antidilution
adjustments.
Holders of the Series A, B, C, D, E and F preferred stock are entitled to
receive dividends at a rate of $0.04, $0.075, $0.08, $0.2725, $0.30 and $0.108
per share per annum, whenever funds are legally available and as declared by
Academic's Board of Directors. The holder of each share of preferred stock is
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted. Academic is subject to
certain covenants under the agreements that require the vote or written consent
by a majority of the then outstanding preferred shares regarding certain changes
in the rights and interests of the preferred shares.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of preferred stock are entitled to receive their liquidation value
prior to and in preference to any distribution of the assets or surplus funds of
the Company to the holders of common stock. If, upon the occurrence of such
event, the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of the Company
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of
shares owned by each such holder.
All series of preferred stock have redemption features, at the option of
the Company, which are subject to approval and written consent of a majority of
the shareholders for Series A, B and C, voting separately as a single class, and
75% of the shareholders for Series D and E, voting separately as single class.
F-32
<PAGE> 111
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
In 1992, Academic adopted the 1992 Incentive Stock Option Plan (the
"Plan"). Options for common stock may be incentive stock options or
non-statutory stock options and are granted at the discretion of the Board of
Directors. The Plan permits immediate exercise of options with the unvested
portion subject to repurchase by the Company at the original exercise price, in
the event of termination of employment or engagement. Non-statutory stock
options may be granted to employees and consultants whereas incentive stock
options may be granted to employees only. The option price for incentive stock
options shall not be less than 100% of the fair value on the date of grant, and
the option price of non-statutory options shall not be less than 85% of the fair
value on the date of grant. The maximum term of options granted under the Plan
is ten years. Options granted under the Plan are immediately exercisable in full
and generally vest at the rate of 25% after one year from the date of employment
and 1/36 of the remaining shares every month thereafter.
Academic is authorized to issue 10,798,792 shares of common stock to
eligible employees, officers, directors and consultants under the Plan, of which
options to purchase 1,408,277 shares are available for future grant at September
30, 1998.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1998
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year..................... 2,328,500 $.154 8,121,333 $.095
Granted............................................ 7,874,000 $.107 2,615,000 $.100
Exercised.......................................... (329,287) $.087 (362,115) $.087
Forfeited.......................................... (1,751,880) $ .23 (1,618,251) $.100
---------- ----------
Outstanding -- end of year........................... 8,121,333 $.095 8,755,967 $.096
========== ==========
Exercisable -- end of year........................... 1,315,059 3,167,551
========== ==========
Weighted-average fair value of options granted during
the year........................................... $ .021 $ .018
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------- ------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-
REMAINING WEIGHTED-AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
----------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$.05 775,000 0.27 $ .05 775,000 $ .05
$.10 7,977,217 3.87 $ .10 2,390,051 $ .10
$.25 3,750 1.51 $ .25 2,500 $ .25
--------- ---------
8,755,967 $.096 3,167,551 $.088
========= =========
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if Academic had accounted for its employee stock options
under the fair value method of that statement. The fair value of these options
was estimated at the date of grant using the minimum value option pricing
F-33
<PAGE> 112
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
model with the following weighted average assumption for 1997 and 1998,
respectively: risk-free interest rates of 6.09% and 6.29%, respectively;
dividend yields of 0%; and a weighted-average expected life of the options of
3.66 and 3.75 years, respectively.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1997 1998
------------ -----------
<S> <C> <C>
Pro forma net loss....................................... $(10,138,200) $(8,682,944)
============ ===========
</TABLE>
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of
Academic's deferred tax assets are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 10,915,000 $ 13,917,000
Deferred revenue...................................... 600,000 608,000
Research and development credits...................... 852,000 1,020,000
Other................................................. 251,000 181,000
------------ ------------
Total deferred tax assets............................... 12,618,000 15,726,000
Valuation allowance for deferred tax assets........... (12,618,000) (15,726,000)
------------ ------------
Net deferred tax assets................................. $ -- $ --
============ ============
</TABLE>
A valuation allowance has been recognized to offset the deferred tax assets
as realization of such assets is uncertain.
At September 30, 1998, Academic has federal and California net operating
loss carryforwards of approximately $37,000,000 and $22,000,000 respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to capitalization of research expenses and limitations on
net operating losses for California tax purposes. The federal tax loss
carryforwards will begin expiring in 2008 unless previously utilized. The
Company also has federal and California research and development tax credit
carryforwards of $689,000 and $486,000, respectively, which will begin expiring
in 2007 unless previously utilized. The above carryforwards were determined as
if the Company were filing tax returns at September 30, 1998. However, for tax
return purposes, the Company uses a June 30 year end.
F-34
<PAGE> 113
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Section 382 and 383, the use of the
Company's net operating loss and credit carryforwards may be limited in the
event of a cumulative change in ownership of more than 50%. Management believes
such limitations will not have a material impact on Academic's ability to use
its carryforwards.
7. SUBSEQUENT EVENTS
CONVERTIBLE PROMISSORY NOTES
In March 1999, Academic issued Convertible Promissory Notes (Notes) in the
amount of approximately $3,300,000 from certain of its existing investors. The
Notes bear interest at the prime rate, and all principal and interest is due and
payable on June 30, 1999. The Notes are convertible into the number and type of
equity security issued in the next equity financing completed by the Company
which results in gross proceeds of at least $5,000,000. The Notes allow for the
issuance of warrants to the noteholders if the Notes are not repaid or converted
by May 1, 1999. Upon the consummation of the merger discussed below, the Notes
were converted into 3,168,165 shares of Academic's Series F convertible
preferred stock.
ACQUISITION BY THE LIGHTSPAN PARTNERSHIP, INC.
On May 10, 1999, Academic entered into a merger agreement with The
Lightspan Partnership, Inc. ("Lightspan".) Under the merger agreement, which was
consummated on September 20, 1999, Lightspan acquired all of Academic's
outstanding shares of common and preferred stock in exchange for Lightspan
Series E convertible preferred stock, Lightspan common stock and cash.
F-35
<PAGE> 114
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
INTRODUCTION
On May 10, 1999, The Lightspan Partnership, Inc. ("Lightspan") entered into
a merger agreement with Academic Systems Corporation ("Academic"), which was
consummated on September 20, 1999.
The unaudited pro forma combined condensed statements of operations which
follow have been prepared by Lightspan based upon the historical financial
statements of Lightspan and Academic, and may not be indicative of the results
that may have actually occurred if the combination had been in effect on the
date indicated or for the periods presented or which may be obtained in the
future. The unaudited pro forma combined condensed statements of operations
includes the statements of operations of both Lightspan and Academic for the
year ended January 31, 1999 and the nine months ended October 31, 1999. The pro
forma combined condensed financial statements should be read in conjunction with
the audited financial statements and notes of Lightspan and Academic included
elsewhere in the Prospectus.
The unaudited pro forma combined condensed statements of operations for the
year ended January 31, 1999 and the nine months ended October 31, 1999 assume
the purchase of Academic had been consummated on February 1, 1998. The pro forma
information is based on the historical financial statements of Lightspan and
Academic giving effect to the transaction under the purchase method of
accounting and the assumptions and adjustments in the accompanying footnotes.
F-36
<PAGE> 115
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
THE LIGHTSPAN ACADEMIC ADJUSTMENTS COMBINED
PARTNERSHIP, INC. SYSTEMS (NOTE 5) PRO FORMA
----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 30,831,424 $ 6,376,241 $ -- $ 37,207,665
Cost of revenues.................. 11,508,137 2,138,785 -- 13,646,922
------------ ----------- ------------- ------------
Gross profit...................... 19,323,287 4,237,456 -- 23,560,743
Operating expenses:
Technology and development...... 10,593,735 3,281,876 -- 13,875,611
Sales and marketing............. 22,066,261 6,747,590 -- 28,813,851
General and administrative...... 3,590,159 2,189,785 5,779,944
Stock-based compensation........ 19,680 -- -- 19,680
Amortization of intangible
assets....................... -- -- 11,833,500(1) 11,833,500
------------ ----------- ------------- ------------
Total operating expenses.......... 36,269,835 12,219,251 11,833,500 60,322,586
------------ ----------- ------------- ------------
Loss from operations.............. (16,946,548) (7,981,795) (11,833,500) (36,761,843)
Other income (expense), net....... 417,713 163,747 (52,075)(2) 529,385
------------ ----------- ------------- ------------
Net loss.......................... $(16,528,835) $(7,818,048) $ (11,885,575) $(36,232,458)
============ =========== ============= ============
Historical net loss per share
basic and diluted............... $ 10.70
============
Shares used in the computation of
historical net loss per share,
basic and diluted............... 3,387,772
============
Pro forma net loss per share,
basic and diluted............... $ (1.40)
============
Shares used in the computation of
pro forma net loss per share,
basic and diluted............... 25,967,615(3)
============
</TABLE>
- ---------------
(1) Represents the amortization of intangible assets and goodwill over estimated
useful lives ranging from four to ten years, and the amortization of
goodwill over four years.
(2) Represents the forgone interest income on the cash paid to effect the
acquisition, based on an assumed 3% rate of return.
(3) Pro forma net loss per share is based on Lightspan's weighted average common
shares outstanding, after giving effect to the issuance of shares of
Lightspan common and preferred stock used to complete the acquisition as if
such issuance had occurred at the beginning of the period, and the assumed
conversion of all of Lightspan's outstanding shares of preferred stock as of
their original dates of issuance.
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
F-37
<PAGE> 116
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
THE LIGHTSPAN ACADEMIC ADJUSTMENTS COMBINED
PARTNERSHIP, INC. SYSTEMS (NOTE 5) PRO FORMA
----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues............................ $ 31,051,022 $ 6,216,416 $ (488,798)(4) $ 36,778,640
Cost of revenues.................... 10,850,277 1,730,292 (145,057)(4) 12,435,512
------------ ----------- ------------- ------------
Gross profit........................ 20,200,745 4,486,124 (343,741) 24,343,128
Operating expenses:
Technology and development........ 7,525,997 1,705,034 (233,800)(4) 8,997,231
Sales and marketing............... 23,474,445 4,674,575 (596,602)(4) 27,552,418
General and administrative........ 4,082,508 1,625,850 (175,054)(4) 5,533,304
Stock-based compensation.......... 2,503,458 11,945 (11,945)(4) 2,503,458
Amortization of intangible
assets.......................... 1,615,839 1,479,197 7,395,921(1) 9,011,760
(1,479,197)(4)
------------ ----------- ------------- ------------
Total operating expenses............ 39,202,247 9,496,601 4,899,323 53,598,171
------------ ----------- ------------- ------------
Loss from operations................ (19,001,502) (5,010,477) (5,243,064) (29,255,043)
Other income (expense), net......... 230,982 (89,595) 3,692(4) 106,023
(39,056)(2)
------------ ----------- ------------- ------------
Net loss............................ $(18,770,520) $(5,100,072) $ (5,278,428) $(29,149,020)
============ =========== ============= ============
Historical net loss per share basic
and diluted $ (7.49)
============
Shares used in the computation of
historical net loss per share,
basic and diluted................. 3,891,940
============
Pro forma net loss per share, basic
and diluted....................... $ (1.04)
============
Shares used in the computation of
pro forma net loss per share,
basic and diluted................. 27,940,184(3)
============
</TABLE>
- ---------------
(1) Represents the amortization of intangible assets over estimated useful lives
ranging from four to ten years, and the amortization of goodwill over four
years, for the period February 1, 1999 through September 19, 1999.
(2) Represents the forgone interest income on the cash paid to effect the
acquisition, based on an assumed 3% rate of return.
(3) Pro forma net loss per share is based on Lightspan's weighted average common
shares outstanding, after giving effect to the issuance of shares of
Lightspan common and preferred stock used to complete the acquisition as if
such issuance had occurred at the beginning of the period, and the assumed
conversion of all of Lightspan's outstanding shares of preferred stock as of
their original dates of issuance.
(4) Represents results of operations for Academic Systems from the acquisition
date through October 31, 1999, which are already included in the results of
operations of Lightspan.
See accompanying notes to unaudited pro forma combined condensed statements of
operations
F-38
<PAGE> 117
NOTE 1.
Pursuant to the merger agreement between Lightspan and Academic, the
following consideration was issued: (i) cash of $1,735,840; (ii) 570,356 shares
of Lightspan's common stock valued at $8.26 per share; (iii) 7,191,839 shares of
its Series E convertible preferred stock valued at $5.00 per share; (iv) options
to acquire 263,404 shares of the Lightspan's common stock, valued at $6.82 per
share; and (v) warrants to purchase 42,216 shares of Lightspan's Series E
convertible preferred stock, valued at $1.25 per share for 8,000 shares and
$0.33 per share for the remaining 34,216 shares. Subsequent to September 20,
1999, the date the acquisition was consummated, Lightspan determined that it
will issue additional consideration in the amount of $5,340,075 in early 2000 to
certain Academic stockholders. Lightspan intends to issue 1,068,015 shares of
Series E preferred stock, subject to regulatory approval, to such stockholders.
If regulatory approval is not obtained, Lightspan intends to issue cash or some
other form of consideration. As a result, the aggregate purchase price is
calculated to be $49,933,078, which includes acquisition costs of $369,121. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets acquired..................................... $ 3,287,669
Property, equipment and other assets........................ 480,864
Goodwill.................................................... 23,333,966
Customer base............................................... 16,200,000
Core technology............................................. 5,600,000
Trademark and trade name.................................... 3,000,000
Assembled workforce......................................... 1,000,000
Deferred revenue............................................ 1,486,849
Liabilities assumed......................................... (1,482,572)
-----------
$49,933,078
===========
</TABLE>
The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right."). The 262,494 options to purchase Lightspan common stock that were
issued to Academic optionholders were recorded at their fair value of $6.82 per
share in accordance with APB 16, with the fair value determined by the minimum
value method.
Lightspan also converted 50,000 warrants to purchase Academic Series C
preferred stock originally issued in connection with lease financing into 8,000
warrants to purchase Lightspan Series E preferred stock and 34,216 warrants to
purchase Academic Series F preferred stock originally issued in connection with
debt financing into 34,216 warrants to purchase Lightspan Series E preferred
stock. These warrants were valued at $1.25 per share and $0.33 per share,
respectively, in accordance with APB 16, with the fair value determined by the
minimum value method.
F-39
<PAGE> 118
LIGHTSPAN LOGO
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except for the SEC registration fee, the NASD
filing fee and the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Registration fee............................................ $31,970
NASD filing fee............................................. 12,000
Nasdaq Stock Market Listing Application fee................. 95,000
Blue sky qualification fees and expenses....................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent and registrar fees...........................
Miscellaneous...............................................
-------
Total.............................................
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation and Bylaws include provisions
to (i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by
Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware
Law") and (ii) require the Registrant to indemnify its Directors and officers to
the fullest extent permitted by Section 145 of the Delaware Law, including
circumstances in which indemnification is otherwise discretionary. Pursuant to
Section 145 of the Delaware Law, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as Directors and officers.
These provisions do not eliminate the Directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware Law. In addition,
each Director will continue to be subject to liability for breach of the
Director's duty of loyalty to the Registrant, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a Director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
II-1
<PAGE> 120
The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
Director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 1, 1996, we have sold and issued the following unregistered
securities:
(a) On April 26, 1996, we issued and sold a warrant to purchase 26,625
shares of our Series C preferred stock at an exercise price of $6.00 per
share to Comdisco, Inc., an accredited investor. At the close of this
offering, this will become a warrant to purchase 21,243 shares of common
stock at an exercise price of $12.00 per share. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(b) On September 20, 1996, we issued and sold an aggregate of
3,222,618 shares of our Series C preferred stock (convertible into
2,571,235 shares of common stock) to 14 accredited investors for an
aggregate purchase price of $19,335,708. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(c) On November 13, 1996, we issued and sold an aggregate of 41,667
shares of our Series C preferred stock (convertible into 33,245 shares of
common stock) to two accredited investors for an aggregate purchase price
of $250,002. We relied on the exemption provided by Section 4(2) of the
Securities Act of 1933.
(d) On March 24, 1997, we issued a warrant to purchase 70,000 shares
of our Series C preferred stock to Silicon Valley Bank, an accredited
investor, at an exercise price of $6.00 per share. At the close of this
offering, this will become a warrant to purchase 55,850 shares of common
stock at an exercise price of $3.00 per share. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(e) In March, May and June 1997, we issued warrants to purchase an
aggregate of 156,510 shares of Series D preferred stock to twelve
accredited investors at an exercise price of $3.76 per share. At the close
of this offering, these will become warrants to purchase an aggregate of
78,255 shares of common stock at an exercise price of $7.52 per share. We
relied on the exemption provided by Section 4(2) of the Securities Act of
1933.
(f) On June 24, 1997, we issued and sold an aggregate of 6,985,833
shares of our Series D preferred stock (convertible into 3,492,917 shares
of common stock) to twenty-one accredited investors for an aggregate
purchase price of $26,266,732.08. We relied on the exemption provided by
Section 4(2) of the Securities Act of 1933.
(g) On November 14, 1997, we issued and sold an aggregate of 132,978
shares of our Series D preferred stock (convertible into 66,489 shares of
common stock) to Anderson Lightspan Partners, an accredited investor, for
an aggregate purchase price of $499,997.28. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
II-2
<PAGE> 121
(h) On December 15, 1997, we issued and sold an aggregate of 531,915
shares of our Series D preferred stock (convertible into 265,958 shares of
common stock) to three accredited investors for an aggregate purchase price
of $2,000,000.40. We relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.
(i) On March 10, 1998, we issued and sold an aggregate of 5,478,717
shares of our Series D preferred stock (convertible into 2,739,359 shares
of common stock) to twenty-five accredited investors for an aggregate
purchase price of $20,599,975.92. We relied on the exemption provided by
Section 4(2) of the Securities Act of 1933.
(j) On March 10, 1998, we issued warrants to purchase up to 3,326,112
shares of our Series D Preferred Stock to 33 accredited investors at an
exercise price of $0.01 per share. Concurrently with the close of this
offering, these warrants will become warrants to purchase up to 1,663,056
shares of common stock. For the issuance of the warrant, we relied on the
exemption provided by Section 4(2) of the Securities Act of 1933.
(k) On June 24, 1998, we issued a warrant to purchase 127,659 shares
of Series D preferred stock to Montgomery Securities, an accredited
investor, at an exercise price of $4.70 per share. At the close of this
offering, this will become a warrant to purchase 63,830 shares of common
stock at an exercise price of $9.40 per share. We relied on the exemption
provided by Section 4(2) of the Securities Act of 1933.
(l) On August 16, 1998, we issued and sold an aggregate of 1,150,000
shares of our Series E preferred stock (convertible into 575,000 shares of
common stock) to thirteen accredited investors for an aggregate purchase
price of $5,750,000. We relied on the exemption provided by Section 4(2) of
the Securities Act of 1933.
(m) On July 8, 1999 we issued and sold an aggregate of 4,294,183
shares of our Series E preferred stock (convertible into 2,147,092 shares
of common stock) to eight accredited investors for an aggregate purchase
price of $21,470,923. We relied on the exemption provided by Section 4(2)
of the Securities Act of 1933.
(n) On July 27, 1999, we issued and sold an aggregate of 1,000,000
shares of our Series E preferred stock (convertible into 500,000 shares of
common stock) to Comcast Interactive Investments, Inc., and accredited
investors for an aggregate purchase price of $5,000,000. We relied on the
exemption provided by Section 4(2) of the Securities Act of 1933.
(o) In September 1999, in connection with our acquisition of Academic
Systems, we issued shares of our Series E preferred stock and shares of our
common stock to the former preferred and common shareholders of Academic
Systems. We relied on the exemption provided by 3(a)(10) of the Securities
Act of 1933.
(p) On October 29, 1999, we sold an aggregate of 250,000 shares of our
Series E preferred stock (convertible into 125,000 shares of common stock)
to three accredited investors for an aggregate purchase price of
$1,250,000. We relied on the exemption provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
(q) On October 29, 1999 we issued and sold 217,000 shares of our
Series E preferred stock (convertible into 108,500 shares of common stock)
as partial consideration for assets we purchased from American Computer
Resources, Inc., an accredited investor. We relied on the exemption
provided by Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
(r) On November 1, 1999, we sold and issued 2,500,000 shares of our
Series E preferred stock (convertible into 1,250,000 shares of common
stock) and a warrant to purchase up to 500,000 shares of our Series E
preferred stock (convertible into 250,000 shares of common stock) to CINAR
Corporation, an accredited investor, in connection with a strategic
relationship. We relied on the exemption provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder.
II-3
<PAGE> 122
(s) On November 15, 1999 we issued and sold 100,000 shares of our
Series E preferred stock (convertible into 50,000 shares of common stock)
to an accredited investor for an aggregate purchase price of $500,000. We
relied on the exemption provided by Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
The recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about us.
II-4
<PAGE> 123
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
2.1* Agreement and Plan of Merger.
3.1* Amended and Restated Articles of Incorporation, as currently
in effect.
3.2* Bylaws, as currently in effect.
3.3* Amended and Restated Certificate of Incorporation, to be
filed and become effective upon re-incorporation into
Delaware.
3.4* Bylaws to become effective upon re-incorporation into
Delaware.
3.5* Amended and Restated Certificate of Incorporation, to be
filed and become effective upon the closing of the offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.(1)
10.1* 1992 Stock Option Plan.
10.2* Forms of Incentive and Nonstatutory Stock Option Agreement
under the 1992 Stock Option Plan.
10.3* 2000 Equity Incentive Plan.
10.4* Form of Stock Option Agreement pursuant to the 2000 Equity
Incentive Plan.
10.5* 2000 Employee Stock Purchase Plan and related offering
documents.
10.6 Office Lease by and between the Company and Insurance
Company of the West dated as of May 28, 1996.
10.7* Lease by and between the Travelers Insurance Company and
Academic Systems Corporation dated as of July 1, 1996 and
amended December 3, 1996.
10.8 Office Sublease by and between the Company and Qualcomm
Incorporated dated as of December 1, 1997 and amended
September 21, 1998.
10.9* Office Lease by and between the Company and McWin
Corporation dated as of May 1, 1997.
10.10 Office Lease by and between the Company and Auerbach Plaza
Limited Partnership and Goliac, Inc., dated as of June 4,
1999.
10.11* Loan and Security Agreement by and between the Company and
Silicon Valley Bank dated as of February 25, 1997 and
amended December 31, 1997, March 31, 1998 and March 26,
1999.
10.12* Master Lease Agreement by and between the Company and
Transamerica Business Credit Corporation dated as of August
14, 1997, including Schedules 1, 2, 3, 4 and 5 thereto.
10.13* Master Equipment Lease by and between the Company and
Pentech Financial Services, Inc. dated as of July 25, 1999,
including supplements 1, 2 and 3 thereto.
10.14* Equipment Financing Agreement by and between the Company and
Pentech Financial Services, Inc. dated as of July 1, 1999.
10.15* Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
July 8, 1999.
10.16* Amendment and Waiver dated October 28, 1999.
10.17* Amendment to Investor Rights Agreement dated October 29,
1999.
10.18* Form of Indemnity Agreement between the Company and its
directors and officers.
10.19* Developer Agreement by and between the Company and Sony
Computer Entertainment America dated as of January 26, 1996.
10.20+ Sale and License Agreement by and between the Company and
Sony Computer Entertainment America dated as of January 26,
1996.
10.21+ Letter Agreement by and between the Company and
SmarterKids.com, Inc. dated as of July 12, 1999.
10.22* Academic Systems Fulfillment Agreement by and between
Academic Systems Corporation and FGI Print Management dated
as of June 12, 1998.
</TABLE>
II-5
<PAGE> 124
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.23* Series E Stock Purchase Agreement by and between the Company
and CINAR Corporation dated as of October 29, 1999.
10.24* Warrant Agreement to purchase Series A preferred stock by
and between the Company and Comdisco, Inc. dated as of March
15, 1994.
10.25* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of May
30, 1995.
10.26* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.27* Warrant to purchase Series C preferred stock by and between
the Company and Silicon Valley Bank dated as of March 24,
1997.
10.28* Warrant Agreement to purchase Series C preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.29* Warrant to purchase Series D preferred stock by and between
the Company and Montgomery Securities.
10.30* Form of Warrant to purchase Series D preferred stock.
10.31* Form of Warrant to purchase Series D preferred stock.
10.32+ Letter Agreement regarding strategic initiatives by and
between the Company and CINAR Corporation dated as of
October 29, 1999.
10.33* Amendment and Waiver dated October 28, 1999.
10.34 Warrant to purchase Series E preferred stock by and between
the Company and Comdisco, Inc.
10.35 Form of Warrant to purchase Series E preferred stock.
10.36 Warrant to purchase Series D preferred stock by and between
the Company and SZ Investments L.L.C. dated as of June 6,
1997.
10.37 Oracle Reseller agreement, dated as of August 9, 1994,
including Addendums.(1)
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP., Independent Auditors.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.(1)
24.1 Power of Attorney. Reference is made to page II-5.
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
(1) To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 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 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 such
director, officer or controlling person in connection with the securities being
registered, 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
II-6
<PAGE> 125
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the 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.
(b) For the purpose of determining any liability under the Securities
Act of 1933, 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-7
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, County of San Diego, State of California, on December 15, 1999.
By: /s/ CARL ZEIGER
------------------------------------
Carl Zeiger
President and Chief Operating
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer December 15, 1999
- --------------------------------------------------- and Chairman
John T. Kernan (Principal Executive Officer)
/s/ CARL ZEIGER President, Chief Operating December 15, 1999
- --------------------------------------------------- Officer and Director
Carl Zeiger
* Vice President of Finance December 15, 1999
- --------------------------------------------------- and Chief Financial Officer
Kathleen R. McElwee (Principal Financial and
Accounting Officer)
* Executive Vice President, December 15, 1999
- --------------------------------------------------- President of Academic Systems
John H. Brandon and Director
* Director December 15, 1999
- ---------------------------------------------------
James W. Breyer
* Director December 15, 1999
- ---------------------------------------------------
L. John Doerr
* Director December 15, 1999
- ---------------------------------------------------
Jeffrey P. Sanderson
* Director December 15, 1999
- ---------------------------------------------------
David D. Hiller
* Director December 15, 1999
- ---------------------------------------------------
Bradley P. Dusto
* Director December 15, 1999
- ---------------------------------------------------
Bruce W. Ravenel
* Director December 15, 1999
- ---------------------------------------------------
Barry J. Schiffman
Director
- ---------------------------------------------------
Ronald A. Weinberg
*By: /s/ CARL ZEIGER
- --------------------------------------------------
(Carl Zeiger)
(Attorney-in-Fact)
</TABLE>
II-8
<PAGE> 127
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
2.1* Agreement and Plan of Merger.
3.1* Amended and Restated Articles of Incorporation, as currently
in effect.
3.2* Bylaws, as currently in effect.
3.3* Amended and Restated Certificate of Incorporation, to be
filed and become effective upon re-incorporation into
Delaware.
3.4* Bylaws to become effective upon re-incorporation into
Delaware.
3.5* Amended and Restated Certificate of Incorporation, to be
filed and become effective upon the closing of the offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2* Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.(1)
10.1* 1992 Stock Option Plan.
10.2* Forms of Incentive and Nonstatutory Stock Option Agreement
under the 1992 Stock Option Plan.
10.3* 2000 Equity Incentive Plan.
10.4* Form of Stock Option Agreement pursuant to the 2000 Equity
Incentive Plan.
10.5* 2000 Employee Stock Purchase Plan and related offering
documents.
10.6 Office Lease by and between the Company and Insurance
Company of the West dated as of May 28, 1996.
10.7* Lease by and between the Travelers Insurance Company and
Academic Systems Corporation dated as of July 1, 1996 and
amended December 3, 1996.
10.8 Office Sublease by and between the Company and Qualcomm
Incorporated dated as of December 1, 1997 and amended
September 21, 1998.
10.9* Office Lease by and between the Company and McWin
Corporation dated as of May 1, 1997.
10.10 Office Lease by and between the Company and Auerbach Plaza
Limited Partnership and Goliac, Inc., dated as of June 4,
1999.
10.11* Loan and Security Agreement by and between the Company and
Silicon Valley Bank dated as of February 25, 1997 and
amended December 31, 1997, March 31, 1998 and March 26,
1999.
10.12* Master Lease Agreement by and between the Company and
Transamerica Business Credit Corporation dated as of August
14, 1997, including Schedules 1, 2, 3, 4 and 5 thereto.
10.13* Master Equipment Lease by and between the Company and
Pentech Financial Services, Inc. dated as of July 25, 1999,
including supplements 1, 2 and 3 thereto.
10.14* Equipment Financing Agreement by and between the Company and
Pentech Financial Services, Inc. dated as of July 1, 1999.
10.15* Amended and Restated Investor Rights Agreement by and among
the Company and certain stockholders of the Company dated
July 8, 1999.
10.16* Amendment and Waiver dated October 28, 1999.
10.17* Amendment to Investor Rights Agreement dated October 29,
1999.
10.18* Form of Indemnity Agreement between the Company and its
directors and officers.
10.19* Developer Agreement by and between the Company and Sony
Computer Entertainment America dated as of January 26, 1996.
10.20+ Sale and License Agreement by and between the Company and
Sony Computer Entertainment America dated as of January 26,
1996.
10.21+ Letter Agreement by and between the Company and
SmarterKids.com, Inc. dated as of July 12, 1999.
10.22* Academic Systems Fulfillment Agreement by and between
Academic Systems Corporation and FGI Print Management dated
as of June 12, 1998.
10.23* Series E Stock Purchase Agreement by and between the Company
and CINAR Corporation dated as of October 29, 1999.
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.24* Warrant Agreement to purchase Series A preferred stock by
and between the Company and Comdisco, Inc. dated as of March
15, 1994.
10.25* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of May
30, 1995.
10.26* Warrant Agreement to purchase Series B preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.27* Warrant to purchase Series C preferred stock by and between
the Company and Silicon Valley Bank dated as of March 24,
1997.
10.28* Warrant Agreement to purchase Series C preferred stock by
and between the Company and Comdisco, Inc. dated as of April
26, 1996.
10.29* Warrant to purchase Series D preferred stock by and between
the Company and Montgomery Securities.
10.30* Form of Warrant to purchase Series D preferred stock.
10.31* Form of Warrant to purchase Series D preferred stock.
10.32+ Letter Agreement regarding strategic initiatives by and
between the Company and CINAR Corporation dated as of
October 29, 1999.
10.33* Amendment and Waiver dated October 28, 1999.
10.34 Warrant to purchase Series E preferred stock by and between
the Company and Comdisco, Inc.
10.35 Form of Warrant to purchase Series E preferred stock.
10.36 Warrant to purchase Series D preferred stock by and between
the Company and SZ Investments L.L.C. dated as of June 6,
1997.
10.37 Oracle Reseller Agreement dated as of August 9, 1994,
including Addendums.(1)
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.(1)
24.1 Power of Attorney. Reference is made to page II-5.
27 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
(1) To be filed by amendment.
<PAGE> 1
EXHIBIT 4.2
NUMBER SHARES
LIGHTSPAN
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFIES THAT SEE REVERSE FOR
STATEMENTS RELATING
TO RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS, IF ANY
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
THE LIGHTSPAN PARTNERSHIP, INC.
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
[ILLEGIBLE] [SEAL] [ILLEGIBLE]
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
HARRIS TRUST COMPANY OF CALIFORNIA
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, SUCH
SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH
REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE
COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR
TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS
OF SAID ACT.
A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon the respective classes or series of shares and upon
the holders thereof as established by the Articles of Incorporation of the
Corporation and by any certificate of determination, and the number of shares
constituting each class or series and the designations thereof, may be obtained
by any shareholder of the Corporation upon written request and without charge
from the Secretary of the Corporation at its corporate headquarters.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription 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 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
----------- ---
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 ASSIGNED
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital 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 WHATSOEVER.
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> 1
EXHIBIT 10.6
FULL SERVICE MODIFIED GROSS LEASE
BETWEEN
INSURANCE COMPANY OF THE WEST
AS LANDLORD
AND
THE LIGHTSPAN PARTNERSHIP, INC.
AS TENANT
EXECUTED ON MAY 28TH, 1996
Initial
--------------
<PAGE> 2
TABLE OF CONTENTS
1. AGREEMENT TO LET....................................................... 1
2. PRINCIPAL LEASE PROVISIONS............................................. 1
3. TERM................................................................... 2
4. DELIVERY OF POSSESSION................................................. 2
5. USE OF PREMISES AND COMMON AREAS....................................... 2
5.1. PERMITTED USE OF PREMISES........................................ 2
5.2. COMPLIANCE WITH LAWS............................................. 2
5.3. CONDITION DURING PERIODS OF NON-USE.............................. 3
5.4. USE OF COMMON AREA............................................... 3
5.5. GENERAL COVENANTS AND LIMITATIONS ON USE......................... 3
6. SECURITY DEPOSIT....................................................... 3
7. RENT................................................................... 4
8. LEASE EXPENSES......................................................... 4
8.1. DEFINITION OF LEASE EXPENSES..................................... 4
8.2. BASE YEAR LEASE EXPENSES......................................... 4
8.3. PAYMENT OF LEASE EXPENSES........................................ 4
9. UTILITIES AND SERVICES................................................. 5
10. REAL PROPERTY TAXES.................................................... 5
10.1. DEFINITION OF TAXES.............................................. 5
10.2. PAYMENT OF TAXES................................................. 5
11. PERSONAL PROPERTY TAXES................................................ 6
12. MAINTENANCE............................................................ 6
12.1. TENANT'S DUTIES.................................................. 6
12.2. LANDLORD'S DUTIES................................................ 6
13. PARKING................................................................ 6
14. SIGNS.................................................................. 6
15. RULES, REGULATIONS, AND COVENANTS...................................... 6
16. EARLY ACCESS INSURANCE................................................. 6
17. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE......................... 7
18. FIRE AND EXTENDED COVERAGE INSURANCE................................... 7
i
<PAGE> 3
19. BUSINESS INTERRUPTION INSURANCE........................................ 7
20. INSURANCE GENERALLY.................................................... 7
21. WAIVER OF SUBROGATION.................................................. 7
22. LANDLORD'S INSURANCE................................................... 8
23. ALTERATIONS............................................................ 8
24. SURRENDER OF PREMISES AND HOLDING OVER................................. 8
25. DEFAULT................................................................ 9
26. LANDLORD'S REMEDIES.................................................... 9
26.1. CONTINUATION OF LEASE............................................ 9
26.2. RENT FROM RELETTING.............................................. 9
26.3. TERMINATION OF TENANT'S RIGHT TO POSSESSION...................... 10
26.4. LANDLORD'S RIGHT TO CURE DEFAULT................................. 10
26.5. ENFORCEMENT COSTS................................................ 10
27. INTEREST AND LATE CHARGES.............................................. 10
28. QUARTERLY PAYMENTS..................................................... 10
29. DESTRUCTION............................................................ 10
30. CONDEMNATION........................................................... 11
31. ASSIGNMENT AND OTHER TRANSFERS......................................... 11
32. COMMON AREAS........................................................... 12
33. [INTENTIONALLY OMITTED]................................................ 12
34. ACCESS BY LANDLORD..................................................... 13
35. LANDLORD'S RESERVED RIGHTS............................................. 13
36. INDEMNITY AND EXEMPTION OF LANDLORD FROM LIABILITY..................... 13
37. HAZARDOUS SUBSTANCES................................................... 13
38. PROHIBITION AGAINST ASBESTOS-CONTAINING MATERIALS...................... 14
39. SECURITY MEASURES...................................................... 14
40. SUBORDINATION AND ATTORNMENT........................................... 15
41. ESTOPPEL CERTIFICATES.................................................. 15
42. WAIVER................................................................. 15
43. BROKERS................................................................ 16
ii
<PAGE> 4
44. EASEMENTS.............................................................. 16
45. LIMITATIONS ON LANDLORD'S LIABILITY.................................... 16
46. SALE OR TRANSFER OF PREMISES........................................... 16
47. QUITCLAIM DEED......................................................... 16
48. NO MERGER.............................................................. 16
49. CONFIDENTIALITY........................................................ 16
50. MISCELLANEOUS.......................................................... 16
51. Exhibit "A"............................................................ 19
52. Exhibit "B"............................................................ 20
53. Exhibit "C"............................................................ 21
iii
<PAGE> 5
FULL SERVICE MODIFIED GROSS LEASE
This Full Service Modified Gross Lease ("Lease") is executed as of May 28,
1996, between INSURANCE COMPANY OF THE WEST, a California corporation
("Landlord"), and THE LIGHTSPAN PARTNERSHIP, INC., a California corporation
("Tenant"), who agree as follows:
1. AGREEMENT TO LET. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, upon all the terms, provisions, and conditions contained
in this Agreement, those certain premises described in Paragraph 2.2, below
(the "Premises") along with the non-exclusive right to use, in common with
Landlord and the other users of space within the Project (as defined in
Paragraph 2.1, below), those portions of the Project intended for the common
use of all the tenants of the Project including, without limitation, the
landscaped areas, passageways, walkways, hallways, elevators (if any), parking
areas, and driveways (the "Common Areas"). This Lease confers no rights,
however, to the roof, exterior walls, or utility raceways of the Building nor
rights to any other building (if any) in the Project, nor with regard to either
the subsurface of the land below the ground level of the Project or with regard
to the air space above the ceiling of the Premises.
2. PRINCIPAL LEASE PROVISIONS. The following are the Principal Lease
Provisions of this Lease. Other portions of this Lease explain and define the
Principal Lease Provisions in more detail and should be read in conjunction
with this Paragraph. In the event of any conflict between the Principal Lease
Provisions and the other portions of this Lease, the Principal Lease Provisions
shall control. (Terms shown in quotations are defined terms used elsewhere in
this Lease).
2.1. "Project": Insurance Company of the West Building
(see Exhibit "A").
2.2. "Premises": 10140 Campus Point Drive, San Diego, California,
92121 (see Exhibit "B").
2.3. Leasable Area of the Premises: Approximately 64,800 square feet
(subject to adjustment, at Landlord's election, based upon field verification
of the Premises following occupancy by Tenant, if so provided in the attached
Addendum).
2.4. Initial Lease Term: seven (7) years beginning as of the
Commencement Date.
2.4.1. "Commencement Date" (estimated): November 15, 1996
(see Exhibit "C").
2.4.2. "Initial Expiration Date": (estimated) October 31, 2003
(the Initial Expiration Date stated herein, even if adjusted pursuant to
Exhibit "C", must always be the last day of a calendar month).
2.4.3. Extension Rights: Yes X No__
(If yes, see Addendum to Lease).
2.5. "Anchor Tenants" in the Project: N/A while they are tenants in
the Project, along with such other tenants in the Project as may be so
designated by Landlord from time to time.
2.6. "Basic Monthly Rent": $72,627.84 (subject to adjustment as
provided in attached Addendum).
2.7. "Security Deposit": $90,123.84 (subject to adjustment based upon
field verification of the Premises following occupancy by Tenant, if so
provided in the attached Addendum). Tenant's Security Deposit does not
constitute last month's rent. Last month's rent must be separately paid by
Tenant on or before the first day of the last month of the Lease Term.
2.8. "Percentage Rent": Yes__ No X; If Yes, "Sales Percentage": _____
(If yes, see Addendum).
2.9. Guarantor: None.
2.10. Address for Landlord:
(Prior to Occupancy)
Insurance Company of the West
c/o American Assets, Inc.
10140 Campus Point Dr., Suite 400
San Diego, CA 92121
(Following Occupancy)
Insurance Company of the West
c/o American Assets, Inc.
11455 El Camino Real, Suite 200
San Diego, CA 92130
Attn: John W. Chamberlain, Vice President
Landlord________ Tenant________
<PAGE> 6
2.11. Addresses for Tenant:
(Prior to Occupancy)
2382 Faraday Avenue, Suite 300
Carlsbad, CA 92008
(Following Occupancy)
At the Premises
10140 Campus Point Drive
San Diego, CA 92121
Attn: Michelle Hays, Controller
2.12. Permitted Uses By Tenant: Office space and for no other use
("Permitted Use").
2.13. Exclusive Uses By Tenant: Yes No X (If yes, see
--- ---
Addendum).
2.14. Permitted Trade Name: The Lightspan Partnership, Inc.
2.15. Participating Brokers: John Burnham & Company representing
Landlord and CB Commercial Real Estate Group Representing Tenant.
2.16. Amounts Payable upon Lease Execution $162,751.68
representing 4th month's rent and the Security Deposit identified in Paragraph
2.7, above.
3. TERM. The term of this Lease ("Term") shall commence on the
"Commencement Date", as defined in Paragraph 2.4.1, above, and shall expire on
the "Initial Expiration Date", as defined in Paragraph 2.4.2, above, subject to
(i) any extension rights described in the Addendum to this Lease, and (ii)
earlier termination, as provided in this Lease. The term "Expiration Date", as
used in this Lease shall mean the Initial Expiration Date, any earlier date
upon which this Lease is terminated by Landlord, as provided below, or, if the
Term is extended, then any extended Term expiration date.
4. DELIVERY OF POSSESSION. On or about August 1, 1996, Landlord shall
deliver possession of the Premises to Tenant in a broom clean condition. If
possession of the Premises is not delivered to Tenant on August 1, 1996, then
Landlord shall not be liable for any damage caused by such delay, and such
delay shall neither affect the validity of this Lease, affect Tenant's
obligations under this Lease, nor extend the Term, except that, unless Tenant
has caused or contributed to such delay, the Commencement Date will be extended
on a day-for-day basis by each day that expires beyond August 1, 1996 until
possession is turned over. However, if such delay is caused or contributed to
by Tenant then the Commencement Date will not be so extended. Tenant shall, by
acceptance of possession of the Premises, be deemed to have (i) accepted the
Premises in its then as-is condition with no right to require Landlord to
perform any additional work therein, and (ii) waived any express or implied
warranties regarding the condition of the Premises, including any implied
warranties of fitness for a particular purpose or merchantability. The
foregoing provisions of this Paragraph 4 are not intended to and will not
relieve Landlord of its liability for maintenance, as specifically set forth
elsewhere in this Lease.
5. USE OF PREMISES AND COMMON AREAS.
5.1. PERMITTED USE OF PREMISES. Tenant may use the Premises for the
Permitted Use specified in Paragraph 2.12 and for no other use. Any change in
the Permitted Use (or any change in Tenant's trade name from the Permitted
Trade Name identified in Paragraph 2.15, above) shall require Landlord's prior
written consent, which consent may be granted or withheld in Landlord's
reasonable discretion.
5.2. COMPLIANCE WITH LAWS. Tenant shall comply with all laws
concerning the Premises and/or Tenant's use of the Premises, including without
limitation the obligation at Tenant's sole cost to alter, maintain, or restore
the Premises in compliance with all applicable laws, even if such laws are
enacted after the date of this Lease, even if compliance entails costs to
Tenant of a substantial nature and even if compliance requires structural
alterations. Such obligation to comply with laws shall include without
limitation compliance with Title III of the Americans With Disabilities Act of
1990 (42 U.S.C. 12181 et seq.) (the "ADA"). If Tenant's use of the Premises
after the Commencement Date results in the need for modifications or
alterations to any portion of the Common Area or the Project in order to comply
with the ADA (and Landlord was not required to make such modifications pursuant
to Paragraph 11 of the Addendum to this Lease), then Tenant shall additionally
be responsible for the cost of such modifications and alterations.
Notwithstanding anything to the contrary in this Lease, as of the Commencement
Date the Premises and the Project shall conform to all requirements of any
recorded covenant, conditions, restrictions, and encumbrances recorded against
the Project ("CC&Rs"), all underwriter requirements associated with obtaining
the insurance required hereunder, and all rules, regulations, statutes,
ordinances, laws and building codes (collectively, "Laws") applicable to the
Project and the Premises. Tenant shall not be required to construct or pay the
cost of complying with any CC&Rs, underwriter's requirements, or Laws requiring
construction of improvements in the Premises which would constitute capital
improvements under generally accepted accounting principles unless such
compliance is necessitated by Tenant's particular use of the Premises or
Tenant's application for a permit or license with respect to the Premises.
Landlord_____ Tenant_____
2
<PAGE> 7
5.3 CONDITION DURING PERIODS OF NON-USE. During any period of time in
which Tenant is not continuously using and occupying the Premises, Tenant shall
take such measures as may be necessary or desirable, in Landlord's reasonable
opinion, to secure the Premises from break-ins and use by unauthorized persons,
to minimize the appearance of non-use, and to otherwise maintain the interior
and exterior portions of Tenant's Premises, including all windows and doors, in
first class condition and consistent with the manner in which the Premises were
maintained during Tenant's occupancy.
5.4 USE OF COMMON AREA. Tenant's use of the Common Area shall at all
times comply with the provisions of all rules and regulations regarding such use
as Landlord may from time to time adopt. In no event shall the rights granted to
Tenant to use the Common Area include the right to store any property in the
Common Area, whether temporarily or permanently. Any property stored in the
Common Area may be removed by Landlord and disposed of, and the cost of such
removal and disposal shall be payable by Tenant upon demand. Additionally, in no
event shall Tenant use any portion of the Common Area for loading, unloading, or
parking, except in those areas specifically designated by Landlord for such
purposes, nor for any sidewalk sale or similar commercial purpose.
5.5 GENERAL COVENANTS AND LIMITATIONS ON USE. Tenant shall not do, bring,
or keep anything in or about the Premises that will cause a cancellation of any
insurance covering the Premises. If the rate of any insurance carried by
Landlord is increased as a result of Tenant's use, Tenant shall pay to Landlord,
within 10 days after Landlord delivers to Tenant a notice of such increase, the
amount of such increase. Furthermore, Tenant covenants and agrees that no
noxious or offensive activity shall be carried on, in or upon the Premises nor
shall anything be done or kept in the Premises which may be or become a public
nuisance or which may cause embarrassment, disturbance, or annoyance to others
in the Building, on the Project, or on adjacent or nearby property. To that end,
Tenant additionally covenants and agrees that no light shall be emitted from the
Premises which is unreasonably bright or causes unreasonable glare; no sounds
shall be emitted from the Premises which are unreasonably loud or annoying; and
no odor shall be emitted from the Premises which is or might be noxious or
offensive to others in the Building, on the Project, or on adjacent or near-by
property. In addition, Tenant covenants and agrees that no unsightliness shall
be permitted in the Premises. Without limiting the generality of the foregoing,
all unsightly equipment, objects, and conditions shall be kept enclosed within
the Premises and screened from view; no refuse, scraps, debris, garbage, trash,
bulk materials, or waste shall be kept, stored, or allowed to accumulate except
as may be properly enclosed within the Premises; the Premises shall not be used
for sleeping or washing clothes, nor use the Premises for cooking (unless the
Permitted Use is as a restaurant) or the preparation, manufacture, or mixing of
anything that might emit any odor or objectionable noises or lights onto the
Project or nearby properties; and all pipes, wires, poles, antennas, and other
facilities for utilities or the transmission or reception of audio or visual
signals shall be kept and maintained enclosed within the Premises. Tenant shall
be solely responsible for the timely removal of all refuse, scraps, debris,
garbage, trash, bulk materials, or waste from the Premises which does not fit
within a regular office waste bin, and the deposit thereof in the trash
containers or dumpsters located adjacent to the Building. Further, Tenant shall
not keep or permit to be kept any bicycle, motorcycle, or other vehicle, nor any
animal (excluding seeing-eye dogs), bird, reptile, or other exotic creature in
the Premises unless Tenant operates a bona fide pet store, pet grooming
facility, or other veterinary medicine clinic, hospital, and/or related animal
care facility under direct operation and supervision of a State Licensed
Veterinarian, and such use has been specifically approved in writing by
Landlord, which consent may be withheld in Landlord's sole discretion. Neither
Tenant nor Tenant's Invitees shall do anything that will cause damage or waste
to the Project. Neither the floor nor any other portion of the Premises shall be
overloaded. No machinery, apparatus, or other appliance shall be used or
operated in or on the Premises that will in any manner injure, vibrate, or shake
all or any part of the Project. In the event of any breach of this Paragraph 5
by Tenant or Tenant's Invitees, Landlord, at its election, pay the cost of
correcting such breach and Tenant shall immediately, upon demand, pay the cost
thereof, plus a supervisory fee in the amount of ten percent (10%) of such cost.
6. SECURITY DEPOSIT. Upon the execution of this Lease, Tenant shall
deposit with Landlord cash in the amount of the Security Deposit set forth in
Paragraph 2.7, above (the "Security Deposit"), to secure the performance by
Tenant of its obligations under this Lease, including without limitation
Tenant's obligations (i) to pay Basic Monthly Rent and Additional Rent, and any
Percentage Rent payable by Tenant pursuant to the Addendum to this Lease, (ii)
to repair damages to the Premises and/or the Project caused by Tenant or
Tenant's agents, employees, contractors, licensees, and invitees (collectively,
"Tenant's Invitees"), (iii) to clean the Premises upon the termination of this
Lease, and (iv) to remedy any other defaults by Tenant in the performance of any
of its obligations under this Lease. If Tenant commits any default under this
Lease, Landlord may, at its election, use the Security Deposit to cure such
defaults, and to compensate Landlord for all damage suffered by Landlord from
such defaults, including, without limitation, attorneys' fees and costs incurred
by Landlord. Upon demand by Landlord, Tenant shall promptly pay to Landlord a
sum equal to any portion of the Security Deposit so used by Landlord, in order
to maintain the Security Deposit in the amount set forth in Paragraph 2.7, above
(subject to increase as set forth below). If the Basic Monthly Rent shall, from
time to time, increase during the Term, then, upon demand by Landlord, Tenant
shall deposit with Landlord cash in an amount necessary to increase the Security
Deposit such that it shall at all times bear the same proportion to the
then-current Basic Monthly Rent as the initial Security Deposit bears to the
initial Basic Monthly Rent. Following the Expiration Date or earlier termination
of this Lease, and within the time frame required by applicable law, Landlord
shall deliver to Tenant, at Tenant's last known address, any portion of the
Security Deposit not used by Landlord, as provided in this Paragraph. Landlord
may commingle the Security Deposit with Landlord's other funds and Landlord
shall not pay interest on such Security Deposit to Tenant.
Landlord Tenant
------- -------
3
<PAGE> 8
7. RENT. Tenant shall pay to Landlord as minimum monthly rent, without
deduction, setoff, prior notice, or demand, the Basic Monthly Rent described in
Paragraph 2.6, above (subject to adjustment as provided in the attached
Addendum), in advance, on the first day of each calendar month throughout the
Term. If the Commencement Date is other than the first day of a calendar month,
then the Basic Monthly Rent payable by Tenant for the first month of the Term
(which shall be payable upon the Commencement Date) and the final month of the
Term shall be prorated on the basis of the actual number of days during the Term
occurring during the relevant month. All "Rental" (which include Basic Monthly
Rent, Percentage Rent, if any, and any items designated as "Additional Rent"
hereunder) shall be paid to Landlord at the same address as notices are to be
delivered to Landlord pursuant to Paragraph 2.10, above.
8. LEASE EXPENSES.
8.1. DEFINITION OF LEASE EXPENSES. As used in this Lease, the term
"Lease Expenses" shall mean and refer to all costs and expenses, of any kind or
nature, which are paid or incurred by Landlord relative to the operation,
repair, restoration, replacement, maintenance, and/or for management of the
Project including, without limitation, all costs and expenses relating to: (i)
all personnel involved in the operation, repair, replacement, maintenance, and
management of the Project (other than Landlord's corporate officers) including
wages, fringe benefits, and other labor payments (and including a pro rata share
of such expenses for employees of Landlord who do not work exclusively at the
Project), (ii) water, sewage disposal, drainage, refuse collection and disposal,
gas, electricity, and other utility services, and the maintenance of all
components, systems, and apparatus by which such utilities and services are
provided, (iii) general maintenance and repair of the Project, including,
without limitation, and among other things, the driveways, asphalt, and concrete
surfaces, the structural components of the improvements located within the
Project, including the portions of the roof to be maintained pursuant to
Paragraph 12.2, below, repainting of, improvements, and sweeping, janitorial and
security services (if any), (iv) maintenance of landscaping (including
irrigation and sprinkler systems) and, where and when necessary, replanting, (v)
keeping the parking area in good condition and free from litter, dirt, debris,
and other obstructions, and keeping all lighting and signage serving the Project
in good condition and fully operating, (vi) any expenses payable by Landlord
pursuant to the provisions of any recorded Covenants, Conditions, and
Restrictions affecting the Project, (vii) any personal property taxes,
assessments, or other impositions levied, assessed, or imposed upon any personal
property of Landlord used in connection with the Project, (viii) the cost of all
casualty, liability, and other insurance obtained by Landlord relative to the
Project, including all premiums therefore and any deductibles payable with
respect to any loss insured thereby, (ix) management fees (which management fees
will equal 5% of gross rents collected from tenants within the Project) and
legal, accounting, inspection, and consultation fees, (x) the cost of holiday
decorations, and (xi) capital improvements or structural modifications required
by any change in laws, ordinances, rules, or regulations governing the Project,
or other capital improvements or structural modifications deemed reasonably
necessary or desirable by Landlord, including, without limitation, capital
improvements or structural modifications which reduce Lease Expenses; provided,
however, any costs of such capital improvements or structural modifications (or
any other items within the definition of "Lease Expenses" which would be
capitalized under generally accepted accounting principles) shall be amortized
(including an interest factor) over the useful life of such capital improvements
or structural modifications. Notwithstanding anything to the contrary contained
in this Lease, Tenant shall not be liable for any deductibles payable with
respect to any loss insured against by insurance obtained by Landlord relative
to the Project in excess of $10,000 per loss (subject to adjustment in
accordance with increases in the consumer price index for the San Diego region
over the term of the Lease).
8.2. BASE YEAR LEASE EXPENSES. As used in this Lease, the term "Base
Year Lease Expenses" shall mean and refer to the Lease Expenses paid or incurred
by Landlord during calendar year 1997.
8.3. PAYMENT OF LEASE EXPENSES. Tenant shall pay to Landlord, on the
first day of each calendar month during the Term, commencing on the first day of
January 1998, as Additional Rent, an amount ("Tenant's Monthly Payment") equal
to one-twelfth of Tenant's Pro Rata Share of the amount by which the Lease
Expenses for such calendar year exceed the Base Year Lease Expenses ("Increased
Lease Expenses), as estimated by Landlord in the most recently delivered
Estimated Statement (as defined below). Landlord intends to deliver to Tenant,
prior to the commencement of each calendar year during the Term, a written
statement ("Estimated Statement") setting forth Landlord's estimate of the Lease
Expenses and Increased Lease Expenses allocable to the ensuing calendar year,
and Tenant's Pro Rata Share of such Increased Lease Expenses. Landlord may, at
its option, during any calendar year, deliver to Tenant a revised Estimated
Statement, revising Landlord's estimate of the Lease Expenses and Increased
Lease Expenses, in accordance with Landlord's most current estimate. Within
approximately 90 days after the end of each calendar year during the Term,
Landlord intends to deliver to Tenant a written statement ("Actual Statement")
setting forth the actual Lease Expenses allocable to the preceding calendar year
or, in the case of the calendar year in which the Commencement Date occurs, such
Actual Statement will set forth the Base Year Lease Expenses. Tenant's failure
to object to Landlord regarding the contents of an Actual Statement, in writing,
within 60 days after delivery to Tenant of such Actual Statement, shall
constitute Tenant's absolute and final acceptance and approval of the Actual
Statement. If the sum of Tenant's Monthly Payments actually paid by Tenant
during any calendar year exceeds Tenant's Pro Rata Share of the actual Increased
Lease Expenses allocable to such calendar year, then such excess will be
credited against future Tenant's Monthly Payments, unless such calendar year was
the calendar year during which the Expiration Date occurs (the "Last Calendar
Year"), in which event either (i) such excess shall be credited against any
monetary default of Tenant under this Lease, or (ii) if Tenant is not in default
under this Lease, then Landlord shall pay to Tenant such excess. If the sum of
Tenant's Monthly Payments actually paid by Tenant during any calendar year is
less than Tenant's Pro Rata Share of the actual Increased Lease Expenses
allocable to such calendar year, then Tenant shall, within ten days of delivery
of the Actual Statement, pay to Landlord the amount of such deficiency.
Landlord's delay in delivering any Estimated
Landlord___________ Tenant__________
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Statement or Actual Statement will not release Tenant of its obligation to pay
any Tenant's Monthly Payment or any such excess upon receipt of the Estimated
Statement or the Actual Statement, as the case may be. For purposes of this
Lease, the term "Tenant's Pro Rata Share" will mean and refer to the portion of
the Lease Expenses payable by Tenant. Tenant's Pro Rata Share will be
originally calculated as of the January 1 immediately following the
Commencement Date and will be re-calculated as of each January 1 thereafter
during the Term as the fractional portion of the total Increased Lease Expenses
(excluding therefrom the portion of the Increased Lease Expenses actually paid
by the Anchor Tenants in the Project) determined by multiplying such Increased
Lease Expenses by a fraction, the numerator of which is the leasable square
footage of the Premises, and the denominator of which is the total aggregate
leasable square footage of the Project, excluding the portions of the Project
occupied by the Anchor Tenants (who are designated as Anchor Tenants by Landlord
as of the date such calculation is being made). In the event the leasable
square footage in the Project changes from time to time due to the addition or
removal of buildings, such change will not result in a recalculation of
Tenant's Pro Rata Share until the January 1 next following such occurrence, as
if such change had not taken place until such following January 1. The
references in this Paragraph to the actual Increased Lease Expenses allocable
to a calendar year, shall include, if such calendar year is the Last Calendar
Year, the actual Increased Lease Expenses allocable to the portion of the Last
Calendar Year prior to the Expiration Date.
9. UTILITIES AND SERVICES. Except as otherwise provided in the Addendum
to this Lease, Landlord shall provide electricity, water, sewer, and gas to the
Premises for ordinary and customary uses as well as ordinary and customary
trash collection, janitorial, and window washing services. Except for
Landlord's obligations as set forth above, Tenant shall make all arrangements
for and pay the cost of all utilities and services (including without
limitation their connection charges and taxes thereon) furnished to the
Premises or used by Tenant, including without limitation telephone and
communication services. Landlord shall not be liable for failure to furnish any
utilities or services to the Premises when such failure results from causes
beyond Landlord's reasonable control, and such failure shall neither be deemed
an actual or constructive eviction, nor release Tenant from its obligations
under this Lease including, without limitation, Tenant's obligation to pay
Rental. If Landlord constructs new or additional utility facilities, including
without limitation wiring, plumbing, conduits, and/or mains, resulting from
Tenant's changed or increased utility requirements, Tenant shall on demand
promptly pay to Landlord the total cost of such items. If any governmental
authority having jurisdiction over the Project imposes mandatory controls
relating to the use or conservation of water, gas, electricity, power, or the
reduction of automobile emissions, Landlord, at its sole discretion, may comply
with such mandatory controls and, accordingly, require Tenant to so comply.
Landlord shall not be liable for damages to persons or property for any such
reduction, nor shall such reduction in any way be construed as a partial
eviction of Tenant, cause an abatement of rent, or operate to release Tenant
from any of Tenant's obligations under this Lease.
10. REAL PROPERTY TAXES.
10.1. DEFINITION OF TAXES. As used in this Lease, the term "Taxes"
shall mean and refer to all real property or real estate taxes, assessments,
and other impositions, whether general, special, ordinary, or extraordinary,
and of every kind and nature, which may be levied, assessed, imposed upon or
with respect to the Project, or any portion thereof, by any local, state, or
federal entity from time to time.
10.2. PAYMENT OF TAXES. Tenant shall pay to Landlord, on the first
day of each calendar month during the Term, commencing with the first day of
January, 1998, as Additional Rent, an amount ("Tenant's Monthly Tax Payment")
equal to one-twelfth of Tenant's Pro Rata Share of the amount by which the
Taxes for such calendar year exceed the Taxes which are assessed against the
Project during calendar year 1997 (the "Increased Taxes"), as estimated by
Landlord in the most recently delivered Estimated Tax Statement (as defined
below). Landlord intends to deliver to Tenant, prior to the commencement of
each calendar year during the Term, a written statement ("Estimated Tax
Statement") setting forth Landlord's estimate of the Taxes and Increased Taxes
allocable to the ensuing calendar year, and Tenant's Pro Rata Share of such
Increased Taxes. Landlord may, at its option, during any calendar year, deliver
to Tenant a revised Estimated Tax Statement, revising Landlord's estimate of
the Taxes and Increased Taxes, in accordance with Landlord's most current
estimate. No later than 90 days after the end of each calendar year during the
Term, Landlord intends to deliver to Tenant a written statement ("Actual Tax
Statement") setting forth the actual Taxes allocable to the preceding calendar
year or, in the case of the calendar year in which the Commencement Date
occurs, such Actual Tax Statement will set forth the Taxes which are assessed
against the Project during the calendar year in which the Commencement Date
takes place. Tenant's failure to object to Landlord regarding the contents of
an Actual Tax Statement, in writing, within 30 days after delivery to Tenant of
such Actual Tax Statement, shall constitute Tenant's absolute and final
acceptance and approval of the Actual Tax Statement. If the sum of Tenant's
Monthly Tax Payments actually paid by Tenant during any calendar year exceeds
Tenant's Pro Rata Share of the actual Increased Taxes allocable to such
calendar year, then such excess will be credited against future Tenant's
Monthly Tax Payments, unless such calendar year was the Last Calendar Year, in
which event either (i) such excess shall be credited against any monetary
default of Tenant under this Lease, or (ii) if Tenant is not in default under
this Lease, then Landlord shall pay to Tenant such excess. If the sum of
Tenant's Monthly Tax Payments actually paid by Tenant during any calendar year
is less than Tenant's Pro Rata Share of the actual Increased Taxes allocable to
such calendar year, then Tenant shall, within ten days of delivery of the
Actual Tax Statement, pay to Landlord the amount of such deficiency. Landlord's
delay in delivering any Estimated Tax Statement or Actual Tax Statement will
not release Tenant of its obligation to pay any Tenant's Monthly Tax Payment or
any such excess upon receipt of the Estimated Tax Statement or the Actual Tax
Statement, as the case may be. The references in this Paragraph to the actual
Increased Taxes allocable to a calendar year, shall include, if such calendar
year is the Last Calendar Year, the actual Increased Taxes allocable to the
portion of the Last Calendar Year prior to the Expiration Date. Notwithstanding
anything to the contrary
Landlord Tenant
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contained in this Lease, Tenant shall not be liable for any Taxes or increases
in Taxes occasioned by or resulting from (i) a conveyance or other transfer of
the real property of which the Premises is a part (a) to any person or entity
affiliated with or related to Landlord or the partners, shareholders, officers,
or directors of Landlord, (b) in connection with estate planning of Landlord,
or (c) which is not a bona fide sale to an unrelated third party, or (ii)
assessments and other fees for improvements in services which do not benefit
the Premises, as reasonably determined by Landlord.
11. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all
taxes, assessments, license fees, and other charges that are levied or
assessed against, or based upon the value of, Tenant's personal property
installed or located in or on the Premises including without limitation trade
fixtures, furnishings, equipment, and inventory (collectively, "Tenant's
Personal Property"). On demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of such payments. If any such taxes, assessments, license
fees, and/or other charges are levied against Landlord or Landlord's property,
or if the assessed value of the Premises is increased by the inclusion of a
value placed on Tenant's Personal Property, and if Landlord pays such taxes,
assessments, license fees, and/or other charges or any taxes based on the
increased assessments caused by Tenant's Personal Property, then Tenant, on
demand, shall immediately reimburse Landlord for the sum of such taxes,
assessments, license fees, and/or other charges so levied against Landlord, or
the proportion of taxes resulting from such increase in Landlord's assessment.
Landlord may, at its election, pay such taxes, assessments, license fees,
and/or other charges or such proportion, and receive such reimbursement,
regardless of the validity of the levy.
12. MAINTENANCE.
12.1. TENANTS DUTIES. Subject to the provisions of Paragraphs 21, 29
and 30, below, Tenant shall at its sole cost maintain, repair, replace, and
repaint, all in first class condition, any damage to Premises or the Project
resulting from the acts or omissions of Tenant or Tenant's Invitees, including,
without limitation, any damage to the roof or damage relating to a roof
penetration caused by Tenant or Tenant's Invitees. If Tenant fails to maintain,
repair, replace, or repaint any portion of the Premises or the Property as
provided above then Landlord may, at its election, maintain, repair, replace,
or repaint any such portion of the Premises or the Project and Tenant shall
promptly reimburse Landlord for Landlord's actual cost thereof, plus a
supervisory fee in the amount of ten - percent (10%) of Landlord's actual cost.
12.2. LANDLORD'S DUTIES. Landlord shall at its sole cost maintain,
repair, replace, and repaint, all in first class condition, the Common Areas
and the Premises, except to the extent of Tenant's obligations as set forth in
Paragraph 12.1, above. Landlord's failure to perform its obligations set forth
in the preceding sentence will not release Tenant of its obligations under this
Lease, including without limitation Tenant's obligation to pay Rental. Tenant
waives the provisions of California Civil Code Section 1942 (or any successor
statute), and any similar principles of law with respect to Landlord's
obligations for tenantability of the Premises and Tenant's right to make
repairs and deduct the expense of such repairs from rent.
13. PARKING. Subject to the remaining provisions of this Paragraph,
Landlord grants to Tenant (for the benefit of Tenant and Tenant's invitees) the
right to the non-exclusive use of the parking area within the boundaries of and
serving the Project (the "Parking Area"). Tenant's use of the Parking Area
shall be subject to such rules as Landlord may, in its reasonable discretion,
adopt from time to time with respect to the Parking Area. Notwithstanding
anything to the contrary in this Paragraph, Landlord may, at its election,
construct improvements upon or otherwise alter in any manner the Parking Area
provided that Landlord makes reasonable amounts of parking available (or
reasonable amount of parking will remain available) to Tenant elsewhere on the
Project, or within a reasonable distance from the Project.
14. SIGNS. Tenant may not place, construct, or maintain any sign,
advertisement, awning, banner, or other exterior decoration (collectively,
"sign") in the Premises which is visible from the exterior of the Premises, or
on the Building without Landlord's prior written consent, which consent will
not unreasonably be withheld or delayed. Any sign that Tenant is permitted by
Landlord to place, construct, or maintain in the Premises or on the Building
shall comply with all applicable laws, ordinances, rules, or regulations, and
Tenant shall obtain any approval required by such laws, ordinances, rules, and
regulations. Landlord makes no representation with respect to Tenant's ability
to obtain any such approval. Tenant shall, at Tenant's sole cost, make any
changes to any of Tenant's signs in the Premises or on the Building as required
by any new or revised applicable laws, ordinances, rules, or regulations, or
any changes in the Sign Criteria.
15. RULES, REGULATIONS, AND COVENANTS. Tenant shall (and shall cause
Tenant's Invitees to) observe faithfully and comply strictly with any
reasonable rules and regulations which Landlord may from time to time adopt for
the Project as well as any recorded covenants, conditions, or restrictions
affecting the Premises or the Project, whether now existing or hereafter
adopted or amended from time to time (all of the foregoing, collectively,
"rules"). Landlord has no duty or obligation to enforce any rule against any
other tenant, and Landlord will not be liable to Tenant for violation of any
rule by any other tenant, or any other tenant's agents, employees, officers,
independent contractors, customers, invitees, visitors, or licensees.
16. EARLY ACCESS INSURANCE. At any time prior to the Commencement Date
that Tenant is making any Alterations (as defined below) to the Premises or
performing any of the Tenant's work, (i) Tenant shall, at Tenant's sole cost,
maintain (a) "Builder's Risk" insurance with respect to the Premises,
reasonably satisfactory to Landlord, and (b) all of the insurance to be
maintained by Tenant during the Term, including without limitation public
liability and property damage insurance, fire and extended coverage insurance
and special form, boiler and machinery
Landlord Tenant
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<PAGE> 11
insurance, and workers compensation insurance, (ii) the provisions of the
Paragraph in this Lease entitled "Indemnity and Exemption of Landlord from
Liability" shall be operative. Any Alterations pursuant to this Paragraph shall
be subject to all the provisions of the Paragraph in this Lease entitled
"Alterations". Nothing in this Paragraph shall be construed as granting
permission to Tenant to enter the Premises, or to make any Alterations, prior
to the Commencement Date and no such right shall exist unless specified in
Exhibit "C".
17. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE. Tenant shall, at
Tenant's sole cost, maintain public liability and property damage insurance (i)
with a combined single limit liability of not less than $2,000,000.00, (ii)
insuring (a) against all liability of Tenant and Tenant's Invitees arising out
of or in connection with Tenant's use or occupancy of the Premises, and (b)
performance by Tenant of the indemnity provisions set forth in this Lease,
(iii) naming Landlord, its agent, and any Lender as additional named insureds,
(iv) containing cross-liability endorsements, and (v) which includes products
liability insurance (if Tenant is to sell merchandise or other products derived
from the Premises). Not more frequently than once every year, if, in the
reasonable opinion of Landlord, the amount of such insurance at that time is
not adequate, then Tenant shall increase such insurance as reasonably required
by Landlord. Additionally, if Tenant sells or serves alcoholic beverages from
the Premises, Tenant shall obtain and maintain "dram shop" coverage and such
other insurance coverage as Landlord may designate from time to time and in
such amounts as Landlord deems reasonably appropriate.
18. FIRE AND EXTENDED COVERAGE INSURANCE. Tenant shall, at Tenant's sole
cost, maintain on Tenant's Alterations and Tenant's Personal Property (as
defined below) a policy of standard fire and extended coverage and special form
insurance, with vandalism and malicious mischief endorsements, coverage with
respect to increased costs due to building ordinances, demolition coverage, and
sprinkler leakage coverage, in each case to the extent of at least 100 percent
of full replacement cost, and business interruption insurance, issued in the
name of Tenant with Landlord, Landlord's Lender and Landlord's designated agent
as additional insureds. Such "full replacement cost" shall be determined by the
company issuing such policy at the time the policy is initially obtained. Not
more frequently than once every two years, either Landlord or Tenant may, at
its election, notify the other that it elects to have the replacement value
redetermined by an insurance company. Such redetermination shall be made
promptly and in accordance with the rules and practices of the Board of Fire
Underwriters, or a like board recognized and generally accepted by the
insurance company, and Landlord and Tenant shall be promptly notified of the
results by the company. Such policy shall be promptly adjusted according to such
redetermination.
19. BUSINESS INTERRUPTION INSURANCE. Tenant shall obtain business
interruption insurance in amounts sufficient to reimburse Tenant for direct or
indirect loss of earnings attributable to all perils commonly insured against
by prudent tenants or attributable to prevention of access to the Premises or
to the Project as a result of such perils.
20. INSURANCE GENERALLY. If Tenant fails during the Term to maintain any
insurance required to be maintained by Tenant under this Lease, then Landlord
may, at its election, arrange for any such insurance, and Tenant shall
reimburse Landlord for any premiums for any such insurance within five days
after Tenant receives a copy of the premium notice. If any such premiums are
allocable to a period, a portion of which occurs during the Term and the
remainder of which occurs before or after the Term, then such premiums shall be
apportioned between Landlord and Tenant based upon the number of days during
such period that occur during the Term and the number of days that occur before
or after the Term, such that Tenant pays for the premiums that are allocable to
the period during the Term. Insurance required to be maintained by Tenant under
this Lease (i) shall be issued as a primary policy by insurance companies
authorized to do business in the state in which the Premises are located with a
Best's Rating of at least "A+" and a Best's Financial Size Category rating of at
least "XIV", as set forth in the most current edition of "Best's Insurance
Reports" (unless otherwise approved by Landlord), or such higher rating as may
be required by any Lender, (ii) shall name Landlord and any Lender as
additional named insureds, (iii) shall consist of "occurrence" based coverage,
without provision for subsequent conversion to "claims" based coverage, (iv)
shall not be cancelable or subject to reduction of coverage or other
modification except after 30-days' prior written notice to Landlord and any
Lender, and (v) shall not provide for a deductible or co-insurance provision in
excess of $5,000.00. Tenant shall, at least 30 days prior to the expiration of
each such policy, furnish Landlord with a renewal of or "binder" extending such
policy. Tenant shall promptly upon request deliver to Landlord copies of such
policy or policies or certificates evidencing the existence and amounts of such
insurance together with evidence of payment of premiums.
21. WAIVER OF SUBROGATION. Landlord and Tenant release each other,
Tenant's Invitees, and Landlord's employees, contractors, agents, invitees, and
licensees (collectively, "Landlord's Invitees") from all claims for damage,
loss, or injury to the Center, to Tenant's Personal Property, and to the
fixtures and Alterations of either Landlord or Tenant in or on the Project to
the extent such damage, loss or injury is one which would ordinarily be
covered by any insurance policies required to be carried by Landlord or Tenant
under this Lease and which is covered by any insurance policies carried by
Landlord or Tenant and in force at the time of such damage. Subject to the
remaining provisions of this Paragraph, Landlord and Tenant shall each cause
all insurance policies obtained by it pursuant to this Lease to provide that
the insurance company waives all right of recovery by way of subrogation
against Landlord and Tenant in connection with any damage, loss, or injury
covered by such policy. If any such policy cannot be obtained with a waiver of
subrogation, or is obtainable only by the payment of an additional premium
charge above that charged by insurance companies issuing policies without
waiver of subrogation endorsements, the party undertaking to obtain such
policy (the "Undertaking Party") shall so notify the other party (the "Notified
Party"). The Notified Party shall, within 10 days after the giving of such
notice, either obtain such policy from a company that is reasonably
satisfactory to the Undertaking Party and that will issue such policy with a
waiver of subrogation endorsement, or agree to pay the additional premium if
such policy is obtainable at additional cost. If such policy cannot be obtained
with a waiver of subrogation endorsement or the Notified Party
Landlord Tenant
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refuses to pay such additional premium, then the Undertaking Party shall not be
required to obtain a waiver of subrogation endorsement with respect to such
policy.
22. LANDLORD'S INSURANCE. Landlord may, at its election, maintain any of
the following insurance, in such amounts and with such limits as Landlord shall
determine in its reasonable discretion: (i) Public liability and property damage
insurance, and products liability insurance; (ii) Fire and extended coverage and
special form insurance, coverage with respect to increased costs due to building
ordinances, demolition coverage, and sprinkler leakage coverage; (iii) boiler
and machinery insurance; (iv) fidelity insurance; (v) Plate-glass insurance; and
(vi) rental interruption insurance. The premiums, costs, expenses, and
deductibles (or similar costs or charges) of and/or with respect to any such
insurance (all of the preceding, collectively, "Insurance Expenses") shall be
included in Lease Expenses. Notwithstanding anything to the contrary contained
in this Lease, Landlord shall maintain standard fire and extended coverage and
special form insurance, with such endorsements as Landlord deems appropriate and
with coverage equal to at least 90 percent of the full replacement cost of the
Project.
23. ALTERATIONS. Tenant shall not make any alterations, improvements,
additions, installations, or changes of any nature in or to the Premises (any of
the preceding, "Alterations") unless (i) Tenant first obtains Landlord's written
consent, (ii) Tenant complies with all conditions which may be imposed by
Landlord, including but not limited to Landlord's selection of specific
contractors or construction techniques, and (iii) Tenant pays to Landlord the
reasonable costs and expenses of Landlord for architectural, engineering, or
other consultants which reasonably may be incurred by Landlord in determining
whether to approve any such Alterations; provided, however, Tenant shall not be
required to comply with the provisions of this sentence in the event such
Alterations consist of interior, non-structural alterations costing less than
$25,000, in the aggregate. At least 30 days prior to making any Alterations,
Tenant shall submit to Landlord, in written form, proposed detailed plans of
such Alterations. Tenant shall, prior to the commencement of any Alterations, at
Tenant's sole cost, (i) acquire (and deliver to Landlord a copy of) a permit
from appropriate governmental agencies to make such Alterations (any conditions
of which permit Tenant shall comply with, at Tenant's sole cost, in a prompt and
expeditious manner), (ii) obtain and deliver to Landlord (unless this condition
is waived in writing by Landlord) a lien and completion bond in an amount equal
to 125 percent of the estimated cost of the proposed Alterations, to insure
Landlord against any liability for mechanics' liens and to insure completion of
the work (provided, however, no such bond will be required if the estimated cost
of the proposed Alterations is less than $100,000, in the aggregate, or if
Landlord has mandated the particular contractor which Tenant is to use), (iii)
provide Landlord with 10 days' prior written notice of the date the installation
of the Alterations is to commence, so that Landlord can post and record an
appropriate notice of non-responsibility, and (iv) obtain (and deliver to
Landlord proof of) reasonably adequate workers compensation insurance with
respect to any of Tenant's employees installing or involved with such
Alterations (which insurance Tenant shall maintain in force until completion of
the Alterations). All Alterations shall become the property of Landlord upon the
expiration of the Lease and shall remain on and be surrendered with the Premises
on the Expiration Date or earlier termination of this Lease, except that
Landlord may, at its election, require Tenant to remove any or all of the
Alterations, by so notifying Tenant in writing on or before the Expiration Date
or earlier termination of this Lease (except where Landlord's prior consent to
an Alteration has been obtained, in which event Landlord must notify Tenant at
the time it grants its consent that Tenant will be required to remove such
Alteration), in which event, Tenant shall, at its sole cost, on or before the
Expiration Date or earlier termination of this Lease, repair and restore the
Premises to the condition of the Premises prior to the installation of the
Alterations which are to be removed. Tenant shall pay all costs for Alterations
and other construction done or caused to be done by Tenant and Tenant shall keep
the Premises free and clear of all mechanics' and materialmen's lien's resulting
from or relating to any Alterations or other construction. Tenant may, at its
election, contest the correctness or validity of any such lien provided that (a)
immediately on demand by Landlord, Tenant procures and records a lien release
bond, issued by a corporation satisfactory to Landlord and authorized to issue
surety bonds in the state in which the Premises are located, in an amount equal
to 125 percent of the amount of the claim of lien, which bond meets the
requirements of California Civil Code Section 3143 or any successor statute, and
(b) Landlord may, at its election, require Tenant to pay Landlord's attorneys'
fees and costs in participating in such an action. Notwithstanding anything to
the contrary contained in this Lease, Tenant's personal property and trade
fixtures shall be and remain the property of Tenant at all times; provided,
however, any such personal property and trade fixtures which are not removed by
Tenant on or before the Lease is terminated/expired, shall be and remain the
property of Landlord.
24. SURRENDER OF PREMISES AND HOLDING OVER. On the Expiration Date or
earlier termination of this Lease, (i) Tenant shall surrender to Landlord the
Premises and all Alterations (except for Alterations that Tenant is obligated to
remove as expressly set forth above) in a first class and clean condition,
ordinary wear and tear, damage and destruction covered by Paragraph 29 and not
caused by Tenant or Tenant's Invitees, damage from condemnation covered by
Paragraph 30, and Hazardous Substances not introduced in, on, under or about the
Premises by Tenant or Tenant's Invitees, excepted, (ii) Tenant shall remove all
of Tenant's Personal Property and perform all repairs and restoration required
by the removal of any Alterations or Tenant's Personal Property, and (iii)
Tenant shall surrender to Landlord all keys to the Premises (including without
limitation any keys to any exterior or interior doors). Landlord may elect to
retain or dispose of in any manner any Alterations or Tenant's Personal Property
that Tenant does not remove from the Premises on the Expiration Date or earlier
termination of this Lease as required by this Lease by giving written notice to
Tenant. Any such Alterations or Tenant's Personal Property that Landlord elects
to retain or dispose of shall immediately upon notice to Tenant vest in
Landlord. Tenant waives all claims against Landlord for any damage to Tenant
resulting from Landlord's retention or disposition of any such Alterations or
Tenant's Personal Property. Tenant shall be liable to Landlord for Landlord's
costs for storing, removing or disposing of any such Alterations or Tenant's
Personal Property. If Tenant fails to surrender the Premises to Landlord on the
Expiration Date or earlier termination of this Lease, Tenant shall
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indemnify Landlord against all liabilities, damages, losses, costs, expenses,
attorneys' fees and claims resulting from such failure, including without
limitation any claim for damages made by a succeeding tenant. If Tenant, with
Landlord's consent, remains in possession of the Premises after the Expiration
Date or earlier termination of this Lease, such possession by Tenant shall be
deemed to be a month-to-month tenancy terminable on 30-days' written notice
given at any time by Landlord or Tenant. During any such month-to-month
tenancy, Tenant shall pay, as Basic Monthly Rent, 150 percent of the Basic
Monthly Rent in effect immediately prior to the Expiration Date or earlier
termination of this Lease, as the case may be. All provisions of this Lease
except for those pertaining to Term shall apply to such month-to-month tenancy.
25. DEFAULT. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant:
25.1. The vacating or abandoning of the Premises by Tenant if Tenant fails
to pay the Rental and perform its other obligations under this Lease.
25.2. Tenant's failure to make any payment of Rental within five business
days after receipt of notice from Landlord that such payment of Rental is past
due, provided that any such notice shall be in lieu of and not in addition to
any notice required under applicable unlawful detainer statutes, and no more
than one such notice shall be required during any calendar year. No grace period
prior to the imposition of a late charge pursuant to Paragraph 28 below, shall
extend the date when such Rental is due and payable, and Tenant shall be in
default under this Lease if such payment is not timely made.
25.3. Tenant's failure to observe or perform any of the provisions of this
Lease to be observed or performed by Tenant, other than described in the
preceding two Paragraphs where such failure shall continue for a period of ten
days after written notice of such failure from Landlord to Tenant; provided,
however, that any such notice shall be in lieu of, and not in addition to, any
notice required under applicable unlawful detainer statutes; and provided
further, however, that if the nature of Tenant's default is such that more than
ten days are required for its cure, then Tenant shall not be deemed to be in
default if Tenant commenced such cure with in such ten day period and thereafter
diligently prosecutes such cure to completion within 30 days after Landlord's
written notice.
25.4. Tenant's failure to deliver to Landlord pursuant to Paragraph 50.2,
within 15 days after Landlord's written request, any financial statement of
Tenant (including without limitation a current annual balance sheet of Tenant)
reasonably requested by Landlord, or if any financial statement given to
Landlord by Tenant, or by any assignee, subtenant, or guarantor of Tenant, is
materially false or evidences that Tenant's net worth is negative, and Tenant
fails to furnish to Landlord, within 10 days after written notice from Landlord
to Tenant, with cash as an additional security deposit in an amount equal to the
aggregate Rental payable under this Lease for the six full calendar months
immediately following such notice.
25.5. The making by Tenant of any general arrangement or assignment for the
benefit of creditors; Tenant's becoming bankrupt, insolvent or a "debtor" as
defined in 11 U.S.C. Section 101, or any successor statute (unless, in the case
of a petition filed against Tenant, such petition is dismissed within 30 days
after its original filing); the institution of proceedings under the bankruptcy
or similar laws in which Tenant is the debtor or bankrupt; the appointing of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease (unless possession
is restored to Tenant within 30 days after such taking); the attachment,
execution, or judicial seizure of substantially all of Tenant's assets located
at the Premises or Tenant's interest in this Lease (unless such attachment,
execution, or judicial seizure is discharged within 30 days after such
attachment, execution, or judicial seizure); or, if Tenant is a partnership or
consists of more than one person or entity, any partners of the partnership or
any such other person or entity becoming bankrupt or insolvent or making a
general arrangement or assignment for the benefit of creditors.
26. LANDLORD'S REMEDIES. Landlord shall have the following remedies if
Tenant commits a default or breach under this Lease; these remedies are not
exclusive, but are cumulative and in addition to any remedies provided
elsewhere in this Lease, or now or later allowed by law.
26.1. CONTINUATION OF LEASE. No act by Landlord (including without
limitation the acts set forth in the succeeding sentence) shall terminate
Tenant's right to possession unless Landlord notifies Tenant in writing that
Landlord elects to terminate Tenant's right to possession. As long as Landlord
does not terminate Tenant's right to possession, Landlord may (i) continue this
Lease in effect, (ii) continue to collect Rental when due and enforce all the
other provisions of this Lease, (iii) to the extent permitted by law, enter the
Premises and relet them, or any part of them, to third parties for Tenant's
account, for a period shorter or longer than the remaining term of this Lease,
and (iv) have a receiver appointed to collect Rental and conduct Tenant's
business. Tenant shall immediately pay to Landlord all costs Landlord incurs in
such reletting, including, without limitation, brokers' commissions, attorneys'
fees, advertising costs, and expenses of remodeling the Premises for such
reletting.
26.2. RENT FROM RELETTING. If Landlord elects to relet all or any portion
of the Premises as permitted above, rent that Landlord receives from such
reletting shall be applied to the payment of, in the following order and
priority, (i) any indebtedness from Tenant to Landlord other than Basic Monthly
Rent due from Tenant, (ii) all costs incurred by Landlord in such reletting,
and (iii) Basic Monthly Rent due and unpaid under this Lease. After applying
such payments as referred to above, any sum remaining from the rent Landlord
receives from such reletting shall be held by Landlord and applied in payment
of future Basic Monthly Rent as it becomes due under
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this Lease. In no event shall Tenant be entitled to any excess rent received by
Landlord unless and until all obligations of Tenant under this Lease, including
all future obligations, are satisfied in full.
26.3 TERMINATION OF TENANT'S RIGHT TO POSSESSION. Landlord may terminate
this Lease and Tenant's right to possession of the Premises at any time, by
notifying Tenant in writing that Landlord elects to terminate this Lease and
Tenant's right to possession. On termination of this Lease, Landlord has the
right to recover from Tenant (i) the worth at the time of the award of the
unpaid Basic Monthly Rent which had been earned at the time of such termination,
(ii) the worth at the time of the award of the amount by which the unpaid Basic
Monthly Rent which would have been earned after such termination until the time
of award exceeds the amount of such loss of Basic Monthly Rent that Tenant
proves could have been reasonably avoided, (iii) the worth at the time of the
award of the amount by which the unpaid Basic Monthly Rent for the balance of
the Term after the time of award (had there been no such termination) exceeds
the amount of such loss of Basic Monthly Rent that Tenant proves could be
reasonably avoided, and (iv) any other amount necessary to compensate Landlord
for all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease or in the ordinary course of things would be likely
to result therefrom. The "worth at the time of the award" of the amounts
referred to in Clauses (i) and (ii) above is to be computed by allowing interest
at the Default Rate, as set forth below, or if no Default Rate is set forth,
then at the maximum rate permitted by applicable law. The "worth at the time of
the award" of the amount referred to in Clause (iii) above is to be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent.
26.4 LANDLORD'S RIGHT TO CURE DEFAULT. Landlord, at any time after Tenant
commits a default or breach under this Lease, may cure such default or breach at
Tenant's sole cost. If Landlord at any time, by reason of Tenant's default or
breach, pays any sum or does any act that requires the payment of any sum, such
sum shall be due immediately from Tenant to Landlord at the time Landlord
notifies Tenant that such sum has been paid, and shall be deemed Additional Rent
under this Lease. If Tenant fails to timely pay any amount due under this
Paragraph, then (without curing such default) interest at the rate of ten
percent (10%) per annum shall accrue (and be immediately payable) on such
overdue amount until it is paid.
26.5 ENFORCEMENT COSTS. All costs and expenses incurred by Landlord in
connection with collecting any amounts and damages owing by Tenant pursuant to
the provisions of this Lease, or to enforce any provision of this Lease,
including reasonable attorneys' fees, whether or not any action is commenced by
Landlord, shall be paid by Tenant to Landlord upon demand. If Tenant fails to
timely pay any amount due under this Paragraph, then (without curing such
default) interest at the rate of ten percent (10%) per annum shall accrue (and
be immediately payable) on such overdue amounts until it is paid.
27. INTEREST AND LATE CHARGES. Late payment by Tenant to Landlord of Rental
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which would be impracticable or extremely difficult to fix. Such costs
include, without limitation, processing, collection and accounting charges, and
late charges that may be imposed on Landlord by the terms of any deed of trust
covering the Premises. Therefore, if any Rental is not received by Landlord
within ten days after its due date, then, without any requirement for notice to
Tenant, Tenant shall pay to Landlord an additional sum of ten percent (10%) of
such overdue amount as a late charge. Such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of any late
payment by Tenant, and therefore this Paragraph is reasonable under the
circumstances existing at the time this Lease is made. Acceptance of such late
charge by Landlord shall not constitute a waiver of Tenant's default with
respect to such overdue amount, nor prevent Landlord from exercising any of the
other rights and remedies available to Landlord under this Lease. In addition to
the late charge payable by Tenant, as provided above, if any such Rental is not
paid within 30 days after the date such Rental was due, then Tenant shall pay to
Landlord interest on such overdue Rental at the rate of three percent (3%) above
the "reference rate" announced from time to time by Bank of America, NT&SA (the
"Default Rate"). Such interest shall additionally accrue and be payable by
Tenant relative to any other amounts payable by Tenant to Landlord under the
provisions of this Lease which are not paid when due (if such reference rate
ceases to be announced, then a comparable "prime rate" shall be utilized,
selected by Landlord).
28. QUARTERLY PAYMENTS. If a late charge is payable under this Lease,
whether or not collected, for two installments of Basic Monthly Rent or other
Rental due under this Lease during any one calendar year during the Term, then
Basic Monthly Rent, and Tenant's Monthly Payments, shall automatically become
due and payable quarterly in advance, rather than monthly. All monies paid to
Landlord under this Paragraph may be commingled with other monies of Landlord
and shall not bear interest. If Tenant breaches any provision of this Lease,
then any balance remaining from funds paid to Landlord under the provisions of
this Paragraph may, at Landlord's election, be applied to the payment of any
monetary default of Tenant in lieu of being applied to the payment of personal
property taxes, real property taxes and insurance premiums.
29. DESTRUCTION. If the Project is totally or partially destroyed during
the Term, rendering the Premises totally or partially inaccessible or unusable,
then, subject to the remainder of this Paragraph, (i) Landlord shall restore the
Project to substantially the same condition as it was in immediately before such
destruction, (ii) Landlord shall not be required to restore Tenant's Alterations
or Tenant's Personal Property, unless they are an integral part of the Premises
and specifically covered by insurance proceeds received by Landlord, such
excluded items being the sole responsibility of Tenant to restore, (iii) such
destruction shall not terminate this Lease, and (iv) all obligations of Tenant
under this Lease shall remain in effect, except that the Basic Monthly Rent
shall be abated or reduced, between the date of such destruction and the date of
completion of restoration, by the ratio of (a) the area of the Premises rendered
unusable or inaccessible by the destruction to (b) the area of the Premises
prior to such
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destruction. Notwithstanding anything to the contrary in this Lease, Landlord
may, at its election, terminate this Lease by so notifying Tenant in writing on
or before the later of 120 days after such destruction or 60 days after
Landlord's receipt of the proceeds from insurance maintained by Landlord, if
(A) then-existing laws do not permit such restoration, (B) such destruction
occurs during the last year of the Term, (C) such destruction exceeds 25
percent (25%) of the then-replacement value of the Premises or the Project or
(D) Landlord determines that the cost of such restoration exceeds the amount of
insurance proceeds (including the amount of the insurance deductible) relating
to such destruction actually received by Landlord from insurance maintained by
Landlord. If Landlord so terminates this Lease, then (1) Landlord shall have no
obligation to restore the Project, (2) Landlord shall retain all insurance
proceeds relating to such destruction (other than insurance proceeds from
policies maintained by Tenant covering Tenant's personal property or
Alterations), and (3) this Lease shall terminate as of the date of such damage
or destruction. If Landlord restores the Premises as provided above, then
Tenant waives the provisions of California Civil Code Sections 1932(2) and
1933(4) or any successor statute with respect to any destruction of the
Premises. In the event Landlord restores the Premises following any such
destruction, Tenant shall immediately refixturize, re-equip, and restock the
Premises and shall re-open the Premises for business as soon thereafter as is
reasonably practicable. Notwithstanding anything to the contrary contained in
this Lease, Landlord shall notify Tenant, within 30 days after the occurrence
of any damage or destruction, how long Landlord reasonably estimates repair and
restoration will take. If Landlord estimates that repair and restoration will
take more than 270 days, Tenant shall have the right to elect to terminate the
Lease upon notice to Landlord within 15 days of the date Landlord notifies
Tenant of Landlord's estimate of the time required for such repair and
restoration. If Tenant exercises such right of termination, then (i) Landlord
shall have no obligation to restore the Project, (ii) Landlord shall retain all
insurance proceeds relating to such damage or destruction, and (iii) this Lease
shall terminate as of the date Tenant vacates the Premises, which Tenant shall
do no later than 15 days after the date of Tenant's notice of termination to
Landlord and, provided Tenant timely vacates the Premises, Tenant's Rental
obligations hereunder shall terminate as of the date of the destruction.
30. CONDEMNATION. If during the Term, or during the period of time
between the execution of this Lease and the Commencement Date, there is any
taking of all or any part of the Premises or any interest in this Lease by the
exercise of any governmental power, whether by legal proceedings or otherwise,
by any public or quasi-public authority, or private corporation or individual,
having the power of condemnation (any of the preceding a "Condemnor"), or a
voluntary sale or transfer by Landlord to any Condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending (any of
the preceding, a "Condemnation"), the rights and obligations of Landlord and
Tenant shall be determined pursuant to this Paragraph. If such Condemnation is
of the entire Premises, then this Lease shall terminate on the date the
Condemnor takes possession of the Premises (the "Date of Condemnation"). A
temporary Condemnation of the Premises, or any part of the Premises, for less
than 180 days, shall not constitute a Condemnation under this Paragraph; but
the Basic Monthly Rent shall abate as to the portion of the Premises affected
during such temporary Condemnation. If such Condemnation is of any portion, but
not all, of the Premises, then this Lease shall remain in effect, except that,
if the remaining portion of the Premises is rendered unsuitable for Tenant's
continued use of the Premises, then Tenant may elect to terminate this Lease,
by so notifying Landlord in writing (the "Termination Notice") within 30 days
after the date Tenant has received notice of the nature and extent of the
Condemnation. Such termination shall be effective on the earlier of (i) the
date that is 30 days after the giving of the Termination Notice, and (ii) the
Date of Condemnation. If Tenant does not give to Landlord the Termination
Notice within such 30-day period, then all obligations of Tenant under this
Lease shall remain in effect, except that (unless the Premises are restored as
set forth below) Basic Monthly Rent shall be reduced by the ratio of (a) the
area of the Premises taken to (b) the area of the Premises immediately prior to
the Date of Condemnation. Notwithstanding anything to the contrary in this
Paragraph, if, within 20 days after Landlord's receipt of the Termination
Notice, Landlord notifies Tenant that Landlord at its cost will add to the
remaining Premises (or substitute for the Premises other comparable space in
the Project) so that the area of the Premises will be substantially the same
after the Condemnation as they were before the Condemnation, and Landlord
commences the restoration promptly and completes it within 150 days after
Landlord so notifies Tenant, then all obligations of Tenant under this Lease
shall remain in effect, except that Basic Monthly Rent shall be abated or
reduced during the period from the Date of Condemnation until the completion of
such restoration by the ratio of (A) the area of the Premises taken to (B) the
area of the Premises immediately prior to the Date of Condemnation. Unless
Landlord restores the Premises pursuant to the preceding sentence, or unless
Tenant gives to Landlord the Termination Notice within the relevant 30-day
period, Tenant at its sole cost shall accomplish any restoration required by
Tenant to use the Premises. All compensation, sums, or anything of value
awarded, paid, or received on a total or partial Condemnation (the "Award")
shall belong to and be paid to Landlord. Tenant shall have no right to any part
of the Award, and Tenant hereby assigns to Landlord all of Tenant's right,
title, and interest in and to any part of the Award, except that Tenant shall
receive from the Award any sum paid expressly to Tenant from the Condemnor for
Tenant's loss of goodwill. Landlord and Tenant waive the provisions of any
statute (including without limitation California Code of Civil Procedure
Section 1265.130 or any successor statute) that allows Landlord or Tenant to
petition the superior court (or any other local court) to terminate this Lease
in the event of a partial taking of the Premises. Notwithstanding anything to
the contrary contained in this Lease, if this Lease is not terminated pursuant
to this Paragraph 30 in connection with a Condemnation, Landlord shall use
Condemnation proceeds it receives to restore the Premises to a condition which
will reasonably allow Tenant to continue the conduct of its business.
31. ASSIGNMENT AND OTHER TRANSFERS. Without Landlord's prior written
consent, which shall not be unreasonably withheld, none of the following shall
occur (nor be permitted by Tenant to occur), voluntarily, involuntarily, by
operation of law, or otherwise (any of the following, a "Transfer"): (i) any
assignment, sublease, disposition, sale, concession, license, mortgage,
encumbrance, hypothecation, pledge, collateral assignment, or other transfer,
by Tenant of this Lease, any interest in this Lease, or all or any portion of
the Premises; or (ii) any
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assignment, disposition, sale, transfer, acquisition, or issuance of equitable
interests (whether stock, partnership or otherwise) in Tenant, to or by any
person, entity, or group of related persons or affiliated entities, whether in a
single transaction or in a series of related or unrelated transactions, which
results in such person, entity, or group holding (or assigning, transferring,
disposing of, or selling) 50 percent (50%) or more of the aggregate issued and
outstanding equitable interests in Tenant (other than as part of a public
offering of Tenant's securities). Landlord shall not be liable in damages to
Tenant or to any proposed subtenant, assignee or other transferee (any of the
preceding a "Proposed Transferee") if such consent is adjudicated to have been
unreasonably withheld, and, in such event, Tenant's sole remedy shall be to have
the proposed Transfer declared as valid as if Landlord's consent had been given,
although Tenant shall be entitled to reasonable attorney's fees if Tenant is the
prevailing party in such litigation. At least 20 days prior to entering into any
proposed Transfer, Tenant shall submit to Landlord the sum of $400.00 (as
payment toward Landlord's and Landlord's attorneys' cost of reviewing,
consenting to, rejecting and/or consummating any proposed Transfer), and a
written notice ("Tenant's Notice") which includes or sets forth in reasonable
detail (a) the form of the proposed Transfer, including without limitation all
related agreements, documents, instruments, exhibits, and escrow instructions,
(b) the name and address of the Proposed Transferee, (c) the terms and
conditions of the proposed Transfer, including without limitation the
commencement or effective date of the proposed Transfer, which shall be at least
30 days after Tenant's Notice is given, and (d) the nature, character, and
current banking, financial, and other credit information and references with
respect to the Proposed Transferee and the business of the Proposed Transferee
(including without limitation tax returns for the three most-recent years, a
business plan with cash-flow projections and financial projections with
assumptions and competitive market analysis), in reasonably sufficient detail to
enable Landlord to determine the Proposed Transferee's financial responsibility.
Within 20 days after Landlord's receipt from Tenant of such sum and Tenant's
Notice, and all documentation requested of Tenant by Landlord, Landlord shall
notify Tenant whether Landlord has consented to the proposed Transfer. If
Landlord fails to respond to the Tenant's Notice within such 20-day period,
Tenant may send a second notice to Landlord stating (in bold capital letters) as
follows: "TENANT HEREBY REQUESTS CONSENT TO THE PROPOSED TRANSFER DESCRIBED
BELOW. YOUR FAILURE TO RESPOND WITHIN TEN DAYS OF RECEIPT OF THIS NOTICE WILL
CONSTITUTE YOUR DEEMED APPROVAL TO THE DESCRIBED TRANSFER." If Landlord fails to
respond to such second notice within ten days of Landlord's receipt of such
notice, such Transfer will be deemed approved. Any consent by Landlord to any
proposed Transfer shall not constitute a consent with respect to any other
Transfer. If Landlord consents to any proposed Transfer, and Tenant fails to
consummate such Transfer on or before the commencement or effective date of the
proposed Transfer (as set forth in Tenant's Notice), then such consent shall be
deemed withdrawn and Tenant shall be required again to comply with this
Paragraph before making a Transfer. Landlord shall not have unreasonably
withheld its consent with respect to any Transfer if Landlord shall not have
received such sum or Tenant's Notice, if the nature or character of the Proposed
Transferee, or the proposed use and occupancy of the Premises by the Proposed
Transferee, is not in keeping with the dignity and character of the Building and
the surrounding area, if the proposed Transfer will result in the diminution of
the value or marketability of the Premises or the Project, if Landlord is not
satisfied that the Proposed Transferee is creditworthy, or if the proposed
Transfer will conflict with or result in a breach of any of the provisions of,
or constitute a default under, any agreement, instrument, or document to which
Landlord is a party or by which the Project may be bound. No Transfer shall
release or discharge Tenant from any liability, whether past, present, or
future, under this Lease and Tenant shall continue to remain primarily liable
under this Lease. Tenant irrevocably assigns to Landlord, as security for
Tenant's obligations under this Lease, all rent and other amounts from any
Transfer, and Landlord, or a receiver for Tenant appointed on Landlord's
application, may collect such rent and other amounts and apply them toward
Tenant's obligations under this Lease; except that, unless Tenant defaults under
this Lease, Tenant shall have the right to collect such rent and other amounts.
Unless otherwise agreed to by all parties, the Tenant's security deposit, if
any, shall be retained by Landlord and returned to the lawful tenant in
possession at the time of the Lease termination, subject to the terms and
conditions of Paragraph 6 of this Lease. Any Transfer must contain the following
provisions, which provisions whether contained in such Transfer or not, shall
apply to such Transfer: (A) Such Transfer shall be subject and subordinate to
all provisions of this Lease; (B) No Proposed Transferee shall be permitted to
enter into any Transfer without Landlord's prior written consent; and (C) At
Landlord's option, in the event of cancellation or termination of this Lease for
any reason or the surrender of this Lease, whether voluntarily, involuntarily,
by operation of law or otherwise, prior to the expiration of such Transfer, the
Proposed Transferee shall make full and complete attornment to Landlord for the
balance of the term of such Transfer. Such attornment shall be evidenced by an
agreement in form and substance satisfactory to Landlord which the Proposed
Transferee shall execute and deliver to Landlord within five days after request
by Landlord. Tenant shall promptly reimburse Landlord for Landlord's reasonable
cost (less any payment made by Tenant with Landlord as set forth above) of
reviewing, consenting to, rejecting and/or consummating any proposed Transfer,
including without limitation reasonable attorneys' fees. Tenant shall promptly
pay to Landlord fifty percent (50%) of all rents and other consideration, of
whatever nature, paid to (or for the benefit of) Tenant pursuant to any
Transfer, which exceed (1) if a sublease of a portion of the Premises, the
portion of the Basic Monthly Rent that is allocable to the portion of the
Premises subleased (such allocation based on the area of the portion subleased),
or (2) if any other Transfer, the Basic Monthly Rent.
32. COMMON AREAS. Landlord may, at its election, (i) close any of the Common
Areas to the extent required in the opinion of Landlord's legal counsel to
prevent a dedication of any of the Common Areas or the accrual of any rights to
any person or to the public in and to any portion of the Common Areas, (ii)
close, temporarily, any of the Common Areas for maintenance purposes, (iii)
designate other property outside the boundaries of the Project to become part of
the Common Areas, (iv) close off or otherwise utilize portions of the Common
Area while constructing improvements or making repairs or alterations to any
portion of the Project, and/or (v) make any changes to the Common Areas, or any
part of the Project, including without limitation changes to buildings or other
improvements, the addition of new buildings or other improvements, and/or
changes in the
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location of driveways, entrances, exits, vehicular parking spaces, or the
direction of the flow of traffic, provided that no such changes shall
materially and adversely affects Tenant's use and occupancy of the Premises for
the purposes contemplated hereunder.
33. [INTENTIONALLY OMITTED.]
34. ACCESS BY LANDLORD. Landlord and any of the Landlord's Invitees
shall have the right to enter the Premises at all reasonable times, during
normal business hours if feasible under the circumstances, and upon reasonable
notice, if feasible under the circumstances, (i) to determine whether the
Premises are in good condition and whether Tenant is complying with its
obligations under this Lease, (ii) to do any necessary maintenance or make any
restoration to the Premises that Landlord has the right or obligation to
perform, (iii) to serve, post, or keep posted, any notices required or allowed
under this Lease, (v) to post "for sale" or "for rent" or "for lease" signs
during the final six months of the Lease Term, as extended, (vi) to show the
Premises to brokers, agents, prospective buyers, prospective tenants, or other
persons interested in a listing of, financing, purchasing, or occupying the
Project, the Premises or any portion of the Project or the Premises (during the
final six months of the Lease Term, as extended), and (vii) to shore the
foundations, footings, and walls of the Project, and to erect scaffolding and
protective barricades around and about the Premises, but not so as to prevent
entry to the Premises, and to do any other act or thing necessary for the
safety or preservation of the Premises if any excavation or other construction
is undertaken or is about to be undertaken on any adjacent property or nearby
street. In the event of an emergency Landlord shall have the right to enter the
Premises at any time, without prior notice to Tenant. Landlord's rights under
clause (vii) of this Paragraph extend, with Landlord's consent, to the owner of
adjacent property on which excavation or construction is to take place and the
adjacent property owner's agents, employees, officers, and contractors.
Landlord shall not be liable for any inconvenience, disturbance, loss of
business, nuisance, or other damage arising out of any entry on the Premises as
provided in this Paragraph except damage resulting directly from the negligent
acts, or intentional misconduct of Landlord or Landlord's Invitees. Tenant
shall not be entitled to any abatement or reduction of Basic Monthly Rent or
other Rental because of the exercise by Landlord of any rights under this
Paragraph.
35. LANDLORD'S RESERVED RIGHTS. Landlord, as owner of the Project,
reserves the right from time to time: (i) to change the name of the Project;
(ii) to temporarily utilize portions of the Common Areas; and (iii) to utilize
the lighting standards and other areas or improvements in the Common Areas for
advertising purposes.
36. INDEMNITY AND EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby
indemnifies Landlord against all Claims (as defined below) and all costs,
expenses, and attorneys' fees incurred in the defense or handling of any such
Claims or any action or proceeding brought on any of such Claims. For purposes
of this Lease, "Claims" shall mean all liabilities, damages, losses, costs,
expenses, attorneys' fees, and claims (except to the extent they result from
Landlord's negligent acts or willful misconduct) arising from or which seek to
impose liability under or because of (i) Tenant's or Tenant's Invitees' use of
the Premises, (ii) the conduct of Tenant's business, (iii) any activity, work,
or things done by Tenant or any of Tenant's Invitees in or about the Premises or
elsewhere, (iv) any breach or default in the performance of any obligation to be
performed by Tenant under this Lease, and/or (v) any negligence of Tenant or any
of Tenant's Invitees. If any action or proceeding is brought against Landlord by
reason of any such Claims, Tenant upon notice from Landlord shall defend such
action or proceeding at Tenant's sole cost by legal counsel satisfactory to
Landlord. Except to the extent caused by Landlord's negligent acts or willful
misconduct (or Landlord's breach of this Lease), Tenant assumes all risk of,
Tenant waives all claims against Landlord in respect of, and Landlord shall not
be liable for, any of the matters set forth above in this Paragraph or any of
the following: injury to Tenant's business, loss of income from such business,
or damage or injury to the goods, wares, merchandise, or other property or the
person of Tenant, Tenant's Invitees, or any other persons in, upon, or about the
Premises, whether such damage, loss, or injury is caused by or results from
criminal acts, fire, steam, electricity, gas, water, rain, the breakage,
leakage, obstruction or other defects of pipes, sewer lines, sprinklers, wires,
appliances, plumbing, air-conditioning or lighting fixtures, or any other cause,
conditions arising upon the Premises, or other sources or places, and regardless
of whether the cause of such damage, loss, or injury or the means of repairing
such damage, loss, or injury is inaccessible to Tenant. This Lease shall not be
affected or impaired by any change to any part of the Project or any sidewalks,
streets or improvements nearby the Project. Landlord may, at its election, at
any time and without liability to Tenant, change the name of the Project. The
foregoing indemnifications and releases shall not apply to any Claims or other
matters to the extent they are covered by insurance.
37. HAZARDOUS SUBSTANCES. Landlord hereby notifies Tenant, and Tenant
hereby acknowledges that, prior to the leasing of the Premises pursuant to this
Lease, Tenant has been notified, pursuant to California Health and Safety Code
Section 25359.7 (or any successor statute), that Landlord knows; or has
reasonable cause to believe, that certain hazardous substances (as such term is
used in such Section 25359.7), including without limitation common cleaning
supplies, office supplies, spillage of petroleum products from motor vehicles,
and other consumer products, may have come to be located on or beneath the
Premises and/or the Project. Tenant hereby indemnifies Landlord against all
Environmental Claims (as defined below) and all costs, expenses, and attorneys'
fees incurred in the defense of any such Environmental Claims or any action or
proceeding brought on any of such Environmental Claims. For purposes of this
Paragraph, "Environmental Claims" shall mean all liabilities, damages, losses,
costs, expenses, attorneys' fees, and claims (except to the extent they arise
as a result of the negligent acts or willful misconduct of Landlord or
Landlord's Invitees), arising from or which seek to impose liability (i)
because of or relating to any discharges, releases, or threatened releases of
noise, pollutants, contaminants, herbicides, pesticides, insecticides, or
hazardous or toxic wastes, substances, or materials (any of the preceding a
"Hazardous Material") by Tenant or Tenant's Invitees into ambient air, water,
or land from, on, under, or above the Premises, (ii) relating
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to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, or hazardous or toxic
wastes, substances, or materials from, on, or under, the Premises by Tenant or
Tenant's Invitees, or (iii) under any environmental law (which shall mean any
federal, state or local law, statute, regulation, ordinance, guideline, or
common law principle relating to public health or safety or the use or control
of the environment, including without limitation the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the
Carpenter-Presley-Tanner Hazardous Substance Account Act, the California
Hazardous Waste Control Law, the Federal Clean Air Act, The California Air
Resources Act, the Federal Clean Water Act, the California Porter-Cologne Water
Quality Control Act, the Federal Resource Conservation and Recovery Act, the
California Nejedly-Z'berg-Dills Solid Waste Management and Recovery Act, and
California Health and Safety Code Section 25359.7) and relating to the Premises
in the use, storage, manufacture, disposal, transportation, or manufacture of
Hazardous Substances by Tenant or Tenant's Invitees during the Term. Tenant
agrees to promptly reimburse Landlord for all of Landlord's costs arising from
periodic monitoring of Tenant's use, handling, or storage of Hazardous
Substances at or surrounding the Premises if Tenant's use, handling, or storage
of Hazardous Substances is in violation of applicable laws. Neither Tenant nor
any of Tenant's Invitees shall use, manufacture, store, or dispose of any
Hazardous Materials anywhere within the Premises or the Project which are or
could (a) be detrimental to the Project, human health, or the environment,
except in accordance with all applicable laws, or (b) adversely affect the value
of the Premises or the Project. If the Premises are contaminated (or, due to the
acts or omissions of Tenant or Tenant's Invitees, the Project is contaminated)
by any Hazardous Material during the Term, then, when tenant acquires actual
knowledge of such contamination or actual knowledge of facts which would lead a
reasonable person to believe such contamination might exist (1) Tenant shall
promptly notify Landlord in writing of such contamination, and (2) Landlord may
elect to either (A) demand that Tenant perform all remediation required by
Landlord (to Landlord's satisfaction and at Tenant's sole cost, necessary to
return the Premises (and/or the Project) to at least as good a condition as the
Premises (or the Project) are in as of the date of this Lease, which Tenant
shall immediately do upon receipt of notice from Landlord, or (B) proceed to
cause such investigation, clean-up, and remediation work which Landlord deems
reasonably necessary or desirable to be undertaken, whereupon the entire cost
thereof (plus a supervisory fee equal to ten percent (10%) of such cost) will be
payable by Tenant to Landlord upon demand as Additional Rent. If Tenant does not
promptly commence and diligently pursue such remediation, then Landlord may, at
Landlord's election, perform or cause to be performed such remediation and
Tenant shall immediately, upon demand, pay the cost thereof, plus a supervisory
fee in the amount of ten percent (10%) of such cost.
38. PROHIBITION AGAINST ASBESTOS-CONTAINING MATERIALS. Tenant shall not
cause or allow Tenant's Invitees to cause any materials which contain asbestos
in any form or concentration ("Asbestos-Containing Materials") to be used or
stored in the Premises or used in the construction of any improvements or
alterations to the Premises, including, without limitation, building or
construction materials and supplies. Such prohibition against
Asbestos-Containing Materials shall apply regardless of whether the
Asbestos-Containing Materials may be considered safe or approved for use by a
manufacturer, supplier, or governmental authority, or by common use or practice.
Landlord shall have the right, upon reasonable notice, to enter upon and conduct
inspections of the Premises to determine Tenant's compliance with this
paragraph. If Tenant causes or allows Tenant's Invitees to cause
Asbestos-Containing Materials to be used or stored in the Premises or used in
the construction of any improvements or alterations to the Premises, (a) Tenant
shall, upon notice from Landlord, immediately remove such Asbestos-Containing
Materials at Tenant's sole cost, (b) such removal shall comply with all
applicable laws, regulations, and requirements concerning asbestos and the
removal and disposal of Asbestos-Containing Materials, (c) Tenant shall
reimburse Landlord for all expenses incurred in connection with any inspection
of the Premises conducted by Landlord, and (d) unless Tenant completes such
removal within 30 days after notice from Landlord, Landlord may, at its
election, do either or both of the following: (i) declare Tenant in breach of
this Lease and terminate this Lease upon 10 days prior written notice to Tenant,
and (ii) remove and dispose of the Asbestos-Containing Materials and obtain
reimbursement from Tenant for the cost of such removal and disposal. Tenant
shall indemnify Landlord and Landlord's directors, officers, employees, and
agents against all costs, liability, expenses, penalties, and claims for
damages, including, without limitation, litigation costs and attorneys' fees,
arising from (A) the presence of Asbestos-Containing Materials upon the
Premises, to the extent that such Asbestos-Containing Materials are used or
stored in the Premises or used in the construction of any improvements or
alterations to the Premises by Tenant or Tenant's agents, employees,
representatives, or independent contractors, (b) any lawsuit, settlement,
governmental order, or decree relating to the presence, handling, removal, or
disposal of Asbestos-Containing Materials upon or from the Premises, to the
extent that such Asbestos-Containing Materials are used or stored in the
Premises or used in the construction of any improvements or alternations to the
Premises by Tenant or Tenant's agents, employees, representatives or independent
contractors, or (C) Tenant's failure to perform its obligations to remove such
Asbestos-Containing Materials under this paragraph.
39. SECURITY MEASURES. Tenant acknowledges (i) that the Basic Monthly
Rent does not include the cost of any security measures for any portion of the
Project (ii) that Landlord shall have no obligation to provide any such security
measures, (iii) that Landlord has made no representation to Tenant regarding the
safety or security of the Project, and (iv) that Tenant will be solely
responsible for providing any security it deems necessary to protect itself, its
property, and Tenant's Invitees in, on, or about the Project. If Landlord
provides any security measures at any time, then the cost thereof shall be
included as part of the Lease Expenses, but Landlord will not be obligated to
continue providing such security measures for any period of time, Landlord may
discontinue such service without notice and without liability to Tenant, and
Landlord will not be obligated to provide such security measures with any
particular standard of care. Tenant assumes all responsibility for the security
and safety of Tenant, Tenant's property, and Tenant's Invitees. Tenant releases
Landlord from all claims for damage, loss, or injury to Tenant, Tenant's
Invitees, and/or to the personal property of Tenant and/or of Tenant's Invitees,
even if such damage, loss or injury is caused by or results from the criminal or
negligent acts of third parties. Landlord shall have no duty
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to warn Tenant of any criminal acts or dangerous conduct that has occurred in or
near the Project, regardless of Landlord's knowledge of such crimes or conduct,
and Tenant is hereby instructed to conduct its own investigation through local
police agencies regarding any criminal acts or dangerous conduct that has
occurred in or near the Project.
40. SUBORDINATION AND ATTORNMENT. This Lease and Tenant's rights under
this Lease are subject and subordinate to any mortgage, deed of trust, ground
lease, or underlying lease (and to all renewals, modifications, consolidations,
replacements, or extensions thereof), now or hereafter affecting the Premises.
The provisions of this Paragraph shall be self-operative, and no further
instrument of subordination shall be required. In confirmation of such
subordination, however, Tenant shall promptly execute and deliver any
instruments that Landlord, any Lender, or the lessor under any ground or
underlying lease, may reasonably request to evidence such subordination,
provided that any such instruments shall contain language providing that so
long as Tenant is not in default under this Lease, the beneficiary under such
subordination instrument will not disturb Tenant's quiet possession of the
Premises. Notwithstanding the preceding provisions of this Paragraph, if any
ground lessor or Lender elects to have this Lease prior to the lien of its
ground lease, deed of trust, or mortgage, and gives written notice thereof to
Tenant that this Lease shall be deemed prior to such ground lease, deed of
trust, or mortgage, whether this Lease is dated prior or subsequent to the date
of such ground lease, deed of trust, or mortgage, then this Lease shall be
deemed to be prior to the lien of such ground lease or mortgage and such ground
lease, deed of trust, or mortgage shall be deemed to be subordinate to this
Lease. If any Lender, or the lessor of any ground or underlying lease affecting
the Premises, shall hereafter succeed to the rights of Landlord under this
Lease, whether by foreclosure, deed in lieu of foreclosure or otherwise, then
(i) such successor landlord shall not be subject to any offsets or defenses
which Tenant might have against Landlord, (ii) such successor landlord shall
not be bound by any prepayment by Tenant of more than one month's installment
of Basic Monthly Rent or any other Rental, (iii) such successor landlord shall
not be subject to any liability or obligation of Landlord except those arising
after such succession, (iv) Tenant shall attorn to and recognize such successor
landlord as Tenant's landlord under this Lease, (v) Tenant shall promptly
execute and deliver any instruments that may be necessary to evidence such
attornment, (vi) Tenant hereby irrevocably appoints Landlord (and such
successor landlord) as Tenant's special attorney-in-fact to execute and deliver
such instruments on behalf of Tenant, and (vii) upon such attornment, this
Lease shall continue in effect as a direct lease between such successor
landlord and Tenant upon and subject to all of the provisions of this Lease. If
any Lender requests reasonable amendment(s) to this Lease at any time during
the Term, then Tenant shall not unreasonably withhold or delay its written
consent to such amendment(s). Notwithstanding anything to the contrary
contained in this Lease, Tenant shall not be required to execute any documents
subordinating this Lease or attorning to any successor-in-interest or ground
lessor, unless such successor-in-interest or ground lessor assumes, in writing,
all obligations of the Landlord under this Lease from and after the date such
successor-in-interest or ground lessor succeeds to the interests of Landlord
under this Lease. Furthermore, any such successor-in-interest or ground lessor
who succeeds to Landlord's interest under this Lease shall, to the extent the
Landlord delivers any security deposit held by Landlord to such
successor-in-interest or ground lessor, assume Landlord's obligations under
this Lease with respect to such security deposit.
41. ESTOPPEL CERTIFICATES. Within 10 days after notice from Landlord,
Tenant shall execute and deliver to Landlord, in recordable form, a certificate
stating (i) whether this Lease is unmodified and in full force and effect, or
whether it is in full force and effect as modified, and stating all
modifications, (ii) the then-current Basic Monthly Rent, (iii) the dates to
which Basic Monthly Rent has been paid in advance, (iv) the amount of any
security deposit, prepaid rent or other payment constituting Rental which has
been paid, (iv) whether or not Tenant or Landlord is in default under this
Lease and whether there currently exist any defenses or rights of offset under
the Lease, and (v) such other matters as Landlord shall reasonably request
which are statements of fact. Tenant's failure to deliver such certificate
within such 10-day period shall be conclusive upon Tenant for the benefit of
Landlord, and any successor in interest to Landlord, any lender or proposed
lender, and any purchaser of the Project that, except as may be represented by
Landlord, this Lease is unmodified and in full force and effect, no Rental has
been paid more than 30 days in advance, and neither Tenant nor Landlord is in
default under this Lease. Tenant irrevocably constitutes and appoints Landlord
as its special attorney-in-fact to execute and deliver such certificate to any
third party if Tenant fails to deliver such certificate within such 10-day
period.
42. WAIVER. No delay or omission in the exercise of any right or remedy of
either party in the event of any default by the other party shall impair such
right or remedy or be construed as a waiver. The receipt and acceptance by
Landlord of delinquent Rental shall not constitute a waiver of any default other
than the particular Rental payment accepted. Landlord's receipt and acceptance
from Tenant, on any date (the "Receipt Date"), of an amount less than Rental due
on such Receipt Date, or to become due at a later date but applicable to a
period prior to such Receipt Date, shall not release Tenant of its obligation
(i) to pay the full amount of such Rental due on such Receipt Date or (ii) to
pay when due the full amount of such Rental to become due at a later date but
applicable to a period prior to such Receipt Date. No act or conduct of
Landlord, including without limitation, the acceptance of the keys to the
Premises, shall constitute an acceptance by Landlord of the surrender of the
Premises by Tenant before the Expiration Date. Only a written notice from
Landlord to Tenant stating Landlord's election to terminate Tenant's right to
possession of the Premises shall constitute acceptance of the surrender of the
Premises and accomplish a termination of this Lease. Landlord's consent to or
approval of any act by Tenant requiring Landlord's consent or approval shall not
be deemed to waive or render unnecessary Landlord's consent to or approval of
any other subsequent act by Tenant. Any waiver by either party of any default
must be in writing and shall not be a waiver of any other default concerning the
same or any other provision of this Lease. Tenant hereby waives any rights
granted to Tenant under California Code of Civil Procedure Section 1179,
California Civil Code Section 3275, and/or any successor statute(s). Tenant
represents and warrants that if Tenant breaches this Lease and, as a result,
this Lease is terminated, Tenant will not suffer any undue hardship as a result
of such
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termination and, during the Term, will make such alternative or other
contingency plans to provide for its vacation of the Premises and relocation in
the event of such termination. Tenant acknowledges that Tenant's waivers set
forth in this Paragraph are a material part of the consideration for Landlord's
entering into this Lease and that Landlord would not have entered into this
Lease in the absence of such waivers.
43. BROKERS. Each party represents that, except as disclosed in Paragraph
2.15, above, no real estate broker, agent, finder, or other person is
responsible for bringing about or negotiating this Lease and neither party has
dealt with any real estate broker, agent, finder, or other person, relative to
this Lease in any manner. Each party hereby indemnifies the other against all
liabilities, damages, losses, costs, expenses, attorneys' fees and claims
arising from any claims that may be made against the indemnitee by any real
estate broker, agent, finder, or other person (other than as set forth above),
alleging to have acted on behalf of or to have dealt with the indemnitor.
44. EASEMENTS. Landlord may, at its election, from time to time, grant
such easements, rights and dedications, and cause the recordation of parcel
maps, easement and operating agreements, and restrictions affecting the
Premises and the Project. Tenant shall promptly sign any documents or
instruments to accomplish the foregoing upon request by Landlord. Tenant
irrevocably appoints Landlord as Tenant's special attorney-in-fact to execute
and deliver such documents or instruments on behalf of Tenant if Tenant refuses
or fails to do so.
45. LIMITATIONS ON LANDLORD'S LIABILITY. If Landlord is in default of this
Lease, and as a consequence Tenant recovers a money judgment against Landlord,
such judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levy against the right, title, and interest of
Landlord in the Project, and out of rent or other income from the Project
receivable by Landlord or out of the consideration received by Landlord from the
sale or other disposition of all or any part of Landlord's right, title, and
interest in the Project and from any insurance proceeds available to Landlord
with respect to such matter. Neither Landlord nor Landlord's shareholders,
officers, directors, agents, or the partners comprising Landlord (if any) shall
be personally liable for any deficiency.
46. SALE OR TRANSFER OF PREMISES. If Landlord sells or transfers any
portion of the Premises, and the purchaser or other transferee assumes
Landlord's obligations under this Lease from and after the date of such sale or
transfer in writing, Landlord, on consummation of the sale or transfer, shall
be released from any liability thereafter accruing under this Lease. If any
security deposit or prepaid rent has been paid by Tenant, Landlord shall
transfer the security deposit and/or prepaid rent to Landlord's
successor-in-interest and on such transfer Landlord shall be discharged from
any further liability arising from the security deposit or prepaid rent.
47. QUITCLAIM DEED. Tenant shall execute and deliver to Landlord on the
Expiration Date or earlier termination of this Lease, promptly on Landlord's
request, a quitclaim deed to the Premises, in recordable form, designating
Landlord as transferee.
48. NO MERGER. The voluntary or other surrender of this Lease by Tenant,
or a mutual cancellation of this Lease, or a termination by Landlord, shall not
work a merger, and shall, at the option of Landlord, terminate any existing
subleases or may, at the option of Landlord, operate as an assignment to
Landlord of any such subleases.
49. CONFIDENTIALITY. Except as essential to the consummation of the
transaction contemplated by this Lease (together with all amendments and
addenda hereto):
49.1. Tenant shall keep and maintain the terms of this Lease and the
transactions contemplated by this Lease or any aspect of this Lease in strict
confidence; and
49.2. Tenant may not make or allow any notices, statements,
disclosures, communication, or news releases concerning this Lease, the terms
of this Lease and the transactions contemplated by this Lease or any aspect of
this Lease.
Nothing provided herein, however, shall prevent Tenant from disclosing to its
legal counsel and/or certified public accountants, prospective purchasers, or
lenders the existence and terms of this Lease or any transaction under this
Lease, or any aspect of this lease, or from complying with any governmental or
court order or similar legal requirement which requires such party to disclose
this Lease, the terms of this Lease, the transaction contemplated by this Lease
and/or any aspect of this Lease; provided that such party uses reasonable and
diligent good faith efforts to disclose no more than is absolutely required to
be disclosed by such legal requirement. If Tenant violates this confidentiality
provision, in addition to all other remedies to which Landlord may be entitled
under law or in equity, Landlord shall be entitled to receive immediately the
entire value of any rent relief, rent abatement, free rent, reimbursement, or
other concession which Landlord has previously granted to Tenant.
50. MISCELLANEOUS.
50.1. Tenant covenants and agrees not to protest or in any way oppose
any application for a license to serve or sell liquor filed by tenants or other
users of space within the Project.
50.2. Upon Landlord's written request, no more frequently than once
per calendar year, Tenant shall promptly furnish to Landlord, with financial
statements certified by Tenant to be true and correct, reflecting Tenant's then
current financial condition. Such financial statements shall include a current
balance sheet and a profit and loss statement covering the most recent 12-month
period available. In addition, upon Landlord's written
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request, Tenant shall allow Landlord, or a certified public accountant of
Landlord's choosing, to determine Tenant's current financial condition by
reviewing Tenant's current financial books, records, and accounts. Landlord
shall keep all such financial statements confidential except that the
exceptions applicable to Tenant's similar obligation in Paragraph 49.2, above,
shall apply to Landlord, and except that Landlord shall have the right to
disclose such information to any lender or prospective lender or purchaser or
prospective purchaser.
50.3. Notwithstanding any other provision in this Lease to the contrary,
Tenant shall refrain from selling or otherwise distributing any alcoholic
beverages unless such sale is specifically permitted pursuant to Paragraph
2.12, above, and in any event, such sales shall be expressly forbidden under
this Lease unless and until Tenant holds the appropriate license as issued
and/or approved by the California Alcoholic Beverage Control Agency.
50.4. This Lease shall be governed by and construed in accordance with the
laws of the state in which the Premises are located. If the Premises are located
outside of California, then the references in this Lease to California statutes
shall be deemed to include any relevant statute of the jurisdiction in which
the Premises are located that is comparable to such California statutes.
50.5. For purposes of venue and jurisdiction, this Lease shall be deemed
made and to be performed in the City of San Diego, California (whether or not
the Premises are located in San Diego, California) and Landlord and Tenant
hereby consent to the jurisdiction of the Courts of the County of San Diego.
50.6. This Lease may be executed in counterparts, each of which shall be
deemed an original and all of which together shall constitute one document.
50.7. Whenever the context so requires, all words used in the singular
shall be construed to have been used in the plural (and vice versa), each
gender shall be construed to include any other genders, and the word "person"
shall be construed to include a natural person, a corporation, a firm, a
partnership, a joint venture, a trust, an estate or any other entity.
50.8. Each provision of this Lease shall be valid and enforceable to the
fullest extent permitted by law. If any provision of this Lease or the
application of such provision to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected by such
invalidity or unenforceability, unless such provision or such application of
such provision is essential to this Lease.
50.9. In the event any litigation, arbitration, mediation, or other
proceeding ("Proceeding") is initiated by any party against any other party to
enforce, interpret or otherwise obtain judicial or quasi-judicial relief in
connection with this Lease the prevailing party in such Proceeding shall be
entitled to recover from the unsuccessful party all costs, expenses, and actual
attorney's fees and expert witness fees relating to or arising out of () such
Proceeding (whether or not such Proceeding proceeds to judgment), and () any
post-judgment or post-award proceeding including without limitation one to
enforce any judgment or award resulting from any such Proceeding. Any such
judgment or award shall contain a specific provision for the recovery of all
such subsequently incurred costs, expenses, and actual attorney's fees and
expert witness fees.
50.10. This Lease shall become effective when it has been executed by each
Landlord and Tenant.
50.11. Subject to any restriction on transferability contained in this
Lease, this Lease shall be binding upon and shall inure to the benefit of the
successors-in-interest and assigns of each party to this Lease. Nothing in this
Paragraph shall create any rights enforceable by any person not a party to this
Lease, except for the rights of the successors-in-interest and assigns of each
party to this Lease, unless such rights are expressly granted in this Lease to
other specifically identified persons.
50.12. The headings of the Paragraphs of this Lease have been included only
for convenience, and shall not be deemed in any manner to modify or limit any of
the provisions of this Lease, or be used in any manner in the interpretation of
this Lease.
50.13. Time and strict and punctual performance are of the essence with
respect to each provision of this Lease.
50.14. This Lease contains the entire agreement between Landlord and
Tenant with respect to the subject matter of this Lease, is a complete and
exclusive statement of the terms of such agreement, and supersedes all prior
understandings, agreements, representations and warranties, if any, with
respect to such subject matter.
50.15. Each party to this Lease and its legal counsel have had an
opportunity to review and revise this Lease. The rule of construction that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Lease or any Addendum or Exhibit to this Lease,
and such rule of construction is hereby waived by Tenant.
50.16. All notices or other communications required or permitted to be
given to Tenant or Landlord shall be in writing and shall be personally
delivered, sent by certified mail, postage prepaid, return receipt requested,
or sent by an overnight express courier service that provides written
confirmation of delivery, to Tenant at the address set forth in Paragraph 2.11
of this Lease and to Landlord at the address set forth in Paragraph 2.10
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of this Lease. Each such notice or other communication shall be deemed given,
delivered and received upon its actual receipt, except that if it is sent by
mail in accordance with this Paragraph, then it shall be deemed given,
delivered and received three days after the date such notice or other
communication is deposited with the United States Postal Service in accordance
with this Paragraph. Landlord or Tenant must give a notice of a change of its
address to the other, if such address changes.
50.17. If more than one person is Tenant, then the obligations of
Tenant under this Lease shall be the joint and several obligations of each of
such persons; provided, however, that any act or signature of one or more of any
of such persons and any notice or refund given to or served on any one of such
persons shall be fully binding on each of such persons.
50.18. All provisions, whether covenants or conditions, to be
performed or observed by Tenant shall be deemed to be both covenants and
conditions.
50.19. All payments to be made by Tenant to Landlord under this Lease
shall be in United States currency.
50.20. The Exhibits and Addendum attached to this Lease are
incorporated herein by this reference.
50.21. The parties hereto waive trial by jury in connection with
proceedings or counterclaims brought by either of the parties hereto against the
other.
50.22. This Lease and the Exhibits A, B, C, Addendum and rider, if any,
attached hereto and forming a part hereof, as set forth herein, constitute all
of the covenants, promises, assurances, representations, warranties, statements,
agreements, conditions and understandings between Landlord and Tenant
concerning the Premises and the Project and there are no covenants, promises,
assurances, representations, warranties, statements, conditions, or
understandings, either oral or written, between them, other than as herein set
forth. Except as herein otherwise provided, no subsequent alteration, change, or
addition to this Lease shall be binding upon Landlord or Tenant unless reduced
to writing and signed by each of them.
50.23. This Lease supersedes and revokes any and all previous
negotiations, arrangements, letters of intents, offers to lease, lease proposals
or drafts, brochures, representations, and information conveyed, whether oral or
written, between parties hereto or their respective representations or any other
person purported to represent Landlord or Tenant. The Tenant acknowledges it has
not been induced to enter into this Lease by any representations not set forth
in the Lease, nor has it relied on any such representations. No such
representations should be used in the interpretation or construction of this
Lease and the Landlord shall have no liability for any consequences arising as a
result of any such representations.
LANDLORD: Insurance Company of the West,
a California corporation
By: American Assets, Inc.,
a California corporation
Its Agent
By: /s/ John W. Chamberlain
-----------------------
John W. Chamberlain, Vice President
Date: May 28, 1996
------------
\
TENANT: The Lightspan Partnership, Inc.,
a California corporation
By: /s/ Michelle M. Hays
--------------------
Its: Controller
----------
Date: May 24, 1996
------------
Landlord___________ Tenant__________
18
<PAGE> 23
ADDENDUM NO. 1
TO FULL SERVICE MODIFIED GROSS LEASE
1. BASIC RENT
Basic Monthly Rent (as defined below), during the Lease Term shall be as
follows:
Months 1-6 $ 72,627.84 per month (1.1208 per rentable square foot)--
subject to partial deferral as set forth in Paragraph 2,
below)
Months 7-12 $ 81,699.84 per month (1.2608 per rentable square foot)
Months 13-18 $ 90,123.84 per month (1.3908 per rentable square foot)
Months 19-24 $ 98,547.84 per month (1.5208 per rentable square foot)
Months 25-36 $103,083.84 per month (1.5908 per rentable square foot)
Months 37-48 $ 94,608.00 per month (1.46 per rentable square foot)
Months 49-60 $ 98,496.00 per month (1.52 per rentable square foot)
Months 61-72 $102,435.84 per month (1.5801 per rentable square foot)
Months 73-84 $106,533.27 per month (1.6433 per rentable square foot)
2. DEFERRED RENT
The Basic Monthly Rent due under the terms of Section 2.5, of this Lease
for the following identified period (hereinafter the "Deferral Period")
shall be partially deferred until the end of the Initial Lease Term as
set forth in Paragraph 2.4. Should Tenant commit a default or breach under
the terms of this Lease, as described in Paragraph 26, at any time during
the Initial Lease Term, the total amount of Basic Monthly Rent deferred
during the Deferral Period shall immediately become due and owing to
Landlord.
A. The Deferral Period shall consist of the following:
AMOUNT OF DEFERRED
MONTHS BASIC MONTHLY RENT
1, 2, and 3 $60,264.00 per month
As a result of such deferral, the Basic Monthly Rent initially
payable by Tenant hereunder during months 1, 2, and 3 of the Initial
Lease Term (but subject to the provisions hereof regarding default)
will be $12,363.84.
B. In the event no default or breach under the terms of the Lease has
been committed by Tenant as of the end of the Initial Lease Term, the
Basic Monthly Rent which was deferred in the Deferral Period will be
deemed forgiven.
C. Tenant shall be responsible for all Additional Rent, including
Tenant's Pro Rate Share of Lease Expenses (as defined in Section 8.1
of the Lease), during the entire Deferral Period.
3. OPTION TO EXTEND
Tenant shall have the option to extend the Term of this Lease (the
"Option") for one (1) period of five (5) years (such period an "extension
term") provided Tenant gives Landlord written notice of its election to
exercise the Option at least 180 days prior to the expiration of the Term
of this Lease. The terms and conditions governing such extension term will
be the same as those for the Initial Lease Term, except and to the extent
modified by the terms of Paragraph E, below. Time is of the essence.
A. The Option is personal to the Tenant originally named in this Lease
and may not be exercised by or be assigned to, voluntarily or
involuntarily, any other person or entity separate from the Lease.
The Option herein granted to Tenant may be assigned with any
permitted assignment of this Lease.
B. Tenant shall not have the right to exercise the Option,
notwithstanding anything set forth above to the contrary:
1. During any period of time commencing from the date Landlord gives
to Tenant a written notice that Tenant is in default under any
provision of this Lease, and continuing until the default alleged
in said notice is cured;
Landlord Tenant
--------------- ---------------
ADDENDUM NO. 1 - Page 1 of 4
<PAGE> 24
2. During the period of time commencing on the day after a monetary
obligation to Landlord is due from Tenant and unpaid (without any
necessity for notice thereof to Tenant) and continuing until the
obligation is paid;
3. At any time after the occurrence of any default described in
Paragraph 26 of the Lease other than those described in the
preceding paragraphs (without any necessity of Landlord to give
notice of such default to Tenant); or
4. In the event that Landlord has given to Tenant two or more notices
of default or a late charge has become payable under the Lease
during the twelve-month period prior to the time that Tenant
intends to exercise the Option.
C. The period of time within which the Option may be exercised shall not
be extended or enlarged by reason of Tenant's inability to exercise
the Option because of the foregoing provisions of Paragraph B, even if
the effect thereof is to eliminate Tenant's right to exercise the
Option.
D. All rights with respect to the Option shall terminate and be of no
further force or effect even after Tenant's due and timely exercise of
the Option, if, after such exercise, but prior to the commencement of
the applicable extension term, (1) Tenant fails to pay to Landlord a
monetary obligation of Tenant for a period of ten days after such
obligation become due (without any necessity of Landlord to give
notice thereof to Tenant); (2) Tenant fails to cure a non-monetary
default within 30 days after the date the Landlord gives notice to
Tenant of such default (or such longer time as is reasonably needed to
cure such default provided that Tenant commences its cure during such
30-day period and diligently prosecutes it to completion); or (3)
Landlord gives to Tenant two or more notices of default or a late
charge becomes payable for any such default, whether or not such
defaults are cured.
E. The Basic Monthly Rent shall be increased on the first day of the
extension term (the "Rental Adjustment Date") to 95% of "fair rental
value" of the Premises, determined in the following manner.
1. Not later than 270 days prior to the Rental Adjustment Date,
Landlord and Tenant shall meet in an effort to negotiate, in good
faith, the fair rental value of the Premises as of such applicable
Rental Adjustment Date. If Landlord and Tenant have not agreed upon
the fair rental value of the Premises at least 225 days prior to
the applicable Rental Adjustment Date, the fair rental value shall
be determined by appraisal as described below.
2. If Landlord and Tenant are not able to agree upon the fair rental
value of the Premises within the time period prescribed in
Paragraph 1, then Landlord and Tenant shall attempt to agree in
good faith upon a single appraiser not later than 210 days prior to
the applicable Rental Adjustment Date. If Landlord and Tenant are
unable to agree upon a single appraiser within such time period,
then Landlord and Tenant shall each appoint an appraiser not later
than 210 days prior to the applicable Rental Adjustment Date.
Within five days thereafter, the two appointed appraisers shall
appoint a third appraiser. If Landlord and Tenant agree upon an
appraiser, or if either Landlord or Tenant fails to appoint its
appraiser within the prescribed time period, the single appraiser
appointed shall determine the fair rental value of the Premises. If
both parties fail to appoint appraisers within the prescribed time
periods, then the first appraiser thereafter selected by a party
shall determine the fair rental value of the Premises. Each party
shall bear the cost of its own appraiser and the parties shall
share equally the cost of the single or third appraiser if
applicable. Each such appraiser must have at least five years
experience in the appraisal or commercial/industrial real property
in the area in which the Project is located and shall be members
of a professional organization such as MAI or equivalent.
3. For the purposes of such appraisal, the term "fair rental value"
shall mean the price that a ready and willing tenant would pay, as
of the applicable Rental Adjustment Date, as monthly rent to a
ready and willing Landlord of property comparable to the Premises
if such property were exposed for lease (on the terms and
conditions of this Lease) on the open market for a reasonable
period of time and taking into account that such property is used
for general office purposes under the terms and conditions of this
Lease. If a single appraiser is chosen, then such appraiser shall
determine the fair market value of the Premises. Otherwise, the
fair rental value of the Premises shall be the arithmetic average
of the two of the three appraisals which are closest in amount, and
the third appraisal shall be disregarded. In no event, however,
shall the Basic Monthly Rent be reduced by reason of such
computation or the operation of this Article.
Landlord and Tenant shall instruct the appraiser(s) to complete
their determination of the fair rental value no later than 190 days
prior to the applicable Rental Adjustment Date. If,
ADDENDUM NO.1 - Page 2 of 4 Landlord______ Tenant______
<PAGE> 25
notwithstanding such instruction, the fair rental value is not
determined before the first day of an extension term, then Tenant
shall continue to pay to Landlord the Basic Monthly Rent
applicable to the Premises immediately prior to such extension
term, until the fair rental value of the Premises is determined.
When the fair rental value of the Premises is determined,
Landlord shall deliver notice thereof to Tenant, and Tenant shall
pay to Landlord, within ten days after receipt of such notice,
the difference between the Basic Monthly Rent actually paid by
Tenant to Landlord and the new Basic Monthly Rent determined
hereunder.
F. On each anniversary date of the commencement of an extension term the
Basic Monthly Rent will increase four percent (4%) annually.
4. ELECTRICAL SERVICE
Tenant shall be solely responsible for the cost of electric services for
the Premises.
5. BASE YEAR
Landlord shall utilize a 1997 Base Year, with expenses estimated on 100%
occupancy of the Project. Any increases in the Operating Expenses over the
previous year shall be passed through to Tenant as additional rent
pursuant to Paragraph 8.3 of the Lease. Operating Expenses shall be
reconciled at the end of each calendar year.
6. SPACE PLANNER ALLOWANCE
Landlord shall provide a $1,500.00 allowance for Tenant's interior planner
to prepare preliminary drawings.
7. PARKING
The Tenant shall have exclusive use of all parking on the site. Tenant
understands the building is currently parked at 4.2 spaces per 1,000
rentable square feet leased. All parking will be free for the Tenant and
Tenant's visitors.
8. ASSIGNMENT AND SUBLETTING
The Lightspan Partnership shall have the right to assign the Lease in its
entirety, or to sublease all or a portion of the Premises without the
consent of the Landlord to any entity resulting from a merger or
consolidation with The Lightspan Partnership or any subsidiary or
affiliate with The Lightspan Partnership, provided that the use is the
same as that of the Tenant and that the assignee has a net worth equal to,
or greater than, the Tenant at the time of assignment. Any other
assignment or sublease shall be made with a prior written approval of the
Landlord, whose consent shall not be unreasonably withheld or delayed.
Profits, if any, received by Tenant from subleasing shall be split 50/50
with the Landlord after all subleasing expenses including tenant
improvements, commissions, lost rent during vacancy, and other incidental
expenses are considered; except that the provisions of this sentence shall
not apply during the forty third through eighty fourth months of the
Initial Lease Term. Sale of Tenant's stock in a public offering will not
constitute an assignment or subletting under this Lease.
9. SIGNAGE
Tenant shall have complete discretion over signage within city codes and
regulations to be installed at its own cost and expense. Sign criteria
shall be in accordance with the regulations of the City of San Diego.
10. NON-DISTURBANCE AGREEMENT
A Non-Disturbance Agreement will be provided from the owner and all
lenders prior to lease commencement.
11. AMERICANS WITH DISABILITIES ACT
The Building's common areas are believed to meet current requirements set
forth by the Americans With Disabilities Act ("ADA"). In the event,
through no action by Tenant, Tenant is informed by the City of San Diego
(or other applicable government entity), that as part of the process of
obtaining approval for the plans and specifications for the Tenant's Work,
work must be performed relative to the Building's common areas in order to
bring them into compliance with the ADA, then Landlord shall bear the cost
of such improvements pursuant to Paragraph 12, below. None of the
construction allowance payable by Landlord pursuant to Exhibit "C" to the
Lease will be used to upgrade the Building for ADA requirements imposed as
conditions by the City of San Diego, as provided above.
Landlord Tenant
----- -----
ADDENDUM NO. 1 - Page 3 of 4
<PAGE> 26
12. LANDLORD'S IMPROVEMENTS TO THE PREMISES
The following improvements to the Building shall be paid for by Landlord.
The amounts so paid will not constitute a part of the construction
allowance payable by Landlord pursuant to Exhibit "C" to the Lease:
A. To the extent required by the City of San Diego (simply as a result of
Tenant's submittal of plans to the City and Tenant's application for permits,
and not as a result of any affirmative attempt by Tenant to call such matter to
the attention of the City) in order to meet applicable codes or regulations,
Landlord shall pay to raise the exterior metal railings on the Building
balconies.
B. To the extent required by the City of San Diego (simply as a result of
Tenant's submittal of plans to the City and Tenant's application for permits,
and not as a result of any affirmative attempt by Tenant to call such matter to
the attention of the City) in order to meet applicable codes or regulations,
Landlord will upgrade the existing ceiling to meet earthquake safety
requirements.
C. To the extent required by the City of San Diego (simply as a result of
Tenant's submittal of plans to the City and Tenant's application for permits,
and not as a result of any affirmative attempt by Tenant to call such matter to
the attention of the City) in order to meet applicable codes or regulations,
Landlord will upgrade the Premises to meet ADA requirements.
D. To the extent required by the City of San Diego (simply as a result of
Tenant's submittal of plans to the City and Tenant's application for permits,
and not as a result of any affirmative attempt by Tenant to call such matter to
the attention of the City) in order to meet applicable codes or regulations,
Landlord will change Halon to FM200 System in the designated computer room
(provided, however, such change will only be Landlord's responsibility if it is
required to meet applicable codes and not because of Tenant's particular use of
such space).
E. Landlord will remove the 75 kva transformers at each floor and replace
them with 150 kva transformers -- providing each floor with 400 amps.
F. To the extent required by the City of San Diego (simply as a result of
Tenant's submittal of plans to the City and Tenant's application for permits,
and not as a result of any affirmative attempt by Tenant to call such matter to
the attention of the City) in order to meet applicable codes or regulations (in
particular, Title 24), Landlord will install electronic time clocks for the
lighting system in the Building.
G. To the extent required by the City of San Diego (simply as a result of
Tenant's submittal of plans to the City and Tenant's application for permits,
and not as a result of any affirmative attempt by Tenant to call such matter to
the attention of the City) in order to meet applicable codes and regulations (in
particular, Title 24), Landlord will install 15 bypass timers for the lighting
system in the Building
13. GOVERNANCE.
Any provisions of this Addendum which conflict with the provisions of the
Lease preceding this Addendum shall supersede and replace such conflicting
Lease provisions.
TENANT: The Lightspan Partnership, Inc.,
a California corporation
By: /s/ Michelle M Hays
--------------------------
Its: CONTROLLER
--------------------------
Date: May 24, 1996
--------------------------
LANDLORD: Insurance Company of the West,
a California Corporation
By: American Assets, Inc.,
a California Corporation
Its Agent
By: /s/ John W. Chamberlain
-----------------------------------
John W. Chamberlain, Vice President
Date: MAY 28, 1996
--------------------------
ADDENDUM NO. 1 - Page 4 of 4 Landlord Tenant
----- -----
<PAGE> 27
EXHIBIT "A"
TO STANDARD OFFICE LEASE
SITE PLAN FOR THE BUILDING
--------------------------
To be inserted at a later date.
DISCLAIMER: This drawing is for general information purposes only. Any and all
features, matters and other information depicted hereon or contained herein are
for illustrative marketing purposes only, are subject to modification without
notice, are not intended to be relied upon by any party and are not intended to
constitute representations and warranties as to the size and nature of
improvements to be constructed (or that any improvements will be constructed) or
as to the Identity or nature of any occupants thereof.
Landlord Tenant
----- -----
<PAGE> 28
EXHIBIT "B"
TO STANDARD OFFICE LEASE
DEMISED PREMISES PLAN
---------------------
Demised Premises Plan is to be the set of construction drawings as
completed by the Tenant or the Tenant's approved representative and approved by
the Landlord and appropriate government agency. Actual area of Demised Premises
Plan to be field verified upon occupancy of premises by Tenant. Rental rate
(basic rent) to be adjusted (increased or decreased) to reflect the actual
square footage.
Landlord Tenant
----- -----
<PAGE> 29
EXHIBIT "C"
DESCRIPTION OF WORK
(Work Letter Agreement)
This Work Letter is executed simultaneously with and is an exhibit to that
certain Lease (the "Lease"), dated as of the date hereof between Insurance
Company of the West ("Landlord"), and The Lightspan Partnership ("Tenant"),
wherein Tenant is leasing certain office space (the "Premises") at 10140 Campus
Point Drive (the "Building"), in San Diego, CA, as more particularly described
in the Lease. In consideration of the parties entering into the Lease and of
the mutual promises and covenants hereinafter contained, the Landlord and
Tenant hereby agree as follows:
SECTION A. REPRESENTATIVES. Landlord, at its expense, appoints Landlord's
Representative to act for Landlord and Tenant, at its expense, appoints
Tenant's Representative to act for Tenant in all matters covered by this Work
Letter Agreement. All inquiries, request, instructions, authorization and other
communications with respect to the matters covered by this Work Letter
Agreement will be made to Landlord's Representative or Tenant's Representative,
as the case may be. Either party may change its Representative under this Work
Letter Agreement at any time with one day prior written notice to the other
party.
Tenant's Representative: Sandra Clark, Space Matters
Landlord's Representative: John W. Chamberlain, American Assets
Space Planner: Howard - Sneed Interior Architecture
SECTION 1. PLAN AND BID APPROVAL. Immediately following the execution of
this Lease, Tenant shall cause the following detailed plans and specifications
(the "Plans") to be prepared by Howard Sneed Interior Architecture (or another
architect and/or space planner pre-approved by Landlord) and delivered to
Landlord; which Plans shall reflect the work to be performed within the Premises
by Tenant in order to suitably prepare the Premises for Tenant's use ("Tenant's
Work"). Plans to be approved include: 1) Tenant Approved Space Plan; 2)
Construction Specifications & Standards; 3) 50% Complete Drawings; and 4) Final
Construction Drawings. Tenant and Landlord agree that the mechanical and
electrical systems will be done on a design-build basis utilizing subcontractors
that are mutually acceptable to Tenant and Landlord. The selection of these
subcontractors will be managed by Tenant and the selected General Contractor
pursuant to Section 7 and shall (along with the plans and specifications
prepared by such subcontractors) be subject to Landlord's reasonable approval.
Space Planner will furnish plans to selected mechanical and electrical
design-build contractors ("Engineers"), to enable the Engineers to complete
drawings which will, when incorporated with other plans provided by Space
Planner, enable the selected General Contractor to secure a permit for
construction of the Tenant Improvements. Landlord shall, within five business
days following its receipt of the Plans, either approve such Plans or provide
Tenant with the reasons that Landlord is withholding such approval. Landlord and
Tenant acknowledge that Space Planner will continue with completion of drawings
and specifications during the Landlord review period. Tenant shall review
Landlord's comments and shall incorporate requested changes if there is no
disagreement. In the event Tenant disagrees with changes requested by Landlord,
Tenant and Space Planner will immediately meet to review Landlord's requested
changes and to reach mutually acceptable resolution. Any change to such Plans
will require Landlord's prior written consent unless they are minor in nature
and do not effect any of the matters described in (i) through (v), below.
Landlord may withhold its approval of any Tenant Plans (which term
hereinafter includes the plans and specifications prepared by the design-build
subcontractors referenced above), including any revisions requested by Tenant,
Tenant Work, or Change Orders which require work which:
(i) Exceeds or adversely affects the structural integrity of the
Building, or any part of the heating, ventilating, air
condition, plumbing, mechanical, electrical, communication, or
other systems of the Building;
(ii) Violates any agreement which affects the Building or binds
Landlord;
(iii) Landlord reasonably believes will increase the cost of
operation or maintenance of any of the systems or the Building;
(iv) Landlord reasonably believes will reduce the market value of
the Premises or the Building at the end of the term of the
Lease; or
(v) Does not conform to applicable building codes or is not
approved by all governmental authorities with jurisdiction over
the Building.
Landlord Tenant
---- ----
1
<PAGE> 30
Failure of Landlord to disapprove any such Plans within the respective
time periods specified shall be deemed approval of such plans if Tenant sends
an additional 48 hour notice to Landlord that such failure will be deemed to
constitute Landlord's approval and Landlord still fails to respond.
1.1 Landlord and Tenant agree that the General Contractor will be
selected through a competitive bid of the contractor's overhead, profit,
general conditions, insurance and proposed project team. Upon execution of
this Lease, Tenant and Landlord will mutually agree upon up to three (3)
prospective general contractors who will be invited to participate in the
bid/interview process. Tenant will manage the contractor selection process and
Landlord will participate in interviews and the final contractor selection. All
such contractors (including the design-build contractors referenced above) will
bid (and all contracts will be let) on a fixed price or guaranteed maximum
price basis.
Upon selection of the General Contractor as provided above, Tenant will
enter into a construction contract with the selected General Contractor on a
fixed price or guaranteed maximum price basis. The selected General Contractor
will then manage the selection of the mechanical and electrical design-build
subcontractors, subject to Landlord's approval. The General Contractor and
design-build subcontractors will all agree in their construction agreements
that they will have no lien rights against Landlord's interest in the subject
property, but only in Tenant's leasehold interest therein.
1.2 Upon approval of the Plans (and any other construction documents) by
Tenant and Landlord, Tenant will cause the General Contractor to competitively
bid all of the work contained in the Plans (and other construction documents)
and to obtain a minimum of three bids for all trades. Landlord will participate
in the evaluation of all subcontractors bids and the selection of all
subcontractors to complete the work covered under Section 12 of Addendum 1 to
the Lease.
If the total cost of construction of the Tenant's Work (excluding work
covered under Section 12 of Addendum 1 to the Lease), together with all other
costs relating to the Tenant's Work which can be charged against the Allowance
(as defined below) pursuant to this Work Letter Agreement (the "Final Tenant
Improvement Cost"), is more than the Allowance, Tenant will either:
(i) Agree in writing to pay the amount by which the Tenant's Final
Tenant Improvement Cost exceed the Allowance, or,
(ii) Revise the Plans in order to assure that the Final Tenant
Occupancy Cost is acceptable to Tenant (and if greater than the
Allowance, then Tenant will also agree in writing to pay such
excess, as provided herein). Once such Plans have been approved
by Landlord, Tenant shall obtain fixed-price or guaranteed
maximum price bids for the Tenant's Work from three reputable,
licensed general contractors reasonably satisfactory to Landlord.
In addition, Tenant shall obtain separate, fixed-price bids from
such contractors for any work which is described in Paragraph 12
of Addendum No. 1 to this Lease which Landlord is required to pay
for pursuant to such Addendum. Once such bids are obtained,
Tenant shall submit such bids to Landlord. If none of the bids
obtained by Tenant are approved by Landlord, Tenant shall cause
the Tenant's Work to be re-bid (either by the same general
contractors or by other general contractors approved by
Landlord). If only one such bid is approved by Landlord, then
Tenant shall engage the contractor whose bid was approved by
Landlord to perform the Tenant's Work. If more than one bid is
approved, then Tenant shall select from among the approved bids.
The contractor selected to perform the Tenant's Work in
accordance with this paragraph is hereinafter referred to as the
"Tenant's Contractor."
SECTION 2. ESTIMATED DELIVERY DATE. Landlord shall make reasonable
efforts to cause the Premises to be delivered to Tenant in broom clean condition
on or before August 1, 1996, subject to delays from causes beyond the reasonable
control of Landlord such as, but not limited to, acts of God, strikes, work
stoppages, unavailability of or delay in receiving labor or materials, defaults
by contractors or subcontractors, weather conditions, fire or other casualty, or
action of governmental authorities.
SECTION 3. EFFECT OF DELAY ON LEASE TERM. In the event the Premises are
not delivered to Tenant by August 1, 1996, this Lease shall remain in full force
and effect except that the Commencement Date shall be delayed on a day-for-day
basis for the actual number of days of delay in delivery of the Premises. In the
event the Premises are not delivered to Tenant by August 1, 1996, this Lease
shall not, except as provided in Section 10, below, be affected or modified and
shall remain in full force and effect and Landlord shall not be liable for any
damage on account of any delay in delivery.
SECTION 4. TENANT INSTALLATION PERIOD. Landlord has notified Tenant that
it anticipates delivering the Premises to Tenant on or about August 1, 1996, in
order to allow Tenant an approximate 90-day
Landlord__________ Tenant___________
2
<PAGE> 31
period in which to perform and complete the Tenant's Work (The "Tenant
Installation Period"). During the Tenant Installation Period, if (a) Tenant's
Contractor has been approved by Landlord, along with Tenant's Contractor's bid
for the Tenant's Work, (b) the Plans have been approved by Landlord, and (c)
Tenant has obtained all necessary governmental permits and approvals, Tenant
shall have the right and the obligation, promptly and in a good and workmanlike
manner, at Tenant's sole cost and expense (subject to Tenant's rights under
Section 8, below), to cause the Tenant's Work to be completed by Tenant's
Contractor. During the Tenant Installation Period, Tenant covenants and agrees
that Tenant shall be obligated under the provisions of the Lease even though
the Lease Term shall not commence until the Commencement Date.
SECTION 5. COORDINATION OF CONSTRUCTION. Tenant covenants and agrees that
Tenant and Tenant's Contractor (which for purposes of this Exhibit shall
include all subcontractors) shall not destroy or in any way damage any portion
of the Project exclusive of demolition work expressly approved by Landlord. All
of Tenant's Work shall be performed in strict accordance with the approved
Plans. Any deviation from such Plans (other than deviations which are minor in
nature and which do not affect any of the matters described in clauses (i)
through (v) of Section 1, above) will require Landlord's prior written approval.
SECTION 6. NO LANDLORD LIABILITY. Landlord will not be liable for any
loss, cost, damage, or expense incurred or claimed by Tenant or any other
person or party on account of the construction or installation of the Tenant's
Work or any other person or party on account of the construction or
installation of the Tenant's Work or any other improvements to the Premises
made by Tenant. Tenant hereby acknowledges and agrees that the compliance of
the Tenant's Work, or other Alterations made to the Premises by the Tenant and
any plans therefore, with all applicable governmental laws, codes, and
regulations shall be solely Tenant's responsibility. Landlord assumes no
liability or responsibility resulting from the failure of the Tenant to comply
with all applicable governmental laws, codes and regulations or for any defect
in any of the Tenant's Work or other Alteration to the Premises made by Tenant.
Landlord's review or approval of the Plans, or any other action taken by
Landlord pursuant hereto, shall not make Landlord responsible for any failure
of such Plans to meet Tenant's needs or comply with applicable laws, codes, and
regulations. Tenant agrees to indemnify, defend, and hold harmless Landlord
from any loss, cost, damage or expense incurred, claimed, asserted, or arising
in connection with any of the foregoing.
SECTION 7. CONSTRUCTION OF TENANT IMPROVEMENT BY TENANT'S CONTRACTOR.
After the Plans for the Tenant's Work have been approved by Landlord, Tenant,
and the local governing agencies, Tenant shall enter into a construction
contract reasonably satisfactory to Landlord with Tenant's Contractor. Landlord
shall the right to post a notice of non-responsibility at a prominent location
within Tenant's Premises. It shall be the responsibility of Tenant to enforce
the following requirements of Tenant's Contractor.
7.1 Tenant's Contractor shall be responsible for the repair, replacement,
or clean-up of any damage to the Project.
7.2 Tenant and Tenant's Contractor are responsible for compliance with
all applicable codes and regulations of duly constituted authorities having
jurisdiction as far as the performance of the Tenant's Work and completed
improvements are concerned for all work performed by Tenant or Tenant's
Contractor and all applicable safely regulations established by the Landlord for
the Center, and Tenant further agrees to save and hold Landlord harmless for
said work. Prior to commencement of construction, Tenant shall submit to
Landlord evidence of insurance as required by this Lease and evidence of
insurance of Tenant's Contractor.
7.3 Tenant's Contractor or subcontractors shall not post signs on any part
of the Center on the Premises.
7.4 Tenant shall be responsible for and shall obtain and record a Notice of
Completion promptly following completion of Tenant's Work.
7.5 Landlord may require that, prior to the commencement of construction,
Tenant shall obtain or cause its contractor to obtain payment and performance
bonds covering the faithful performance of the contract for the construction of
the Tenant's Work and the payment of all obligations arising thereunder. Such
bonds shall be for the mutual benefit of both Landlord and Tenant.
7.6 Tenant shall provide to Landlord a copy of the fully executed
construction contract, including all addendum and a line item breakdown by
trade thereto, between Tenant and its contractor of the Tenant's work.
Landlord Tenant
---- ----
3
<PAGE> 32
7.7 Permits must be obtained and all necessary calculations, including,
but not limited to, those required under Title 24, must be submitted to the
local governing agencies for all work to be performed by Tenant or Tenant's
Contractor in the Premises.
7.8 The Tenant's Work shall be completed by Tenant in strict accordance
with the Plans (and any modifications approved by Landlord) in a good and
workmanlike manner, and using only new materials. Tenant shall ensure that the
Tenant's Work is completed without the filing of any mechanic's or materialmen's
liens against the Project and shall indemnify and defend Landlord against the
same.
SECTION 8. CONSTRUCTION ADVANCE. The Tenant's Work is to be constructed
by Tenant's Contractor in accordance with this Exhibit "C". Landlord shall pay
to Tenant's Contractor (or advance to Tenant for payment to Tenant's Contractor)
Twelve Dollars per square foot of the Premises for a total of $777,600.00 as a
tenant improvement allowance (the "Allowance"). No portion of the Allowance will
be payable by Landlord until Tenant has first paid (and Landlord has received
evidence of such payment) that portion of the Final Tenant Improvement Cost
which exceeds the amount of the Allowance (the "Excess Cost"). Once the Excess
Cost has been paid by Tenant, the Allowance will be disbursed as follows:
i. Tenant will cause the Tenant's Contractor to provide a payment
application no later than the 5th day of each month for work that
is completed the preceding month. Tenant's Contractor's payment
application will stipulate the percentage of completion of work by
each trade on a line-item-line-item basis. A retention totaling
10% of the total payment application will be withheld on each
payment application.
ii. Space Planner will review and approve Tenant's Contractor's
payment application and will submit to Tenant for processing.
iii. Following payment of the Excess Cost, Tenant will submit the
approved payment application to Landlord for payment. Landlord
will have no obligation to pay any amount in excess of the
Allowance, and any such excess cost will be Tenant's sole
responsibility. Landlord will (if it approves of such payment
application) make payment to Tenant within 15 business days of
receipt of the approved payment application along with all
appropriate back-up documentation (including releases) requested
by Landlord.
iv. Tenant shall be responsible to obtain unconditional lien releases
upon progress payments for all payments that are made throughout
the course of the project, as well as conditional lien releases to
accompany each payment application.
v. The final payment from Landlord to Tenant that covers the billing
for all retention amounts withheld during the project will be made
subject to the satisfaction of the following conditions:
8.1 Contractor has substantially completed the Tenant's Work in accordance
with the approved Plans.
8.2 A notice of completion has been properly recorded for Tenant's Work,
and 35 days have expired since the timely recordation of such notice of
completion without the filing of any liens.
8.3 Contractor has submitted a complete set of "as built" plans and
specifications to Landlord.
8.4 Tenant has provided to Landlord copies of all insurance certificates
required under this Lease.
8.5 A final certificate of occupancy (conditional or unconditional) for
the Premises has been issued by the appropriate governmental agency.
8.6 Tenant has provided Landlord with all material and labor lien releases
from Tenant's Contractor and subcontractors. Said lien releases must total at
least the amount of the Allowance plus any Excess Cost paid by Tenant.
8.7 Tenant has provided Landlord copies of all construction warranties and
guarantees in connection with construction of Tenant's Improvements.
8.8 Landlord has inspected and approved the Tenant's Work and believes
that the Tenant's Work has been performed in a good and workmanlike manner in
accordance with the approved Plans.
Landlord Tenant
---- ----
4
<PAGE> 33
Tenant's submittal of a final payment application to Landlord will
constitute Tenant's representation to Landlord that the Tenant's Work has been
completed in a good and workmanlike manner and in accordance with the approved
Plans.
SECTION 9. USE OF LANDLORD'S CONSTRUCTION ALLOWANCE.
9.1 The Allowance that Landlord agrees to contribute toward Tenant's Work
shall in no event be applied toward Tenant's consultants (including Tenant's
Representative), moving expenses, furniture, fixtures, furnishings, personal
property, signs or any monetary obligations of Tenant under this Lease. It is
intended to be used solely for the cost of the tenant improvements that shall
become the property of Landlord and shall remain upon and be surrendered with
the Premises, as a part thereof, at the end of the Term of this Lease.
9.2 Landlord's Allowance may be used only to pay (i) fees, permits, and
utility charges associated with the construction of the Tenant's Work, (ii)
fees payable to Tenant's architect and/or space planner for preparation of the
Plans and overseeing construction of the Tenant's Work, and (iii) the actual
hard construction costs, including low voltage cabling for voice and data
systems (labor and materials), associated with the performance of the Tenant's
Work.
SECTION 10. INITIAL COMMENCEMENT OF LEASE TERM. The Lease Term shall
commence November 15, 1996. Notwithstanding the foregoing, in the event
possession of the Premises is delivered to Tenant later than August 1, 1996, the
November 15 date provided for in clause (i), above, shall be extended by the
number of days beyond August 1 which elapse before the Premises are delivered to
Tenant. Landlord and Tenant shall execute an amendment to this Lease to reflect
the exact date of commencement of the Lease Term (the "Commencement Date") as
set forth herein; however, any failure to do so shall not affect the
Commencement Date. If the Commencement Date provided for by this Section is
different than the estimated Commencement Date set forth in Paragraph 2.4.1 of
the Lease, then (a) the Commencement Date provided for by this Section shall
control and (b) Paragraphs 2.4.1 and 2.4.2 of the Lease shall be deemed amended
accordingly.
Landlord Tenant
---- ----
5
<PAGE> 1
EXHIBIT 10.8
SUBLEASE
QUALCOMM INCORPORATED,
A DELAWARE CORPORATION
"SUBLESSEE"
AND
THE LIGHTSPAN PARTNERSHIP, INC.,
A CALIFORNIA CORPORATION
"SUBLESSOR"
DECEMBER 1, 1997
<PAGE> 2
SUBLEASE
1. PARTIES.
This Sublease, dated, for reference purposes only, December 1, 1997,
is made by and between QUALCOMM INCORPORATED, A DELAWARE CORPORATION (herein
called "Sublessee") and THE LIGHTSPAN PARTNERSHIP, INC. A CALIFORNIA
CORPORATION (herein called "Sublessor").
2. MASTER LEASE. Sublessor has previously executed that certain "Full
Service Modified Gross Lease" dated as of May 28, 1996 (the "Master Lease")
between Insurance Company of the West, as landlord and Sublessor, as tenant, a
copy of which is attached hereto as Exhibit B. The interest of Insurance
Company of the West as landlord has been transferred to CARR America ("Master
Lessor" herein). This Sublease is and shall at all times be subject to the
rights of Master Lessor under the Master Lease. The rights of Sublessee to
occupy and use the Subleased Premises under this Sublease shall be subject to
any restrictions and limitations on use set forth in the Master Lease.
Sublessee agrees that it shall not take any action, or use the Subleased
Premises in any way that will constitute a default under the Master Lease.
Sublessor, in turn, agrees to perform all of its obligations under the Master
Lease and to keep the Master Lease in full force and effect, and not to modify
or terminate the same, throughout the term of this Sublease, including any
options to extend, if so exercised by Sublessor; provided however, that
Sublessor shall not be in breach of this Section if the Master Lease is
terminated by Master Lessor through no fault of Sublessor. This Sublease shall
not be effective unless, within ten (10) days after the execution of this
Sublease by Sublessor and Sublessee, Master Lessor signs the consent attached
to this Sublease, thereby giving its consent to this subletting.
3. BASIC SUBLEASE PROVISIONS.
Certain basic provisions of this Sublease are set forth below. These
provisions are subject to the remaining terms and conditions of this Sublease.
3.1 Base Rent: $11,393.43 per month, or $1.3908 per square foot of
rentable area of the Subleased Premises per month (calculated as provided in
Section 3.6 below). If Sublessee exercises any option to extend the initial
term of this Sublease, then the Base Rent will be adjusted (on a per square
foot basis) at the same time and at the same amount per square foot of rentable
area as is set forth in Paragraph 1 of the Addendum to the Master Lease for the
adjustment of Sublessor's Basic Monthly Rent under the Master Lease.
3.2 (a) Commencement Date: January 7, 1998.
(b) Expiration Date: December 31, 1998, subject to extension as
provided in Paragraph 5 below.
3.3 Permitted Use: Office use.
3.4 Address for Notices to Sublessee:
Qualcomm Incorporated
6455 Lusk Boulevard
San Diego, California 92121
Attn: Vice President of Facilities
3.5 Address for Notices to Sublessor:
The Lightspan Partnership
10140 Campus Point Drive
San Diego, CA 92121
Attn: Teddi Tindall, Facilities Manager
3.6 Subleased Premises: Approximately 8,192 square feet of rentable
area located on the first floor of the building situated at 10140 Campus Point
Drive, San Diego, California. The Subleased Premises are more particularly
described in Exhibit A attached. The exact square footage of rentable area of
the Subleased Premises shall
<PAGE> 3
be mutually calculated by Sublessor and Sublessee using BOMA standards for a
multi-tenant office building and the Base Rent shall be computed based on such
result. In addition to the rentable area of the Subleased Premises, Sublessee
shall have use of the lobby and restrooms on the first floor and the "Common
Areas" described in the Master Lease. Sublessee and its employees,
representatives, visitors, licensees and invitees shall have the non-exclusive
use of the parking areas on a first come, first served basis.
3.7 The following Exhibits and Addenda are attached hereto and
incorporated herein: "A" (description of Subleased Premises, "B" (copy of Master
Lease).
4. SUBLEASED PREMISES.
Sublessor hereby Subleases to Sublessee and Sublessee Subleases from
Sublessor for the term, at the rental, and upon all of the conditions set forth
herein, the Subleased Premises more particularly described on Exhibit "A".
5. TERM.
5.1 INITIAL TERM. The initial term of this Sublease shall commence
on the Commencement Date as defined in Paragraph 3.2(a) and shall expire on the
Expiration Date set forth in Paragraph 3.2(b). If Sublessee occupies the
Subleased Premises prior to the Commencement Date, such occupancy shall be
subject to all the provisions hereof, such occupancy shall not advance the
termination date, and Sublessee shall pay rent for such period at the initial
monthly rate set forth in Section 3.1.
5.2 OPTIONS TO EXTEND. Sublessee shall have a series of options to
extend the term of this Sublease for a period of one year each ("One Year
Extensions"), and each such option for a One Year Extension may be exercised by
Sublessee throughout the "Initial Lease Term" as defined in the Master Lease.
Each such option to extend the Sublease term for a One Year Extension shall be
exercised by Sublessee's delivery of written notice thereof to Sublessor at
least thirty (30) days prior to the expiration of the then current term of this
Sublease, as the same may have been previously extended; provided that no
default or event of default then exists under this Sublease on the part of
Sublessee. In the event Sublessor elects to exercise its option to extend the
term of the Master Lease pursuant to Paragraph 3 of the Addendum No. 1 to the
Master Lease, then Sublessee's right to exercise additional options for One Year
Extensions shall continue through the five year "extension term" provided in the
Master Lease. Notwithstanding the foregoing, if Sublessor requires use of the
Subleased Premises for Sublessor's own business operations (and not for
assignment or sublease to another person or entity), Sublessor may cancel
Sublessee's option to extend the Lease term beyond the first One Year Extension,
provided that (i) Sublessor delivers written notice of such cancellation to
Sublessee at least one hundred twenty (120) days prior to the expiration of the
then current term of this Sublease, and (ii) Sublessor occupies the Subleased
Premises for its own business use within sixty days of the expiration of the
term of this Sublease and continues such use for a period of at least one year.
Any such cancellation shall be effective as of the expiration of the then
current term of this Sublease and shall only apply to options to extend
following the first One Year Extension; provided that if Sublessor cancels any
extension term pursuant to the terms of this Section 5.2, Sublessee shall have
no further option to extend the term of this Sublease. Rent payable for each One
Year Extension occurring during the Initial Lease Term of the Master Lease will
be calculated as set forth in Paragraph 3.1 above. With respect to any One Year
Extensions exercised by Sublessee during the five year "extended term" of the
Master Lease, the Base Rent payable during each such One Year Extension shall be
equal to Sublessee's Share (as defined below) of the Basic Monthly Rent payable
by Sublessor under the Master Lease during such one year period of the extended
term. All other terms and provisions of this Sublease shall apply to such One
Year Extensions. If the "Initial Lease Term" (if Sublessor does not extend the
term of the Master Lease) or the "extended term" described in the Master Lease
expires on a date prior to the last day of a calendar year, then any One Year
Extension then in effect upon such expiration of the Master Lease shall
terminate concurrently with the expiration of the term of the Master Lease.
Nothing contained herein shall be construed in any way to obligate Sublessor to
extend the terms of the Master Lease or to exercise any options under the Master
Lease.
6. RENT.
6.1 BASE RENT. Sublessee agrees to pay Sublessor as Base Rent for
the Subleased Premises the sum set forth in Section 3.1. Base Rent shall be paid
in advance on the first day of each and every calendar month during the term of
this Sublease.
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<PAGE> 4
6.2 ADDITIONAL RENT. In addition to the Base Rent, Sublessee shall
pay to Sublessor, concurrently with the payment of monthly Base Rent,
Sublessee's Share of (i) Tenant's Monthly Payment as set forth in Paragraph 8.3
of the Master Lease, and (ii) Tenant's Monthly Tax Payment as set forth in
Paragraph 10.1 of the Master Lease (together, the "Additional Rent"). In no
event shall the Additional Rent payable by Sublessee exceed five (5) cents per
square foot of rentable area per month for the calendar year 1998. Thereafter,
if Sublessee exercises its options to extend the initial term of this Sublease,
the Additional Rent may be adjusted to reflect adjustments in Tenant's Monthly
Payment and Tenant's Monthly Tax Payment under the Master Lease; provided,
however, in no event shall the Additional Rent payable by Sublessee in any
calendar year exceed 106% of the Additional Rent payable by Sublessee during
the immediately preceding calendar year. If the actual "Increased Lease
Expenses" and "Increased Taxes" payable by Sublessor under Paragraphs 8.3 and
10.2 of the Master Lease are less than the estimated payments made by
Sublessor, then Sublessee shall be entitled to receive a refund from Sublessor
for any Additional Rent paid by Sublessee which exceeds Sublessee's Share of
the actual expenses for such calendar year. As used herein, the term
"Sublessee's Share" means a percentage, the numerator of which is the rentable
area of the Subleased Premises, and the denominator of which is 64,800 square
feet.
6.3 RENT. Base Rent, Additional Rent and other rental items
specified in this Sublease shall together be denominated "Rent." Rent shall be
paid to Sublessor in lawful money of the United States of America, at the
office of Sublessor as set forth in Paragraph 3.5 or to such other person or at
such other place as Sublessor may from time to time designate in writing.
7. USE.
7.1 USE. The Subleased Premises shall be used and occupied only for
the purpose set forth in Paragraph 3.3 above and for no other purpose.
7.2 COMPLIANCE WITH LAW. Sublessee shall not use the Subleased
Premises in any manner that will tend to create waste or a nuisance or shall
constitute any violation of law. Notwithstanding the foregoing, Sublessee shall
not be required to make or pay for any improvements to the Subleased Premises
or the surrounding area to comply with any law or regulation, unless such
required improvement relates solely to the type of business being conducted in
the Subleased Premises by Sublessee. Sublessee shall be responsible for
ensuring that all tenant improvements made to the Subleased Premises by
Sublessee comply with Americans with Disability Act ("ADA") requirements, but
Sublessee shall not be responsible for costs associated with compliance with
ADA or other legal or regulatory requirements for areas outside the interior
space of the Subleased Premises.
7.3 CONDITION OF SUBLEASED PREMISES. Sublessor shall deliver the
Subleased Premises to Sublessee in good condition and repair, free of all
debris, and with the existing cubicles and other improvements in the Subleased
Premises in place, except that the smaller work stations in Room 104 of the
Subleased Premises will be removed by Sublessee. Sublessee will be responsible,
at its cost, for separating the Subleased Premises with doors from the
remainder of the space ("Sublessor's Remaining Space") leased by Sublessor
under the Master Lease, and Sublessee will install drywall or a similar
material over the windows looking into the Subleased Premises from Sublessor's
Remaining Space, Sublessor and Sublessee will split the cost, on a 50/50 basis,
for installing card readers in the stairwells of floors 2, 3 and 4. Sublessee
also shall move Sublessor's furniture and equipment from the Subleased Premises
and into Sublessor's Remaining Space, after Sublessor has prepared same for
moving. In addition, Sublessee will rearrange Sublessor's cubicles in
Sublessor's Remaining Space pursuant to a reasonable plan to be mutually agreed
upon by Sublessor and Sublessee. To the best of Sublessor's knowledge,
Sublessor warrants to Sublessee that the plumbing, lighting, air conditioning,
heating and other systems in the Subleased Premises shall be in good operating
condition on the Commencement Date. In the event that it is determined that
this warranty has been violated, then Sublessor shall use its best efforts to
cause Master Lessor to rectify such violation. If Sublessee fails to give
Sublessor notice of any such violation within ninety (90) days after the
Commencement Date, then the Subleased Premises shall be deemed to be in good
condition and repair, with the exception of any latent defects which Sublessor
shall use its best efforts to cause Master Lessor to remedy promptly after
receipt of notice from Sublessee; provided, however, that Sublessor shall in no
event be required to incur (unless Sublessee agrees in writing to reimburse
Sublessor for same) material costs to third parties to cause Master Lessor to
perform Master Lessor's obligations under this Section 7.3.
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<PAGE> 5
8. MAINTENANCE, REPAIRS, ALTERATIONS
8.1 SUBLESSOR'S OBLIGATIONS. Sublessor shall takes such reasonable actions
as are necessary to cause, for the benefit of Sublessee, the Master Lessor to
perform all of Master Lessor's obligations under the Master Lease, including,
without limitation, those maintenance and repair obligations set forth in
Paragraph 12.2 of the Master Lease; provided, however, that Sublessor shall in
no event be required to incur (unless Sublessee agrees in writing to reimburse
Sublessor for same) material costs to third parties to cause Master Lessor to
perform Master Lessor's obligations under the Master Lease. If for any reason
Sublessor is unable to cause Master Lessor to perform any obligation within
thirty days of Sublessee's written demand therefore, Sublessee may terminate
this Sublease by delivery of written notice thereof to Sublessor.
8.2 SUBLESSEE'S OBLIGATIONS. Except as provided elsewhere in this
Sublease, including, without limitation, Section 7.1 above, and except for
damage or destruction to the Subleased Premises from casualty or as a result of
condemnation, Sublessee, at Sublessee's expense, shall perform such maintenance
and repair obligations, with respect to the interior of the Subleased Premises
only, as are so required to be performed by Sublessor pursuant to Paragraph 12.1
of the Master Lease. On the last day of the term hereof, or on any sooner
termination, Sublessee shall surrender the Subleased Premises to Sublessor in
the same condition as received, ordinary wear and tear and casualty excepted,
clean and free of debris. Sublessee shall remove any alterations installed by
Sublessee in the Subleased Premises. Notwithstanding the foregoing, Sublessee
may elect to leave any alterations in the Subleased Premises if Sublessor has
previously agreed in writing that such specific alterations may be so left by
Sublessee following the expiration or earlier termination of this Sublease.
8.3 ALTERATIONS AND ADDITIONS.
(a) Sublessee shall not, without Sublessor's prior written consent,
make any alterations, improvements, additions or installations in, on or about
the Subleased Premises exceeding twenty-five thousand dollars in cost in any
calendar year. Sublessor shall not unreasonably withhold its consent to any
alteration. To the extent the Master Lease requires that the consent of Master
Lessor be obtained, Sublessee also shall be so required to obtain the consent of
Master Lessor and Sublessor shall reasonably cooperate with Sublessee in
obtaining such consent; provided, however, that Sublessor shall in no event be
required to incur material costs to third parties to cause Master Lessor to
provide its consent as required under the Master Lease.
(b) Any alterations, improvements, additions or installations in or
about the Subleased Premises requiring Sublessor's consent shall be presented to
Sublessor in written form with proposed detailed plans. If Sublessor shall give
its consent, the consent shall be deemed conditioned upon Sublessee acquiring
any required permit to do so from appropriate governmental agencies, the
furnishing of a copy thereof to Sublessor prior to the commencement of the work
and the compliance by Sublessee of all conditions of said permit in a prompt and
expeditious manner.
(c) Sublessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Sublessee at or for use in
the Subleased Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Subleased Premises, or any interest therein.
Sublessee shall give Sublessor and Master Lessor not less than ten (10) days'
notice prior to the commencement of any work in the Subleased Premises, and
Sublessor and Master Lessor shall have the right to post notices of
non-responsibility in or on the Subleased Premises or the Building as provided
by law.
9. INSURANCE.
9.1 LIABILITY INSURANCE -- SUBLESSEE. Sublessee shall, at Sublessee's
expense, obtain and keep in force during the term of this Sublease a policy of
Combined Single Limit Bodily Injury and Property Damage insurance insuring
Sublessee, Sublessor and Master Lessor against any liability arising out of the
use or occupancy of the Subleased Premises by Sublessee. Such insurance shall be
in an amount not less than $2,000,000 per occurrence.
9.2 PROPERTY INSURANCE. Sublessee shall obtain and keep in force
during the term of this Sublease a policy or policies of property insurance
covering loss or damage to Sublessee's personal property in the amount of the
full replacement value thereof, as the same may exist from time to time,
providing protection against
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<PAGE> 6
perils included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils ("all risk," as such term is used
in the insurance industry).
9.3 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least equal to that
required under Paragraph 20 of the Master Lease. Sublessee shall deliver to
Sublessor certificates evidencing the existence and amounts of such insurance
prior to the Commencement Date of this Sublease. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Sublessor. Sublessee shall, at
least thirty (30) days prior to the expiration of such policies, furnish
Sublessor with renewals or "binders" thereof. Notwithstanding anything in this
Article 9 to the contrary, to the extent the Master Lease requires Sublessor to
carry insurance with greater liability limits or of broader scope than the
insurance described herein, then Sublessee also shall carry such insurance with
respect to the Subleased Premises.
9.4 WAIVER OF SUBROGATION. Sublessor and Sublessee each hereby
releases and relieves the other, and waives its entire right of recovery against
the other for loss or damage arising out of or incident to the perils insured
against or required to be insured against which perils occur in, on or about
the Subleased Premises whether due to the negligence of Sublessor or Sublessee
or their respective agents, employee, contractors, licensees and/or invitees.
Each party shall cause each insurance policy obtained by it hereunder to
provide that the insurance company waives all right of recovery by way of
subrogation against the other party in connection with any loss or damage
covered by any policy. To the extent the insurance proceeds are sufficient to
cover any such loss or damage, neither Sublessor nor Sublessee shall be liable
for any loss or damage caused by fire or any of the risks insured against
under any insurance policy required by this Sublease.
10. TAXES.
10.1 REAL PROPERTY TAXES. Pursuant to Paragraph 6.2 above, and
subject to the limitations set forth therein, Sublessee shall pay to Sublessor
Sublessee's Share of the "Tenant's Monthly Tax Payments" as set forth in
Paragraph 10.2 of the Master Lease. Sublessee's Share of such Tenant's Monthly
Tax Payment shall be prorated for any period for which such taxes were paid
which is applicable to any period occurring prior to the Commencement Date or
following the Expiration Date.
10.2 PERSONAL PROPERTY TAXES
(a) Sublessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Sublessee contained in or on the Subleased Premises.
(b) If any of Sublessee's said personal property shall be
assessed with Master Lessor's real property, or Sublessor's property, Sublessee
shall pay to Sublessor the taxes attributable to Sublessee within thirty (30)
days after receipt of a written statement from Sublessor setting forth the
taxes applicable to Sublessee's property.
10.3 LICENSES AND PERMITS FOR SUBLESSEE'S BUSINESS. Sublessee
shall pay any fees imposed by law for licenses or permits for any business or
activities of Sublessee upon the Subleased Premises or under this Sublease.
11. SERVICES.
Sublessor shall use its best efforts, for the benefit of
Sublessee, to cause Master Lessor to perform Master Lessor's obligations under
the Master Lease, including, without limitation, to provide those services to
the Common Areas and the Subleased Premises as are set forth in Paragraph 9 of
the Master Lease; provided that Sublessor shall not be liable to Sublessee for
Master Lessor's failure to perform obligations under the Master Lease so long
as Sublessor has used its best efforts to cause Master Lessor to so perform.
From time to time, Sublessee shall, within thirty days of Sublessor's demand,
reimburse Sublessor for Sublessee's Share of the cost actually incurred by
Sublessor for electrical service supplied during the term of this Sublease to
the Premises leased under the Master Lease.
5
<PAGE> 7
12. ASSIGNMENT OR SUBLETTING.
Sublessee shall not sell, assign, sublet or transfer (collectively,
"Transfer") all or any part of Sublessee's interest in this Sublease or the
Subleased Premises, without the prior written consent of Sublessor in each
instance, which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, Sublessee may, without the consent of Sublessor, Transfer this
Sublease to any person or business entity controlling, controlled by, or under
common control with, Sublessee, or in which Sublessee holds a controlling
partnership or other controlling ownership interest. A consent to one
assignment, subletting, occupation or use by any other person shall not be
deemed to be a consent to any subsequent assignment, subletting, occupation or
use by another person. Consent to any such assignment or subletting shall in no
way relieve Sublessee of any liability under this Sublease. Any such assignment
or subletting without such consent shall be void, and shall, at the option of
the Sublessor, constitute a default under the terms of this Sublease. If any
Transfer requires the consent of Master Lessor under the Master Lease,
Sublessee shall first obtain Master Lessor's consent to such Transfer and
Sublessor shall reasonably cooperate with Sublessee in obtaining such consent;
provided, however, that Sublessor shall in no event be required to incur
material costs to third parties to cause Master Lessor to provide its consent
as required under the Master Lease.
13. DEFAULT; REMEDIES.
13.1 DEFAULT. The occurrence of any one or more of the following
events shall constitute a material default of this Sublease by Sublessee:
(a) The failure by Sublessee to make any payment of rent or any
other payment required to be made by Sublessee hereunder, as and when due,
where such failure shall continue for a period of ten (10) days after written
notice thereof from Sublessor to Sublessee.
(b) Except as otherwise provided in this Sublease, the failure by
Sublessee to observe or perform any of the covenants, conditions or provisions
of this Sublease to be observed or performed by Sublessee, other than described
in subparagraph (a) above, where such failure shall continue for a period of
thirty (30) days after written notice thereof from Sublessor to Sublessee;
provided, however, that if such default is not reasonably subject to cure
within such thirty (30) day period, then Sublessee shall have such additional
reasonable time necessary to complete such cure.
(c) Notwithstanding the foregoing, to the extent that
Sublessee's use of, or operations in the Subleased Premises constitute a
default by Sublessor under the Master Lease, then such event shall constitute a
default by Sublessee hereunder. In addition, to the extent that any default by
Sublessee under this Sublease is of the kind or nature that would also
constitute a default by Sublessor under the Master Lease, then any applicable
cure periods set forth in this Section 13.1 (commencing on the date of
Sublessee's receipt of written notice of such default), shall not exceed the
time period granted to Sublessor under the Master Lease for the cure of the
same default.
13.2 REMEDIES. In the event of a default of this Sublease by Sublessee
following expiration of the applicable cure period, with or without further
notice or demand, and without limiting Sublessor in the exercise of any right
or remedy which Sublessor may have by reason of such default, Sublessor may (a)
exercise any remedies granted to Master Lessor under Section 26 of the Master
Lease, and/or (b) terminate Sublessee's right to possession of the Subleased
Premises by any lawful means, in which case this Sublease and the term hereof
shall terminate and Sublessee shall immediately surrender possession of the
Subleased Premises of Sublessor.
13.3 DEFAULT BY SUBLESSOR. Sublessor shall not be in default unless
Sublessor fails to perform obligations required of Sublessor within a
reasonable time, but in no event later than thirty (30) days after written
notice by Sublessee to Sublessor; provided, however, that if the nature of
Sublessor's obligation is such that more than thirty (30) days are required for
performance, then Sublessor shall not be in default if Sublessor commences
performance within such thirty (30) day period and thereafter diligently
prosecutes the same to completion. In the event of any default by Sublessor,
Sublessee shall have all rights and remedies available to Sublessee in law and
equity. In addition, in the event of a default by Sublessor, Sublessee may cure
such default and charge Sublessor for the cost thereof, or offset such cost
against future rent.
6
<PAGE> 8
14. SEVERABILITY.
The invalidity of any provision of this Sublease as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
15. RIGHT OF FIRST REFUSAL.
Sublessor shall not, at any time prior to the expiration of the term
of this Sublease, or any extension thereof, assign, sublet or otherwise transfer
all or any portion of Sublessor's Remaining Space or any rights of Sublessor
under the Master Lease, or any interest therein (collectively, a "Sublessor
Transfer"), without first giving written notice thereof to Sublessee, which
notice is hereinafter referred to as "Notice of Transfer." The Notice of
Transfer shall include the exact and complete terms of the proposed Sublessor
Transfer and shall have attached thereto a photocopy of bona fide offer and
counteroffer, if any, duly executed by both Sublessor and the prospective
assignee, sublessee or transferee.
For a period of ten (10) business days after receipt by Sublessee of
the Notice of Sublessor Transfer, Sublessee shall have the right to give written
notice to Sublessor of Sublessee's exercise of Sublessee's right to sublet or
acquire the Master Lease, or the Remaining Space or portion thereof or interest
therein, on the same terms, price, rent and conditions as set forth in the
Notice of Sublessor Transfer. In the event that Sublessor does not receive
written notice of Sublessee's exercise of the right herein granted within said
twenty (20) day period, there shall be a conclusive presumption that Sublessee
has elected not to exercise Sublessee's right hereunder, and Sublessor may
complete the Sublessor Transfer, on the same terms set forth in the Notice of
Sublessor Transfer.
In the event that Sublessee declines to exercise its right of first
refusal after receipt of the Notice of Sublessor Transfer, and, thereafter,
Sublessor and the prospective purchaser modify any of the terms or conditions of
such Sublessor Transfer, or in the event that the Sublessor Transfer is not
consummated within 160 days of the date of the Notice of Sublessor Transfer,
then Sublessee's right of first refusal shall reapply to said transaction as of
the occurrence of the aforementioned events.
16. TIME OF ESSENCE.
Time is of the essence with respect to the obligations to be performed
under this Sublease.
17. NOTICES.
Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail, and if given
personally or by mail, shall be deemed sufficiently given if addressed to
Sublessee or to Sublessor at the address noted in the Basic Sublease Provisions
set forth in Paragraph 3 above. Either party may by notice to the other specify
a different address for notice purposes. A copy of all notices required or
permitted to be given to Sublessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Sublessor may from time to time
hereafter designate by notice to Sublessee.
18. BINDING EFFECT; CHOICE OF LAW.
Subject of any provisions hereof restricting assignment or subletting
by Sublessee, this Sublease shall bind the parties, their personal
representatives, successors and assigns. This Sublease shall be governed by the
laws of the State where the Subleased Premises are located.
19. ATTORNEY'S FEES.
In the event of any litigation between Sublessee and Sublessor to
enforce any provision of this Sublease or otherwise with respect to the subject
matter hereof, the unsuccessful party in such litigation shall pay to the
successful party all costs and expenses, including reasonable attorneys' fees
and court costs, incurred therein by the successful party. Such fees shall
include, without limitation, any fees and costs incurred in connection with any
bankruptcy or other similar proceeding.
7
<PAGE> 9
20. SIGNS.
Upon obtaining Sublessor's prior written consent, which will not be
unreasonably withheld, Sublessee may place signs upon the Subleased Premises,
so long as Sublessee complies with all requirements of applicable law and
obtains any consent required of Master Lessor with respect thereto.
21. BROKERS.
Sublessor and Sublessee each represents and warrants that it has had no
dealings with any broker concerning this Sublease, and that it knows of no
person who is or might be entitled to a commission, finder's fee or other such
payment in connection herewith.
22. SUCCESSORS AND ASSIGNS.
All the covenants, conditions and provisions of this Sublease shall be
binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns, subject at
all times, however, to all agreements and restrictions contained in the Master
Lease and in this Sublease respecting assignments, sublettings and other
transfers of rights and sharings of the Subleased Premises.
"SUBLESSEE" "SUBLESSOR"
QUALCOMM INCORPORATED, a Delaware THE LIGHTSPAN PARTNERSHIP, INC., a
corporation California corporation
By: /s/ T. C. Stafford By: /s/ M. Hays
------------------------------ ------------------------------
Its: VP Facilities Its: VP Finance
------------------------------ ------------------------------
By: By:
------------------------------ ------------------------------
Its: Its:
------------------------------ ------------------------------
Executed on Jan. 7 , 1998. Executed on 1/7 , 1998.
---------------- ----------------
8
<PAGE> 10
CONSENT TO SUBLEASE
THE UNDERSIGNED MASTER LESSOR of 10140 Campus Point Drive, San Diego,
California pursuant to that certain "Full Service Modified Gross Lease" dated
as of May 28, 1996 (the "Master Lease") between Insurance Company of the West,
predecessor in interest to the undersigned, and The Lightspan Partnership, Inc.
("Sublessor") hereby consents to the subletting of a portion of the Premises
described in the Master Lease to Qualcomm Incorporated ("Sublessee") pursuant
to the terms of that certain Sublease dated as of December 1, 1997, to which
this form of Consent is attached.
Nothing in this Consent shall be deemed to release Sublessor from any of
its obligations under the Master Lease or to relieve Sublessor from its
obligation to obtain the consent of the undersigned to any further subletting
of the Premises, if so required pursuant to the provisions of the Master Lease.
CARR AMERICA
By:
----------------------------------
Its:
----------------------------------
By:
----------------------------------
Its:
----------------------------------
9
<PAGE> 11
[EXHIBIT A -- FIRST FLOOR SPACE PLAN]
<PAGE> 12
CONSENT BY LANDLORD TO SUBLEASE
The undersigned, as Landlord under that certain Lease dated May 28, 1996,
with The Lightspan Partnership, Incorporated ("Sublandlord") for certain
premises at 10140 Campus Pointe Drive in San Diego, CA (the "Master Lease"),
hereby consents to the entering into of the foregoing Sublease dated December
1, 1997 ("Sublease") between Sublandlord, as sublessor, and QualComm,
Incorporated, a Delaware Corporation, as subtenant ("Subtenant"), upon the
express understandings and conditions that:
1. Landlord neither approves nor disapproves the terms, conditions and
agreements contained in the Sublease (all of which shall be subordinate and
subject at all times to the terms, covenants and conditions of the Master
Lease) and assumes no liability or obligation of any kind whatsoever on
account of anything contained in the Sublease;
2. By executing this consent, Landlord shall not be deemed to have waived any
rights under the Master Lease nor shall Landlord be deemed to have waived
Sublandlord's obligations to obtain any required consents under the Master
Lease (other than consent to the Sublease itself);
3. Notwithstanding anything in the Sublease to the contrary, Sublandlord shall
be and continue to remain liable for the payment of rent and the full and
prompt performance of all of the obligations of Tenant under and as set
forth in the Master Lease;
4. Nothing contained in the Sublease shall be taken or construed to in any way
modify, alter, waive or affect any of the terms, covenants or conditions
contained in the Master Lease, or be deemed to grant Subtenant any privity
of contract with Landlord, or require Landlord to accept any payments from
Subtenant on behalf of Sublandlord;
5. The Sublease shall be deemed and agreed to be a sublease only and not an
assignment and there shall be no further subletting or assignment of all or
any portion of the premises demised under the Master Lease (including the
premises demised by the foregoing Sublease) except in accordance with the
terms and conditions of the Master Lease;
6. If Landlord terminates the Master Lease as a result of a default by
Sublandlord thereunder or the Master Lease terminates for any other reason,
the Sublease shall automatically terminate concurrently therewith unless
Landlord elects in writing, in its sole and absolute discretion and without
obligation, to keep the Sublease in full force and effect in which case the
Sublease shall become and be deemed to be a direct lease between Landlord
and Subtenant;
7. Sublandlord and Subtenant acknowledge and agree that in the event
Sublandlord or Landlord elects to terminate the Master Lease pursuant to
the terms thereof, Landlord shall have no responsibility, liability or
obligation to Subtenant, and the Sublease shall terminate except as
expressly provided in Section 6 above;
8. Notwithstanding anything to the contrary set forth in the Sublease, by
entering into the foregoing Sublease, Sublandlord and Subtenant agree to
each of the terms and conditions
<PAGE> 13
of this Consent, and in the event of any conflict between the terms of
the Sublease and this Consent, the terms of this Consent shall
control;
9. This Consent may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an
original, and all of which counterparts taken together shall
constitute but one and the same instrument. Signature pages may be
detached from the counterparts and attached to a single copy of the
applicable document to physically form one document.
10. This Consent shall be of no force and effect unless Landlord receives
duly executed originals of this Consent from both Sublandlord and
Subtenant on or before 5:00 pm Pacific time on Friday, January 23,
1998.
LANDLORD
CarrAmerica Realty Corporation
By: Phillip Mertz
--------------------
Name:
--------------------
Title: Director
--------------------
Dated:
--------------------
ACCEPTED AND AGREED:
SUBLANDLORD
LIGHTSPAN
- --------------------------
a
- --------------------------
By: /s/ Michelle Hays
--------------------
Name: Michelle Hays
--------------------
Title: VP Finance
--------------------
Dated: 1/15/98
--------------------
SUBTENANT
QUALCOMM INCORPORATED
- ---------------------------
a Delaware Corporation
- ---------------------------
By: /s/ T.C. Stafford
--------------------
Name: Thomas C. Stafford
--------------------
Title: VP, Facilities
--------------------
Dated: Jan. 15, 1998
--------------------
<PAGE> 14
FIRST AMENDMENT TO SUBLEASE
THIS FIRST AMENDMENT TO SUBLEASE ("First Amendment") is made as of August
21, 1998 by and between QUALCOMM INCORPORATED, a Delaware corporation
("Sublessee") and THE LIGHTSPAN PARTNERSHIP, INC., a California corporation
("Sublessor") with respect to the following:
A. Sublessor and Sublessee have entered in to that certain sublease (the
"Sublease") dated as of December 1, 1997 with respect to certain premises (the
"Subleased Premises") located on the first floor of the building situated at
10140 Campus Point Drive, San Diego, California.
B. Sublessor desires to sublease to Sublessee, and Sublessee desires to
sublease from Sublessor additional space located on the second floor of the
building described above. In connection therewith, Sublessor and Sublessee
desire to amend the Sublease to include such space on the second floor within
the Subleased Premises and to make such other modifications as are set forth
below. Except as otherwise defined herein, all initially capitalized words as
used herein shall have the same meaning as set forth in the Sublease.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Sublessor and Sublessee agree
that the Sublease is hereby amended as follows:
1. SUBLEASED PREMISES. Effective as of the Additional Premises
Commencement Date, that certain space containing approximately 9,666 square
feet of rentable area (including the common area factor) and more particularly
described on the floor plan attached hereto as Exhibit A (the "Additional
Premises") shall be included within the "Subleased Premises" under the
Sublease. Following the Additional Premises Commencement Date, the Subleased
Premises shall contain a total of 17,858 square feet of rentable area.
Sublessee also shall have access to the common areas on the second floor shown
on Exhibit A (e.g., hallways, restrooms, kitchen, and deck). Following receipt
of reasonable notice from Sublessor, Sublessee shall permit Sublessor to have
access to the electrical room located in the Additional Premises on an as
needed basis, subject to Sublessee's reasonable security requirements.
2. TERM. The commencement of the term for the Additional Space shall be
September 1, 1998 (the "Additional Premises Commencement Date"). The initial
expiration date of the term of the Sublease is extended from December 31, 1998
to August 31, 1999. Sublessor shall deliver the Additional Premises to
Sublessee in good condition and repair, free of all debris, and with the
existing cubicles and other improvements in the Additional Premises in place.
1
<PAGE> 15
3. OPTIONS TO EXTEND. The fourth sentence in Section 5.2 of the Sublease
is deleted and the following is substituted in its place:
"Notwithstanding the foregoing, if Sublessor requires use of the Subleased
Premises for Sublessor's own business operations (and not for assignment or
sublease to another person or entity), Sublessor may cancel Sublessee's
option to extend the Lease term beyond the second One Year Extension,
provided that (i) Sublessor delivers written notice of such cancellation to
Sublessee at least one hundred twenty (120) days prior to the expiration of
the then current term of this Sublease, and (ii) Sublessor occupies the
Subleased Premises for its own business use within sixty days of the
expiration of the term of this Sublease and continues such use for a period
of at least one year."
4. RENT. Commencing on the Additional Premises Commencement Date, the Base
Rent for the Subleased Premises shall be increased to $24,836.91 per month, or
$1.3908 per square foot of rentable area of the Subleased Premises (calculated
as provided in Section 3.6 of the Sublease). The Base Rent will be adjusted from
time to time (on a per square foot basis) at the same time and at the same
amount per square foot of rentable area as is set forth in Paragraph 1 of the
Addendum to the Master Lease for the adjustment of Sublessor's Basic Monthly
Rent under the Master Lease.
5. EARLY MOVE IN/TENANT IMPROVEMENTS. Immediately following Master Lessor
providing its written consent to this First Amendment, Sublessee shall have the
right to enter upon the Additional Premises for the purpose of constructing its
tenant improvements. Sublessee will be responsible, at Sublessee's cost, for (i)
the installation of a demising wall as necessary to separate the Additional
Premises from the space still occupied by Sublessor on the Second Floor, subject
to a mutually agreed upon plan, (ii) the installation of necessary card readers
in the stairwells to the second, third and fourth floors, and (iii) the moving
of Sublessor's furniture and equipment from the Additional Premises to the third
floor, after Sublessor has prepared same for moving.
6. AFTER HOURS HVAC/COMMON AREA COSTS. HVAC charges for HVAC usage over
59 hours per week (7:00 A.M. - 6:00 P.M. Monday through Friday and 8:00 A.M. -
1:00 P.M. Saturday) will be $40.00 per hour, calculated monthly. Sublessor and
Sublessee acknowledge that the current Additional Rent payable by Sublessee
under the Sublease is approximately six (6) cents per square foot of rentable
area per month, subject to adjustment up or down on yearly actual cost basis
pursuant to the terms of the Master Lease.
7. FULL FORCE. Except as expressly modified herein, the Sublease shall
remain in full force and effect and binding upon the parties hereto. This First
Amendment shall not be effective unless and until the Master Lessor has provided
its written consent to this First Amendment.
2
<PAGE> 16
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this First
Amendment as of the date first set forth above.
"SUBLESSEE" "SUBLESSOR"
QUALCOMM INCORPORATED, a THE LIGHTSPAN PARTNERSHIP, INC., a
Delaware corporation California corporation
By T.C. Stafford By: M. Hays
---------------------- --------------------------
Its: V.P. Facilities Its: V.P. Finance
---------------------- --------------------------
Executed on August 24, 1998. Executed on 08/24 , 1998.
--------------- ----------------------
3
<PAGE> 17
THE UNDERSIGNED MASTER LESSOR of 10140 Campus Point Drive, San Diego,
California pursuant to that certain "Full Service Modified Gross Lease" dated
as of May 28, 1996 (the "Master Lease") between Insurance Company of the West,
predecessor in interest to the undersigned, and The Lightspan Partnership, Inc.
("Sublessor") previously consented to that certain Sublease dated December 1,
1997 between Sublessor and Qualcomm Incorporated, a Delaware corporation
("Sublessee"). This will confirm that Master Lessor further consents to the
First Amendment to Sublease to which this form is attached.
Nothing in this Consent shall be deemed to release Sublessor from any of
its obligations under the Master Lease or to relieve Sublessor from its
obligation to obtain the consent of the undersigned to any further subletting
of the Premises, if so required pursuant to the provisions of the Master Lease.
CARR AMERICA
By:
-----------------------
Its:
-----------------------
4
<PAGE> 18
CONSENT BY LANDLORD TO FIRST AMENDMENT OF SUBLEASE
The undersigned, as Landlord under that certain Lease dated May 28, 1996,
with The Lightspan Partnership, Incorporated ("Sublandlord") for certain
premises at 10140 Campus Pointe Drive in San Diego, CA (the "Master Lease"),
hereby consents to the entering into of the foregoing First Amendment to
Sublease dated August 21, 1998 ("First Amendment") between Sublandlord, as
sublessor, and QualComm, Incorporated, a Delaware Corporation, as subtenant
("Subtenant"), upon the express understandings and conditions that:
1. Landlord neither approves nor disapproves the terms, conditions and
agreements contained in the First Amendment (all of which shall be
subordinate and subject at all times to the terms, covenants and conditions
of the Master Lease) and assumes no liability or obligation of any kind
whatsoever on account of anything contained in the First Amendment;
2. By executing this consent, Landlord shall not be deemed to have waived any
rights under the Master Lease nor shall Landlord be deemed to have waived
Sublandlord's obligations to obtain any required consents under the Master
Lease (other than consent to the First Amendment itself);
3. Notwithstanding anything in the First Amendment to the contrary,
Sublandlord shall be and continue to remain liable for the payment of rent
and the full and prompt performance of all of the obligations of Tenant
under and as set forth in the Master Lease;
4. Nothing contained in the First Amendment shall be taken or construed to in
any way modify, alter, waive or affect any of the terms, covenants or
conditions contained in the Master Lease, or be deemed to grant Subtenant
any privity of contract with Landlord, or require Landlord to accept any
payments from Subtenant on behalf of Sublandlord;
5. The First Amendment shall be deemed and agreed to be an amendment to
sublease only and not an assignment and there shall be no further
subletting or assignment of all or any portion of the premises demised
under the Master Lease (including the premises demised by the foregoing
First Amendment) except in accordance with the terms and conditions of the
Master Lease;
6. If Landlord terminates the Master Lease as a result of a default by
Sublandlord thereunder or the Master Lease terminates for any other reason,
the First Amendment shall automatically terminate concurrently therewith
unless Landlord elects in writing, in its sole and absolute discretion and
without obligation, to keep the First Amendment in full force and effect in
which case the First Amendment and the Sublease shall become and be deemed
to be a direct lease between Landlord and Subtenant;
7. Sublandlord and Subtenant acknowledge and agree that in the event
Sublandlord or Landlord elects to terminate the Master Lease pursuant to
the terms thereof, Landlord shall have no responsibility, liability or
obligation to Subtenant, and the First Amendment shall terminate except as
expressly provided in Section 6 above;
<PAGE> 19
8. Notwithstanding anything to the contrary set forth in the First Amendment,
by entering into the foregoing First Amendment, Sublandlord and Subtenant
agree to each of the terms and conditions of this Consent, and in the event
of any conflict between the terms of the First Amendment and this Consent,
the terms of this Consent shall control;
9. This Consent may be executed in any number of counterparts, each of which
when so executed and delivered shall be deemed to be an original, an all of
which counterparts taken together shall constitute but one and the same
instrument. Signature pages may be detached from the counterparts and
attached to a single copy of the applicable document to physically form
one document.
10. This Consent shall be of no force and effect unless Landlord receives duly
executed originals of this Consent from both Sublandlord and Subtenant.
LANDLORD
CarrAmerica Realty Corporation
By: /s/ Dwight Merriman
---------------------------
Name: Dwight Merriman, III
-------------------------
Title: Senior Vice President
---------------------------
Dated: September 18, 1998
------------------------
ACCEPTED AND AGREED:
SUBLANDLORD
The Lightspan Partnership, Inc.,
a California corporation
By: /s/ Sandra Klausen
------------------------------
Name: Sandra Klausen
----------------------------
Title: Director ??? Facilities
---------------------------
Dated: 9-21-98
---------------------------
SUBTENANT
Qualcomm Incorporated,
a Delaware corporation
By: /s/ J.C. Stafford
------------------------------
Name:
----------------------------
Title:
---------------------------
Dated:
---------------------------
<PAGE> 1
EXHIBIT 10.10
OFFICE LEASE
By and Between
AUERBACH PLAZA LIMITED PARTNERSHIP,
a California limited partnership,
and
GOLIAC, INC.,
a California corporation
(collectively, "Landlord")
and
THE LIGHTSPAN PARTNERSHIP, INC.,
a California corporation
("Tenant")
dated
June 4, 1999
<PAGE> 2
OFFICE LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. BASIC LEASE PROVISIONS AND DEFINITIONS........................................... 1
2. PREMISES AND COMMON AREAS........................................................ 3
3. TERM............................................................................. 3
4. POSSESSION....................................................................... 3
5. RENT............................................................................. 4
6. OPERATING EXPENSES/ADDITIONAL RENT............................................... 5
7. INTENTIONALLY OMITTED............................................................ 10
8. USE OF PREMISES.................................................................. 10
9. UTILITIES AND SERVICES........................................................... 12
10. REPAIRS.......................................................................... 14
11. ALTERATIONS...................................................................... 15
12. ASSIGNMENT AND SUBLETTING........................................................ 17
13. QUIET ENJOYMENT.................................................................. 21
14. DEFAULT.......................................................................... 21
15. REMEDIES ON DEFAULT.............................................................. 23
16. NON-LIABILITY AND INDEMNIFICATION OF LANDLORD.................................... 24
17. INSURANCE........................................................................ 25
18. WAIVER OF CLAIMS; WAIVER OF SUBROGATION.......................................... 27
19. DESTRUCTION OF PREMISES.......................................................... 27
20. EMINENT DOMAIN................................................................... 29
21. ESTOPPEL CERTIFICATE............................................................. 29
22. SUBORDINATION.................................................................... 29
23. SURRENDER; HOLDING OVER.......................................................... 29
24. LIENS............................................................................ 30
25. ENTRY BY LANDLORD................................................................ 30
26. BROKERS.......................................................................... 31
27. TAXES ON TENANT'S PROPERTY....................................................... 31
28. PARKING.......................................................................... 31
29. NO LIGHT, AIR OR VIEW EASEMENT................................................... 33
30. SIGNS............................................................................ 33
31. GENERAL PROVISIONS............................................................... 33
32. MODIFICATION AND CURE RIGHTS FOR LANDLORD'S MORTGAGEES AND LESSORS............... 36
33. LEASE EXECUTION.................................................................. 36
34. OPTION TO EXTEND................................................................. 36
35. OPTIONS.......................................................................... 38
37. EXPANSION OPTION................................................................. 39
38. RIGHT OF FIRST OFFER TO LEASE ADDITIONAL SPACE................................... 39
</TABLE>
ADDENDUM
EXHIBITS:
Exhibit A Omitted
Exhibit B Legal Description
Exhibit C Floor Plan
Exhibit D Rules and Regulations
Exhibit E Memorandum of Actual Commencement and Expiration
Exhibit F Work Letter Agreement
-i-
<PAGE> 3
OFFICE LEASE
In consideration of the rents and covenants set forth herein,
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the
following described premises upon the following terms and conditions:
1. BASIC LEASE PROVISIONS AND DEFINITIONS.
1.1 LANDLORD: Auerbach Plaza Limited Partnership,
a California limited partnership, and Goliac, Inc.,
a California corporation (collectively, "Landlord")
1.2 TENANT: The Lightspan Partnership, Inc.,
a California corporation ("Tenant")
1.3 BUILDING NAME: 2001 Wilshire Boulevard ("Building") a 6 story
office building containing for purposes of this Lease 101,219
rentable square feet, located in the City of Santa Monica, the
County of Los Angeles, the State of California, as more
particularly described in Exhibit B attached hereto.
1.4 PREMISES SUITE NUMBERS: 301 and 320
1.5 BUILDING ADDRESS: 2001 Wilshire Boulevard
Santa Monica, California 90403
1.6 AREA OF PREMISES: Suite 301 containing 4,261 rentable square
feet (3,838 usable square feet) and Suite 320 containing 2,639
rentable square feet (2,356 usable square feet) for all
purposes of this Lease, for a total of 6,900 rentable square
feet (6,194 usable square feet), all located on the third
floor of the Building as shown on Exhibit C.
1.7 LEASE TERM: Thirty-eight (38) months
1.8 COMMENCEMENT DATE: The date set forth in the Work Letter
Agreement attached hereto as Exhibit "F".
ESTIMATED COMMENCEMENT DATE: August 1, 1999
1.9 BASE RENT SCHEDULE:
<TABLE>
<CAPTION>
Effective Period Basic Rental Rate
of Rent Rate Monthly Rate Per Month
---------------- ------------ -----------
<S> <C> <C>
mos. 1 - 19 $16,560.00 $2.40
mos. 20-38 $17,250.00 $2.50
</TABLE>
1.10 TENANT'S PROPORTIONATE SHARE: 6.816%, with a Base Year of 1999
1.11 SECURITY DEPOSIT: Waived
1.12 PERMITTED USE: General Office Use
1.13 BROKERS: CB Richard Ellis, Inc. representing Landlord and
Tenant
1.14 PARKING: Based upon a ratio of three (3) spaces per thousand
rentable square feet leased, twenty (20) parking spaces as
follows: zero (0) reserved parking spaces, zero (0) tandem
parking space(s) and twenty (20)
<PAGE> 4
unreserved parking spaces, subject to the terms and conditions
of Article 28 below and the Rules and Regulations regarding
parking contained in Exhibit D. Current parking rates are as
follows: $121.50 per month for reserved parking spaces; $66.00
per month for tandem parking spaces and $71.50 per month for
unreserved parking spaces. Subject to availability and
Landlord's approval, which may be withheld in Landlord's sole
discretion, Tenant shall have the right to lease additional
parking spaces from Landlord on a month-to-month basis at the
then current rates for comparable parking spaces at the
Project.
1.15 ADDRESSES FOR NOTICES:
<TABLE>
<S> <C> <C>
Landlord: Tenant:
Auerbach Plaza Limited Prior to Lease Commencement:
Partnership and Goliac, Inc.
c/o Orix Real Estate Equities, Inc. The Lightspan Partnership, Inc.
550 South Hope Street 2001 Wilshire Boulevard
Suite 1600 Suite 320
Los Angeles, California 90071 Santa Monica, California 90403
Attn: Asset Management
After Lease Commencement:
To the Premises
</TABLE>
1.16 PROJECT: The Building and all exterior common areas serving the
Building including the parking structure adjacent to the Building.
1.17 GUARANTOR(S): None
1.18 INTEREST RATE: shall mean the greater of ten percent (10%) per
annum or two percent (2%) in excess of the prime lending or reference rate of
Wells Fargo Bank N.A. or any successor bank in effect on the twenty-fifth (25th)
day of the calendar month immediately prior to the event giving rise to the
Interest Rate imposition; provided, however, the Interest Rate will in no event
exceed the maximum interest rate permitted to be charged by applicable law.
1.19 EXHIBITS: A through F, inclusive, which Exhibits are attached
to this Lease and incorporated herein by this reference. As provided in Section
3 below, a completed version of Exhibit E will be delivered to Tenant after
Landlord delivers possession of the Premises to Tenant.
The foregoing provisions in this Article 1 summarize for convenience
only certain key terms of the Lease set out more fully in the Lease. In the
event of any conflict between the provisions of this Article 1 and the balance
of the Lease, the latter shall control.
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2. PREMISES AND COMMON AREAS.
2.1 PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord that certain office space as described in the Basic Lease
Provisions and Definitions and as indicated on Exhibit C attached hereto and by
reference thereto made a part hereof ("Premises") located in the Building set
out in Section 1.3 of the Basic Lease Provisions and Definitions legally
described on Exhibit B attached hereto and made a part hereof. The parties agree
that for all purposes of this Lease, the usable and rentable square footage of
the Premises and the rentable square footage of the Building shall be deemed to
be as stated in Sections 1.6 and 1.3 of the Basic Lease Provisions and
Definitions, respectively.
2.2 TENANT'S USE OF COMMON AREAS. During the Term of this Lease,
Tenant shall have the nonexclusive right to use in common with Landlord and all
persons, firms and corporations conducting business in the Building and their
respective customers, guests, licensees, invitees, subtenants, employees and
agents (collectively, "Building Occupants"), subject to the terms of this Lease,
the Rules and Regulations referenced in Section 32.1 below and all covenants,
conditions and restrictions now or hereafter affecting the Building, the
following common areas of the Building and/or the Project (collectively, the
"Common Areas"):
(i) The Building's common entrances, hallways, lobbies, public
restrooms on multi-tenant floors, elevators, stairways and accessways,
loading docks, ramps, drives and platforms and any passageways and
serviceways thereto, and the common pipes, conduits, wires and appurtenant
equipment within the Building which serve the Premises (collectively,
"Building Common Areas"); and
(ii) The parking facilities of the Project which serve the
Building (subject to the provisions of Exhibit D), loading and unloading
areas, trash areas, roadways, sidewalks, walkways, parkways, driveways,
landscaped areas, plaza areas, fountains and similar areas and facilities
situated within the Project and appurtenant to the Building which are not
reserved for the exclusive use of any Project Occupants (collectively,
"Project Common Areas").
2.3 LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and
access to the Premises and parking to be provided to Tenant under this Lease is
not interfered with in an unreasonable manner, Landlord reserves for itself the
right from time to time to: (i) install, use, maintain, repair, replace and
relocate pipes, ducts, conduits, wires and appurtenant meters and equipment
above the ceiling surfaces, below the floor surfaces, within the walls and in
the central core areas of the Building; (ii) make changes to the design and
layout of the Project, including, without limitation, changes to buildings,
driveways, entrances, loading and unloading areas, direction of traffic,
landscaped areas and walkways, and, subject to the parking provisions contained
in Article 28 and Exhibit D, parking spaces and parking areas; and (iii) use or
close temporarily the Building Common Areas, the Project Common Areas and/or
other portions of the Project while engaged in making improvements, repairs or
alterations to the Building, the Project, or any portion thereof.
3. TERM. The term of this Lease ("Term") shall be for the period set out
in Section 1.7 of the Basic Lease Provisions and Definitions and shall commence
on the Commencement Date set out in Section 1.8 of the Basic Lease Provisions
("Commencement Date"). The Commencement Date shall be confirmed by Landlord by
Notice to Tenant in the form attached hereto as Exhibit E. As used herein,
"Term" shall mean the initial term referenced in Section 1.7 of the Basic Lease
Provisions and Definitions as extended or reduced in accordance with the terms
of this Lease.
4. POSSESSION.
4.1 DELIVERY OF POSSESSION. Landlord agrees to deliver possession of
the Premises to Tenant in accordance with the terms of the Work Letter Agreement
attached hereto as Exhibit F. Notwithstanding the foregoing, Landlord will not
be obligated to deliver possession of the Premises to Tenant (but Tenant will be
liable for rent if Landlord can otherwise deliver the Premises to Tenant) until
Landlord has received from Tenant all of the following:
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(i) a copy of this Lease fully executed by Tenant (ii) the Security Deposit and
the first installment of Monthly Base Rent; (iii) certificate of insurance as
required under Section 17.3 of this Lease; (iv) copies of all governmental
permits and authorizations, if any, required in connection with Tenant's
operation of its business within the Premises; and (v) a certificate of good
standing and a certificate of secretary, certifying as to the authority of the
individuals executing this Lease on behalf of Tenant.
4.2 LANDLORD'S FAILURE TO DELIVER POSSESSION. If Landlord, for any
reason whatsoever other than for reasons of Tenant Delays or Force Majeure
Delays, cannot deliver possession of the Premises to the Tenant by the Estimated
Commencement Date set forth in Section 1.8 of the Basic Lease Provisions and
Definitions, this Lease shall be voidable at Tenant's option; provided, however,
if Landlord cannot deliver possession of the Premises by the Estimated
Commencement Date and Tenant does not void this Lease, Landlord shall not be
liable to Tenant for any loss or damage resulting therefrom, but in that event,
the Commencement Date shall not occur until Landlord delivers possession of the
Premises as provided in Exhibit F. If for reasons other than Tenant Delays,
Landlord has not delivered possession of the Premises to Tenant within sixty
(60) days after the Estimated Commencement Date, Tenant shall receive a rent
credit of two (2) days of rent for every one (1) day beyond sixty (60) days
after the Estimated Commencement Date Landlord is delayed for reasons other than
Tenant Delays until the date on which Landlord delivers possession of the
Premises to Tenant. The foregoing notwithstanding, if Landlord's failure to
deliver possession prior to the Estimated Commencement Date is attributable, in
whole or in part, to any "Tenant Delays" as defined in Exhibit F, the
Commencement Date and the commencement of Tenant's obligation to pay rent will
occur as of the date the Commencement Date would have occurred but for such
Tenant Delays; provided that Landlord shall be required to notify Tenant in
writing of any such Tenant Delays as and when such delays occurred, and the
effect of such Tenant Delays on the Estimated Commencement Date, if any.
4.3 EARLY OCCUPANCY. Provided Tenant does not interfere with the
completion of the Tenant Improvements, Tenant shall be permitted to occupy the
Premises for thirty (30) days prior to the Commencement Date for purposes of
installing Tenant's furniture, telephone and data cabling and equipment. Such
early occupancy shall be subject to all the provisions of this Lease, except for
the payment of rent. Said early possession shall not advance the expiration date
of the term of this Lease. Tenant shall provide Landlord with prior notice of
any such intended early occupancy and shall cooperate with Landlord during the
period of any such early occupancy so as not to interfere with the completion of
the Tenant Improvements by Landlord.
4.4 CONDITION OF PREMISES. Except as otherwise provided in Exhibit
F, by taking possession of the Premises, Tenant will be deemed to have accepted
the Premises and the Building in their "AS-IS" condition on the date of delivery
of possession and to have acknowledged that any tenant improvements have been
installed to Tenant's satisfaction and that there are no additional items
needing work or repair other than punch-list items to be completed by Landlord
and any latent defects not readily ascertainable from an inspection of the
Premises. Tenant acknowledges that except as expressly provided herein, neither
Landlord nor any agent of Landlord has made any representation or warranty with
respect to the Premises, the Building, the Project or any portions thereof or
with respect to the suitability of same for the conduct of Tenant's business and
Tenant further acknowledges that Landlord will have no obligation to construct
or complete any additional buildings or improvements within the Project.
5. RENT.
5.1 BASE RENT. Commencing upon the Commencement Date specified in
Section 1.8 of the Basic Lease Provisions and Definitions, Tenant agrees to pay
to Landlord as rent for the Premises, without prior notice, offset, deduction or
demand, the sum(s) shown in Section 1.9 of the Basic Lease Provisions and
Definitions (the "Base Rent"), in advance, on or before the first (1st) day of
each and every calendar month of the term hereof, except that the second (2nd)
month's rent shall be paid upon execution hereof. Rent for any period during the
Term hereof which is for less than one (1) month shall be a prorated portion of
the monthly installment herein, based upon a thirty (30) day month. Rent shall
be paid to Landlord in lawful
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money of the United States of America, which shall be legal tender at the time
of payment, at such place as Landlord may from time to time designate in
writing.
5.3 ADDITIONAL RENT. The Base Rent and the additional rent as
provided in Article 6 hereof and all other amounts required to be paid by Tenant
to Landlord under this Lease including, but not limited to, additional rent,
parking structure rent, interest, security deposits, tenant improvement costs
chargeable to Tenant, penalties and reimbursements are sometimes collectively
referred to as and shall constitute "rent." All rent not paid by Tenant to
Landlord in a timely manner shall bear interest at the Interest Rate stated in
Section 1.18 of the Basic Lease Provisions and Definitions. Landlord's failure
to demand payment of rent or interest so charged shall not constitute a
forbearance and shall not compromise Landlord's right to deem Tenant's failure
to pay such rent in a timely manner as a default or limit any other rights given
to Landlord under this Lease or by law or equity.
6. OPERATING EXPENSES/ADDITIONAL RENT.
6.1 DEFINITIONS. For purposes of this Article 6, the following
terms, words or phrases shall have the meanings and definitions described in
this Section 6.1:
(a) "Lease Year" for the purposes of the first (1st) calendar
year means that period of time from and including the Commencement Date
through December 31 of said calendar year and, thereafter, "Lease Year"
shall mean a consecutive twelve (12) month period commencing January 1 and
ending December 31, both inclusive.
(b) "Tenant's Proportionate Share" shall mean the percentage
stated in Section 1.10 of the Basic Lease Provisions and Definitions.
(c) "Operating Expenses" shall consist of all commercially
reasonable costs and expenses of operation and maintenance of the
Building, the Common Areas and the Project, as determined by standard
accounting practices, calculated assuming the Building is ninety-five
percent (95%) occupied, including the following costs by way of
illustration but not limitation: (a) any and all assessments imposed with
respect to the Building, Common Areas, and/or Project pursuant to any
covenants, conditions and restrictions affecting the Project, Common Areas
or Building; (b) costs, levies or assessments resulting from statutes or
regulations promulgated by any government authority in connection with the
use or occupancy of the Building or the Premises or the parking facilities
serving the Building or the Premises; (c) waste disposal and janitorial
services; (d) security; (e) costs incurred in the management of the
Project, Building and Common Areas, including, without limitation: (1)
supplies, (2) wages and salaries (and payroll taxes and similar
governmental charges related thereto) of employees used in the operation
and maintenance of the Project, Building and Common Areas, and (3) a
commercially reasonable management/administrative fee not to exceed 3 1/2%
of total gross rents; (f) supplies, materials, equipment and tools; (g)
repair and maintenance of the elevators and the structural portions of the
Building, including the plumbing, heating, ventilating, air-conditioning
and electrical systems installed or furnished by Landlord; (h)
maintenance, costs and upkeep of all parking and Common Areas; (i)
amortization on a straight-line basis over the useful life of all costs of
a capital nature (including, without limitation, capital improvements,
capital replacements, capital repairs, capital equipment and capital
tools) determined in accordance with GAAP consistently applied: (1)
reasonably intended to produce a reduction in operating charges or energy
consumption; or (2) required after the date of the Lease under any
governmental law or regulation that was not applicable to the Building at
the time it was originally constructed; or (3) for repair or replacement
of any Building equipment needed to operate the Building at the same
quality levels as prior to the replacement; (j) costs and expenses of
gardening and landscaping; (k) maintenance of signs (other than signs of
tenants of the Building); and (l) costs and expenses of repairs,
resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse
removal, security and similar items, including appropriate reserves.
Notwithstanding the foregoing, Operating Expenses shall not include the
following:
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(i) costs of alterations of any premises in the
Building for tenants of the Building other than Tenant;
(ii) costs of capital improvements to the Property as
defined in accordance with generally accepted accounting principles
consistently applied (except that Operating Expenses shall include
(1) the cost during the Term of this Lease, as reasonably amortized
by Landlord with interest at a rate equal to Landlord's then
applicable borrowing rate (not to exceed 10% per annum) on the
unamortized amount, of any capital improvement completed after the
commencement of the Term of this Lease which reduces any component
cost included within Operating Expenses and (2) the cost of any
capital improvements which Landlord is required to make, or which
Landlord shall deem necessary, to keep the Building in compliance
with all applicable governmental rules and regulations applicable
from time to time thereto excluding any costs incurred in connection
with, responding to, or to comply with, any law, rule or regulation
applicable to the Building or any portion thereof enacted or adopted
prior to the Lease Commencement Date, including without limitation
fire/life safety codes, federal, state or local laws or regulations
relating to the handicapped or access for the handicapped or
disabled, any applicable ordinances pertaining to the
installation/retrofit of fire sprinklers in the Building, and any
seismic safety ordinance, including with respect to structural
earthquake repairs or seismic retrofits necessitated by the January
17, 1994 earthquake that occurred in the vicinity of the Building);
(iii) interest and principal payments on mortgages or
deeds of trust or other debt for borrowed money;
(iv) specific costs or services billed to and paid by
specific tenants other than Tenant;
(v) costs of repairs and maintenance which are
reimbursable by any other party or any tenant or occupant of the
Building;
(vi) costs and expenses incurred in connection with
negotiations for leases with prospective tenants;
(vii) attorneys' fees and other costs incurred in
attempting to collect rent or evict tenants for nonpayment or rent;
(viii) depreciation, amortization and interest payments
(except as above);
(ix) costs including penalties, fines and associated
legal expenses incurred due to the violation by Landlord or any
other tenant in the Building of applicable federal, state or local
governmental laws, codes and similar regulations that would not have
been incurred but for any such violations by Landlord or any tenant
in the Building, it being intended that each party shall be
responsible for the costs resulting from its own violation of such
laws, codes and regulations;
(x) general overhead and general administrative
expenses, advertising and promotional expenses incurred in
connection with leasing the Building;
(xi) ground rental payments;
(xii) and leasing commissions or fees incurred by
Landlord in connection with Landlord's leasing activities conducted
at the Building;
(xiii) Taxes (as defined below in Subparagraph 6(d));
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(xiv) Insurance Costs (as defined below in Subparagraph
6(e); and
(xv) Utilities Costs (as defined below in Subparagraph
6(f);
(xvi) any costs (including permit, license and
inspection costs) incurred in connection with the installation of
Tenant's or other occupants' improvements or incurred in connection
with renovating or otherwise improving, decorating or painting
vacant space for Tenant or other occupants of the Building;
(xvii) that portion of any billing by Landlord, its
subsidiaries or affiliates, or any partner thereof, for goods or
services in the Building, to the extent that same exceeds the cost
of such goods or services if rendered by qualified, unaffiliated
third parties on a competitive basis.
(xviii) any costs associated with operating the entity
which constitutes Landlord, as the same are distinguished from the
costs of operating the Building, including partnership accounting,
legal matters, costs of defending any lawsuits with any mortgagee,
costs of selling, syndicating, financing, mortgaging or
hypothecating any of Landlord's interest in the Building;
(xix) charitable or political contributions by Landlord;
(xx) the purchase or rental of any sculpture, paintings
or other objects of art, whether or not installed in, on or upon the
Building;
(xxi) any costs to repair, restore or rebuild any
portion of the Building after casualty loss or any taking by eminent
domain or condemnation;
(xxii) any costs arising from the negligence or willful
misconduct of Landlord, its affiliates or any of their agents, or
employees, and costs arising from negligence or willful misconduct
of vendors, contractors or providers of material or services unless
Landlord is not able to recover such costs from such parties despite
the exercise of commercially reasonable efforts under the
circumstances; and
(xxiv) any costs expressly excluded from Operating
Expenses elsewhere in this Lease.
(d) "Taxes" means all federal, state and local governmental
taxes, assessments and charges (including transit or transit district
taxes or assessments) of any kind or nature, whether general, special,
ordinary or extraordinary, which Landlord or its beneficiaries shall pay
or become obligated to pay because of or in connection with ownership,
leasing, management, control or operation of the Building or of the
personal property, fixtures, machinery, equipment, systems and apparatus
located therein or used in connection therewith including, without
limitation, all ad valorem taxes, costs and reasonable expenses incurred
to protest, reduce or minimize Taxes and any taxes, assessments or charges
associated with parking or other facilities which benefit the Building
whether located on or off the property in which the Building is located.
The amount included in Taxes for any Lease Year shall be the amount
indicated by the tax bills due or payable for that Lease Year (e.g. the
taxes includable in Taxes for calendar year 1998 shall be the Taxes paid
by Landlord in 1998 for the 1997-1998 tax roll), except that if the tax
bills for such Lease Year are not available as of the date of said
statement, the amount of such Taxes may be reasonably estimated by the
person preparing said statement. There shall be deducted from Taxes as
determined for any Lease Year the amount of any refund of Taxes received
by Landlord during such Lease Year and if any such refund shall be
received for the tax year(s) in which the Base Year occurs, there shall be
an adjustment to the Base Year Taxes to reflect such reduced tax amount
for the Base Year for purposes of calculating Taxes in all subsequent
years. There shall be included in Taxes for any Lease Year the amount of
all fees, costs and expenses
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(including attorneys' and consultants' fees) paid by Landlord during such
Lease Year in seeking or obtaining any refund or reduction of Taxes. If
any special assessment payable in installments is levied against the
Building, Taxes for any Lease Year shall include only the installments of
such assessments and any interest thereon, payable with respect to such
Lease Year (all without regard to any right to pay or payment of any such
special assessment in a lump sum or single payment). Taxes include
reasonable legal fees, court costs and expenses charged or payable by or
on behalf of the Landlord for the contest of or protest of any Taxes.
Notwithstanding anything to the contrary herein, Taxes shall not include
any federal, state or local franchise, capital stock, inheritance, income,
or estate taxes, except that if a change occurs in the method of taxation
resulting in the substitution of any such Taxes for any Taxes as
hereinabove defined, such substituted Taxes shall be included in Taxes.
The amount of Taxes for the Base Year attributable to the valuation of the
Project, inclusive of tenant improvements, shall be known as the "Base
Taxes". If in any comparison year subsequent to the Base Year, the amount
of Taxes decreases below the amount of Base Taxes, then for purposes of
all subsequent comparison years, including the comparison year in which
such decrease in Taxes occurs, the Base Taxes, and therefore the Base
Year, shall be decreased by an amount equal to the decrease in Taxes.
Notwithstanding anything to the contrary set forth above in this Article
6, Tenant shall not be liable for Tenant's Proportionate Share of any
increase in Taxes arising from any reassessment of the Building and/or the
Project resulting from the sale or transfer of all or any part of
Landlord's interest in the Building and/or the Project during the initial
Lease Term. Tenant shall however, remain liable for (i) increases in Taxes
resulting from any sale or transfer of Landlord's interest in the Building
and/or the Project occurring during the Option Term and (ii) any regularly
scheduled annual increases in Taxes not arising from a reassessment due to
a sale or transfer of Landlord's interest in the Building and/or the
Project. Further, Tenant shall not be liable for Tenant's Proportionate
Share of any penalties or interest incurred as a result of Landlord's
failure to make any payment of Taxes when due.
(e) "Insurance Costs" means the cost of all insurance obtained
and maintained by Landlord (including self-insured amounts and
deductibles) with respect to the Building, Common Areas and the Project
provided such costs are commercially reasonable, excluding, however, any
insurance deductibles in excess of reasonable and customary deductible
amounts and/or whether or not reasonable and customary, any such
deductibles in excess of $100,000 in any calendar year;
(f) "Utilities Costs" means all actual charges for utilities
for the Building and Common Areas, including but not limited to water,
sewer and electricity, and the costs of heating, ventilating and air
conditioning and other utilities (but excluding those charges for which
tenants are individually responsible) as well as related fees, assessments
and surcharges; and
(g) "Estimated Rent Adjustment Payments" means one-twelfth
(1/12) of the amount of the Rent Adjustment (as hereinafter defined) if
any, for the then current Lease Year as Landlord shall reasonably estimate
from time to time and communicate in writing to Tenant.
6.2 RENT ADJUSTMENT. In addition to paying the Base Rent for each
and every Lease Year during the Term of this Lease, commencing on the first
anniversary of the Commencement Date and continuing thereafter throughout the
Term, Tenant shall pay the amount by which Tenant's Proportionate Share of the
Operating Expenses, Taxes, Insurance Costs and Utilities Costs paid or accrued
during each Lease Year of the Term of this Lease exceeds Tenant's Proportionate
Share of the Operating Expenses, Taxes, Insurance Costs and Utilities Costs paid
or accrued during the Base Year specified in Section 1.10 of the Basic Lease
Provisions and Definitions ("Rent Adjustment"). If any portion of the Term of
this Lease occurs during less than an entire Lease Year (including, for example,
the remaining months of the second Lease Year which follow the expiration of the
Base Year), then Tenant's Proportionate Share of Operating Expenses, Taxes,
Insurance Costs and Utilities Costs for said Lease Year and
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the Base Year Operating Expenses, Taxes, Insurance Costs and Utilities Costs
shall be reduced proportionately to reflect only the number of days during said
Lease Year to which the Term of this Lease applied. For purposes of calculating
Taxes for the Base Year, Taxes for calendar year 1998 shall be used and there
shall be excluded from the calculation of Taxes for the Base Year any one-time
taxes, assessments, amortized costs relating to capital improvements, and other
extraordinary impositions incurred in the Base Year only. For purposes of
calculating Operating Expenses for the Base Year one-time utility surcharges and
other extraordinary one-time charges resulting from boycotts, strikes,
embargoes, shortages or other extraordinary events occurring during the Base
Year only shall be excluded from the calculation of Base Year Operating
Expenses.
6.3 LIMITATION. Notwithstanding any provisions to the contrary
contained in this Article 6, the Rent Adjustment is subject to the limitation
that in no event shall the application of any Rent Adjustment for any Lease Year
be construed as decreasing or be applied so as to decrease the Base Rent for any
Lease Year below the Base Rent.
6.4 LEASE YEAR CALCULATION PAYMENT. Commencing as of the first
anniversary of the Commencement Date, Tenant shall pay to Landlord the Estimated
Rent Adjustment Payments for said month and each month of the balance of the
Term of this Lease in advance on the first (1st) day of each month of the Term.
As soon as practicable after the expiration of each Lease Year, Landlord shall
cause to be prepared and will forward to Tenant a notice in writing certified by
Landlord or an agent of Landlord setting forth the actual Operating Expenses,
Taxes, Insurance Costs and Utilities Costs for the preceding Lease Year and the
calculation of Rent Adjustment described in Section 6.2 above (subject to
limitation set forth in Section 6.3 above) ("Landlord's Expense Notice"). If
Landlord fails to provide Tenant with such notice within twelve (12) months
after the end of the Lease Year in question, then Landlord shall not be entitled
to payment by Tenant of any increased Operating Expenses other than the initial
estimate previously received.
6.5 PAYMENT BY TENANT. To the extent the Rent Adjustment, as
calculated, exceeds the Estimated Rent Adjustment Payments made by Tenant during
a Lease Year, Tenant covenants and agrees to pay Landlord, or otherwise at
Landlord's direction, the amount of such increase or excess within twenty (20)
days of Tenant's receipt of Landlord's Expense Notice plus any revised Estimated
Rent Adjustment Payments of which Landlord notifies Tenant. To the extent the
total Estimated Rent Adjustment Payments paid by Tenant during a Lease Year
exceeds the actual Rent Adjustment for such Lease Year, at Landlord's option,
such excess shall be credited against payments next due hereunder or refunded by
Landlord to Tenant, provided Tenant is not then in default under this Lease.
Unless Tenant shall take written exception to any item contained in Landlord's
Expense Notice within sixty (60) days following Tenant's receipt of Landlord's
Expense Notice, Landlord's Expense Notice to Tenant shall be considered as final
and accepted by Tenant. Any amount due to Landlord as shown on Landlord's
Expense Notice, whether or not written exception by Tenant is taken thereto,
shall be paid by Tenant within thirty (30) days after Landlord shall have
submitted to Tenant Landlord's Expense Notice. Tenant will have the right, by
not less than ten (10) days prior written notice ("Audit Notice") given within
the sixty (60) day period ("Audit Period") following receipt of any Landlord's
Expense Notice and at reasonable times during normal business hours, to audit or
cause a third party to audit Landlord's accounting records with respect to
Operating Expenses, Taxes, Insurance Costs and/or Utilities Costs relative to
the year to which such Expense Notice relates at the offices of Landlord or
Landlord's property manager. Any audit conducted by or on behalf of Tenant shall
be performed during normal business hours and in a manner so as to minimize
interference with Landlord's or its property manager's business operations. In
no event will Landlord or its property manager be required to (i) photocopy any
accounting records or other items or contracts, (ii) create any ledgers or
schedules not already in existence, (iii) incur any costs or expenses relative
to such inspection, or (iv) perform any other tasks other than making available
such accounting records as aforesaid. The audit must be completed within sixty
(60) days of the date of Tenant's Audit Notice and the results of such audit
shall be delivered to Landlord within ninety (90) days of the date of Tenant's
Audit Notice. If such audit or review correctly reveals that Landlord has
overcharged Tenant, then within thirty (30) days after the results of such audit
are made available to Landlord, Landlord agrees to reimburse Tenant the amount
of such
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overcharge. If the audit reveals that Tenant was undercharged, then within
thirty (30) days after the results of the audit are made available to Tenant,
Tenant agrees to reimburse Landlord the amount of such undercharge. Tenant
agrees to pay the cost of such audit, provided that if the audit reveals that
Landlord's determination of Tenant's Proportionate Share of Operating Expenses,
Taxes, Insurance Costs and/or Utilities Costs as set forth in the relevant
Landlord's Expense Notice was in error in Landlord's favor by more than five
percent (5%) of the amount charged by Landlord to Tenant pursuant to such
Expense Notice, then Landlord agrees to pay the reasonable, third-party cost of
such audit incurred by Tenant. To the extent Landlord must pay the cost of such
audit, such cost shall not exceed a reasonable hourly charge for a reasonable
amount of hours spent by such third-party in connection with the audit, and in
no event will exceed the amount of Tenant's Proportionate Share of the error.
Tenant agrees to keep, and will cause its agents, employees and contractors to
keep all information revealed by any audit of Landlord's books and records
strictly confidential and not to disclose any such information or permit any
such information to be disclosed to anyone other than Landlord, unless compelled
to do so by a court of law in connection with a dispute between Landlord and
Tenant. To that end, Landlord may require Tenant and its auditor to execute a
reasonable confidentiality agreement provided by Landlord.
Tenant's obligation to pay Rent Adjustments shall survive the
termination of this Lease and if the expiration date of this Lease shall fall on
a day which is other than the last day of the final Lease Year, Landlord shall
prorate the Rent Adjustment due from Tenant for said Lease Year.
6.6 BOOKS AND RECORDS. Landlord shall maintain books and records in
accordance with sound accounting and management practices, reflecting the
Operating Expenses, Taxes, Insurance Costs and Utilities Costs and shall make
such books and records available to Tenant at reasonable times at Landlord's
office or its property manager's office for Tenant's review.
6.7 GENERAL. If the Building is less than ninety-five percent (95%)
occupied during all or any portion of the Base Year or any other Lease Year,
Landlord may elect to make an appropriate adjustment of those Operating
Expenses, Taxes, Insurance Costs and Utilities Costs for the Base Year or such
Lease Year, as applicable, that vary with the level of occupancy of the Building
("Variable Expenses") to determine the amount of Operating Expenses, Taxes,
Insurance Costs and Utilities Costs that would have been paid or incurred by
Landlord had the Building been one hundred percent (100%) occupied and the
amount so determined shall be deemed to have been the amount of Variable
Expenses for the Base Year or such Lease Year. For purposes of determining Base
Year Operating Expenses, Taxes, Insurance Costs and Utilities Costs, Operating
Expenses, Taxes, Insurance Costs and Utilities Costs shall not include one-time
special assessments, charges, costs or fees or extraordinary charges or costs
incurred in the Base Year only, including those attributable to boycotts,
embargoes, strikes or other shortages of services or supplies. No reduction in
Operating Expenses, Taxes, Insurance Costs, or Utilities Costs after the Base
Year will reduce the Base Rent payable by Tenant hereunder or entitle Tenant to
receive a credit against future installments of Operating Expenses, Taxes,
Insurance Costs, Utilities Costs, or other additional rent due hereunder.
If any Operating Expenses, Taxes, Insurance Costs, and/or Utilities
Costs, though paid in one (1) Lease Year, relate to more than one (1) Lease
Year, at the option of Landlord, such Operating Expenses, Taxes, Insurance
Costs, and/or Utilities Costs may be allocated among such related Lease Years.
If any Operating Expenses, Taxes, Insurance Costs, and/or Utilities Costs relate
to more than one parcel of property, contiguous with or adjacent to the
Building, at the option of Landlord, such Operating Expenses, Taxes, Insurance
Costs, and/or Utilities Costs shall be allocated among all parcels of property
to which they relate.
7. INTENTIONALLY OMITTED.
8. USE OF PREMISES.
8.1 LIMITATIONS ON USE. Tenant shall use the Premises only for the
purposes set forth in Section 1.12 of the Basic Lease Provisions and Definitions
and shall not use or permit
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the Premises to be used for any other purpose without the prior written consent
of Landlord, which consent Landlord may withhold in its sole discretion. At
Tenant's sole cost and expense, Tenant agrees to procure, maintain and hold
available for Landlord's inspection, all governmental licenses and permits
required for the proper and lawful conduct of Tenant's business from the
Premises, if any. Tenant agrees not to use, alter or occupy the Premises or
allow the Premises to be used, altered or occupied in violation of, and Tenant,
at its sole cost and expense, agrees to use and occupy the Premises and cause
the Premises to be used and occupied in compliance with: (i) any and all laws,
statutes, zoning restrictions, ordinances, rules, regulations, orders and
rulings now or hereafter in force and any requirements of any insurer, insurance
authority or duly constituted public authority having jurisdiction over the
Premises, the Building or the Project now or hereafter in force, (ii) the
requirements of the Board of Fire Underwriters and any other similar body, (iii)
the Certificate of Occupancy issued for the Building, and (iv) any recorded
non-discriminating covenants, conditions and restrictions and similar regulatory
agreements, if any, which affect the use, occupation or alteration of the
Premises, the Building and/or the Project and which are provided to Tenant by
Landlord prior to enforcement of any provisions therein. Tenant agrees to comply
with the Rules and Regulations referenced in Section 32.1 below. Tenant shall,
upon five (5) days' written notice from Landlord, discontinue any use of the
Premises or of the Building which is declared by any governmental authority
having jurisdiction to be a violation of law or of the certificate of occupancy.
Landlord shall not be liable to Tenant in the event Tenant is required to
discontinue any use of the Premises or of the Building. Tenant shall comply with
any direction of any governmental authority having jurisdiction which shall
impose, by reason of the nature of Tenant's use or occupancy of the Premises,
any duty upon Tenant or Landlord with respect to the Premises or with respect to
the use or occupancy thereof.
8.2 ADDITIONAL LIMITATIONS ON USE. Tenant shall not do or permit to
be done anything which will invalidate or increase the cost of any fire,
extended coverage or any other insurance policy covering the Building and/or
property or improvements situated thereon and shall comply with all rules,
orders, regulations and regulations of the Pacific Fire Rating Bureau or any
other organization performing a similar function. If Tenant fails to cease doing
or permitting such activities within a reasonable period of time following
notice from Landlord, Tenant shall promptly upon demand reimburse Landlord, as
additional rent, the full amount of any additional premium charged for such
policy by reason of Tenant's failure to comply with the provisions of this
Article 8; provided, however, that such demand for reimbursement shall not be
Landlord's exclusive remedy nor shall it compromise or limit any other rights
granted Landlord by this Lease or by law or equity. Tenant shall not in any way
obstruct or interfere with the rights of other tenants or occupants of the
Building, or use or allow the Premises to be used for unlawful purpose, nor
shall Tenant cause, maintain, or permit any nuisance in, on or about the
Premises. Tenant shall not commit or suffer to be committed any waste in or upon
the Premises. Tenant shall at all times comply with all covenants, conditions
and restrictions affecting the Building.
8.3 AMERICANS WITH DISABILITIES ACT. Tenant shall not use or occupy
the Premises in violation of Title III of the Americans With Disabilities Act of
1990 (42 U.S.C. Section 12101 et seq.) and the regulations promulgated
thereunder ("ADA"). Following the initial build-out of the Premises by Landlord,
which shall be in compliance with the ADA, Tenant shall be responsible, at its
sole cost and expense, for complying with the ADA within the Premises to the
extent relating to or required as a result of the use or conduct of business
within the Premises by Tenant or any improvements, alterations or modifications
of the Premises performed by or for Tenant within the Premises. If Tenant fails
to comply with the ADA, Landlord shall give Tenant written notice that Tenant
must do such acts and expend such funds at the expense of Tenant as are
reasonably required to comply with the ADA. Should Tenant refuse or neglect to
comply with the ADA within ten (10) days from the date on which Landlord makes
such written demand on Tenant to effect such compliance (or if effectuating
compliance shall require more than ten [10] days to complete and Tenant shall
fail to commence such work necessary to effectuate compliance within such ten
[10] day period and to thereafter pursue such work diligently to completion),
Landlord may enter the Premises and perform such work, and upon completion
thereof, Tenant agrees to pay to Landlord as additional rent, Landlord's
reasonable costs of completing such work plus an amount not to exceed ten
percent (10%) of
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such costs for Landlord's overhead, within ten (10) days of receipt from
Landlord of a written itemized bill therefor. Tenant shall promptly notify
Landlord of and shall promptly provide Landlord with true, correct and legible
copies of all orders, reports, notices and correspondence (even those which may
be considered confidential) of or concerning the investigation, compliance, and
corrective actions and all complaints, pleadings, and other legal documents
filed against Tenant relating to Tenant's failure to comply with the ADA.
Notwithstanding the foregoing, throughout the Lease Term, Landlord shall be
solely responsible for causing the Common Areas to comply with the ADA, as and
when required by applicable governmental authorities.
8.4 HAZARDOUS MATERIALS. Landlord hereby represents, warrants and
agrees that Landlord is not aware of the presence, release, storage or use of
any Hazardous Materials in, about, under or adjacent to the Building, and
Landlord shall indemnify, defend, protect and hold Tenant and its partners,
officers, affiliates, employees, contractors, agents, and representatives
harmless from any and all claims, actions, administrative proceedings,
judgments, damages, punitive damages, penalties, fines, costs, expenses,
liabilities, obligations, interest or losses, including, attorneys',
consultant's, and expert's fees (collectively "Claims"), that arise directly or
indirectly from or in connection with the actual or alleged presence, release or
remediation of any Hazardous Material in or into the air, soil, surface or
groundwater at, on, about, under or within the Premises or the Building, or any
portion thereof that the foregoing indemnity shall not apply to any Claims to
the extent that the same relate to Hazardous Materials brought onto, released or
discharged by Tenant on or about the Building or Premises. Except for ordinary
and general office supplies typically used in the ordinary course of business
within office buildings, such as copier toner, liquid paper, glue, ink and
common household cleaning materials (some or all of which may constitute
"Hazardous Materials" as defined in this Lease), Tenant agrees not to cause or
permit any Hazardous Materials to be brought upon, stored, used, handled,
generated, released or disposed of on, in, under or about the Premises, the
Building, the Common Areas or any other portion of the Project by Tenant, its
agents, employees, subtenants, assignees, licensees, contractors or invitees
(collectively, "Tenant's Parties"), without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion. Upon the expiration or earlier termination of this Lease, Tenant
agrees to promptly remove from the Premises, the Building and the Project, at
its sole cost and expense, any and all Hazardous Materials, including any
equipment or systems containing Hazardous Materials which are installed, brought
upon, stored, used, generated or released upon, in, under or about the Premises,
the Building and/or the Project or any portion thereof by Tenant or any of
Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to
promptly indemnify, protect, defend and hold harmless Landlord and Landlord's
partners, officers, directors, employees, agents, successors and assigns
(collectively, "Landlord Indemnified Parties") from and against any and all
claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation, clean-up,
removal, remediation and restoration costs, sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees and court costs) which arise or
result from the presence of Hazardous Materials on, in, under or about the
Premises, the Building or any other portion of the Project and which are caused
or permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly
notify Landlord of any release of Hazardous Materials at the Premises, the
Building or any other portion of the Project which Tenant becomes aware of
during the Term of this Lease, whether caused by Tenant or any other persons or
entities. In the event of any release of Hazardous Materials caused or permitted
by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the
obligation, to cause Tenant to immediately take all steps Landlord deems
necessary or appropriate to remediate such release and prevent any similar
future release to the satisfaction of Landlord and Landlord's mortgagee(s). As
used in this Lease, the term "Hazardous Materials" shall mean and include any
hazardous or toxic materials, substances or wastes as now or hereafter
designated under any law, statute, ordinance, rule, regulation, order or ruling
of any agency of the State, the United States Government or any local
governmental authority, including, without limitation, asbestos, petroleum,
petroleum hydrocarbons and petroleum based products, urea formaldehyde foam
insulation, polychlorinated biphenyls ("PCBs"), and freon and other
chlorofluorocarbons. The provisions of this Section 8.5 will survive the
expiration or earlier termination of this Lease.
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9. UTILITIES AND SERVICES.
9.1 PROVISION OF UTILITIES. Landlord agrees to furnish or cause to
be furnished to the Premises, the utilities and services described herein,
subject to the conditions and in an accordance with standards set forth below:
9.1.1 Landlord shall provide HVAC services to the Premises
Monday through Friday from 8:00 a.m. to 6:00 p.m. and Saturday from 9:00
a.m. to 1:00 p.m., subject to any governmental requirements or standards
relating to, among other things, energy conservation and except for
nationally recognized legal holidays as established from time to time,
which nationally recognized legal holidays for the Building shall
initially be New Year's Day, Labor Day, President's Day, Thanksgiving Day,
Memorial Day, Independence Day and Christmas Day.
Upon request, Landlord shall make available to Tenant
after-hours HVAC services at a charge to Tenant equal to Landlord's actual
cost of such services as the same may change from time to time. The
after-hours HVAC charge will include related HVAC electrical usage within
the Premises, excluding any separately metered air conditioning systems.
Upon request, Landlord shall provide Tenant with documentation to support
Landlord's after-hours HVAC charges to Tenant. The minimum use of
after-hours HVAC services is two hours. The expenses for such after-hours
HVAC services shall be billed to Tenant monthly, as additional rent, and
shall be payable within ten (10) days of receipt. Landlord represents that
the current hourly rate for after-hours HVAC service is Sixty-Five and
No/100ths Dollars ($65.00) per hour.
9.1.2 Landlord shall make available to the Premises, to the
extent shown on the approved Building plans and specifications and subject
to interruptions beyond Landlord's control, fluorescent tubes in the
standard lighting fixtures installed by Landlord, facilities for the
removal of sewage and delivery of water, electrical current adequate for
normal business office operations during normal business hours. Tenant
shall be responsible for providing and replacing all bulbs and fluorescent
tubes in non-building standard lighting fixtures, if any, installed in the
Premises. Tenant's use of electric current and other utilities shall not
exceed five (5) watts per rentable square foot (on a connected load basis)
for combined lighting, HVAC, receptacle and convenience usage and shall,
in any event, never exceed the capacity of the feeders to the Building or
the risers or wiring installation.
9.1.3 Water provided by Landlord shall be furnished for
drinking, cleaning and lavatory purposes only.
9.1.4 Landlord shall provide janitorial services to the
Premises comparable to that provided in other similar office buildings in
the vicinity; provided the Premises are used exclusively as offices, and
are kept reasonably in order by Tenant.
9.1.5 Landlord shall provide interior and exterior window
washing services comparable to that provided in other similar office
buildings in the vicinity.
9.1.6 The standard hours of operation of the Building are
presently Monday through Friday 8:30 a.m. to 5:30 p.m., except for the
excluded holidays set forth in Section 9.1.1 above.
9.2 ADDITIONAL USE. Landlord may impose a reasonable charge, which
charge shall be equivalent to Landlord's actual cost of providing such utilities
and services, including, but not limited to, costs incurred by Landlord in
connection with hiring an engineer or other third party, for any utilities and
services, including, without limitation, air conditioning, electric current and
water, required to be provided by reason of any substantial recurrent use of the
Premises at any time other than established business hours or any use beyond the
levels described in Section 9.1 above, or special electrical, cooling or
ventilating needs created in certain areas by hybrid telephone equipment,
computers and other similar equipment or uses. At
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Landlord's option, additional separate meters for such utilities and services
may be installed for the Premises, at Tenant's cost.
9.3 TENANT COOPERATION. Tenant agrees to cooperate fully at all
times with Landlord and to abide by all regulations and requirements which
Landlord may reasonably prescribe for the use of the above utilities and
services. Expenses or costs described above are additional rent and failure to
pay such shall constitute a breach of the obligation to pay rent under this
Lease, and shall entitle, but not limit, Landlord to the rights granted for such
breach in this Lease by law or equity.
9.4 LIMIT ON LANDLORD LIABILITY. Notwithstanding the provisions of
this Article 9, except in the case of the gross negligence or willful misconduct
of Landlord, its agents, contractors, directors, or employees, Landlord shall
not be liable for, and Tenant shall not be entitled to, any abatement or
reduction of rent, by reason of Landlord's failure to furnish any of the
utilities or services when such failure is caused by accident, breakage,
repairs, strikes, lockouts or other labor disturbance or labor dispute of any
character, governmental regulation, moratorium or other governmental action,
inability by exercise of reasonable diligence to obtain electricity, water or
fuel, or by any other cause beyond Landlord's reasonable control, nor shall any
such failure, stoppage or interruption thereof constitute a forcible eviction or
relieve Tenant from the performance of any covenant or agreement in this Lease
to be performed by Tenant. In the event of any failure, stoppage or interruption
in utilities or services, Landlord shall use all reasonable diligence to cause
such utilities and/or services to be promptly resumed. Notwithstanding the
foregoing, if such failure to furnish utilities or services will likely
materially adversely affect the operation of Tenant's business in, affect
Tenant's use of, or prevent Tenant's reasonable access to, the Premises for a
period of time reasonably expected to be greater than 180 days, then Tenant may
elect to exercise an ongoing right to terminate the Lease, upon thirty (30) days
prior written notice.
9.5 RESERVATION OF RIGHT TO MODIFY. Notwithstanding anything
hereinabove to contrary, Landlord reserves the right from time to time to make
reasonable nondiscriminatory modifications to the above standards for utilities
and services.
9.6 SERVICE PROVIDER. Landlord shall have the right at any time and
from time-to-time during the Lease Term to contract for service from any
reputable company or companies providing electricity service ("Service
Provider"). Tenant shall cooperate with Landlord and the Service Provider at all
times and, as reasonably necessary, shall allow Landlord and Service Provider
reasonable access to the Building's electric lines, feeders, risers, wiring, and
any other machinery within the Premises provided that the operation of Tenant's
business in the Premises is not interfered with or disrupted, and provided that
the cost for such electric service is not increased as a result of Landlord's
election. Landlord shall in no way be liable or responsible for any loss,
damage, or expense that Tenant may sustain or incur by reason of any change,
failure, interference, disruption, or defect in the supply or character of the
electric energy furnished to the Premises, or if the quantity or character of
the electric energy supplied by the Service Provider is no longer available or
suitable for Tenant's requirements, no such change, failure, defect,
unavailability, or unsuitability shall constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of rent, or relieve Tenant from any of its obligations under the Lease;
provided, however, if as a result of any change in the Service Provider,
electricity to the Premises shall be interrupted for any period in excess of 48
hours such that Tenant cannot reasonably operate its business from the Premises,
then rent shall abate for the period of such electricity service interruption to
the Premises.
10. REPAIRS.
10.1 TENANT OBLIGATIONS. Tenant shall, at Tenant's sole cost and
expense, keep the Premises and every part thereof in good order, condition and
repair, ordinary wear and tear excepted. Tenant will pay for any repairs to the
Premises and the Building made necessary by any negligence or willful misconduct
of Tenant or its assignees, subtenants, employees or their respective agents or
other persons permitted in the Building by Tenant or any of them. If Tenant
fails to maintain the Premises in good order, condition and repair, Landlord
shall give Tenant written notice that Tenant must do such acts and expend such
funds at the expense of Tenant as
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are reasonably required to perform such work. Should Tenant refuse or neglect to
repair the Premises at any time within ten (10) days from the date on which
Landlord makes such written demand on Tenant to effect such repair (or if such
repair shall require more than ten [10] days to complete and Tenant shall fail
to commence such repair within such ten [10] day period and to thereafter pursue
such repair diligently to completion), Landlord may enter the Premises and make
such repairs, and upon completion thereof, Tenant agrees to pay to Landlord as
additional rent, Landlord's reasonable costs of completing such repairs plus an
amount not to exceed ten percent (10%) of such costs for Landlord's overhead,
within ten (10) days of receipt from Landlord of a written itemized bill
therefor. Prior to commencing any item of repair or maintenance work which is
connected to or may affect any structural portion of the Building or any of its
basic systems (including, without limitation, air conditioning, heating,
plumbing, electrical and light fixtures), Tenant shall notify Landlord and
Landlord may elect to perform the required work at Tenant's cost. Tenant shall,
upon the expiration or sooner termination of this Lease, surrender the Premises
to the Landlord in good order, condition and repair, ordinary wear and tear
excepted. Except as specifically provided in the Work Letter Agreement, if any,
attached to this Lease as Exhibit F ("Work Letter"), Landlord shall have no
obligation whatsoever to alter, remodel, improve, repair, decorate or paint the
Premises or any part thereof and the parties hereto affirm that Landlord has
made no representation or warranties to Tenant respecting the condition of the
Premises or the Building except as specifically herein set forth.
10.2 LANDLORD OBLIGATIONS. Subject to the provisions of this Lease,
Landlord shall repair and maintain the structural portions of the Building, and
the basic plumbing, air conditioning, heating and electrical systems, unless
such maintenance and repairs are caused in part or in whole by the act, neglect,
fault or omission of any duty of Tenant, its agents, servants, employees or
invites, in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance and repairs. Landlord shall not be liable for any failure to make
any such repairs or to perform any maintenance unless such failure shall persist
for more than ten (10) business days after Tenant has given written notice of
the need of such repairs or maintenance to Landlord. The costs of performing
Landlord's repair and maintenance shall constitute Operating Expenses to the
extent permissible under Section 6.1. Except as provided in Articles 19 and 20
hereof, there shall be no abatement of rent and no liability of Landlord of any
failure by Landlord to make any such repairs or to perform any maintenance or by
reason of any injury to or interference with Tenant's business arising from the
making of any repairs, alterations or improvements in or to any portion of the
Building or the Premises or in or to fixtures, appurtenances and equipment
therein, unless Landlord fails to make such repairs or to perform such
maintenance within ten (10) business days following Tenant's written notice to
Landlord of the need to make such repairs or perform such maintenance (or if
such repair shall require more time to complete and Landlord shall fail to
commence such repair within such reasonable time period and to thereafter pursue
such repair diligently to completion). As a material inducement to Landlord's
entering into the Lease, Tenant expressly waives any right to make repairs at
Landlord's expense whether granted by law, statute, ordinance or otherwise now
or hereafter in effect, including, but not limited to, California Civil Code
Section 1942.
10.3 LANDLORD'S RIGHT OF ENTRY TO MAKE REPAIRS. In addition to the
right of entry set forth in Article 25, Landlord and Landlord's agents,
contractors, licensees, employees, directors, officers, partners, trustees,
invitees, affiliates and subsidiaries (collectively, "Landlord's Agents and
Employees") shall have the right to enter the Premises at all reasonable times
for the purpose of making any alterations, additions, improvements or repairs to
the Premises or the Building as Landlord may deem necessary or desirable,
without liability to Tenant, as long such entry shall be reasonably necessary to
prosecute such repairs to completion and as long as such entry shall be
accomplished as expeditiously as possible and in a manner so as to cause as
little interference to Tenant as reasonably possible. Landlord shall give
reasonable written notice (which in the case of non-emergency repairs shall be
at least forty-eight (48) hours) to Tenant of Landlord's intent to enter the
Premises and effect repairs, except, however, in an emergency situation, in
which case no prior notice shall be required.
11. ALTERATIONS. After installation of the initial Tenant Improvements for
the Premises pursuant to Exhibit F, Tenant may, at its sole cost and expense,
make alterations,
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additions, improvements and decorations to the Premises (collectively,
"Alterations") subject to and upon the following terms and conditions:
11.1 PROHIBITED ALTERATIONS. Tenant may not make any Alterations
which: (i) affect any area outside the Premises; (ii) affect the Building's
structure, equipment, services or systems, or the proper functioning thereof, or
Landlord's access thereto; (iii) affect the outside appearance, character or use
of the Building or the Building Common Areas; (iv) in the reasonable opinion of
Landlord, lessen the value of the Building; or (v) will violate or require a
change in any occupancy certificate applicable to the Premises.
11.2 LANDLORD'S APPROVAL. Before proceeding with any Alterations
which are not prohibited in Section 11.1 above, Tenant must first obtain
Landlord's written approval of the plans, specifications and working drawings
for such Alterations, which approval Landlord will not unreasonably withhold or
delay; provided, however, Landlord's prior approval will not be required for any
such Alterations which are not prohibited by Section 11.1 above and which cost
less than Ten Thousand Dollars ($10,000) as long as (i) Tenant delivers to
Landlord notice and a copy of any final plans, specifications and working
drawings for any such Alterations, if any, at least ten (10) days prior to
commencement of the work thereof, and (ii) the other conditions of this Article
11 are satisfied, including, without limitation, conforming to Landlord's rules,
regulations and insurance requirements which govern contractors. Landlord's
approval of plans, specifications and/or working drawings for Alterations will
not create any responsibility or liability on the part of Landlord for their
completeness, design sufficiency, or compliance with applicable permits, laws,
rules and regulations of governmental agencies or authorities.
11.3 CONTRACTORS. Alterations for which Landlord's approval is
required may be made or installed only by contractors and subcontractors which
have been approved by Landlord, which approval Landlord will not unreasonably
withhold, delay or condition; provided, however, Landlord reserves the right to
require that Landlord's contractor for the Building be given the first
opportunity to bid for any Alteration work. Before proceeding with any
Alterations, Tenant agrees to provide Landlord with ten (10) days prior written
notice and Tenant's contractors must obtain and maintain, on behalf of Tenant
and at Tenant's sole cost and expense: (i) all necessary governmental permits
and approvals for the commencement and completion of such Alterations; and (ii)
if reasonably requested by Landlord, a completion and lien indemnity bond, or
other surety, reasonably satisfactory to Landlord for such Alterations.
Throughout the performance of any Alterations, Tenant agrees to obtain, or cause
its contractors to obtain, workers compensation insurance and general liability
insurance in compliance with the provisions of Article 17 of this Lease.
11.4 MANNER OF PERFORMANCE. All Alterations must be performed: (i)
in accordance with the approved plans, specifications and working drawings; (ii)
in a lien-free and first-class and workmanlike manner; (iii) in compliance with
all applicable permits, laws, statutes, ordinances, rules, regulations, orders
and rulings now or hereafter in effect and imposed by any governmental agencies
and authorities which assert jurisdiction; (iv) in such a manner so as not to
unreasonably interfere with the occupancy of any other tenant in the Building,
nor impose any additional expense upon nor delay Landlord in the maintenance and
operation of the Building; and (v) at such times, in such manner, and subject to
such rules and regulations as Landlord may from time to time reasonably
designate.
11.5 OWNERSHIP. The initial Tenant Improvements installed pursuant
to Exhibit F, including, without limitation, all affixed sinks, dishwashers,
microwave ovens and other fixtures, and all Alterations will become the property
of Landlord and will remain upon and be surrendered with the Premises at the end
of the Term of this Lease; provided, however, Landlord may, by written notice
delivered to Tenant concurrently with Landlord's approval of the final working
drawings for any Alterations, identify those Alterations which Landlord will
require Tenant to remove at the expiration or earlier termination of this Lease.
Landlord may also require Tenant to remove Alterations which Landlord did not
have the opportunity to approve as provided in this Article 11. If Landlord
requires Tenant to remove any Alterations, Tenant, at its sole cost and expense,
agrees to remove the identified Alterations on or before the expiration or
earlier termination of this Lease and repair any damage to the Premises caused
by
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such removal (or, at Landlord's option, Tenant agrees to pay to Landlord all of
Landlord's reasonable costs of such removal and repair).
11.6 PLAN REVIEW. Tenant agrees to pay Landlord, as additional rent,
the actual reasonable costs of professional services and costs for general
conditions of Landlord's third party consultants if utilized by Landlord (but
not Landlord's "in-house" personnel) for review of all plans, specifications and
working drawings for any Alterations, within ten (10) business days after
Tenant's receipt of invoices either from Landlord or such consultants. In
addition, Tenant agrees to pay Landlord, within ten (10) business days after
completion of any Alterations, Landlord's actual costs of supervising and
administering the installation of such Alterations, which costs are incurred in
connection with third party consultants utilized by Landlord to install such
Alterations.
11.7 PERSONAL PROPERTY. All articles of personal property owned by
Tenant or installed by Tenant at its expense in the Premises (including Tenant's
business and trade fixtures, furniture, movable partitions and equipment [such
as telephones, copy machines, computer terminals, refrigerators and facsimile
machines]) will be and remain the property of Tenant, and must be removed by
Tenant from the Premises, at Tenant's sole cost and expense, on or before the
expiration or earlier termination of this Lease. Tenant agrees to repair any
damage caused by such removal at its cost on or before the expiration or earlier
termination of this Lease.
11.8 REMOVAL OF ALTERATIONS. If Tenant fails to remove by the
expiration or earlier termination of this Lease all of its personal property, or
any Alterations identified by Landlord for removal, following ten (10) days
prior written notice to Tenant, Landlord may (without liability to Tenant for
loss thereof) treat such personal property and/or Alterations as abandoned and,
at Tenant's sole cost and expense, and in addition to Landlord's other rights
and remedies under this Lease, at law or in equity: (a) remove and store such
items; and/or (b) upon ten (10) days prior notice to Tenant, sell, discard or
otherwise dispose of all or any such items at private or public sale for such
price as Landlord may obtain or by other commercially reasonable means. Tenant
shall be liable for all costs of disposition of Tenant's abandoned property and
Landlord shall have no liability to Tenant with respect to any such abandoned
property. Landlord agrees to apply the proceeds of any sale of any such property
to any amounts due to Landlord under this Lease from Tenant (including
Landlord's attorneys' fees and other costs incurred in the removal, storage
and/or sale of such items), with any remainder to be paid to Tenant.
12. ASSIGNMENT AND SUBLETTING.
12.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not sell, assign,
mortgage, pledge, hypothecate or encumber this Lease (any such act being
referred to herein as an "assignment"), and shall not sublet the Premises or any
part thereof, without the prior written consent of Landlord in each instance,
which consent shall not be unreasonably withheld, delayed or conditioned and any
attempt to do so without such consent shall be voidable by Landlord and, at
Landlord's election, shall constitute a material default under this Lease.
Notwithstanding the foregoing provisions, Tenant may assign this
Lease or sublet the Premises or any portion thereof ("Permitted Transfer"),
without Landlord's consent to any parent, subsidiary or affiliate entity which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from a merger or consolidation with Tenant, or to any
person or entity which acquires all or a majority of the stock or the assets of
Tenant's business as a going concern, provided that: (i) at least twenty (20)
days prior to such assignment or sublease, Tenant delivers notice thereof to
Landlord, together with financial statements and other financial and background
information of the assignee or sublessee described in Section 12.2; (ii) if in
the case of an assignment, the assignee assumes, in full, the obligations of
Tenant under this Lease (or if in the case of a sublease, the sublessee of a
portion of the Premises or Term assumes, in full, the obligations of Tenant with
respect to such portion) in a written document delivered to Landlord promptly
upon the assignment (or sublease, if applicable); (iii) Tenant remains fully
liable under this Lease; and (iv) the use of the Premises under Paragraph 8
remains unchanged.
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12.2 TENANT'S APPLICATION. If Tenant desires at any time to assign
this Lease (which assignment shall in no event be for less than its entire
interest in this Lease) or to sublet the Premises or any portion thereof, Tenant
shall submit to Landlord at least thirty (30) days prior to the proposed
effective date of the transaction ("Proposed Effective Date"), in writing, a
notice of intent to assign or sublease, setting forth: (i) the Proposed
Effective Date, which shall be no less than thirty (30) nor more than ninety
(90) days after the sending of such notice; (ii) the name of the proposed
subtenant or assignee; (iii) the nature of the proposed subtenant's or
assignee's business to be carried on in the Premises; and (iv) a description of
the terms and provisions of the proposed sublease or assignment. Such notice
shall be accompanied by (i) such financial information as Landlord may
reasonably request concerning the proposed subtenant or assignee, including
recent financial statements and bank references; (ii) a conformed or photostatic
copy of the proposed sublease or assignment agreement; and (iii) any fee
required under Section 12.8. During the time that Landlord has in which to
exercise the options available to Landlord upon the giving of such notice, as
hereinafter described, Tenant shall not sublet all or any part of the Premises
nor assign all or any part of this Lease.
12.3 LANDLORD'S OPTION TO RECAPTURE PREMISES. If, other than in
connection with a Permitted Transfer (for which Landlord shall have no recapture
right), Tenant proposes to assign this Lease or sublease all or substantially
all of the Premises for the balance of the Lease Term, Landlord may, at its
option upon written notice to Tenant given within thirty (30) days after its
receipt of the above-described notice from Tenant, elect to recapture the
Premises or such portion of the Premises as Tenant proposes to sublease and upon
such election by Landlord, this Lease shall terminate as to the portion of the
Premises recaptured. In the event only a portion of the Premises is recaptured,
the Rent payable under this Lease, and Tenant's Proportionate Share shall be
proportionately reduced based on the rentable square footage retained by Tenant
and the rentable square footage leased by Tenant hereunder immediately prior to
such recapture and termination, and Landlord and Tenant shall thereupon execute
an amendment of this Lease in accordance therewith. If Landlord recaptures only
a portion of the Premises, it shall construct and erect at its sole cost such
partitions as may be required to separate the space retained by Tenant from the
space recaptured by Landlord; provided, however, that said partitions need only
be finished in Building Standard condition. Landlord may, at its option, lease
the recaptured portion of the Premises to the proposed subtenant or any other
party without liability to Tenant. If Landlord does not elect to recapture
pursuant to this Section 12.3, Tenant may thereafter enter into a valid
assignment of this Lease or sublease with respect to the Premises upon the terms
stated in Tenant's notice to Landlord, provided Landlord, pursuant to this
Section 12, consents thereto, and provided further that the assignment or
sublease is executed within ninety (90) days after notification to Landlord of
such proposal. Any termination as provided in this Section 12.3 shall be subject
to the written consent of any Mortgagee of Landlord. The effective date of any
such termination shall be the Proposed Effective Date so long as Tenant has
complied with the provisions of Section 12.2 above, and otherwise shall be as
specified in Landlord's notice of termination.
12.4 APPROVAL/DISAPPROVAL STANDARDS. If Tenant complies with the
provisions of Section 12.2, and Landlord does not exercise its option to
recapture under Section 12.3, Landlord's consent to a proposed assignment or
sublease shall not be unreasonably withheld, delayed or conditioned. In
determining whether to grant or withhold consent to a proposed assignment or
sublease, Landlord may consider any reasonable factor. Without limiting what may
be construed as a reasonable factor, it is hereby agreed that any one of the
following factors will be reasonable grounds for disapproval of a proposed
assignment or sublease:
12.4.1 Tenant has not complied with the requirements set forth
in Section 12.2 above;
12.4.2 The proposed assignee or subtenant does not, in
Landlord's reasonable judgment, have sufficient financial worth,
considering the responsibility involved;
12.4.3 The proposed assignee or subtenant does not, in
Landlord's reasonable judgment, have a good reputation as a tenant of
property;
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12.4.4 Landlord has had prior negative leasing experience with
the proposed assignee or subtenant;
12.4.5 The use of the Premises by the proposed assignee or
subtenant will not be identical to the Permitted Use (as defined in
Section 1.12) or any other use permitted by this Lease;
12.4.6 In Landlord's reasonable judgment, the proposed
assignee or subtenant is engaged in a business, and the Premises, or the
relevant part thereof, will be used in a manner, that is not in keeping
with the then current standards of the Building, or that will violate any
restrictive or exclusive covenant as to use contained in any other lease
of space in the Building or the Project;
12.4.7 The use of the Premises by the proposed assignee or
subtenant will violate any applicable law, ordinance or regulation;
12.4.8 The proposed assignee or subtenant, or any person that
directly or indirectly controls, is controlled by, or is under common
control with, the proposed assignee or subtenant, or any person who
controls the proposed assignee or subtenant, is then an occupant of a part
of the Building or the Project;
12.4.9 The proposed assignee or subtenant is a person with
whom Landlord is negotiating to lease space in the Building or the
Project;
12.4.10 The proposed assignment or sublease fails to include
all of the terms and provisions reasonably required to be included therein
pursuant to this Article 12; or
12.4.11 Tenant is then in default of any monetary or material
non-monetary obligation of Tenant under this Lease, or Tenant has been in
monetary default under this Lease on three (3) or more occasions during
the twelve (12) months preceding the date that Tenant requests Landlord's
consent.
12.5 APPROVAL/DISAPPROVAL PROCEDURE. Landlord shall approve or
disapprove the proposed assignment or sublease by written notice to Tenant given
within ten (10) days following Tenant's request for approval. If Landlord shall
exercise its option to recapture the Premises as herein provided, or denies a
request for consent to a proposed sublease or assignment, Landlord shall not be
liable to the proposed assignee or subtenant, or to any broker or other person
claiming a commission or similar compensation in connection with the proposed
assignment or sublease. If Landlord approves the proposed assignment or
sublease, Tenant shall, prior to the Proposed Effective Date, submit to Landlord
all executed originals of the assignment or sublease agreement and, in the event
of a sublease, Landlord's customary consent to subletting form executed by
Tenant and sublessee for execution by Landlord. Provided such assignment or
sublease agreement is in accordance with the terms approved by Landlord,
Landlord shall execute each original as described above and shall retain two
originals for its file and return the others to Tenant. No purported assignment
or sublease shall be deemed effective as against Landlord and no proposed
assignee or subtenant shall take occupancy unless such document is delivered to
Landlord in accordance with the foregoing.
12.6 REQUIRED PROVISIONS. Any and all assignment or sublease
agreements shall (i) contain such terms as are described in Tenant's notice
under Section 12.2 above or as otherwise agreed by Landlord; (ii) impose the
same obligations and conditions on the assignee or sublessee as are imposed on
Tenant by this Lease except as to Rent and term or as otherwise agreed by
Landlord; (iii) be expressly subject and subordinate to each and every provision
of this Lease, (iv) have a term that expires on or before the expiration of the
Term of this Lease; (v) provide that if Landlord succeeds to sublessor's
position, Landlord shall not be liable to sublessee for advance rental payments,
deposits or other payments which have not been actually delivered to Landlord by
the sublessor, and (vi) provide that Tenant and/or the assignee or sublessee
shall pay Landlord the amount of any additional costs or expenses incurred by
Landlord for repairs, maintenance or otherwise as a result of any change in the
nature of
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occupancy caused by the assignment or sublease. Any and all sublease agreements
shall also provide that in the event of termination, re-entry, or dispossession
by Landlord under this Lease, Landlord may, at its option, take over all of the
right, title and interest of Tenant as sublessor under such sublease, and such
subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then
executory provisions of the sublease, except that Landlord shall not: (i) be
liable for any previous act or omission of Tenant under the sublease; (ii) be
subject to any offset not expressly provided in the sublease, that theretofore
accrued to the subtenant against Tenant; or (iii) be bound by any previous
modification of such sublease or by any previous prepayment of more than one (1)
month's fixed rent or any additional rent then due.
12.7 PAYMENT OF ADDITIONAL RENT UPON ASSIGNMENT OR SUBLEASE. If
Landlord shall give its consent to any assignment of this Lease or to any
sublease of the Premises, Tenant shall, in consideration therefor, pay to
Landlord, as additional Rent:
12.7.1 In the case of an assignment, fifty percent (50%) of an
amount equal to all sums and other consideration paid to Tenant by the
assignee for, or by reason of, such assignment (including, without
limiting the generality of the foregoing, all sums paid for the sale of
Tenant's leasehold improvements); and
12.7.2 In the case of a sublease, fifty percent (50%) of any
rents, additional charges, or other consideration paid under the sublease
by the subtenant to Tenant that are in excess of the Rent and Tenant's
Share of Expenses accruing during the term of the sublease in respect of
the subleased space (at the rate per square foot payable by Tenant
hereunder) pursuant to the terms hereof (including, without limiting the
generality of the foregoing, all sums paid for the sale or rental of
Tenant's leasehold improvements).
The sums payable under Sections 12.7.1 and 12.7.2 above shall be paid to
Landlord, following actual receipt of such funds by Tenant, upon the effective
date of the assignment. The sums payable under Sections 12.7.1 and 12.7.1 above
shall be net of commercially reasonable third party brokerage commissions,
reasonable advertising costs, reasonable attorneys' fees, and the unamortized
cost of any improvements to the Premises to the extent paid for solely by Tenant
provided acceptable written evidence of such expenditures is provided to
Landlord. Within fifteen (15) days after written request therefor by Landlord,
Tenant shall at any time and from time to time furnish evidence to Landlord of
the amount of all such sums or other consideration received or expected to be
received.
12.8 FEES FOR REVIEW. Tenant shall reimburse Landlord for its actual
out-of-pocket third-party costs, not to exceed One Thousand Dollars ($1,000.00)
as reimbursement for expenses incurred by Landlord in connection with reviewing
each such transaction.
12.9 NO RELEASE OF TENANT. Unless otherwise agreed to by Landlord in
connection with an assignment or sublease, no consent by Landlord to any
assignment or subletting by Tenant shall relieve Tenant of any obligation to be
performed by Tenant under this Lease, whether occurring before or after such
consent, assignment or subletting, including Tenant's obligation to obtain
Landlord's express prior written consent to any other assignment or subletting.
In no event shall any permitted subtenant assign its sublease, further sublet
all or any portion of its sublet space, or otherwise suffer or permit the sublet
space, or any part thereof, to be used or occupied by others, except upon
compliance with, and subject to the provisions of this Article 12. The
acceptance by Landlord of payment from any person other than Tenant shall not be
deemed to be a waiver by Landlord of any provision of this Lease or to be a
consent to any subsequent assignment or sublease, or to be a release of Tenant
from any obligation under this Lease.
12.10 ASSUMPTION OF OBLIGATIONS. Each assignee of Tenant shall
assume the obligations of Tenant under this Lease and shall be and remain liable
jointly and severally with Tenant for the payment of the Rent and the
performance of all the terms, covenants, conditions and agreements herein
contained on Tenant's part to be performed for the Term of this Lease. No
assignment shall be binding on Landlord unless the assignee or Tenant delivers
to Landlord a counterpart of the instrument of assignment in recordable form
which contains a covenant of
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assumption by the assignee satisfactory in substance and form to Landlord, and
consistent with the requirements of this Article 12. The failure or refusal of
the assignee to execute such instrument of assumption shall not release or
discharge the assignee from its liability to Landlord hereunder. Landlord shall
have no obligation whatsoever to perform any duty to or respond to any request
from any sublessee, it being the obligation of Tenant to administer the terms of
its subleases.
12.11 INVOLUNTARY ASSIGNMENT. Other than as described in Section
12.1, no interest of Tenant in this Lease shall be assignable by operation of
law (including, without limitation, the transfer of this Lease by testacy or
intestacy, or in any bankruptcy or insolvency proceeding). Each of the following
acts shall be considered an involuntary assignment: (i) If Tenant is or becomes
bankrupt or insolvent, makes an assignment for the benefit of creditors, or
institutes a proceeding under any bankruptcy law in which Tenant is the
bankrupt; or, if Tenant is a partnership or consists of more than one (1) person
or entity, if any partner of the partnership or other such person or entity is
or becomes bankrupt or insolvent, or makes an assignment for the benefit of
creditors; (ii) If a writ of attachment or execution is levied on this Lease;
(iii) If, in any proceeding or action to which Tenant is a party, a receiver is
appointed with authority to take possession of the Premises; or (iv) there is
any assumption, assignment, sublease or other transfer under or pursuant to the
Bankruptcy Code, 11 U.S.C. 101 et seq. (hereinafter referred to as the
"Bankruptcy Code"). An involuntary assignment shall constitute a default by
Tenant and Landlord shall have the right to elect to terminate this Lease, in
which case this Lease shall not be treated as an asset of Tenant. If Landlord
shall elect not to exercise its right hereunder to terminate this Lease in the
event of an involuntary assignment, then, in addition to any other rights or
remedies of Landlord under this Lease or provided by law, the provisions of
Sections 12.3, 12.6, 12.7, 12.8, 12.9, and 12.13 shall apply to any such
involuntary assignment. Such sums, if any, payable pursuant to the referenced
Sections shall be and remain the exclusive property of Landlord and shall not
constitute property of Tenant or of the estate of Tenant within the meaning of
the Bankruptcy Code. Such sums which are not paid or delivered to Landlord shall
be held in trust for the benefit of Landlord, and shall be promptly paid or
turned over to Landlord upon demand. Any person or entity to which this Lease is
assigned pursuant to the provisions of the Bankruptcy Code shall be deemed
without further act or deed to have assumed all of the obligations of Tenant
arising under this Lease on and after the date of such assignment. Any such
assignee shall upon demand execute and deliver such instruments and documents
reasonably requested by Landlord confirming such assumption.
12.12 ASSIGNMENT OF SUBLEASE RENTS. Following a material default
hereunder by Tenant, Tenant shall be deemed to have immediately and irrevocably
assigned to Landlord, as security for Tenant's obligations under this Lease, all
rent from any subletting of all or any part of the Premises earned following
such default, and Landlord, as assignee and as attorney-in-fact for Tenant for
purposes hereof, or a receiver for Tenant appointed on Landlord's application,
may collect such rents and apply same toward Tenant's obligations under this
Lease; except that, until the occurrence of an act of default by Tenant, Tenant
shall have the right and license to collect such rents.
13. QUIET ENJOYMENT. Landlord covenants that, so long as Tenant is not in
material default hereunder beyond all applicable cure periods, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term hereby demised
without hindrance or interruption by Landlord or any other person or persons
lawfully or equitably claiming by, through or under Landlord, subject,
nevertheless, to the terms and conditions of this Lease, any mortgage and/or
deed of trust to which this Lease is subordinate as of the date hereof and any
public law or restriction enacted or promulgated by any public entities or
political subdivision thereof.
14. DEFAULT. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Tenant:
14.1 PAYMENT. Any failure by Tenant to pay the rental or to make any
other payment required to be made by Tenant hereunder, where such failure
continues for five (5) days after written notice thereof by Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under Section 1161, et seq., of the California Code of
Civil Procedure;
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14.2 OTHER BREACH. Any failure by Tenant to observe and perform any
other provision of this Lease to be observed or performed by Tenant, where such
failure continues for thirty (30) days (except where a different period of time
is specified in this Lease) after written notice by Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under Section 1161 et seq., of the California Code of
Civil Procedure. If the nature of such default is such that the same cannot
reasonably be cured within such thirty (30) day period, Tenant shall not be
deemed to be in default if Tenant shall within such period commence such cure
and thereafter diligently prosecute the same to completion and in fact completes
such cure within sixty (60) days of Landlord's notice;
14.3 MISREPRESENTATION. Tenant makes or has made or furnishes or has
furnished any warranty, representation or statement to Landlord in connection
with this Lease, or any other agreement to which Tenant and Landlord are
parties, which is or was false or misleading in any material respect when made
or furnished;
14.4 INSOLVENCY. Tenant becomes insolvent, as defined in the Federal
Bankruptcy Code, admits in writing its insolvency or its present or prospective
inability to pay its debts as they become due, is unable to or does not pay any
material portion (in number or dollars amount) of its debts as they become due,
permits or suffers a judgment to exist against it which affects Tenant's ability
to conduct its business in the ordinary course (unless enforcement thereof is
stayed pending appeal), makes or proposes an assignment for the benefit of
creditors, or any class thereof, for purposes of effecting a moratorium upon or
extension or composition of its debts, proposed any such moratorium, extension
or composition, or commences or purposes to commence any bankruptcy,
reorganization or insolvency proceeding, or other proceeding under any federal,
state or other law for the relief of debtors;
14.5 BANKRUPTCY. Tenant fails to obtain the dismissal, within sixty
(60) days after the commencement thereof, of the bankruptcy, reorganization or
insolvency proceeding, or other proceeding under any law for the relief of
debtors, instituted against it by one or more third parties or fails actively to
oppose any such proceeding, or, in any such proceeding, defaults or files an
answer admitting the material allegations upon which the proceeding was based or
alleges its willingness to have an order for relief entered or its desire to
seek liquidation, reorganization or adjustment of any of its debts;
14.6 RECEIVERSHIP. Any receiver, trustee or custodian is appointed
to take possession of all or any substantial portion of the assets of Tenant, or
any committee of Tenant's creditors, or any class thereof, is formed for the
purpose of monitoring or investigating the financial affairs of Tenant or
enforcing such creditors' rights;
14.7 LIENS. Tenant fails to cause the release, within twenty (20)
days following actual notice to Tenant of the filing of any lien arising out of
any work performed, materials furnished, or obligations incurred by or for
Tenant, which has been filed against the Building or Premises; or
14.8 ASSIGNMENT OR SUBLETTING. Tenant attempts to transfer, assign,
sublet or permit the occupancy of the Premises in contravention of Article 12
hereof.
14A The occurrence of any of the following shall constitute a
material default and breach of this Lease by Landlord:
14.9 Any failure by Landlord to make any payment required to be made
by Landlord to Tenant hereunder, where such failure continues for ten (10) days
after written notice thereof by Tenant to Landlord; and
14.10 Any failure by Landlord to observe and perform any other
provision of this Lease to be observed or performed by Landlord within a
reasonable period of time, given the circumstances (including whether such
circumstance constitutes an emergency), after the receipt of such notice, but in
any event not later than thirty (30) days after receipt of such notice
(provided, however, that if the nature of repairs and/or maintenance is such
that the same cannot reasonably be completed within such thirty (30) day period,
then Landlord shall have such
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reasonable additional time to so, provided Landlord commences such repairs-
and/or maintenance within said thirty (30) day period, and thereafter diligently
prosecutes the same to completion).
15. REMEDIES ON DEFAULT.
15.1 TERMINATE LEASE. In the event of any material default by Tenant
and the expiration of the applicable cure period, then in addition to any other
remedies available to Landlord at law or in equity, Landlord shall have the
option to terminate this Lease and all rights of Tenant hereunder by giving
written notice of such intention to terminate; provided, however, that
notwithstanding anything herein to the contrary, Tenant shall have five (5) days
following receipt of such written notice in which to cure such default. In the
event that Landlord has the right, and elects, to so terminate the Lease, then
Landlord may recover from Tenant:
15.1.1 the value at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
15.1.2 the value at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss Tenant proves
reasonably could have been avoided; plus
15.1.3 the value at the time of award of the amount by which
the unpaid rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Tenant proves reasonably could
be avoided; plus
15.1.4 any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, and
15.1.5 at Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable California law.
15.2 INTEREST. As used in Sections 15.1.1 and 15.1.2 above, the
"value at the time of award" is computed by allowing interest at the rate
specified in Section 32.8 below. As used in Section 15.1.3 above, the "value at
the time of award" is computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
15.3 RE-ENTER. In the event of any such material default by Tenant,
Landlord shall also have the right, with or without terminating this Lease, to
reenter the Premises and remove all persons and property from the Premises; such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Tenant.
15.4 RECOVER RENT. In the event of the vacation or abandonment of
the Premises by Tenant or in the event that Landlord shall elect to reenter as
provided above or shall take possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then, without terminating
this Lease, Landlord may, but shall not be obligated to, lease to a third party
the Premises or any portion thereof as the agent of Tenant upon such terms and
conditions as Landlord may deem necessary or desirable in order to relet the
Premises.
15.5 APPLICATION OF NEW RENT. If Landlord elects to relet the
Premises or any portion thereof pursuant to Section 15.4 above, then rentals
received by Landlord from reletting shall be applied: first to the payment of
any indebtedness other than rent due hereunder from Tenant to Landlord; second,
to the payment of any cost of such reletting; third, to the payment of the cost
of any necessary alterations and repairs to the Premises; fourth, to the payment
of rent due and unpaid hereunder; and the residue, if any, shall be held by
Landlord and applied in payment of future rent as the same may become due and
payable hereunder. Should reletting result in the actual payment of rentals at
less than the rent payable during that month by Tenant hereunder, then Tenant
shall pay as additional rent such deficiency to Landlord immediately upon demand
therefor by Landlord. Such deficiency shall be calculated and paid monthly.
Tenant shall also pay to Landlord as soon as ascertained and also as additional
rent, any costs and
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expenses incurred by Landlord in such reletting or in making such alterations
and repairs not covered by the rentals received from such reletting.
15.6 OPTIONS UPON REENTRY. No reentry or taking possession of the
Premises by Landlord pursuant to this Article 15 shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Landlord because of any default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such default. No acceptance by
Landlord of a lesser sum than that due by Tenant nor any endorsement or
statement on any check or letter accompanying any check shall be deemed an
accord and satisfaction. The rights of Landlord hereunder are cumulative and
non-exclusive and Landlord may pursue any and all rights and remedies permitted
under applicable California law.
15.7 TENANT REMEDIES. In the event of any material default by
Landlord and the expiration of the applicable cure period, then Tenant shall
have all remedies available to Tenant hereunder, at law or in equity.
16. NON-LIABILITY AND INDEMNIFICATION OF LANDLORD.
16.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent
such matter is not covered by the insurance required to be maintained by Tenant
under this Lease and such matter is attributable to the negligence or willful
misconduct of Landlord, Landlord shall not be liable to Tenant, Tenant's
employees, agents or invitees for: (i) any damage to property of Tenant, or of
others, located in, on or about the Premises, nor for (ii) the loss of or damage
to any property of Tenant or of others by theft or otherwise, (iii) any injury
or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, water, rain or leaks from any part of the
Premises or from the pipes, appliance of plumbing works or from the roof, street
or subsurface or from any other places or by dampness or by any other cause of
whatsoever nature, or (iv) any such damage caused by other tenants or persons in
the Premises, occupants of adjacent property of the Project, or the public, or
caused by operations in construction of any private, public or quasi-public
work. Landlord shall in no event be liable to Tenant for any consequential
damages or for loss of revenue or income and Tenant waives any and all claims
for any such damages. All property of Tenant kept or stored on the Premises
shall be so kept or stored at the sole risk of Tenant and Tenant shall hold
Landlord harmless from any claims arising out of damage to the same, including
subrogation claims by Tenant's insurance carriers, unless such damage shall be
caused by the negligence or willful misconduct of Landlord. Landlord or its
agents shall not be liable for interference with the light or other intangible
rights.
16.2 INDEMNITY.
16.2.1 Tenant shall be liable for, and shall indemnify,
defend, protect and hold Landlord and Landlord's partners, officers,
directors, employees, agents, successors and assigns (collectively,
"Landlord Indemnified Parties") harmless from and against, any and all
claims, damages, judgments, suits, causes of action, losses, liabilities
and expenses, including attorneys' fees and court costs (collectively,
"Indemnified Claims"), arising or resulting from (a) any act or omission
relating to Tenant's use of the Premises of Tenant or any of Tenant's
agents, employees, contractors, subtenants, assignees, licensees or with
respect to acts or omissions within the Premises only, Tenant's invitees
(collectively, "Tenant Parties"); (b) the use of the Premises and Common
Areas and conduct of Tenant's business by Tenant or any Tenant Parties, or
any other activity, work or thing done, permitted or suffered by Tenant or
any Tenant Parties, in or about the Premises, the Building or elsewhere in
the Project; and/or (c) any default by Tenant of any obligations on
Tenant's part to be performed under the terms of this Lease. In case any
action or proceeding is brought against Landlord or any Landlord
Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon
notice from Landlord, shall defend the same at Tenant's expense by counsel
approved in writing by Landlord, which approval shall not be unreasonably
withheld.
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16.2.2 Landlord shall be liable for, and shall indemnify,
defend, protect and hold Tenant and Tenant's partners, officers,
directors, employees, agents, successors and assigns (collectively,
"Tenant Indemnified Parties") harmless from and against, any and all
claims, damages, judgments, suits, causes of action, losses, liabilities
and expenses, including attorney's fees and court costs arising or
resulting from (a) any cause in or about the Project, the Building (other
than within the Premises), or the Common Areas (to the extent the same
would be covered under a customary CGL policy of insurance or is otherwise
covered by Landlord's insurance), or (b) any negligence or willful
misconduct of Landlord or any of the Landlord Indemnified Parties, whether
in or about the Project, the Building, the Premises or the Common Areas;
provided, however, that the foregoing indemnity shall not apply to the
extent of the negligence or willful misconduct of any Tenant Indemnified
Party.
16.3 LIMITATIONS ON LANDLORD'S LIABILITY. In consideration for the
benefits accruing hereunder, Tenant and all successors and assigns covenant and
agree that, in the event of any actual or alleged failure, breach or default
hereunder by Landlord: the sole exclusive remedy shall be against Landlord's
equity in the Building (and all proceeds of any kind therefrom, including
without limitation, any condemnation, insurance or financing proceeds) and not
against any of Landlord's other assets; no constituent partner of Landlord shall
be sued or named as a party in any suit or action (except as may be necessary to
secure jurisdiction or the partnership); no service or process shall be made
against any constituent partner of Landlord (except as may be necessary to
secure jurisdiction of the partnership); no constituent partner of Landlord
shall be required to answer or otherwise plead to any service of process; no
judgment will be taken against any constituent partner of Landlord; any judgment
taken against any constituent partner of Landlord may be vacated and set aside
at any time without hearing; no writ of execution will be levied against the
assets of any constituent partner of Landlord; and these covenants and
agreements are enforceable both by Landlord and also by any constituent partner
of Landlord. Tenant agrees that each of the foregoing covenants and agreements
in this Section 16.3 shall be applicable to any covenant or agreement either
expressly contained in this Lease or imposed by statute or at common law.
17. INSURANCE.
17.1 TENANT'S OBLIGATION. Tenant hereby agrees to maintain in full
force and effect at all times during the Term of this Lease, at its own expense,
for the protection of Tenant, Landlord and, if required by Landlord, Landlord's
lenders, policies of insurance issued by a responsible carrier or carriers
having ratings of not less than Class X and a general rating of A or better in
"Bests" insurance reports and in a form acceptable to Landlord which afford the
following coverages:
<TABLE>
<S> <C>
Worker's Compensation, including statutory Statutory amounts
amount, employer's liability
Commercial General Liability insurance, including, Not less than $2,000,000 combined single limit
without limitation, blanket contractual liability for both bodily injury and property damage
broad form property damage, fire damage, personal
injury, completed operations, products liability,
owned and non-owned automobile coverage, and
protective and/or contingent liability insurance.
Property insurance, including fire and extended In amounts sufficient to cover the full cost of
coverage, vandalism and malicious mischief, and replacement of all improvements and
sprinkler leakage insurance with coverages as betterments to the Premises installed by or on
previously covered under "All-Risk" coverage. behalf of Tenant and all of Tenant's fixtures and
other personal property.
</TABLE>
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<PAGE> 28
<TABLE>
<S> <C>
Business interruption insurance. In such amounts as will reimburse Tenant for
direct or indirect loss of earnings and incurred
costs attributable to the perils covered by
Tenant's property insurance described above.
</TABLE>
17.2 DEDUCTIBLES. Without altering Tenant's responsibility to pay
rent, Tenant may elect to have reasonable deductibles in connection with each
insurance policy.
17.3 CERTIFICATES OF INSURANCE. Tenant shall deliver to Landlord on
or before the Commencement Date of this Lease, and thereafter at least thirty
(30) days prior to expiration of such policy, certificates of insurance
evidencing the above coverages with limits not less than those specified above.
Such certificates, with the exception of Worker's Compensation, shall name
Landlord and each of its lenders as additional insureds and shall expressly
provide that the interests of same therein shall not be affected by any breach
of Tenant of any policy provision for which such certificates evidence coverage.
Further, all certificates shall expressly provide that not less than thirty (30)
days' prior written notice shall be given Landlord in the event of material
alteration to or cancellation of the coverages evidenced by such certificates.
17.4 INCREASES. Upon demand, Tenant shall provide Landlord, at
Tenant's expense, with such increased amount of existing insurance, and such
other insurance in such limits, as Landlord may require and such other hazard
insurance as the nature and condition of the Premises may require, consistent
with the insurance requirements imposed by Landlord of comparable buildings in
the West Los Angeles/Santa Monica area, to afford Landlord adequate protection
for said risks.
17.5 LOSS AS ADDITIONAL RENT. If Landlord is adjudged a co-insurer
by its insurance carrier as a result of any failure of Tenant to comply with any
provision of this Section 17, then any loss or damage Landlord shall sustain by
reason thereof shall be borne by Tenant as additional rent and shall be
immediately paid by Tenant upon receipt of a bill thereof and evidence of such
loss. Such additional rent shall bear interest at the maximum rate permitted by
law and shall not compromise any other rights accruing to Landlord under this
Lease or by law or equity.
17.6 NO REPRESENTATION REGARDING ADEQUACY. Landlord makes no
representation that the limits of liability specified to be carried by Tenant
under the terms of this Lease are adequate to protect Tenant against Tenant's
undertaking under this Article 17, and in the event Tenant believes that any
such insurance coverage called for under this Lease is insufficient, Tenant
shall provide, at its own expense, and without altering its responsibility to
pay rent, such additional insurance as Tenant deems adequate.
17.7 NO LIABILITY. Any covenants, conditions, provisions or
agreements on the part of Landlord to perform any act or thing for the benefit
of Tenant shall not be deemed breached if Landlord is unable to furnish or
perform the same by virtue of a strike, lock out, laws, rules, orders,
ordinances, directions, regulations or requirements of any federal, state,
county or municipal authority, labor trouble or any other cause whatsoever
beyond Landlord's control, nor shall Tenant's rent be abated by reason of such
inability on the part of Landlord.
17.8 LANDLORD'S INSURANCE. Notwithstanding anything to the contrary
contained in this Article or elsewhere in the Lease, during the Lease Term,
Landlord agrees to insure (i) the Building, including all Tenant Improvements
installed within the Premises by Landlord or at Landlord's expense, but
excluding any property which Tenant is obligated to insure under this Lease, and
(ii) the Common Areas (to the extent Landlord is the owner of the Common Areas)
against damage with "All Risks" property insurance and public liability
insurance, all in such commercially reasonable amounts and with such reasonable
deductibles as are appropriate for a prudent owner of a similar first-class
office building located in the West Los Angeles/Santa Monica area. At Landlord's
option, such insurance may be carried under any blanket or umbrella policies
which Landlord has in force for other buildings and projects.
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<PAGE> 29
Landlord may, but will not be obligated to, obtain and carry any other form or
forms of insurance including, without limitation, rental abatement insurance, as
it or Landlord's mortgagees may reasonably determine advisable. The cost of
insurance obtained by Landlord will be included in Operating Expenses.
Notwithstanding any contribution by Tenant to the cost of insurance premiums as
part of Operating Expenses, Tenant acknowledges that Tenant is not entitled to
any rights as an insured or loss payee under any insurance policies maintained
by Landlord and has no right to directly receive any proceeds from any insurance
policies carried by Landlord.
18. WAIVER OF CLAIMS; WAIVER OF SUBROGATION.
18.1 MUTUAL WAIVER OF PARTIES. Landlord and Tenant hereby waive
their rights against each other with respect to any claims or damages or losses
which are caused by or result from (a) property damage insured against under any
property insurance policy carried by Landlord or Tenant (as the case may be)
pursuant to the provisions of this Lease and enforceable at the time of such
damage or loss, or (b) property damage which would have been covered under any
insurance required to be obtained and maintained by Landlord or Tenant (as the
case may be) under this Lease (as applicable) had such insurance been obtained
and maintained as required therein. The foregoing waivers shall be in addition
to, and not a limitation of, any other waivers or releases contained in this
Lease.
18.2 WAIVER OF INSURERS. Each party shall cause each property
insurance policy required to be obtained by it pursuant to this Lease to provide
that the insurer waives all rights of recovery by way of subrogation against
either Landlord or Tenant, as the case may be, in connection with any claims,
losses and damages covered by such policy. If either party fails to maintain
property insurance required hereunder, such insurance shall be deemed to be
self-insured with a deemed full waiver of subrogation as set forth in the
immediately preceding sentence.
19. DESTRUCTION OF PREMISES.
19.1 LOSS COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Building is wholly
or partially damaged or destroyed by a casualty, the loss to Landlord from which
is (except for any applicable deductible) fully covered by insurance maintained
by Landlord or for Landlord's benefit, which casualty renders the Premises
totally or partially inaccessible or unusable by Tenant for general office use,
then:
19.1.1 Repairs Which Can Be Completed Within Six (6) Months.
Within a reasonable period of time after notice to Landlord of the damage
or destruction, but in any event within sixty (60) days of notice to
Landlord of such damage or destruction, Landlord shall provide Tenant with
notice of its determination of whether the damage or destruction can be
repaired within six (6) months of such damage or destruction without the
payment of overtime or other premiums. If all repairs to such Premises or
Building can, in Landlord's judgment, be completed within six (6) months
following the date of notice to Landlord of such damage or destruction
without the payment of overtime or other premiums, Landlord shall use due
diligence to repair the same and this Lease shall remain in full force and
effect and a proportionate reduction of the Rent shall be allowed Tenant
for such portion of the Premises as shall be rendered inaccessible or
unusable to Tenant, and which is not used by Tenant, during the period of
time that such portion is unusable or inaccessible and not used by Tenant.
In such event, Tenant shall assign to Landlord (or to any party designated
by Landlord) all insurance proceeds payable to Tenant under Tenant's
property insurance required under Section 17.1 of this Lease; provided
that if the cost of such repair by Landlord exceeds the amount of
insurance proceeds received by Landlord from Tenant's insurance carrier,
as assigned by Tenant, the cost of such repairs shall be paid by Tenant to
Landlord prior to Landlord's commencement of repair of the damage.
19.1.2 Repairs Which Cannot Be Completed Within Six Months. If
all such repairs to the Building and Premises cannot, in Landlord's
reasonable judgment, be completed within six (6) months following the date
of notice to Landlord of such damage
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<PAGE> 30
or destruction without the payment of overtime or other premiums, Landlord
shall notify Tenant of such determination and either Landlord or Tenant
may, by written notice to the other no later than fifteen (15) business
days after Tenant's receipt of such notification, elect to terminate this
Lease as of the date of the occurrence of such damage or destruction. If
neither Landlord nor Tenant elect to terminate this Lease pursuant to the
preceding sentence, then Landlord shall, at Landlord's expense, use due
diligence to repair the same and this Lease shall remain in full force and
effect but the Rent shall be proportionately reduced as provided in
Section 19.1.1 above.
19.1.3 Repairs Not Completed Within Six Months. If Landlord is
obligated to repair the Premises or a portion of the Building necessary
for Tenant's occupancy pursuant to this Article 19, then Landlord shall
commence such repairs promptly and shall diligently pursue such repairs to
completion within the six (6) month period set forth above. If Landlord
should fail to complete such work within such six (6) month period
(provided, however, that such six (6) month period shall be extended for
any delays in the completion of such work which result from causes beyond
Landlord's reasonable control (financial inability excluded) including
without limitation any delays caused by Tenant but in no event shall such
six (6) month period be extended for more than sixty (60) days for delays
other than those caused by Tenant), then Tenant may elect to terminate
this Lease upon ten (10) days' notice to Landlord given within thirty (30)
days following such failure.
19.2 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Building is totally
or partially damaged or destroyed from a casualty, the loss to Landlord from
which is (except for any applicable deductible) not required to be covered by
insurance maintained by Landlord or for Landlord's benefit, which damage renders
the Premises inaccessible or unusable to Tenant in the ordinary course of its
business, and such uninsured portion of the cost of repairing or restoring such
damage or destruction exceeds Two Hundred Fifty Thousand Dollars ($250,000.00),
Landlord may, at its option, upon written notice to Tenant within a reasonable
period of time after notice to Landlord of the damage or destruction, but in any
event within sixty (60) days after notice to Landlord of the occurrence of such
damage or destruction, elect to repair or restore such damage or destruction, or
Landlord may elect to terminate this Lease. If Landlord elects to repair or
restore such damage or destruction, this Lease shall continue in full force and
effect but the Rent shall be proportionately reduced as provided in Section
19.1.1. If Landlord does not elect by notice to Tenant to repair such damage, or
if the damage cannot, in Landlord's judgment, be completed within six (6) months
following the date of notice to Landlord of such damage or destruction, this
Lease shall terminate.
19.3 DESTRUCTION DURING FINAL YEAR. Notwithstanding anything to the
contrary contained in Sections 19.1 and 19.2, if the Premises or the Building
are wholly or partially damaged or destroyed (to an extent which will require
sixty (60) days or more to repair) within the final twelve (12) months of the
Term of this Lease (including any Option Period with respect to which the Option
to Extend has been or is concurrently therewith exercised), either Landlord or
Tenant may, at their option, by giving the other party notice within sixty (60)
days after notice to Landlord of the occurrence of such damage or destruction,
elect to terminate this Lease.
19.4 TENANT'S PERSONAL PROPERTY. Landlord shall not be required to
repair any injury or damage by fire or other cause, or to make any repairs or
replacements of any uninsured leasehold improvements, fixtures or other personal
property of Tenant.
19.5 WAIVER OF TERMINATION RIGHT. Landlord and Tenant agree that the
foregoing provisions of this Article 19 are to govern their respective rights
and obligations in the event of any damage or destruction and supersede and are
in lieu of the provisions of any applicable law, statute, ordinance, rule,
regulation, order or ruling now or hereafter in force which provide remedies for
damage or destruction of leased premises (including, without limitation, to the
extent the Premises are located in California, the provisions of California
Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any
successor statute or laws of a similar nature).
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<PAGE> 31
20. EMINENT DOMAIN. If the whole of the Premises, or such part thereof as
shall substantially interfere with Tenant's use and occupancy thereof, shall be
taken by any lawful power or authority by exercise of the right of eminent
domain, or sold to prevent such taking, either Tenant or Landlord may terminate
this Lease effective as of the date possession is required to be surrendered to
said authority. Except as provided herein, Tenant shall not because of such
taking assert any claim against Landlord for any compensation because of such
taking. If the amount of property or the type of estate taken shall not
substantially interfere with Tenant's use of the Premises, Landlord shall be
entitled to the entire amount of the award without deduction for any estate or
interest of Tenant. In such event, Landlord shall proceed promptly to restore
the Premises to substantially their condition prior to such partial taking, and
a proportionate allowance shall be made to Tenant for the rent corresponding to
the time during which, and to the part of the Premises of which, Tenant shall be
so deprived on account of such taking and restoration. Nothing contained in this
Article 20 shall be deemed to give Landlord any interest in, or prevent Tenant
from seeking any award against the taking authority for, the taking of personal
property and fixtures belonging to Tenant or for relocation or business
interruption expenses recoverable by Tenant from the taking authority.
21. ESTOPPEL CERTIFICATE. Tenant shall at any time and from time to time
upon not less than fifteen (15) days' prior written notice from Landlord
execute, acknowledge and deliver to Landlord a statement in writing, (a)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified, is in full force and effect), and the date to which the rental
and other charges are paid in advance, if any, (b) acknowledging that there are
not, to Tenant's knowledge, any uncured material defaults, or if there are any
uncured material defaults, a description of such material defaults, and (c)
certifying such other reasonable matters as Landlord may request. Any such
statement may be relied upon by any prospective purchaser or encumbrancer of all
or any portion of the real property of which the Premises are a part. If Tenant
does not provide Landlord with a statement as required in this Paragraph within
the thirty (30) day period mentioned therein, Tenant shall be deemed to have
acknowledged all of the matters set forth herein. Landlord shall, upon not less
than fifteen (15) days' prior written notice from Tenant, delivered not more
than one time in each calendar year during the Term, execute, acknowledge and
deliver to Tenant a statement in writing, (a) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease as so modified, is in full
force and effect), and the date to which the rental and other charges have been
paid in advance, if any, and (b) acknowledging that there are not, to Landlord's
knowledge, any uncured material defaults by Tenant, or if there are any uncured
material defaults by Tenant, a description of such material defaults.
22. SUBORDINATION. Tenant agrees that this Lease and any sublease shall,
without the necessity of the execution and delivery of any further instruments
on the part of Tenant to effectuate such subordination, be subordinate to any
ground leases, mortgages, deeds of trust or other security instruments of any
kind that are or may hereafter be placed upon the Building and to any and all
advances to be made thereunder, and to the interest thereon, and all renewals,
replacements and extensions thereof; provided, however, that any such ground
lease, mortgage, deed of trust or security instrument executed or entered into
following execution of this Lease shall not interfere with Tenant's use and
quiet enjoyment of the Premises. Landlord shall use commercially reasonable
efforts to procure a non-disturbance agreement from any such future lenders on
terms reasonably acceptable to Tenant and such lender. In the event of any
foreclosure on such lien or encumbrance, or the transfer of title to the
Building, Tenant shall attorn to the new owner and will recognize such owner as
Landlord under this Lease. Notwithstanding the foregoing, Tenant covenants and
agrees to promptly execute and deliver upon demand such further instruments
evidencing such subordination of this Lease, and to cause to be delivered from
any subtenant such further instruments evidencing the subordination of such
subleases as may reasonably be requested by Landlord.
23. SURRENDER; HOLDING OVER.
23.1 SURRENDER. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not constitute a merger, and
shall, at the option of Landlord,
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<PAGE> 32
operate as an assignment to Landlord of any or all subleases or subtenancies.
Upon the expiration or earlier termination of this Lease, Tenant agrees to
peaceably surrender the Premises to Landlord broom clean and in a state of
first-class order, repair and condition, ordinary wear and tear and casualty
damage (if this Lease is terminated as a result thereof pursuant to Article 19)
excepted, with all of Tenant's personal property and Alterations removed from
the Premises to the extent required under Article 11 and all damage caused by
such removal repaired as required by Article 11. Prior to the date Tenant is to
actually surrender the Premises to Landlord, Tenant agrees to give Landlord
reasonable prior notice of the exact date Tenant will surrender the Premises so
that Landlord and Tenant can schedule a walk-through of the Premises to review
the condition of the Premises and identify the alterations and personal property
which are to remain upon the Premises and which items Tenant is to remove, as
well as any repairs Tenant is to make upon surrender of the Premises. The
delivery of keys to any employee of Landlord or to Landlord's agent or any
employee thereof alone will not be sufficient to constitute a termination of
this Lease or a surrender of the Premises.
23.2 HOLDING OVER. If Tenant holds over after the expiration or
earlier termination of the Term hereof without the express written consent of
Landlord, Tenant shall become a tenant-at-sufferance only, and Tenant shall be
liable to Landlord for the payment of Base Rent hereunder at one hundred fifty
percent (150%) of Landlord's then scheduled Base Rent for the Premises, plus all
additional rent payable by Tenant under this Lease, and such unpermitted
holdover shall be subject to the terms, covenants and conditions specified
herein, so far as applicable. Acceptance by Landlord of rent after such
expiration or earlier termination shall not result in a renewal of this Lease.
The foregoing provisions of this Article 23 are in addition to and do not affect
any of the rights of Landlord to pursue Tenant for all of Landlord's damages, as
a result of Tenant's unpermitted holdover of the Premises. In the event that
Tenant fails to surrender the Premises upon such termination or expiration, then
Tenant shall indemnify and hold Landlord harmless against all loss or liability
resulting from or arising out of Tenant's failure to surrender the Premises,
including, but not limited to, any actual and reasonable amounts required to be
paid to any tenant or prospective tenant who was to have occupied the Premises
after said termination or expiration and any related attorneys' fees and
brokerage commissions.
24. LIENS. Tenant shall use commercially reasonable efforts to prevent any
mechanics', materialmen's or other liens to be filed against the Building nor
against the Tenant's leasehold interest in the Premises as a result of Tenant's
use of the Premises. Landlord shall have the right at all reasonable times to
post and keep posted on the Premises any notices which it deems necessary for
protection from such liens. If any such liens are filed, Tenant shall, within
twenty (20) days of the date of actual notice of such filing, cause such liens
to be released of record by payment of the lien amount, posting a bond in the
amount of such lien or otherwise. Should Tenant fail to cause such liens to be
released of record within such twenty (20) day period, Landlord may, without
waiving its rights and remedies based on such breach of Tenant and without
releasing Tenant from any of its obligations, cause such liens to be released by
any means it shall deem proper, including payment in satisfaction of the claim
giving rise to such lien. Tenant shall pay to Landlord within thirty (30) days
of receipt of notice from Landlord, any sum paid by Landlord to remove such
liens, together with interest at the maximum rate per annum permitted by law
from the date of such payment by Landlord, as Additional Rent.
25. ENTRY BY LANDLORD. Landlord reserves and shall at any and all
reasonable times (upon reasonable prior notice under the circumstances), have
the right to enter the Premises, inspect the same, supply janitorial service and
any other service to be provided by Landlord to Tenant hereunder, ascertain
whether Tenant has complied with the terms of this Lease, perform work required
to be performed by Tenant but with respect to which Tenant is in default, or
otherwise to cure any default of Tenant, to submit said Premises to prospective
purchasers or during the last two hundred seventy (270) days of this Lease Term
to prospective tenants, to post notices of non-responsibility, and to alter,
improve or repair the Premises and any portion of the Building that Landlord may
deem necessary or desirable as set forth in Section 10.3, without abatement of
rent except as otherwise expressly set forth in this Lease. For such purposes,
Landlord may erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, always providing that the
entrance to the
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<PAGE> 33
Premises shall not be blocked thereby, and further providing that such entry by
Landlord shall be accomplished by Landlord as expeditiously as reasonably
possible and in a manner so as to cause as little interference to Tenant as
reasonably possible. Tenant hereby waives any claim for damages or for any
injury or inconvenience to of interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, and any other loss occasioned
thereby except as otherwise expressly set forth in this Lease. For each of the
aforesaid purpose, Landlord shall at all times have and retain a key with which
to unlock all of the doors in upon and about the Premises, excluding Tenant's
vaults, safes and files, and Landlord shall have the right to use any and all
means which Landlord may deem proper to open said doors in an emergency, in
order to obtain entry to the Premises without liability to Tenant except for any
failure to exercise due care for Tenant's property. Any entry to the Premises
obtained by Landlord by any of these means, or otherwise, shall not under any
circumstances be construed or deemed to be a forcible or unlawful entry into, or
a detainer of, the Premises, or an eviction of Tenant from the Premises or any
portion thereof.
26. BROKERS. The parties acknowledge that the broker(s) who negotiated
this Lease are stated in Section 1.13 of the Basic Lease Provisions and
Definitions. Each party represents and warrants to the other, that to its
knowledge, no other broker, agent or finder (a) negotiated or was instrumental
in negotiating or consummating this Lease on its behalf, and (b) is or might be
entitled to a commission or compensation in connection with this Lease. Landlord
and Tenant each agree to promptly indemnify, protect, defend and hold harmless
the other from and against any and all claims, damages, judgments, suits, causes
of action, losses, liabilities, penalties, fines, expenses and costs (including
attorneys' fees and court costs) resulting from any breach by the indemnifying
party of the foregoing representation, including, without limitation, any claims
that may be asserted by any broker, agent or finder undisclosed by the
indemnifying party.
27. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency,
all taxes and assessments (real and personal) levied against (a) any personal
property or trade fixtures placed by Tenant in or about the Premises (including
any increase in the assessed value of the Premises based upon the value of any
such personal property or trade fixtures); and (b) any Tenant Improvements or
Alterations in the Premises (whether installed and/or paid for by Landlord or
Tenant) to the extent such items are assessed at a valuation higher than the
valuation at which tenant improvements conforming to Landlord's building
standard tenant improvements are assessed. If any such taxes or assessments are
levied against Landlord or Landlord's property, Landlord may, after written
notice to Tenant (and under proper protest if requested by Tenant) pay such
taxes and assessments, in which event Tenant agrees to reimburse Landlord all
amounts paid by Landlord within ten (10) business days after demand by Landlord;
provided, however, Tenant, at its sole cost and expense, will have the right,
with Landlord's cooperation, to bring suit in any court of competent
jurisdiction to recover the amount of any such taxes and assessments so paid
under protest.
28. PARKING.
28.1 GRANT OF PARKING RIGHTS. So long as this Lease is in effect and
provided Tenant is not in default hereunder, Tenant and Tenant's Authorized
Users (as defined below) shall have the right, but not the obligation, to rent
the number and type of parking spaces designated in item 1.14 of the Basic Lease
Provisions and Definitions subject to the terms and conditions of this Article
28 and the Rules and Regulations regarding parking contained in Exhibit D
attached hereto. Upon written request of Landlord, Tenant agrees to submit to
Landlord or, at Landlord's election, directly to Landlord's parking operator
with a copy to Landlord, written notice in a form reasonably specified by
Landlord containing the names, office addresses and telephone numbers of those
persons who are authorized by Tenant to use Tenant's parking spaces on a monthly
basis ("Tenant's Authorized Users") and shall use its reasonable efforts to
identify each vehicle of Tenant's Authorized Users by make, model and license
number. Tenant agrees to deliver such notice prior to the beginning of the Term
of this Lease and to periodically update such notice as well as upon specific
request by Landlord or Landlord's parking operator to reflect changes to
Tenant's Authorized Users or their vehicles.
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<PAGE> 34
28.2 VISITOR PARKING. So long as this Lease is in effect, Tenant's
visitors and guests will be entitled to use those specific parking areas which
are designated for short term visitor parking and which are located within the
surface parking area(s), if any, and/or within the parking structure(s) which
serve the Building. Visitor parking will be made available at a charge to
Tenant's visitors and guests, with the rate being established by Landlord in its
discretion from time to time. Tenant, at its sole cost and expense, may elect to
validate such parking for its visitors and guests All such visitor parking will
be on a non-exclusive, in common basis with all other visitors and guests of the
Project.
28.3 USE OF PARKING SPACES. Tenant will not use or allow any of
Tenant's Authorized Users to use any parking spaces which have been specifically
assigned by Landlord to other tenants or occupants or for other uses such as
visitor parking or which have been designated by any governmental entity as
being restricted to certain uses. Tenant will not be entitled to increase its
parking privileges applicable to the Premises during the Term of the Lease
except as follows: If at any time Tenant desires to increase the number of
parking spaces allocated to it under the terms of this Lease, Tenant must notify
Landlord in writing of such desire and Landlord will have the right, in its sole
and absolute discretion, to either (a) approve such requested increase in the
number of parking spaces allocated to Tenant (with an appropriate increase to
the additional rent payable by Tenant for such additional spaces based on the
then prevailing parking rates), or (b) disapprove such requested increase in the
number of parking spaces allocated to Tenant. Promptly following receipt of
Tenant's written request, Landlord will provide Tenant with written notice of
its decision including a statement of any adjustments to the additional rent
payable by Tenant for parking under the Lease, if applicable. Tenant shall have
the right, upon notice to Landlord, to elect to decrease the number of parking
spaces applicable to the Premises (with an appropriate reduction in the
additional rent payable by Tenant for such eliminated parking spaces based on
the then prevailing parking rates).
28.4 GENERAL PROVISIONS. Except as otherwise expressly set forth in
this Lease, Landlord reserves the right to set and increase monthly fees and/or
daily and hourly rates for parking privileges from time to time during the Term
of the Lease. Landlord may assign any unreserved and unassigned parking spaces
and/or make all or any portion of such spaces reserved, if Landlord reasonably
determines that it is necessary for orderly and efficient parking or for any
other reasonable reason. Rent for all parking spaces shall be paid monthly
together with Basic Monthly Rent. Failure to pay the rent for any particular
parking spaces or failure to comply with any terms and conditions of this Lease
applicable to parking may be treated by Landlord as a default under this Lease
and, in addition to all other remedies available to Landlord under the Lease, at
law or in equity, Landlord may elect to recapture such parking spaces for the
balance of the Term of this Lease if Tenant does not cure such failure within
the applicable cure period set forth in Article 14 of this Lease. In such event,
Tenant and Tenant's Authorized Users will be deemed visitors for purposes of
parking space use and will be entitled to use only those parking areas
specifically designated for visitor parking subject to all provisions of this
Lease applicable to such visitor parking use. Except in connection with an
assignment or sublease expressly permitted under the terms of this Lease,
Tenant's parking rights and privileges described herein are personal to Tenant
and may not be assigned or transferred, or otherwise conveyed, without
Landlord's prior written consent, which consent Landlord may withhold in its
sole and absolute discretion. In any event, under no circumstances may Tenant's
parking rights and privileges be transferred, assigned or otherwise conveyed
separate and apart from Tenant's interest in this Lease.
28.5 COOPERATION WITH TRAFFIC MITIGATION MEASURES. Tenant agrees to
use its reasonable, good faith efforts to cooperate in traffic mitigation
programs which may be undertaken by Landlord independently, or in cooperation
with local municipalities or governmental agencies or other property owners in
the vicinity of the Building. Such programs may include, but will not be limited
to, carpools, vanpools and other ridesharing programs, public and private
transit, flexible work hours, preferential assigned parking programs and
programs to coordinate tenants within the Project with existing or proposed
traffic mitigation programs. Neither this Section or any other provision in this
Lease, however, is intended to or shall create any rights or benefits in any
person, firm, company, governmental entity or the public.
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28.6 PARKING RULES AND REGULATIONS. Tenant and Tenant's Authorized
Users shall comply with all rules and regulations regarding parking set forth in
Exhibit D attached hereto and Tenant agrees to cause its employees, subtenants,
assignees, contractors, suppliers, customers and invitees to comply with such
rules and regulations. Landlord reserves the right from time to time to modify
and/or adopt such other reasonable and non-discriminatory rules and regulations
for the parking facilities as it deems reasonably necessary for the operation of
the parking facilities.
29. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose any liability on
Landlord.
30. SIGNS. Landlord will designate the location at the Premises, if any,
for one or more Tenant identification sign(s). Tenant agrees to have Landlord
install and maintain Tenant's identification sign(s) in such designated location
in accordance with this Article 30 at Tenant's sole cost and expense. In
addition to any other signs permitted by Landlord hereunder, Tenant shall be
entitled to directory strips on the directory board in the Building lobby at
Landlord's sole cost and expense, based upon two (2) names per thousand rentable
square feet leased, i.e., eight (8) directory strips. Except as expressly
provided in this Lease, Tenant has no right to install Tenant identification
signs in any other location in, on or about the Premises or the Project and will
not display or erect any other signs, displays or other advertising materials
that are visible from the exterior of the Building or from within the Building
in any interior or exterior common areas; provided, however, that Tenant shall
have the right to install, at its sole cost and expense, its custom sign on the
exterior of the main entry door to the Premises, subject to the other provisions
of this Section. The size, design, color and other physical aspects of any and
all permitted sign(s) will be subject to (i) Landlord's written approval prior
to installation, which approval may be withheld in Landlord's reasonable
discretion, (ii) any covenants, conditions or restrictions governing the
Premises, and (iii) any applicable municipal or governmental permits and
approvals. Tenant will be solely responsible for all costs for installation,
maintenance, repair and removal of any Tenant identification sign(s). If Tenant
fails to remove Tenant's sign(s) upon termination of this Lease and repair any
damage caused by such removal, Landlord may do so at Tenant's sole cost and
expense. Tenant agrees to reimburse Landlord for all costs incurred by Landlord
to effect any installation, maintenance or removal on Tenant's account, which
amount will be deemed additional rent, and may include, without limitation, all
sums disbursed, incurred or deposited by Landlord including Landlord's costs,
expenses and actual attorneys' fees with interest thereon at the Interest Rate
from the date of Landlord's demand until paid by Tenant. Any sign rights granted
to Tenant under this Lease are personal to Tenant and may not be assigned,
transferred or otherwise conveyed to any assignee or subtenant of Tenant without
Landlord's prior written consent, which consent Landlord may withhold in its
sole and absolute discretion.
31. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord
and not more often than once in each calendar year during the Term, Tenant
agrees to provide Landlord with unaudited financial statements for Tenant for
the two years prior to the current or then current fiscal year, as the case may
be, upon ten (10) days prior written notice from Landlord. Such statements are
to be prepared in accordance with generally accepted accounting principles,
certified by Tenant's financial officer as being true and correct. Landlord
agrees to keep all such financial information provided by Tenant confidential as
between Landlord, its partners(s), lender(s), accountant(s), attorney(s) and any
prospective purchaser(s) of the Building or the Project.
32. GENERAL PROVISIONS.
32.1 RULES AND REGULATIONS. Tenant's use of the Premises and the
Building and any parking areas associated therewith are subject to the rules and
regulations attached hereto as Exhibit D and incorporated herein by this
reference. Landlord shall have the right to make reasonable non-discriminatory
changes and modifications to such rules and regulations and all such reasonable
changes and modifications shall be binding upon Tenant upon receipt thereof.
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32.2 WAIVER. No waiver by Landlord of any provision of this Lease or
of any breach by Tenant hereunder shall be deemed to be a waiver of any of the
provisions hereof, or of any subsequent breach by Tenant of the same or any
other provisions. Landlord's consent to or approval of any act by Tenant
requiring Landlord's consent or approval shall not be deemed consent to or
approval of any subsequent act of Tenant. No waiver by Tenant of any provision
of this Lease or of any breach by Landlord hereunder shall be deemed to be a
waiver of any of the provisions hereof, or of any subsequent breach by Landlord
of the same or any other provisions. Tenant's consent to or approval of any act
by Landlord requiring Tenant's consent or approval shall not be deemed consent
to or approval of any subsequent act of Landlord. No act or thing done by
Landlord or Landlord's agents during the term of this Lease shall be deemed an
acceptance of a surrender of the Premises, unless done in writing signed by
Landlord. The delivery of the keys to any employee or agent of Landlord shall
not operate as a termination of the Lease or a surrender of the Premises. The
acceptance of any rent by Landlord following a breach of this Lease by Tenant
shall not constitute a waiver by Landlord of such breach or any other breach
unless such waiver is expressly stated in a writing signed by Landlord.
32.3 NOTICES. All notices and demands which may or are to be
required or permitted to be given by either party to the other hereunder shall
be in writing. All notices and demands by Landlord to Tenant shall be personally
served on Tenant at the Premises or shall be sent by United States mail, postage
prepaid, addressed to Tenant at the Premises, or to such other places as Tenant
may from time to time designate in a notice to Landlord. All notices and demands
by Tenant to Landlord shall be personally served on Landlord at the office of
the Building or shall be sent by United States certified mail, return receipt
requested, postage prepaid, addressed to Landlord at the Office of the Building,
or to such other person or place as Landlord may from time to time designate in
a notice to Tenant.
32.4 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees, agents and attorneys, shall not intentionally
and voluntarily disclose the terms and conditions of this Lease to any newspaper
or other publication or any other tenant or apparent prospective tenant of the
Building or other portion of the Project, or real estate agent, either directly
or indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
32.5 PLATS AND RIDERS. Clauses, plats, and riders, if any, signed by
the Landlord and the Tenant and endorsed on or affixed to this Lease, including,
without limitation, the Work Letter attached hereto as Exhibit F, are
specifically by this reference made a part hereof.
32.6 TIME. Time is of the essence of this Lease and each and all of
its provisions in which performance is a factor.
32.7 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and shall bind
the heirs, successors, executors, administrators and assigns of the parties
hereto.
32.8 INTEREST ON TENANT'S OBLIGATIONS AND LATE CHARGES. Any amount
due from Tenant to Landlord which is not paid when due following notice and the
opportunity to cure in accordance with Section 14.1, shall bear interest at the
Interest Rate stated in Section 1.18 of the Basic Lease Provisions and
Definitions from the date such payment is due until paid, but the payment of
such interest shall not excuse or cure the default. If Tenant is more than ten
(10) days late in paying any installments of rent due under this Lease, Tenant
shall pay Landlord a late charge equal to five percent (5%) of the delinquent
installment of rent. The parties agree that the amount of such late charge
represents a reasonable estimate of the cost and expense that would be incurred
by Landlord in processing each delinquent payment of rent by Tenant, that it is
impracticable or extremely difficult to fix the actual damages for such and that
such late charge shall be paid to Landlord as liquidated damages for each
delinquent payment pursuant to
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California Civil Code Section 1671. The parties further agree that the payment
of late charges and the payment of interest provided for herein above are
distinct and separate from one another in that the payment of interest is to
compensate Landlord for the use of Landlord's money by Tenant, while the payment
of late charges is to compensate Landlord for the additional administrative
expense incurred by Landlord in handling and processing delinquent payments.
32.9 PRIOR AGREEMENTS. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreements or understanding pertaining to any such matters
shall be effective for any purpose. No provisions of this Lease may be amended
or added to except by an agreement in writing signed by the parties hereto or
their respective successors-in-interest. This Lease shall not be effective or
binding on any party until fully executed by both parties hereto.
32.10 INABILITY TO PERFORM. This Lease and the obligations of
Landlord and Tenant hereunder shall not be affected or impaired because either
is unable to fulfill any of its obligations hereunder or is delayed in doing so,
if such liability or delay is caused by reason of any event of "Force Majeure."
For purposes hereof, "Force Majeure" shall mean an event or occurrence which
causes either party to be delayed or hindered in or prevented from the
performance of any act required hereunder by reason of strikes, lock-outs, labor
troubles, inability to procure materials, failure of power, governmental
moratorium or other governmental action or inaction (including failure, refusal
or delay in issuing permits, approvals and/or authorizations), injunction or
court order, riots, insurrection, war, fire, earthquake, flood or other natural
disaster or other reason of a like nature not the fault of the party delaying in
performing work or doing acts required under the terms of this Lease (but
excluding delays due to financial inability) in the event of Force Majeure,
performance of the act in question shall be excused for the period of the Force
Majeure delay and the period for the performance of any such act shall be
extended for a period equivalent to the period of such Force Majeure delay. The
provisions of this Section 32.10 shall not apply to nor operate to excuse Tenant
from the payment of Basic Rent or any other payments payable by Tenant under
this Lease strictly in accordance with the terms of this Lease.
32.11 ATTORNEYS' FEES. In the event of any action or proceeding
brought by either party against the other under this Lease the prevailing party
shall be entitled to recover all reasonable costs and expenses including the
reasonable fees of its attorneys in such action or proceeding in such amount as
the court may adjudge reasonable as attorneys' fees. If Landlord is
involuntarily made a party defendant to any litigation concerning this Lease or
the Premises by reason of any act or omission of Tenant, Tenant shall hold
Landlord harmless from all costs, liabilities, damages and expenses by reasons
thereof, including attorneys' fees and all costs incurred by Landlord in such
litigation. If Tenant is involuntarily made a party defendant to any litigation
concerning this Lease or the Premises by reason of any act or omission of
Landlord, Landlord shall hold Tenant harmless from all costs, liabilities,
damages and expenses by reasons thereof, including attorneys' fees and all costs
incurred by Tenant in such litigation.
32.12 SALE OF PREMISES BY LANDLORD. Any sale or conveyance by
Landlord of the Building shall operate to release Landlord from any and all
liability arising under this Lease following the closing of such sale or
conveyance and the assumption of all of Landlord's obligations and liabilities
hereunder by the purchaser of the Building provided that Landlord's transferee
is a bona fide transferee and assumes in writing all of Landlord's obligations
hereunder.. Subject to the provisions of Article 22 hereof, Tenant's right to
quiet possession of the Premises shall not be disturbed so long as Tenant shall
pay the rent and observe and perform all of the material provisions of this
Lease to be observed and performed by Tenant, unless this Lease is terminated
pursuant to specific provisions relating thereto or contained herein. If any
security deposit has been made by Tenant, Landlord may transfer such security
deposit to the purchaser of the Building, and thereupon Landlord shall be
discharged form any further liability in reference thereto.
32.13 NAME. Tenant shall not use the name of the Building or of the
development in which the Building is situated for any purpose other than as an
address of the business to be conducted by the Tenant in the Premises.
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32.14 SEPARABILITY. Any provision of this Lease which shall prove to
be invalid, void or illegal shall in no way affect, impair or invalidate any
other provision hereof and such other provision shall remain in full force and
effect.
32.15 CUMULATIVE REMEDIES. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
32.16 CHOICE OF LAW. This Lease shall be governed by the laws of the
State in which the Premises are located.
32.17 NEGOTIATED TRANSACTION. This Lease has been negotiated at
arm's length. Accordingly, the provisions of this Lease shall be deemed to have
been drafted by all of the parties and any rule of law that would require
interpretation of this Lease against the party that has drafted it is not
applicable and is waived.
33. CURE RIGHTS FOR LANDLORD'S MORTGAGEES AND LESSORS.
33.1 CURE RIGHTS. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgage covering the Premises or ground
lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees
to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity
to cure the default (including with respect to any such beneficiary or
mortgagee, time to obtain possession of the Premises, subject to this Lease and
Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such
should prove necessary to effect a cure).
34. LEASE EXECUTION.
34.1 JOINT AND SEVERAL OBLIGATIONS. If more than one person executes
this Lease as Tenant, their execution of this Lease will constitute their
covenant and agreement that (i) each of them is jointly and severally liable for
the keeping, observing and performing of all of the terms, covenants,
conditions, provisions and agreements of this Lease to be kept, observed and
performed by Tenant, and (ii) the term "Tenant" as used in this Lease means and
includes each of them jointly and severally. The act of or notice from, or
notice or refund to, or the signature of any one or more of them, with respect
to the tenancy of this Lease, including, but not limited to, any renewal,
extension, expiration, termination or modification of this Lease, will be
binding upon each and all of the persons executing this Lease as Tenant with the
same force and effect as if each and all of them had so acted or so given or
received such notice or refund or so signed.
34.2 TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this
Lease as a corporation or partnership, then Tenant represents and warrants that
such entity is duly qualified and in good standing to do business in California
and that the individuals executing this Lease on Tenant's behalf are duly
authorized to execute and deliver this Lease on its behalf, and in the case of a
corporation, in accordance with a duly adopted resolution of the board of
directors of Tenant, and in accordance with the by-laws of Tenant, and, in the
case of a partnership, in accordance with the partnership agreement and the most
current amendments thereto, if any, and that this Lease is binding upon Tenant
in accordance with its terms.
34.3 EXAMINATION OF LEASE. Submission of this instrument by Landlord
to Tenant for examination or signature by Tenant does not constitute a
reservation of or option for lease, and it is not effective as a lease or
otherwise until execution by and delivery to both Landlord and Tenant.
35. OPTION TO EXTEND.
Subject to the terms of this Paragraph 35 and Paragraph 36 below,
entitled "Options", Landlord hereby grants Tenant a one time option to extend
the Term ("Option to Extend") for an additional period of three (3) years (the
"Option Period"). Tenant's Option to Extend shall be for a term that shall begin
immediately following the initial Term and shall be exercised by Tenant by
giving written notice to Landlord at least six (6) months but not earlier than
nine (9) months prior to the expiration of the initial Term. If Tenant exercises
its Option to
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Extend, Tenant shall continue to lease the Premises for the Option Period upon
the same terms and conditions set forth in this Lease except that the Base Rent
payable by Tenant to Landlord during the Option Period shall be at the
prevailing fair market rental rate for the Premises based upon the prevailing
fair market rental rate for similar space in similar class A office buildings
within the vicinity of the Project, taking into account what a willing,
comparable, non-equity tenant (excluding sublease and assignment transactions)
would pay, and a willing, comparable landlord of a comparable Class "A" quality
office building located in the West Los Angeles/Santa Monica, California area
would accept, in an arm's length transaction (what Landlord is accepting in then
current transactions for the Building may be considered for purposes of
projecting rent for the Option Period), for space of comparable size, quality
and floor height as the Premises taking into account the age, quality and layout
of the existing improvements in the Premises and taking into account items that
professional real estate brokers customarily consider, including, but not
limited to, rental rates, office space availability, tenant size, tenant
improvement allowances, operating expenses and allowance, parking charges,
reduced rent, free rent, reduced rate parking, free parking and any other lease
concessions, if any, then being charged or granted by Landlord or the lessors of
such similar office buildings. The fair market rental rate will be an effective
rate, not specifically including, but accounting for, the appropriate economic
concessions described above.
Landlord shall provide Tenant with written notice of the fair market
rental rate for the Premises, including all appropriate rental concessions, not
later than thirty (30) days after the date upon which Tenant timely exercises
the right giving rise to the necessity for such fair market rental rate
determination. Tenant shall have twenty (20) days ("Tenant's Review Period")
after receipt of Landlord's notice of the fair market rental rate within which
to accept such fair market rental rate or to reasonably object thereto in
writing. If within Tenant's Review Period, Tenant objects to the fair market
rental rate submitted by Landlord, Landlord and Tenant will meet together with
their respective advisors to present and discuss their individual determinations
of the fair market rental rate for the Premises under the parameters set forth
above and shall diligently and in good faith attempt to negotiate a rental rate
on the basis of such individual determinations. Such meeting shall occur no
later than ten (10) days after the expiration of Tenant's Review Period. The
parties shall each provide the other with such supporting information and
documentation as they deem appropriate. At such meeting if Landlord and Tenant
are unable to agree upon the fair market rental rate, they shall each submit to
the other their respective best and final offer as to the fair market rental
rate. If Landlord and Tenant fail to reach agreement on such fair market rental
rate within five (5) business days following such a meeting (the "Outside
Agreement Date") then, Tenant's Option to Extend will be deemed null and void
unless Tenant demands appraisal, in which event each party's best and final
determination of the fair market rental rate for the Premises be submitted to
appraisal in accordance with the following:
(i) Landlord and Tenant shall each appoint one appraiser who
shall by profession be an MAI certified real estate appraiser who shall
have been active over the five (5) year period ending on the date of such
appointment in the appraisal of commercial properties in the West Los
Angeles/Santa Monica, California area. The determination of the appraisers
shall be limited solely to the issue of whether Landlord's or Tenant's
last proposed (as of the Outside Agreement Date) best and final fair
market rental rate for the Premises is the closest to the actual fair
market rental rate for the Premises as determined by the appraisers,
taking into account the requirements of this subparagraph (i). Each such
appraiser shall be appointed within fifteen (15) days after the Outside
Agreement Date.
(ii) The two appraisers so appointed shall within fifteen (15)
days of the date of the appointment of the last appointed appraiser agree
upon and appoint a third appraiser who shall be qualified under the same
criteria set forth hereinabove for qualification of the initial two
appraisers.
(iii) The three appraisers shall within thirty (30) days of
the appointment of the third appraiser reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted best and final fair
market rental rate to establish the new
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Monthly Base Rent rate, and shall notify Landlord and Tenant thereof.
During such thirty (30) day period, Landlord and Tenant may submit to the
appraisers such information and documentation to support their respective
positions as they shall deem reasonably relevant and Landlord and Tenant
may each appear before the appraisers jointly to question and respond to
questions from the appraisers. Such decision shall be based upon the
projected prevailing fair market rentals being paid for similar office
space in similar first class office buildings in the West Los
Angeles/Santa Monica, California area.
(iv) The decision of the majority of the three appraisers
shall be binding upon Landlord and Tenant.
(v) If either Landlord or Tenant fails to appoint an appraiser
within the time period specified in subparagraph (i) hereinabove, the
appraiser appointed by one of them shall within thirty (30) days following
the date on which the party failing to appoint an appraiser could have
last appointed such appraiser, reach a decision based upon the procedures
set forth above (i.e., by selecting either Landlord's or Tenant's
submitted best and final fair market rental rate), notify Landlord and
Tenant thereof, and such appraiser's decision shall be binding upon
Landlord and Tenant.
(vi) If the two appraisers fail to agree upon and appoint a
third appraiser, both appraisers shall be dismissed and a third appraiser
shall be appointed by the Superior Court of Los Angeles County,
California.
(vii) The cost of appraisal (and, if necessary, arbitration)
shall be paid by Landlord and Tenant equally.
(viii) If the process described hereinabove has not resulted
in a selection of either Landlord's or Tenant's submitted best and final
fair market rental rate by the commencement of the applicable lease term,
then the fair market rental rate estimated by Landlord will be used until
the appraiser(s) reach a decision, with an appropriate rental credit and
other adjustments for any overpayments of Monthly Base Rent or other
amounts if the appraisers select Tenant's submitted best and final
estimate of the fair market rental rate. The parties shall enter into an
amendment to this Lease confirming the terms of the decision.
36. OPTIONS.
(a) DEFINITION. As used in this Paragraph, the word "Option"
means the Option to Extend pursuant to Paragraph 35 and the Right of First
Offer pursuant to Paragraph 38 herein.
(b) OPTIONS PERSONAL. Each Option granted to Tenant is
personal to the original Tenant executing this Lease and may be exercised
only by the original Tenant executing this Lease while occupying the
entire Premises and without the intent of thereafter assigning this Lease
or subletting the Premises and may not be exercised or be assigned,
voluntarily or involuntarily, by any person or entity other than the
original Tenant executing this Lease. An Option is not assignable separate
and apart from this Lease, nor may any Option be separated from this Lease
in any manner, either by reservation or otherwise.
(c) EFFECT OF DEFAULT ON OPTIONS. Tenant will have no right to
exercise any Option, notwithstanding any provision of the grant of option
to the contrary, and Tenant's exercise of an Option may be nullified by
Landlord and deemed of no further force or effect, if (i) Tenant is in
default of any monetary obligation or material non-monetary obligation
beyond all applicable cure periods under the terms of this Lease as of
Tenant's exercise of the Option or (ii) Landlord has given Tenant three
(3) or more notices of a monetary default, whether or not such defaults
are subsequently cured, during any twelve (12) consecutive month period of
this Lease.
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(d) OPTIONS AS ECONOMIC TERMS. Each Option is hereby deemed an
economic term which Landlord in its sole and absolute discretion, may or
may not offer in conjunction with any future extensions of the Term.
37. INTENTIONALLY OMITTED.
38. RIGHT OF FIRST OFFER TO LEASE ADDITIONAL SPACE.
(a) Tenant shall have a continuing right of first offer to
lease ("Tenant's Right of First Offer") any space on the third (3rd) floor
of the Building to the extent such space becomes available for lease to
third parties after the expiration of any existing lease for such space
during the Lease Term, including the expiration of all renewal or
extension options, and after the existing tenant or occupant vacates such
space ("First Offer Space"). Tenant's Right of First Offer is subject and
subordinate to the rights of all other existing tenants of the Building
with prior expansion or lease rights relative to any such First Offer
Space.
(b) Promptly following written request ("Tenant Request") by
Tenant (which may not be given more than twice in any twelve (12)
consecutive month period), Landlord will give Tenant written notice of the
availability of any First Offer Space and the date the existing tenant or
occupant, if any, is expected to vacate such space ("Landlord's
Availability Notice"). Within five (5) business days following delivery of
Landlord's Availability Notice, Tenant will have the right to request from
Landlord in writing a written statement setting forth the basic economic
terms, including, but not limited to, Landlord's determination of the Base
Rent, tenant improvement allowance, if any, and all other economic terms
and conditions (collectively, the "Economic Terms"), upon which Landlord
is willing to lease the First Offer Space desired by Tenant, either to
Tenant or to a third party. Such Economic Terms will represent Landlord's
reasonable determination of the fair market rental rate for such First
Offer Space. Such fair market rental rate will mean the annual amount per
rentable square foot, projected during the relevant period, that a
willing, comparable, non-equity tenant (excluding sublease and assignment
transactions) would pay, and a willing, comparable landlord of a
comparable Class "A" quality office building located in the West Los
Angeles/Santa Monica area would accept, at arm's length (what Landlord is
accepting in current transactions for the Building may be considered), for
space of comparable size, quality and floor height as the leased area at
issue taking into account the age, quality and layout of the existing
improvements in the leased area at issue and taking into account items
that professional real estate brokers customarily consider, including, but
not limited to, rental rates, office space availability, tenant size,
tenant improvement allowances, operating expenses and allowance, parking
charges, free rent, reduced rent, free parking, reduced parking, and any
other lease concessions, if any, then being charged or granted by Landlord
or the lessors of such similar office buildings.
(c) Within five (5) business days after receipt of the
Economic Terms from Landlord, Tenant must give Landlord written notice
pursuant to which Tenant shall elect to either: (i) lease such First Offer
Space upon such Economic Terms and the same non-Economic Terms as set
forth in the Lease with respect to the Premises; (ii) refuse to lease such
First Offer Space, specifying that such refusal is not based upon the
Economic Terms, but upon Tenant's lack of need for such First Offer Space,
in which event Landlord may at any time thereafter lease such First Offer
Space to any party upon any terms Landlord deems appropriate; or (iii)
refuse to lease the First Offer Space, specifying that such refusal is
based upon the Economic Terms, in which event Tenant will also specify
revised Economic Terms upon which Tenant is willing to lease such First
Offer Space (provided that Tenant may not specify a different lease term
for the First Offer Space). Tenant's failure to timely choose either
clause (i), clause (ii) or clause (iii) above will be deemed to be
Tenant's choice of clause (ii) above.
(d) If Tenant gives Landlord notice pursuant to clause
(c)(iii) above, Landlord may elect, within five (5) days following receipt
of such notice from Tenant, either to: (i) lease such First Offer Space to
Tenant upon such revised Economic Terms
-39-
<PAGE> 42
proposed by Tenant, and the same other non-Economic Terms as set forth in
this Lease; or (ii) lease the First Offer Space at any time thereafter to
any third party upon terms which are not substantially more favorable to
said party than the Economic Terms originally proposed by Tenant.
Landlord's failure to timely choose either clause (i) or clause (ii) above
will be deemed to be Landlord's choice of clause (ii) above.
(e) If Tenant chooses (or is deemed to have chosen) clause
(c)(ii) above, or if Landlord chooses (or is deemed to have chosen) clause
(d)(ii) above, Tenant's Right to Lease any First Offer Space will be null
and void until Tenant once again validly delivers to Landlord a Tenant
Request, in which event, the procedures and sequences set forth above will
be followed. If Tenant exercises its Right of First Offer as provided
herein, the parties will promptly thereafter execute an amendment to the
Lease to include the First Offer Space in the Premises and to document the
lease terms thereof.
(f) As provided above, Tenant's Right of First Offer is
subject to all expansion and extension rights and other rights to lease,
as applicable, which Landlord has granted to other tenants prior to the
date of the Lease. Thus, Landlord's Economic Terms will be delivered to
Tenant only after Landlord has appropriately notified and received
negative responses from all other tenants with rights in the First Offer
Space superior to Tenant's rights.
[END OF NUMBERED PROVISIONS]
-40-
<PAGE> 43
IN WITNESS WHEREOF, the parties hereto execute this Lease on the
date written below.
LANDLORD TENANT
AUERBACH PLAZA LIMITED PARTNERSHIP, THE LIGHTSPAN PARTNERSHIP, INC.,
a California limited partnership a California corporation
By: OLC California, Inc., a
California corporation,
General Partner By: /s/ WINIFRED B. WECHSLER
----------------------------
Print Name: Winifred B. Wechsler
----------------------------
Print Title: Senior Vice President
----------------------------
By: /s/ MICHAEL W. SCHRAMM Date: June 2, 1999
------------------------------- ----------------------------
Print Name: MICHAEL W. SCHRAMM
-----------------------
Print Title: V.P.
-----------------------
Date: 6/4/99
--------------------------
By: /s/ [signature illegible]
----------------------------
Print Name: [illegible]
----------------------------
Print Title: Sr. V.P.
----------------------------
Date: June 2, 1999
----------------------------
GOLIAC, INC.,
a California corporation
By: /s/ NAOTO YABU
-------------------------------
Print Name: NAOTO YABU
-----------------------
Print Title: V.P.
-----------------------
Date: 6-4-99
--------------------------
-41-
<PAGE> 44
OMITTED
-42-
EXHIBIT A
<PAGE> 45
LEGAL DESCRIPTION
Lots 4, 5, 6 and 7 in Block 7 of Green Acres, in the City of Santa Monica, in
the County of Los Angeles, State of California, as per map recorded in Book 9,
Page 126 of Maps, in the office of the County Recorder of said county.
Together with that portion of the alley 20 feet wide, as shown on said map lying
southeasterly of Lot 4 of said Green Acres, vacated by resolution 5173 (CCS) on
the City Council of the City of Santa Monica, recorded January 23, 1979, as
Instrument No. 79-96679, of Official Records of said county.
Excepting all mineral rights in and to said real property, but waiving all
surface rights in and to such property to a depth of 500 feet, as provided in
the deed recorded October 4, 1977 as Instrument No. 77-1096549, Official
Records.
EXHIBIT B
<PAGE> 46
FLOOR PLAN OF PREMISES
[DRAWING]
EXHIBIT C
<PAGE> 47
RULES AND REGULATIONS
A. GENERAL RULES AND REGULATIONS. It is agreed that the following rules
and regulations shall be and are hereby made a part of this Lease, and the
Tenant agrees that Tenant and its employees and agents or any other persons
permitted by the Tenant to occupy or enter the Premises (collectively, "Tenant's
Representatives") will at all times abide by these rules and regulations. It is
further agreed that a material default in the performance and observation of
these rules and regulations shall operate the same as any other material default
under this Lease.
1. The sidewalks, entries, passages, and stairways shall not be
obstructed by the Tenant or its agents, or used by them for any purpose other
than ingress and egress to and from their offices.
2. (a) Furniture, equipment, or supplies shall be moved in or out of
the Building only during such hours and in such manner as may be
prescribed by the Landlord.
(b) No safe or article, the weight of which can constitute a
hazard or danger to the Building or its equipment, shall be moved into the
Demised Premises. Safes and other equipment, the weight of which is not
excessive, shall be moved into, from or about the Building during such
hours and in such manner as shall be prescribed by the Landlord, and the
Landlord shall have the right to designate the location of such articles
in the space hereby demised.
3. The name of the Tenant and/or signs of the Tenant shall not be
placed upon any part of the Demised Premises except as provided by the Landlord.
4. Water closets and other water fixtures shall not be used for any
purpose other than that for which the same are intended, and any damage
resulting to the same from misuse on the part of the Tenant, its agents or
employees, shall be paid for by the Tenant. No person shall waste water by tying
back or wedging the faucets or in any other manner.
5. No animals shall be allowed in the office, halls, or corridors of
the Building; provided, however that one employee of Tenant shall be entitled to
bring its pet Golden Retriever into Tenant's office on a daily basis if so
desired, subject to the following terms and conditions which shall be in
addition to any terms and conditions of the Lease which may be applicable to
such activity within the Premises:
(a) Tenant shall be solely responsible and liable for any and all
damage to property or injury or death to persons resulting in any way from the
presence of any such dog at or within the Project, the Building or the Premises;
(b) Tenant shall immediately pick up and dispose of any excrement or
body fluids left by the dog within the Premises, the Building or elsewhere
within the Project, and shall use reasonable efforts to sanitize and disinfect
any indoor areas affected thereby. Furthermore, Tenant shall promptly repair any
damage to the Premises, the Building or the Project caused by any such dog upon
discovery or upon notice from Landlord whichever occurs first;
(c) Tenant shall cause its employee to refrain from transporting the
dog within the Building elevators during Building business hours; and
(d) Tenant hereby indemnifies and agrees to protect and hold
Landlord harmless in accordance with Section 16.2.1 of the Lease from and
against any and all "Indemnified Claims" (as defined in the Lease) arising in
any way out of the presence of any such dog at or within the Project, the
Building or the Premises.
6. Bicycles or other vehicles shall not be permitted in the offices,
halls, or corridors of the Buildings, nor shall any obstruction of sidewalks of
entrances of the Building by such be permitted.
EXHIBIT D
<PAGE> 48
7. No person shall disturb the occupants of the Building or
adjoining buildings or premises by the use of any television, radio, or musical
instrument or equipment, or by making of loud or improper noises.
8. No additional lock or locks shall be placed by the Tenant on any
door in the Building unless written consent of the Landlord shall first be
obtained.
9. The use of oil, gas or inflammable liquids for heating, lighting,
or any other purpose is expressly prohibited. Explosives or other articles
deemed extra hazardous shall not be brought into the Building.
10. The Tenant shall exercise due care and within reasonable limits
shall not mark upon, paint or affix upon, cut, drill into, drive nails or screws
into, or in any way deface the walls, ceiling, partitions, or floors of the
Demised Premises (except normal pictures, wall boards, displays, etc.), or of
the Building, and any defacement, damage, or injury caused by the Tenant, its
agents or employees, shall be paid for by the Tenant.
11. The Landlord shall at all times have the right by its officers
or agents to enter the Demised Premises to inspect and examine the same and to
show the same to persons wishing to lease, purchase, or mortgage them by
appointment.
12. The Tenant agrees to use chair pads to be furnished by the
Tenant under all rolling and ordinary desk chairs in the carpeted areas of the
Demised Premises throughout the term of this Lease.
13. The Landlord reserves the right to make such other and further
reasonable rules and regulations as in its judgment may from time to time be
necessary and desirable for the safety, care, and cleanliness of the Demised
Premises and for the preservation of good order therein. Such rules and
regulations shall be effective upon receipt of changes and/or additions as
provided by the provision for Notice, Section 32.3 of said Lease.
B. PARKING RULES AND REGULATIONS. The following rules and regulations
govern the use of the parking facilities which serve the Building. Tenant will
be bound by such rules and regulations and agrees to cause its employees,
subtenants, assignees, contractors, suppliers, customers and invitees to observe
the same:
1. Tenant will not permit or allow any vehicles that belong to or
are controlled by Tenant or Tenant's employees, subtenants, customers or
invitees to be loaded, unloaded or parked in areas other than those designated
by Landlord for such activities. No vehicles are to be left in the parking areas
overnight and no vehicles are to be parked in the parking areas other than
normally sized passenger automobiles, motorcycles and pick-up trucks. No
extended term storage of vehicles is permitted.
2. Vehicles must be parked entirely within painted stall lines of a
single parking stall.
3. All directional signs and arrows must be observed.
4. The speed limit within all parking areas shall be five (5) miles
per hour.
5. Parking is prohibited: (a) in areas not striped for parking; (b)
in aisles or on ramps; (c) where "no parking" signs are posted; (d) in
cross-hatched areas; and (e) in such other areas as may be designated from time
to time by Landlord or Landlord's parking operator.
6. In the event that Tenant permits any vehicles to use the Parking
Area in violation of the Lease or these Rules and Regulations, Landlord shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away and store the vehicle involved and
charge the cost to Tenant, which cost shall be immediately payable upon demand
by Landlord, Further, Landlord reserves the right, without cost or liability to
Landlord, to tow any vehicle if such vehicle's audio theft alarm system remains
engaged for an unreasonable period of time or is otherwise parked in violation
of these Rules and Regulations.
D-2
<PAGE> 49
7. Washing, waxing, cleaning or servicing of any vehicle in any area
not specifically reserved for such purpose is prohibited.
8. Landlord may refuse to permit any person to park in the parking
facilities who violates these rules with unreasonable frequency, and any
violation of these rules shall subject the violator's car to removal, at such
car owner's expense. Tenant agrees to use its best efforts to acquaint its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
with these parking provisions, rules and regulations.
9. Parking stickers, access cards, or any other device or form of
identification supplied by Landlord as a condition of use of the parking
facilities shall remain the property of Landlord. Parking identification
devices, if utilized by Landlord, must be displayed as requested and may not be
mutilated in any manner. The serial number of the parking identification device
may not be obliterated. Parking identification devices, if any, are not
transferable and any device in the possession of an unauthorized holder will be
void. Landlord reserves the right to refuse the sale of monthly stickers or
other parking identification devices to Tenant or any of its agents, employees
or representatives who willfully refuse to comply with these rules and
regulations and all unposted city, state or federal ordinances, laws or
agreements.
10. Loss or theft of parking identification devices or access cards
must be reported to the management office in the Development immediately, and a
lost or stolen report must be filed by the Tenant or user of such parking
identification device or access card at the time. Landlord has the right to
exclude any vehicle from the parking facilities that does not have a parking
identification device or valid access card. Any parking identification device or
access card which is reported lost or stolen and which is subsequently found in
the possession of an unauthorized person will be confiscated and the illegal
holder will be subject to prosecution.
11. The Parking Spaces and additional parking spaces provided for
herein are provided solely for the accommodation of Tenant and Landlord assumes
no responsibility or liability of any kind whatsoever from whatever cause with
respect to the automobile parking areas, including adjoining streets, sidewalks,
driveways, property and passageways, or the use thereof by Tenant or Tenant's
Representatives.
12. The parking operators, managers or attendants are not authorized
to make or allow any exceptions to these rules and regulations, without the
express written consent of Landlord. Any exceptions to these rules and
regulations made by the parking operators, managers or attendants without the
express written consent of Landlord will not be deemed to have been approved by
Landlord.
13. Landlord reserves the right, without cost or liability to
Landlord, to tow any vehicles which are used or parked in violation of these
rules and regulations.
14. Landlord reserves the right from time to time to modify and/or
adopt such other reasonable and non-discriminatory rules and regulations for the
parking facilities as it deems reasonably necessary for the operation of the
parking facilities.
D-3
<PAGE> 50
MEMORANDUM OF ACTUAL
COMMENCEMENT AND EXPIRATION
Tenant certifies that Tenant took possession of the Premises which
were in a clean, good and acceptable condition, to begin Tenant's tenancy under
the Lease on ____________, 1999 so that the terms of this Lease will end on
_________, 19__, if not terminated sooner.
LANDLORD TENANT
AUERBACH PLAZA LIMITED PARTNERSHIP, THE LIGHTSPAN PARTNERSHIP, INC.,
a California limited partnership a California corporation
By: OLC California, Inc., a
California corporation,
General Partner By:
----------------------------
Print Name:
----------------------------
Print Title:
----------------------------
By: Date:
---------------------------- ---------------------------
Print Name:
----------------------
Print Title:
--------------------
Date:
----------------------
By:
----------------------------
Print Name:
----------------------------
Print Title:
----------------------------
Date:
----------------------------
GOLIAC, INC.,
a California corporation
By:
----------------------------
Print Name:
----------------------
Print Title:
--------------------
Date:
----------------------
EXHIBIT E
<PAGE> 51
WORK LETTER AGREEMENT
(ALLOWANCE)
This WORK LETTER AGREEMENT ("Work Letter Agreement") is entered into as of
the day of May 1999 by and between AUERBACH PLAZA LIMITED PARTNERSHIP, a
California limited partnership, and GOLIAC, INC., a California corporation
(collectively, "Landlord"), and THE LIGHTSPAN PARTNERSHIP, INC., a California
corporation ("Tenant").
R E C I T A L S :
A. Concurrently with the execution of this Work Letter Agreement, Landlord and
Tenant have entered into a lease (the "Lease") covering certain premises (the
"Premises") more particularly described in Exhibit C attached to the Lease. All
terms not defined herein have the same meaning as set forth in the Lease. To the
extent applicable, the provisions of the Lease are incorporated herein by this
reference.
B. In order to induce Tenant to enter into the Lease and in consideration of the
mutual covenants hereinafter contained, Landlord and Tenant agree as follows:
1. TENANT IMPROVEMENTS. As used in the Lease and this Work Letter Agreement, the
term "Tenant Improvements" or "Tenant Improvement Work" means those items of
general tenant improvement construction shown on the Final Plans (described in
Paragraph 4 below), more particularly described in Paragraph 5 below.
2. WORK SCHEDULE. As soon as practicable following the execution of this Lease,
Landlord will deliver to Tenant, for Tenant's review and approval, a schedule
("Work Schedule") which will set forth the timetable for the planning and
completion of the installation of the Tenant Improvements and the Commencement
Date of the Lease. The Work Schedule will set forth each of the various items of
work to be done or approval to be given by Landlord and Tenant in connection
with the completion of the Tenant Improvements. The Work Schedule will be
submitted to Tenant for its approval, which approval Tenant agrees not to
unreasonably withhold, and, once approved by both Landlord and Tenant, the Work
Schedule will become the basis for completing the Tenant Improvements. All plans
and drawings required by this Work Letter Agreement and all work performed
pursuant thereto are to be prepared and performed in accordance with the Work
Schedule.
3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following
person(s) as Landlord's representative ("Landlord's Representative") to act for
Landlord in all matters covered by this Work Letter Agreement: ________________.
Tenant hereby appoints the following person(s) as Tenant's representative
("Tenant's Representative") to act for Tenant in all matters covered by
this Work Letter Agreement: ___________________________________________________
______________________________________________________________________________.
All communications with respect to the matters covered by this Work Letter
Agreement are to be made to Landlord's Representative or Tenant's
Representative, as the case may be, in writing in compliance with the notice
provisions of the Lease. Either party may change its representative under this
Work Letter Agreement at any time by written notice to the other party in
compliance with the notice provisions of the Lease.
4. TENANT IMPROVEMENT PLANS.
(a) PREPARATION OF SPACE PLANS. Landlord has approved DSR Design ("Space
Planner") to prepare the architectural drawings for the Premises. In accordance
with the Work Schedule, Tenant agrees to meet with Space Planner for the purpose
of promptly preparing preliminary space plans for the layout of Premises ("Space
Plans"). The Space Plans are to be sufficient to convey the architectural design
of the Premises and layout of the Tenant Improvements therein and are to be
submitted to Landlord in accordance with the Work Schedule for Landlord's
EXHIBIT F
<PAGE> 52
approval. If Landlord reasonably disapproves any aspect of the Space Plans,
Landlord will advise Tenant in writing of such disapproval and the reasons
therefor in accordance with the Work Schedule. Tenant will then submit to
Landlord for Landlord's approval, in accordance with the Work Schedule, a
redesign of the Space Plans incorporating the revisions reasonably required by
Landlord.
(b) PREPARATION OF FINAL PLANS. Based on the approved Space Plans, and in
accordance with the Work Schedule, Space Planner will prepare complete
architectural plans, drawings and specifications and complete engineered
mechanical, structural and electrical working drawings for all of the Tenant
Improvements for the Premises (collectively, the "Final Plans"). The Final Plans
will show: (a) the subdivision (including partitions and walls), layout,
lighting, finish and decoration work (including carpeting and other floor
coverings) for the Premises; (b) all internal and external communications and
utility facilities which will require conduiting or other improvements from the
base Building shell work and/or within common areas; and (c) all other
specifications for the Tenant Improvements. The Final Plans will be submitted to
Tenant for signature to confirm that they are consistent with the Space Plans.
If Tenant reasonably disapproves any aspect of the Final Plans based on any
inconsistency with the Space Plans, Tenant agrees to advise Landlord in writing
of such disapproval and the reasons therefor within the time frame set forth in
the Work Schedule. In accordance with the Work Schedule, Landlord will then
cause Space Planner to redesign the Final Plans incorporating the revisions
reasonably requested by Tenant so as to make the Final Plans consistent with the
Space Plans.
(c) REQUIREMENTS OF TENANT'S FINAL PLANS. Tenant's Final Plans will include
locations and complete dimensions, and the Tenant Improvements, as shown on the
Final Plans, will: (i) be compatible with the Building shell and with the
design, construction and equipment of the Building; (ii) if not comprised of the
Building standards set forth in the written description thereof (the
"Standards"), then compatible with and of at least equal quality as the
Standards and approved by Landlord; (iii) comply with all applicable laws,
ordinances, rules and regulations of all governmental authorities having
jurisdiction, and all applicable insurance regulations; (iv) not require
Building service beyond the level normally provided to other tenants in the
Building and will not overload the Building floors; and (v) be of a nature and
quality consistent with the overall objectives of Landlord for the Building, as
determined by Landlord in its reasonable but subjective discretion.
(d) SUBMITTAL OF FINAL PLANS. Once approved by Landlord and Tenant, Space
Planner will submit the Final Plans to the appropriate governmental agencies for
plan checking and the issuance of a building permit. Space Planner, with
Tenant's cooperation, will make any changes to the Final Plans which are
requested by the applicable governmental authorities to obtain the building
permit. After approval of the Final Plans no further changes may be made without
the prior written approval of both Landlord and Tenant, and then only after
agreement by Tenant to pay any excess costs resulting from the design and/or
construction of such changes. Tenant hereby acknowledges that any such changes
will be subject to the terms of Paragraph 10 below.
(e) CHANGES TO SHELL OF BUILDING. If the Final Plans or any amendment thereof or
supplement thereto shall require changes in the Building shell, the increased
cost of the Building shell work caused by such changes will be paid for by
Tenant or charged against the "Allowance" described in Paragraph 5 below.
(f) WORK COST ESTIMATE AND STATEMENT. Landlord shall solicit bids from at least
two (2) reputable, qualified and unaffiliated (with Landlord) general
contractors for the Tenant Improvement Work and in conjunction with Tenant,
shall select the general contractor for the construction of the Tenant
Improvements. Prior to the commencement of construction of any of the Tenant
Improvements shown on the Final Plans, Landlord will submit to Tenant a written
estimate of the cost to complete the Tenant Improvement Work, which written
estimate will be based on the Final Plans taking into account any modifications
which may be required to reflect changes in the Final Plans required by the City
or County in which the Premises are located (the "Work Cost Estimate"). Tenant
will either approve the Work Cost Estimate or disapprove specific items and
submit to Landlord revisions to the Final Plans to reflect deletions of and/or
substitutions for such disapproved items. Submission and approval of the Work
Cost Estimate will proceed in accordance with the Work Schedule. Upon Tenant's
approval of the Work Cost
F-2
<PAGE> 53
Estimate (such approved Work Cost Estimate to be hereinafter known as the "Work
Cost Statement"), Landlord will have the right to purchase materials and to
commence the construction of the items included in the Work Cost Statement
pursuant to Paragraph 6 hereof. If the total costs reflected in the Work Cost
Statement exceed the Allowance described in Paragraph 5 below, Tenant agrees to
pay such excess, as additional rent, within five (5) business days after
Tenant's approval of the Work Cost Estimate. Throughout the course of
construction, any differences between the estimated Work Cost in the Work Cost
Statement and the actual Work Cost will be determined by Landlord and
appropriate adjustments and payments by Landlord or Tenant, as the case may be,
will be made within five (5) business days thereafter.
5. PAYMENT FOR THE TENANT IMPROVEMENTS.
(a) ALLOWANCE. Landlord hereby grants to Tenant a tenant improvement allowance
of $27.00 per usable square foot of Suite 301 of the Premises, i.e., One Hundred
Three Thousand Six Hundred Twenty Six and No/100 Dollars ($103,626.00), plus
$10.00 per rentable square foot of Suite 320 of the Premises, i.e., Twenty Six
Thousand Three Hundred Ninety and No/100ths Dollars ($26,390.00) (collectively,
the "Allowance") for all costs relating to the initial design and construction
of the Tenant Improvements, including without limitation:
(i) Payment of the cost of preparing the Space Plans and the Final Plans,
including mechanical, electrical, plumbing and structural drawings and of all
other aspects necessary to complete the Final Plans. The Allowance will not be
used for the payment of extraordinary design work not consistent with the scope
of the Standards (i.e., above-standard design work) or for payments to any other
consultants, designers or architects other than Landlord's architect and/or
Tenant's architect.
(ii) The payment of plan check, permit and license fees relating to construction
of the Tenant Improvements.
(iii) Construction of the Tenant Improvements, including, without limitation,
the following:
(aa) Installation within the Premises of all partitioning, doors, floor
coverings, ceilings, wall coverings and painting, millwork and similar items;
(bb) All electrical wiring, lighting fixtures, outlets and switches, and other
electrical work necessary for the Premises;
(cc) The furnishing and installation of all duct work, terminal boxes, diffusers
and accessories necessary for the heating, ventilation and air conditioning
systems within the Premises, including the cost of meter and key control for
after-hour air conditioning;
(dd) Any additional improvements to the Premises required for Tenant's use of
the Premises including, but not limited to, odor control, special heating,
ventilation and air conditioning, noise or vibration control or other special
systems or improvements;
(ee) All fire and life safety control systems such as fire walls, sprinklers,
halon, fire alarms, including piping, wiring and accessories, necessary for the
Premises;
(ff) All plumbing, fixtures, pipes and accessories necessary for the
Premises;
(gg) Testing and inspection costs; and
(hh) Fees for the contractor and tenant improvement coordinator including, but
not limited to, fees and costs attributable to general conditions associated
with the construction of the Tenant Improvements. A construction administration
fee of five percent (5%) of all construction costs including related
architectural, design and engineering fees and reimbursables (but excluding
Tenant's non-construction costs described in subparagraph (v) below) shall be
paid to Landlord.
(iv) Costs of Tenant's Building identity signs.
F-3
<PAGE> 54
(v) All other costs to be expended by Landlord in the construction of the Tenant
Improvements, including those costs incurred by Landlord for construction of
elements of the Tenant Improvements in the Premises, which construction was
performed by Landlord prior to the execution of this Lease by Landlord and
Tenant and which construction is for the exclusive benefit of Tenant and is
customarily performed by Landlord prior the execution of leases for space in the
Building for reasons of economics (examples of such construction would include,
but not be limited to, the extension of mechanical [including heating,
ventilating and air conditioning systems] and electrical distribution systems
outside of the core of the Building, wall construction, column enclosures and
painting outside of the core of the Building, ceiling hanger wires and window
treatment)
(b) CARPET CHARGE. There shall be charged against the Allowance otherwise
payable to or for the benefit of Tenant the following amounts: (1) Five Thousand
and No/100ths Dollars ($5,000.00) which Landlord has already expended installing
new carpet in Suite 320 of the Premises and (2) One Thousand Six Hundred and
No/100ths Dollars ($1,600.00) which Landlord has already expended in performing
electrical work in Suite 320 of the Premises.
(c) EXCESS COSTS. The cost of each item referenced in Paragraph 5(a) above shall
be charged against the Allowance. If the Work Cost exceeds the Allowance, Tenant
may elect to either (1) pay to Landlord such excess (including Landlord's
standard 5% administrative fee) within five (5) business days after invoice
therefor (less any sums previously paid by Tenant for such excess pursuant to
the Work Cost Estimate) or (2) amortize such excess costs with interest at ten
percent (10%) per annum over the initial Term of the Lease. If Tenant selects
option (2), the amortized excess costs shall be due and payable monthly
concurrently with Tenant's payments of Base Rent under the Lease. In no event
will the Allowance be used to pay for Tenant's furniture, artifacts, equipment,
telephone systems or any other item of personal property which is not affixed to
the Premises.
(d) CHANGES. If, after the Final Plans have been prepared and the Work Cost
Statement has been established, Tenant requires any changes or substitutions to
the Final Plans, any additional costs related thereto (including Landlord's
standard 5% administrative fee) are to be paid by Tenant to Landlord prior to
the commencement of construction of the Tenant Improvements. Any changes to the
Final Plans will be approved by Landlord and Tenant in the manner set forth in
Paragraph 4 above and will, if necessary, require the Work Cost Statement to be
revised and agreed upon between Landlord and Tenant in the manner set forth in
Subparagraph 4(f) above. Landlord will have the right to decline Tenant's
request for a change to the Final Plans if such changes are inconsistent with
the provisions of Paragraph 4 above, or if the change would unreasonably delay
construction of the Tenant Improvements and the Commencement Date of the Lease.
(e) GOVERNMENTAL COST INCREASES. If increases in the cost of the Tenant
Improvements as set forth in the Work Cost Statement are due to requirements of
any governmental agency, Tenant agrees to pay Landlord the amount of such
increase (including Landlord's standard 5% administrative fee) within five (5)
days of Landlord's written notice; provided, however, that Landlord will first
apply toward any such increase any remaining balance of the Allowance.
(f) UNUSED ALLOWANCE AMOUNTS. Any unused portion of the Allowance upon
completion of the Tenant Improvements will not be refunded to Tenant or be
available to Tenant as a credit against any obligations of Tenant under the
Lease unless Tenant has paid for excess costs as described in Subparagraphs
5(c), 5(d) or 5(e), in which case the unused Allowance may be applied toward
such excess cost amounts and paid to Tenant.
6. CONSTRUCTION OF TENANT IMPROVEMENTS. Until Tenant approves the Final Plans
and Work Cost Statement, Landlord will be under no obligation to cause the
construction of any of the Tenant Improvements. Following Tenant's approval of
the Work Cost Statement described in Subparagraph 4(f) above and upon Tenant's
payment of the total amount by which such Work Cost Statement exceeds the
Allowance, if any, Landlord's contractor will commence and diligently proceed
with the construction of the Tenant Improvements, subject to Tenant Delays (as
described in Paragraph 9 below) and Force Majeure Delays (as described in
Paragraph 10 below).
F-4
<PAGE> 55
7. FREIGHT/CONSTRUCTION ELEVATOR. Landlord will, consistent with its obligation
to other tenants in the Building, if appropriate and necessary, make the
freight/construction elevator reasonably available to Tenant in connection with
initial decorating, furnishing and moving into the Premises. Tenant agrees to
pay for any after-hours staffing of the freight/construction elevator, if
needed.
8. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION.
(a) COMMENCEMENT DATE. The Term of the Lease will commence on the date (the
"Commencement Date") which is the earlier of: (i) the date Tenant moves into the
Premises to commence operation of its business in all or any portion of the
Premises; or (ii) the date the Tenant Improvements have been "substantially
completed" (as defined below); provided, however, that if substantial completion
of the Tenant Improvements is delayed as a result of any Tenant Delays described
in Paragraph 9 below, then the Commencement Date as would otherwise have been
established pursuant to this Subparagraph 8(a)(ii) will be accelerated by the
number of days of such Tenant Delays.
(b) SUBSTANTIAL COMPLETION; PUNCH-LIST. For purposes of Subparagraph 8(a)(ii)
above, the Tenant Improvements will be deemed to be "substantially completed"
when Landlord's contractor certifies in writing to Landlord and Tenant that
Landlord: (a) is able to provide Tenant with reasonable access to the Premises;
(b) has substantially performed all of the Tenant Improvement Work required to
be performed by Landlord under this Work Letter Agreement, other than decoration
and minor "punch-list" type items and adjustments which do not materially
interfere with Tenant's access to or use of the Premises; and (c) has obtained a
temporary certificate of occupancy or other required equivalent approval from
the local governmental authority permitting occupancy of the Premises. Within
ten (10) days after receipt of such certificate from Landlord's contractor,
Tenant will conduct a walk-through inspection of the Premises with Landlord and
provide to Landlord a written punch-list specifying those decoration and other
punch-list items which require completion, which items Landlord will thereafter
diligently complete.
(c) DELIVERY OF POSSESSION. Landlord agrees to deliver possession of the
Premises to Tenant when the Tenant Improvements have been substantially
completed in accordance with Subparagraph (b) above. The parties estimate that
Landlord will deliver possession of the Premises to Tenant and the Term of this
Lease will commence on or before the Estimated Commencement Date set forth in
Subparagraph 1.8 of the Lease. Landlord agrees to use its commercially
reasonable efforts to cause the Premises to be substantially completed on or
before the Estimated Commencement Date. If Landlord is unable to deliver
possession of the Premises to Tenant on or prior to the date which is sixty (60)
days following the Estimated Commencement Date specified in Subparagraph 1.8 of
the Lease for reasons other than Tenant Delays or Force Majeure Delays, the
Lease will be voidable at the option of Tenant; provided, however, if Landlord
cannot deliver possession of the Premises to Tenant on or prior to the Estimated
Commencement Date and Tenant does not void this Lease, Landlord shall not be
liable to Tenant for any loss or damage resulting therefrom, but if such late
delivery is due to Landlord's negligence or willful misconduct or due to any
Force Majeure Delay(s), then, as Tenant's sole remedy, the Commencement Date and
the Expiration Date of the Term will be extended one (1) day for each day
Landlord is delayed in delivering possession of the Premises to Tenant.
9. TENANT DELAYS. For purposes of this Work Letter Agreement, "Tenant Delays"
means any delay in the completion of the Tenant Improvements resulting from any
or all of the following: (a) Tenant's failure to timely perform any of its
obligations pursuant to this Work Letter Agreement, including any failure to
complete, on or before the due date therefor, any action item which is Tenant's
responsibility pursuant to the Work Schedule delivered by Landlord to Tenant
pursuant to this Work Letter Agreement; (b) Tenant's changes to Space Plans or
Final Plans after Landlord's approval thereof; (c) Tenant's request for
materials, finishes, or installations which are not readily available or which
are incompatible with the Standards; (d) any delay of Tenant in making payment
to Landlord for Tenant's share of the Work Cost; or (e)
F-5
<PAGE> 56
any other act, delay or failure to act by Tenant, Tenant's employees, agents,
architects, contractors, independent contractors, consultants and/or any other
person performing or required to perform services on behalf of Tenant.
10. FORCE MAJEURE DELAYS. For purposes of this Work Letter, "Force Majeure
Delays" means any actual delay in the construction of the Tenant Improvements,
which is beyond the reasonable control of Landlord or Tenant, as the case may
be, as described in Section 32.10 of the Lease.
11. TENANT'S ENTRY INTO THE PREMISES PRIOR TO SUBSTANTIAL COMPLETION. Provided
that Tenant and its agents do not interfere with, or delay, Landlord's
contractor's work in the Premises, Tenant shall be permitted access to the
Premises prior to the Substantial Completion thereof for the purpose of
installing overstandard equipment or fixtures (including Tenant's data and
telephone equipment) in the Premises. Prior to Tenant's entry into the Premises
as permitted by the terms of this Section 11, Tenant shall submit a schedule to
Landlord, for its approval, which schedule shall detail the timing and purpose
of Tenant's entry. Tenant shall hold Landlord harmless from and indemnify,
protect and defend Landlord against any loss or damage to the Premises and
against injury to any persons caused by Tenant's actions pursuant to this
Section 11.
IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this Work
Letter Agreement to be duly executed by their duly authorized representatives as
of the date of the Lease.
LANDLORD TENANT
AUERBACH PLAZA LIMITED PARTNERSHIP, THE LIGHTSPAN PARTNERSHIP, INC.,
a California limited partnership a California corporation
By: OLC California, Inc., a
California corporation,
General Partner By: /s/ WINIFRED B. WECHSLER
----------------------------
Print Name: Winifred B. Wechsler
----------------------------
Print Title: Senior Vice President
----------------------------
By: /s/ MICHAEL W. SCHRAMM Date: June 2, 1999
------------------------------- ----------------------------
Print Name: MICHAEL W. SCHRAMM
-----------------------
Print Title: V.P.
-----------------------
Date: 6/4/99
--------------------------
By: /s/ [signature illegible]
----------------------------
Print Name: [illegible]
----------------------------
Print Title: Sr. V.P.
----------------------------
Date: June 2, 1999
----------------------------
GOLIAC, INC.,
a California corporation
By: /s/ NAOTO YABU
-------------------------------
Print Name: NAOTO YABU
-----------------------
Print Title: V.P.
-----------------------
Date: 6-4-99
--------------------------
F-6
<PAGE> 57
CONSENT TO ASSIGNMENT
THIS CONSENT TO ASSIGNMENT (the "Consent") is made by and among TST
Mountain Bay, L.L.C. ("Landlord"), and The Lightspan Partnership, Inc.
("Assignee") and Academic Systems Corporation ("Assignor"), the tenant under a
Lease dated as of July 1, 1996 (which Lease as heretofore or hereafter amended
is hereinafter called the "Lease"), under which Landlord leases to Assignor the
premises commonly known as 444 Castro Street, Suite 1200, Mountain View,
California (the "Premises"). Landlord hereby consents to the assignment by
Assignor to Assignee, pursuant to an Assignment (the "Assignment") dated as of
_______________, 1999, a full and complete copy of which is attached hereto as
Exhibit "A," of the Premises, such Consent being subject to and upon the
following terms and conditions, to each of which Assignor and Assignee agree:
1. Nothing contained in this Consent shall either:
(a) Operate as a consent to or approval or ratification by Landlord
of any of the particular provisions of the Assignment or as a representation or
warranty by Landlord and Landlord shall not be bound or estopped in any way by
the provisions of the Assignment; or
(b) Be construed to modify, waive, impair or affect (i) any of the
provisions, covenants or conditions in the Lease, (ii) any of Assignor's
obligations under the Lease, or (iii) any rights or remedies of Landlord under
the Lease or otherwise to enlarge or increase Landlord's obligations or
Assignor's rights under the Lease or otherwise; or
(c) Be construed to waive any present or future breach or default on
the part of Assignor under the Lease. In case of any conflict between the
provisions of this Consent and the provisions of the Assignment, the provisions
of this Consent shall prevail unaffected by the Assignment.
2. Assignor and Assignee each represent that, except as set forth in the
Assignment, no fee, premium or other consideration is being paid or is payable
to Assignor in connection with the Assignment or for the use, sale or rental of
Assignor's fixtures, leasehold improvements, equipment, furniture, or personal
property. Assignor and Assignee each further represent and warrant that the
Assignment is the complete, true and correct agreement between the parties.
Assignor and Assignee each further represent and warrant that Assignee is
financially responsible, of good reputation, and is engaged in a business which
meets the standards set by Landlord for the Building and its tenants.
3. The Assignment takes effect on June 25, 1999 (the "Effective Date").
By execution hereof, Assignee accepts the Assignment and assumes and agrees to
perform, from the Effective Date, as a direct obligation to Landlord, all the
provisions of the Lease.
4. The Assignment (and all amendments and modifications thereof) shall
be subject and subordinate at all times to the Lease and all of its provisions,
covenants and conditions. In
<PAGE> 58
case of any conflict between the provisions of the Lease and the provisions of
the Assignment, the provisions of the Lease shall prevail unaffected by the
Assignment.
5. Neither the Assignment nor this Consent shall release or discharge
Assignor from any liability under the Lease and Assignor shall remain liable
and responsible for the full performance and observance of all of the
provisions, covenants and conditions set forth in the Lease to be performed and
observed. Any breach or violation of any provision of the Lease by Assignee
shall be deemed to be and shall constitute a default by Assignor in fulfilling
such provision.
6. As of the date hereof, Assignor and Assignee acknowledge that the
Lease is in full force and effect and the Landlord is not in default in the
performance of its obligations under the Lease.
7. This consent by Landlord is not assignable and shall not be construed
as a consent by Landlord to any further assignment or subletting either by
Assignor or Assignee, nor shall it be construed as a waiver of any restriction
in the Lease concerning further assignment or subletting. The Lease may not be
assigned or sublet without the prior written consent of Landlord thereto in
each instance.
8. Landlord now holds the sum of Thirty-Four Thousand Five Hundred
Thirty-One and 25/100 Dollars ($34,531.25) as a security deposit, to be applied
subject to the provisions of the Lease. Assignor releases all claims to that
sum, and the sum shall be held by Landlord for the benefit of Assignee, subject
to the provisions of the Lease.
9. Neither the partners, members, directors or officers of Landlord
(collectively, the "Parties") shall be liable for the performance of Landlord's
obligations under this Consent or the Lease. Assignor and Assignee, as the case
may be, shall look solely to Landlord to enforce Landlord's obligations
hereunder and thereunder and shall not seek any damages against any of the
Parties. The liability of Landlord for Landlord's obligations under this
Consent and the Lease shall be limited to Landlord's interest in the Building,
and Assignor and Assignee shall not look to any other property or assets of
Landlord or the property or assets of any of the Parties in seeking either to
enforce Landlord's obligations under this Consent or the Lease or to satisfy a
judgment for Landlord's failure to perform such obligations.
10. Assignor agrees that it shall pay any brokerage commissions payable
in connection with the Assignment and Landlord shall have no responsibility
with respect thereto. Assignor agrees to indemnify and hold harmless Landlord
against and from any claims for any such brokerage commissions and all costs,
expenses and liabilities in connection therewith, including, without
limitation, attorneys' fees and expenses. The provisions of this paragraph 10
shall survive the expiration or sooner termination of the Lease.
11. This Consent shall not be effective until Assignor shall have paid
Landlord's attorneys' fees in connection with this Consent and the Assignment.
<PAGE> 59
12. All communication, notices and demands of any kind which a party may
be required or desire to give or to serve upon another party shall be made in
writing and shall be deemed to have been fully given when deposited in the
United States mail, registered or certified, postage prepaid, return receipt
requested, to the following addresses:
To Landlord: TST Mountain Bay, L.L.C.
c/o Tishman Speyer Properties, L.P.
444 Castro Street
Mountain View, CA 94041
Attn: Building Manager
Copy to: Tishman Speyer Properties, L.P.
520 Madison Avenue, 6th Floor
New York, NY 10022
Attn: General Counsel
To Assignor: Academic Systems Corporation
444 Castro Street, Suite 1200
Mountain View, CA 94041
Attn: Brian T. McGee
To Assignee: The Lightspan Partnership, Inc.
____________________________________
San Diego, CA _________
Attn: ______________________________
13. This Consent shall be construed in accordance with the laws of the
State of California and contains the entire agreement of the parties hereto.
<PAGE> 60
IN WITNESS WHEREOF, the parties hereto have executed this Consent this
______ day of September, 1999.
LANDLORD:
TST Mountain Bay, L.L.C., a Delaware
limited liability company
By:
-------------------------------------
Its:
-------------------------------------
ASSIGNOR:
Academic Systems Corporation, a
Lightspan corporation
By: /s/ [signature illegible]
-------------------------------------
Its: /s/ [signature illegible]
-------------------------------------
By:
-------------------------------------
Its:
-------------------------------------
<PAGE> 61
ASSIGNEE
The Lightspan Partnership, Inc., a _______________
corporation
By:
------------------------------------
Its:
-----------------------------------
By:
------------------------------------
Its:
-----------------------------------
<PAGE> 1
EXHIBIT 10.20
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
SALE AND LICENSE AGREEMENT
This License Agreement (the "Agreement") is entered into as of the 26th day of
January, 1996, by and between SONY COMPUTER ENTERTAINMENT AMERICA, a division of
Sony Interactive Entertainment Inc. (hereinafter "Sony"), and The Lightspan
Partnership, Inc. (hereinafter "Licensee").
TERM SCHEDULE
All information contained in this Term Schedule is set out for ease of
reference, and is to be incorporated and read in conjunction with the
applicable terms and conditions contained herein, as well as this Agreement in
whole.
1. PARTIES: Sony Computer Entertainment America
The Lightspan Partnership, Inc.
2. NOTICES: Sony Computer Entertainment The Lightspan Partnership,
America Inc.
919 East Hillsdale, 2nd Floor 2382 Faraday Avenue
Foster City, CA 94404 Suite 300
Attn: Executive Vice Carlsbad, CA 92008-7218
President of Business Attn: Bob Greene
Development Fax: (619) 930-2350
Fax: (415) 655-8001
With a copy to: With a copy to:
Sony Interactive
Entertainment Inc.
919 East Hillsdale, 2nd Floor
Foster City, CA 94404
Attn: Executive Vice
President
Fax: (415) 655-8042
3. DESCRIPTION OF
SERVICES: Sale of PlayStation(TM) game consoles for distribution to
the School Market only. License to develop educational
software compatible with the PlayStation game console,
subject to Sony's approval as set forth in Section 6 of
the Agreement.
4. EXCLUSIVITY: The license granted hereunder shall be non-exclusive.
5. LICENSED
TRADEMARKS: a. "PlayStation"
b. PS Logo
c. PlayStation Logo
6. LICENSED
TERRITORY: United States and Canada
7. INITIAL TERM: Four (4) years.
8. NONREFUNDABLE
PAYMENT: See Exhibit B.
CONFIDENTIAL
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<PAGE> 2
9. MINIMUM ORDER QUANTITY
FOR 1996: [***] of PlayStation Hardware to be ordered and
delivered in 1996. Future minimum order quantities
shall be determined as set forth in Section 4.4.
10. REQUIRED LEGAL COPY: "Licensed by Sony Computer Entertainment America.
PlayStation and the PlayStation logos are
trademarks of Sony Computer Entertainment Inc. (R)
1995 Sony Interactive Entertainment Inc."
Licensee shall consult with Sony regarding the
credit for each software title developed by
Licensee.
[END OF TERM SCHEDULE]
TERMS AND CONDITIONS
WHEREAS, Sony and/or its affiliates have developed a CD-based interactive
console for playing video games and for other entertainment purposes known as
the PlayStation(TM) Game Console (as defined below) and also own or have the
right to grant licenses to certain intellectual property rights including the
trademark(s) identified more fully in the Term Schedule attached hereto (the
"Trademarks") used in connection with the PlayStation Game Console.
WHEREAS, Licensee desires to be granted the right to acquire units of the
PlayStation Game Console for distribution in solely in the School Market, and
desires to be granted a non-exclusive license to develop and distribute
Licensed Products (as defined below) pursuant to the terms and conditions set
forth in this Agreement.
WHEREAS, Sony and Licensee have entered into a Developer Agreement, dated as
of January 12, 1996, regarding the development of educational software for the
PlayStation Game Console (hereinafter the "Developer Agreement").
WHEREAS, Sony is willing, on the terms and subject to the conditions of this
License Agreement, to grant Licensee the right to acquire and distribute units
of the PlayStation Game Console and to grant Licensee the desired non-exclusive
license to distribute Licensed Products solely in the School Market, and Sony
desires to manufacture such Licensed Products for Licensee.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Licensee and Sony
hereby agree as follows:
1. DEFINITION OF TERMS.
1.1 "Discs" shall mean the CD-ROM media which contains Executable
Software.
1.2 "School Market" shall mean distribution directly by Licensee to and
for elementary and secondary (i.e., K-12) students, through distribution and
sale to elementary and secondary (i.e., K-12) public and private schools in the
Licensed Territory.
1.3 "Executable Software" means Licensee's object code software which
includes the Licensee Software and any software (whether in object code or
source code form) provided by
-2- CONFIDENTIAL
*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 3
Sony which is intended to be combined with Licensee Software for execution on a
PlayStation Game Console and has the ability to communicate with the software
resident in the PlayStation Game Console.
1.4 "Intellectual Property Rights" means, by way of example but not by
way of limitation, all current and future worldwide patents and other patent
rights, copyrights, trademarks, service marks, trade names, mask work rights,
trade secret rights, technical information, know-how, and the equivalents of
the foregoing under the laws of any jurisdiction, and all other proprietary or
intellectual property rights throughout the universe, including without
limitation all applications and registrations with respect thereto, and all
renewals and extensions thereof.
1.5 "Licensed Territory" means the countries listed in the Term Schedule.
1.6 "Licensed Products" shall mean each unit of Executable Software
embodied on Discs and including all Printed Materials and Packaging.
1.7 "Licensee Software" means Licensee's application object code and data
(including audio and video material) developed by Licensee in accordance with
this Agreement, which, when linked to any software provided by Sony, create
Executable Software. All Licensee Software shall be educational in nature.
1.8. "PlayStation Game Console" means the Sony video game console Part
No. SCPH-1001940000 or functional equivalent, which version is available to
consumers in the retail market in the Licensed Territory as of the date of this
Agreement.
1.9 "Packaging" means, with respect to each Licensed Product, the carton,
containers, packaging and wrapping materials (but excluding instructional
manuals, liners or other user information for such Licensed Product to be
inserted therein).
1.10 "PlayStation Hardware" means the finished hardware components to be
provided to Licensee by Sony, including the PlayStation Game Console and all
peripherals and accessories related thereto.
1.11 "Sony Materials" means any data, technology, object code, source
code, documentation, and hardware provided or supplied to Licensee by Sony,
including, without limitation, any portion or portions of the PlayStation
Hardware and development tools.
2. LICENSES.
Sony hereby grants to Licensee, and Licensee hereby accepts, for the term
of this Agreement, within the Licensed Territory, under Sony's Intellectual
Property Rights, including without limitation any relevant patents Sony may own
or have acquired by license, a non-exclusive, nontransferable license, without
the right to sublicense (except as specifically provided herein): (i) to
reproduce and distribute executable files for execution on a PlayStation Game
Console incorporating Licensee Software which has been developed in accordance
with the provisions of the Developer Agreement and this License Agreement,
including without limitation, Section 7 of the License Agreement; (ii) to
market, distribute and sell such Licensed Products and the PlayStation Hardware
solely in the School Market; (iii) to use the Licensed Trademarks in connection
with the packaging of the Licensed Products; and (iv) to sublicense to end
users the right to use the Licensed Products for non-commercial purposes only
and not for public performance.
-3- CONFIDENTIAL
<PAGE> 4
3. PLAYSTATION HARDWARE.
3.1 SALE OF PLAYSTATION HARDWARE. Sony hereby agrees to sell to Licensee,
and Licensee hereby accepts, for the term and subject to the conditions set
forth herein, the PlayStation Hardware for the consideration set forth below in
Section 4 and Exhibit B hereto. All sales of PlayStation Hardware to Licensee
shall be governed by the Standard Terms and Conditions of Sale attached hereto
as Exhibit A, which may be amended from time to time by Sony ("Terms and
Conditions"). Sony agrees to provide such number of units of the PlayStation
Hardware as Licensee may reasonably request, subject to availability, during
the term of this License Agreement. Licensee agrees to acquire all PlayStation
Hardware directly from Sony or from a Sony-approved supplier and not from any
third party.
3.2 FORECASTS. During the Term of the Agreement, Licensee agrees to give
Sony a written forecast of demand for PlayStation Hardware every three (3)
months for the next eighteen (18) months on a rolling basis in advance of
expected delivery of units to Licensee in order for Sony to have the ability to
meet Licensee's demand.
3.3 SERVICE. The parties shall discuss entering into a separate agreement
for service and maintenance of the PlayStation Hardware, but Sony's warranty on
such PlayStation Hardware sold to Licensee shall otherwise be governed by the
Terms and Conditions and this License Agreement.
3.4 DEMONSTRATION UNITS OF PLAYSTATION HARDWARE. Notwithstanding other
provisions of this Agreement and Exhibits A and B, Sony agrees to provide to
Licensee [***] units of PlayStation Hardware at the then current price as
determined in Exhibit B on the date of delivery of such units provided that no
later than October 1, 1996 Licensee takes delivery of same. Payment for such
units shall not be due and payable until December 31, 1996, at which time
payment shall be due and payable in full. The units of PlayStation Hardware
provided to Licensee in this Section shall be used by Licensee for
demonstration purposes only in order for Licensee to demonstrate the Licensed
Products and PlayStation Hardware to the School Market on a limited trial
basis. Licensee will provide to Sony a written accounting of the use of these
demonstration systems in a manner to be agreed upon mutually by Licensee and
Sony.
4. COMPENSATION FOR PLAYSTATION HARDWARE AND LICENSED PRODUCTS.
4.1 CONSIDERATION FOR PLAYSTATION HARDWARE AND LICENSED PRODUCTS. The
nonrefundable amount to be paid by Licensee (the "Nonrefundable Payment") [***]
shall be as set forth in Exhibit B. [***] All Nonrefundable Payments due
hereunder shall be made in United States currency drawn on a United States
bank, unless otherwise specified between the parties.
4.2 ORDER AND PAYMENT TERMS FOR PLAYSTATION HARDWARE AND LICENSED
PRODUCTS. Licensee shall issue to Sony written purchase order(s) in accordance
with the Terms and Conditions. Such orders shall reference this Agreement,
specify the number of units of PlayStation hardware ordered and state the
requested delivery date, which shall be at least three to six months from the
date of order. Licensee shall provide Sony with a purchase order for each order
placed.
4.3 NO DEDUCTIONS FROM NONREFUNDABLE PAYMENT. No costs incurred in the
development, manufacture, marketing, sale, and/or distribution of the
PlayStation Hardware and Licensed Products shall be deducted from any
Nonrefundable Payments payable to Sony hereunder.
CONFIDENTIAL
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*CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 5
Similarly, there shall be no deduction from the Nonrefundable Payments
otherwise owed to Sony hereunder as a result of any uncollectible accounts
owed to Licensee, or for any credits, discounts, royalties, allowances or
returns which Licensee may credit or otherwise grant to any third party, or for
any taxes, fees, assessments, or expenses of any kind which may be incurred by
Licensee in connection with its sale and/or distribution of any units of the
PlayStation Hardware and/or Licensed Products and/or arising with respect to
the payment of any Nonrefundable Payment hereunder. In addition to the
Nonrefundable Payments provided to Sony hereunder, Licensee shall be solely
responsible for and bear any cost relating to any withholding taxes or other
assessments which may be imposed by any governmental authority or any other
U.S. or foreign federal, state or local sales or value-added tax, use or excise
tax, customs duties or other similar taxes or duties, which Sony may be
required to collect or pay. Licensee shall be solely responsible for the
payment or reimbursement of any such taxes, fees, and other such charges or
assessments applicable to the payment by Licensee of any such Nonrefundable
Payment. In addition, Licensee shall pay all personal property taxes or similar
charges, however imposed, on the ownership, use and possession of the
PlayStation Hardware and Licensed Products during the term of the License
Agreement. The receipt or acceptance by Sony of any Nonrefundable Payment made
shall not prevent Sony, or its agent, from subsequently challenging the
validity or accuracy of such payment within four years of invoice.
4.4. Minimum Order Quantity Cap. Licensee shall purchase and have
delivered the minimum number of units set forth in the Term Schedule for
calendar year 1996. Licensee shall also be required to meet a minimum order
quantity requirement for subsequent calendar years of the term, which shall be
[***] of the number of units forecasted for such calendar year based on the
forecast provided to Sony by Licensee in October of the preceding calendar
year. Failure of Licensee to place orders for the minimum number of units shall
subject Licensee to the termination provisions of Section 14.2.
5. Limitations on Licenses; Reservation of Rights.
5.1. Reverse Engineering Prohibited. Licensee hereby agrees not to
disassemble, peel semiconductor components, decompile, or otherwise reverse
engineer or attempt to reverse engineer or derive source code from, all or any
portion of the Sony Materials (whether or not all or any portion of the Sony
Materials are integrated with the Licensee Software), or permit or encourage
any third party to do so, or use or acquire any materials from any third party
who does so. Licensee shall not use, modify, reproduce, sublicense, distribute,
create derivative works from, or otherwise provide to third parties, the Sony
Materials, in whole or in part, other than as expressly permitted by this
License Agreement. Licensee shall be required in all cases to make payments in
accordance with Section 4 hereto to Sony on any of Licensee's products
utilizing Sony Materials or which are in any way derived from the disassembly,
decompilation, reverse engineering of, or use of source code derived from, the
Sony Materials.
5.2 Limitations on Distribution.
5.2.1 Limitations on Channel of Distribution. Licensee agrees that the
rights granted herein from Sony to Licensee are granted for the School Market
only. No publication, marketing, distribution or sale of PlayStation Hardware
or Licensed Products, directly or indirectly, may be made or solicited by
Licensee under this License Agreement to third parties in the retail channel or
to distributors, agents, representatives or other third parties who sell to the
retail channel, and Licensee agrees that it will not knowingly sell the
PlayStation Hardware or Licensed Products to any persons who may resell them
outside the School Market. Sales to distributors, agents, representatives
and/or any other third parties shall be subject to Sony's prior written
approval in its sole discretion. In the event that Licensee desires to publish,
market, distribute and/or sell the Licensed Products outside of the School
Market, it must negotiate a separate agreement with Sony for such rights, and
Sony shall have a right of first refusal for any distribution,
CONFIDENTIAL
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* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 6
publication, marketing or sale of such Licensed Products. Licensee
agrees that, in the event that units of the PlayStation Hardware or Licensed
Products are returned to Sony, either directly from a consumer or through a
retail distributor or retailer, it will reimburse Sony for either the full
amount of compensation for such unit as set forth in Exhibit B or the amount of
compensation paid by Sony to such retailer for the returned unit, whichever is
less.
5.2.2 LIMITATIONS ON LICENSED TERRITORY. Notwithstanding any other
provisions in this License Agreement, Licensee shall not, directly or
indirectly, solicit orders from and/or sell any units of the Licensed Products
to any person or entity outside of the Licensed Territory, and Licensee further
agrees that it shall not directly or indirectly solicit orders for and/or sell
any units of the Licensed Products in any situation where Licensee reasonably
should know that such Licensed Products will be exported or resold outside of
the Licensed Territory.
5.2.3 LIMITATIONS ON IN-SCHOOL VS. IN-HOME DISTRIBUTION. Licensee
agrees that the ratio of units of PlayStation hardware distributed to schools
for school use vs. units of PlayStation Hardware distributed to students for
home use shall be less than 1 to 5.
5.3 CHANGES TO LICENSED TERRITORY. The licenses granted in Section 2 of
this License Agreement may only be exercised by Licensee in the Licensed
Territory. Sony shall have the right to delete, and intends to delete any
country or countries from the Licensed Territory if, in Sony's reasonable
judgment, the laws or enforcement of such laws in such country or countries do
not protect Sony's Intellectual Property Rights. In the event a country is
deleted from the Licensed Territory, Sony shall deliver to Licensee a notice
stating the number of days within which Licensee shall cease exercising such
licenses in the deleted country or countries. Licensee agrees to cease
exercising such licenses, directly or through subcontractors, in such deleted
country or countries, by the end of the period stated in such notice.
5.4 LIMITATION ON LICENSED TRADEMARKS. The Licensed Trademarks shall be
subject to the Guidelines set forth in Exhibit C hereto. Nothing contained in
the Term Schedule or this License Agreement shall in any way grant Licensee the
right to use the trademark "Sony" in any manner as a trademark, trade name,
service mark or logo other than as expressly permitted by Sony. Sony may amend
the above Licensed Trademarks upon reasonable notice to Licensee. Licensee will
have no right to or interest in any trademarks or trade names owned, used or
claimed now or in the future by Sony Computer Entertainment America, Sony
Interactive Entertainment Inc., Sony Corporation of America, Sony Computer
Entertainment Inc. or Sony Corporation (Japan) and their affiliates or
licensors.
5.5 RESERVATION OF SONY'S RIGHTS. The licenses granted in this License
Agreement extend only to development, marketing, distribution and sale of
Licensed Products for the School Market for use on the PlayStation Game Console,
in such format as may be designated by Sony. Without limiting the generality of
the foregoing, Licensee shall not have the right to distribute or transmit the
Executable Software or the Licensed Products outside the School Market
(including without limitation to or through retail channels of distribution) or
via electronic means or any other means now known or hereafter devised,
including without limitation, via wireless, cable, fiber optic means, telephone
lines, microwave and/or radio waves, or over a network of interconnected
computers or other devices. This License Agreement does not grant any right or
license, under any Intellectual Property Rights of Sony or otherwise, except as
expressly provided herein, and no other right or license is to be implied by or
inferred from any provision of this License Agreement or the conduct of the
parties hereunder. Licensee shall not make use of any of the Sony Materials and
PlayStation Game Console or any Intellectual Property Rights related to the Sony
Materials and PlayStation Game Console (or any portion thereof) except as
authorized by and in compliance with the provisions of this License Agreement or
as may be otherwise expressly authorized in writing by Sony. No right, license
or privilege has been granted to Licensee hereunder concerning the development
of any collateral product or other use or purpose of any kind whatsoever which
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displays or depicts any of the Licensed Trademarks. The use of the Licensed
Products or PlayStation Hardware as a premium, promotional tie-in or for any
other secondary use is not licensed hereunder.
5.6 RESERVATION OF LICENSEE'S RIGHTS. Licensee retains all rights, title
and interest in and to the Licensee Software, including without limitation,
Licensee's Intellectual Property Rights therein, and nothing in this Agreement
shall be construed to restrict the right of Licensee to develop products
incorporating the Licensee Software (separate and apart from the Sony
Materials) for any hardware platform or service other than the PlayStation Game
Console.
6. QUALITY STANDARDS FOR THE LICENSED PRODUCTS.
6.1 QUALITY ASSURANCE OF PRODUCT PROPOSAL. The Licensed Products,
including, without limitation, the contents and title of each of the Licensed
Products, and/or Licensee's use of any of the Licensed Trademarks, shall be
subject to Sony's prior written approval, which shall be within Sony's sole
discretion as to acceptable standards of quality. Before Licensee commences
programming of the Licensee Software for each of the Licensed Products,
Licensee shall submit to Sony, for Sony's written approval or disapproval, a
written proposal (the "Product Proposal") setting forth (i) the description of
the proposed Licensed Product, including the proposed title and story line,
(ii) a description of any licensed rights of third parties to be used by
Licensee, (iii) a description of the user interface characteristics, (iv) a
description of any multiple PlayStation Game Console options, (v) the
development team profile, (vi) a description of any special hardware/software
requirements, (vii) the scheduled and/or anticipated delivery dates with
respect to any deliverable items and/or release dates with respect to the
proposed Licensed Product, and (viii) any additional information that Sony may
deem to be useful in evaluating the proposed Licensed Product. In the event
that Sony rejects such Product Proposal, Sony shall have the right in its sole
discretion to request Licensee to make revisions or modifications to such
proposal, and any such changes shall be made at Licensee's cost. Licensee shall
notify Sony promptly in writing in the event of any material proposed change in
any portion of the Product Proposal and shall, from time to time at the request
of Sony for quality assurance purposes, submit work-in-progress on the
Licensed Product during the development process, in a medium designated by
Sony, for Sony's approval. Sony shall have the right, from time-to-time with
appropriate notice to Licensee, to limit the number of proposed Licensed
Products that Licensee may submit to Sony for review and approval or
disapproval, during any twelve (12) month period following the effective date of
this Agreement. Licensee agrees that all Licensed Products will be of high
quality and shall be designed (if an original title for the PlayStation Game
Console) or modified (if a pre-existing title) to substantially utilize the
particular capabilities of the Sony Materials and the PlayStation Game Console.
6.2 APPROVAL OF EXECUTABLE SOFTWARE. Following Sony's written approval
of the Product Proposal, Licensee shall on or before the date specified in the
Product Proposal, deliver to Sony for its inspection and evaluation, a
prototype of the Executable Software for the proposed Licensed Product. Such
prototype shall be in the format prescribed by Sony. Sony will evaluate such
prototype Executable Software and notify Licensee in writing of its approval or
disapproval of such Executable Software. If such Executable Software is
disapproved, Sony shall specify the reasons for such disapproval and state what
corrections and/or improvements are necessary. After making the necessary
corrections and/or improvements, Licensee may submit a new prototype for
approval or disapproval by Sony. No approval by Sony of any element of the
Executable Software shall be deemed an approval of any other element of the
Licensed Product, nor shall any such approval be deemed to constitute a waiver
of any of Sony's rights under this Agreement.
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6.3 APPROVAL OF PACKAGING AND ARTWORK. For each proposed Licensed
Product, Licensee shall be responsible, at Licensee's expense, for developing
all artwork and mechanicals ("Artwork") set forth on the Packaging, and all
instructional manuals, liners and other user materials ("Inserts") inserted
into the Packaging (Artwork and Inserts herein collectively referred to as
"Printed Materials"). All Printed Materials shall comply with the requirements
of the Sony Guidelines (hereinafter "Guidelines") to be provided to Licensee
subsequent to the execution of this License Agreement, and as may be amended
from time to time by Sony. At the time prototype Executable Software for a
proposed Licensed Product is submitted to Sony for inspection and evaluation,
Licensee shall also deliver to Sony, for review and evaluation, the proposed
final Printed Materials for such proposed Licensed Product, and a form of
limited warranty for the proposed Licensed Product. Licensee agrees that the
quality of such Printed Materials shall be of the same quality as that
associated with high quality consumer products. If any of the Printed Materials
are disapproved, Sony shall specify the reasons for such disapproval and state
what corrections are necessary. After making the necessary corrections to the
disapproved Printed Materials, Licensee may submit new proposed Printed
Materials for approval by Sony. Sony shall not unreasonably withhold its
approval of the proposed Printed Materials submitted for review by Licensee. No
approval by Sony of any element of the Printed Materials shall be deemed an
approval of any other element of the Licensed Product, nor shall any such
approval be deemed to constitute a waiver of any of Sony's rights under this
Agreement.
6.4 ADVERTISING MATERIALS. Pre-production samples of the advertising,
merchandising, promotional, and display materials of or concerning the Licensed
Products (collectively referred to hereinafter as the "Advertising Materials")
shall be submitted by Licensee to Sony, free of cost, for Sony's evaluation and
approval as to quality, style, appearance, usage of any of the Licensed
Trademarks, and appropriate reference of the notices, prior to any actual
production, use, or distribution of any such items by Licensee or in its
behalf. No such proposed Advertising Materials shall be produced, used, or
distributed directly or indirectly by Licensee without first obtaining the
written approval of Sony. Subject in each instance to the prior written
approval of Sony, Licensee may use such textual and/or pictorial advertising
matter (if any) as may be created by Sony or in its behalf pertaining to the
Sony Materials and/or to the Licensed Trademarks on such promotional and
advertising materials as may, in Licensee's judgment, promote the sale of the
Licensed Products within the Licensed Territory. Sony shall have the right to
use the Licensed Products in any advertising or promotion for PlayStation Game
Console at Sony's expense, subject to giving Licensee reasonable prior notice
of such advertisement or promotion. Sony shall confer with Licensee regarding
the text of any such advertisement. If required by Sony and/or any governmental
entity, Licensee shall include, at Licensee's cost and expense, the required
consumer advisory rating code(s) on any and all marketing and advertising
materials used in connection with the Licensed Product, which shall be procured
in accordance with the provisions of Section 6.5 below.
6.5 LABELING REQUIREMENTS. Sony reserves the right to affix or have
affixed to all units of PlayStation Hardware, Executable Software and all
Printed Materials for each unit of the Licensed Products a conspicuous, legible
and irremovable notice to be specified in a template which will be provided to
Licensee subsequent to the execution of this License Agreement, which template
may be amended from time to time by Sony during the term of this License
Agreement. Such template shall specify that such units of PlayStation Hardware
and Licensed Products are for educational use only and not for resale to the
retail market. Licensee agrees that, if required by Sony or any governmental
entity, it shall submit each Licensed Product to a consumer advisory ratings
system designated by Sony and/or such governmental entity for the purpose of
obtaining rating code(s) for each Licensed Product. Any and all costs and
expenses incurred in connection with obtaining such rating code(s) shall be
borne solely by Licensee. Any required consumer advisory rating code(s)
procured hereby shall be displayed on the Licensed Product and the associated
Printed Materials in accordance with the Guidelines, at Licensee's cost and
expense.
CONFIDENTIAL
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6.6 STANDARDS FOR LICENSED PRODUCTS IN SCHOOL MARKET. Because of the
inherent differences between educational software and game software, Sony and
Licensee acknowledge that different or additional quality standards and
requirements may be necessary for distribution of Licensed Products to the
School Market. Therefore, both Sony and Licensee shall meet to discuss the
standards set forth in this Section 6 and to decide whether any such different
or additional quality standards should apply for Licensed Products distributed
in the School Market. Notwithstanding the foregoing, Sony reserves the right in
its sole discretion to determine, and require Licensee to meet, any and all
standards with respect to the quality and content of the Licensed Products.
7. MANUFACTURE OF THE LICENSED PRODUCTS.
7.1 MANUFACTURE BY SONY.
7.1.1 APPOINTMENT OF SONY AS [***] MANUFACTURER OF DISCS. Licensee
hereby appoints Sony, and Sony hereby accepts such appointment, as the [***]
manufacturer of all Discs of the Licensed Products. Licensee acknowledges and
agrees that it shall purchase from Sony [***] percent of its requirements for
finished Discs of the Licensed Products during the term of the Agreement.
Licensee shall also have the option, in its discretion, of appointing Sony as
the [***] manufacturer of Packaging and/or Printed Materials, subject to
Section 7.1.3 below. Sony shall provide to Licensee written specifications
setting forth terms relating to the manufacturing of Licensed Products,
Packaging and their component parts ("Specifications") subsequent to execution
of this Agreement, which may be amended from time to time upon reasonable
notice to Licensee. Sony shall have the right, but no obligation, to
subcontract any phase of production of any or all of the Discs, the Packaging
or any part thereof.
7.1.2 CREATION OF MASTER CD-ROM. Following approval by Sony of each
Licensed Product pursuant to Section 6.2, Licensee shall provide Sony with two
(2) copies (in the form of CD write-once discs or such other form as may be
requested by Sony in the Specifications) of the pre-production Executable
Software for the original master Disc (the "Master CD-ROM") from which all
other copies of the Disc are to be replicated. Promptly following such receipt
of such samples, Sony shall create the Master CD-ROM from one (1) such sample
of the pre-production Disc in compliance with specifications effective at the
time of replication. Licensee shall be responsible for the costs, as set forth
in the Specifications, of creating such Master CD-ROM. In order to insure
against loss or damage to the copies of the Executable Software furnished to
Sony, Licensee will retain duplicates of all such Executable Software. Sony
shall not be liable for loss of or damage to any copies of the Executable
Software.
7.1.3 DELIVERY OF PRINTED MATERIALS. Licensee may, at its option,
shall deliver the film for all Printed Materials to Sony or at Sony's option to
Sony's designated manufacturing facility in accordance with the Specifications,
at Licensee's sole risk and expense. In the event that Licensee elects to be
responsible for manufacturing the Printed Materials and/or Packaging (at its
sole cost and expense) and subject to Section 7.1.4 with respect to assembly,
Licensee shall deliver such Printed Materials and/or Packaging to Sony, in the
minimum order quantities set forth in Section 7.2.2 below.
7.1.4 MANUFACTURE OF UNITS. Upon approval, pursuant to Section 6, of
such pre-production samples of the Executable Software for the Master CD-ROM
and the associated Printed Materials, Sony will, in accordance with the terms
and conditions set forth in this Section 7, and at Licensee's expense (a)
manufacture Discs of the Licensed Product for Licensee; (b) manufacture
Licensee's Printed Materials (subject to Licensee's right to manufacture its
own Printed Materials at Licensee's sole cost and expense); and (c) package the
Discs with the Printed Materials (subject to Licensee's right to manufacture
its own Packaging at Licensee's sole cost and expense). Licensee shall have the
option of assembling the Discs, Packaging and Printed Materials at its sole
cost and
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expense, in which case it will purchase the Discs and, at its option, the
Packaging and Printed Materials from Sony in accordance with pricing set forth
in the Specifications, subject to the limitations set forth in Section 7.2.1.
7.2 PRICE, PAYMENT AND TERMS FOR MANUFACTURE OF LICENSED PRODUCTS.
7.2.1 PRICE. The applicable price for manufacture of any units of
the Licensed Products ordered hereunder shall be determined by Sony and provided
to Licensee in the Specifications prior to manufacture of the Licensed Products.
Purchase price(s) shall be stated in United States dollars and are subject to
change by Sony at any time upon reasonable notice to Licensee; provided,
however, the applicable price shall not be changed with respect to any units of
the Licensed Products which are the subject of an effective purchase order but
which have not yet been delivered by Sony at the designated F.O.B. point. Prices
for the finished units of the Licensed Products are exclusive of any foreign or
U.S. federal, state, or local sales or value-added tax, use, excise, customs
duties or other similar taxes or duties, which Sony may be required to collect
or pay as a consequence of the sale or delivery of any units of the Licensed
Products to Licensee. Licensee shall be solely responsible for the payment or
reimbursement of any such taxes, fees, and other such charges or assessments
applicable to the sale and/or purchase of any finished units of any of the
Licensed Products.
7.2.2 ORDERS. Licensee shall issue to Sony written purchase order(s)
in accordance with the Specifications. Such orders shall reference this
Agreement, give Licensee authorization number, specify quantities by Licensed
Product, state requested delivery date and all packaging information and be
submitted on or with an order form to be provided in the Specifications. All
purchase orders shall be subject to acceptance by Sony. Licensee shall issue to
Sony, for each of the Licensed Products approved by Sony pursuant to Section
6.1, a non-cancelable Purchase Order for at least [***] units of such Licensed
Product. In the event that Sony manufactures the Printed Materials for the
Licensee pursuant to Section 7.1.3 above, Licensee may, at Licensee's option,
allow Sony to purchase an additional [***] of such Printed Materials at
Licensee's expense in anticipation of reorders. Licensee agrees that such
Printed Materials will be stored by Sony for a period of no more than ninety
(90) days. Licensee may order additional units of any such Licensed Products in
the minimum reorder quantity of [***] units per order, provided that reorder
quantities may be less than [***] in Sony's sole discretion, in the event that
either (i) Sony has additional quantities of Printed Materials in stock with
respect to any such Licensed Product, or (ii) Licensee agrees to provide its own
Printed Materials in accordance with Section 7.1.3 above. Licensee shall have no
right to cancel or reschedule any Purchase Order (or any portion thereof) for
any of the Licensed Products unless the parties shall first have reached mutual
agreement as to Licensee's financial liability with respect to any desired
cancellation or rescheduling of any such Purchase Order (or any portion
thereof).
7.2.3 PAYMENT TERMS. Sony shall use good faith efforts to establish
a line of credit for Licensee. In the event that an order or orders placed by
Licensee exceed Licensee's line of credit or Licensee fails to pay on time or
otherwise fails to meet Sony's credit requirements, Sony shall have the right
to require Licensee, at any time with respect to such purchase order or orders,
to provide Sony with a suitable letter of credit, letter of guarantee or an
equivalent, each of which must be acceptable to Sony. Where credit is extended,
all orders must be entered and cleared by the Credit Department before they are
considered valid orders. Orders will be invoiced upon shipment. Each invoice
will be paid in full within thirty (30) days of the date of the invoice. Upon
notice by Sony, Licensee will furnish Sony such financial information as Sony
may reasonably request for credit approval. If credit is extended, Sony
reserves the right to establish credit limits for Licensee which may be
modified from time to time at Sony's sole discretion. Sony may, in its sole
discretion, cancel any order at any time or delay shipment of Licensed Products
if Customer fails to meet credit requirements established by Sony, or if
Licensee exceeds its line of credit and
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<PAGE> 11
fails to provide Sony with a suitable letter of credit, letter of guarantee or
acceptable equivalent. No other deduction may be made from remittances unless an
approved credit memo has been issued by Sony. No claim for credit due to
shortage or breakage will be allowed unless it is made within seven (7) days
from the date of shipment. Each shipment of Licensed Products to Licensee shall
constitute a separate sale obligating Licensee to pay therefore, whether said
shipment be whole or partial fulfillment of any order. All sums owed or
otherwise payable to Sony under this Section 7 shall bear interest at the rate
of one and one-half (1-1/2%) percent per month, or such lower rate as may be the
maximum rate permitted under applicable law, from the date upon which payment of
the same shall first become due up to and including the date of payment thereof
whether before or after judgment. Licensee shall be additionally liable for all
of Sony's costs and expenses of collection, including, without limitation,
reasonable fees for attorneys and court costs. Notwithstanding the foregoing,
such specified rate of interest shall not excuse or be construed as a waiver of
Licensee's obligation to timely provide any and all payments owed to Sony
hereunder.
7.3 DELIVERY OF LICENSED PRODUCTS. Sony shall have no obligation to store
completed units of Licensed Products. Delivery of Licensed Products shall be in
accordance with the Specifications. Title, risk of loss, or damage in transit to
any and all Licensed Products manufactured by Sony pursuant to Licensee's orders
shall vest in Licensee immediately upon delivery to the carrier.
7.4 TECHNOLOGY EXCHANGE AND QUALITY ASSURANCE. There will be no technology
exchange between Sony and Licensee under this Agreement. Due to the proprietary
nature of the mastering process, Sony will not under any circumstances release
any master discs or other in-process materials to the Licensee. All such
physical master discs, stampers, etc. shall be and remain the sole property of
Sony.
7.5 INSPECTION AND ACCEPTANCE. Licensee may inspect and test any units of
the Licensed Products at Licensee's receiving destination. Any finished units of
the Licensed Products which fail to conform to the Specifications and/or any
descriptions contained in this Agreement may be rejected by Licensee by
providing written notice thereof to Sony within thirty (30) days of receipt of
such units of the Licensed Products at Licensee's receiving destination. In such
event, the provisions of Section 11.4 regarding Sony's warranty of the units
shall apply with respect to any such rejected units of the Licensed Products.
Notwithstanding the provisions of Section 11.4.1 hereto, if Licensee fails to
properly reject any units of the Licensed Products within such thirty (30) day
period, such Licensed Product units shall be deemed accepted by Licensee and may
not be subsequently rejected.
8. MARKETING AND DISTRIBUTION.
8.1 GENERAL. In accordance with the provisions of this License Agreement,
Licensee shall, at no expense to Sony, diligently market, sell and distribute
the Licensed Products in the School Market, and shall use its reasonable best
efforts to stimulate demand for such Licensed Products in such School Market in
the Licensed Territory and to supply any resulting demand. Licensee shall use
its reasonable best efforts to protect the Licensed Products from and against
illegal reproduction and/or copying by end users or by any other persons or
entities. Such methods of protection may include, without limitation, markings
or insignia providing identification of authenticity and packaging seals.
Subject to availability, Licensee shall sell to Sony quantities of the Licensed
Products at as low a price and on terms as favorable as Licensee sells similar
quantities of the Licensed Products to the School Market; provided, however,
Sony shall not directly or indirectly resell any such units of the Licensed
Products within or outside of the Licensed Territory without Licensee's prior
written consent.
8.2 MARKET RESEARCH MODEL. Both parties acknowledge and agree that it is
their intent to review the results of the distribution of PlayStation Hardware
and Licensed Products for market
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<PAGE> 12
research purposes. Sony and Licensee will jointly agree on an acceptable
methodology for any research of the PlayStation Hardware usage in homes and
schools. Licensee will provide Sony with any market information which Sony
reasonably requests and which is not deemed to be confidential or sensitive to
the School Market.
9. REPRESENTATIONS AND WARRANTIES.
9.1 REPRESENTATIONS AND WARRANTIES OF SONY. Sony represents and warrants
solely for the benefit of Licensee that Sony has the right, power and authority
to enter into this License Agreement and to fully perform its obligations
hereunder.
9.2 REPRESENTATIONS AND WARRANTIES OF LICENSEE. Licensee represents and
warrants that: (i) there is no threatened or pending action, suit, claim or
proceeding alleging that the use by Licensee of all or any part of the Licensee
Software or any underlying work or content embodied therein, or any name,
designation or trademark used in conjunction with the Licensed Products
infringes or otherwise violates any Intellectual Property Right or other right
or interest of any kind whatsoever of any third party, or otherwise contesting
any right, title or interest of Licensee in or to the Licensee Software or any
underlying work or content embodied therein, or any name, designation or
trademark used in conjunction with the Licensed Products; (ii) Licensee has the
right, power and authority to enter into this License Agreement and to fully
perform its obligations hereunder; (iii) the making of this License Agreement by
Licensee does not violate any separate agreement, rights or obligations existing
between Licensee and any other person or entity, and, throughout the term of
this License Agreement, Licensee shall not make any separate agreement with any
person or entity that is inconsistent with any of the provisions of this License
Agreement; (iv) Licensee shall not make any representation or give any warranty
to any person or entity expressly or impliedly on Sony's behalf, or to the
effect that the Licensed Products are connected in any way with Sony (other than
that the Licensed Products have been developed, marketed, manufactured, sold,
and/or distributed under license from Sony), (v) the Executable Software shall
be distributed by Licensee solely in object code form; (vi) each of the Licensed
Products shall be marketed, sold, and distributed solely to the School Market
and in an ethical manner and in accordance with all applicable laws and
regulations; and (vii) Licensee's policies and practices with respect to the
marketing, sale, and/or distribution of the Licensed Products shall in no manner
reflect adversely upon the name, reputation or goodwill of Sony.
10. INDEMNITIES; LIMITED LIABILITY.
10.1 INDEMNIFICATION BY SONY. Sony shall indemnify and hold Licensee
harmless from and against any and all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs incurred
in the settlement or avoidance of any such claim which result from or are in
connection with a breach of any of the warranties provided by Sony herein;
provided, however, that Licensee shall give prompt written notice to Sony of
the assertion of any such claim, and provided, further, that Sony shall have the
right to select counsel and control the defense and/or settlement thereof,
subject to the right of Licensee to participate in any such action or
proceeding at its own expense with counsel of its own choosing. Sony shall have
the exclusive right, at its discretion, to commence and prosecute at its own
expense any lawsuit or to take such other action with respect to such matters
as shall be deemed appropriate by Sony. Licensee agrees to provide Sony, at no
expense to Licensee, reasonable assistance and cooperation concerning any such
matter; and Licensee shall not agree to the settlement of any such claim,
action or proceeding without Sony's prior written consent.
10.2 INDEMNIFICATION BY LICENSEE. Licensee shall indemnify and hold Sony
harmless from and against any and all claims, losses, liabilities, damages,
expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs
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<PAGE> 13
incurred in the settlement or avoidance of any such claim, which result from or
are in connection with (i) a breach of any of the representations or warranties
provided by Licensee herein, including without limitation claims resulting from
Licensee's failure to timely pay any withholding taxes or other assessments as
set forth in Section 4 or 7.2 hereto or any breach of Licensee's
confidentiality obligations as set forth in Section 13 hereto; or (ii) any
claim of infringement or alleged infringement of any third party's
Intellectual Property Rights with respect to the Licensee Software; or (iii)
any claims of or in connection with any bodily injury (including death) or
property damage, by whomsoever such claim is made, arising out of, in whole or
in part, the development, manufacture, sale, marketing and/or use of the
Licensed Products manufactured by Sony hereunder or any sale and/or use of any
of the PlayStation Hardware hereunder, unless due to the negligence of Sony in
performing any of the specific duties and/or providing any of the specific
manufacturing services required of it hereunder; provided, however, that Sony
shall give prompt written notice to Licensee of the assertion of any such
claim, and provided, further, that Licensee shall have the right to select
counsel and control the defense and/or settlement thereof, subject to the
right of Sony to participate in any such action or proceeding at its own
expense with counsel of its own choosing. Licensee shall have the exclusive
right, at its discretion, to commence and/or prosecute at its own expense any
lawsuit or to take such other action with respect to such matter as shall be
deemed appropriate by Licensee. Sony shall provide Licensee, at no expense to
Sony, reasonable assistance and cooperation concerning any such matter. If Sony
is joined as a party to any lawsuit initiated by or against Licensee, Licensee
shall indemnify and hold Sony harmless from and against all claims, losses,
liabilities, damages, expenses and costs, including, without limitation,
reasonable fees for attorneys and court costs, incurred in connection with any
such lawsuit. Sony shall not agree to the settlement of any such claim, action
or proceeding without Licensee's prior written consent.
10.3 LIMITATION OF LIABILITY; LICENSEE'S OBLIGATIONS.
10.3.1 LIMITATION OF SONY'S LIABILITY. IN NO EVENT SHALL SONY OR ITS
AFFILIATES, SUPPLIERS, OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS BE LIABLE FOR
PROSPECTIVE PROFITS, OR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT
LIMITATION THE BREACH OF THIS AGREEMENT BY SONY, THE MANUFACTURE OF THE
LICENSED PRODUCTS AND THE USE OF THE LICENSED PRODUCTS AND/OR THE PLAYSTATION
HARDWARE BY LICENSEE OR ANY END-USER, WHETHER UNDER THEORY OF CONTRACT, TORT
(INCLUDING NEGLIGENCE), INDEMNITY, THE ESTABLISHMENT, DEVELOPMENT OR
MAINTENANCE OR BUSINESS REPUTATION OR GOODWILL, COST OF CAPITAL, PRODUCT
LIABILITY OR OTHERWISE. IT IS THE RESPONSIBILITY OF LICENSEE TO REVIEW THE
ACCURACY OF THE DATA ON THE UNITS MANUFACTURED BY SONY FOR LICENSEE. IN NO
EVENT SHALL SONY'S LIABILITY ARISING UNDER OR IN CONNECTION WITH THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION ANY LIABILITY FOR DIRECT DAMAGES, AND
INCLUDING WITHOUT LIMITATION ANY LIABILITY UNDER SECTION 10.1 AND ANY WARRANTY
IN SECTION 10.4 HERETO, EXCEED THE TOTAL AMOUNT PAID BY LICENSEE TO SONY UNDER
THIS AGREEMENT. EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER SONY, NOR ANY
AFFILIATE, NOR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES OR
AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY RESPONSIBILITY OR LIABILITY, OF ANY
KIND TO LICENSEE OR TO ANY THIRD PARTIES WITH RESPECT TO THE QUALITY AND/OR
PERFORMANCE OF ANY PORTION OF THE SONY MATERIALS OR THE LICENSED PRODUCTS,
INCLUDING, WITHOUT LIMITATION, THE OPERATION OR PERFORMANCE OF ANY OF THE
LICENSED PRODUCTS.
10.3.2 LIMITATION OF LICENSEE'S LIABILITY. IN NO EVENT SHALL
LICENSEE BE LIABLE TO SONY FOR ANY PROSPECTIVE PROFITS, OR SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH (i) THIS LICENSE
AGREEMENT, (ii) THE USE OR DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THIS LICENSE AGREEMENT OF ANY OBJECT CODE PROVIDED BY SONY, IN
WHOLE OR IN PART, OR ANY LICENSEE SOFTWARE BY LICENSEE OR ANY THIRD PARTY, IN
WHOLE OR IN PART, WHETHER
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UNDER THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE), INDEMNITY, PRODUCT
LIABILITY OR OTHERWISE, PROVIDED THAT LICENSEE EXPRESSLY AGREES THAT SUCH
LIMITATIONS SHALL NOT APPLY TO DAMAGES RESULTING FROM LICENSEE'S BREACH OF
SECTIONS 2, 5, 10.2, 11.2, OR 13 OF THIS AGREEMENT, AND PROVIDED FURTHER THAT
SUCH LIMITATIONS SHALL NOT APPLY TO AMOUNTS WHICH LICENSEE MAY BE REQUIRED TO
PAY TO THIRD PARTIES UNDER SECTIONS 10.2 OR 16.9.
10.3.3 LICENSEE'S OBLIGATIONS. If at any time or times subsequent to
the approval of the Executable Software pursuant to Section 6.2, Sony identifies
any bugs with respect to the Licensed Product or any bugs are brought to the
attention of Sony, Licensee shall, at no cost to Sony, promptly correct any such
bugs, to Sony's reasonable satisfaction. In the event any units of any of the
Licensed Products create any risk of loss or damage to any property or injury to
any person, Licensee shall immediately take effective steps, at Licensee's sole
liability and expense, to recall and/or to remove such defective product units
from any affected channels of distribution. Licensee shall provide all end-user
support for the Licensed Products.
10.4 WARRANTIES: DISCLAIMER OF WARRANTIES.
10.4.1 MANUFACTURING WARRANTY. Sony warrants that the units of
Licensed Product that are manufactured by Sony for Licensee pursuant to Section
7 of this Agreement shall, at time to delivery to Licensee, be free from defects
in material. The sole obligation of Sony under this warranty shall be, for a
period of one year from the date of shipment of such discs by Sony to Licensee,
at Sony's election, either to replace, to issue credit, or to refund to Licensee
the purchase price paid to Sony for any such defective discs. Such warranty is
the only warranty applicable to the Licensed Product manufactured by Sony for
Licensee pursuant to Section 7 of this Agreement. This warranty shall not apply
to damage resulting from accident, alteration, negligence or misuse of the
Licensed Products. If, during the aforesaid period, a defective disc is received
by Licensee, Licensee shall notify Sony and, upon request by Sony, provide Sony
with the returned disc(s) and a written description of the defect claimed. Sony
shall not accept the return of any disc(s) except factory defective disc(s)
(i.e., those discs that are not free from defects in material), and all such
returns must be authorized by Sony in writing and in advance. All discs for
which return is authorized will be sent to a place designated by Sony at Sony's
expense. If the defect did not arise from causes placing liability on Sony under
the above warranty, Licensee shall reimburse Sony for expenses incurred in
shipping, processing and analyzing the discs. Sony's judgment as to the origin
of the defect shall be final and binding.
10.4.2 DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH
ABOVE, NEITHER SONY NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES LICENSEE
RECEIVE, ANY WARRANTIES, EXPRESS, IMPLIED OR STATUTORY REGARDING THE SONY
MATERIALS AND THE PLAYSTATION GAME CONSOLE AND/OR THE UNITS OF THE LICENSED
PRODUCTS MANUFACTURED HEREUNDER. SONY SHALL NOT BE LIABLE FOR ANY INJURY, LOSS
OR DAMAGE, DIRECT OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE
THE UNITS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SONY AND ITS
AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS UNDER
THE LAWS OF ANY JURISDICTION, REGARDING THE SONY MATERIALS AND THE PLAYSTATION
GAME CONSOLE AND/OR THE UNITS MANUFACTURED HEREUNDER. ANY WARRANTY AGAINST
INFRINGEMENT THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL
CODE AND/OR IN ANY OTHER COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED.
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11. COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS.
11.1 LICENSEE RIGHTS. The copyrights with respect to the Licensee
Software (exclusive of the rights licensed from Sony hereunder) and any names
or other designations used as titles for the Licensed Products are and shall be
the exclusive property of Licensee or of any third party from which Licensee
has been granted the license and related rights to develop and otherwise
exploit any such Licensee Software or any such names or other designations.
11.2 SONY RIGHTS.
11.2.1. LICENSED TRADEMARKS. The Licensed Trademarks and the
goodwill associated therewith are and shall be the exclusive property of Sony.
Nothing herein shall give Licensee any right, title or interest in or to any of
the Licensed Trademarks, other than the non-exclusive license and privilege
during the term hereof to display and use the Licensed Trademarks solely in
accordance with the provisions of this License Agreement. Licensee shall not do
or cause to be done any act or thing contesting or in any way impairing or
tending to impair any of Sony's rights, title, or interests in or to any of the
Licensed Trademarks, nor shall Licensee register any trademark in its own name
or in the name of any other person or entity which is similar to or is likely
to be confused with any of the Licensed Trademarks. If, during the term of this
Agreement, any of Sony's rights, title and/or interest in or to any or all of
the Licensed Trademarks (or any portion thereof) should become for any reason
whatsoever vested in Licensee by operation of law or otherwise, Licensee agrees
that it shall immediately upon the earlier of Sony's request or on the
termination or expiration of this Agreement, assign any and all rights,
together with any goodwill associated therewith, to Sony or Sony's designee.
Licensee agrees that upon any termination (for any cause) or the expiration of
this Agreement it shall immediately cease to use any and all Licensed
Trademarks.
11.2.2 LICENSE OF SONY MATERIALS AND PLAYSTATION GAME CONSOLE.
Subject to the rights granted by Sony to Licensee hereunder, all rights with
respect to the Sony Materials and PlayStation Game Console, including without
limitation, all of Sony's Intellectual Property Rights therein, are and shall
be the exclusive property of Sony. Nothing herein shall give Licensee any
right, title or interest in or to the Sony Materials or the PlayStation Game
Console (or any portion thereof), other than the non-exclusive license and
privilege during the term hereof to use the Sony Materials and PlayStation Game
Console for the development of the Executable Software solely in accordance
with the provisions of this License Agreement. Licensee shall not do or cause to
be done any act or thing contesting or in any way impairing or tending to
impair any of Sony's rights, title, and/or interests in or to the Sony
Materials or the PlayStation Game Console (or any portion thereof). If, during
the term of this Agreement, any of Sony's rights, title and/or interest in or
to any or all of the Equipment or Sony Materials (or any portion thereof)
should become for any reason whatsoever vested in Licensee by operation of law
or otherwise, Licensee agrees that it shall immediately upon the earlier of
Sony's request or on the termination or expiration of this Agreement, assign
any and all such rights, together with any good will associated therewith, to
Sony or Sony's designee.
11.3 EFFECT OF TERMINATION. Upon the expiration or earlier termination
of this License Agreement for any reason, Licensee shall immediately cease and
desist from any further use of the Licensed Trademarks and Sony Materials
licensed hereunder, subject to the provisions of Section 15.3, below.
12. COPYRIGHT, TRADEMARK AND TRADE SECRET PROTECTION.
In the event that either Licensee or Sony discovers or otherwise becomes
aware that any of the Intellectual Property Rights of the other embodied in any
of the Licensed Products or the PlayStation Hardware have been or are being
infringed upon by any third party, then the party with
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knowledge of such infringement or apparent infringement shall promptly notify
the other party. Sony shall have the sole right, in its discretion, to institute
and prosecute lawsuits against Third Parties for such infringement of Sony's
Intellectual Property Rights. Licensee shall have the right, in its discretion,
to institute and prosecute lawsuits against third persons for such infringement
of Licensee's Intellectual Property Rights which are distinct from Sony's
Intellectual Property Rights. If Licensee does not institute an infringement
suit within thirty (30) days after Sony's written request that it do so, Sony
may institute and prosecute such lawsuit. Any lawsuit shall be prosecuted solely
at the cost and expense of the party bringing suit and all sums recovered in any
such lawsuits, whether by judgment, settlement or otherwise, in excess of the
amount of reasonable attorneys' fees and other out of pocket expenses of such
suit, shall belong solely to the party bringing the suit. Upon request of the
party bringing the lawsuit, the other party shall execute all papers, testify on
all matters, and otherwise cooperate in every way necessary and desirable for
the prosecution of any such lawsuit. The party bringing suit shall reimburse the
other party for the expenses incurred as a result of such cooperation.
13. CONFIDENTIALITY.
13.1 NONDISCLOSURE AGREEMENT. Licensee hereby acknowledges that the
Nondisclosure Agreement dated September 28, 1995 between Sony and Licensee
("Nondisclosure Agreement") will remain in full force and effect with respect to
the Confidential Information of Sony throughout the term of this Agreement. In
the event of any conflict or inconsistency between the provisions of the
Nondisclosure Agreement and the provisions of this Section 13, the provisions of
the Nondisclosure Agreement shall control with respect to the Confidential
Information of Sony.
13.2 CONFIDENTIAL INFORMATION. For the purposes of this License Agreement,
"Confidential Information" of Sony means (i) the Sony Materials and information
regarding Sony's finances, business, marketing and technical plans, (ii) all
documentation and information relating to the foregoing (other than
documentation and information expressly intended for use by and released to end
users or the general public), and (iii) any and all other information, of
whatever type and in whatever medium (including without limitation all data,
ideas, discoveries, developments, know-how, trade secrets, inventions, creations
and improvements), that is disclosed in writing or in any other form by Sony to
Licensee. "Confidential Information" of Licensee shall mean the Licensee
Software as provided to Sony pursuant to this License Agreement and all
documentation and information relating thereto that is disclosed in writing or
in any other form by Licensee to Sony if the information is designated as (or is
provided under circumstances indicating the information is) confidential or
proprietary.
13.3 PRESERVATION OF CONFIDENTIALITY; NON-DISCLOSURE. Each party
("receiving party") shall hold all Confidential Information of the other party
("disclosing party") in trust and in strict confidence for the sole benefit of
the disclosing party and for the exercise of the limited rights expressly
granted to the receiving party under this License Agreement. The receiving party
shall take all steps necessary to preserve the confidentiality of the
Confidential Information of the disclosing party, and to prevent it from falling
into the public domain or into the possession of persons other than those
persons to whom disclosure is authorized hereunder, including but not limited to
those steps that the receiving party takes to protect the confidentiality of its
own most highly confidential information. Except as may be expressly authorized
by the disclosing party in writing, the receiving party shall not at any time,
either before or after any termination of this License Agreement, directly or
indirectly: (i) disclose any Confidential Information to any person other than
an employee or subcontractor of the receiving party who needs to know or have
access to such Confidential Information for the purposes of this License
Agreement, and only to the extent necessary for such purposes (and with respect
to any subcontractor, only in accordance with Section 16.5 below); (ii) except
as otherwise provided in this License Agreement, duplicate the Confidential
Information for any purpose whatsoever; (iii) use the Confidential Information
for any reason or purpose other than as expressly permitted in this License
Agreement; or (iv) remove any
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copyright notice, trademark notice and/or other proprietary legend set forth on
or contained within any of the Confidential Information.
13.4 OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE.
13.4.1 NOTICE TO DISCLOSING PARTY. If at any time the receiving
party becomes aware of any unauthorized duplication, access, use, possession or
knowledge of any Confidential Information, the receiving party shall
immediately notify the disclosing party. The receiving party shall provide any
and all reasonable assistance to the disclosing party to protect the disclosing
party's proprietary rights in any Confidential Information that the receiving
party or its employees or permitted subcontractors may have directly or
indirectly disclosed or made available and that may be duplicated, accessed,
used, possessed or known in a manner or for a purpose not expressly authorized
by this License Agreement including but not limited to enforcement of
confidentiality agreements, commencement and prosecution in good faith (alone
or with the disclosing party) of legal action, and reimbursement for all
reasonable attorneys' fees (and all related costs), costs and expenses incurred
by the disclosing party to protect its proprietary rights in the Confidential
Information. The receiving party shall take all reasonable steps requested by
the disclosing party to prevent the recurrence of any unauthorized duplication,
access, use, possession or knowledge of the Confidential Information.
13.4.2 ACCOUNTING, ETC. If Licensee violates or fails to comply
with any of the terms or conditions of this Section 13 or Section 5 hereto,
Sony shall be entitled to an accounting and repayment of all forms of
compensation, commissions, remuneration or benefits which Licensee directly or
indirectly realizes as a result of or in connection with any such violation or
failure to comply. Such remedy shall be in addition to and not in limitation of
any injunctive relief or other remedies to which Sony may be entitled under
this Agreement or otherwise, at law or in equity.
13.5 EXCEPTIONS. The foregoing restrictions will not apply to information
to the extent that the receiving party can demonstrate such information: (i)
was known to the receiving party at the time of disclosure to the receiving
party by the disclosing party as shown by the files of the receiving party in
existence at the time of disclosure; (ii) becomes part of information in the
public domain through no fault of the receiving party; (iii) has been
rightfully received from a third party authorized by the disclosing party to
make such disclosure without restriction; (iv) has been approved for release by
prior written authorization of the disclosing party; or (v) has been disclosed
by court order or as otherwise required by law (including without limitation to
the extent that disclosure may be required under Federal or state securities
laws), provided that the receiving party has notified the disclosing party
immediately upon learning of the possibility of any such court order or legal
requirement and has given the disclosing party a reasonable opportunity (and
cooperated with the disclosing party) to contest or limit the scope of such
required disclosure (including application for a protective order). Information
shall not be deemed known to the receiving party or publicly known for purposes
of the above exceptions (A) merely because it is embraced by more general
information in the prior possession of the receiving party or others, or (B)
merely because it is expressed in public material in general terms not
specifically the same as Confidential Information.
13.6 CONFIDENTIALITY OF AGREEMENT. The terms and conditions of this
License Agreement shall be treated as Confidential Information; provided that
each party may disclose the terms and conditions of this License Agreement: (i)
to legal counsel; (ii) in confidence, to accountants, banks and financing
sources and their advisors; and (iii) in confidence, in connection with the
enforcement of this License Agreement or rights under this License Agreement.
Neither party shall disclose any of the terms of this License Agreement without
the prior written permission of the other party. Notwithstanding the foregoing,
Licensee shall not disclose any Confidential Information or any of the terms of
this License Agreement to [***]
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in Licensee without Sony's prior written approval.
14. TERM AND TERMINATION
14.1 EFFECTIVE DATE: TERM. This License Agreement shall not be binding
upon the parties until it has been signed by or on behalf of each party, in
which event it shall be effective as of the date first written above (the
"Effective Date") and shall last for the period set forth in the Term Schedule
(the "Term").
14.2 TERMINATION BY SONY. Sony shall have the right to terminate this
License Agreement immediately, by providing written notice of such election to
Licensee, upon the occurrence of any of the following events or circumstances:
(i) if Licensee breaches any of its material obligations provided for in this
License Agreement and such breach is not corrected or cured within thirty (30)
days after receipt of written notice of such breach; (ii) if the Developer
Agreement is terminated for any reason; (iii) Licensee's failure to pay, or a
statement that it is unable to pay, any amount due hereunder, or is unable to
pay its debts generally as they shall become due; (iv) Licensee's filing of an
application for, or consenting to, or directing the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of all or
substantially all of Licensee's property, whether tangible or intangible,
wherever located; (v) The making by Licensee of a general assignment for the
benefit of creditors; (vi) The commencing by Licensee or Licensee's intention to
commence a voluntary case under any applicable bankruptcy laws (as now or
hereafter may be in effect); (vii) The adjudication that Licensee is a bankrupt
or insolvent; (viii) The filing by Licensee or the intent to file by Licensee of
a petition seeking to take advantage of any other law providing for the relief
of debtors; (ix) Licensee's acquiescence to, intention to acquiesce to, or
failure to have dismissed within ninety (90) days, any petition filed against it
in any involuntary case under any such bankruptcy law; (x) if control of more
than fifty percent (50%) of the ownership of Licensee or substantially all of
Licensee's assets are transferred to any person or entity; or (xi) if, directly
or indirectly, control of more than twenty-five percent (25%) of the ownership
of Licensee or substantially all of Licensee's assets are transferred to any one
of [***] known or unknown; (xii) if Licensee agrees to port or deliver its
educational software on any other competing technology, meaning a video game
system with real-time animation, video decompression, and/or 3D rendering
including but not limited to products from [***]; or (xiii) Licensee fails to
order the Minimum Order Quantity during any calendar year.
14.3 PRODUCT-BY-PRODUCT TERMINATION BY SONY. In addition to the events of
termination described in Section 14.2 above, Sony, as its option, shall be
entitled to terminate, on a product-by-product basis, the licenses and related
rights herein granted to Licensee (a) in the event that Licensee fails to
notify Sony promptly in writing of any material change to any of the elements
approved in Section 6.1, above; (b) if Licensee fails to provide Sony in
accordance with the provisions of Section 6.2 above with the prototype
Executable Software for any Licensed Product, in the format required by Sony,
and which meets Sony's specifications; provided, however, Sony shall not be
entitled to exercise such right of termination if Licensee's failure to provide
such final Executable Software for any of the Licensed Products is directly
caused by Sony's failure to timely comply with any of its material obligations
expressly set forth herein.
14.4 PAYMENTS NONREFUNDABLE. In the event of the termination of this
License Agreement in accordance with any of the provisions of Section 14.2 or
14.3, above, no portion of any payments of any kind whatsoever, including
without limitation any and all Nonrefundable Payments and payments of
manufacturing costs, previously provided to Sony hereunder shall be owed or be
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repayable to Licensee.
15. EFFECT OF EXPIRATION OR TERMINATION.
15.1 INVENTORY STATEMENT. Within thirty (30) days of the date of
expiration or the effective date of termination with respect to any or all
Licensed Products, Licensee shall provide Sony with an itemized statement,
certified to be accurate by an officer of Licensee, specifying the number of
unsold units of the Licensed Products and PlayStation Hardware as to which such
termination applies, on a title-by-title basis, which remain in its inventory
and/or under its control at the time of expiration or the effective date of
termination. Sony shall be entitled to conduct a physical inspection of
Licensee's inventory and work in process during normal business hours in order
to ascertain or verify such inventory and/or statement.
15.2 REVERSION OF RIGHTS. If this License Agreement is terminated by Sony
as a result of any breach or default by Licensee, the licenses and related
rights herein granted to Licensee shall immediately revert to Sony, and
Licensee shall cease and desist from any further use of the Sony Materials and
any Intellectual Property Rights related to the Sony Materials, and, subject to
the provisions of Section 15.3 below, Licensee shall have no further right to
continue the development, marketing, sale, and/or distribution of any units of
the Licensed Products or PlayStation Hardware, nor to continue to use the
Licensed Trademarks.
15.3 DISPOSAL OF UNSOLD UNITS. Provided this License Agreement is not
terminated due to a breach or default by Licensee, Licensee may, upon
expiration or termination of this License Agreement, sell off existing
inventories of Licensed Products, on a non-exclusive basis, for a period of
ninety (90) days from the date of expiration or termination of this License
Agreement, and provided such inventories have not been manufactured solely or
principally for sale during such period. With respect to existing inventories
of PlayStation Hardware, Sony reserves the right to buy back the inventory at
its then-current fair market value, to allow Licensee to sell off such
inventories subject to the requirements set forth in the first sentence of this
Section, or to require Licensee to destroy such inventories. Subsequent to the
expiration of such ninety (90) day period, or in the event this License
Agreement is terminated as a result of any breach or default by Licensee, any
and all units of the Licensed Products remaining in Licensee's inventory shall
be destroyed by Licensee within five (5) working days of such expiration or
termination. Within five (5) working days after such destruction, Licensee
shall provide Sony with an itemized statement, certified to be accurate by an
officer of Licensee, indicating the number of units of the Licensed Products
which have been destroyed (on a title-by-title basis), the location and date of
such destruction, and the disposition of the remains of such destroyed
materials.
15.4 RETURN OF CONFIDENTIAL INFORMATION. Upon the expiration or earlier
termination of this License Agreement, Licensee and Sony shall immediately
deliver to the other party as the disclosing party, or if and to the extent
requested by the disclosing party destroy, all Confidential Information of the
other party, including any and all copies thereof, which the other party
previously furnished to it in furtherance of this License Agreement, including,
without limitation, any such information, knowledge, or know-how of which
either party, as the receiving party, was apprised and which was reduced to
tangible, machine readable or written form by such party or on its behalf at
any time during the term of this License Agreement. Within five (5) working
days after any such destruction, each receiving party shall provide the
disclosing party with an itemized statement certified to be accurate by an
officer of receiving party, indicating the number of copies of the Confidential
Information which have been destroyed, the location and date of such
destruction and the disposition of the remains of such destroyed materials.
15.5 RENEWAL OR EXTENSION OF LICENSE AGREEMENT. Sony shall be under no
obligation to renew or extend this License Agreement notwithstanding any
actions taken by either of the parties prior to the expiration of this License
Agreement. Upon the expiration of this License Agreement
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neither party shall be liable to the other for any damages (whether direct,
consequential, or incidental, and including, without limitation, any
expenditures, loss of profits, or prospective profits) sustained or arising out
of or alleged to have been sustained or to have arisen out of such expiration.
However, the expiration of this License Agreement shall not excuse either party
from its previous breach of any of the provisions of this License Agreement or
from any obligations surviving the expiration of this License Agreement, and
full legal and equitable remedies shall remain available for any breach or
threatened breach of this License Agreement or any obligations arising
therefrom.
15.6 TERMINATION WITHOUT PREJUDICE. The expiration or termination of this
License Agreement in accordance with the provisions of Section 14, above, shall
be without prejudice to any rights or remedies which one party may otherwise
have against the other party.
16. MISCELLANEOUS PROVISIONS.
16.1 NOTICES. All notices or other communications required or desired to
be sent to either of the parties shall be in writing and shall be sent by
registered or certified mail, postage prepaid, return receipt requested, or
sent by recognized international courier service (e.g., Federal Express, DHL,
etc.) telex, telegram or facsimile, with charges prepaid and subject to
confirmation by letter sent via registered or certified mail, postage prepaid,
return receipt requested. The address for all notices or other communications
required to be sent to Sony or Licensee, respectively, shall be the mailing
address stated in the Term Schedule, or such other address as may be provided
by written notice from one party to the other on at least ten (10) days' prior
written notice. Any such notice shall be effective upon the date of receipt.
16.2 FORCE MAJEURE. Neither Sony nor Licensee shall be liable for any loss
or damage or be deemed to be in breach of this License Agreement if its failure
to perform or failure to cure any of its obligations under this License
Agreement results from any event or circumstance beyond its reasonable control,
including, without limitation, any natural disaster, fire, flood, earthquake, or
other Act of God; shortage of equipment, materials, supplies, or transportation
facilities; strike or other industrial dispute; war or rebellion; or compliance
with any law, regulation, or order (whether valid or invalid) of any
governmental body, other than an order, requirement, or instruction arising out
of Licensee's violation of any applicable law or regulation; provided, however,
that the party interfered with gives the other party written notice thereof
promptly, and, in any event, within fifteen (15) working days of discovery of
any such Force Majeure condition. If notice of the existence of any Force
Majeure event or circumstance described in such notice, except that any such
cause shall not excuse the payment of any sums owed to Sony prior to, during, or
after any such Force Majeure condition. If any of these acts or events of force
majeure exceed sixty (60) continuous or cumulative days, then either party may,
as its sole remedy, cancel outstanding orders to the extent not previously
fulfilled by giving the other notice, and neither party will be liable to the
other for damages resulting from such cancellation.
16.3 NO PARTNERSHIP OR JOINT VENTURE. The relationship between Sony and
Licensee, respectively, is that of licensee and licensor. Licensee is an
independent contractor and is not the legal representative, agent, joint
venturer, partner, or employee of Sony for any purpose whatsoever. Neither
party has any right or authority to assume or create any obligations of any
kind or to make any representation or warranty on behalf of the other party,
whether express or implied, or to bind the other party in any respect
whatsoever.
16.4 ASSIGNMENT. Sony has entered into this License Agreement based upon
the particular reputation, capabilities and experience of Licensee and its
officers, directors and employees. Accordingly, Licensee may not assign this
License Agreement or any of its rights
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hereunder, nor delegate or otherwise transfer any of its obligations hereunder,
to any third party unless the prior written consent of Sony shall first be
obtained. Any attempted or purported assignment, delegation or other such
transfer without the required consent of Sony shall be void and a material
breach of this License Agreement. Subject to the foregoing, this License
Agreement shall inure to the benefit of the parties and their respective
successors and permitted assigns. Sony shall have the right to assign any and
all of its rights and obligations hereunder to any affiliate(s), including,
without limitation, its obligations under Section 7 hereof.
16.5 SUBCONTRACTORS. Licensee shall not sell, lease, assign, delegate,
subcontract, sublicense or otherwise transfer or encumber all or any portion of
the rights herein granted. Licensee shall have the right to employ suitable
subcontractors for the purposes of assisting Licensee with the development of
the Licensed Products, provided that Licensee must obtain the prior written
consent of Sony. Licensee shall not disclose to any subcontractor any
Confidential information of Sony (as defined herein and in the Nondisclosure
Agreement), including, without limitation, any Sony Materials, unless and until
Licensee shall have such subcontractor sign a written agreement containing
substantially identical terms to the Nondisclosure Agreement, and the
confidentiality provisions of this Agreement and shall submit a copy of such
agreement to Sony. Any and all agreements between Licensee and its permitted
subcontractors shall provide that Sony is a third party beneficiary of such
agreements and has the full right to bring any actions against such
subcontractors to comply in all respects with the terms and conditions of this
License Agreement. Notwithstanding any consent which may be granted by Sony for
Licensee to employ any such permitted subcontractor(s), or any such separate
agreement(s) that may be entered into by Licensee with any such permitted
subcontractor, Licensee shall remain fully liable for its compliance with all of
the provisions of this License Agreement and for the compliance of any and all
permitted subcontractors with the provisions of any agreements entered into by
such subcontractors in accordance with this Section 16.5 Licensee shall cause
its subcontractors to comply in all respects with the terms and conditions of
this License Agreement, and hereby unconditionally guarantees all obligations of
its subcontractors. Notwithstanding the foregoing, Licensee shall not
subcontract any rights under this agreement to TCI (Telecommunications Inc.) or
Microsoft without Sony's prior written approval.
16.6 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all times
comply with all applicable regulations and orders of their respective countries
and all conventions and treaties to which their countries are a party or
relating to or in any way affecting this License Agreement and the performance
by the parties of this License Agreement. Each party, at its own expense, shall
negotiate and obtain any approval, license or permit required in the performance
of its obligations, and shall declare, record or take such steps to render this
License Agreement binding, including, without limitation, the recording of this
License Agreement with any appropriate governmental authorities (if required).
16.7 GOVERNING LAW: CONSENT TO JURISDICTION. This License Agreement shall
be governed by and interpreted in accordance with the laws of the State of New
York, excluding that body of law related to choice of laws, and of the United
States of America. Any action or proceeding brought to enforce the terms of this
License Agreement or to adjudicate any dispute arising hereunder shall be
brought in the courts of the County of New York, State of New York (if under
State law) or the Southern District of New York (if under Federal law). Each of
the parties hereby submits itself to the exclusive jurisdiction and venue of
such courts for purposes of any such action and agrees that any service of
process may be effected by delivery of the summons in the manner provided in the
delivery of notices set forth in Section 16.1 above.
16.8 LEGAL COSTS AND EXPENSES. In the event it is necessary for either
party to retain the services of an attorney or attorneys to enforce the terms of
this License Agreement or to file or defend any action arising out of this
Agreement, then the prevailing party in any such action shall be entitled, in
addition to any other rights and remedies available to it at law or in equity to
recover.
-21-
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<PAGE> 22
from the other party its reasonable fees for attorneys and expert witnesses,
plus such court costs and expenses as may be fixed by any court of competent
jurisdiction. The term "prevailing party" for the purposes of this Section
shall include a defendant who has by motion, judgment, verdict or dismissal by
the court, successfully defended against any claim that has been asserted
against it.
16.9 REMEDIES. Unless expressly set forth to the contrary, either party's
election of any remedies provided for in this License Agreement shall not be
exclusive of any other remedies available hereunder or otherwise at law or in
equity, and all such remedies shall be deemed to be cumulative. Any breach of
Sections 2, 3, 5, 6, 7.1.1, 11, and 13 of this Agreement would cause
irreparable harm to Sony, the extent of which would be difficult to ascertain.
Accordingly, Licensee agrees that, in addition to any other remedies to which
Sony may be entitled, in the event of a breach by Licensee or any of its
employees or permitted subcontractors of any such sections of this Agreement,
Sony shall be entitled to the immediate issuance without bond of exparte
injunctive relief enjoining any breach or threatened breach of any or all of
such provisions. In addition, Licensee shall indemnify Sony for all losses,
damages, liabilities, costs and expenses (including actual attorneys' fees and
all related costs) which Sony may sustain or incur as a result of such breach.
16.10 SEVERABILITY. In the event that any provision of this License
Agreement (or portion thereof) is determined by a court of competent
jurisdiction to be invalid or otherwise unenforceable, such provision (or part
thereof) shall be enforced to the extent possible consistent with the stated
intention of the parties, or, if incapable of such enforcement, shall be deemed
to be deleted from this License Agreement, while the remainder of this License
Agreement shall continue in full force and remain in effect according to its
stated terms and conditions.
16.11 SECTIONS SURVIVING EXPIRATION OR TERMINATION. The following sections
shall survive the expiration or earlier termination of this License Agreement
for any reason: 4, 5, 7.2, 9.2, 10, 11, 12, 13, 14.4, 15, 16.4, 16.5, 16.7,
16.8, 16.9, and 16.10 and Exhibits A-C.
16.12. WAIVER. No failure or delay by either party in exercising any right,
power, or remedy under this License Agreement shall operate as a waiver of any
such right, power, or remedy. No waiver of any provision of this License
Agreement shall be effective unless in writing and signed by the party against
whom such waiver is sought to be enforced. Any waiver by either party of any
provision of this License Agreement shall not be construed as a waiver of any
other provision of this License Agreement, nor shall such waiver operate as or
be construed as a waiver of such provision respecting any future event or
circumstance.
16.13 MODIFICATION. No modification of any provision of this License
Agreement shall be effective unless in writing and signed by both of the
parties.
16.14 HEADINGS. The section headings used in this License Agreement are
intended primarily for reference and shall not by themselves determine the
construction or interpretation of this License Agreement or any portion hereof.
16.15 INTEGRATION. This License Agreement (together with the Term Schedule
and Exhibits attached hereto) constitutes the entire agreement between Sony and
Licensee and supersedes all prior or contemporaneous agreements, proposals,
understandings, and communications between Sony and Licensee, whether oral or
written, with respect to the subject matter hereof; provided, however, that
notwithstanding anything to the contrary in the foregoing, the Nondisclosure
Agreement referred to in Section 13 hereto shall remain in full force and
effect.
16.16 COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed an original, and both of which together shall
constitute one and the same instrument.
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16.17 CONSTRUCTION. This License Agreement shall be fairly interpreted in
accordance with its terms and without any strict construction in favor of or
against either of the parties.
16.18 EXPORT CONTROLS. Licensee certifies that it shall not reexport,
directly or indirectly, any PlayStation Hardware or Sony Materials in violation
of U.S. law and regulations. Licensee shall be solely responsible for the
obtaining of the compliance with any required export licenses. Licensee
certifies that the Equipment and any Sony Materials will not be resold or
delivered, directly or indirectly, to entities located in destinations
prohibited under U.S. laws and regulations or resold or delivered, directly or
indirectly, to nationals from those destinations. The prohibited destinations
include Cuba, Iraq, Libya, North Korea, Yugoslavia (Serbia and Montenegro) or
any other countries that are subsequently declared prohibited destinations under
such laws or regulations. Prohibited sales may subject Licensee to fines and
imprisonment under applicable U.S. law. Violation of this Certification will
result in the termination for cause of this Agreement and all licenses granted
hereunder from Sony to Licensee. In addition, Licensee shall, at its own
expense, obtain and arrange for the maintenance in full force and effect of all
governmental approvals, consents, licenses, authorizations, declarations,
filings and registrations as may be necessary or advisable for performance of
all of the terms and conditions of this Agreement, including, but not limited
to, foreign exchange approvals, import and offer agent licenses, fair trade
approvals and all approvals which may be required to realize the purposes of
this Agreement.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be duly
executed as of the day and year first written above.
SONY COMPUTER THE LIGHTSPAN PARTNERSHIP, INC.
ENTERTAINMENT AMERICA
By: /s/ Bernard Stolar By: /s/ J. T. Kernan
Title: V.P. Bus. Dev. Title: Chairman & CEO
Date: 02-22-96 Date: 6/30/96
NOT AN AGREEMENT UNTIL EXECUTED BY BOTH PARTIES
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EXHIBIT A
TERMS AND CONDITIONS
Sony Computer Entertainment America ("Sony"), a division of Sony Interactive
Entertainment Inc., does business with its Customers under the terms and
conditions set forth herein. These Terms and Conditions supersede those
contained in any Customer purchase order, request for quotation, acceptance or
other purchasing documents concerning any PlayStation Hardware which are
inconsistent with, different from or in addition to the terms and conditions
stated herein.
1. APPROVAL OF ORDERS: All orders must be in writing or sent via EDI. No
verbal orders will be accepted. All Customer purchase orders for PlayStation
Hardware are subject to acceptance by Sony, including, if appropriate, approval
by Sony's Credit Department. Any statement in a purchase order document that is
not expressly approved or acknowledged in writing by Sony will not be
considered a part of the agreement between the parties.
Please send orders to: Sony Computer Entertainment America
Sales Service Department
919 East Hillsdale Boulevard, 2nd Floor
Foster City, CA 94404
Phone: (415) 655-5600
Fax: (415) 655-5500
2. CREDIT: Sony shall use good faith efforts to establish a line of credit
for Licensee. In the event that an order or orders placed by Licensee exceed
Licensee's line of credit or Licensee fails to pay on time or otherwise fails
to meet Sony's credit requirements, Sony shall have the right to require
Licensee, at any time with respect to such purchase order or orders, to provide
Sony with a suitable letter of credit, letter of guarantee or an equivalent,
each of which must be acceptable to Sony. Where credit is extended, all orders
must be entered and cleared by the Credit Department before they are considered
valid orders. (Orders which require shipment to different locations shall be
considered individual orders.) Upon notice by Sony, Customer will furnish Sony
such financial information as Sony may reasonably request for credit approval.
If credit is extended, Sony reserves the right to establish credit limits for
Customer which may be modified from time to time at Sony's sole discretion.
Sony may, in its sole discretion, cancel any order at any time or delay
shipment of Products if Customer fails to meet credit requirements established
by Sony, or if Licensee exceeds its line of credit and fails to provide Sony
with a suitable letter of credit, letter of guarantee or acceptable equivalent.
While special sales programs may be offered from time to time which
include purchase discounts and/or timing extensions, only Customers that are in
good standing shall be eligible to participate. The amount of credit made
available and the manner in which it has been handled will affect eligibility.
3. TERMS OF SALE: Invoices will be issued and dated as of the merchandise
shipment date. Although prepared daily, invoices are generally batched and
mailed during the week following the week of shipment. Customers to whom Sony
extends credit must pay for Products in full within forty-five (45) days from
date of invoice. No Customers may make deductions or offsets of any kind from
payments due Sony unless such Customer has received a written credit memorandum
or other backup documentation from Sony authorizing such deduction or offset or
Customer has strictly complied with all of the terms of a Sony authorized sales
program. In the event that a check is returned because of insufficient funds or
for any other reason, additional handling charges and fees will be assessed if
the replacement payment is not received in accordance with our stipulated terms.
4. ORDER QUANTITY: All sales orders will be subject to stock availability.
Only master case orders will be accepted for shipment to distribution centers.
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<PAGE> 25
Customer prepacks/stickering will not be accepted as a standard business
practice. However, if an exception is made at Sony's sole discretion, such
prepacks/stickering will require fifteen business days to process and will be
subject to additional minimum quantities and handling charges.
5. FINANCE CHARGE/COSTS OF COLLECTION: A condition of credit is payment of
all purchases in accordance with the terms of sale. If Customer fails to pay
Sony for PlayStation Hardware when due, then, in addition to any other remedies
available to Sony allowed by law for that default, Customer will pay Sony an
additional monthly financing charge equal to the lesser of (a) one and one-half
percent (1.5%) or (b) the maximum monthly interest rate allowed by law, of any
portion of Customer's account not paid within terms stated on invoice,
chargeable during each month that payment remains outstanding and Sony's
reasonable expenses of collection, including but not limited to attorneys' and
experts' fees and court costs. The obligation is considered past due after
forty-five days (45) or in accordance with other terms stated on the invoice.
Notwithstanding the foregoing, such specified rate of interest shall not excuse
or be construed as a waiver of Licensee's obligation to timely provide any and
all payments owed to Sony hereunder.
6. TAXES: Prices for PlayStation Hardware exclude all taxes, including but
not limited to, sales, excise or use taxes. Customer shall pay all sales, use,
ad valorem, excise and/or any other taxes imposed on either party by virtue of
Customer's order, except for taxes based on Sony's net income. Sony will invoice
Customer for any of the taxes that Sony is legally obligated to collect from
Customer.
7. PRICES AND PAYMENT: Payments should be remitted to our lock box at:
Sony Computer Entertainment America
P.O. Box 91102
Chicago, Illinois 60693
Current prices are available on the Sony published price sheet for all active
catalog products. Sony shall have the right to change prices to Customer on any
product at any time, except with respect to orders which have been accepted by
Sony prior to such price modifications. Licensee shall be notified of any such
price change. Sony may change the prices for PlayStation Hardware included in a
previously accepted order by giving Customer prior notice. If Customer does not
wish to purchase PlayStation Hardware previously ordered and accepted by Sony
because of any price increase, then Customer may, as its sole remedy, cancel its
purchase, to the extent not previously fulfilled, by giving Sony notice within
ten (10) days of its receipt of a price change notice from Sony.
8. RESCHEDULING AND CANCELLATIONS: Requests for order rescheduling and
cancellations must be in writing and received by Sony according to the following
schedule:
<TABLE>
<CAPTION>
Time Frame Result
<S> <C>
Within 30 days of delivery date Purchase order may not be canceled or rescheduled
30-60 days from delivery date Purchase order may not be canceled but may be rescheduled
60-90 days from delivery date Purchase orders may be canceled and rescheduled
</TABLE>
Orders put on hold may be canceled at the discretion of Sony.
9. DELIVERY: Requests for specific shipping dates will be honored whenever
possible subject to existing circumstance, and Sony will use reasonable efforts
to meet them. Regardless of the date of actual shipment, Customer will not be
excused from its obligation to pay for PlayStation Hardware when shipped or from
any of its other obligations hereunder. SONY SHALL NOT BE LIABLE FOR ANY
DAMAGES, WHETHER INCIDENTAL, CONSEQUENTIAL OR OTHERWISE, FOR FAILURE TO FILL
ORDERS, DELAYS IN DELIVERY OR ANY ERROR IN THE FILLING OF ORDERS.
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<PAGE> 26
10. METHODS AND POINT OF DELIVERY: Unless otherwise provided by the parties,
Sony will choose the carrier for shipping PlayStation Hardware. Sony's
responsibility for delivery will cease when carrier signs for shipment to
destination as specified. Sony may make partial shipments on Customer orders,
which shipments shall constitute separate sales and may be separately invoiced
and shall be paid for when due, without regards to subsequent shipments. Delay
on shipment or delivery of any particular installment shall not relieve
Customer of its obligation to accept the remaining installments. Regardless of
the party paying freight charges, all risk of loss or damage in transit will be
borne by Customer. All claims for damage to, or loss of, PlayStation Hardware
must be made by Customer directly to the carrier or the insurance company (as
the case my be).
11. TRANSPORTATION COSTS: Unless otherwise provided by the parties, the prices
for PlayStation Hardware will include the payment by Sony of ground
transportation costs but will exclude all other charges including, but not
limited to, charges for insurance, customs and special packaging. Orders
calling for drop shipments or other special handling will be assessed a 3%
handling charge. Charges for the difference between the cost of ground
transportation and the cost of any shipping method other than ground
transportation will be borne by Customer.
12. CLAIMS AND ADJUSTMENT: Claims for adjustments on short or otherwise
unsatisfactory merchandise due to fault of Sony must be made to Sony within
fourteen (14) days of receipt of shipment. In such situations, Sony shall have
the right to examine the applicable merchandise and shipping records at
Customer's location. If the prices for PlayStation Hardware sold to Customer
are prices which have been reduced based on Customer's representation that
Customer has complied with the terms of a Sony authorized sales program and
Customer fails to adequately comply with the terms thereof then, in addition to
any other remedies available to Sony under this Agreement or allowed by law for
that default, Sony may retroactively increase those prices to make them equal
to those prevailing for the quantities of PlayStation Hardware actually
purchased by Customer and Sony will invoice Customer for any resulting increase
in prices.
13. RETURNS AND REPLACEMENTS: Sony will accept returns of mis-shipped or
defective PlayStation Hardware for credit only with prior authorization from
Sony's corporate office and receipt of a Sony Return Authorization form. The
Customer should contact Sony Return Representative to obtain any additional
handling instructions. Customer should request return authorization in writing
or via facsimile to the address listed in the invoice. Any returns which are
received by Sony without a Sony Return Authorization form will be refused and
returned to Customer at Customer's expense. PlayStation Hardware returned is not
to exceed quantity authorized. All returns must have freight prepaid and no
C.O.D.'s will be accepted. Credit will be issued only after PlayStation Hardware
is inspected and approved and will be based on Customer's cost, less a fee for
repair, refurbishment, repackaging and restocking equal to 3%. Returns missing
original components will be charged back on a prorated basis.
Unauthorized Product Returns consist of PlayStation Hardware inadvertently
returned or returned in error to Sony. This category also includes cut-outs
which are no longer returnable, and PlayStation Hardware not originally
distributed by Sony. All Unauthorized Product Returns will be scrapped and no
credit will be issued unless Sony has prior written authorization to return it
freight collect. Unsaleable product, including counterfeit, promotional, used or
illegally imported PlayStation Hardware or empty jewel boxes and/or inserts
returned to Sony will be scrapped and no credit will be issued. All opened
video game software will be returned freight collect. Sony reserves the right
to charge a processing fee on any of the above products received by our returns
center.
From time to time, Sony may delete certain elements of the PlayStation
Hardware from its active catalog. Any such lists are printed on the Sony
current price sheet within the discontinued product section. No credit will be
issued for deleted product which is returned after the date specified in the
heading of each list.
14. CHANGES IN PRODUCTS AND POLICIES. Sony may at any time add, change or
cease
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<PAGE> 27
making available any PlayStation Hardware without notice to Customer, and
Customer shall have no claim against Sony for failure to furnish PlayStation
Hardware of the model, design or type previously sold or for failure to install
modification in PlayStation Hardware previously sold. In addition, Sony may at
any time change its financial requirements or its warranty or service policies
without incurring any liability to Customer.
15. DEFAULTS: If Customer becomes delinquent in payment obligations or other
credit or financial requirements established by Sony, or if Customer is in
default of any of the terms or conditions hereof or of any agreement with Sony,
or if in the opinion of Sony, Customer's credit becomes impaired, Sony shall
have the following rights and remedies as well as those provided by applicable
law:
(a) Sony may declare all sums immediately due and payable, notwithstanding any
credit terms previously in effect.
(b) Sony may refuse any order placed by Customer.
(c) Sony may cancel any accepted orders or delay shipment of any order.
(d) Sony may require as a condition of continuing to do business with Customer,
that Customer execute a letter of credit, promissory note(s), security
agreement(s), financial statement(s) and such other Instruments as Sony,
in its sole discretion, deems necessary for its protection.
(e) If credit has been previously extended by Sony to Customer, and Sony elects
to make additional sales to Customer, Sony may require payment on a
cash-in-advance basis.
(f) In the event collection of sums due from Customer to Sony is referred to an
attorney or if suit is brought to collect such sums or to enforce rights of
Sony, Customer agrees to pay all costs and reasonable collection or
attorney's fees incurred in any collection suit or appellate proceeding and
in executing on any judgment based on Customer's obligations.
16. NON-EXCLUSIVE SALES: All sales are made to Customers on a non-exclusive
basis. Further, Sony shall have the right, from time to time at its option, to
supply PlayStation Hardware directly to consumers for promotional purposes.
17. LIMITED WARRANTY: The warranty cards enclosed with PlayStation Hardware
state Sony's limited warranty to end users applicable to those elements of the
PlayStation Hardware. If PlayStation Hardware is not accompanied by warranty
cards, Sony's then current warranty applicable to those elements of the
PlayStation Hardware will apply. All repairs to or replacements of PlayStation
Hardware after the expiration of the applicable warranty period will be
Customer's responsibility.
EXCEPT FOR THE FOREGOING WARRANTIES, SONY HEREBY DISCLAIMS AND EXCLUDES ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ANY WARRANTY
WITH REGARD TO ANY CLAIM OF INFRINGEMENT THAT MAY BE PROVIDED IN SECTION
2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR IN ANY OTHER COMPARABLE STATE
STATUTE RESPECTING PLAYSTATION HARDWARE IS EXPRESSLY EXCLUDED, SONY HEREBY
DISCLAIMS ANY REPRESENTATION OR WARRANTY THAT PLAYSTATION HARDWARE IS COMPATIBLE
WITH ANY COMBINATION OF NON-SONY PRODUCTS USED IN CONNECTION WITH THE
PLAYSTATION HARDWARE.
18. SPECIAL CONDITIONS OF SALE: Sony reserves the right to refuse to sell
PlayStation Hardware to any Customer that has sold, or is currently selling
promotional, bootleg, or counterfeit PlayStation Hardware or software.
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<PAGE> 28
19. PROOF OF DELIVERY: Sony will accept requests for a proof of delivery (a
"P.O.D.") request up to sixty (60) days after the invoice date. Sony reserves
the right to charge Customers a service charge or handling fee for each P.O.D.
requested by Customer.
20. CERTIFICATION: Customer certifies that it has read the sections entitled
Limited Warranty and Limitation of Liability contained in the License Agreement
and these Terms and Conditions, that they have been explicitly negotiated and
that they have become part of the basis of its bargain with Sony.
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EXHIBIT B
COMPENSATION
1. NONREFUNDABLE PAYMENT - The Nonrefundable Payment [***] shall be [***].
[2. ***
a.
b.
3. ***]
* CONFIDENTIAL TREATMENT REQUESTED
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EXHIBIT C
GUIDELINES FOR THIRD PARTY USE OF PLAYSTATION(TM) TRADEMARK & LOGOS
These guidelines are meant to assist third parties in complying with legal
requirements regarding the use of the PlayStation trademark and logos. ALL
PRINTED MATERIALS USING THE PLAYSTATION TRADEMARK AND LOGOS MUST BE SUBMITTED
FOR PRIOR WRITTEN APPROVAL. THE FOLLOWING IS PROVIDED FOR GUIDANCE ONLY.
1. SONY COMPUTER ENTERTAINMENT TRADEMARKS AND LOGOS
a. Third Parties may use the PlayStation and PS logos on compatible
products, documentation and advertising materials.
b. Third Parties may not use the Sony logo or trademark in any
circumstance.
2. TRADEMARK USE
a. Trademarks must always be legible.
b. Trademarks must always be used as adjectives in conjunction with the
product, e.g., for use on your PlayStation game console.
c. Trademarks must not be used in plural (e.g., PlayStations) or
possessive form (e.g., PlayStation's) or as a noun (e.g., the
PlayStation).
d. Trademarks must always be given correct logo treatment, or in text,
the "P" and "S" in PlayStation must be capitalized.
3. TRADEMARK NOTICE SYMBOLS AND CREDIT LINES
a. Use the trademark symbol (TM) unless instructed to use (R). A
trademark symbol should follow all headline and prominent use of
trademarks and logos, and should appear at least once, preferable the
first time used, in any long copy.
Place the trademark symbol on the right shoulder or at the foot of
the trademark or logo.
Example: PlayStation(TM)
b. Credits should state that the product is Licensed by Sony Computer
Entertainment America and that PlayStation and the PlayStation logos
belong to Sony Computer Entertainment Inc.
Example: Licensed by Sony Computer Entertainment America for use
with the PlayStation game console. PlayStation and the
PlayStation logos are trademarks of Sony Computer
Entertainment Inc.
4. MISUSE OF THE PLAYSTATION TRADEMARK AND LOGOS
The PlayStation trademark and logos are valuable property rights. If you
misuse them, you may be in breach of your License Agreement or you may be
liable for trademark infringement, unfair competition or passing off.
Please treat them properly. If you have any questions please contact the
Sony Interactive Entertainment Inc. Legal and Business Affairs department.
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<PAGE> 31
AMENDMENT #1 TO
SALE AND LICENSE AGREEMENT
Amendment, dated as of February 6, 1997 between Sony Computer Entertainment
America, a division of Sony Computer Entertainment America Inc. (formerly known
as Sony Interactive Entertainment Inc.), with offices at 919 E. Hillsdale
Boulevard, 2nd Floor, Foster City, CA 94404 ("Sony") and The Lightspan
Partnership, Inc., with offices at 2382 Farsday Avenue, Suite 300, Carlsbad, CA
92008-7218 ("Licensee") to the Agreement dated as of January 26, 1996 between
Sony and Licensee (the "Agreement").
1. Section 3.4 of the Agreement is hereby amended and restated in its entirety
to read as follows:
"3.4 DEMONSTRATION UNITS OF PLAYSTATION HARDWARE. Sony may, from time to
time at the request of Licensee and subject to Sony's approval, supply Licensee
with units of PlayStation Hardware for demonstration purposes. Any
demonstration units of PlayStation Hardware provided to Licensee by Sony shall
be used by Licensee for demonstration purposes only in order for Licensee to
demonstrate the Licensed Products and PlayStation Hardware to the School Market
on a limited trial basis. Licensee will provide to Sony a written accounting of
the use of these demonstration systems in order to substantiate the
effectiveness of the demonstration units in obtaining sales. All terms and
conditions of this Agreement, including without limitation the terms and
conditions set forth in Exhibit A, shall apply with respect to any
demonstration units."
2. Section 16.7 of the Agreement is hereby amended and restated in its
entirety to read as follows:
"16.7 GOVERNING LAW; CONSENT TO JURISDICTION. This License Agreement shall
be governed by and interpreted in accordance with the laws of the State of
California, excluding that body of law related to choice of laws, and of the
United States of America. Any action or proceeding brought to enforce the terms
of this License Agreement or to adjudicate any dispute arising hereunder shall
be brought in the courts of the County of San Mateo, State of California (if
under State law) or the Northern District of California (if under Federal law).
Each of the parties hereby submits itself to the exclusive jurisdiction and
venue of such courts for purposes of any such action and agrees that any
service of process may be effected by delivery of the summons in the manner
provided in the delivery of notices set forth in Section 16.1 above."
3. Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects. This
Amendment all be governed by and construed in accordance with the laws of the
State of California.
SONY COMPUTER ENTERTAINMENT AMERICA THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ P. Harrisen By: /s/ Robert Greene
------------------------------- ----------------------------
Name: P. Harrisen Name: Robert Greene
------------------------------ --------------------------
Title: VP Title: SVP
----------------------------- -------------------------
Date: 5/8/97 Date: 5/1/97
------------------------------ --------------------------
CONFIDENTIAL
<PAGE> 32
AMENDMENT #2 TO
SALE AND LICENSE AGREEMENT
Amendment, dated as of May 28, 1997 between Sony Computer Entertainment America,
a division of Sony Computer Entertainment America Inc. (formerly known as Sony
Interactive Entertainment Inc.), with offices at 919 E. Hillsdale Boulevard,
2nd Floor, Foster City, CA 94404 ("Sony") and The Lightspan Partnership, Inc.,
with offices at 2382 Faraday Avenue, Suite 300, Carlsbad, CA 92008-7218
("Licensee") to the Sale and License Agreement dated as of January 26, 1996
between Sony and Licensee (the "Agreement").
WHEREAS, Sony has licensed to Licensee the right to acquire and distribute
units of the PlayStation Game Console to the School Market pursuant to the
Agreement;
WHEREAS, [***]
WHEREAS, [***]
WHEREAS, [***]
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Licensee and Sony
hereby agree as follows:
1. CREDIT ON UNITS PURCHASED. Upon full execution of this Amendment, Sony
agrees to credit the amount of [***] to Licensee, [***] Licensee shall use best
efforts to purchase the Forty Thousand (40,000) units of the PlayStation Game
Console subject to the increase set forth above by no later than the end of
this fiscal year, which shall end on March 31, 1998. [***]
[2. ***]
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* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 33
3. Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects. This
Amendment shall be governed by and construed in accordance with the laws of the
State of California.
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed
as of the day and year first written above.
SONY COMPUTER ENTERTAINMENT AMERICA THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ Kazuo Hirai By: /s/ Robert Greene
------------------------------- ---------------------------
Name: Kazuo Hirai Name: Robert Greene
------------------------------ --------------------------
Title: EVP/COO Title: SVP
----------------------------- -------------------------
Date: 7/21/97 Date: 7/10/97
------------------------------ --------------------------
NOT AN AGREEMENT UNTIL EXECUTED BY BOTH PARTIES
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<PAGE> 34
THIRD AMENDMENT TO SALE AND LICENSE AGREEMENT
This Third Amendment ("Third Amendment") to the Sale and License Agreement
dated January 26, 1996, as twice amended (the "License Agreement") is entered
into this twenty first day of December, 1998, by and between Sony Computer
Entertainment America Inc. ("Sony") and The Lightspan Partnership, Inc.
("Licensee").
1. All definitions contained in the License Agreement shall be
incorporated herein.
2. Section 1.10 shall be deleted and replaced with:
1.10 "PlayStation Hardware" means the finished hardware components to
be provided to Licensee by Sony, including (i) the PlayStation Game
Console and all peripherals and accessories customarily packaged
therewith (the "PlayStation Console"), (ii) the [***] and (iii) the
Peripherals.
3. Section 1.12 shall be added as follows:
1.12 [***]
4. Section 1.13 shall be added as follows:
1.13 "Peripherals" shall mean those PlayStation console accessories
(e.g. memory cards) that are customarily sold separately by Sony.
5. Section 1.14 shall be added as follows:
1.14 "Lightspan PlayStation Licenses" shall mean the PlayStation
software licenses that have been and are currently marketed and
distributed by Licensee to the School Market.
6. Section 3.1 shall be amended to exclude any [***]
7. Section 3.1.1 shall be added as follows:
3.1.1 Sony may sell the [***] to Licensee; Licensee's purchase of
the [***] shall be governed by Exhibit A and the terms and conditions of this
Agreement. Licensee acknowledges and agrees that (i) Sony's development and
manufacturing of the [***] is experimental, (ii) notwithstanding anything else
contained in this Agreement, Sony makes no representations or warranties with
respect to the [***] and (iii) Sony may discontinue the manufacture and sale to
Licensee of [***] at any time, without notice, in Sony's sole discretion.
8. Sections 3.3 and 3.4 shall be amended to exclude the [***]
9. Section 4.1 shall be amended to exclude the [***]
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 35
THIRD AMENDMENT TO SALE AND LICENSE AGREEMENT
DECEMBER 21, 1998
PAGE 2
10. Section 4.1.1 shall be added as follows:
4.1.1 The purchase price for the Communications Devices and
Peripherals shall be determined by Sony and are subject to change
without notice. All payments to Sony for the Communications Devices
and Peripherals shall be made in United States currency drawn on a
United States bank, unless otherwise specified between the parties.
11. Each reference to "PLAYSTATION GAME CONSOLE" in section 10.4.2 of the
License Agreement shall be hereby amended to read "PLAYSTATION HARDWARE."
12. Exhibit B shall be amended as follows:
1. The Nonrefundable Payment for units [***] shall be calculated
per the method of calculation set forth in this Exhibit B
and the Second Amendment to the License Agreement--less [***]
2. Not amended.
3. Not amended.
[4. ***]
[The remainder of this page left intentionally blank]
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 36
THIRD AMENDMENT TO SALE AND LICENSE AGREEMENT
DECEMBER 21, 1998
PAGE 3
13. Except as are expressly amended herein, all terms and conditions of
the License Agreement shall remain in full force and effect, and are hereby
ratified by the parties hereto.
THE LIGHTSPAN PARTNERSHIP INC. SONY COMPUTER ENTERTAINMENT AMERICA INC.
By: /s/ Bob Greene By: /s/ Kazuo Hirai
------------------------ -----------------------
(Name) Bob Greene (Name) Kazuo Hirai
(Title) Senior VP (Title) EVP/COO
(Date) 1/4/99 (Date) 1/14/99
[Neither an offer nor an agreement until executed by both parties hereto]
<PAGE> 37
FOURTH AMENDMENT TO SALE AND LICENSE AGREEMENT
This Fourth Amendment (the "Fourth Amendment") to Sale and License
Agreement, as previously amended, (the "Agreement") is entered into this twenty
fifth day of May, 1999, to be effective the 26th day of January, 2000 (the
"Effective Date"), by and between Sony Computer Entertainment America, Inc.
(hereinafter "SCEA"), and The Lightspan Partnership, Inc. ("Licensee").
RECITALS
WHEREAS, SCEA and Licensee entered into the Agreement dated January 26,
1996, as subsequently amended; and
WHEREAS, SCEA and Licensee wish to extend the Agreement, as modified below.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and for good and valuable consideration received, beginning on the Effective
Date the parties hereto agree as follows:
1. REFERENCES. All references in the Agreement to Sony Computer
Entertainment America as "Sony" shall be changed to "SCEA".
2. EXTENSION OF TERM. The Term of the Agreement is hereby extended for a
term of two (2) years until January 26, 2002 and shall renew automatically for
one (1) year periods unless and until terminated by either party upon ninety
(90) days written notice.
3. NOTICES. Section 2 of the Term Schedule shall be revised as follows:
Sony Computer Entertainment America The Lightspan Partnership, Inc.
919 East Hillsdale Blvd., 2nd Fl. 10140 Campus Point Drive
Foster City, CA 94404 San Diego, CA 92121
Attn: Anne Chen Attn: Carl Zeiger
Fax: (650) 655-8001 Fax: (619) 824-8001
With a copy to: With a copy to:
Sony Computer Entertainment America Etsuko Adelman
919 East Hillsdale Blvd., 2nd Fl. Fax: (650) 631-9427
Foster City, CA 94404
Attn: Legal & Business Affairs
Fax: (650) 655-5901
4. RATIFICATION. Except as is expressly modified or supplemented herein,
SCEA and Licensee hereby confirm and ratify the Agreement as though fully set
forth herein.
SONY COMPUTER ENTERTAINMENT AMERICA, INC. THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ Masayuki Chatani By: /s/ Carl Zeiger
------------------------------------- -------------------------------
(Name) Masayuki Chatani (Name) Carl Zeiger
(Title) VP of Business & Technology (Title) President
(Date) 6/14/99 (Date) 6/10/99
[Neither an offer nor an agreement until executed by both parties hereto]
<PAGE> 38
[SONY COMPUTER ENTERTAINMENT LETTERHEAD]
August 10, 1999
VIA FACSIMILE ONLY
Robert Greene
Lightspan Partnership, Inc., The
10140 Campus Point Drive,
San Diego, CA 92121
Re: Modification of Territory in License Agreement
Dear Mr. Greene:
SCEA is pleased to advise you that, effective immediately, your Licensed
Territory per the License Agreement shall be expanded to include the Republic
of Mexico, under the express condition that all Licensed Products -- whether
sold in the US, Canada or, now, in Mexico -- comply with all applicable laws
and regulations (see, License Agreement).
SCEA will review and approve all printed materials for Mexico per our
normal procedures, however the Licensed Publisher is responsible for the
accuracy of any text translation. In the event that SCEA makes any changes to
our standard packaging guidelines to reflect local language issues it will be
communicated through an amendment to the Source Book in due course.
We regret that we cannot, at this time, expand your territory to include
any other countries in Central or South America. When we can do so, we will
advise you promptly in writing.
Please contact John Miller if you have any questions regarding this.
Very truly yours,
/s/ Phil Harrison
Phil Harrison
VP 3rd Party
cc: John Miller
Joanna Krouskup
<PAGE> 1
* Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80(b)(4),
200.83 and 230.406
EXHIBIT 10.21
By Telecopy
July 12, 1999
Mr. David Blohm
President and CEO
SmarterKids.com, Inc.
200 Highland Avenue
Needham, MA 02494
Re: Private Label SmarterKids.com Store for Lightspan
Dear David:
In accordance with our discussions, this letter agreement ("Agreement") sets
forth the terms agreed to between The Lightspan Partnership, Inc., a California
corporation ("Lightspan"), and SmarterKids.com, Inc., a Massachusetts
corporation ("SmarterKids") for the development and operation, by
SmarterKids, for Lightspan, of a "private label" version of SmarterKids'
e-commerce store SmarterKids.com.
This Agreement will be effective as of the date set forth above when executed by
an authorized representative of each party where indicated below.
Following the execution of this Agreement, the parties agree to work
expeditiously in good faith to negotiate and execute a long form agreement
("Long Form Agreement"). Unless and until the Long Form Agreement is executed
and delivered by the parties, this Letter Agreement shall be valid and binding
upon the parties.
1. General
Smarterkids.com will create, own and operate a co-branded on-line store for
Lightspan (the "Lightspan Store") that will become the premier educational
products e-commerce site on (i) Lightspan's Page One and the Lightspan Education
Portal; and (ii) if Lightspan elects to add e-commerce to Lightspan's
subscription education service, the Lightspan Network, on The Lightspan Network.
Lightspan Page One, the Lightspan Education Portal and The Lightspan Network are
referred to collectively herein as the "Lightspan Internet Services."
2. Branding
The name of the Lightspan store will, at Lightspan's election, include
"Lightspan" in some fashion (e.g. "The Lightspan Learning Store") and will also
carry the Smarterkids.com brand as a secondary identifier (e.g. "Powered by
Smarterkids.com"). The Smarterkids.com brand will be at least 25% of the
Lightspan identifier in the home page for the store. This will be comparable to
Yahoo's presence in the branding of Lightspan PageOne. Unless the parties
<PAGE> 2
otherwise agree, the name of the store will be presented as follows on the home
page for the store:
[LIGHTSPAN LEARNING STORE LOGO]
3. Description of Lightspan Store
a. The Lightspan Store will include a customized "home page" that will be
arrived at from a Lightspan owned and branded URL. The look and feel of
this "home page" will be differentiated from Smarterkids.com but
functionally the same as Smarterkids.com in all material respects.
Lightspan may market additional product offerings not found in
Smarterkids.com from this home page. The parties will work together to
determine a mutually agreeable process and time line for SmarterKids'
addition of such products and mutually agreeable arrangements for the
handling of purchase, inventory ownership and other similar issues related
to the offering of such products. Every Smarterkids.com page that is
reached off the Lightspan Store home page (in other words the whole user
session originated from the Lightspan store) will have the co-branded logo,
as described in paragraph 2, indicating the user is in the Lightspan Store.
The Smarterkids.com "Nav bar" will be arranged so that clicking on "home"
or "about us" will take the user to the appropriate pages as differentiated
between Smarterkids.com and the Lightspan Store.
b. SmarterKids will provide all customer service for the Lightspan Store.
Customer service for the Lightspan Store will be equal to or superior to
that of Smarterkids.com in all material respects. If customer service for
the Lightspan Store falls materially below other comparable category
members as measured by an independent party, such as BizRate, or falls
materially below that of SmarterKids.com, and SmarterKids fails to rectify
the situation within 30 days of Lightspan's provision of written notice
requesting it to do so, Lightspan will be entitled to terminate this
Agreement.
c. Lightspan will have a right of approval (not to be unreasonably
withheld) with respect to all Lightspan Store content that shows up
uniquely within the Lightspan Store. The process for this approval will be
further defined to avoid slowdowns in the development process.
d. Lightspan will not have a right of approval with respect to content
which is common to SmarterKids.com and the Lightspan Store; provided,
however, that SmarterKids agrees that such content will not vary,
fundamentally, from that currently included on SmarterKids.com, and will
not, under any circumstances, include content inappropriate for children or
content that could otherwise jeopardize the business or
2
<PAGE> 3
reputation of Lightspan or impugn the integrity of the Lightspan Internet
Services. Without limiting the generality of the foregoing, SmarterKids
agrees that all product reviews included in the Lightspan Store will be
unbiased and not influenced by any benefit or incentive offered by a
product supplier.
e. Smarter Kids will not, in any way, encourage customers of the Lightspan
Store to instead become customers of SmarterKids.com. In order to ensure
that promotions for SmarterKids do not encourage customers of the
Lightspan Store to become customers of SmarterKids.com, SmarterKids agrees
that, to the extent to which SmarterKids runs "customer days" or other
promotions for customers of SmarterKids, it will run an equivalent
promotion for the Lightspan Store which is specifically designed to drive
return visits to the Lightspan Store. Thus, by way of example, a customer
days promotion for SmarterKids.com which provides SmarterKids.com
customers a special URL that allows them to obtain discounts that are not
then generally available on SmarterKids.com would be accompanied by an
equivalent promotion for Lightspan Store customers providing Lightspan
Store customers with their own unique Lightspan Store promotion URL.
4. Links from Lightspan Internet Services to Lightspan Store
a. A special link or interface for the Lightspan Store will be included in
an e-commerce section in Lightspan Page One and an e-commerce section
in the Lightspan Portal and, if Lightspan elects to include e-commerce
links from the Lightspan Network, in an e-commerce page in the Lightspan
Network. The "real estate" permanently assigned by Lightspan for such links
will be generally equivalent to or superior to the "real estate"
permanently assigned by Lightspan within the e-commerce section to any
other third-party vendor (i.e. non-Lightspan owned vendor) within the
e-commerce section. The forgoing shall not prohibit Lightspan from
providing a third party vendor superior "real estate" in the e-commerce
section during temporary promotional events.
b. The parties agree to work together to determine a mutually acceptable
way to prominently integrate product recommendations generated by
Smarterkids.com into Learning Activities on certain portions of Lightspan
Page One, certain portions of the Lightspan Education Portal and, at
Lightspan's election, certain portions of the Lightspan Network (e.g. a
visitor looking for math learning activities for a 2 year old with a
particular learning style would be offered math learning products for a 2
year old with that learning style). Ideally, these links will be available
both on the initial pages of the Learning Activities as well as in the
results of Learning Activity searches within the Lightspan Learning
Search. The recommendations will be linked directly to the Lightspan Store
in a way that allows the user of Lightspan to make an immediate purchase
of the products recommended. Lightspan will consult with Smarterkids.com
regarding the placement of the links, but Lightspan will ultimately
control all placement, editorial, layout, navigation, content and
other aspects of the Lightspan Internet Services in its sole discretion.
Smarterkids acknowledges that it is Lightspan's intention that the links
be included in a way that would allow them to be
3
<PAGE> 4
directed specifically to parents, and not to children and that would allow
them to be tied only to Learning Activities intended for use outside the
classroom.
c. In the event Lightspan elects to include other links to the Lightspan
Store from the Lightspan Internet Services, SmarterKids agrees to work with
Lightspan to add the links as quickly as reasonably practicable.
5. Links from SmarterKids.com and Lightspan Store to Lightspan Internet
Services
Smarterkids will work with Lightspan to correlate the Lightspan Learning
Activity categories to Smarterkids.com's proprietary categorization of products.
Provided that Lightspan offers Learning Activities that are educationally sound
and that include functionality which is generally equivalent or superior to the
functionality of Learning Activities included in Internet sites comparable to
the Lightspan Internet Services, SmarterKids will integrate recommendations for
Lightspan Learning Activities in appropriate locations within MySmarterKids and
the Smarterkids.com and Lightspan Store sites. Such recommendations will relate
to the products the Smarterkids.com/ Lightspan Store user is looking for at that
time (e.g. a shopper looking for math products for a 2 year old with a
particular learning style would be offered Lightspan math learning activities
for 2 year olds with that learning style). The Learning Activities will be
hosted by Lightspan and the recommendations will link users directly to the
specific Lightspan Learning Activity on the Lightspan Internet Services.
Smarterkids will consult with Lightspan regarding the links and Lightspan will
have a right of approval, not to be unreasonably denied, with respect to the
links, but Smarterkids.com will ultimately control all placement, editorial,
layout, navigation content and other aspects of Smarterkids.com.
6. MySmarterkids Functionality/ Coordination of Registration Processes
a. The Lightspan Store will include MySmarterkids.com functionality for
personalized product recommendations.
b. The parties agree that, ideally, registration for the Lightspan Internet
Services and for the Lightspan Store will be coordinated so that a
registrant of one site who wishes to use the other will not be required to
re-register. The parties will work together in good faith to determine a
process that -- while not "automatically" registering users for both the
Lightspan Store and the Lightspan Internet Services -- avoids
re-registration or, failing that, simplifies the second registration so
that the user is only required to provide additional information required
for the second registration and is not required to provide the same
information twice. The parties agree that any such coordinated registration
process would need to meet both parties' requirements and standards for
children's registration and parental approvals of children's registration.
7. Lightspan Content included in SmarterKids.com Parent Center and Lightspan
Store Parent Center
4
<PAGE> 5
Within the new layout of the Smarterkids.com Parent Center (also available in
the Lightspan Store), Lightspan will contribute a "bylined" article(s) on a
regular and rotating basis, based on the Smarterkids.com editorial calendar,
editorial guidelines and mutually agreed upon topics. The Lightspan bylined area
will include links to Lightspan.com through "tell me more" icons and/or prompts.
Smarterkids.com will have editorial approval rights, not to be unreasonably
denied, for content hosted by Smarterkids.com. Smarterkids.com and Lightspan
will discuss the desirability and investigate the feasibility of including
Lightspan Learning Search for Lightspan activities within the Parent Center.
8. [***]
[***]
a. [***]
b. [***]
c. [***]
d. [***]
*** Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
5
<PAGE> 6
[***]
e. [***]
9. Data Tracking
Smarterkids.com will separately identify, in its database, all Lightspan Store
registrants and all Smarterkids.com registrants who have some on-going
relationship with Lightspan that SmarterKids is aware of (e.g. who are
subscribers to the Lightspan subscription network, a member of a Lightspan
PageOne club or who have established a MyLightspan account) ("Lightspan
Shoppers"). Smarterkids.com will [***] to be determined by the parties in
accordance with terms to be included in the Long Form Agreement. Lightspan will
be entitled to a copy of all registration, shopping, traffic, customer service
and other data Smarterkids.com collects with respect to users of the Lightspan
Store. SmarterKids will send the data to Lightspan in a weekly report in
standard CSV or Microsoft Excel format.
10. Sharing of registration data
Both SmarterKids.com and Lightspan will jointly own the registration data
collected on customers and registrants from the Lightspan Store. SmarterKids.com
will provide Lightspan copies of this data on an ongoing basis throughout the
Term. SmarterKids will create a weekly report in standard CSV or Microsoft Excel
format to be transmitted to Lightspan that will contain the Lightspan Store
customers and all registration information other than credit card numbers.
Neither SmarterKids nor Lightspan shall be entitled to sell any Lightspan Store
registration data to any third party. SmarterKids will make changes in its
registration and privacy policy statements for use in connection with the
Lightspan Store to include Lightspan as appropriate and to allow for the sharing
of registration information with Lightspan as contemplated in this Agreement.
11. Implementation Schedule
SmarterKids will launch the Lightspan Store as early as September 1, 1999
and no later than October 15, 1999. Assuming Lightspan provides SmarterKids
with the content it requires, SmarterKids also agrees to add to SmarterKids.com
the Lightspan content and links referenced above in accordance with the same
schedule. [***]
*** Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
6
<PAGE> 7
12. Fees/Revenue Sharing
Smarterkids.com will pay Lightspan a commission on the Net Revenue of all
purchases made at the Lightspan Store during the Term (i.e. all Lightspan Store
purchases, whether or not the purchaser accessed the Lightspan Store from any of
the Lightspan Internet Services and including, by way of example and not by way
of limitation, all purchases commenced during one session and concluded in
another session). The amount of the commission shall be 11% of Net Revenue. As
used herein, Net Revenue means [***] SmarterKids will also be entitled to
exclude [***] from Net Revenues and to exclude [***] from Net Revenues. By way
of example, a purchase of three items regularly priced at [***] each, but sold
as part of a buy 2 get one free promotion would yield Net Revenue of [***].
SmarterKids agrees that the only revenues, other than standard MDF or co-op ad
funds, it will accept with respect to the Lightspan Store will be revenues from
customers and that it will not sell or carry advertising on the Lightspan Store
or otherwise seek revenues from suppliers of products carried on the Lightspan
Store.
13. Exclusivity
a. During the Term, Smarterkids will not engage in any arrangement
whereby branded content provided by a "Lightspan competitor" or links to a
"Lightspan competitor" are included on Smarterkids.com or the Lightspan
Store or whereby SmarterKids builds, for a "Lightspan competitor," a club
program similar to the Page One club program or a "private label store"
similar to that defined in this Agreement, where "Lightspan competitor"
means Family Education Network, Electric School House, Scholastic Network,
Classroom Connect, ZapMe, American School Directory or Jostens Learning or
any other comparable provider of educational content or services over the
Internet which is not under common ownership with SmarterKids.
b. During the Term, Lightspan will not include links from content or
activity areas of the Lightspan Internet Services (as opposed to e-commerce
areas of the Lightspan Internet Services) to any of the following sites:
etoys,KayBeeToys.com, RedRocket, Toysmart, ToysRUs.com or ZanyBrainy.com
or any other comparable e-commerce site targeted primarily to parents which
primarily sells children's merchandise similar to that carried by
Smartkids.com and which is not under common ownership with Lightspan. The
foregoing will not, in any way, restrict Lightspan's sale of ads to such
sites, which ads may also serve as links to such sites.
14. Ownership
Each party shall continue to own its intellectual property rights. Lightspan
will own the URL for the Lightspan Store and the name of the Lightspan Store,
any URL for the Page One clubs program and any new names and trademarks that
may be associated with the Page One Clubs
*** Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
7
<PAGE> 8
program. The long form agreement shall include, inter alia, non-exclusive
intellectual properties licenses between the parties appropriate to implement
the terms of this Agreement.
15. Term/ Renewal/ Effect of Termination
a. This Agreement will have an initial term (the "Term") of eighteen (18)
months and will be renewable annually thereafter by the mutual agreement of
the parties.
b. At the conclusion of the Term, the parties' respective links will be
dismantled. Lightspan and Smarterkids.com shall each own all data regarding
Lightspan Store users and the Page One clubs purchase program.
Smarterkids.com shall provide such data to Lightspan in an electronic
format in standard CSV or Microsoft Excel format. Smarterkids.com shall not
have any ownership or usage rights to Lightspan Internet Services
registrant information provided to it by Lightspan unless the customer data
came through the Lightspan Store. Neither party shall otherwise be entitled
to keep a copy of nor use any other registration data provided to it by the
other party during the Term.
16. Joint Promotional Activities.
The parties will work together to create Joint on/offline promotional programs
that will be mutually beneficial, including an initial press release. At least
[***] such programs shall be initiated during the first [***] of the Term. All
aspects of such programs, including, without limitation, the text of any press
release, will be subject to the mutual approval of the parties.
17. Indemnities
SmarterKids shall indemnify Lightspan against any third-party claim or loss with
respect to any aspect of SmarterKids operation of SmarterKids.com or the
Lightspan Store. Lightspan shall indemnify SmarterKids against any third-party
claim or loss with respect to Lightspan's operation of the Lightspan Internet
Services. The Long Form Agreement shall include fuller indemnification
provisions.
18. Confidentiality
Concurrently with the signature of this Agreement, the parties shall enter into
a mutual non-disclosure agreement. For purposes of such agreement, the terms of
this Agreement and all financial, traffic and other information shared by the
parties pursuant to the terms of this Agreement shall be deemed confidential
information.
*** Certain information on this page has been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
8
<PAGE> 9
If the forgoing is acceptable, please have two copies of this Agreement
executed where indicated below by an authorized representative of SmarterKids
and returned to us by telecopy and by express mail service.
Thanks for your assistance in putting this deal together. We are excited by
the opportunities it creates.
Very truly yours,
Merritt D. Farren
Senior Vice President, Corporate Development
ACCEPTED AND AGREED:
SmarterKids.com, Inc. Lightspan Partnership, Inc.
By: [ILLEGIBLE] By: [ILLEGIBLE]
----------------------- ---------------------
Its: CEO Its: SR VP & GM
----------------------- ---------------------
9
<PAGE> 1
EXHIBIT 10.34
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH
MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
WARRANT AGREEMENT
To Purchase Shares of the Series C Preferred Stock of
ACADEMIC SYSTEMS CORPORATION
Dated as of June 7, 1993
WHEREAS, Academic Systems Corporation, a California corporation (the
"Company") has entered into a Master Lease Agreement dated as of June 7, 1993,
Equipment Schedule No. VL-1, and related Summary Equipment Schedules (the
"Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in consideration
for such Leases, the right to purchase shares of its Series C Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Leases and in consideration of mutual covenants and agreements
contained herein, the Company and Warrantholder certify and agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE SERIES C PREFERRED STOCK.
For value received, the Company hereby grants to the Warrantholder, and the
Warrantholder is entitled, upon the terms and subject to the conditions
hereinafter set forth, to subscribe for and purchase, from the Company, 50,000
fully paid and non-assessable shares of the Company's Series C Preferred Stock
("Preferred Stock") at a purchase price of $.80 per share (the "Exercise
Price"). The number and purchase price of such shares are subject to adjustment
as provided in Section 8 hereof.
2. TERM OF THE WARRANT AGREEMENT.
(a) Except as otherwise provided for herein, the term of this Warrant
Agreement and the right to purchase Preferred Stock as granted herein shall
commence on the date of execution hereof and shall be exercisable for a period
of (i) ten (10) years after the date of execution hereof, or (ii) five (5) years
from the effective date of the Company's initial public offering, whichever is
longer.
(b) Acceleration of Term. Notwithstanding the term of this Warrant
Agreement fixed pursuant to Section 2(a) hereof and the provisions of Section
B(a) below, the right to purchase Preferred Stock as granted herein shall
expire, if not previously exercised, immediately upon either: (i) the closing of
the issuance and sale of shares of Common Stock of the Company in the Company's
first public offering of securities for its own account pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Initial Public Offering"), provided that the Preferred Stock issuable to
Warrantholder upon exercise hereof shall be included in such registration
statement only upon request of Warrantholder; or (ii) a merger of the Company
with or into another corporation provided that such merger results in a per
share value of $1.60 or more for Lessee's stock (the "Accelerating Merger").
The Company shall notify the Warrantholder if the Initial Public Offering
or Accelerating Merger is proposed, within a reasonable period of time prior to
the filing of a registration statement or a firm commitment with respect to an
Accelerating Merger, as applicable, and if the Company fails to deliver such
written notice within a reasonable period of time, anything to the contrary in
this Warrant Agreement notwithstanding, the rights to purchase will not expire
until ten (10) business days after the Company delivers such notice to the
Warrantholder. Such notice shall also contain such details of the proposed
Initial Public Offering or Accelerating Merger as are reasonable in the
circumstances and notice that this Warrant Agreement is expected to expire upon
closing thereof. If such closing does not take place, the Company shall promptly
notify the Warrantholder that such proposed transaction has been terminated.
Anything to the contrary in this Warrant
<PAGE> 2
Agreement notwithstanding, the Warrantholder may rescind any exercise of its
purchase rights promptly after such notice of termination of the proposed
transaction if the exercise of Warrants occurred after the Company notified the
Warrantholder that the Initial Public Offering or Accelerating Merger was
proposed or if the exercise were otherwise precipitated by such proposed Initial
Public Offering or Accelerating Merger. In event of such rescission, the
Warrants will continue to be exercisable on the same terms and conditions.
3. EXERCISE OF THE PURCHASE RIGHTS.
The purchase rights set forth in this Warrant Agreement are exercisable by
the Warrantholder, in whole or in part, at any time, or from time to time,
prior to the expiration of the term set forth in Section 2 above, by tendering
to the Company at its principal office a notice of exercise in the form
attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and
executed. Upon receipt of the Notice of Exercise and the payment of the
purchase price in accordance with the terms set forth below, the Company shall
issue to the Warrantholder a certificate for the number of shares of Preferred
Stock purchased and shall execute the Notice of Exercise indicating the number
of shares which remain subject to future purchases, if any.
Notwithstanding anything to the contrary contained in Section 2 above or
this Section 3, the Warrantholder shall either (i) exercise all outstanding
warrants by paying to the Company, by cash or check, an amount equal to the
aggregate Warrant Price of the shares being purchased, or (ii) receive shares
equal to the value (as determined below) of this Warrant by surrender of the
Warrant at the principal office of the Company together with notice of such
election in which event the Company shall issue to the Warrantholder a number
of shares of Preferred computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Preferred to be issued to the
Warrantholder.
Y = the number of shares of Preferred under this Warrant.
A = the fair market value of one share of Common.
B = Exercise Price.
As used herein, current fair market value of Common Stock shall mean with
respect to each share of Common Stock the average of the closing prices of the
Company's Common Stock sold on all securities exchanges on which the Common
Stock may at the time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day the Common Stock is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 p.m., New York City time, or, if on any day the
Common Stock is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked price on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which the current fair market value of Common Stock
is being determined and the 20 consecutive business days prior to such day. If
at any time the Common Stock is not listed on any securities exchange or quoted
in the NASDAQ System or the over-the-counter market, the current fair market
value of Preferred Stock shall be the highest price per share which the Company
could obtain from a willing buyer (not a current employee or director) for
shares of Preferred Stock sold by the Company, from authorized but unissued
shares, as determined in good faith by the Board of Directors of the Company,
unless (i) the Company shall become subject to a merger, acquisition or other
consolidation pursuant to which the Company is not the surviving party, in
which case the current fair market value of the Preferred Stock shall be deemed
to be the value received by the holders of the Company's Series C Preferred
Stock for each share of Series C Preferred Stock (or Common Stock if all such
shares have been converted into Common Stock) pursuant to the Company's
acquisition; or (ii) the Warrantholder shall purchase such shares in
conjunction with the initial underwritten public offering of the Company's
Common Stock pursuant to a registration statement filed under
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<PAGE> 3
the Securities Act of 1933, as amended (the "1933 Act") in which case, the fair
market value of the shares of stock subject to this Warrant shall be the price
at which all registered shares are sold to the public in such offering.
4. RESERVATION OF SHARES.
(a) Authorization and Reservation of Shares. During the term of this
Warrant Agreement, the Company will at all times have authorized and reserved a
sufficient number of shares of its Preferred Stock to provide for the exercise
of the rights to purchase Preferred Stock as provided for herein.
(b) Registration or Listing. If any shares of Preferred Stock required to
be reserved for purposes of exercise of the Warrant Agreement hereunder by
Warrantholder require registration with or approval of any governmental
authority under any Federal or State law (other than any registration under the
1933 Act, as then in effect, or any similar Federal statute then enforced, or
any state securities law, required by reason of any transfer involved in such
conversion), or listing on any domestic securities exchange, before such shares
may be issued upon conversion, the Company will, at its expense and as
expeditiously as possible, use its best efforts to cause such shares to be duly
registered, listed or approved for listing on such domestic securities exchange,
as the case may be.
5. NO FRACTIONAL SHARES OR SCRIP.
This Warrant may only be exercised for a whole number of shares of
Preferred Stock. In the event that, pursuant to Section 8 below, this Warrant is
exercisable for some other security, then no fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of such fractional shares, the Company shall make a cash
payment therefor upon the basis of the Exercise Price then in effect,
aggregating for each Warrantholder all fractional shares and paying cash only
for any fractional share remaining after such aggregation.
6. NO RIGHTS AS SHAREHOLDERS.
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a shareholder of the Company prior to the exercise of
the Warrantholder's rights to purchase Preferred Stock as provided for herein.
7. WARRANTHOLDER REGISTRY.
The Company shall maintain a registry showing the name and address of the
registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS.
The purchase price per share and the number of shares of Preferred Stock
purchasable hereunder are subject to adjustment from time to time, as follows:
(a) Merger and Sale of Assets. Subject in all respects to Section 2(b)
above, if at any time there shall be a capital reorganization of the shares of
the Company's stock (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), or a merger or
consolidation of the Company with or into another corporation when the Company
is not the surviving corporation, or the sale of all or substantially all of the
Company's properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, lawful provision shall be made so
that the Warrantholder shall thereafter be entitled to receive upon exercise of
its rights to purchase Preferred Stock, the number of shares of Preferred Stock
or other securities of the successor corporation resulting from such merger or
consolidation, to which a holder of the Preferred Stock deliverable upon
exercise of the right to purchase Preferred Stock hereunder would have been
entitled in such capital reorganization, merger, consolidation or sale if the
right to purchase such Preferred Stock hereunder had been exercised immediately
prior to such capital reorganization,
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<PAGE> 4
merger, consolidation or sale. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant Agreement with respect to the
rights and interest of the Warrantholder after the reorganization, merger,
consolidation or sale to the end that the provisions of this Warrant Agreement
(including adjustments of the Exercise Price and number of shares of Preferred
Stock purchasable pursuant to the terms and conditions of this Warrant
Agreement) shall be applicable after that event, as near as reasonably may be,
in relation to any shares deliverable after that event upon the exercise of the
Warrantholder's rights to purchase Preferred Stock pursuant to this Warrant
Agreement.
(b) Reclassification of Shares. If the Company at any time shall, by
combination, reclassification, exchange, conversion or subdivision of
securities or otherwise, change, or if the Series C Preferred is converted into
Common Stock pursuant to the Company's Amended and Restated Articles of
Incorporation, any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of
any other class or classes, this Warrant Agreement shall thereafter represent
the right to acquire such number and kind of securities as would have been
issuable as the result of such change with respect to the securities which were
subject to the purchase rights under this Warrant Agreement immediately prior
to such combination, reclassification, exchange, subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any time shall
combine or subdivide its Preferred Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a dividend
payable in, or make any other distribution (except any distribution
specifically provided for in the foregoing subsections (a) or (b)) of the
Company's stock, then the Exercise Price shall be adjusted, from and after the
date of determination of stockholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Exercise Price in
effect immediately prior to such date of determination by a fraction (i) the
numerator of which shall be the total number of all shares of the Company's
stock outstanding immediately prior to such dividend or distribution, and (ii)
the denominator of which shall be the total number of all shares of the
Company's stock outstanding immediately after such dividend or distribution.
The Warrantholder shall thereafter be entitled to purchase, at the Exercise
Price resulting from such adjustment, the number of shares of Preferred Stock
(calculated to the nearest whole share) obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of shares of
Preferred Stock issuable upon the exercise hereof immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting
from such adjustment.
(e) Right to Purchase Additional Stock. If, for any reason, the total
Warrantholder's cost of equipment leased pursuant to the Leases should exceed
$400,000.00, Warrantholder shall have the right to purchase from the Company,
at the Exercise Price per share specified in Section 1 (which price may be
subject to adjustment from time to time as provided for in this Section 8), an
additional number of shares, which number shall be determined by (i)
multiplying the amount by which the Warrantholder's total equipment cost
exceeds $400,000.00 by 10%, and (ii) dividing the product thereof by the
Exercise Price per share referenced above.
(f) Notice of Adjustments. In the event that: (i) the Company shall
declare any dividend or distribution upon its stock, whether in cash, property,
stock or other securities; (ii) the Company shall offer for subscription prorata
to the holders of any class of its Preferred or other convertible stock any
additional shares of stock of any class or other rights, then the Company shall
send to the Warrantholder written notice of such event within ten (10) days
thereafter; (iii) there shall be any capital reorganization, reclassification,
consolidation, merger or sale of all or substantially all of the Company's
assets; or (iv) there shall be any voluntary or involuntary dissolution,
liquidation or winding up of the Company; then, in connection with each such
event, the Company shall send to the Warrantholder at least ten (10) days prior
written notice of such event.
Each such written notice shall set forth, in reasonable detail, (i) the
event requiring the adjustment, (ii) the amount of the adjustment, (iii) the
method by which such adjustment was calculated, (iv) the Exercise Price, and
(v) the number of shares subject to purchase hereunder after giving effect to
such adjustment, and shall
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<PAGE> 5
be given by first class mail, postage prepaid, addressed to the Warrantholder,
at the address as shown on the books of the Company.
(g) Registration and Listing. The Company will take all such actions as
may be necessary to assure that all shares of Preferred Stock issuable pursuant
to this Warrant Agreement by Warrantholder may be so issued without violation
of any applicable law or regulation or any requirements of any domestic stock
exchange (except for official notice of issuance, which will be immediately
transmitted by the Company upon issuance) upon which shares of Preferred Stock
or other shares of the same class may be listed. The Company will not take any
action which will result in any adjustment of the number of shares of Preferred
Stock issuable upon exercise of this Warrant Agreement if the total number of
shares of Preferred Stock issuable after such action upon exercise of the
Warrant Agreement then outstanding, together with the total number of shares of
Preferred Stock then outstanding, would exceed the total number of shares of
Preferred Stock then authorized and not reserved for any purpose other than the
purpose of issue upon exercise of the Warrant Agreement.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
Subject in all respect to the Schedule of Exceptions attached hereto as
Schedule 1, the Company makes the following representations and warranties:
(a) Reservation of Preferred Stock. The Preferred Stock issuable upon
exercise of the Warrantholder's rights has been duly and validly reserved and,
when issued in accordance with the provisions of this Warrant Agreement, will
be validly issued, fully paid and non-assessable, and will be free of any
taxes, liens, charges or encumbrances of any nature whatsoever, excepting those
liens, charges or encumbrances caused or permitted to be caused by the
Warrantholder, provided, however, that the Preferred Stock issuable pursuant to
this Warrant Agreement may be subject to restrictions on transfer under state
and/or Federal securities laws. The Company has made available to the
Warrantholder true, correct and complete copies of its Amended and Restated
Articles of Incorporation and By-Laws, as amended, and minutes of all Board of
Directors (including all committees of the Board of Directors, if any) and
Shareholder meetings, if any, from May 5, 1992 through April 28, 1993. The
issuance of certificates for shares of Preferred Stock upon exercise of the
Warrant Agreement shall be made without charge to the Warrantholder for any
issuance tax in respect thereof, or other cost incurred by the Company in
connection with such exercise and the related issuance of shares of Preferred
Stock; provided that the Company shall not be required to pay any tax which may
be payable in respect of any transfer involved and the issuance and delivery of
any certificate in a name other than that of the Warrantholder. Subject to the
terms of the legend at the top of the first page of this Warrant Agreement and
applicable securities law, the Company will not close its books against the
transfer of the Warrant Agreement or of any share of Preferred Stock issued or
issuable upon exercise of the Warrant and any agreement in any manner which
interferes with the timely exercise of the Warrant.
(b) Due Authority. The execution and delivery by the Company of the
Leases, and this Warrant Agreement and the performance of all obligations of
the Company thereunder and hereunder, including the issuance to Warrantholder
of the right to acquire the shares of Preferred Stock set forth in Section 1
above (which number of shares may be from time to time adjusted pursuant to the
terms of Section 8 above) have been duly authorized by all necessary corporate
action on the part of the Company, and the Leases and this Warrant Agreement
are not inconsistent with the Company's Amended and Restated Articles of
Incorporation or By-Laws, do not contravene any law or governmental rule,
regulation or order applicable to it, do not and will not contravene any
provision of, or constitute a default under, any indenture, mortgage, contract
or other instrument to which it is a party or by which it is bound, and the
Leases and this Warrant Agreement constitute legal, valid and binding
agreements of the Company, enforceable in accordance with their respective
terms, subject to the effect of applicable bankruptcy and other similar laws
affecting the rights of creditors generally and rules of law concerning
equitable remedies.
(c) Consents and Approvals. No consent or approval of, giving of notice
to, registration with, or taking of any other action in respect of any state,
Federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Company of its obligations under
this Warrant Agreement, except, if deemed appropriate by the Company, for the
filing of notices pursuant to Regulation D
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<PAGE> 6
under the 1933 Act and Section 25102(f) of the California Corporate Securities
Law, which filings will be effective by the time required thereby.
(d) Litigation. Thee are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against or
affecting the Company in any court or before any governmental commission, board
or authority which, if adversely determined, will have a material adverse
effect on the ability of the Company to perform its obligations under the
Leases and this Warrant Agreement.
(e) Subsidiaries or Affiliates. The Company has no subsidiaries or
affiliated companies and does not otherwise own or control, directly or
indirectly, any other corporation, association or business entity.
(f) Issued Securities. All issued and outstanding shares of Common stock,
Preferred Stock or any other securities of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. All outstanding shares
of Common Stock, Preferred Stock and any other securities were issued in full
compliance with all Federal and state securities laws. In addition:
(i) The authorized capital of the Company consists of (A) 15,000,000
shares of Common Stock, of which 3,870,000 shares are issued outstanding, and
(b) 7,233,107 shares of preferred stock, of which 6,983,107 shares are issued
and outstanding and are convertible into 6,983,107 shares of Common Stock at the
average price of $.73 per share.
(ii) The Company has reserved (A) 1,880,000 shares of Common Stock for
issuance under its 1992 Stock Option Plan, under which 420,000 options are
outstanding at an average price of $0.01 per share, and (B) 0 shares of Common
Stock for issuance under its Incentive Stock Option Plan, under which 0 options
are outstanding at an average price of $0 per share. There are no other options,
warrants, conversion privileges or other rights presently outstanding to
purchase or otherwise acquire any authorized but unissued shares of the
Company's capital stock or other securities of the Company.
(iii) In accordance with the Company's Amended and Restated Articles
of Incorporation, no shareholder of the Company has preemptive rights to
purchase new issuances of the Company's capital stock.
(g) Financial Statements. The Company has delivered to the Warrantholder
its consolidated financial statements for its fiscal year ended June 30, 1992,
together with the report thereon of its independent public accountants, if any,
and its unaudited Balance Sheet and Statement of Operations for the one month
period ending February 28, 1993 (the "Financial Statements"). The Financial
Statements are complete and correct in all material respects and have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated. The condition and operating
results of the Company as of the dates and during the periods indicated, as
reflected therein, are true and correct in all material aspects, subject as to
the Balance Sheet and Statement of Income for the one month period then ending
February 28, 1993 to normal year-end audit adjustments. Since February 28, 1993,
there has been no change in the assets, liabilities, financial condition or
operations of the Company from that reflected in the Financial Statements other
than changes in the ordinary course of business which have not been,
individually or in the aggregate, materially adverse.
The Company shall deliver to the Warrantholder (i) within one hundred
twenty (120) days after the end of the Company's fiscal year, the Statement of
Operations for such fiscal year, a balance sheet of the Company as of the end of
such year and consolidated statement of cash flows for such year, which year-end
financial reports shall be in reasonable detail and certified by independent
public accountants of nationally recognized standing selected by the Company,
and (ii) within forty-five (45) days after the end of each fiscal quarter other
than the last fiscal quarter, unaudited statements of operations and a balance
sheet as of the end of such quarter.
(h) Contingent and Absolute Liabilities. The Company has no material
liabilities or obligations, absolute or contingent except the liabilities and
obligations of the Company as set forth in the Financial Statements and
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<PAGE> 7
liabilities and obligations which have occurred in the ordinary course of
business, and which have not been materially adverse.
(i) Licenses, Patents and Copyrights. To the best of the Company's
knowledge, the Company owns, possesses, has access to, or can become licensed
on reasonable terms under, all patents, patent applications, trademarks, trade
names, inventions, franchises, licenses, permits, computer software and
copyrights necessary for the operation of its business as now conducted, with
no known infringement of, or conflict with, the rights of others.
(j) Employee Contracts. To the best of the Company's knowledge, no
employee of the Company is in violation of any material term of any employment
contract, patent disclosure agreement or any other contract or agreement
relating to the relationship of any such employee with the Company or any prior
employer because of the nature of the business conducted by the Company.
(k) Insurance. The Company has in full force and effect insurance
policies, insuring the Company and its property and business against such
losses and risks, and in such amounts, as are customary for corporations
engaged in a similar business and similarly situated and as otherwise may be
required pursuant to the terms of any other contract or agreement.
(l) Other Commitments to Register Securities. Except as set forth in the
Warrant Agreement, the Company is not, pursuant to the terms of any other
agreement currently in existence, under any obligation to register under the
1933 Act, any of its presently outstanding securities or any of its
securities which may hereafter be issued.
(m) Exempt Transaction. Subject to the accuracy of the Warrantholder's
representations in Section 10 hereof, the issuance of the Preferred Stock upon
exercise of the Warrantholder's right to purchase such Preferred Stock will
constitute transactions exempt from (i) the registration requirements of
Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the
qualification of the California Corporate Securities Law, in reliance upon
Section 25102(f) thereof.
(n) Compliance with Rule 144. At the written request of the Warrantholder,
who proposes to sell Preferred Stock issuable upon the exercise of the Warrant
in compliance with Rule 144 promulgated by the Securities and Exchange
Commission under the 1933 Act, the Company shall furnish to the Warrantholder,
within ten days after receipt of such request, a written statement confirming
the Company's compliance with the filing requirements of the Securities and
Exchange Commission as set forth in such Rule, as such Rule may be amended from
time to time.
(o) No Events of Default, Material Contracts. All material contracts,
agreements and instruments to which the Company is a party are in full force and
effect in all material respects, and are valid, binding and enforceable by the
Company in accordance with their respective terms, subject to the effect of any
applicable bankruptcy and other similar laws affecting the rights of creditors
generally, and rules of law concerning equitable remedies and no event of
default, and no event which, with the passing of the time or the giving of
notice, or both, would constitute an event of default has occurred or is
continuing under any such contract, agreement of instrument.
(p) Brokers' Fees. The Company has not incurred, and will not incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Warrant Agreement or
any other transaction contemplated thereby.
(q) Untrue, Misleading Statements. No representation or warranty of the
Company contained in the Leases, and this Warrant Agreement or any certificate
or exhibit furnished or to be furnished to Warrantholder pursuant thereto or in
connection with the transaction contemplated thereby (when read together)
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained therein not misleading.
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<PAGE> 8
(r) Indebtedness to Employees and Shareholders. The Company is not
indebted to any employee, shareholder, officer or director of the Company, and
no such employee, shareholder, officer or director is indebted to the Company.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
This Warrant Agreement has been entered into by the Company in reliance
upon the following representations and covenants of the Warrantholder, which by
its execution hereof the Warrantholder hereby confirms:
(a) Investment Purpose. The right to acquire Preferred Stock or the
Preferred Stock issuable upon exercise of the Warrantholder's rights contained
herein will be acquired for investment and not with a view to the sale or
distribution of any part thereof, and the Warrantholder has no present
intention of selling or engaging in any public distribution of the same except
pursuant to a registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the Preferred
Stock issuable upon exercise of the Warrantholder's rights contained herein is
not registered under the 1933 Act or qualified under applicable state
securities laws on the ground that the issuance contemplated by this Warrant
Agreement will be exempt from the registration and qualifications requirements
thereof, and (i) that the Company's reliance on such exemption is predicated on
the representations set forth in this Section 10.
(c) Disposition of Warrantholder's Rights. In no event will the
Warrantholder make a disposition of any of its rights to acquire Preferred
Stock or Preferred Stock issuable upon exercise of such rights unless and until
(i) it shall have notified the Company of the proposed disposition, and (ii) if
requested by the Company, it shall have furnished the Company with an opinion
of counsel (which counsel may either be inside or outside counsel to the
Warrantholder) satisfactory to the Company and its counsel to the effect that
(A) appropriate action necessary for compliance with the 1933 Act has been
taken, or (B) an exemption from the registration requirements of the 1933 Act
is available. Notwithstanding the foregoing, the restrictions imposed upon the
transferability of any of its rights to acquire Preferred Stock or Preferred
Stock issuable on the exercise of such rights do not apply to transfers from
the beneficial owner of any of the aforementioned securities to its nominee or
from such nominee to its beneficial owner, and shall terminate as to any
particular share of Preferred Stock when (1) such security shall have been
effectively registered under the 1933 Act and sold by the holder thereof in
accordance with such registration or (2) such security shall have been sold
without registration in compliance with Rule 144 under the 1933 Act, or (3) a
letter shall have been issued to the Warrantholder at its request by the staff
of the Securities and Exchange Commission or a ruling shall have been issued to
the Warrantholder at its request by such Commission stating that no action
shall be recommended by such staff or taken by such Commission, as the case may
be, if such security is transferred without registration under the 1933 Act in
accordance with the conditions set forth in such letter or ruling and such
letter or ruling specifies that no subsequent restrictions on transfer are
required. Whenever the restrictions imposed hereunder shall terminate, as
hereinabove provided, the Warrantholder or holder of a share of Preferred Stock
then outstanding as to which such restrictions have terminated shall be
entitled to receive from the Company, without expense to such holder, one or
more new certificates for the Warrant or for such shares of Preferred Stock not
bearing any restrictive legend.
(d) Financial Risk. The Warrantholder has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment and has the ability to bear the economic risks of its
investment.
(e) Risk of No Registration. The Warrantholder understands that if the
Company does not register with the Securities and Exchange Commission pursuant
to Section 12 of the 1933 Act, or file reports pursuant to Section 15(d), of
the Securities Exchange Act of 1934 (the "1934 Act"), or if a registration
statement covering the securities under the 1933 Act is not in effect when it
desires to sell (i) the rights to purchase Preferred Stock pursuant to this
Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the
right to purchase, it may be required to hold such securities for an indefinite
period. The Warrantholder also understands that any sale of its rights of the
Warrantholder to purchase Preferred Stock or Preferred Stock
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<PAGE> 9
which might be made by it in reliance upon Rule 144 under the 1933 Act may be
made only in accordance with the terms and conditions of that Rule.
11. REQUESTS FOR REGISTRATION.
Warrantholder and Company agree that all shares of Common Stock issuable
upon conversion of Preferred Stock subject to the Warrant Agreement shall have
the same registration rights and be subject to the same terms and conditions
with respect to the registration and sale of such stock as possessed by the
Series C Preferred Shareholders as provided for in the Investors' Rights
Agreement dated February 24, 1993, by and among the Company and those certain
Purchasers identified therein, attached hereto as Exhibit II.
12. TRANSFERS.
Subject to the terms and conditions contained in Section 10 hereof, as well
as applicable resale restrictions under the Federal and State securities laws,
this Warrant Agreement and all rights hereunder are transferable in whole or in
part by the Warrantholder and any successor transferee, provided, however, that
in no event shall the number of transfers of the rights and interests in all of
the Warrants exceed three (3) transfers. The transfer shall be recorded on the
books of the Company upon receipt by the Company of a notice of transfer in the
form attached hereto as Exhibit III (the "Transfer Notice"), at its principal
offices and the payment to the Company of all transfer taxes and other
governmental charges imposed on such transfer.
13. MISCELLANEOUS.
(a) Effective Date. The provisions of this Warrant Agreement shall be
construed and shall be given effect in all respects as if it had been executed
and delivered by the Company on the date hereof. This Warrant Agreement shall be
binding upon any successors or assigns of the Company.
(b) Attorneys' Fees. In any litigation, arbitration or court proceeding
between the Company and the Warrantholder relating hereto, the prevailing party
shall be entitled to attorneys' fees and expenses and all costs of proceedings
incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by and
construed for all purposes under and in accordance with the laws of the State of
California.
(d) Counterparts. This Warrant Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Titles and Subtitles. The titles of the paragraphs and subparagraphs of
this Warrant Agreement are for convenience and are not to be considered in
construing this Agreement.
(f) Notices. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail, by registered or certified mail, addressed
(i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018,
attention: James Labe, Venture Leasing Director, cc: Legal Department, and (ii)
to the Company at 444 Castro Street, Suite 1200, Mountain View, California 94041
attn.: Chief Financial Officer, or at such other address as any such party may
subsequently designate by written notice to the other party.
(g) Specific Performance. The Company recognizes and agrees that the
Warrantholder will not have an adequate remedy if the Company fails to comply
with this Agreement and that damages will not be readily ascertainable, and the
Company expressly agrees that, in the event of such failure, it shall not oppose
an application by the Warrantholder or any other person entitled to the benefit
of this Agreement requiring specific performance of any or all provisions hereof
or enjoining the Company from continuing to commit any such breach of this
Agreement.
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<PAGE> 10
(h) Survival. The representations, warranties, covenants and conditions of
the respective parties contained herein or made pursuant to this Warrant
Agreement shall survive the execution and delivery of this Warrant Agreement.
(i) Severability. In the event any one or more of the provisions of this
Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
(j) Amendments. Any provision of this Warrant Agreement may be amended by a
written instrument signed by the Company and by the Warrantholder.
(k) Additional Documents. The Company, upon execution of this Warrant
Agreement, shall provide the Warrantholder with certified resolutions and an
opinion from the Company's counsel addressed to the Warrantholder with respect
to the representations, warranties and covenants set forth in subparagraphs (a)
through (f) and subparagraphs (l), (m) and (o) of Section 9 above and shall also
supply such other documents as the Warrantholder may from time to time
reasonably request.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement
to be executed by its officers thereunto duly authorized.
Company:
ACADEMIC SYSTEMS CORPORATION
Dated June 7, 1993 By: /s/ [SIGNATURE ILLEGIBLE]
------ -- -------------------------------
Title: VP & CFO
----------------------------
Warrantholder:
COMDISCO, INC.
By: /s/ [SIGNATURE ILLEGIBLE]
-------------------------------
Title: [TITLE ILLEGIBLE]
-----------------------------
6-10-93
<PAGE> 11
Exhibit I
NOTICE OF EXERCISE
To: ____________________
(1) The undersigned Warrantholder hereby elects to purchase ______ shares of the
Preferred Stock (or such other number and/or type of security as may be
provided pursuant to Section 8 of the Warrant Agreement) of ACADEMIC SYSTEMS
CORPORATION pursuant to the terms of the Warrant Agreement dated the 7th day
of June, 1993 (the "Warrant Agreement") between ACADEMIC SYSTEMS CORPORATION
and the Warrantholder, and tenders herewith payment of the purchase price
for such shares in full, together with all applicable transfer taxes, if
any.
(2) In exercising its rights to purchase the Preferred Stock of ACADEMIC SYSTEMS
CORPORATION, the undersigned hereby confirms and acknowledges the investment
representations and warranties made in Section 10 of the Warrant Agreement.
(3) Please issue a certificate or certificates representing said shares of
Preferred Stock in the name of the undersigned or in such other name as is
specified below.
----------------------------------------
(Name)
----------------------------------------
(Address)
Warrantholder: COMDISCO, INC.
By:
----------------------------------
Title:
----------------------------------
Date:
----------------------------------
-11-
<PAGE> 12
ACKNOWLEDGEMENT OF EXERCISE
The undersigned __________________________, hereby acknowledges receipt of
the "Notice of Exercise" from Comdisco, Inc., to purchase _____ shares of the
Preferred Stock, of ACADEMIC SYSTEMS CORPORATION, pursuant to the terms of the
Warrant Agreement, and further acknowledges that ______ shares remain subject
to purchase under the terms of the Warrant Agreement.
Company:
By:
---------------------------------
Title:
---------------------------------
Date:
---------------------------------
-12-
<PAGE> 13
Exhibit III
TRANSFER NOTICE
(To transfer or assign the foregoing Warrant Agreement execute this form
and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights
evidenced thereby are hereby transferred and assigned to
------------------------
- --------------------------------------------------------------------------------
(Please Print)
whose address is
----------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated:
----------------------------------
Holder's Signature:
---------------------
----------------------------------------
Signature Guaranteed:
-------------------
NOTE: The signature to this Transfer Notice must correspond with the name as it
appears on the face of the Warrant Agreement, without alteration or
enlargement or any change whatever. Officers of corporations and those
acting in a fiduciary or other representative capacity should file proper
evidence of authority to assign the foregoing Warrant Agreement.
-13-
<PAGE> 1
EXHIBIT 10.35
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY
OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH ANY STATE SECURITIES
AUTHORITIES. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE COMPANY
AND LEGAL COUNSEL FOR THE COMPANY.
Void after March 25, 2004
THE LIGHTSPAN PARTNERSHIP, INC.
SERIES E PREFERRED STOCK PURCHASE WARRANT
----------
THIS CERTIFIES THAT, for value received, _______________ and its registered
assigns (hereinafter called the "Holder") is entitled to purchase from The
Lightspan Partnership, Inc. (the "Company"), at any time prior to 5:00 p.m.
Pacific Standard Time on the Expiration Date, as such term is defined in Section
1 hereof, _________ shares of the Company's Series E Preferred Stock ("Warrant
Shares").
The Exercise Price per share of this warrant shall be $5.00. This Warrant
may be exercised in whole or in part at the option of the Holder.
1. Term. This Warrant shall be exercisable through March 25, 2004 (the
"Expiration Date").
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the Holder, in whole or in part, by:
2.1 the surrender of this Warrant (with the notice of exercise form
attached hereto as Attachment A and the Investment Representation Statement
attached hereto as Attachment B duly executed) at the principal office of the
Company; and
<PAGE> 2
2.2 the payment to the Company, by check or wire, of an amount
equal to the then applicable Exercise Price per share multiplied by the number
of Warrant Shares then being purchased.
If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant, execute and deliver a new Warrant evidencing the
rights of the Holder thereof to purchase the balance of the Warrant Shares
purchasable hereunder. Upon receipt by the Company of this Warrant and such
notice of exercise, together with, if applicable, the aggregate Exercise Price,
at such office, or by the stock transfer agent or warrant agent of the Company
at its office, the Holder shall be deemed to be the holder of record of the
applicable Warrant Shares, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such Warrant
Shares shall not then be actually delivered to the Holder. The Company shall pay
any and all documentary stamp or similar issue or transfer taxes payable in
respect of the issue or delivery of the Warrant Shares.
2.3 Net Exercise. In addition to and without limiting the rights
of the Holder under the terms of this Warrant, the Holder may elect to convert
this Warrant or any portion thereof (the "Conversion Right") into Warrant
Shares, the aggregate value of which Warrant Shares shall be equal to the value
of this Warrant or the portion thereof being converted. The Conversion Right may
be exercised by the Holder by surrender of this Warrant at the principal office
of the Company together with notice of the Holder's intention to exercise the
Conversion Right, in which event the Company shall issue to the Holder a number
of Warrant Shares computed using the following formula:
Y(A - B)
X = ------------------
A
Where:
X - The Number of Warrant Shares to be issued to the holder upon
exercise of Conversion Right.
Y - The number of Warrant Shares issuable under this Warrant.
A - The fair market value of one Warrant Share, as determined in
good faith by the board of directors of the Company, as at the
time the Conversion Right is exercised pursuant to this
Section 2.
B - Exercise Price (as adjusted to the date of such calculations).
3. Stock Fully Paid; Reservation of Warrant Shares. All shares of stock
which may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance, be fully
<PAGE> 3
paid and nonassessable, and free from all taxes, liens and charges with respect
to the issue thereof. During the period within which the rights represented by
this Warrant may be exercised, the Company will at all times have authorized
and reserved for the purpose of issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its stock to
provide for the exercise of the rights represented by this Warrant. In the
event that there is an insufficient number of Warrant Shares reserved for
issuance pursuant to the exercise of this Warrant, the Company will take
appropriate action to authorize an increase in the capital stock to allow for
such issuance or similar issuance acceptable to the Holder.
4. Adjustment of Exercise Price and Number of Warrant Shares. The number
and kind of Warrant Shares purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
4.1 Reclassification; Merger. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value,
or from no par value to par value, or as a result of a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise of
this Warrant), or any other corporate reorganization in which the Company shall
not be the continuing or surviving entity of such consolidation, merger or
reorganization, or any transaction in which in excess of 50% of the Company's
voting power is transferred, or any sale of all or substantially all of the
stock or assets of the Company, the Company shall, as condition precedent to
such transaction, execute a new Warrant or cause such successor or purchasing
corporation, as the case may be, to execute a new Warrant, providing that the
Holder shall have the right to exercise such new Warrant and upon such exercise
to receive, in lieu of each share of stock theretofore issuable upon exercise of
this Warrant, the kind and amount of shares of stock, other securities, money
and property receivable upon such reclassification, change, merger or
acquisition by a holder of one share of stock. Such new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to
the adjustments provided for in this Section 4. The provisions of this Section
4.1 shall similarly apply to successive reclassifications, changes, mergers,
and acquisitions.
4.2 Subdivisions or Combination of Warrant Shares. If the Company at
any time while this Warrant remains outstanding and unexpired shall subdivide
or combine its stock, the Exercise Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination.
4.3 Stock Dividends. If the Company at any time while this Warrant
is outstanding and unexpired shall pay a dividend with respect to stock payable
in, or make any other distribution with respect to stock (except any
distribution specifically provided for in the foregoing Sections 4.1 and 4.2)
of, stock, then the Exercise Price shall be adjusted, from and after the date
<PAGE> 4
of determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Exercise Price in
effect immediately prior to such date of determination by a fraction (1) the
numerator of which shall be the total number of shares of stock outstanding
immediately prior to such dividend or distribution, and (ii) the denominator of
which shall be the total number of shares of stock outstanding immediately
after such dividend or distribution.
4.4 Adjustment of Number of Warrant Shares. Upon each adjustment in
the Exercise Price, the number of shares of stock purchasable hereunder shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Warrant Shares purchasable immediately prior to such adjustment
in the Exercise Price by a fraction, the numerator of which shall be the
Exercise Price immediately prior to such adjustment and the denominator of
which shall be the Exercise Price immediately thereafter.
5. Fractional Warrant Shares. No fractional Warrant Shares will be
issued in connection with any exercise hereunder, but in lieu of such
fractional shares the Company shall make a cash payment therefor upon the basis
of the Exercise Price then in effect.
6. Compliance with Securities Act; Non-transferability of Warrant;
Disposition of Shares of Stock.
6.1 Compliance with Securities Act. The Holder, by acceptance
hereof, agrees that this Warrant and the Warrant Shares are being acquired for
investment and that he will not offer, sell or otherwise dispose of this
Warrant or any Warrant Shares except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended (the "Act"). Upon
exercise of this Warrant, the Holder hereof shall confirm in writing, in a form
of Attachment B, that the Warrant Shares so purchased are being acquired for
investment and not with a view toward distribution or resale. In addition, the
Holder shall provide such additional information regarding such Holder's
financial and investment background as the Company may reasonably request. This
Warrant and all Warrant Shares (unless registered under the Act) shall be
stamped or imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION."
<PAGE> 5
6.2 Transferability of Warrant. This Warrant may not be transferred or
assigned in whole or in part without (i) the prior written consent of the
Company and (ii) compliance with applicable federal and state securities laws;
provided, however, that the Warrant may be transferred without the prior
written consent of the Company in the following transactions:
A transfer of the Warrant in whole by a Holder who is a natural
person during such Holder's lifetime or on death by will or intestacy to such
Holder's immediate family or to any custodian or trustee for the account of
such Holder or such Holder's immediate family. "Immediate family" as used
herein shall mean spouse, lineal descendant, father, mother, brother, or sister
of the Holder.
A transfer of the Warrant in whole to the Company or to any
shareholder of the Company.
A transfer of the Warrant in whole or in part to a person who, at the
time of such transfer, is or is an affiliate of an officer or director of the
Company.
A transfer of the Warrant in whole pursuant to and in accordance with
the terms of any merger, consolidation, reclassification of shares or capital
reorganization of the corporate shareholder or pursuant to a sale of all or
substantially all of the stock or assets of a corporate shareholder.
A transfer of the Warrant in whole to a parent, subsidiary or
affiliate of a Holder.
A transfer of the Warrant in whole by a Holder which is a limited or
general partnership to any of its partners or former partners.
6.3 Disposition of Warrant Shares. Upon exercise of the Warrant Shares,
the Holder will be entitled to any registration rights granted the other
holders of securities issued in the Next Financing. With respect to any offer,
sale or other disposition of any Warrant Shares prior to registration of such
shares, the Holder and each subsequent Holder of this Warrant agrees to give
written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such Holder's counsel, if
reasonably requested by the Company, to the effect that such offer, sale or
other disposition may be effected without registration or qualification (under
the Act as then in effect or any federal or state law then in effect) of such
Warrant Shares and indicating whether or not under the Act certificates for
such shares to be sold or otherwise disposed of require any restrictive legend
as to applicable restrictions on transferability in order to ensure compliance
with the Act; provided, however, that no such opinion of counsel or no action
letter shall be necessary for a transfer without consideration by a Holder
which is a partnership to a partner of such partnership, so long as such
transfer is made
<PAGE> 6
pursuant to the terms of the partnership agreement, or to the transfer by gift,
will or intestate succession by the Holder to his or her spouse or lineal
descendants or ancestors or any trust for the benefit of any of the foregoing if
the transferee agrees in writing to be subject to the terms hereof to the same
extent as if he/she were an original Holder hereunder. Notwithstanding the
foregoing, such Warrant Shares may be offered, sold or otherwise disposed of in
accordance with Rule 144.
7. Rights of Shareholders. No Holder of this Warrant shall be entitled to
vote or receive dividends or be deemed the holder of stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Holder of this Warrant, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant has been exercised and the Warrant Shares shall
have become deliverable, as provided herein.
8. Governing Law. The terms and conditions of this Warrant shall be
governed by and construed in accordance with California law.
9. Miscellaneous. The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof my be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the Company and the registered Holder. All notices and other communications from
the Company to the Holder shall be delivered by hand or mailed by first-class
registered or certified mail, postage prepaid, to the address furnished to the
Company in writing by the Holder.
THE LIGHTSPAN PARTNERSHIP, INC.
By:
--------------------------------------
John Kernan
Chief Executive Officer
<PAGE> 7
ATTACHMENT A
NOTICE OF EXERCISE
TO: The Lightspan Partnership, Inc.
1. The undersigned hereby elects to purchase _________ shares of stock of
The Lightspan Partnership, Inc. pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full,
together with all applicable transfer taxes, if any.
1. The undersigned hereby elects to convert the attached Warrant into
Warrant Shares in the manner specified in Section 2.3 of the Warrant. This
conversion is exercised with respect to ___________________________ of the
Shares covered by the Warrant.
[STRIKE PARAGRAPH ABOVE THAT DOES NOT APPLY.]
2. Please issue a certificate or certificates representing said shares of
stock in the name of the undersigned or in such other name as is specified
below:
Name: _______________________________
Address: ____________________________
____________________________
____________________________
3. The undersigned represents that the aforesaid shares of stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Attachment B.
__________________________________
WARRANTHOLDER
By: ______________________________
Title: ___________________________
Date: ________________________
<PAGE> 8
ATTACHMENT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
COMPANY : THE LIGHTSPAN PARTNERSHIP, INC.
SECURITY :
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities and underlying
stock (the "Securities"), I, the Purchaser, represent to the Company the
following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities, except as may be
required under an Investor Rights Agreement entered into by the Company. In
addition, I understand that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel for the Purchaser.
<PAGE> 9
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements
of rule 144 are not satisfied, registration under the Securities Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive,
the Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
that pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers
or sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
---------------------------------
WARRANTHOLDER
---------------------------------
(signature)
---------------------------------
(title)
Date:
----------------------------
<PAGE> 1
EXHIBIT 10.36
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. NO SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY
OR WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES
AND EXCHANGE COMMISSION.
THE SALE OF THESE SECURITIES HAS NOT BEEN QUALIFIED WITH ANY STATE SECURITIES
AUTHORITIES. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
THIS WARRANT MAY NOT BE EXERCISED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE
FEDERAL AND STATE SECURITIES LAWS TO THE REASONABLE SATISFACTION OF THE COMPANY
AND LEGAL COUNSEL FOR THE COMPANY.
Warrant D-13 Void after June 6, 2002
THE LIGHTSPAN PARTNERSHIP, INC.
SERIES D PREFERRED STOCK PURCHASED WARRANT
--------
THIS CERTIFIES THAT, for value received, SZ Investments, LLC and its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from The Lightspan Partnership, Inc. (the "Company"), at any time after the date
specified in Section 1 hereof and ending at 5:00 p.m. Pacific Standard Time on
the Expiration Date, as such term is defined in Section 1 hereof, Twenty-Six
Thousand Five Hundred Ninety-Five (26,595 shares of the Company's Series D
Preferred Stock (the "Warrant Shares"). The Exercise Price per share shall be
$3.76 (the "Warrant Price"). This Warrant may be exercised in whole or in part,
at the option of the Holder.
1. Term. This Warrant shall be exercisable immediately, and at any time
through June 6, 2002 (the "Expiration Date").
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the Holder, in Whole or in part, by:
<PAGE> 2
2.1 the surrender of this Warrant (with the notice of exercise
form attached hereto as Attachment A and the Investment Representation Statement
attached hereto as Attachment B duly executed) at the principal office of the
Company; and
2.2 the payment to the Company, by check or wire, of an amount
equal to the then applicable Warrant Price per share multiplied by the number of
Warrant Shares then being purchased.
If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant, execute and deliver a new Warrant evidencing the
rights of the Holder thereof to purchase the balance of the Warrant Shares
purchasable hereunder. Upon receipt by the Company of this Warrant and such
notice of exercise, together with, if applicable, the aggregate Warrant Price,
at such office, or by the stock transfer agent or warrant agent of the Company
at its office, the Holder shall be deemed to be the holder of record of the
applicable Warrant Shares, notwithstanding that the stock transfer books of the
Company shall then be closed or that certificates representing such Warrant
Shares shall not then be actually delivered to the Holder. The Company shall pay
any and all documentary stamp or similar issue or transfer taxes payable in
respect of the issue or delivery of the Warrant Shares.
2.3 Net Exercise. In addition to and without limiting the rights
of the Holder under the terms of this Warrant, the Holder may elect to convert
this Warrant or any portion thereof (the "Conversion Right") into Warrant
Shares, the aggregate value of which Warrant Shares shall be equal to the value
of this Warrant or the portion thereof being converted. The Conversion Right may
be exercised by the Holder by surrender of this Warrant at the principal office
of the Company together with notice of the Holder's intention to exercise the
Conversion Right, in which event the Company shall issue to the Holder a number
of Warrant Shares computed using the following formula:
Y(A - B)
X = ------------------
A
Where:
X - The Number of Warrant Shares to be issued to the holder upon
exercise of Conversion Right.
Y - The number of Warrant Shares issuable under this Warrant.
A - The fair market value of one Warrant Share, as determined in
good faith by the board of directors of the Company, as at the time the
Conversion Right is exercised pursuant to this Section 2.
B - Exercise Price (as adjusted to the date of such calculations).
- 2 -
<PAGE> 3
3. Stock Fully Paid; Reservation of Warrant Shares. All share of stock
which may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance, be fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized and reserved for the purpose of issue upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares
of its stock to provide for the exercise of the rights represented by this
Warrant. In the event that there is an insufficient number of Warrant Shares
reserved for issuance pursuant to the exercise of this Warrant, the Company will
take appropriate action to authorize an increase in the capital stock to allow
for such issuance or similar issuance acceptable to the Holder.
4. Adjustment of Warrant Price and Number of Warrant Shares. The number
and kind of Warrant Shares purchasable upon the exercise of this Warrant and
the Warrant Price shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
4.1 Reclassification; Merger. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any consolidation or merger of the Company with or into another
corporation (other than a merger with another corporation in which the Company
is a continuing corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or any
other corporate reorganization in which the Company shall not be the continuing
or surviving entity of such consolidation, merger or reorganization, or any
transaction in which in excess of 50% of the Company's voting power is
transferred, or any sale of all or substantially all of the stock or assets of
the Company, the Company shall, as condition precedent to such transaction,
execute a new Warrant or cause such successor or purchasing corporation, as the
case may be, to execute a new Warrant, providing that the Holder shall have the
right to exercise such new Warrant and upon such exercise to receive, in lieu of
each share of stock theretofore issuable upon exercise of this Warrant, the kind
and amount of shares of stock, other securities, money and property receivable
upon such reclassification, change, merger or acquisition by a holder of one
share of stock. Such new Warrant shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 4. The provisions of this Section 4.1 shall similarly apply to
successive reclassifications, changes, mergers, and acquisitions.
4.2 Subdivision or Combination of Warrant Shares. If the Company at
any time while this Warrant remains outstanding and unexpired shall subdivide
or combine its stock, the Warrant Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination.
-3-
<PAGE> 4
4.3 Stock Dividends. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend with respect to stock payable in,
or make any other distribution with respect to stock (except any distribution
specifically provided for in the foregoing Sections 4.1 and 4.2) of, stock, then
the Warrant Price shall be adjusted, from and after the date of determination of
shareholders entitled to receive such dividend or distribution, to that price
determined by multiplying the Warrant Price in effect immediately prior to such
date of determination by a fraction (i) the numerator of which shall be the
total number of shares of stock outstanding immediately prior to such dividend
or distribution, and (ii) the denominator of which shall be the total number of
shares or stock outstanding immediately after such dividend or distribution.
4.4 Adjustment of Number of Warrant Shares. Upon each adjustment in
the Warrant Price, the number of shares of stock purchasable hereunder shall be
adjusted, to the nearest whole share, to the product obtained by multiplying the
number of Warrant Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
5. Fractional Warrant Shares. No fractional Warrant Shares will be issued
in connection with any exercise hereunder, but in lieu of such fractional shares
the Company shall make a cash payment therefor upon the basis of the Warrant
Price then in effect.
6. Compliance with Securities Act; Non-transferability of Warrant;
Disposition of Shares of Stock.
6.1 Compliance with Securities Act. The Holder, by acceptance hereof,
agrees that this Warrant and the Warrant Shares are being acquired for
investment and that he will not offer, sell or otherwise dispose of this Warrant
or any Warrant Shares except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended (the "Act"). Upon exercise
of this Warrant, the Holder hereof shall confirm in writing, in a form of
Attachment B, that the Warrant Shares so purchased are being acquired for
investment and not with a view toward distribution or resale. In addition, the
Holder shall provide such additional information regarding such Holder's
financial and investment background as the Company may reasonably request. This
Warrant and all Warrant Shares (unless registered under the Act) shall be
stamped or imprinted with a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMPANY AND WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY
TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
- 4 -
<PAGE> 5
ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION."
6.2 Transferability of Warrant. This Warrant may not be transferred
or assigned in whole or in part without (i) the prior written consent of the
Company and (ii) compliance with applicable federal and state securities laws;
provided, however, that the Warrant may be transferred without the prior written
consent of the Company in the following transactions:
A transfer of the Warrant in whole by a Holder who is a natural
person during such Holder's lifetime or on death by will or intestacy to such
Holder's immediate family or to any custodian or trustee for the account of
such Holder or such Holder's immediate family. "Immediate family" as used herein
shall mean spouse, lineal descendant, father, mother, brother, or sister of the
Holder.
A transfer of the Warrant in whole to the Company or to any
shareholder of the Company.
A transfer of the Warrant in whole or in part to a person who,
at the time of such transfer, is or is an affiliate of an officer or director
of the Company.
A transfer of the Warrant in whole pursuant to and in accordance
with the terms of any merger, consolidation, reclassification of shares or
capital reorganization of the corporate shareholder or pursuant to a sale of
all or substantially all of the stock or assets of a corporate shareholder.
A transfer of the Warrant in whole to a parent, subsidiary or
affiliate of a Holder.
A transfer of the Warrant in whole by a Holder which is a
limited or general partnership to ay of its partners or former partners.
6.3 Disposition of Warrant Shares. Upon exercise of the Warrant
Shares, the Holder will be entitled to any registration rights granted the other
holders of Series D Preferred Stock. With respect to any offer, sale or other
disposition of any Warrant Shares prior to registration of such shares, the
Holder and each subsequent Holder of this Warrant agrees to give written notice
to the Company prior thereto, describing briefly the manner thereof, together
with a written opinion of such Holder's counsel, if reasonably requested by the
Company, to the effect that such offer, sale or other disposition may be
effected without registration or qualification (under the Act as then in effect
or any federal or state law then in effect) of such Warrant Shares and
indicating whether or not under the Act certificates for such shares to be sold
or otherwise disposed of require any restrictive legend as to applicable
restrictions on transferability in order to
- 5 -
<PAGE> 6
ensure compliance with the Act; provided, however, that no such opinion of
counsel or no action letter shall be necessary for a transfer without
consideration by a Holder which is a partnership to a partner of such
partnership, so long as such transfer is made pursuant to the terms of the
partnership agreement, or to the transfer by gift, will or intestate succession
by the Holder to his or her spouse or lineal descendants or ancestors or any
trust for the benefit of any of the foregoing if the transferee agrees in
writing to be subject to the terms hereof to the same extent as if he/she were
an original Holder hereunder. Notwithstanding the foregoing, such Warrant
Shares may be offered, sold or otherwise disposed of in accordance with Rule
144.
7. Rights of Shareholders. No Holder of this Warrant shall be entitled to
vote or receive dividends or be deemed the holder of stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Holder of this Warrant, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until this Warrant has been exercised and the Warrant Shares shall
have become deliverable, as provided herein.
8. Governing Law. The terms and conditions of this Warrant shall be
governed by and construed in accordance with California law.
9. Miscellaneous. The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the Company and the registered Holder. All notices and other communications from
the Company to the Holder shall be delivered by hand or mailed by first-class
registered or certified mail, postage prepaid, to the address furnished to the
Company in writing by the Holder.
THE LIGHTSPAN PARTNERSHIP, INC.
By: /s/ CARL ZEIGER
-----------------------------
Carl Zeiger
President
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<PAGE> 7
ATTACHMENT A
NOTICE OF EXERCISE
TO: The Lightspan Partnership, Inc.
1. The undersigned hereby elects to purchase _________ shares of stock of
The Lightspan Partnership, Inc. pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full,
together with all applicable transfer taxes, if any.
1. The undersigned hereby elects to convert the attached Warrant into
Warrant Shares in the manner specified in Section 2.3 of the Warrant. This
conversion is exercised with respect to ___________________________ of the
Shares covered by the Warrant.
[STRIKE PARAGRAPH ABOVE THAT DOES NOT APPLY.]
2. Please issue a certificate or certificates representing said shares of
stock in the name of the undersigned or in such other name as is specified
below:
Name: _______________________________
Address: ____________________________
____________________________
____________________________
3. The undersigned represents that the aforesaid shares of stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Attachment B.
__________________________________
WARRANTHOLDER
By: ______________________________
Title: ___________________________
Date: ________________________
<PAGE> 8
ATTACHMENT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
COMPANY : THE LIGHTSPAN PARTNERSHIP, INC.
SECURITY :
AMOUNT :
DATE :
In connection with the purchase of the above-listed securities and underlying
stock (the "Securities"), I, the Purchaser, represent to the Company the
following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for a minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is otherwise available. Moreover, I understand that the
Company is under no obligation to register the Securities. In addition, I
understand that the certificate evidencing the Securities will be imprinted with
a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
<PAGE> 9
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale.
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required; and
that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the
SEC has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
_________________________________
WARRANTHOLDER
_________________________________
(signature)
_________________________________
(title)
Date:__________________, ________
<PAGE> 1
EXHIBIT 10.37
ORACLE
RESELLER AGREEMENT
This Reseller Agreement (the "Agreement") is between Oracle Corporation with
its principal place of business at 500 Oracle Parkway, Redwood City, California
94065 ("Oracle") and Academic Systems (legal name) with its principal place of
business at 444 Castro Street, Suite 1200, Mt. View, CA ("Reseller"). The terms
of this Agreement shall apply to each Program license granted and to all
services provided by Oracle under this Agreement. When completed and executed
by both parties, an Order Form shall evidence the Program licenses granted and
the services that are to be provided.
1. DEFINITIONS
1.1 "COMMENCEMENT DATE" shall mean the date on which the Programs are
delivered to Reseller, or if no delivery is necessary, the Effective
Date set forth on the relevant Order Form.
1.2 "DESIGNATED SYSTEM" shall mean the computer hardware and operating
system designated on the relevant Order Form for use in conjunction
with a Sublicensed Program or a Development License or Marketing
Support License.
1.3 "ORDER FORM" shall mean the document by which Reseller orders Program
licenses and services, and which is agreed to by the parties. The Order
Form shall reference the Effective Date of this Agreement.
1.4 "PRICE LIST" shall mean Oracle's standard commercial fee schedule that
is in effect when a Program license or services are ordered by the
Reseller.
1.5 "PROGRAM" shall mean the computer software in object code form owned or
distributed by Oracle for which the Reseller is granted a license
pursuant to this Agreement, the user guides and manuals for use of the
software ("Documentation"); and Updates. "LIMITED PRODUCTION PROGRAMS"
shall be Programs not specified on the Price List or specified as
Limited Production, Tier 3 or with special restrictions on the Price
List.
1.6 "RESELLER ADDENDA" shall mean the addenda to this Agreement specifying
additional Sublicense terms and Sublicense rates and fees for the
various types of Sublicenses which may be granted by the Reseller.
1.7 "SUBLICENSE" shall mean a nonexclusive, nontransferable right granted
by the Reseller under a Reseller Addendum to an end user to use an
object code copy of the Programs with the Value-Added Package.
"SUBLICENSEE" shall mean a third party who is granted a Sublicense of
the Programs with the Value-Added Package for such party's own internal
business purposes and not for purposes of any further distribution.
1.8 "SUPPORTED PROGRAM LICENSE" shall mean a Development License or
Marketing Support License for which Reseller has ordered Technical
Support for the relevant time period. "TECHNICAL SUPPORT" shall mean
Program support provided under Oracle's policies in effect on the date
Technical Support is ordered.
1.9 "UPDATE(S)" shall mean subsequent releases of the Programs which are
generally made available for Supported Program Licenses at no
additional charge, other than media and handling charges. Updates shall
not include any releases, options or future products which Oracle
licenses separately.
1.10 "USER" unless otherwise specified in the Order Form, shall mean a
specific individual employed by Reseller who is authorized by Reseller
to use the Programs, regardless of whether the individual is actively
using the Programs at any given time. With respect to a Sublicense,
"User" shall mean a specific individual employed by the Sublicensee who
is authorized by the Sublicensee to use the Programs, regardless of
whether the individual is actively using the Programs at any given time.
1.11 "VALUE-ADDED PACKAGE" shall mean the hardware or software products or
services having Value-Added which are developed, sold, and/or licensed
with the Programs to a Sublicensee by the Reseller, as provided under
the applicable Reseller Addenda, to satisfy such Sublicensee's internal
business requirements and objectives.
2. LICENSES GRANTED
2.1 DEVELOPMENT LICENSES AND TRIAL LICENSES
A. Oracle grants to Reseller a nonexclusive license to use the
Development Licenses Reseller obtains under this Agreement, as follows:
1. to develop or prototype the Value-Added Package on the Designated
System or on a backup system if the Designated System is inoperative,
up to any applicable maximum number of designated Users (if any User
limitation applies);
2. to demonstrate the Programs to potential Sublicensees solely in
conjunction with the Value-Added Package;
3. to provide training and technical support to employees and customers
solely in conjunction with the Value-Added Package;
4. to use the Documentation provided with the Programs in support of
Reseller's authorized use of the Programs; and
5. to copy the Programs for archival or backup purposes; no other
copies shall be made without Oracle's prior written consent. All
titles, trademarks, and copyright and restricted rights notices shall
be reproduced in such copies. All archival and backup copies of the
Programs are subject to the terms of this Agreement.
B. The Reseller may order temporary trial licenses ("Trial Licenses")
for its evaluation purposes only and not for development or prototype
purposes for use during a period specified in the Order Form. Each
Order Form for Trial Licenses shall clearly state the trial period and
shall identify that the order is for a Trial License.
2.2 MARKETING SUPPORT LICENSES
Oracle grants to Reseller a nonexclusive license to use the
Marketing Support Licenses Reseller obtains under this Agreement, as
follows:
A. to demonstrate the Programs to potential Sublicensees solely in
conjunction with the Value-Added Package, up to any applicable maximum
number of designated Users (if any User limitation applies);
B. to develop customized prototypes of the Value-Added package for
prospective Sublicensees on the Designated System if the Reseller does
not receive any fees related to the development of such customized
prototype;
<PAGE> 2
C. to use the Documentation provided with the Programs in support of
Reseller's authorized use of the Programs; and
D. to copy the Programs for archival or backup purposes; no other copies
shall be made without Oracle's prior written consent. All titles,
trademarks, and copyright and restricted rights notices shall be reproduced
in such copies. All archival and backup copies of the Programs are subject
to the terms of this Agreement.
2.3 SUBLICENSING
A. LICENSE TO SUBLICENSE PROGRAMS
As further set forth in the applicable Reseller Addendum, Oracle
hereby grants the Reseller a nonexclusive, nontransferable license to
market and grant Sublicenses as set forth in such Reseller Addenda and at
the rates and fees set forth in such Reseller Addendum. The Reseller shall
only have the right to Sublicense Programs pursuant to an effective
Reseller Addendum between the parties hereto.
Reseller shall Sublicense the Programs solely through a written
Sublicense agreement as provided under Section 2.3.B. Upon Oracle's
request, the Reseller shall provide Oracle with a copy of the Reseller's
standard Sublicense agreement.
B. SUBLICENSE AGREEMENT
Every Sublicense agreement shall include, at a minimum, contractual
provisions which:
1. Restrict use of the Programs to object code form on a single Designated
System by a maximum number of Users for the Sublicensee's own internal
data processing only;
2. Prohibit transfer or duplication of the Programs except for temporary
transfer in the event of cpu malfunction and a single backup or
archival copy;
3. Prohibit assignment, timesharing or rental of the Programs;
4. Prohibit use of the Programs for any purpose outside the scope of the
Value-Added Package;
5. Prohibit causing or permitting the reverse engineering, disassembly or
decompilation of the Programs;
6. Prohibit title from passing to the Sublicenses;
7. Disclaim Oracle's liability for any damages, whether direct, indirect,
incidental or consequential arising from the use of the Programs;
8. Require the Sublicensee, at the termination of the Sublicense, to
discontinue use and destroy or return to the Reseller the Programs,
Documentation and all archival or other copies of the Program;
9. Restrict publication of any results of benchmark tests run on the
Programs;
10. For Programs Sublicensed for use in the United States, prohibit
transfer of the Programs outside the United States; for Programs
Sublicensed for use outside the United States, require the Sublicense
to comply fully with all relevant export laws and regulations of the
United States to assure that neither the Programs, not any direct
product thereof, are exported, directly or indirectly, in violation of
United States law;
11. Specify Oracle as a third party beneficiary of the Sublicense
agreement; and
12. Allow the Reseller to comply with Section 8.10 of this Agreement.
C. MARKETING/SUBLICENSING PRACTICES
In marketing and Sublicensing the Programs, the Reseller shall:
1. Avoid deceptive, misleading, illegal, or unethical practices that may
be detrimental to Oracle or to the Programs;
2. Not make any representations, warranties, or guarantees to Sublicensees
concerning the Programs that are inconsistent with or in addition to
those made in this Agreement or by Oracle; and
3. Comply with all applicable federal, state, and local laws and
regulations in performing its duties with respect to the Programs.
2.4 ACCEPTANCE OF PROGRAMS
For each Program license for which delivery from Oracle is required
under this Agreement, Reseller shall have a 15 day Acceptance Period,
beginning on the Commencement Date, in which to evaluate the Program.
During the Acceptance Period, Reseller may cancel the license by giving
written notice to Oracle and returning the Program in accordance with
Section 6.6 below. Unless such cancellation notice is given, the license
will be deemed to have been accepted by Reseller at the end of the
Acceptance Period.
2.5 LIMITATIONS ON USE
The Reseller shall not use or duplicate the Programs (including the
Documentation) for any purpose other than as specified in this Agreement or
make the Programs available to unauthorized third parties. The Reseller may
not use the Programs for the processing of internal administrative data or
customer data. The Reseller shall not rent, electronically distribute or
timeshare the Programs or market the Programs by interactive cable or
remote processing services or otherwise distribute the Programs other than
as specified in this Agreement. The Reseller agrees not to cause or permit
the reverse engineering, disassembly, or decompilation of the Programs.
Reseller shall not copy or use the Programs (including the Documentation)
except as otherwise specified in this Agreement.
2.6 TITLE
Oracle shall retain all title, copyright, and other proprietary rights
in the Programs and any modifications or translations thereof. The Reseller
and its Sublicensees do not acquire any rights in the Programs other than
those specified in this Agreement.
2.7 TRANSFER OF PROGRAMS
Except as otherwise specified in the Order Form, within the United
States, a Development License or Marketing Support License may be
transferred to another computer system of like configuration (same model
and operating system), or the Designated System may be transferred to
another location within Reseller's organization, upon written notice to
Oracle. All other transfers, including transfer of a Program license
outside the United States, shall be permitted only with Oracle's prior
written consent and shall be subject to Oracle's prior written consent and
shall be subject to Oracle's standard transfer fees in effect at the time
of the transfer.
3. TECHNICAL SERVICES
3.1 TECHNICAL SUPPORT SERVICES
Technical Support services ordered by Reseller will be provided under
Oracle's Technical Support policies in effect on the date Technical Support
is ordered, subject to the payment by Reseller of the applicable fees. At
Reseller's request, Oracle will provide remote assistance in the
installation of each
2
<PAGE> 3
Supported Program license. Reinstatement of lapsed Technical Support
services is subject to Oracle's Technical Support reinstatement fees in
effect on the date Technical Support is re-ordered. Limited Production
Programs and pre-production releases of Programs may not be eligible for
standard Technical Support services; Reseller may obtain Technical
Support services for Limited Production Programs on a time and materials
basis.
3.2 TRAINING SERVICES
Oracle will provide training services agreed to by the parties
under the terms of this Agreement. For any on site services requested by
Reseller, Reseller shall reimburse Oracle for actual, reasonable travel
and out-of-pocket expenses incurred, plus an administrative fee of 15%
of such amount.
4. FEES AND PAYMENTS
4.1 LICENSE FEES AND SUBLICENSE FEES
The Reseller may order Development Licenses or Marketing Support
Licenses at the standard Program license fees set forth in the Price
List or at the fees otherwise provided in a Reseller Addenda. For each
copy of the programs Sublicensed by the Reseller, the Reseller agrees
to pay Oracle a Sublicense fee as set forth in the applicable Reseller
Addenda.
The Reseller is free to determine unilaterally its own license
fees to its Sublicensees. If the Reseller or a Sublicensee upgrades
the Programs to a larger cpu, transfers the Programs to another
operating system, or increases the licensed number of Users, the
Reseller will pay additional Sublicense fees to Oracle as provided under
Oracle's transfer policies and rates in effect at the time the Program
is upgraded or transferred.
4.2 TECHNICAL SUPPORT FEES
Technical Support services ordered by Reseller for Development
Licenses and Marketing Support Licenses will be provided under Oracle's
Technical Support policies and rates in effect on the date Technical
Support is ordered.
4.3 GENERAL PAYMENT TERMS
Except as otherwise provided herein, invoices for payment of
license fees shall be payable 30 days from the Commencement Date.
Technical Support fees for sublicenses shall be as specified in the
applicable Reseller Addendum. Technical Support fees for Development
Licenses and Marketing Support Licenses shall be payable annually in
advance, net 30 days from the renewal date; such fees will be those in
effect at the beginning of the period for which the fees are paid. Fees
due by Reseller shall not be subject to set off for any claims against
Oracle. All payments made shall be in United States currency and shall
be made without deductions based on any taxes or withholdings, except
where such deduction is based on gross income. The fees listed in this
Agreement do not include taxes; if Oracle is required to pay sales, use,
property, value-added, or other federal, state or local taxes based on
the licenses granted under this Agreement, or Sublicenses granted by the
Reseller, then such taxes shall be billed to and paid by the Reseller;
this shall not apply to taxes based on Oracle's income. Any amounts
payable by Reseller hereunder which remain unpaid after the due date
shall be subject to late penalty fees equal to 1.5% per month from the
due date until such amount is paid. Reseller agrees to pay applicable
media and shipping charges.
5. RECORDS
5.1 RECORDS INSPECTION
The Reseller shall maintain books and records in connection with
activity under this Agreement. Such records shall include executed
Sublicense agreements and the information required in or related to the
Sublicense reports required under a Reseller Addendum. Oracle may, at
its expense, audit the executed Sublicensee agreements, the number of
copies of Programs used or Sublicensed by the Reseller, the Computers on
which the Programs are installed, and the number of Users using the
Programs upon reasonable notice to the Reseller. Oracle may audit the
relevant books and records of the Reseller to ensure compliance with the
terms of this Agreement. Any such audit shall be conducted during
regular business hours at the Reseller's offices and shall not interfere
unreasonably with the Reseller's business activities. If an audit
reveals that the Reseller has underpaid fees to Oracle, the Reseller
shall be invoiced for such underpaid fees based on the Price List in
effect at the time the audit is completed. If the underpaid fees are in
excess of five percent (5%), then the Reseller shall pay Oracle's
reasonable costs of conducting the audit. Audits shall be made no more
than once annually.
5.2 NOTICE OF CLAIM
The Reseller will notify the Oracle legal department promptly in
writing of: (a) Any claim or proceeding involving the Programs that
comes to its attention; and (b) All claimed or suspected defects in the
Programs; and (c) Any material change in the management or control of
the Reseller.
6. TERM AND TERMINATION
6.1 TERM
Each Program license granted under this Agreement shall remain
in effect perpetually (if not otherwise specified on the Order Form),
unless a license or this Agreement is terminated as provided in Section
6.2 or 6.3 below. The term of each Reseller Addendum hereunder shall be
as set forth in such Addendum.
6.2 TERMINATION BY RESELLER
Reseller may terminate any Program license, any Reseller
Addenda, or this Agreement at any time; however, termination shall not
relieve Reseller's obligation to pay all fees that have accrued or that
Reseller has agreed to pay under any Order Form or other similar
ordering document under this Agreement.
6.3 TERMINATION BY ORACLE
Oracle may terminate any Program license, any Reseller Addenda,
or this Agreement upon written notice if Reseller breaches this
Agreement and fails to correct the breach within 30 days following
written notice specifying the breach.
6.4 FORCE MAJEURE
Neither party shall be liable to the other for failure or delay
in the performance of a required obligation if such failure or delay is
caused by strike, riot, fire, flood, natural disaster, or other similar
causes beyond such party's control, provided that such party gives
prompt written notice of such condition and resumes its performance as
soon as possible, and provided further that the other party may
terminate this Agreement if such condition continues for a period of one
hundred eighty (180) days.
6.5 EFFECT OF TERMINATION
<PAGE> 4
Upon expiration or termination of a Reseller Addendum or this
Agreement, all the Reseller's rights to market, Sublicense, and use the
Programs as set forth in such Reseller Addendum or this Agreement shall
cease.
The termination of this Agreement, a Reseller Addendum, or any
license shall not limit either party from pursuing any other remedies
available to it, including injunctive relief, nor shall such termination
relieve Reseller's obligation to pay all fees that have accrued or that
Reseller has agreed to pay under any Order Form or other similar ordering
document under this Agreement. The parties' rights and obligations under
Sections 2.5, 2.6, 2.7 and Articles 5, 6, 7, and 8 shall survive
termination of this Agreement.
If Reseller materially breaches this Agreement, including failing to
make any payments required hereunder when due under any Order Form or
other similar ordering document to this Agreement, then Oracle may declare
all sums due and to become due hereunder immediately due and payable.
6.6 RETURN OF PROGRAMS UPON TERMINATION
If a license granted under this Agreement expires or otherwise
terminates, Reseller shall (a) cease using the applicable Programs, and
(b) certify to Oracle within one month after expiration or termination
that Reseller has destroyed or has returned to Oracle the Programs and all
copies. This requirement applies to copies in all forms, partial and
complete, in all types of media and computer memory, and whether or not
modified or merged into other materials. Before returning Programs to
Oracle, Reseller shall acquire a Return Material Authorization ("RMA")
number from Oracle at (415) 506-1500.
7. INDEMNITY, WARRANTIES, REMEDIES, LIMITATION OF LIABILITY
7.1 INFRINGEMENT INDEMNITY
Oracle will defend and indemnify Reseller against a claim that
Programs furnished and used within the scope of this Agreement infringe a
United States copyright or patent, provided that: (a) Reseller notifies
Oracle in writing within 30 days of the claim; (b) Oracle has sole control
of the defense and all related settlement negotiations; and (c) Reseller
provides Oracle with the assistance, information and authority necessary
to perform Oracle's obligations under this paragraph. Reasonable
out-of-pocket expenses incurred by Reseller in providing such assistance
will be reimbursed by Oracle.
Oracle shall have no liability for any claim of infringement based
on: (a) use of a suspended or altered release of Programs if the
infringement would have been avoided by the use of a current unaltered
release of the Programs that Oracle provides to Reseller; or (b) the
combination, operation or use of any Programs furnished under this
Agreement with software, hardware or other materials not furnished by
Oracle if such infringement would have been avoided by the use of the
Programs without such software, hardware or other materials.
In the event the Programs are held or are believed by Oracle to
infringe, Oracle shall have the option, at its expense, to (a) modify the
Programs to be noninfringing; (b) obtain for Reseller a license to
continue using the Programs; or (c) terminate the license for the
infringing Programs and refund the license fees paid for those Programs,
prorated over a five year term from the Commencement Date. This Section
7.1 states Oracle's entire liability and Reseller's exclusive remedy for
infringement.
7.2 WARRANTIES AND DISCLAIMERS
A. WARRANTIES
1. PROGRAM LICENSE WARRANTIES
For each Supported Program License, Oracle warrants for a period of
one year from the Commencement Date that the Programs, unless modified by
Reseller, will perform the functions described in the Documentation
provided by Oracle when operated on the Designated System. Oracle will
undertake to correct any reported error condition in accordance with its
technical support policies.
ORACLE DOES NOT WARRANT THAT THE PROGRAMS WILL RUN PROPERLY ON ALL
HARDWARE, THAT THE PROGRAMS WILL MEET REQUIREMENTS OF THE RESELLER OR THE
SUBLICENSEES OR OPERATE IN THE COMBINATIONS WHICH MAY BE SELECTED FOR USE
BY THE RESELLER OR THE SUBLICENSEES, THAT THE OPERATION OF THE PROGRAMS
WILL BE UNINTERRUPTED OR ERROR FREE, OR THAT ALL PROGRAM ERRORS WILL BE
CORRECTED.
IF RESELLER DOES NOT OBTAIN TECHNICAL SUPPORT SERVICES, THE PROGRAMS
ARE DISTRIBUTED "AS IS."
The Reseller shall not make any warranty on Oracle's behalf.
2. SERVICES WARRANTY
Oracle warrants that its Technical Support and training services
will be performed consistent with generally accepted industry standards.
This warranty shall be valid for 90 days from performance of service.
B. LIMITATIONS ON WARRANTIES
1. THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
2. As an accommodation to Reseller, Oracle may supply Reseller with
Limited Production Programs or with pre-production releases of Programs
(which may be labeled "Alpha" or "Beta"). These products are not suitable
for production use. ORACLE DOES NOT WARRANT LIMITED PRODUCTION PROGRAMS,
PRE-PRODUCTION RELEASES OR COMPUTER-BASED TRAINING PRODUCTS; THESE
PRODUCTS ARE DISTRIBUTED "AS IS."
7.3 EXCLUSIVE REMEDIES
For any breach of the warranties contained in Section 7.2 above,
Reseller's exclusive remedy, and Oracle's entire liability, shall be:
A. FOR PROGRAMS
The correction of Program errors that cause breach of the warranty,
or if Oracle is unable to make the Program operate as warranted, Reseller
shall be entitled to recover the fees paid to Oracle for the Program
license or Update, as applicable.
B. FOR SERVICES
The reperformance of the services, or if Oracle is unable to perform
the services as warranted, Reseller shall be entitled to recover the fees
paid to Oracle for the deficient services.
7.4 LIMITATION OF LIABILITY
<PAGE> 5
In no event shall either party be liable for any indirect,
incidental, special or consequential damages, or damages for loss of
profits, revenue, data or use, incurred by either party or any third
party, whether in an action in contract or tort, even if the other party
or any other person has been advised of the possibility of such damages.
Oracle's liability for damages hereunder shall in no event exceed the
amount of fees paid by Reseller under this Agreement, and if such damages
result from Reseller's use of the Program or services, such liability
shall be limited to fees paid for the relevant Program or services giving
rise to the liability, prorated over a five-year term from the
Commencement Date of the applicable license or the date of performance of
the applicable services.
The provisions of this Article 7 allocate the risks under this
Agreement between Oracle and Reseller. Oracle's pricing reflects this
allocation of risk and the limitation of liability specified herein.
7.5 INDEMNIFICATION OF ORACLE
The Reseller agrees to enforce the terms of its Sublicense
agreements required by this Agreement and to inform Oracle of any known
breach of such terms. The Reseller will defend and indemnify Oracle
against:
A. All claims and damages to Oracle arising from any use by the Reseller
or its Sublicensees of any product not provided by Oracle but used in
combination with the Programs if such claim would have been avoided by
the exclusive use of the Programs;
B. All damages to Oracle caused by the Reseller's failure to include the
required contractual terms set forth in Section 2.3.B hereof in each
Sublicense agreement; and
C. All damages to Oracle caused by Sublicensees' breach of any of the
applicable provisions required by Section 2.3 hereof.
7.6 EQUITABLE RELIEF
The Reseller acknowledges that any breach of its obligations with
respect to proprietary rights of Oracle will cause Oracle irreparable
injury for which there are inadequate remedies at law and that Oracle
shall be entitled to equitable relief in addition to all other remedies
available to it.
8. GENERAL TERMS AND CONDITIONS
8.1 NONDISCLOSURE
Neither party shall, without first obtaining the written consent of
the other party disclose the terms and conditions of this Agreement,
except as may be required to implement and enforce the terms of this
Agreement or as may be required by legal procedures or by law. No other
information exchanged between the parties shall be deemed confidential
unless the parties otherwise agree in writing. The Reseller shall not
disclose the results of benchmark test or other evaluation of the
Programs to any third party without Oracle's prior written approval.
8.2 COPYRIGHTS
The Programs are copyrighted by Oracle. The Reseller shall retain
all Oracle copyright notices on the Programs used by the Reseller under
its Development Licenses or Marketing Support Licenses. The Reseller
shall include the following on all copies of the Programs distributed by
the Reseller:
A. A reproduction of Oracle's copyright notice; or
B. A copyright notice indicating that the copyright is vested in the
Reseller containing the following
1. A "c" in a circle and the word "copyright";
2. The Reseller's name;
3. The date of copyright; and
4. The words "All Rights Reserved."
Such notices shall be placed on the Documentation, the sign-on
screen for any application package incorporating the Programs and the
diskette or tape labels. Notwithstanding any copyright notice by the
Reseller to the contrary, the copyright to the Program included in any
such application package shall remain in Oracle. Other than as specified
above on any reproduction or translation of any Programs, Documentation,
or promotional material, the Reseller agreed to reproduce Oracle's
copyright notices intact.
8.3 TRADEMARKS
"Oracle" and any other trademarks and service marks adopted by
Oracle to identify the Programs and other Oracle products and services
belong to Oracle, the Reseller will have no rights in such marks except
as expressly set forth herein and as specified in writing from time to
time. Reseller's use of Oracle's trademarks shall be under Oracle's
trademarks policies and procedures in effect from time-to-time. The
Reseller agrees not to use the trademark "ORACLE," or any mark beginning
with the letters "Ora," or any other mark likely to cause confusion with
the trademark "ORACLE" as any portion of the Reseller's tradename,
trademark for the Reseller's Application Package, or trademark for any
other products of the Reseller. The Reseller shall have the right to use
the trademark "ORACLE" and other Oracle trademarks solely to refer to
Oracle's Programs, products and services.
The Reseller agrees with respect to each registered trademark of
Oracle to include in each advertisement, brochure, or other such use of
the trademark, the trademark symbol "circle R" and the following
statement:
______ is a registered trademark of Oracle Corporation.
Redwood City, California
Unless otherwise notified in writing by Oracle, the Reseller
agrees, with respect to every other trademark of Oracle, to include in
each advertisement, brochure, or other such use of the trademark, the
symbol "TM" and the following statements:
______ is a trademark of Oracle Corporation.
Redwood City, California
The Reseller shall not market the Oracle Programs in any way which
implies that the Oracle Programs are the proprietary product of the
Reseller or of any party other than Oracle. Oracle shall not have any
liability to the Reseller for any claims made by third parties relating
to the Reseller's use of Oracle's trademark.
8.4 RELATIONSHIP BETWEEN PARTIES
In all matters relating to this Agreement, the Reseller will act as
an independent contractor. The relationship between Oracle and the
Reseller is that of licensor/licensee. Neither party will represent that
it has any authority to assume or create any obligation, express or
implied, on behalf of the other party, nor to represent the other party
as agent, employee,
5
<PAGE> 6
franchisee, or in any other capacity. Nothing in this Agreement shall be
construed to limit either party's right to independently develop or
distribute software which is functionally similar to the other party's
product, so long as proprietary information of the other party is not used
in such development.
8.5 ASSIGNMENT
The Reseller may not assign or otherwise transfer any rights under
this Agreement without Oracle's prior written consent.
8.6 NOTICE
All notices, including notices of address change, required to be sent
hereunder shall be in writing and shall be deemed to have been given when
mailed by first class mail to the first address listed in the relevant
Order Form (if to Reseller) or to the Oracle address on the Order Form (if
to Oracle).
To expedite order processing, the Reseller agrees that Oracle may
treat documents faxed by the Reseller to Oracle as original documents;
nevertheless, either party may require the other to exchange original
signed documents.
8.7 GOVERNING LAW/JURISDICTION
This Agreement, and all matters arising out of or relating to this
Agreement, shall be governed by the laws of the State of California and
shall be deemed to be executed in Redwood City, California. The parties
agree that any legal action or proceeding relating to this Agreement shall
be instituted in any state or federal court in San Francisco or San Mateo
County, California. Oracle and the Reseller agree to submit to the
jurisdiction of, and agree that venue is proper in, the aforesaid courts
in any such legal action or proceeding.
8.8 SEVERABILITY
In the event any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions of this Agreement will remain in
full force and effect.
8.9 EXPERT
The Reseller agrees to comply fully with all relevant export laws and
regulations of the United States to assure that neither the Programs, not
any direct product thereof, are exported, directly or indirectly, in
violation of United States law.
8.10 INHERENTLY DANGEROUS APPLICATIONS
The Programs are not specifically developed, or licensed for use in
any nuclear, aviation, mass transit, or medical application or in any
other inherently dangerous applications. The Reseller agrees to notify
each Sublicensee of the Reseller of this limitation. The Reseller hereby
agrees, and each Sublicensee shall agree, that Oracle shall not be liable
for any claims or damages arising from such use if the Reseller or its
Sublicensees use the Programs for such applications. The Reseller agrees
to indemnify and hold Oracle harmless from any claims for losses, costs,
damages, or liability arising out of or in connection with the use of the
Programs in such applications.
8.11 FEDERAL GOVERNMENT SUBLICENSEE
If the Reseller grants a Sublicense to the United States government,
the Programs shall be provided with "Restricted Rights" and the Reseller
will place a legend, in addition to applicable copyright notices, on the
documentation, and on the tape or diskette label, substantially similar to
the following:
RESTRICTED RIGHTS LEGEND
"Use, duplication or disclosure by the Government is subject to
restrictions as set forth in subparagraph (c)(1)(ii) of the Department of
Defense Regulations Supplement ("DFARS") 252.227-7013. Rights in Technical
Data and Computer Software (October 1988) and Federal Acquisition
Regulation ("FAR") 52.227-14, Rights in Data-General, Including Alternate
III (June 1987), as applicable. Oracle Corporation, 500 Oracle Parkway,
Redwood City, CA 94065."
8.12 WAIVER
The waiver by either party of any default or breach of this Agreement
shall not constitute a waiver of any other or subsequent default or
breach.
8.13 ENTIRE AGREEMENT
This Agreement constitutes the complete agreement between the parties
and supersedes all prior or contemporaneous agreements or representations,
written or oral, concerning the subject matter of this Agreement. This
Agreement may not be modified or amended except in a writing signed by a
duly authorized representative of each party; no other act, document,
usage or custom shall be deemed to amend or modify this Agreement. This
Agreement may be executed in any number of counterparts, each of which
shall be an original and all of which shall constitute together but one
and the same document. All terms and conditions of any Reseller purchase
order or other ordering document shall be superseded by the terms and
conditions of this Agreement.
The Effective Date of this Agreement shall be August 9, 1994.
---------------------------
EXECUTED BY RESELLER: EXECUTED BY ORACLE CORPORATION:
Authorized Signature: /s/ JOANNE WEISS Authorized Signature: /s/ [ILLEGIBLE]
---------------- ----------------
Name: JOANNE WEISS Name: [ILLEGIBLE]
-------------------------------- -------------------------------
Title: VP Products & Technology Title: Group Manager-Channels Contracts
------------------------------- --------------------------------
ORACLE
Oracle Corporation
500 Oracle Parkway
Redwood Shores, CA 94065
(415) 506-7000
Oracle is a registered trademark of Oracle Corporation.
6
<PAGE> 7
[ORACLE LOGO]
RUNTIME SUBLICENSE ADDENDUM
This document (the "Addendum") is between Oracle Corporation ("Oracle") and
Academic Systems (the "Reseller") and shall be governed by the terms of the
Reseller Agreement between the Reseller and Oracle effective August 9, 1994 (the
"Agreement") and the terms set forth below.
1. SUBLICENSES
1.1 SUBLICENSE PROGRAMS AND TERMS
The Reseller may only Sublicense Runtime Programs for which the
Reseller has previously acquired a Supported Development License for the
applicable Designated System. Notwithstanding any other provision of this
Agreement, the Reseller shall have no right to Sublicense Programs
designated as Oracle Applications Programs. Oracle Express Programs,
Limited Production Programs, or other Programs specified by Oracle from
time-to-time without the prior written consent of Oracle.
The Reseller shall have the right to market and grant Sublicenses of
Runtime Programs under the conditions set forth in the Agreement and under
the following restrictions.
A. Sublicense Runtime Programs with the Application Program in the
Application Package for use on Designated Systems to Sublicensees. Each
copy of the Runtime Programs distributed shall be for the Sublicensee's
own internal use in the Territory only on a single Designated System
limited to a maximum number of Users; and
B. Make and deliver to the Sublicensee a single copy of the Runtime
Programs in the Application Package for each Sublicense granted.
The Reseller shall use all practical means available, both
contractual and technical, to control the restricted use of each Runtime
Program Sublicense. If a Sublicense uses the Runtime Program beyond the
limited functionality described in described in Section 1.2 hereof, the
Reseller or Distributor shall immediately notify the Sublicensee of such
unauthorized use and if the Sublicensee fails to discontinue such
unauthorized use following notification either terminate the Sublicense or
forward to Oracle one hundred percent (100%) of the applicable Full Use
standard Program license fees in effect at the time the payment is made to
Oracle together with a written request by the Sublicensee for a Full Use
Program license from Oracle. Oracle must approve, in writing, the
Sublicensee's request before continued use of the Programs by the
Sublicensee shall be deemed authorized.
1.2 RUNTIME PROGRAMS
For the purposes of this Addendum, "Runtime Program(s)" shall mean
Programs which shall be limited to use solely for the purpose of executing
an unmodified standard version of the Reseller's Application Program.
Runtime Programs may not be use to build or modify reports or
applications. "Full Use Programs" shall mean unaltered versions of the
Programs with all functions intact.
1.3 VALUE-ADDED PACKAGE
For the purposes of this Addendum, "Application Program(s)" shall
mean the Reseller's value-added application software, described in the
attached Application Package Attachment with which the Runtime Programs
are to be coupled. "Application Package(s)" shall mean the Runtime
Programs coupled with the Application Programs. For purposes of the
Agreement, the Application Program shall be regarded as the Reseller's
Value-Added Package.
1.4 TRIAL SUBLICENSES
The Reseller and its Distributors shall be entitled to grant, at no
charge, up to a maximum combined total of ten (10) temporary Trial
Sublicenses of the Application Package at any one time. Such Sublicenses
shall be for evaluation purposes only and shall be for a period not to
exceed thirty (30) days. The Reseller shall pay Oracle Sublicense fees for
any Trial Sublicenses in excess of thirty (30) days. Each such Trial
Sublicense shall be Sublicensed under a Sublicense agreement which
provides for such trial use.
1.5 DISTRIBUTORS
Oracle grants the Reseller the right to appoint third parties
("Distributors") to market and Sublicense the Runtime Programs in the
Territory, under the terms of the Agreement and this Addendum. However,
Distributors shall have no right to make copies of the Programs for
Sublicensing and shall obtain all such Programs from the Reseller. Each
Distributor shall execute a written agreement with the Reseller binding
the Distributor to provisions substantially similar to those contained in
Sections 2.3, 2.4, 2.5, 5.1, 5.2, 6.1, 6.3, 6.4, 6.6, 7.2D, 7.5, 8.1, 8.2,
8.3, 8.5, 8.7, 8.8, 8.10, and 8.11 of the Agreement and to those contained
in Sections 1 (except 1.5), 3, 4, 5, and 6 of this Addendum. Each
obligation of the Reseller under such provisions shall also be applicable
to each Distributor. Each Distributor agreement shall also contain any
other provisions necessary for the Reseller to satisfy its commitments
under the Agreement. The Reseller shall notify Oracle promptly in writing
of the appointment of each such Distributor.
In addition, the Reseller shall keep executed Distributor agreements
and records of the Distributor information required under the Reseller's
Sublicense reports, and shall allow Oracle to inspect such information as
specified under the Agreement. The Reseller will defend and indemnify
Oracle against all damages to Oracle caused by the Distributors' failure
to include the required contractual terms set forth in Section 2.3B of the
Agreement in each Sublicense agreement. The Reseller agrees to enforce the
terms of its Distributor agreements required under this
<PAGE> 8
Section so as to effect a timely cure of any Distributor breach, and to
notify Oracle of any known breach of such terms.
1.6 DOCUMENTATION
The Reseller shall be responsible for providing documentation for
Sublicensees. The Reseller shall have the right to incorporate portions of
the Documentation into the Reseller's documentation, subject to the
provisions of Section 8.2 of the Agreement.
2. SUBLICENSE FEES
2.1 SUBLICENSE FEES AND RATE
For each copy of the Program Sublicensed by the Reseller or its
Distributor in the Application Package, the Reseller agrees to pay Oracle
a Sublicense fee equal to thirty percent (30%) of the applicable license
fee for each such Program, as specified in the applicable Price List and
Reseller Price List supplement to such Price List in effect at the time
the applicable Programs are Sublicensed.
As further specified in Section 6 of this Addendum, Sublicense fees
shall be due and payable within twenty (20) days of the last day of each
month. The Reseller shall not be relieved of its obligation to pay
Sublicense fees owed to Oracle by the nonpayment of such fees by the
Sublicensee.
On or after each anniversary during the Term of this Addendum,
Oracle may amend the Sublicense fee percentage rate set forth above based
on Oracle's then-current standard Sublicense fee percentage rate schedule
and the actual amount of the Sublicense fee received by Oracle hereunder.
2.2 PRICE LIST FOR SUBLICENSES
Notwithstanding any other provision of the Agreement, the applicable
Price List for determining Sublicense fees shall be the standard Price
List in effect at the time the Application Package is Sublicensed.
Notwithstanding any other provision of this Agreement, if the
Reseller issues a written Sublicense quote and such quote is accepted by
the applicable Sublicensee, for a period of ninety (90) days after the
date of submission of the quote to the Sublicensee, the Sublicense fee
applicable to the Programs identified in the quote shall be based on the
Price List in effect on such date.
2.3 USERS
The Sublicense fees for a Program shall be based and priced on the
applicable User Level for the maximum number of Users for such Program, as
specified in the Price List. The Reseller shall have the right to
Sublicense Programs on any User basis specified in the Price List in
effect at the time the applicable Program is Sublicensed.
3. TERM
This Addendum shall become effective on the Effective Date of this
Addendum and shall be valid for three (3) years (the "Term") from the
Effective Date, unless terminated as provided in the Agreement. Any
renewal of this Addendum shall be subject to renegotiation of the terms
and fees.
Unless the expiration or termination is for default by the
Reseller, the Reseller may continue using the release of the Programs
then in the Reseller's possession on the Designated Systems for which
Development Licenses were granted, solely for the purpose of continuing
technical support for Sublicensees granted prior to termination. Such
continued use of the Programs shall be subject to all the provisions of
this Agreement, including, without limitation, payment of the Technical
Support Fees specified herein.
The Reseller shall have the right to market and grant Sublicenses
of Programs in the United States only (the "Territory").
5. TECHNICAL SUPPORT
5.1 Technical Support for Sublicensees
A. Installation
The Reseller or its Distributors will be responsible for any
assistance needed to install the Application Package at Sublicensee sites.
B. Sublicensing Support
The Reseller is responsible for providing all technical support,
training and consultations to its Sublicensees and Distributors. In
consideration of the payments specified in Section 5.2, the Reseller
shall have the right to use the Oracle Technical Support services
acquired for the Supported Development Licensees to provide technical
support services to its Sublicensees as further set forth in the
Agreement. The Reseller shall continuously maintain Oracle Technical
Support services for the Development Licenses during the period during
which the Reseller provides technical support services to any
Sublicensees. Any questions from the Reseller's Sublicensees or
Distributors will be referred by Oracle to the Reseller.
5.2 Technical Support Fees
For Technical Support services for Sublicensees, each year the
Reseller agrees to pay Oracle annual Technical Support Fees for each
Runtime Program Sublicensed under this Addendum, a previous Reseller
Addendum, or previous distribution agreement between the parties hereto
where the Sublicensee received technical support services for such
Runtime Program during the applicable support period from the Reseller.
Annual Technical Support Fees for a Program shall be equal to the
applicable Technical Support Percentage Rate specified below,
corresponding to the highest Technical Support Services level specified
below for any Development License used under this Addendum, of the
cumulative Sublicense fees accrued to Oracle for a Sublicensed Program
supported by the Reseller.
<TABLE>
<CAPTION>
Technical Support Technical Support
Services Level Percentage Rate
----------------- -----------------
<S> <C>
Bronze 16%
Silver 19%
Gold 26%
</TABLE>
Upon December 31 of each year, the Reseller shall provide Oracle a
report setting forth all of the Resellers' Sublicenses and those
Sublicensed Programs which were supported by the Reseller during the
calendar year. The report shall also
23
<PAGE> 9
include the applicable Technical Support Fees due and payable to Oracle
for such calendar year. The Reseller shall provide Oracle with payment
of all Technical Support Fees for such calendar year required under the
applicable December 31 report with such report in the form of a check
made out in the amount of such fees. All Technical Support Fees paid to
Oracle are noncancelable and nonrefundable.
On or after each anniversary during the Term of this Addendum,
Oracle may amend the Technical Support Percentage Rates set forth above
based on Oracle's then-current standard Technical Support percentage
rate schedule.
6. SUBLICENSE REPORTS
Within twenty (20) days of the last day of each and every month,
the Reseller shall send Oracle a report detailing for that month:
A. For each Sublicensed Application Package shipped during the prior
month, Sublicensee name, address, make/model and operating system of
the Designated System, date of shipment, Runtime Programs shipped,
maximum number of licensed Users, whether the Sublicense is a Trial
Sublicense, and total Sublicense fees and Technical Support Fees due to
Oracle;
B. For each Application Program licensed to end-users to be used with
previously installed software licensed by Oracle in conjunction with
the Application Program, Sublicensee name, address, make/model and
operating system of the computer, and date of installation; and
C. The Distributor agreements executed during the prior month,
including names and addresses of the Distributors.
The Reseller shall require its Distributors to report this
information to the Reseller on a monthly basis and will include it in
the report for the month in which the Reseller received the
information. The Reseller shall provide Oracle with payment of all fees
required under the monthly report with such report in the form of a
check made out in the amount of such fees.
7. ADDITIONAL LICENSES
During the Term, the Reseller may order production release
versions of Oracle off-the-shelf Programs available as production
release as of the Effective Date of this Addendum and listed on the
Price List in effect as of such date. The license fee for Development
Licenses shall be equal to Oracle's standard list license fees in
effect when an order is placed. The Reseller shall have the right to
order Programs for use as Marketing Support Licenses at no further
charge to the Reseller. The Reseller may obtain Technical Support
services from Oracle for such Programs under Oracle's applicable
Technical Support fees and policies in effect when such services are
ordered.
The Effective Date of this Addendum shall be March 10, 1998.
<TABLE>
<S> <C>
EXECUTED BY THE RESELLER: EXECUTED BY ORACLE CORPORATION:
Authorized Signature: /s/ TIMOTHY JENKINS Authorized Signature:
----------------------- -----------------------
Name: Timothy Jenkins Name:
------------------------------------- -------------------------------------
Title: CFO Title:
-------------------------------------- --------------------------------------
</TABLE>
ORACLE
Oracle Corporation
500 Oracle Parkway
Redwood Shores, CA 94065
(415) 608-7000
Oracle is a registered trademark of Oracle Corporation.
7-97
<PAGE> 10
APPLICATION PACKAGE ATTACHMENT
Name of Application Program and Application Package which the Reseller will be
Sublicensing under the Agreement (may not contain the trademarks "Oracle" or
"Ora" or any portion thereof):
Description of Application Package:
Modules:
Functions and Objectives:
<PAGE> 11
AMENDMENT ONE
to the
RUNTIME SUBLICENSE ADDENDUM
to the
RESELLER AGREEMENT
between
ACADEMIC SYSTEMS
and
ORACLE CORPORATION
This document ("Amendment One") shall serve to amend the Runtime Sublicense
Addendum dated March 10, 1998 (the "Addendum") to the Oracle Reseller agreement
between Academic Systems (the "Reseller") and Oracle Corporation ("Oracle")
dated August 4, 1994 (the "Agreement").
The parties agree to amend the Addendum as follows:
1. After the first paragraph of Section 2.2 insert the following new
paragraph:
"All Sublicense fees for Sublicenses installed outside the United
States shall be based on the standard list license fees for the Programs
as set forth on the Oracle' Global Price List."
2. Delete the body of Section 4 in its entirety and insert the following:
"4. TERRITORY
The Reseller shall have the right to market and grant Sublicenses of
Programs in the Application Package in all countries worldwide (the
"Territory"), subject to the terms of this Section.
Oracle may from time to time deny the Reseller the right to
Sublicense in certain countries in the Territory in order to protect
Oracle's interests if, in the reasonable opinion of Oracle's counsel, such
countries (i) do not provide adequate protection for Oracle's proprietary
rights through copyright, trade secret, patent, or other laws; or (ii)
have laws or regulations or the government has committed acts which in the
opinion of Oracle's counsel, are injurious to Oracle's interests in the
Programs.
The Reseller acknowledges that the Programs are subject to export
controls imposed on Oracle and the Reseller by the U.S. Export
Administration Act, United States Departments of Commerce, Treasury, and
State regulations and directives, and other United States law ("Export
laws"). The Reseller certifies that neither the Programs nor any direct
product thereof are (i) exported, directly or indirectly, in violation of
Export laws; or (ii) are intended to be used for any purposes prohibited
by the Export laws, including, without limitation, nuclear,
<PAGE> 12
ORACLE
chemical, or biological weapons proliferation. Furthermore, the Reseller shall
not transfer the Programs outside of the territory for which the Reseller has
Sublicense rights under this Agreement.
The Reseller warrants that neither it nor its distributors will grant
Sublicenses in or ship any Program to a country until it (or the Distributor)
has completed all necessary government formalities in such country and upon
reasonable request by Oracle, the Reseller (or its Distributor) provides
evidence of completion of such formalities to Oracle. The Reseller will
indemnify Oracle for any losses, costs, liability, and damages incurred by
Oracle as a result of a failure by the Reseller or its Distributors to comply
with the necessary government requirements in any country. The obligations
under this Section shall survive the expiration or termination of this
Addendum. Upon Oracle's reasonable request, the Reseller shall make records
available to Oracle to allow to confirm the Reseller's compliance with this
Section."
Other than the modifications set forth above, the terms and conditions of the
Addendum remain unchanged and in full force and effect.
The Effective Date of this Amendment One is 18 May, 1999.
ACADEMIC SYSTEMS ORACLE CORPORATION
By: /s/ BRIAN T. McGEE By:
----------------------------- -----------------------------
Name: BRIAN T. McGEE Name:
--------------------------- ---------------------------
Title: CFO Title:
--------------------------- ---------------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated December 14, 1999, with respect to the financial
statements of The Lightspan Partnership, Inc., and October 28, 1999, with
respect to the financial statements of Academic Systems Corporation, in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-90103) and the
related prospectus of The Lightspan Partnership, Inc. for the registration of
shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
The foregoing consent is in the form that will be signed upon the completion of
the stock split described in Note 5 to the financial statements.
/S/ ERNST & YOUNG LLP
San Diego, California
December 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-2000
<PERIOD-START> FEB-01-1998 FEB-01-1999
<PERIOD-END> JAN-31-1999 OCT-31-1999
<CASH> 7,142,938 22,671,611
<SECURITIES> 0 0
<RECEIVABLES> 7,794,981 11,625,775
<ALLOWANCES> 400,000 (827,472)
<INVENTORY> 1,267,237 1,710,104
<CURRENT-ASSETS> 17,251,153 36,899,283
<PP&E> 5,770,607 7,514,285
<DEPRECIATION> (4,132,721) (4,948,545)
<TOTAL-ASSETS> 19,010,217 91,674,482
<CURRENT-LIABILITIES> 13,919,974 25,907,766
<BONDS> 0 0
0 0
35,527 52,230
<COMMON> 3,541 4,625
<OTHER-SE> 4,275,209 64,850,416
<TOTAL-LIABILITY-AND-EQUITY> 19,010,217 91,674,482
<SALES> 30,831,424 31,051,022
<TOTAL-REVENUES> 30,831,424 31,051,022
<CGS> 11,508,137 10,850,277
<TOTAL-COSTS> 47,777,972 50,052,524
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (417,713) (230,982)
<INCOME-PRETAX> (16,528,835) (18,770,520)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,528,835) (18,770,520)
<EPS-BASIC> (0.76) (0.77)
<EPS-DILUTED> (0.76) (0.77)
</TABLE>
