<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission file number: 0-29733
IPRINT.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0436465
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1450 ODDSTAD DRIVE
REDWOOD CITY, CA 94063
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 298-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes _ No _X_
As of April 30, 2000, 29,929,970 shares of the Registrant's common stock were
outstanding, at $0.001 par value.
<PAGE>
IPRINT.COM, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets at March 31, 2000
and December 31, 1999............................... 3
Condensed Statements of Operations for the three
months ended March 31, 2000 and 1999................ 4
Condensed Statements of Cash Flows for the three
months ended March 31, 2000 and 1999................ 5
Notes to Condensed Financial Statements............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risks........................................ 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of
Proceeds............................................ 16
Item 4. Submission of Matters to Vote of Security Holders... 17
Item 5. Other Information................................... 17
Item 6. Exhibits and Reports on Form 8-K.................... 17
Exhibits....................................... 17
Reports on Form 8-K............................ 18
SIGNATURE ................................................... 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IPRINT.COM, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 40,284 $ 15,080
Short-term investments 12,243 -
Accounts and other receivables 616 255
Prepaid expenses and other current assets 955 892
----------------- -----------------
Total current assets 54,098 16,227
Property and equipment, net 2,933 2,136
Deposits and other assets 302 -
----------------- -----------------
$ 57,333 $ 18,363
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,080 $ 935
Accrued and other current liabilities 2,671 2,061
Current portion of bank borrowings and capital lease 196 96
Software licensing - 60
Deferred revenue 68 -
----------------- -----------------
Total current liabilities 6,015 3,152
Non-current portion of loan and lease 17 119
Redeemable convertible preferred stock - 30,793
Stockholders' equity:
Common stock and additional paid-in capital 84,520 4,080
Notes receivable from stockholder (655) (655)
Deferred compensation, net (4,814) (3,239)
Accumulated deficit (27,750) (15,887)
----------------- -----------------
Total stockholders' equity 51,301 (15,701)
----------------- -----------------
$ 57,333 $ 18,363
================= =================
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
IPRINT.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Revenues:
Printed products $ 2,859 $ 276
Other 173 10
-------------- --------------
Total revenues 3,032 286
Cost of sales:
Printed products 2,176 187
Other 15 1
-------------- --------------
Total cost of sales 2,191 188
Operating expenses:
Research and development (net of $150 and $5 noncash compensation expense) 1,610 555
Sales and marketing (net of $257 and $7 noncash compensation expense) 8,730 555
General and administrative (net of $333 and $9 noncash compensation 1,896 283
expense)
Amortization of deferred compensation 740 21
-------------- --------------
Total operating expenses 12,976 1,414
Other income (expense), net 272 19
-------------- --------------
Net loss $ (11,863) $ (1,297)
Forgiveness of mandatory redemption right of redeemable
convertible preferred stock - 470
-------------- --------------
Net loss attributable to common stock $ (11,863) $ (827)
============== ==============
Basic and diluted net loss per share $ (0.86) $ (0.12)
============== ==============
Shares used to calculate basic and diluted net loss per share 13,832 6,996
============== ==============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
IPRINT.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (11,863) $ (827)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 246 21
Amortization of deferred compensation 715 21
Changes in assets and liabilities:
Accounts receivable (361) (9)
Current and other long-term assets (365) (7)
Accounts payable 2,145 (61)
Accrued liabilities 610 45
Deferred revenue 68 -
--------------- ----------------
Net cash used in operating activities (8,805) (817)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (12,243) -
Capital expenditures (1,043) (136)
--------------- ----------------
Net cash used in investing activities (13,286) (136)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) from bank loans (2) 235
Payment of notes payable (60) (24)
Proceeds from issuance of preferred and common stock, net of issuance costs 47,357 7,065
--------------- ----------------
Net cash provided by financing activities 47,295 7,276
--------------- ----------------
Net change in cash and cash equivalents 25,204 6,323
Cash and cash equivalents at beginning of period 15,080 299
--------------- ----------------
Cash and cash equivalents at end of period $ 40,284 $ 6,622
=============== ================
SUPPLEMENTARY INFORMATION:
Interest paid $ 4 $ 8
FINANCING ACTIVITY:
Proceeds form Initial Public Offering, net of issuance costs $ 46,866 $ -
Deferred compensation related to stock options $ 2,290 $ 166
Conversion of redeemable preferred stock into common stock $ 30,793 $ -
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
IPRINT.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of iPrint.com, inc.
("iPrint") have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, such financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the Company's opinion, all adjustments, consisting of normal recurring accrual
adjustments, considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
These financial statements and notes should be read in conjunction with the
audited financial statements and notes to those financial statements for the
year ended December 31, 1999 included in our Registration Statement on Form S-1
(Registration No. 333-91841 dated March 7, 2000).
2. NET LOSS PER SHARE
The following table presents the calculation of basic and diluted net loss per
common share.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
(In thousands except per share amounts) Three Months Ended March 31,
-------------------------------------------------------------------------------------------
2000 1999
---- ----
<S> <C> <C>
NUMERATOR:
Net loss $ (11,863) $ (1,297)
Preferred stock - forgiveness of mandatory redemption - 470
Numerator for basic and diluted earnings per share - ----------------- -----------------
loss attributable to common stockholders (11,863) (827)
DENOMINATOR:
Denominator for basic and diluted earnings per share
- weighted average shares 13,832 6,996
Basic and diluted net loss per share $ (0.86) $ (0.12)
--------------------------------------------------------------------------------------------
</TABLE>
The computation of basic and diluted earnings per share does not include options
to purchase 2,168,013 shares of common stock at exercise prices ranging from
$0.01 to $15.688 and warrants to purchase 105,500 shares of common stock at
exercise prices ranging from $0.32 to $10.00 as their effect would be
antidilutive.
3. COMPREHENSIVE INCOME
SFAS No. 130 REPORTING COMPREHENSIVE INCOME, establishes standards of reporting
and display of comprehensive income and its components of net income and "Other
Comprehensive Income." "Other Comprehensive Income" refers to revenues,
expenses, gains and losses that are not included in net income but rather are
recorded directly in stockholders' equity. To date, the Company has not had any
transactions that are required to be reported in other comprehensive income.
6
<PAGE>
4. DEFERRED STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option. With respect to the stock options granted since inception
through March 31, 2000, the Company recorded deferred stock-based compensation
of $6.2 million for the difference at the grant date between the exercise price
and the fair value of the common stock underlying the options. This amount is
being amortized in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28 over the vesting period of the individual options,
generally 4 years.
5. INITIAL PUBLIC OFFERING
During the quarter, the Company completed the initial public offering of its
common stock. On March 8, 2000, the Company sold 4,500,000 shares and on March
16, 2000, the Company sold an additional 675,000 shares in connection with the
exercise of the underwriters' over-allotment option, for a total of 5,175,000
shares of common stock registered under the Registration Statement on Form S-1
(No. 333-91841). The Company received $48.1 million in cash, net of underwriting
discounts and commissions. The net proceeds were predominately held in
commercial paper, government agency securities and money market funds at March
31, 2000. Upon the closing of the offering, all of the Company's preferred stock
automatically converted into an aggregate of 16,070,581 shares of Common Stock.
6. BARTER TRANSACTIONS
For the quarter ended March 31, 2000, the Company had advertising barter
transactions whereby its advertisement was placed on a co-labeled third party's
website in exchange for certain of its products offered to customers of the
co-labeled third party. The Company accounts for barter transactions in
accordance with EITF 99-17, "Accounting for Advertising Barter Transactions."
Barter transactions are recorded at the fair value of goods provided or
advertising services received, whichever is more readily determinable in the
circumstances and only if there is verifiable objective evidence provided by
sufficient cash transactions within six months preceding the barter
transactions. Revenues from barter transactions for the quarter ended March 31,
2000 amounted to $149,000.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 is effective for fiscal years beginning
after June 30, 2000. Because the Company does not currently hold any derivative
instruments and does not engage in hedging activities, management does not
believe that the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
8. LIQUIDITY AND FINANCIAL VIABILITY
In the course of its growth and development activities, the Company has
sustained continuing operating losses. Future capital uses and requirements
depend on numerous factors, including growth associated with product and service
offerings, potential geographic expansion, the size, timing and structure of any
acquisitions that the Company may complete, its rate of revenue growth, its
operating losses, the cost of obtaining new customers and technical capabilities
and the cost of upgrading and maintaining its network infrastructure and other
systems. Such capital uses and requirements may increase in future periods.
While the Company is developing an operating plan that will enable the
business to continue without additional funds, its inability to implement
such a plan may require the Company to raise additional capital to fund its
operations prior to reaching profitability through equity or debt financings
or from other sources. The inability to obtain sufficient funds may require
the Company to limit the marketing of its products, license to third parties
the rights to commercialize products or technologies that it would otherwise
seek to develop and market themselves, or delay, scale back or eliminate some
or all of its research and product development programs.
7
<PAGE>
9. SUBSEQUENT EVENT
On April 6, 2000, iPrint.com entered into an agreement with Yahoo!, a global
Internet communications, commerce and media company, to include iPrint.com as
a featured merchant in Yahoo!'s Print Center. The Print Center will be
promoted in Yahoo!'s online properties and will allow access to print
services offered on the iPrint.com website. As part of the agreement,
iPrint.com will offer free business cards to new registrants of Yahoo!'s
email service. iPrint.com is obliged to pay Yahoo! a fee of eight million
dollars in installments over the next four fiscal quarters in connection with
this agreement.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONDENSED FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT, AND IN CONJUNCTION WITH THE
CORRESPONDING DISCUSSION INCLUDED IN OUR FINAL PROSPECTUS IN CONNECTION WITH OUR
INITIAL PUBLIC OFFERING. IN ADDITION TO HISTORICAL INFORMATION, THIS DISCUSSION
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, IN PARTICULAR RELATING TO OUR EXPECTATIONS REGARDING OUR FUTURE
OPERATING EXPENSES AND CAPITAL REQUIREMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO
FACTORS, INCLUDING BUT NOT LIMITED TO, THOSE SET FORTH OR INCORPORATED BY
REFERENCE UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF
STOCK" AND ELSEWHERE IN THIS REPORT.
OVERVIEW
We are an online provider of print and private-labeled print services focused on
the business market. Our online print shops offer customers a one-stop shop for
addressing their printing needs.
Since our inception, we have incurred significant net losses primarily as a
result of costs associated with developing our websites and our marketing
efforts. From inception through March 31, 2000, we accumulated net losses of
$27.8 million. As we seek to expand our business, our operating expenses may
increase as a result of financial commitments related to expanded advertising
and promotional campaigns, the development of additional marketing channels,
relationships with destination websites to increase traffic to our website,
enhancements to our iPrint.com and related websites and other capital
expenditures. We expect that we will incur losses and generate negative cash
flow from operations through the end of next year. Our ability to achieve
profitability depends upon our ability to substantially increase our sales,
increase our gross margins, and reduce our operating expenses. Because we are
an Internet company engaged in electronic commerce, our business is subject
to significant changes in technology and marketing techniques. In view of our
limited operating history, we believe that period-to-period comparisons of
our operating results, including our operating expenses as a percentage of
sales, are not necessarily meaningful and should not be relied upon as an
indication of our future performance.
We generate revenues from the sale of a variety of printed products to end user
customers. Our products and services are available to our customers through our
iPrint.com website, our managed iPrint.com marketing relationship and co-labeled
websites, our private-labeled websites and our specialized print services. We do
not recognize revenues until the product has shipped, collection of the
receivable is probable, and our commercial print vendors have fulfilled all of
our contractual obligations to the customer. We take title to all products that
we instruct our commercial print vendors to produce. We believe that purchases
by businesses account for a majority of our revenues and purchases by consumers
account for a significant portion of our revenues.
For the quarter ending March 31, 2000, approximately 21% of our revenues were
derived from shipping and handling fees compared to 16% for the same period
in 1999. We record sales net of discounts. We have recorded the cost of
promotional products that we give away for free as a sales and marketing
expense. A portion of our revenue is generated through barter transactions
with participants in our co-labeled program in which we sell printed products
in exchange for online advertising. Barter transaction revenues and related
advertising costs are recorded at the fair value of the goods or services
provided or received, whichever is more readily determinable in the
circumstances. Revenues from barter transactions are included in revenues and
the associated advertising expenses are recorded as sales and marketing
expense. The cost of printed products sold in barter transactions is included
in cost of sales. We derived $149,000, which represented approximately 5% of
our revenues, from barter transactions for the quarter ending March 31, 2000
compared to $29,000 or 10% of our revenues for the same period in 1999.
Substantially all of our revenues are generated from sources within the
United States and all sales to date have been in United States dollars.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a
percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
Percentage of Total Revenues: Three Months Ended
March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales 72.3 65.7
-------------- --------------
Gross margins 27.7 34.3
Operating expenses:
Research and development 53.1 194.1
Sales and marketing 287.9 194.1
General and administrative 62.5 99.0
Amortization of deferred compensation 24.4 7.3
-------------- --------------
Total operating expenses 427.9 494.5
Loss from operations (400.2) (460.2)
Other income (expense), net 9.0 6.6
-------------- --------------
Net loss (391.3)% (453.6)%
</TABLE>
REVENUES
We derive our revenues from the sales of various printed products and related
services. Revenues were $3.0 million and $0.3 million for the quarters ended
March 31, 2000 and 1999, representing an increase of $2.7 million, or 960%,
in 2000 over the comparable period in 1999. The growth in revenues was due to
a higher number of orders, substantially all of which resulted from our
promotional offers, increased customer activity on our iPrint.com, co-labeled
and private-labeled websites as well as our specialized print services.
The following table sets forth percentage of revenues by channel for the periods
indicated.
<TABLE>
<CAPTION>
Percentage of Revenues by Channel: Three Months Ended
March 31,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
iPrint.com website 58% 51%
Marketing relationship and co-labeled websites 18 34
Private labeled websites 5 15
Specialized print services 19 -
-------------- --------------
Total 100% 100%
</TABLE>
COST OF SALES
Cost of sales increased to $2.2 million for the quarter ended March 31, 2000
from $0.2 million for the same period in 1999. The increase was primarily due to
increased orders placed by customers through all our distribution channels.
GROSS MARGINS
Gross margins decreased to 27.7% for the quarter ended March 31, 2000 from
34.3% for the same period in 1999. This 6.6% decrease in gross margins
consists primarily of a shift in product mix to lower margin items which
accounted for 6.7% of this decrease and increased specialized print services
revenue at lower margins than our other distribution channels which accounted
for 3.5% of this decrease. These decreases were offset by revenue from web
advertising sales and other business development deals which accounted for an
increase of 3.6%.
10
<PAGE>
RESEARCH AND DEVELOPMENT
During the quarter ended March 31, 2000, research and development expenses
were $1.6 million, an increase of 190% over research and development expenses
of $555,000 for the same period in 1999. The increase was primarily
attributable to increases in the number of research and development personnel
and in consultant and outside contractor costs as we increased the
functionality of our iPrint.com and related websites and broadened our
product offerings. We believe that continued investment in research and
development is critical to attaining our strategic objectives. As a result,
we expect research and development expenses to increase in absolute dollar
amounts in future periods.
SALES AND MARKETING
During the quarter ended March 31, 2000, sales and marketing expenses were
$8.7 million, an increase of 1473% over sales and marketing expenses of
$555,000 for the same period in 1999. This increase was primarily the result
of a $5.9 million increase in advertising and promotional spending and
$750,000 for promotional products given away for free. Also contributing to
this increase was growth in our direct marketing, business development and
customer support staffs, with personnel related costs increasing by $1.2
million. We expect our sales and marketing expenses to decrease on an
absolute dollar basis in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES
During the quarter ended March 31, 2000, general and administrative expenses
were $1.9 million, an increase of 570% over general and administrative
expenses of $283,000 for the same period in 1999. The increase was primarily
attributable to an increase in the number of finance, accounting, legal,
human resources, plant management, web operations and information technology
personnel, an increase in fees paid to outside professional service providers
and increased facility costs. We believe general and administrative expenses
will decrease on an absolute dollar basis in future periods.
AMORTIZATION OF STOCK-BASED COMPENSATION
During the quarter ended March 31, 2000, amortization of stock-based
compensation increased to $740,000 from $21,000 for the same period in 1999.
Deferred stock-based compensation primarily represents the difference between
the exercise price and the deemed fair value of our common stock for
accounting purposes on the date certain stock options were granted. This
amount is included as a component of stockholders' equity and is being
amortized on an accelerated basis by charges to operations over the vesting
period of the options, consistent with the method described in Financial
Accounting Standards Board Interpretation No. 28. As of March 31, 2000, we
had a remaining balance of $4.8 million of deferred compensation to be
amortized.
OTHER INCOME (EXPENSE), NET
Other income (expense), net increased to $272,000 for the quarter ended March
31, 2000 from $19,000 for the same period in 1999. This increase is primarily
due to interest income earned from higher average cash balances as a result
of proceeds from our initial public offering that was completed during March,
2000.
11
<PAGE>
NET LOSS
Net loss increased to $11.9 million for the quarter ended March 31, 2000 from
$1.3 million for the same period in 1999. The $10.6 million increase in net
loss was the result of increased spending in research and development, sales
and marketing, general and administrative, and amortization of deferred
compensation.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we funded our operations primarily with
$32.3 million raised through the private sale of our equity securities. On
March 8, 2000, we sold 4,500,000 shares of common stock as part of our
initial public offering and completed the offering on March 16, 2000 when we
sold an additional 675,000 shares in connection with the exercise of the
underwriters' over-allotment option for a total of 5,175,000 shares of common
stock issued and sold at $10.00 per share. As a result, we received
approximately $48.1 million in cash proceeds, net of underwriting discounts
and commissions. As of March 31, 2000, we had cash and cash equivalents of
$52.5 million. At December 31, 1999, we had a term loan of $225,000 with
Silicon Valley Bank. This loan was completely paid off during the quarter
ended March 31, 2000 and we have no further credit arrangements with Silicon
Valley Bank. We currently have a $2.0 million line of credit with Imperial
Bank that expires on February 16, 2001 and as of March 31, 2000 we have
$190,000 in borrowings.
Net cash used in operations for the quarter ended March 31, 2000 was $8.8
million compared with $1.6 million for the same period in 1999 primarily the
result of net loss of $11.9 million adjusted for depreciation and
amortization expense of deferred stock compensation. Cash outflow for the
quarter was primarily for operating activities, including growth in our
accounts receivable due to higher custom sales, prepaid expenses and
deposits. Cash usage was partially offset by increases in accounts payable
and accrued liabilities related primarily to higher sales and marketing
expenses, and deferred revenue.
Net cash used in investing activities was $13.3 million for the period ended
March 31, 2000 compared with $137,000 for the same period in 1999. The cash
used in investing activities was related to short-term investment purchases
of $12.2 million and $1.0 million purchases of property and equipment.
Net cash provided by financing activities was $47.3 million for the quarter
ended March 31, 2000, compared to $8.1 million for the same period in 1999.
Cash provided by financing activities was primarily from proceeds of the
initial public offering of our common stock and exercises of stock options.
Cash inflow was partially offset by payments of notes payable and bank loan.
In April, 2000, we entered into an agreement with Yahoo! under which iPrint.com
is a featured merchant in Yahoo!'s Print Center (see Note 9 of Notes to
Consolidated Financial Statements). Under the terms of the agreement, we are
obligated to pay Yahoo! a fee of eight million dollars payable in installments
over the next four fiscal quarters.
As of March 31, 2000, we had an aggregate of $4.8 million in future operating
lease obligations of which $0.9 million is to be paid within the next twelve
months. These leases are for 24,100 square feet of office space for our
Redwood City facility and 23,400 square feet of office space for our new
Menlo Park facility. In March 2000, we entered into an agreement with
Bohannon Development Company under which we have leased the facilities in
Menlo Park, California for a term of five years.
We believe our existing cash, cash equivalents and short-term investments
together with cash generated from product sales will be sufficient to fund
our operating expenses, debt obligations and capital requirements through the
next fifteen to twenty-one months. We anticipate an increase in our capital
12
<PAGE>
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel, including growth associated with
product and service offerings, potential geographic expansion and integration
of any businesses we may acquire. Our future capital requirements will depend
on many factors that are difficult to predict, including the size, timing and
structure of any acquisitions that we may complete, our rate of revenue
growth, our operating losses, the cost of obtaining new customers and
technical capabilities and the cost of upgrading and maintaining our network
infrastructure and other systems. While we may need to raise additional
capital within the next fifteen to twenty-one months, we are presently
developing an operating plan that will enable us to fund our business without
securing additional funds. We have no commitments for additional financing,
and we may be unable to obtain additional funding on favorable terms, if at
all. Any difficulty in obtaining additional financial resources could force
us to curtail our operations or prevent us from pursuing our growth strategy.
Any future funding may dilute the ownership of our existing stockholders.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
In this report and from time to time, we may make forward looking statements
which reflect our current beliefs and estimates with respect to future events
and our strategy, growth plans, and future financial performance and operations.
The words "expect," "anticipate," "believe," "plan" and similar expressions
identify forward-looking statements. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements address matters which are subject
to a number of risks and uncertainties which could cause our actual results to
differ materially from those anticipated by these forward-looking statements,
including the risks and uncertainties set forth under the heading "Risk Factors"
in the final prospectus included in our registration statement on Form S-1 (No.
333-91841) on file with the SEC, all of which are incorporated here by
reference, and the following:
OUR QUARTERLY RESULTS ARE DIFFICULT TO PREDICT AND ARE LIKELY TO FLUCTUATE,
WHICH MAY HAVE AN IMPACT ON OUR STOCK PRICE.
Our quarterly revenues, expenses and operating results have varied significantly
in the past and are likely to vary significantly from quarter to quarter in the
future. We compete in the general commercial printing sector, which is
characterized by individual orders from customers for specific printing projects
rather than long-term contracts. Continued engagement for successive jobs
depends on the customers' satisfaction with the services provided. As a result,
we cannot predict the number, size and profitability of printing jobs in a given
period. Our operating results may fall below market analysts' expectations in
some future quarters, which could lead to a significant decline in the market
price of our stock. In addition to the risk factors described elsewhere or
incorporated by reference in this report, quarterly fluctuations may also result
from
- our ability to obtain new customers, retain our existing customers
and increase sales to our existing customers;
- changes in our operating expenses and capital expenditure requirements,
in particular as a result of increased promotional and advertising
expenses and purchases of computer and communications equipment to
support website expansion and increased traffic;
- the decline in price of, or demand for, the printing services we offer;
- changes in the mix of printing services we sell;
13
<PAGE>
- the timing of customer orders, in particular orders for specialized
print services
- increased competition; and
- general or industry-specific economic conditions.
Based on all these factors, we believe that our quarterly revenues, expenses and
operating results will be difficult to predict.
WE HAVE AN EXTREMELY LIMITED OPERATING HISTORY AND ARE SUBJECT TO THE RISKS OF
NEW ENTERPRISES.
We began operations in August 1996 and commercially introduced our
Internet-enabled printing services in January 1997. We have had limited revenues
to date, and our customers have been doing business with us for only a short
time. Our extremely limited operating history and the uncertain and emerging
nature of the market in which we compete make it difficult to assess our
prospects or predict our future operating results. Therefore, you should not
consider our recent revenue growth as an indication of our future rate of
revenue growth, if any. Our prospects are subject to the risks and uncertainties
frequently encountered in the establishment of a new business enterprise,
particularly in the new and rapidly evolving markets for Internet products and
services. To be successful, we must, among other things,
- obtain substantial numbers of new customers rapidly and efficiently
through direct marketing and sales efforts, acquisitions and strategic
alliances;
- retain our existing customers and increase sales to these customers;
- decrease spending as a percentage of revenue;
- increase our gross margins;
- manage our growth effectively, assuming we succeed in expanding our
business;
- anticipate and respond to competitive developments;
- enhance our product and service offerings;
- develop and upgrade our internal control systems;
- identify, attract, retain and motivate qualified personnel; and
- evaluate additional financing alternatives as needed.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES WILL CONTINUE.
We have never been profitable, and we anticipate that we will continue to incur
net losses in future periods. To become profitable, we must significantly
increase our revenues by obtaining new customers
14
<PAGE>
and generating additional revenues from existing customers, control our costs
and improve our gross margins. As of March 31, 2000, we had an accumulated
deficit of $27.8 million. Although we have experienced revenue growth in
recent periods, our revenues may not continue at their current level or
increase in the future. If we are unable to rapidly increase our revenues and
operating margins and decrease our operating expenses, our operating losses
may continue to increase in future periods. Increased competition or other
changes in printing industry economics may also adversely affect our ability
to become profitable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operated primarily in the United States and all sales to date have been
made in United States dollars. Accordingly, we have not had any material
exposure to foreign currency exchange rates. We have a bank loan that is
sensitive to movement in interest rates. Interest income from our investments is
sensitive to changes in the general level of U.S. interest rates, particularly
since the majority of our investments are in short-term instruments. Due to the
nature of our short-term investments, we have concluded that there is no
material market risk exposure. Therefore, no quantitative tabular disclosures
are required.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities.
During the quarter ended March 31, 2000, iPrint.com issued and sold the
following unregistered securities:
- options to purchase 985,200 shares of our common stock on various dates
to employees and consultants under our 1997 Stock Option Plan. These
-ptions were issued in connection with employment or other service
relationships, and no consideration was paid by the recipients for the
options. The exercise price of the options is the fair market value
determined on the date of exercise, and the options are generally on the
standard terms for options issued under the 1997 Stock Option Plan.
- 354,000 shares of our common stock on various dates to employees and
consultants pertaining to exercises of stock options under our 1997
Stock Option Plan. The shares were purchased for cash in the aggregate
amount of $219,000.
- Warrants to Bohannon Development Company to purchase 35,000 shares of
our common stock, with an expiration date of March 7, 2003. The warrants
were issued on March 7, 2000 in connection with a real estate lease
entered into between the recipient of the warrant and the Company. No
cash consideration was paid for the warrants. The warrants are
exercisable at any time until expiration at a price per share of $8.00
(20,000 shares) and $10.00 (15,000 shares), and includes a net exercise
provision under which the holder may surrender some or all of the
warrants for shares equivalent in value to the difference between the
exercise price and the then fair market value of the common stock.
In issuing these securities and granting these options to employees and
consultants, we relied on exemptions from registration under the Securities Act
of 1993 ("the Act") in reliance upon Rule 701 promulgated under Section 3(b) of
the Act. In issuing the warrants, the recipient represented that it was an
accredited investor, and we relied on the exemption from registration under the
Act provided by Section 4(2).
(d) Use of Proceeds.
On March 8, 2000, we completed the initial public offering of our
common stock. The managing underwriters in the offering were Credit Suisse First
Boston, Robertson Stephens, U.S. Bancorp Piper Jaffray and WR Hambrecht & Co.
The shares of the common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (No.
333-91841). The Securities and Exchange Commission declared the Registration
Statement effective on March 7, 2000.
The offering commenced on March 7, 2000 and terminated on March 16,
2000 after we had sold all of the 5,175,000 shares of common stock registered
under the Registration Statement (including 675,000 shares sold in connection
with the exercise of the underwriters' over-allotment option). The initial
public offering price was $10 per share for an aggregate initial public offering
of $51,750,000.
We paid a total of $3.6 million in underwriting discounts and
commissions. In addition, the following table sets forth the estimated costs and
expenses, other than underwriting discounts and commissions, incurred in
connection with the offering. None of the amounts shown was paid directly or
16
<PAGE>
indirectly to any director, officer, general partner of iPrint or their
associates, persons owning 10 percent or more of any class of equity securities
of iPrint or an affiliate of iPrint.
-----------------------------------------------------------------------------
SEC registration fee $ 14,362
-----------------------------------------------------------------------------
NASD filing fee 5,175
-----------------------------------------------------------------------------
Nasdaq National Market application fee 95,500
-----------------------------------------------------------------------------
Printing and engraving expenses 125,000
-----------------------------------------------------------------------------
Legal fees and expenses 341,888
-----------------------------------------------------------------------------
Accounting fees and expenses 398,000
-----------------------------------------------------------------------------
Director and officer liability insurance 270,674
-----------------------------------------------------------------------------
Transfer agent and registrar fees 3,500
-----------------------------------------------------------------------------
Miscellaneous expenses 6,953
-----------------------------------------------------------------------------
Total $1,261,052
-----------------------------------------------------------------------------
After deducting the underwriting discounts and commissions and the
offering expenses, the estimated net proceeds to iPrint from the offering were
approximately $46.9 million. We had no usage of the net proceeds during the
quarter and the funds were predominately held in commercial paper, government
agency securities and money market funds at March 31, 2000.
We currently expect that we will use the net proceeds for capital
expenditures and for working capital purposes, including sales and marketing
expenses, general and administrative expenses and product development.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our predecessor company, iPrint, Inc., a California corporation
("iPrint California"), submitted to our shareholders a proposal to reincorporate
in Delaware through the merger of iPrint California with and into iPrint.com,
inc, with iPrint.com, inc. as the surviving corporation. The proposal was
approved by written consent of the shareholders, effective February 15, 2000. No
separate vote for the election of directors was taken as part of this proposal.
The results of the voting by written consent were as follows: votes FOR the
proposal were cast by holders of 7,874,438 shares of Common Stock and 14,851,764
shares of Preferred Stock. Holders of 333,379 shares of Common Stock and
1,218,817 shares of Preferred Stock did not cast a vote or abstained.
ITEM 5. OTHER INFORMATION
In April 2000, Ed Sanden, our former Chief Marketing Officer,
resigned as an employee and officer of iPrint. In connection with his
resignation, we entered into a separation agreement with Mr. Sanden under
which we agreed to pay Mr. Sanden all accrued and unused vacation earned,
three (3) months of base salary and bonus, and to provide for the vesting of
62,500 stock options, and an additional vesting of 31,250 stock options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.2* Form of Agreement and Plan of Merger between iPrint, Inc., a
California corporation, and iPrint.com, inc., a
Delaware corporation
3.1* Restated Certificate of Incorporation of Registrant
3.2* Bylaws of Registrant
3.4* Form of Certificate of Amendment of Restated Certificate of
Incorporation
4.1* Second Amended and Restated Rights Agreement dated
September 30, 1999 between the Registrant and
certain stockholders
17
<PAGE>
10.11** Form of Underwriting Agreement
10.12 Business Park Lease, dated March 7, 2000, between Bohannon
Development Company and the
Registrant
27.1 Financial Data Schedule (EDGAR - filed version only)
99.0 Items Incorporated by Reference (Risk Factors from the
Registrant's 424(b) Prospectus)
* Incorporated by reference to the corresponding exhibit to our registration
statement on Form S-1 (No. 333-91841)
** Incorporated by reference to Exhibit 1.1 to our registration statement on
Form S-1 (No. 333-91841)
(b) Reports on Form 8-K.
We did not file any Reports on Form 8-K during the quarter ended
March 31, 2000.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
iPrint.com, inc.
By: /s/ ROYAL P. FARROS
---------------------------------------
Royal P. Farros
President, Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ JAMES P. MCCORMICK
---------------------------------------
James P. McCormick
Chief Operating Officer and
Chief Financial Officer
Date: May 15, 2000
<PAGE>
EXHIBIT 10.12
TENANT: IPRINT.COM
LEASE
TABLE OF CONTENTS
ARTICLE TITLE PAGE
1 - Premises and Term.......................................................1
2 - Rent....................................................................1
3 - Landlord's Work - Tenant's Work.........................................2
4 - Streets.................................................................2
5 - Utility Services........................................................2
6 - Assignment - Change of Ownership........................................3
7 - Tenant's Additional Agreements..........................................4
8 - Use of Premises.........................................................6
9 - Indemnity and Public Liability Insurance................................6
10 - Fire Insurance and Casualty.............................................7
11 - Repair..................................................................9
12 - Fixtures & Alterations..................................................10
13 - Remedies................................................................11
14 - Bankruptcy..............................................................12
15 - Surrender of Premises...................................................13
16 - Eminent Domain..........................................................13
17 - Real Property Taxes.....................................................14
18 - Common Area, Parking Facilities.........................................15
19 - Miscellaneous...........................................................17
<PAGE>
BUSINESS PARK LEASE
THIS LEASE is made this 7th day of March, 2000, between BOHANNON
DEVELOPMENT COMPANY, a California corporation, herein referred to as "Landlord,"
and IPRINT.COM, INC., a Delaware corporation, herein referred to as "Tenant".
WITNESSETH:
ARTICLE 1 - PREMISES AND TERM
SECTION 1.1. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the demised premises, including the building and other
improvements thereon (as described in EXHIBIT "A" and located substantially as
shown on EXHIBIT "B" attached hereto) upon and subject to the terms and
provisions of this Lease for a demised term of five (5) years (plus any partial
period prior to the commencement of the first full calendar month), commencing
on the earlier of (i) May 1, 2000, or (ii) three (3) days after Landlord
substantially completes its work pursuant to SECTION 3.1. herein (provided such
date shall not be earlier than April 15, 2000), and subject to the provisions of
Exhibit "C" hereto, and ending on the last day of the fifth (5th) year
(exclusive of such partial period, if any) after such commencement.
SECTION 1.2. Upon execution and delivery of this Lease Agreement,
Tenant shall have the right to occupy the demised premises for the purposes of
performing Tenant's Improvements therein prior to the commencement of the
demised term hereof. From and after the date Tenant first occupies any portion
of the demised premises, all of the provisions of this Lease shall be applicable
to said portion notwithstanding that the demised term has not yet commenced.
Specifically, but without limitation, Tenant's and Landlord's obligations with
respect to insurance and indemnities shall be operable as of the date Tenant
occupies any portion of the demised premises.
ARTICLE 2 - RENT
SECTION 2.1. A. Tenant covenants and agrees to pay to Landlord without
set-off, recoupment, deduction or demand of any nature whatsoever, base rent for
as follows: for the first (1st ) year during the demised term, the amount of
Seven Hundred Seventy Two Thousand Two Hundred Dollars ($772,200.00) per annum,
payable in twelve (12) equal monthly installments of Sixty Four Thousand Three
Hundred Fifty Dollars ($64,350.00); for the second (2nd) year during the demised
term, the amount of Seven Hundred Ninety Nine Thousand Two Hundred Twenty Seven
Dollars ($799,227.00) per annum, payable in twelve (12) equal monthly
installments of Sixty Six Thousand Six Hundred Two and 25/100 Dollars
($66,602.25); for the third (3rd) year during the demised term, the amount of
Eight Hundred Twenty Seven Thousand One Hundred Ninety Nine and 95/100 Dollars
($827,199.95) per annum, payable in twelve (12) equal monthly installments of
Sixty Eight Thousand Nine Hundred Thirty Three and 33/100 Dollars ($68,933.33);
for the fourth (4th) year during the demised term, the amount of Eight Hundred
Fifty Six Thousand One Hundred Fifty One and 95/100 Dollars ($856,151.95) per
annum, payable in twelve (12) equal monthly installments of Seventy
1
<PAGE>
One Thousand Three Hundred Forty Six Dollars ($71,346.00); and for the fifth
(5th) year during the demised term, the amount of Eight Hundred Eighty Six
Thousand One Hundred Seventeen and 27/100 Dollars ($886,117.27) per annum,
payable in twelve (12) equal monthly installments of Seventy Three Thousand
Eight Hundred Forty Three and 11/100 Dollars ($73,843.11). Base rent shall be
paid monthly in advance on the first (1st) day of each calendar month.
B. The demised premises contains a mezzanine consisting of
approximately 7,128 square feet of space. If at any time during the demised term
Tenant occupies and/or uses the mezzanine for any purpose, then the Base Rent
set forth under Subparagraph A above shall be increased by an amount equal to
Three Thousand Five Hundred Sixty Four Dollars ($3,564.00) per month for the
first year of the demised term and increasing by three and one-half percent
(3.5%) each year thereafter at the same time as Base Rent under Subparagraph A
increases. Such Base Rent for the mezzanine space shall commence on the first
day Tenant occupies and/or uses the same for any purpose.
SECTION 2.2. For the purpose of this Lease, a year shall be twelve (12)
calendar months, commencing with the first day of the first full calendar month
of the demised term and the succeeding anniversaries thereof. For any period
prior to the commencement of the first year or subsequent to the end of the last
year of the demised term, rent shall be prorated on the basis of the rental rate
then payable.
SECTION 2.3. All sums payable and all statements deliverable to
Landlord by Tenant under this Lease shall be paid and delivered at 60 Hillsdale
Mall, San Mateo, California 94403-3497, or at such other place as Landlord may
from time to time direct by notice to Tenant and all such sums shall be paid in
lawful money of the United States.
SECTION 2.4. Upon execution of this Lease, Tenant shall provide the
Landlord with the following:
(A) the sum of Sixty Four Thousand Three Hundred Fifty Dollars
($64,350.00) which shall be applied by Landlord to the first base rent to become
due and payable under this Lease, and
(B) a letter of credit in the amount of Two Hundred Fifty Thousand
Dollars ($250,000.00) which shall be held as a Security Deposit pursuant to the
terms of SECTION 19.9.
Tenant shall deliver said letter of credit to Landlord concurrently
with Tenant's execution of this Lease. Such letter of credit shall be issued by
and drawn on an institution reasonably acceptable to Landlord and otherwise upon
conditions acceptable to Landlord and shall be renewed at least thirty (30) days
prior to any scheduled expiration during the entire demised term hereof and
shall remain in effect without expiration for a term ending sixty (60) days
after the scheduled expiration or sooner termination the demised term of this
Lease (including any extended term(s)).
2
<PAGE>
Upon the occurrence and continuance of an event of default that is not
cured within the applicable notice or grace period, if any, as provided herein,
Landlord shall be permitted to draw upon the letter of credit in the amount
necessary to cure such default. The letter of credit shall be substantially in
the form attached hereto as Exhibit "D".
SECTION 2.5. In addition to base rent under SECTION 2.1., all other
payments to be made under this Lease by Tenant to Landlord shall be deemed to be
and shall become additional rent hereunder, whether or not the same to be
designated as such, and shall be included in the term "rent" wherever used in
this Lease; and, unless another time shall be expressly provided for the payment
thereof, all rent and additional rent shall be due and payable together with the
next succeeding installment of base rent; and Landlord shall have the same
remedies for failure to pay the same as for a nonpayment of base rent.
SECTION 2.6. Any amount due from Tenant to Landlord that is not paid
when due and that remains unpaid for five (5) days after written notice to
Tenant shall bear interest at the rate announced from time to time by Wells
Fargo Bank, N.A. as its prime rate plus five percent but not to exceed the
highest rate then permitted to be charged on late payments under leases under
California law; provided, however, the payment of any such interest shall not
excuse or cure the default upon which such interest accrued. Tenant acknowledges
and agrees that payment of such interest on late payments is reasonable
compensation to Landlord for the additional costs incurred by Landlord caused by
such late payment, including, but not limited to, collection and administration
expenses and the loss of the use of the money that was late in payment.
ARTICLE 3 - LANDLORD'S WORK - TENANT'S WORK
SECTION 3.1. Landlord shall, on or before commencement of the demised
term (except as provided in Exhibit "C"), provide, or cause to be provided,
certain interior improvements as described on EXHIBIT "C" attached hereto in
compliance with applicable laws. Except for the work described in EXHIBIT "C",
Landlord shall not be required to perform any other work in the demised
premises; and except for the work described in EXHIBIT "C", Tenant accepts the
demised premises in an "as is" condition.
Notwithstanding the foregoing to the contrary, Landlord agrees that it
will deliver possession of the demised premises to Tenant with the parking area
and walkways in good condition and the following existing building systems in
good working condition and repair: the roof; exterior walls; HVAC system;
electrical system; mechanical; plumbing; lighting; and the existing men's and
women's restrooms in the interior of the building.
SECTION 3.2. Any additional work to be performed other than that
provided for in SECTION 3.1. and designated as Landlord's Work shall be
performed at the sole cost of Tenant in accordance with detailed plans and
specifications therefor which must be approved, in writing, by Landlord or
Landlord's architect before work is commenced. Tenant shall furnish Landlord
with a set of "as built" plans therefor in Windows-based AutoCAD format or such
other format which is compatible to Landlord's computer aided design software
after any such work is completed.
3
<PAGE>
Tenant, at Tenant's sole cost and expense, shall comply with all laws
(including the Americans With Disabilities Act ("ADA")) applicable to its use
and occupancy of the demised premises, including changes required to the
building or demised premises on account of, or arising from, Tenant's work and
improvements, except as expressly provided in EXHIBIT "C" with respect to
Landlord's work.
ARTICLE 4 - STREETS
SECTION 4.1. Tenant agrees to require employees, and to direct
customers and other persons visiting Tenant, to park in the parking area
provided in the Parking and Accommodation Areas, as defined in Article 18 below,
and to allow Landlord to post the streets for no parking.
ARTICLE 5 - UTILITY SERVICES
SECTION 5.1. Landlord has at its own cost and expense secured the
installation of water, gas, sanitary sewers and electrical services to the
demised premises and made all necessary connections thereof to the building.
Tenant shall pay all meter or service charges made by public utilities companies
and shall pay for the water, gas and/or electricity used on the demised premises
and sewer use fees and charges whether ad valorum or not and any so called
"sewer connection charges" based on increased wastewater discharge from the
demised premises exclusively. Tenant shall maintain such connections of
utilities to the building.
SECTION 5.2. Landlord shall not be liable to Tenant for the failure of
any utility services.
ARTICLE 6 - ASSIGNMENT - CHANGE OF OWNERSHIP
SECTION 6.1.
A. Except as otherwise provided herein, Tenant shall not, by operation
of law or otherwise, transfer, assign, sublet, enter into license or concession
agreements, change ownership, mortgage or hypothecate this Lease or the Tenant's
interest in and to the demised premises without first procuring the written
consent of Landlord. Any attempted transfer, assignment, subletting, license or
concession agreement, change of ownership, mortgage or hypothecation without
Landlord's written consent shall be void and confer no rights upon any third
person. Landlord's consent to a proposed assignment or sublease shall not be
unreasonably withheld provided that the proposed assignee or sublessee shall
have: (i) a net worth, at the time of the assignment or sublease, determined in
accordance with good accounting principles, equal to or in excess of the net
worth of Tenant at the date of the Lease; (ii) been active in its current
business for a minimum of three (3) years immediately prior to the assignment or
sublease; and (iii) a good reputation in the business community; provided
further that Tenant shall give Landlord not less than thirty (30)
days notice prior to the effective date of any such assignment or sublease, and
if the transfer is an assignment or a sublease of more than fifty percent (50%)
of the demised premises, Landlord shall
4
<PAGE>
have the option to terminate this Lease with respect to the space to be assigned
or subleased by notice to Tenant given within fifteen (15) days of Landlord's
receipt of Tenant's notice in which event Tenant shall be released from further
liability with respect to the recaptured space as of the date the assignment or
sublease was to commence. Nothing herein contained shall relieve Tenant and any
Guarantor from its covenants and obligations for the demised term except as
expressly provided herein. Tenant agrees to reimburse Landlord for Landlord's
reasonable outside attorneys' fees incurred in conjunction with the processing
and documentation of any such requested transfer, assignment, subletting,
licensing or concession agreement, change of ownership, mortgage or
hypothecation of this Lease or Tenant's interest in and to the demised premises,
not to exceed One Thousand Dollars ($1,000.00) per transaction. If Landlord
consents to any assignment or sublease pursuant to this Article, Tenant shall
pay Landlord, as additional rent:
(a) in the case of each and every assignment (including those
which do not require Landlord's consent), an amount equal to fifty
percent (50%) of all monies, property, and other consideration of every
kind whatsoever paid or payable to Tenant by the assignee with respect
to the demised premises for such assignment and for all property of
Tenant transferred to the assignee as part of the transaction
(including, but not limited to, fixtures, other leasehold improvements,
furniture, equipment, and furnishings, but only to the extent that the
consideration paid exceeds the fair market value thereof ); and
(b) in the case of each and every sublease (including those
which do not require Landlord's consent), fifty percent (50%) of
the amount by which all rent, and/or other monies, property, and
consideration of every kind whatsoever paid or payable to Tenant by the
subtenant under the sublease with respect to the demised premises,
exceeds the sum of (y) all base rent and additional rent under
this Lease accruing during the term of the sublease in respect of the
subleased space (as reasonably determined by Landlord, taking into
account the useable area of the premises demised under the sublease)
plus (x) the following:
(i) commissions actually paid by Tenant to procure
the sublease to an independent third party licensed real estate broker
amortized on a straight line basis over the term of the sublease,
commencing with the date on which the sublease term commences; and
(ii) the actual cost of leasehold improvements
undertaken by Tenant (subject to Landlord's prior written consent)
solely to prepare the subleased space for the subtenant amortized on a
straight line basis over the term of the sublease, commencing with the
date on which the sublease term commences.
B. Each transfer, assignment, subletting, license, concession
agreement, mortgage and hypothecation to which there has been consent shall be
by an instrument in writing in form reasonably satisfactory to Landlord, and
shall be executed by the transferor, assignor, sublessor, licensor,
concessionaire, hypothecator or mortgagor and the transferee, assignee,
sublessee,
5
<PAGE>
licensee, concessionaire or mortgagee in each instance, as the case may be; and
each transferee, assignee, sublessee, licensee, concessionaire or mortgagee
shall agree in writing for the benefit of Landlord herein to assume, to be bound
by, and to perform the terms, covenants and conditions of this Lease to be done,
kept and performed by Tenant from and after the effective date of the transfer
including the payment of all amounts due or to become due under this Lease
directly to Landlord. One (1) executed copy of such written instrument shall be
delivered to Landlord. Failure to first obtain in writing Landlord's consent or
failure to comply with the provisions of this Article shall operate to prevent
any such transfer, assignment, subletting, license, concession agreement,
mortgage, or hypothecation from becoming effective.
C. If Tenant hereunder is a corporation which, under the then current
laws of the State of California, is not deemed a public corporation, or is an
unincorporated association or partnership, the transfer, assignment or
hypothecation of any stock or interest in such corporation, association or
partnership in the aggregate in excess of fifty percent (50%) shall be deemed an
assignment within the meaning and provisions of this SECTION 6.1.
D. Landlord's rights to assign this Lease are and shall remain
unqualified. Upon any sale of the demised premises and provided the purchaser
assumes all obligations under this Lease, Landlord shall thereupon be entirely
released of all obligations of Landlord hereunder from and after the effective
date of the transfer and shall not be subject to any liability resulting from
any act or omission or event occurring after such sale.
E. The consent of Landlord to any transfer, assignment, sublease,
license or concession agreement, change in ownership, mortgage or hypothecation
of this Lease is not and shall not operate as a consent to any future or further
transfer, assignment, sublease, license or concession agreement, change in
ownership, mortgage or hypothecation, and Landlord specifically reserves the
right to refuse to grant any such consents except as otherwise provided in this
SECTION 6.1.
Notwithstanding any provision hereof to the contrary, Landlord's
consent shall not be required (and Landlord shall not be entitled to terminate
this Lease as otherwise provided in Section 6.1.A.) in connection with the
merger or consolidation of Tenant with another entity, the sale of all or
substantially all of the assets of Tenant, the transfer or issuance of Tenant's
capital stock (whether or not constituting a change of control of Tenant), or
any assignment or sublease to any entity controlled by, controlling, or under
common control with Tenant (collectively, a "Tenant Affiliate"), so long as the
net worth of the surviving entity or Tenant Affiliate is at least equal to the
net worth of Tenant immediately prior to the transfer or as of the date of this
Lease, whichever is greater; provided that any such surviving entity or Tenant
Affiliate comply with the provisions of this Lease; and further provided that
any such surviving entity or Tenant Affiliate shall agree in writing, in form
reasonably satisfactory to Landlord, to assume, to be bound by, and to perform
the terms, covenants and conditions of this Lease to be done, kept and performed
by Tenant, including the payment of all amounts due or to become due under this
Lease directly to Landlord, without any modification of this Lease. Tenant shall
provide Landlord with the following no later than ten (10) days prior to the
effective date of the proposed merger or other consolidation transaction: (i)
the name and address of the surviving entity or Tenant Affiliate, and (ii) a
copy of the proposed assignment agreement, and (iii) such reasonable information
as may be requested by Landlord. Nothing herein contained shall be construed as
releasing
6
<PAGE>
Tenant from any of its liabilities or other obligations hereunder, including the
payment of rent.
ARTICLE 7 - TENANT'S ADDITIONAL AGREEMENTS
SECTION 7.1. Tenant agrees at all times during the demised term to: (A)
Keep the demised premises in a neat and clean condition. (B) Promptly remove all
waste, garbage or refuse from the demised premises. (C) Promptly comply with all
laws and ordinances and all rules and regulations of duly constituted
governmental authorities affecting Tenant's use of the demised premises, and the
cleanliness, safety, use and occupation thereof, but this clause (C) shall not
be construed to require Tenant to comply with any such laws, ordinances, rules
or regulations which require structural changes in the demised premises unless
the same are made necessary by act or work performed by Tenant or the nature of
Tenant's business. (D) Prevent the escape from the demised premises of all
fumes, odors and other substances which are offensive or may constitute a
nuisance or interfere with other tenants.
SECTION 7.2. Tenant agrees that it will not at any time during the
demised term without first obtaining the Landlord's written consent: (A) Conduct
or permit any fire, bankruptcy or auction sale in the demised premises. (B)
Place on the exterior walls (including both interior and exterior surfaces of
windows and doors), the roof of any buildings or any other part of the demised
premises, any sign, symbol, advertisement, neon light, other light or other
object or thing visible to public view outside of the demised premises. (C)
Change the exterior color of the building on the demised premises, or any part
thereof, or the color, size, location or composition of any sign, symbol or
advertisement that may have been approved by Landlord. (D) Park, operate, load
or unload, any truck or other delivery vehicle on any place other than the
loading area designated for Tenant's use. (E) Use the plumbing facilities for
any purpose other than that for which they were constructed or dispose of any
foreign substance therein. (F) Install any exterior lighting or plumbing
facilities, shades or awnings, amplifiers or similar devices, or use any
advertising medium which may be heard or experienced outside the demised
premises, such as loudspeakers, phonographs, or radio broadcasts. (G) Deface any
portion of the building or improvements on the demised premises, normal usage
excepted. In the event any portion of the building is defaced or damaged, Tenant
agrees to repair such damage. (H) Permit any rubbish or garbage to accumulate on
the demised premises, or any part thereof, unless confined in metal containers
so located as not to be visible to members of the public. (I) Install, maintain
or operate any sign except as approved in writing by Landlord. (J) Store
materials, supplies, equipment, finished products, raw materials or articles of
any nature outside of the demised premises. (K) Use the demised premises for
walk-in retail, commercial or residential purposes.
SECTION 7.3. Tenant agrees that it will not at any time during the
demised term: (A) Perform any act or carry on any practice which may injure the
demised premises. (B) Burn anything in or about the demised premises. (C) Keep
or display any merchandise or other object on or otherwise obstruct any
sidewalks, walkways or areaways. (D) Use or permit the use of any portion of the
demised premises as living quarters, sleeping apartments, lodging rooms, or for
any unlawful purpose. (E) Use or
7
<PAGE>
permit the demised premises to be used for any purpose which is or shall not
then be allowed under the Zoning Ordinance of the City of Menlo Park,
California, in that area.
SECTION 7.4. Tenant shall, at its expense, comply with all applicable
laws, regulations, rules and orders, regardless of when they become or became
effective, including, without limitation, those relating to health, safety,
noise, environmental protection, waste disposal, and water and air quality to
the extent applicable to Tenant's use and occupancy of the demised premises, and
furnish satisfactory evidence of such compliance upon request of Landlord.
Should any discharge, leakage, spillage, emission or pollution of any
type occur upon or from the demised premises due to Tenant's use and occupancy
thereof, Tenant, at its expense, shall be obligated to remedy the same to the
satisfaction of Landlord and any governmental body having jurisdiction
thereover. Tenant agrees to indemnify, hold harmless, and defend Landlord
against all liability, cost, and expense (including without limitation any
fines, penalties, judgments, litigation costs, and attorneys' fees) incurred by
Landlord as a result of Tenant's breach of this section, or as a result of any
such discharge, leakage, spillage, emission, or pollution to the extent caused
by or arising out of Tenant's activities at the demised premises, regardless of
whether such liability, cost, or expense arises during or after the demised
term, unless such liability, cost or expense is proximately caused solely by the
active negligence of Landlord.
Tenant shall pay all amounts due Landlord under this section, as
additional rent, within ten (10) days after any such amounts become due.
If required by applicable law as a result of Tenant's activities or
occupancy, Tenant shall, at least thirty (30) days prior to the termination of
the demised term, or any earlier termination of this Lease, submit a plan to the
Menlo Park Fire Protection District in accordance with applicable provisions of
the Uniform Fire Code, with a copy to Landlord, demonstrating how any hazardous
materials which were stored, dispensed, handled or used in, at or upon the
demised premises will be transported, disposed of or reused at the expiration or
sooner termination of the demised term of this Lease; and Tenant shall, at the
expiration or sooner termination of the demised term, comply with all applicable
laws, regulations, rules and orders of any governmental body having jurisdiction
thereover (including without limitation the Menlo Park Fire Protection District)
regarding the disposal of any such hazardous materials.
Tenant's obligations under this SECTION 7.4. shall survive the
expiration or earlier termination of this Lease, including without limitation
any termination resulting from any default by Tenant under the Lease.
Notwithstanding any provision hereof to the contrary, Tenant shall not
be responsible for performing or for paying for the cost of performing any
clean-up or remediation of hazardous materials at the demised premises, except
to the extent resulting or arising from a release of hazardous materials at the
demised premises by Tenant or by Tenant's agents, employees, invitees, or
contractors.
8
<PAGE>
ARTICLE 8 - USE OF PREMISES
SECTION 8.1. Tenant shall use the demised premises solely for
administrative offices and the shipping and receiving of goods and products in
the ordinary course of business and for no other purposes without Landlord's
written consent.
ARTICLE 9 - INDEMNITY AND PUBLIC LIABILITY INSURANCE
SECTION 9.1. Tenant agrees to indemnify and save harmless Landlord
from and against all claims for death, bodily injury or property damage arising
from any act, omission or negligence of Tenant, or its contractors, licensees,
agents, servants, invitees or employees, or arising from any accident, injury or
damage whatsoever caused to any person, or to the property of any person
occurring during the demised term at the demised premises, the sidewalks (if
any) adjoining the same and from and against all costs, expenses and liabilities
incurred in or in connection with any such claim or proceeding brought thereon,
including, but not limited to, reasonable attorneys' fees and court costs.
SECTION 9.2. Tenant agrees to maintain in full force during the
demised term a policy of public liability and property damage insurance under
which Landlord (and Landlord's lenders and property manager as are designated by
Landlord and are properly includible as additional insureds under the terms of
any such policies of insurance) and Tenant are named as insureds, and the
insurer agrees to indemnify and hold Landlord and Landlord's said designees
harmless from and against all cost, expense and/or liability arising out of or
based upon any and all claims, accidents, injuries and damage mentioned in
SECTION 9.1. All public liability and property damage policies shall contain a
provision that Landlord, although named as an insured, shall nevertheless be
entitled to recovery under said policies for any loss occasioned to it, its
servants, agents and employees, by reason of the negligence of Tenant. Each such
policy shall be approved as to form and insurance company by Landlord, such
approval not to be unreasonably withheld, be noncancelable with respect to the
Landlord and Landlord's said designees without twenty (20) days' written notice
to the Landlord and Landlord's said designees, and a duplicate original or
certificate thereof shall be delivered to Landlord prior to commencement of the
demised term and thereafter thirty (30) days prior to expiration of the term of
each policy. The limits of liability of such comprehensive general liability
insurance shall be Two Million Dollars ($2,000,000.00) for injury or death to
one or more persons and damage to property, combined single limit. All public
liability, property damage and other casualty policies shall be written as
primary policies, not contributing with and not in excess of coverage which
Landlord may carry.
If Tenant shall not comply with its covenants to maintain insurance
made above, or if Tenant fails to provide duplicate originals or certificates
thereof to Landlord as is provided above, Landlord may, but shall not be
required to, obtain any such insurance; and if Landlord does obtain any such
insurance, Tenant shall, on demand, reimburse Landlord for the premium for any
such insurance.
9
<PAGE>
SECTION 9.3. Tenant agrees to use and occupy the demised premises, the
Parking and Accommodation Areas and to use all other portions of the Business
Park (which it is herein given the right to use) at its own risk and hereby
releases to the full extent permitted by law the Landlord, and its agents,
servants, contractors, and employees, from all claims and demands of every kind
resulting from any accident, damage or injury occurring therein. Landlord shall
have no responsibility or liability for any loss of or damage to fixtures or
other personal property of Tenant. The provisions of this Section shall apply
during the whole of the demised term.
ARTICLE 10 - FIRE INSURANCE AND CASUALTY
SECTION 10.1. If the building on the demised premises should be damaged
or destroyed during the demised term by any casualty insurable under Landlord's
standard fire and extended coverage insurance policies, Landlord shall (except
as hereinafter provided) repair and/or rebuild the same to substantially the
condition in which the same existed immediately prior to such damage or
destruction. Landlord's obligation under this Section shall in no event exceed
either (A) the scope of the work done by Landlord in the original construction
of such building, or (B) the proceeds of any such insurance policy if Landlord
keeps the building and the demised premises insured against loss or damage by
such fire and extended coverage insurance to the extent of at least eighty
percent (80%) of the insurable value of the building if reasonably obtainable
from responsible insurance companies licensed to do business in California,
unless Landlord nevertheless elects to repair and/or rebuild the building and
the demised premises. Tenant shall in the event of any such damage or
destruction, unless this Lease shall be terminated as hereinafter provided, be
responsible for replacing or repairing all exterior signs, trade fixtures,
equipment, display cases, and other installations originally installed by the
Tenant. Tenant shall have no interest in the proceeds of any insurance carried
by Landlord.
SECTION 10.2. Tenant's base rent shall be abated proportionately during
any period in which, by reason of any such damage or destruction, the building
is rendered partially or totally untenantable. Such abatement shall continue for
the period commencing with such destruction or damage and ending with the
substantial completion by the Landlord of such work or repair and/or
reconstruction as Landlord is obligated to do.
SECTION 10.3. If the building on the demised premises should be damaged
or destroyed to the extent of 33-1/3% or more of the then monetary value thereof
by an event described in SECTION 10.1., then Landlord may terminate this Lease
by written notice to Tenant within thirty (30) days after the casualty.
If Landlord does not elect to terminate this Lease then Landlord shall
repair and/or rebuild the same as provided in SECTION 10.1. If such damage or
destruction occurs and this Lease is not so terminated, this Lease shall remain
in full force and effect and the parties waive the provisions of any law to the
contrary. The Landlord's obligation under this Section shall in no event exceed
the scope of the work to be done by the Landlord in the original construction of
said building and the demised premises.
10
<PAGE>
Within thirty (30) days after any casualty, Landlord shall provide
Tenant with an estimate prepared by a contractor, architect or other reliable
source stating the estimated time required to repair the damage and to restore
the demised premises to their condition prior to the casualty. If such repair
and restoration will require more than two hundred seventy (270) days from the
date of such notice, then Tenant, upon written notice to Landlord given within
fifteen (15) days after receipt of such estimate, may terminate this Lease.
SECTION 10.4. Tenant agrees to comply with all of the regulations and
rules of the Insurance Service Office or any similar body and will not do,
suffer, or permit an act to be done in or about the demised premises which will
increase any insurance rate with respect thereto.
SECTION 10.5. Tenant agrees, in addition to any rent provided for
herein, to pay to the Landlord the cost of the fire and extended coverage
insurance policy carried by Landlord on the demised premises during the entire
demised term or any renewal or extension thereof. This Section expressly permits
the Landlord to carry standard fire and extended coverage policies to the extent
of one hundred percent (100%) of the insurable value.
SECTION 10.6. During the demised term, Tenant shall carry, at its
expense, insurance against loss and damage by fire with an "All Risk"
endorsement for the full insurable value of Tenant's merchandise, trade
fixtures, furnishings, operating equipment and personal property, including wall
coverings, carpeting and drapes, if installed by Tenant. Landlord and Landlord's
mortgagee shall be named as additional insureds under said policy, which shall
be noncancellable with respect to Landlord and Landlord's mortgagee without
twenty (20) days' prior written notice. A certificate evidencing such coverage
shall be delivered to Landlord prior to commencement of the demised term and
thereafter thirty (30) days prior to the expiration of the term of such policy.
Such insurance shall be written as a primary policy, not contributing with and
not in excess of coverage Landlord may carry. If Tenant shall not comply with
its covenants to maintain said insurance, or if Tenant fails to provide a
certificate thereof to Landlord, Landlord may, but shall not be required to,
obtain any such insurance, and if Landlord does obtain any such insurance,
Tenant shall, on demand, reimburse Landlord for the premium for any such
insurance.
SECTION 10.7. In the event the building on the demised premises shall
be damaged as a result of any flood, earthquake, act of war, nuclear reaction,
nuclear radiation or radioactive contamination, or from any other casualty not
covered by Landlord's fire and extended coverage insurance, and if the cost of
repair reasonably is expected to exceed One Hundred Thousand Dollars
($100,000.00) Landlord may within ninety (90) days following the date of such
damage, commence repair, reconstruction or restoration of the building and
prosecute the same diligently to completion, in which event this Lease shall
continue in full force and effect, or within said ninety (90) day period elect
not to so repair, reconstruct or restore the building, in which event this Lease
shall cease and terminate. In either such event Landlord shall give Tenant
written notice of its intention within said ninety-day period.
11
<PAGE>
SECTION 10.8. Upon any termination of this Lease under the provisions
of this ARTICLE 10, the rent shall be adjusted as of the date of such
termination and the parties shall be released without further obligation to the
other party upon the surrender of possession of the demised premises to
Landlord, except for items that have been theretofore accrued and are then
unpaid, and except for obligations that are designated as surviving such
termination.
SECTION 10.9. Notwithstanding anything in this ARTICLE 10 or elsewhere
in this Lease to the contrary, Landlord may maintain any insurance on the
demised premises that Landlord deems necessary or advisable, including, but not
limited to, any rental insurance (for up to twelve (12) months of rent), owner's
protective liability insurance or any insurance required by any mortgagee of
Landlord; and Landlord may include the amount of the premiums for such insurance
in the total of the insurance premiums which Tenant is required to pay under the
terms hereof.
Section 10.10. Landlord and Tenant each (i) hereby waives all claims
such party may have against the other to the extent such claims are covered by
insurance carried or required to be carried under this Article 10, and (ii)
shall cause their respective insurers to similarly waive all rights of recovery
against the other, and against the officers, employees, partners, agents and
representatives of the other, for loss of or damage to the property of the
waiving party or the property of others under its control, to the extent such
loss or damage is (or would have been) insured against under any insurance
policy carried (or required to be carried) by Landlord or Tenant under this
Article 10. Each of Tenant and Landlord shall obtain a clause or endorsement to
the applicable insurance policies carried by such party denying its insurer any
rights of subrogation against the other party.
ARTICLE 11 - REPAIR
SECTION 11.1. Landlord agrees, at Landlord's sole expense, to maintain
and repair the structural elements of the building on the demised premises
throughout the life of the Lease, including foundations, exterior walls and
structural portions of the roof. Structural repairs and maintenance shall not be
deemed to include minor cracks or fissures in walls or floors, nor the
requirement of painting or caulking.
SECTION 11.2. Tenant agrees during the demised term or any extension
thereof to maintain the interior of the building on the demised premises, and
every part thereof, except as to work to be performed by Landlord under SECTIONS
11.1. AND 11.3. Tenant further agrees to clean, inside and out, all of the glass
on the exterior of the building. If Tenant should fail to faithfully perform its
maintenance obligations hereunder then Landlord shall, upon having given notice
to Tenant of the need for said maintenance, have the right to perform, or cause
to be performed, said maintenance and Tenant shall on demand reimburse Landlord
for Landlord's costs of providing such maintenance. Landlord's reservation of
the right to enter upon the demised premises to perform any repairs or
maintenance or other work in, to, or about the demised premises which in the
first instance is the Tenant's obligation pursuant to this Lease shall not be
deemed to impose any obligation on Landlord to do so, nor shall Landlord be
rendered liable to
12
<PAGE>
Tenant or any third party for the failure to do so, and Tenant shall not be
relieved from any obligation to indemnify Landlord as otherwise provided
elsewhere in this Lease.
SECTION 11.3 Landlord shall provide the following services and Tenant
shall, in addition to all other payments required to be made under other
provisions of this Lease, on demand reimburse Landlord for Landlord's gross
costs of: (i) maintaining, repairing and replacing the roof membrane; (ii)
painting, maintaining and repairing the exterior of the building; (iii)
maintaining, repairing and replacing the elevator and elevator equipment room
(if any); (iv) maintenance and repair associated with the mechanical and
electrical rooms; (v) maintenance and repair of the trash enclosure utilized in
connection with the building; (vi) maintenance, repair and replacement of the
glass on the exterior of the building and (vii) any other maintenance and repair
other than that which Landlord is required to perform at Landlord's expense per
SECTION 11.1. Tenant shall also, on demand, reimburse Landlord for Landlord's
gross costs of maintaining, repairing and replacing the heating and air
conditioning equipment serving the demised premises, whether furnished by
Landlord or Tenant. Landlord's said gross costs as used in this SECTION 11.3.
shall include all costs and expenses of every kind or nature incurred by
Landlord in the performance of such maintenance, repair or replacements and
Landlord's determination of the amount of said costs and expenses will be final.
Notwithstanding the provisions of Sections 11.3. and 18.3 hereof to the
contrary, Tenant's obligation to reimburse Landlord for (i) costs associated
with the replacement (as opposed to repairs and maintenance) of the roof
membrane and underlayment and the heating, ventilating and air-conditioning
units furnished by Landlord and (ii) the cost of any capital improvement
required to be made by Landlord pursuant to Article 11 and/or Article 18 of this
Lease during the demised term and required under good accounting practice to be
amortized, shall be limited to a proportionate share of such replacement costs
(the "Reimbursement Amounts") calculated as follows:
(a) if such costs are incurred during the initial demised term
of this Lease, by multiplying such replacement costs by a fraction, the
numerator of which is the number of days in the original demised term and the
denominator of which is the number of days in the estimated useful life of the
replacement; and
(b) if Landlord and Tenant agree to extend the term of this
Lease and if such costs are incurred during any such extended term of this
Lease, by multiplying such replacement costs by a fraction, the numerator of
which is the number of days in the demised term of this Lease (including any
extended term) and the denominator of which is the number of days in the
estimated useful life of the replacement.
If a Reimbursement Amount has been determined under subsection
(a) above with respect to any replacement costs, and Landlord and Tenant
subsequently agree to extend the term of this Lease, Tenant shall also be
responsible for another Reimbursement Amount with respect to such replacement
costs determined by multiplying such replacement costs by a fraction, the
numerator of which is the number of days in the extended term of this Lease and
the denominator of which is the number of days in the estimated useful life of
the replacement.
13
<PAGE>
The foregoing limitation shall not apply to equipment furnished by
Tenant and maintained by Landlord. Tenant shall pay any Reimbursement Amounts,
as additional rent, monthly on a straight-line basis amortized over the
remaining demised term of the Lease using an interest rate equal to ten percent
(10%) per annum.
The limitations on Tenant's liability for expenses hereunder shall in
no event apply to any costs for repairs or replacements occasioned by (x)
Tenant's negligent acts or omissions or those of its employees, contractors,
agents, invitees or servants, or (y) the particular nature of Tenant's business,
all of which costs shall be borne solely by Tenant.
SECTION 11.4. If during the term of this Lease Landlord or Landlord's
insurance carrier requires the installation of an Ansul Fire Control System or
its equivalent, or any fire detection device, because of the nature of the
particular activities being carried on by Tenant in the demised premises, then
said system or device shall be installed at the sole cost of the Tenant within
the time specified.
ARTICLE 12 - FIXTURES & ALTERATIONS
SECTION 12.1. All trade fixtures owned by Tenant and installed in the
demised premises shall remain the property of Tenant and may be removed from
time to time and shall be removed at the expiration of the demised term. Tenant
shall repair any damage to the demised premises caused by the removal of said
fixtures. If Tenant fails to remove such fixtures on or before the last day of
the demised term, all such fixtures shall become the property of Landlord,
unless Landlord elects to require their removal, in which case Tenant shall
promptly remove them and restore the demised premises to its condition prior to
such removal. Landlord may also, at Landlord's sole discretion, store such
fixtures at Tenant's expense.
SECTION 12.2. Tenant shall not make any alterations, additions or
improvements in or to the demised premises or the building without submitting
plans and specifications therefor for the prior written consent of Landlord,
which consent shall not be unreasonably withheld so long as any such
alterations, additions or improvements do not affect the exterior of the
building or materially affect the sprinkler system and/or mechanical/electrical
systems or require removal or modification of improvements installed by
Landlord, and so long as Tenant notifies Landlord of any such alterations and
provides Landlord with plans therefor in advance, and which consent, if granted,
may be subject to such conditions as Landlord may deem appropriate. Tenant shall
be permitted to make cosmetic (such as interior painting) and non-structural
improvements and alterations without Landlord's consent so long as no permits
are required by the City of Menlo Park and such improvements and alterations
will not affect any structural or exterior portions of the building or affect
the building electrical, sprinkler, plumbing or HVAC systems. Any such
alterations, additions or improvements consented to by Landlord shall be made at
Tenant's sole cost and expense in accordance with the plans and specifications
therefor and Tenant agrees to provide Landlord with an "as built" set of plans
and specifications after any such work is completed. Tenant shall secure any
14
<PAGE>
and all governmental permits, approvals or authorizations required in connection
with any such work, and shall hold Landlord harmless from any and all liability,
costs, damages, expenses (including attorneys' fees) and any and all liens
resulting therefrom. All alterations, decorations, additions and improvements
(and expressly including all light fixtures and floor coverings installed by
Tenant), except furniture, removable paneling, wall fixtures, trade fixtures,
appliances and equipment which do not become a part of the demised premises,
shall be deemed to belong to Tenant, but shall be deemed to have been attached
to the demised premises or the building and to have become the property of
Landlord upon the termination of the demised term. Upon the expiration or sooner
termination of the demised term hereof, Tenant shall, upon written demand by
Landlord, at Tenant's sole cost and expense, forthwith remove any alterations,
decorations, additions or improvements made by Tenant which were designated by
Landlord to be removed at the time of Landlord's approval of the plans and
specifications therefor, or any alterations, decorations, additions or
improvements made by Tenant without Landlord's consent and designated by
Landlord prior to the termination of the demised term to be removed, and Tenant
shall forthwith at its sole cost and expense repair any damage to the demised
premises or the building caused by such removal.
ARTICLE 13 - REMEDIES
SECTION 13.1. Should Tenant default in the performance of any of its
obligations under this Lease with reference to the payment of rent and such
default continue for five (5) days after the date such payment is due, or should
Tenant default in the performance of any other obligations under this Lease and
such default continue for thirty (30) days after receipt of written notice from
Landlord specifying such default or beyond the time reasonably necessary to cure
if such default is of a nature to require more than thirty (30) days to remedy,
then, in addition to all other rights and remedies Landlord may have under this
Lease or under applicable law, Landlord shall have the following rights and
remedies:
(1) The Landlord has the remedy described in California Civil Code
Section 1951.4 (Landlord may continue the lease in effect after Tenant's breach
and abandonment and recover Rent as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations). If Tenant breaches
any covenants of this Lease or if any event of default occurs, whether or not
Tenant abandons the demised premises, this Lease shall continue in effect until
Landlord terminates Tenant's right to possession, and Tenant shall remain liable
to perform all of its obligations under this Lease and Landlord may enforce all
of Landlord's rights and remedies, including the right to recover rent as it
falls due. If Tenant abandons the demised premises or fails to maintain and
protect the same as herein provided, Landlord shall have the right to do all
things necessary or appropriate to maintain, preserve and protect the demised
premises, including the installation of guards, and may do all things
appropriate to a re-letting of the demised premises, and none of said acts shall
be deemed to terminate Tenant's right of possession, unless Landlord elects to
terminate the same by written notice to Tenant. Tenant agrees to reimburse
Landlord on demand for all amounts reasonably expended by Landlord in
maintaining, preserving and protecting the demised premises, together with
interest on the amounts expended from time to time at
15
<PAGE>
the maximum legal rate. Landlord shall also have the right to repair, remodel
and renovate the demised premises at the expense of Tenant and as deemed
necessary by Landlord.
(2) Landlord shall have the right to terminate Tenant's possession of
the demised premises, and if Tenant's right to possession of the demised
premises is terminated by Landlord by reason of a breach of this Lease by
Tenant, or by reason of the happening of an event of default, or by reason of
abandonment of the demised premises by Tenant, Tenant agrees to pay to Landlord
on demand (i) all unpaid rent earned at the time of termination, together with
interest on all unpaid installments from the times they were due to the date of
termination at the maximum legal rate; (ii) the amounts by which the unpaid rent
which would have been due and payable by Tenant since the date of termination
exceeds the amount of any rental loss that Tenant proves could have been
avoided, together with interest on said amounts from the dates they were due at
the maximum legal rate; (iii) the worth at the time of demand of the amount by
which the unpaid rent for the balance of the term of this Lease exceeds the
amount of rental loss that Tenant proves may reasonably be avoided, together
with interest on such amount at the maximum legal rate from the date of demand
until paid; (iv) all other amounts due Landlord from Tenant under the terms of
this Lease, or necessary to compensate Landlord for all detriment caused by
Tenant's failure to perform its obligations under this Lease. The right to
possession of the demised premises by Tenant should not be deemed terminated
until Landlord gives Tenant written notice of such termination or until Landlord
re-lets all or a portion of the demised premises. In the event that Landlord
seeks to recover the amount due, Landlord shall be entitled to recover the
amounts specified in paragraphs (a) (1), (a) (2) and (a) (4) of Section 1951.2
of the Civil Code of California as such section reads at the date of this Lease,
together with interest on said amounts at the maximum legal rate from the dates
they were due, computed as of the date of the award, together with the worth at
the time of the award of the amount by which the unpaid rent for the balance of
the term exceeds the amount of such rental loss that Tenant proves could
reasonably have been avoided. Landlord shall be required to mitigate damages by
making a good faith effort to re-let the demised premises.
(3) No right or remedy herein conferred upon or reserved to Landlord is
intended to be exclusive of any other right or remedy herein or by law, provided
that each shall be cumulative and in addition to every other right or remedy
given herein or now hereafter existing at law or in equity or by statute.
SECTION 13.2. Landlord shall in no event be in default in the
performance of any of its obligations hereunder unless and until Landlord shall
have failed to perform such obligations within thirty (30) days or such
additional times as is reasonably required to correct any such default after
notice by Tenant to the Landlord properly specifying wherein the Landlord has
failed to perform any such obligation.
ARTICLE 14 - BANKRUPTCY
SECTION 14.1. Tenant shall give written notice to Landlord of its
intention to commence proceedings under any state or federal insolvency or
bankruptcy law, or any
16
<PAGE>
comparable law that is now or hereafter may be in effect, whereby Tenant seeks
to be, or would be, discharged of its debts or the payment of its debts is
sought to be delayed, at least thirty (30) days prior to the commencement of
such proceedings.
SECTION 14.2. If any of the following events occur:
-------------
(1) The entry of an order for relief under Title 11 of the United
States Code as to Tenant or its executors, administrators or assigns, if any, or
the adjudication of Tenant or its executors, administrators or assigns, if any,
as insolvent or bankrupt pursuant to the provisions of any state insolvency or
bankruptcy act;
(2) The appointment of a receiver, trustee or other custodian of the
property of Tenant by reason of the insolvency or inability of Tenant to pay its
debts;
(3) The assignment of the property of Tenant for the benefit of
creditors;
(4) The commencement of any proceedings under any state or federal
insolvency or bankruptcy law, or any comparable law that is now or hereafter may
be in effect, whereby Tenant seeks to be, or would be, discharged of its debts
or the payment of its debts is sought to be delayed;
(5) The failure of Tenant to give written notice to Landlord provided
for in SECTION 14.1. above;
then Landlord may, at any time thereafter, in addition to any and all
other rights or remedies of Landlord under this Lease or under applicable law,
upon written notice to Tenant, terminate this Lease, and upon such notice this
Lease shall cease and terminate with the same force and effect as though the
date set forth in said notice were the date originally set forth herein and
fixed for the expiration of the demised term. Tenant shall thereupon vacate and
surrender the demised premises, but shall remain liable as herein provided.
ARTICLE 15 - SURRENDER OF PREMISES
SECTION 15.1. Tenant shall, upon termination of the demised term, or
any earlier termination of this Lease, surrender to Landlord the demised
premises, including, without limitation, all building equipment and apparatus,
and fixtures (except as provided in SECTIONS 12.1. AND 12.2.) then upon the
demised premises without any damage, injury, or disturbance thereto, or payment
therefor, except damages due to ordinary wear and tear, acts of God, fire and
other perils to the extent the demised premises are not required to be repaired
or restored as hereinbefore provided, and Tenant shall dispose of any hazardous
materials stored, dispensed, handled or used by Tenant or its employees, agents,
invitees, or contractors in, at or upon the demised premises in accordance with
the provisions of SECTION 7.4.
17
<PAGE>
ARTICLE 16 - EMINENT DOMAIN
SECTION 16.1. If more than thirty-three percent (33%) of the floor area
of the building on the demised premises shall be taken under the power of
eminent domain and the portion not so taken will not be reasonably adequate for
the operation of Tenant's business after the Landlord completes such repairs or
alterations as the Landlord is obligated or elects to make, Tenant shall have
the right to elect either to terminate this Lease, or, subject to Landlord's
right to terminate the Lease pursuant to SECTION 16.4., to continue in
possession of the remainder of the demised premises and shall notify Landlord in
writing within ten (10) days after such taking of Tenant's election. In the
event less than thirty-three percent (33%) of the floor area of the building on
the demised premises shall be taken or Tenant elects to remain in possession, as
provided in the first sentence hereof, all of the terms herein provided shall
continue in effect, except that the base rent shall be reduced in the same
proportion that the floor area of the building on the demised premises taken
bears to the original floor area of the building on the demised premises, and
Landlord shall at its own cost and expense make all necessary repairs or
alterations to the building so as to constitute the portion of the building not
taken a complete architectural unit and the demised premises a complete unit for
the purposes allowed by this Lease, but such work shall not exceed the scope of
the work to be done by Landlord in originally constructing said building.
SECTION 16.2. Each party waives the provisions of Code of Civil
Procedure Section 1265.130 allowing either party to petition the Superior Court
to terminate this Lease in the event of a partial taking.
SECTION 16.3. All damages or awards for any taking under the power of
eminent domain whether for the whole or a part of the demised premises shall
belong to and be the property of Landlord whether such damages or awards shall
be awarded as compensation for diminution in value to the leasehold or to the
fee of the demised premises; provided however, that Landlord shall not be
entitled to the award made to Tenant or Landlord for loss of business,
depreciation to, and cost or removal of stock and fixtures and for leasehold
improvements which have been installed by Tenant at its sole cost and expense
less depreciation which is to be computed on the basis of completely
depreciating such leasehold improvements during the initial term of this Lease,
and any award made to Tenant in excess of the then depreciated value of
leasehold improvements shall be payable to the Landlord.
SECTION 16.4. If more than thirty-three percent (33%) of the floor
areas of the building on the demised premises shall be taken under power of
eminent domain, or if any part of the Parking and Accommodation Areas shall be
so taken, Landlord may, by written notice to Tenant delivered on or before the
date of surrendering possession to the public authority pursuant to such taking,
terminate this Lease as of such date.
SECTION 16.5. If this Lease is terminated as provided in this Article,
the rent shall be paid up to the day that possession is so taken by public
authority and Landlord shall make a prorata refund of any rent and all deposits
paid by Tenant in advance and not yet earned.
18
<PAGE>
ARTICLE 17 - REAL PROPERTY TAXES
SECTION 17.1. Tenant shall reimburse Landlord for all real property
taxes, assessments and ongoing sewer fees applicable to the demised premises.
Taxes shall be prorated to lease years for purpose of making this computation.
Such payment shall be made by Tenant within thirty (30) days after receipt of
Landlord's written statement setting forth the amount of such computation
thereof. If the demised term of this Lease shall not expire concurrently with
the expiration date of the fiscal tax year, Tenant's liability for taxes for the
last partial lease year shall be prorated on an annual basis.
SECTION 17.2. If the demised premises are not separately assessed,
Tenant's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Landlord from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Landlord's reasonable determination thereof, in good
faith, shall be conclusive.
SECTION 17.3. Tenant shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Tenant contained in the demised premises or elsewhere.
Tenant shall cause said trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Landlord.
If any of Tenant's said personal property shall be assessed with
Landlord's real property, Tenant shall pay Landlord the taxes attributable to
Tenant within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Tenant's property.
SECTION 17.4. In addition to all other payments provided for herein,
the Tenant shall on demand reimburse Landlord for any surcharges, fees, and any
similar charges required to be paid by any instrumentality of local, state or
federal government in connection with parking in the parking area, including
policing; supervising with attendants; other costs in connection with providing
charged parking; repairs, replacements and maintenance not properly chargeable
to capital account under good accounting principles; interest and depreciation
of the actual cost of modification or improvements to the areas, facilities and
improvements maintained in this Article either (i) required by any
instrumentality of local, state or federal government, or (ii) installed by
Landlord on account of governmental requirements to facilitate payment of a
parking charge by the general public for parking in the parking area, or both,
and other similar costs; and there shall be excluded (a) cost of construction of
such improvements which is properly chargeable to capital account and (b)
depreciation of the original cost of construction of all items not previously
mentioned in this sentence. If Landlord, on account of governmental
requirements, shall require the payment of a parking charge by the general
public for parking in the parking area, then during any period in which such a
charge is made the total revenue (after deducting excise and similar taxes
thereon and taxes, fees or surcharges imposed by any agency or instrumentality
of local, state or federal government) actually received in cash or its
equivalent by Landlord for such parking charge shall be credited against said
gross costs.
19
<PAGE>
SECTION 17.5. Notwithstanding the provisions of ARTICLE 17 hereinabove,
Tenant shall pay any increase in "real property taxes" resulting from any and
all improvements of any kind whatsoever placed on or in the demised premises for
the benefit of or at the request of Tenant regardless of whether said
improvements were installed or constructed either by Landlord or Tenant.
SECTION 17.6. In addition to all other payments provided for herein,
the Tenant shall on demand reimburse Landlord for any tax (excluding income tax)
and/or business license fee or other levy that may be levied, assessed or
imposed upon the rent or other payments provided for herein or on the square
footage of the demised premises, on the act of entering into this Lease, or on
the occupancy of the Tenant however described, as a direct substitution in whole
or in part for, or in addition to, any real property taxes, whether pursuant to
laws presently existing or enacted in the future.
ARTICLE 18 - PARKING AND ACCOMMODATION AREAS
SECTION 18.1. Landlord grants to Tenant during the demised term the
non-exclusive right to use the parking facilities and other areas provided and
designated as "Parking and Accommodation Areas" on EXHIBIT "B" hereto for the
accommodation and parking of such automobiles of the Tenant, its officers,
agents, employees and its customers while working or visiting Tenant. Tenant
agrees that its officers, agents and employees will park their automobiles only
in the parking areas provided in the Parking and Accommodation Areas, and Tenant
specifically agrees that such officers, agents and employees will not park on
any public streets in the vicinity of the demised premises. Except as provided
in SECTION 17.4., Landlord shall not charge parking fees for such right to use
parking facilities.
SECTION 18.2. All parking areas and facilities furnished by Landlord
including, but not limited to, pedestrian sidewalks, landscaped areas and
parking areas shall at all times be subject to the control and management of
Landlord so that Landlord will be in a position to make available efficient and
convenient use thereof, and Landlord shall have the right from time to time to
establish, modify and enforce reasonable rules and regulations with respect to
all facilities and areas mentioned in this Article, and Tenant agrees to abide
by and conform therewith. Landlord shall have the right to construct, maintain
and operate lighting facilities on all of said areas and improvements, to police
the same, from time to time to change the area, location and arrangement of
parking areas and facilities, to restrict employee parking to employee parking
areas, to construct surface, subterranean and/or elevated parking areas and
facilities, to establish and from time to time change the level of parking
surfaces, to close (if necessary) all or any portion of said areas or facilities
to such extent as may in the opinion of Landlord's counsel be legally sufficient
to prevent a dedication thereof or the accrual of any rights of any person or of
the public therein, and to do and perform such other acts in and to said areas
and improvements respectively as in the use of good business judgment the
Landlord shall determine to be advisable with a view to the improvement of the
convenience and use thereof by Tenant, other lessees, and their respective
employees and visitors.
20
<PAGE>
Notwithstanding the foregoing to the contrary, Landlord shall not
(unless necessary to comply with applicable legal requirements) make any changes
to the Parking and Accommodation Areas that will have a material adverse effect
on access to and from the demised premises. Landlord shall keep the Parking and
Accommodation Areas in good condition.
SECTION 18.3. Tenant agrees during the demised term to pay to Landlord
an annual charge which shall be Landlord's actual gross costs of operating,
maintaining and/or replacing all of the areas and facilities mentioned in this
Article. The annual charge shall be an estimate computed on the basis of periods
of twelve (12) consecutive calendar months, commencing and ending on such dates
as may be designated by Landlord, and shall be paid in monthly installments on
the first day of each calendar month in the amount estimated by Landlord. Within
ninety (90) days after the end of each such annual period, Landlord will
determine (and furnish to Tenant a statement showing in reasonable detail) the
actual annual charge for such period and the amounts so estimated and paid
during such period shall be adjusted within such ninety (90) days (including
adjustments on a prorata basis of any partial such period at either end of the
demised term) and one party shall pay to the other on demand whatever amount is
necessary to effectuate such adjustment.
Landlord's said gross costs shall consist of and include all costs and
expenses of every kind or nature incurred by Landlord in the operation,
maintenance and/or replacement of all of the areas, facilities and improvements
mentioned in this Article determined in accordance with good accounting practice
by an accountant employed by Landlord. The determination of such accountant
shall be conclusive. Without otherwise limiting the generality of the foregoing,
there shall be included in such gross costs public liability and property damage
insurance, landscape maintenance, maintenance of utilities, water, cleaning of
areas, facilities and improvements, operation of lighting, common area taxes and
assessments determined in the same manner as taxes and assessments on the
demised premises, policing and sweeping of parking areas, supervising with
attendants, repairs, replacements and maintenance, and an amount equal to ten
percent (10%) of the total of all of the above for administration of the Parking
and Accommodation Areas.
Tenant shall have the right once annually to inspect the books and
records of Landlord with respect to the operating and other costs referred to in
this Section 18.3. Such inspections shall be completed in Landlord's offices
within one hundred twenty (120) days after delivery of Landlord's annual report
for said year setting forth such costs and shall be performed by a certified
public accountant, and the cost thereof shall be paid by Tenant. Tenant shall
give Landlord no less than thirty (30) days' advance written notice of its
intent to inspect.
SECTION 18.4. The Parking and Accommodation Areas included for the
purpose of this Article are those shown on EXHIBIT "B" outside of the building
area.
21
<PAGE>
ARTICLE 19 - MISCELLANEOUS
SECTION 19.1. Landlord and its designee shall have the right during
reasonable business hours following one (1) day advance notice to Tenant (except
in an emergency, when no notice shall be required) to enter the demised premises
except restricted areas as established by or on behalf of the Federal Government
for security purposes (and in emergencies at all times), (i) to inspect the
same, (ii) for any purpose connected with Landlord's rights or obligations under
this Lease and, (iii) for all other lawful purposes.
SECTION 19.2. Tenant shall not be entitled to make repairs at
Landlord's expense, and Tenant waives the provisions of Civil Code Sections 1941
and 1942 with respect to Landlord's obligations for tenantability of the demised
premises and Tenant's right to make repairs and deduct the expenses of such
repairs from rent.
SECTION 19.3. This Lease shall be governed exclusively by the
provisions hereof and by the laws of the State of California as the same from
time to time exist. This Lease expresses the entire understanding and all
agreements of the parties hereto with each other and neither party hereto has
made or shall be bound by any agreement or any representation to the other party
which is not expressly set forth in this Lease.
SECTION 19.4. If Tenant should hold over after the demised term and any
extension thereof as herein provided for, then such holding over shall be
construed as a tenancy from month to month at a rent double that provided for
under the monthly rental of the principal term of this Lease.
SECTION 19.5. Tenant agrees to maintain all toilet and washroom
facilities within the demised premises in a neat, clean and sanitary condition.
SECTION 19.6. Landlord covenants and agrees that Tenant, subject to the
terms and provisions of this Lease, on paying the rent and observing, keeping
and performing all of the terms and provisions of this Lease on its part to be
observed, kept and performed, shall lawfully, peaceably and quietly have, hold,
occupy and enjoy the demised premises during the demised term without hindrance
or ejection by any person lawfully claiming under or against the Landlord.
SECTION 19.7. Subject to ARTICLE 6, the terms and provisions hereof
shall be construed as running with the land and shall be binding upon and inure
to the benefit of heirs, executors, administrators, successors and assigns of
Landlord and Tenant.
SECTION 19.8.
A. Tenant shall promptly pay all sums of money with respect to any
labor, services, materials, supplies or equipment furnished or alleged to have
been furnished to Tenant in, at or about the demised premises, or furnished to
Tenant's agents, employees, contractors or subcontractors, that may be secured
by any mechanic's, materialmen's, supplier's or other liens against the demised
premises or Landlord's interest therein. In the event any such or similar liens
shall be filed, Tenant shall, within three (3) days of receipt thereof, give
notice to Landlord of such lien, and Tenant shall,
22
<PAGE>
within thirty (30) days after receiving notice of the filing of the lien,
discharge such lien by payment of the amount due to the lien claimant. However,
Tenant may in good faith contest such lien provided that within such thirty (30)
day period Tenant provides Landlord with a surety bond from a company acceptable
to Landlord, protecting against said lien in an amount at least one and one-half
(1-1/2) times the amount claimed or secured as a lien or such greater amount as
may be required by applicable law; and provided further that Tenant, if it
should decide to contest such lien, shall agree to indemnify, defend and save
harmless Landlord from and against all costs arising from or in connection with
any proceeding with respect to such lien. Failure of Tenant to discharge the
lien, or, if contested, to provide such bond and indemnification, shall
constitute a default under this Lease and in, addition to any other right or
remedy of Landlord, Landlord may, but shall not be obligated, to discharge or
secure the release of any lien by paying the amount claimed to be due, and the
amount so paid by Landlord, and all costs and expenses incurred by Landlord
therewith, including, but not limited to, court costs and reasonable attorneys'
fees, shall be due and payable by Tenant to Landlord forthwith on demand.
B. At least fifteen (15) days before the commencement by Tenant of any
material construction or remodeling work on the demised premises, Tenant shall
give written notice thereof to Landlord. Landlord shall have the right to post
and maintain on the demised premises such Notices of Non-Responsibility, or
similar notices, provided for under applicable laws.
SECTION 19.9.
A. Tenant shall deposit with Landlord a letter of credit in the amount
specified in SECTION 2.4.(B) hereof as a "Security Deposit". The Security
Deposit shall be held by Landlord as security for the faithful performance of
all the terms of this Lease to be observed and performed by Tenant. The Security
Deposit shall not be mortgaged, assigned, transferred or encumbered by Tenant
without the written consent of Landlord and any such act on the part of Tenant
shall be without force and effect and shall not be binding upon Landlord.
B. If any of the rents herein reserved or any other sum payable by
Tenant to Landlord shall be overdue and unpaid, or should Landlord make payments
on behalf of Tenant, or should Tenant fail to perform any of the terms of this
Lease, then Landlord may, at its option and without prejudice to any other
remedy which Landlord may have on account thereof, apply the entire Security
Deposit, or so much thereof as may be necessary, to compensate Landlord toward
the payment of rent or additional rent, loss, or damage sustained by Landlord
due to such breach on the part of Tenant, and Tenant shall forthwith upon demand
restore said Security Deposit to the original sum deposited. Should Tenant
comply with all of said terms and promptly pay all of the rent and all other
sums payable by Tenant to Landlord, said Security Deposit shall be returned in
full to Tenant at the end of the demised term.
C. In the event of bankruptcy or other similar proceedings listed in
ARTICLE 14 hereof, the Security Deposit shall be deemed to be applied first to
the payment of rent and other charges due Landlord for all periods prior to the
filing of such proceedings.
23
<PAGE>
D. In the event Landlord delivers the Security Deposit to the purchaser
of Landlord's interest in the demised premises, Landlord, after written notice
to Tenant of said delivery, shall be discharged from any further liability with
respect to the Security Deposit. This provision shall also apply to any
subsequent transferees.
SECTION 19.10. All notices, statements, demands, requests, consents,
approvals, authorizations, offers, agreements, appointments or designations
hereunder by either party to the other shall be in writing and shall be
sufficiently given and served upon the other party or, if sent by overnight
carrier or United States certified mail, return receipt requested, postage
prepaid, and addressed as follows:
If sent to Tenant, the same shall be addressed to the Tenant at 1450
ODDSTAD DRIVE, REDWOOD CITY, CALIFORNIA 94063, ATTENTION: VICE PRESIDENT OF
OPERATIONS, or at such other place as Tenant may from time to time designate by
notice to Landlord.
If sent to Landlord, the same shall be addressed to Landlord at 60
HILLSDALE MALL, SAN MATEO, CALIFORNIA 94403-3497, or at such other place as
Landlord may from time to time designate by notice to Tenant.
Any such notice when sent by overnight carrier or certified mail as
above provided shall be deemed duly served on the third business day following
the date of such mailing.
SECTION 19.11. As used in this Lease and when required by the context,
each number (singular or plural) shall include all numbers, and each gender
shall include all genders; and unless the context otherwise requires, the word
"person" shall include corporation, firm or association.
SECTION 19.12. In case of litigation with respect to the mutual rights,
obligations, or duties of the parties hereunder, the prevailing party shall be
entitled to reimbursement from the other party of all costs and reasonable
attorneys' fees actually incurred.
SECTION 19.13. Each term and each provision of this instrument
performable by Tenant shall be construed to be both a covenant and a condition.
SECTION 19.14. Except as otherwise expressly stated, each payment
provided herein to be made by Tenant to Landlord shall be in addition to and not
in substitution for the other payments to be made by Tenant to Landlord.
SECTION 19.15. Time is and shall be of the essence of this Lease and
all of the terms, provisions, covenants and conditions hereof.
SECTION 19.16. The Tenant warrants that it has not had any dealings
with any realtor, broker, or agent in connection with the negotiation of this
Lease excepting only BT Commercial representing Landlord and Spallino Reid
Corporate Real Estate Services representing Tenant, whom Landlord agrees to pay
whatever commission may be due. Each party agrees to hold the other harmless
from any cost, expense or liability for any compensation, commissions or charges
claimed by any realtor, broker,
24
<PAGE>
or agent with respect to this Lease and/or the negotiation thereof with whom the
other party has or purportedly has dealt.
SECTION 19.17.Tenant agrees that its interest in this Lease shall be
subordinate to any mortgage, deed of trust and/or other security indenture
hereafter placed upon the demised premises and to any and all advances made or
to be made thereunder and to the interest thereon made and all renewals,
replacements, and extensions thereof, but nothing herein contained shall be
deemed to alter or limit Tenant's rights as set forth in SECTION 19.6. Tenant
shall, at the request of Landlord or any mortgagee, trustee or holder of any
such security instrument, execute in writing an agreement subordinating its
rights under this Lease to the lien of such mortgage, deed of trust and/or other
security indenture. If any mortgagee, trustee or holder of such security
instrument elects to have the Tenant's interest in this Lease superior to any
such instrument by notice to Tenant, then this Lease should be deemed superior
to the lien of any such mortgage, deed of trust or security indenture whether
this Lease was executed before or after said mortgage, deed of trust and/or
security indenture. Tenant shall not be required to subordinate its interest
under this Lease to any other party unless Tenant receives a binding agreement
from such party confirming that Tenant's rights to use and occupy the demised
premises shall not be disturbed so long as Tenant is not in default after any
applicable cure or grace periods.
SECTION 19.18. Landlord reserves the right during the last six months
of the demised term of this Lease or the last six months of any extension hereof
to enter the property during normal working hours following one (1) day advance
notice for the purpose of showing the demised premises (except restricted areas
established by, or on behalf of, the Federal Government for security purposes)
to prospective tenants or purchasers and to place signs (for the last year) on
the demised premises advertising the property for lease or sale.
SECTION 19.19. The following terms as used in this Lease shall have the
following meaning:
(a) "Unavoidable Delay" means any prevention, delay or stoppage due to
strike(s), lockout(s), labor dispute(s), act(s) of God, inability to obtain
labor or materials or reasonable substitutes therefor, governmental
restrictions, governmental regulations, governmental controls, enemy or hostile
governmental action, civil commotion, fire or other casualty, and other
conditions or causes beyond the reasonable control of the party obligated to
perform.
IN WITNESS WHEREOF, the parties have executed this instrument.
TENANT: LANDLORD:
IPRINT.COM, INC., BOHANNON DEVELOPMENT COMPANY,
a Delaware corporation a California corporation
By: By: .
--------------------------------- --------------------------------
President Executive Vice President
By: By: .
--------------------------------- --------------------------------
Secretary Secretary
25
<PAGE>
BOHANNON PARK
EXHIBIT "A"
DESCRIPTION OF DEMISED PREMISES
FOR
"IPRINT"
255 CONSTITUTION DRIVE
MENLO PARK, CA.
All that certain property situate in the City of Menlo Park, County of
San Mateo, State of California, described as follows:
Commencing at the most Westerly corner of Parcel "B" as said corner is
shown on the map entitled "Parcel Map being a subdivision of Parcel 3 of Parcel
Map Rec. in Vol. 27 at Page 9, San Mateo County Records, Bohannon Park," which
Map was filed in the Office of the County Recorder of San Mateo County, State of
California on August 15, 1979, in volume 47 of Parcel Maps at Page 72.
Thence from said point of commencement South 67(Degree) 17' East 28.50
feet and North 22 43' East 21.00 feet to the true point of the beginning.
Thence North 22(Degree) 43' East 162.50 feet;
Thence South 67(Degree) 17' East 144.00 feet;
Thence South 22(Degree) 17' West 162.50 feet;
and North 67(Degree) 17' West 144.00 feet
to the point of beginning.
Containing approximately 23,400 SQUARE FEET, more or less.
26
<PAGE>
EXHIBIT "B"
[MAP OF AREA OF PREMISES]
27
<PAGE>
EXHIBIT "C"
Provisions Relating to Construction of
Demised Premises Located at
255 Constitution Drive, Menlo Park, California
I Landlord's Work
Landlord shall perform, or cause to be performed, at its sole cost and
expense, the following work in good and workmanlike manner employing good
materials so as to conform to all building codes and regulations. The following
work, in addition to all improvements in the demised premises originally
constructed by Landlord, is herein referred to as "Landlord's Work".
1. Paint the interior of the demised premises;
2. Replace existing carpet in the demised premises with Landlord's
building standard carpet;
3. Remodel one (1) men's and one (1) women's restrooms in accordance
with ADA codes located on the south side of the building
constituting the demised premises;
4. Remove demising wall between the existing loading area and
research and development area of the building and replace the dock
high doors with glass panel roll up doors; and
5. Provide necessary HVAC ducting capacity and lighting in the
expanded research and development area.
Tenant acknowledges that the glass roll up doors may be installed up to
ninety (90) days after commencement of the Lease (subject to availability), and
that installation of said roll up doors after commencement of the demised term
of this Lease shall not delay commencement of rent pursuant to the terms of
Article 1 of the Lease.
II Tenant's Work
All items of work which are not expressly made a part of Landlord's
Work in Part I above.
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 40,284
<SECURITIES> 12,243
<RECEIVABLES> 616
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 955
<PP&E> 3,501
<DEPRECIATION> (568)
<TOTAL-ASSETS> 57,333
<CURRENT-LIABILITIES> 6,015
<BONDS> 0
0
0
<COMMON> 84,520
<OTHER-SE> (33,219)
<TOTAL-LIABILITY-AND-EQUITY> 57,333
<SALES> 2,859
<TOTAL-REVENUES> 3,032
<CGS> 2,176
<TOTAL-COSTS> 2,191
<OTHER-EXPENSES> 12,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (11,863)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,863)
<EPS-BASIC> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
<PAGE>
EXHIBIT 99.0
[The following material is incorporated by reference to pages 7 through 18
(inclusive) from the Registrants form of Prospectus filed pursuant to Rule
424(b) on March 8, 2000]
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY. YOU SHOULD CAREFULLY
CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE OTHER INFORMATION
IN THIS PROSPECTUS, BEFORE BUYING SHARES IN THIS OFFERING.
RISKS RELATED TO OUR BUSINESS
OUR NEWLY INTRODUCED PRODUCTS AND SERVICES MAKE IT DIFFICULT TO EVALUATE OUR
FUTURE PROSPECTS.
iPrint.com was incorporated in August 1996, and to date we have generated
limited revenues. Most of our revenues were generated in the last two quarters.
In January 1997, we began Internet-enabled printing services for the short-run,
mass market sector, which is characterized by orders that can be printed in a
short time and in relatively small quantities. Newly introduced products and
print services represent a significant source of our revenues. Therefore, we
have only a limited operating history with our technology, process, logistics
and customers. As a result, you should not consider our recent revenue growth as
an indication of our future rate of revenue growth, if any. We will encounter
risks and difficulties that early stage companies frequently encounter in new
and rapidly evolving and competitive markets. These risks include expanding the
number of certified commercial print vendors and improving our technological and
logistical connections to these vendors. If we do not successfully address these
risks, our business will be seriously harmed.
WE HAVE NOT BEEN PROFITABLE. WE HAVE AN ACCUMULATED DEFICIT OF $15.9 MILLION AS
OF DECEMBER 31, 1999 AND MAY NOT EVER BE ABLE TO ACHIEVE PROFITABILITY.
Our failure to significantly increase our revenues will seriously harm our
business and operating results. We incurred net losses of $700,000 in 1997, $2.3
million in 1998 and $13.4 million in 1999. As of December 31, 1999, we had an
accumulated deficit of $15.9 million. To become profitable, we must
significantly increase our revenues by obtaining new customers and generating
additional revenues from existing customers, control our costs and improve our
gross margins. We may not be able to sustain our recent growth rates in
revenues. For 1999, shipping and handling fees and barter transactions accounted
for approximately 31% of our revenues. In fact, we may not have any revenue
growth, and our revenues could decline. Moreover, we expect to significantly
increase our operating expenses in connection with:
- increasing our advertising and special promotions; and
1
<PAGE>
- continuing to develop our services and technologies.
As a result, we expect to incur significant losses for the foreseeable future.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE PUBLIC'S EXPECTATIONS, THE MARKET PRICE OF OUR COMMON STOCK MAY
DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We compete primarily in the
short-run, mass market printing industry. We have recently begun offering
special custom quote printing services, which are characterized by small numbers
of orders from larger customers. These orders may vary widely in dollar amount.
Repeat print business depends on the customers' satisfaction with the services
provided. As a result, we cannot predict the amount and profitability of the
print services we will provide in a given period. We believe that period-
to-period comparisons of our results of operations are not meaningful and should
not be relied upon as indicators of future performance. If our operating results
fall below the public's expectations in some future quarter or quarters, the
market price of our common stock will likely fall.
WE PLAN TO INCREASE OUR OPERATING EXPENSES AND IF OUR REVENUES DO NOT INCREASE,
OUR BUSINESS COULD BE SERIOUSLY HARMED.
We plan to increase our operating expenses to expand our sales and marketing
operations, fund greater levels of research and development, develop new
relationships with destination websites to increase traffic to our website,
expand our facilities and increase our professional services and support
capabilities. If our revenues do not increase along with these expenses, our
business could be seriously harmed. In addition, we incur expenses based in part
on expectations of our future revenues, and if our expenses do not generate the
revenues we anticipate, our operating results will suffer.
IF WE FAIL TO INCREASE THE NUMBER OF OUR CUSTOMERS THROUGH SUCCESSFUL MASS
EMAILINGS, OR FAIL TO SATISFACTORILY FULFILL THEIR PRINT ORDERS, OUR BUSINESS
WILL SUFFER.
Our business depends on successful mass emailing to increase the number of
customers and on satisfactory fulfillment of print orders that our customers
place. Our operating results may fluctuate significantly if we are unable to
obtain quality email lists or deliver quality printed products in any given
quarter.
BARTER TRANSACTIONS HAVE ACCOUNTED FOR A SIGNIFICANT PORTION OF OUR REVENUES IN
1999 AND IF THESE REVENUES ARE DISCONTINUED OR DO NOT RECUR, THE PRICE OF OUR
STOCK MAY FALL.
2
<PAGE>
For 1999, barter transactions accounted for approximately 10% of our
revenues. These revenues may be discontinued at any time or may not recur in
future periods, which could cause the price of our stock to fall.
CHANGES IN OUR REVENUE RECOGNITION POLICIES AND PROCEDURES MAY ADVERSELY AFFECT
OUR OPERATING RESULTS.
Our operating results may be adversely affected by our revenue recognition
policies and procedures. These policies and procedures may evolve or change over
time based upon applicable accounting standards and how these standards are
interpreted. For example, in October 1999, the SEC asked the Emerging Issue Task
Force of the Financial Accounting Standards Board to address accounting issues
related to electronic commerce companies. These issues include accounting
treatments of barter transactions, free or heavily discounted products and
shipping and handling costs. Resolution of these issues could have a material
adverse effect on the presentation of our operating results.
ANY DECLINE IN REVENUES GENERATED FROM OUR IPRINT.COM, MARKETING RELATIONSHIP
AND CO-LABELED WEBSITES OR FROM OUR SPECIALIZED PRINT SERVICES WOULD ADVERSELY
AFFECT OUR OPERATING RESULTS.
The printing services we offer on our iPrint.com, marketing relationship and
co-labeled websites and our specialized print services accounted for
substantially all of our revenues in 1998 and 1999. We anticipate that the
services we offer on these websites will continue to generate substantially all
of our revenues for the foreseeable future. Consequently, a decline in the price
of, or demand for, the printing services we offer on those websites and through
custom quotes, or the failure of these services to achieve broad market
acceptance, would seriously harm our business.
BECAUSE THE MARKET FOR OUR INTERNET-ENABLED PRINTING SERVICES IS AT AN EARLY
STAGE, A LARGE NUMBER OF PRINT BUYING CUSTOMERS DO NOT KNOW ABOUT AND MAY NOT
USE OUR SERVICES.
Our success depends on a significant number of print buying customers
knowing about and regularly using our services. The market for Internet-enabled
printing services is at an early stage of development. Many of our customers
will be addressing issues such as quality, reliability, billing, delivery and
customer service, for the first time in a self service, Internet-based print
creation and ordering environment. We must educate these potential customers on
the use and benefits of our self-service website. Educating potential customers
is a complex, time consuming and expensive process. In many cases, organizations
must change established business practices and conduct business in new ways to
use our services. If significant numbers of print buying customers are not
willing to change the method by which they use printing services, our business
may fail.
IF WE ARE UNABLE TO ATTRACT CUSTOMERS WHO HAVE LONG-STANDING RELATIONSHIPS WITH
TRADITIONAL PRINT VENDORS TO OUR WEBSITES, OUR BUSINESS COULD BE HARMED.
3
<PAGE>
To succeed, we must attract new customers, many of whom may have personal
and long-standing relationships with traditional print and design shops, catalog
vendors and office supply chain and stationery stores. If we are unable to
attract customers to our websites for their printing needs, our revenues will
not grow and our stock price will decline. Traditional print and design shops
have many advantages which we cannot offer our customers, including physical
proximity and the ability to store and maintain designs, negatives or print
plates on our premises. In addition, there are disadvantages relating to online
print services, including not speaking face-to-face with a company service
representative, needing a computer that is connected to the Internet, and
requiring a credit card or purchase order to make purchases. Catalog vendors and
office supply chains may be more convenient for customers that also want to
purchase non-printed products, such as office furniture. Office supply chains
and stationery stores may also have better brand recognition than us.
IF OUR PROMOTIONAL EFFORTS ARE NOT SUCCESSFUL, OUR BUSINESS WILL FAIL.
Our success depends upon our ability to acquire customers through promotions
and convert them into repeat paying customers. If we cannot convert a
substantial number of these promotional customers into repeat paying customers,
our business will fail. Direct business promotions are the most important
vehicle we use to acquire customers. These promotions may include providing a
product, such as a mailing label, to a customer for free, or only charging the
customer a shipping and handling fee, in order to introduce that customer to our
products and services. To expand our business and our customer base, we intend
to continue to offer business promotions.
Because we only recently began acquiring customers through aggressive
business promotions, we cannot assure you that our strategy of achieving
customer and revenue growth will be successful. For this strategy to succeed, we
must:
- create compelling business promotions;
- find qualified customer lists in sufficient quantities and at reasonable
prices; and
- process and fulfill orders for the products that the business promotions
generate.
We cannot predict whether using aggressive business promotions will allow us
to grow rapidly enough to recover the large investments we have made, and must
continue to make, in our promotional programs, systems and technologies. Our
business model depends on rapidly acquiring customers to grow our revenues and
achieve profitability. If our business promotions do not attract a substantial
number of new customers, our revenues may not grow and we may not be profitable.
ANY FAILURE ON THE PART OF OUR OUTSIDE COMMERCIAL PRINT VENDORS TO FULFILL OUR
ORDERS IN A TIMELY AND COST-EFFECTIVE MANNER COULD SERIOUSLY HARM OUR BUSINESS.
4
<PAGE>
We depend on outside commercial print vendors to print and fulfill our
customers' orders. Any failure on the part of these vendors to fulfill our
orders in a timely and cost-effective manner could seriously harm our business.
To date, we have only certified approximately 15 commercial print vendors to
fulfill our orders. Our certification process entails onsite evaluation and
analysis, including extensive testing, of the commercial print vendor's existing
equipment, print processes, print quality, workflow management systems and
turnaround times. We do not have long-term contracts with any of them. If one or
more of our commercial print vendors failed to satisfactorily fulfill our
customers' orders, or if the customer orders we receive significantly increased
and our vendors did not have the capacity to fulfill those orders, we would be
required to find and qualify additional commercial print vendors. In that event,
because it typically takes us between four and eight weeks to certify and
integrate a commercial print vendor into our business, we may be delayed in
fulfilling our customers' orders, which may cause us to lose customers and hurt
our business. Furthermore, if our commercial print vendors increase the prices
they charge us, our selling prices or our margins will be adversely affected,
which may make us less competitive and harm our business.
Because we do not own any inventory, we rely on our commercial print vendors
to maintain an adequate stock of raw materials needed to create our products.
Any failure of these commercial print vendors to maintain adequate inventory
could result in delays in product delivery and customer dissatisfaction. This in
turn could harm our business.
FOR SEVERAL PRODUCTS WE HAVE CERTIFIED ONLY ONE COMMERCIAL PRINT VENDOR, AND IF
THAT PRINT VENDOR STOPPED PRINTING THESE PRODUCTS, WE MIGHT NOT BE ABLE TO
FULFILL OUR CUSTOMERS' ORDERS.
For several of the products we offer, for example, full color business
cards, we have certified only one commercial print vendor. If that vendor were
to stop printing these products, and we were unable to certify a new vendor in a
timely manner, we would be unable to fulfill our customers' orders for these
products. Any failure to fulfill our customers' orders will harm our business.
A FAILURE BY OUTSIDE DELIVERY SERVICES TO TIMELY DELIVER OUR CUSTOMERS' ORDERS
COULD SERIOUSLY HARM OUR BUSINESS.
We depend on outside delivery services, including the United States postal
service, Federal Express and U.P.S., to deliver print orders to our customers.
These delivery services have failed in the past, and may fail in the future, to
deliver print orders to our customers on a timely basis. Any failure on the part
of these outside services to deliver our orders in a timely and cost-effective
manner could seriously harm our business.
IF WE ARE UNABLE TO ENHANCE OUR IPRINT.COM AND RELATED WEBSITES ON A TIMELY AND
COST-EFFECTIVE BASIS, OR IF THESE ENHANCEMENTS DO NOT ACHIEVE WIDESPREAD MARKET
ACCEPTANCE, WE WILL BE UNABLE TO GROW, WE WILL MISS MARKET OPPORTUNITIES AND OUR
BUSINESS WILL BE SERIOUSLY HARMED.
5
<PAGE>
If we are unable to enhance our iPrint.com, marketing relationship,
co-labeled or private-labeled websites on a timely and cost-effective basis, or
if these enhancements do not achieve widespread market acceptance, we will be
unable to grow, we will miss market opportunities and our business will be
seriously harmed. Similarly, if we do not make timely and cost-effective
improvements to our other technologies and processes, our business will suffer.
The life cycles of our enhancements, and the rate at which our websites and
processes must be able to accomodate increased volume and products offered, are
difficult to predict because we operate in a new and emerging market that is
characterized by rapid technological change, changing customer needs and
evolving industry standards. The introduction of products and services, from
both the traditional printing industry and the Internet and software commerce
sector, that employ new technologies and standards could render our existing
products or services obsolete and unmarketable.
For example, our technology that enables our customers to compose their
printed designs in electronic format is written in the software language C++. If
a new software language, such as Java, becomes standard in the printing
industry, we may need to rewrite this technology in another software language to
remain competitive. Any need to rewrite our technology would be costly and could
result in significant interruptions to our business.
To be successful, we must offer products and services that keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and achieve
broad market acceptance. In our efforts to develop these types of products and
services, we may:
- not be able to timely or cost-effectively develop and market them;
- encounter products, capabilities or technologies developed by others that
render our products and services obsolete or noncompetitive or that shorten the
life cycles of our existing products and services; or
- experience difficulties that could delay or prevent the successful
development, introduction and adoption of these new products and services.
IF WE FAIL TO ADEQUATELY MAINTAIN AND ENHANCE THE COMPUTER AND
TELECOMMUNICATIONS INFRASTRUCTURE REQUIRED TO SUPPORT OUR IPRINT.COM AND RELATED
WEBSITES, OUR BUSINESS WILL SUFFER.
The performance of our iPrint.com and related websites depends on the
operation of our computer and telecommunications equipment. We are responsible
for the operation of this equipment and have not retained any third-party
companies to maintain or support our equipment. All of our network operations
equipment is located in our Redwood City, California facility, and we do not
have any backup or redundant equipment located at an offsite or third party
location. If we fail to adequately maintain and enhance our network operations
center, our iPrint.com and related websites may not be available to our
customers. Any system failure, including any network, software or hardware
failure, that interrupts or increases the response
6
<PAGE>
time on our websites could decrease customer usage of our services and damage
our reputation. In addition, damage to our computer and telecommunications
infrastructure from fire, earthquakes, power loss, telecommunications failures,
computer viruses, hacker attacks, physical break-ins and similar events may
seriously disrupt our service and devastate our business, particularly since we
do not have backup facilities at another location. On one occasion, a
telecommunications cable on which our services depend was cut, which disrupted
our services for a business day.
OUR WEBSITES AND THE SERVICES WE OFFER MAY NOT FUNCTION IF WE ARE UNABLE TO
OBTAIN AND MAINTAIN LICENSES TO THIRD-PARTY SOFTWARE AND APPLICATIONS.
We rely on technology that we license from third parties, including software
that is integrated with internally developed software and used in our iPrint.com
and other websites to perform key functions. The functionality of our websites
depends on our ability to integrate third-party software into our technology.
The third-party software may not continue to be available to us on commercially
reasonable terms, or at all, it may not be reliable or it may not support
emerging industry standards on which our technology relies. Our inability to
obtain reliable licensed software on commercially reasonable terms could disrupt
or delay our ability to offer key services and products or force us to limit the
features of our websites. Either alternative could seriously harm our business
and operating results.
OUR WEBSITES, TECHNOLOGIES AND PROCESSES MAY CONTAIN UNDETECTED ERRORS OR
DEFECTS WHICH COULD CAUSE OUR WEBSITES TO CRASH OR LIMIT THEIR CAPACITY.
Our websites, and the technologies and processes that support them, are
complex and may contain undetected errors or failures when we first introduce or
revise them. These errors or failures may cause our websites to fail and result
in loss of, or delay in, market acceptance of our products and services. We
routinely discover software errors in new releases of our technologies and
processes after their introduction. We may in the future discover errors,
including year 2000 errors and limitations in the ability of our websites to
handle increased volumes of traffic, in current or future releases after the
commencement of the commercial release. In addition, a delay in the commercial
release of any future version of the iPrint.com, marketing relationship,
co-labeled or private-labeled websites, technologies or processes could
seriously harm our business.
WE MUST INCREASE BRAND AWARENESS TO COMPETE EFFECTIVELY. WE MAY BE UNABLE TO
RAISE THE ADDITIONAL CAPITAL TO INCREASE OUR BRAND AWARENESS, AND THE COSTS OF
OUR EFFORTS MAY EXCEED THE ASSOCIATED BENEFITS OF A STRONG BRAND.
We have not yet established a nationally-known brand and we believe that
establishing and maintaining a strong brand name is crucial to the success of
our business. Not only may a strong brand attract and expand our customer base,
it also provides important competitive advantages, especially as competition
increases. We will require substantial resources to promote our brand name, and
we cannot guarantee that we will succeed or that the benefits associated with
brand
7
<PAGE>
creation will outweigh the risks and costs associated with brand name
establishment. We anticipate that spending on advertising and promotions could
range between $5.5 million and $20 million over the next twelve months,
depending on our results of operations and other factors, including the
promotional efforts of our competitors, the effectiveness of alternative
campaigns, and our assessment of the advantages of devoting resources to
promoting our different products and channels. In addition, we may be unable to
raise the additional capital which may be necessary to effectively establish our
brand name and the costs of our efforts may exceed the associated benefits of a
strong brand. Any failure to develop a strong brand name may materially hurt our
chances of success.
OUR SPECIALIZED PRINT SERVICES BUSINESS MAY HAVE A MORE VOLATILE REVENUE STREAM
THAN OUR SELF-SERVICE BUSINESS.
We are at an early stage in developing our specialized print services
business. Because of the unique nature of this business, our revenue from these
projects is unpredictable. This unpredictability may make forecasting revenue
more difficult. If we are unable to meet earnings expectations because of these
revenue fluctuations, our stock price may fall.
REPRINTS-DUE-TO-ERROR MAY HAVE A GREATER IMPACT ON OUR SPECIALIZED PRINT
SERVICES BUSINESS.
Because our specialized print services involves projects with may have
higher order values than is typical in our self-service businesses, any
reprint-due-to-error will have a greater impact on our results of operations
than a reprint-due-to-error from our self-service operations.
OUR LIMITED EXPERIENCE IN PROVIDING QUOTES FOR OUR SPECIALIZED PRINT SERVICES
COULD INCREASE OUR RISK OF COST OVERRUNS.
We have limited experience in providing quotes for our specialized print
services. We may not adequately reflect the costs of such printing services in
our quotes. If we fail to adequately assess the costs of these services, it
would harm our results of operations.
OUR PRIVATE-LABELED BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND ITS SUCCESS
DEPENDS ON OPTIMIZING THE MANAGEABILITY AND ENHANCING THE FEATURES AND OFFERINGS
OF OUR PRIVATE-LABELED WEBSITES, AND ON WORKING WITH THOSE COMPANIES THAT ARE
PART OF OUR PRIVATE-LABELED BUSINESS TO PROMOTE OUR SERVICES.
We have only recently developed our private-labeled website business
strategy. The terms of the relationships that we have entered into have been
heavily negotiated and are likely to vary significantly in the future. Our
future revenue growth from these websites depends on our ability to:
- optimize the manageability of our private-labeled websites;
8
<PAGE>
- enhance the features and offerings of our private-labeled websites so that
these services achieve widespread commercial acceptance; and
- work with those businesses with whom we have a private-labeled
relationship to promote our services on their websites.
If we are unable to accomplish any of the foregoing, our private-labeled
websites may not succeed, and our revenues from that source may not grow.
WE EXPECT REVENUES FROM OUR PRIVATE-LABELED BUSINESS TO BE CONCENTRATED IN A
RELATIVELY SMALL NUMBER OF COMMERCIAL AND QUICK PRINTERS AND THE LOSS OF ANY
SIGNIFICANT ONE COULD HARM OUR BUSINESS.
We may attract only a small number of commercial and quick printers to
participate in our private-labeled program. Currently, we depend on our
agreements with the four commercial and quick printers that currently
participate in our private-labeled program. We derived 11% of our revenues from
private-labeled relationships in 1999. These four printers may terminate their
agreements with us for a variety of reasons, including our bankruptcy and if we
materially breach or default on the terms of the agreement. In addition, the
four printers may elect to terminate their agreements with us at any time by
providing us advance notice of their intent to do so. Currently, with one of our
four commercial and quick printers, we are operating under the terms of an
agreement that has expired and which, by its terms, does not automatically
renew. We had an agreement with Kinkos regarding its participation in our
private-labeled program. However, in January 2000, Kinkos notified us that it
was terminating this agreement with us for convenience, and we expect to face
competition from Kinkos in the future. A significant decline in revenues from
any one of these printers will adversely affect the success of our
private-labeled business. The revenues we derive from our private-labeled
business may not be enough to maintain and enhance our private-labeled program,
which will cause it to fail.
BECAUSE THE COMMERCIAL AND QUICK PRINTERS THAT PARTICIPATE IN OUR
PRIVATE-LABELED PROGRAM MANAGE THEIR OWN PRICING AND PROMOTIONAL ACTIVITIES,
THEY MAY UNDERPRICE OR INADEQUATELY PROMOTE OUR SERVICES OR PRICE THEIR PRODUCTS
LOWER THAN WE PRICE THE SAME PRODUCTS ON OUR WEBSITES, WHICH COULD HARM OUR
BUSINESS.
We allow the commercial and quick printers that participate in our
private-labeled program to manage their own pricing and promotional activities.
As a result, these printers may inadequately promote our services or price their
products lower than we price the same products on our websites, which could harm
our business.
IF WE ARE UNABLE TO RETAIN OUR CURRENT KEY PERSONNEL, OUR BUSINESS MAY BE
HARMED.
Our future performance depends on the continued service of our senior
management team, in particular Royal P. Farros, our president and chief
executive officer. The loss of the services of
9
<PAGE>
one or more of our senior management team could seriously harm our business. We
do not have employment agreements with most of our senior management team. If
one or more of our senior management team were to resign, the loss could result
in loss of sales, delays in new product development and diversion of management
resources.
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN PERSONNEL, WHICH COULD IMPACT THE DEVELOPMENT AND ACCEPTANCE
OF OUR PRODUCTS AND SERVICES.
Our success depends on our continuing ability to attract, hire, train and
retain a substantial number of highly skilled managerial, technical, sales,
marketing and customer support personnel. Competition for qualified personnel in
these areas is intense. In addition, new hires frequently require extensive
training before they achieve desired levels of productivity. Many of our
existing management personnel have been employed at iPrint.com for less than a
year, including our chief financial officer and chief marketing officer. We may
fail to attract and retain qualified personnel, which could have a negative
impact on our business.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR COMPETITORS
MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE CUSTOMERS.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. Our proprietary rights with respect to our iPrint.com and
related websites may not prove viable or of value in the future since the
validity, enforceability and type of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
Unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult, and while we are unable to determine the
extent to which piracy of our software or code exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Our means of protecting our proprietary rights may
not be adequate and our competitors may independently develop similar
technology, duplicate our products or design around patents issued to us or our
other intellectual property.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME CONSUMING
AND EXPENSIVE FOR US TO DEFEND.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
offer our printing services on our websites. For example, from time to time we
receive notices claiming that our technology infringes patents held by third
parties. When we receive these notices, we evaluate whether or not we believe
that we infringe a valid patent. Third parties could assert, and it may be
found, that our technologies infringe their proprietary rights. We could incur
substantial costs to defend any litigation, and intellectual property litigation
could force us to do one or more of the following:
10
<PAGE>
- cease using key aspects of our technology that incorporates the challenged
intellectual property;
- obtain a license from the holder of the infringed intellectual property
right; and
- redesign some or all of our websites.
In the event of a successful claim of infringement against us and our failure or
inability to license the infringed technology, our business and operating
results would be significantly harmed.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH CAN CAUSE
DILUTION.
We expect that we will need to seek additional funding in the future. We may
need to raise additional funds in the next 12 months to fund additional
expansion, develop new or enhanced services, respond to competitive pressures or
make acquisitions. We do not know if we will be able to obtain additional
financing on favorable terms, if at all. In addition, if we issue equity
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise funds on acceptable terms,
if and when needed, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could seriously harm our business.
RISKS RELATED TO THE PRINTING INDUSTRY AND THE INTERNET
THE PRINTING INDUSTRY IS VERY COMPETITIVE, AS IS THE NEWLY EMERGING ELECTRONIC
COMMERCE BUSINESS. WE FACE INTENSE COMPETITION FROM TRADITIONAL AND NEW PLAYERS
IN THIS INDUSTRY. IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS WILL
FAIL.
The printing industry is intensely competitive. Competitors in the
traditional printing industry are numerous and competitors in both the
traditional and online printing industries vary in size and scope and in the
breadth of the products and services they offer. Competition in the short-run
printing market is intense and we expect this intensity of competition to
dramatically increase in the future. While most of these traditional printers
are independent, some are owned by large consolidators such as Taylor
Corporation. In the online printing industry, we face direct competition from
traditional printing shops such as Taylor Corporation and Discount Labels, that
have developed online websites that provide many of the same services we
provide, and we expect to face competition from Kinkos in the future. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any one of which could seriously harm our business. If we
cannot compete successfully against our current and future competitors, our
business will fail.
11
<PAGE>
ORDERING PRINTED PRODUCTS OVER THE INTERNET IS RELATIVELY NEW AND IF BUSINESSES
DO NOT ADOPT THE INTERNET AS A COMMERCE TOOL, OUR OPERATIONS WILL FAIL.
If businesses do not use the Internet as a commerce tool, our revenues will
not grow and our operating results will suffer. Because print procurement on the
Internet is in its infancy, it is difficult to estimate the size and growth of
this market, if any. To date, many businesses have been deterred from using the
Internet to procure goods and services for a number of reasons, including
concerns relating to:
- security,
- quality of service,
- product quality,
- reliability,
- billing,
- Internet connection, and
- delivery of products.
Even if the Internet becomes a standard tool that businesses regularly use,
it may not be effective or reach broad market acceptance for obtaining printing
services.
TECHNOLOGY ADVANCEMENTS COULD ADVERSELY AFFECT OR REDUCE THE DEMAND FOR OUR
PRODUCTS AND SERVICES, WHICH WOULD HARM OUR BUSINESS.
Technological innovations are common in the printing industry, especially
given the rapid advancement of computer and communications technologies. Home
printing systems are yielding more professional results which may reduce demand
for offset and thermographic, or raised ink, professional printing. Information
previously distributed on paper is now being distributed electronically in an
almost effortless fashion. As technology further enables and enhances these
alternative communication methods, our business may suffer if we experience a
corresponding decrease in demand for our products and services.
POTENTIAL IMPOSITION OF GOVERNMENTAL REGULATION ON ELECTRONIC COMMERCE AND LEGAL
UNCERTAINTIES COULD LIMIT OUR GROWTH.
The adoption of new laws or the adaptation of existing laws to the Internet
may decrease the growth in the use of the Internet, which could in turn decrease
the demand for our services, increase our cost of doing business or otherwise
have a material adverse effect on our business, financial condition and
operating results. Few laws or regulations currently directly apply to
12
<PAGE>
access to commerce on the Internet. Federal, state, local and foreign
governments are considering a number of legislative and regulatory proposals
relating to Internet commerce. As a result, a number of laws or regulations may
be adopted regarding Internet user privacy, taxation, pricing, quality of
products and services, and intellectual property ownership. The application of
existing laws to the Internet in areas such as property ownership, copyright,
trademark, trade secret, obscenity and defamation is uncertain. Numerous state
and local representatives have expressed a desire to impose taxes on sales over
the Internet to consumers and businesses in their jurisdictions. The Internet
Tax Freedom Act of 1998 has generally imposed a moratorium through October 2001
on the imposition of some kinds of consumer-related taxes, other than sales or
use taxes, in connection with Internet access and Internet-related sales. After
this moratorium expires and if no further legislation is adopted by Congress,
state and local taxing authorities will be free to impose these taxes on sales
of goods and services over the Internet, which could substantially hinder the
growth of Internet-based commerce, including sales of our products and services.
RISKS RELATED TO THE OFFERING
OUR STOCK PRICE MAY BE VOLATILE WHICH MAY LEAD TO LOSSES BY INVESTORS.
Before this offering, there has not been a public market for our common
stock and the trading price of our common stock may decline below the initial
public offering price. The initial public offering price was determined by
negotiations between us and the representatives of the underwriters. If you
purchase shares of common stock, an active trading market may not develop and
you may not be able to resell those shares at or above the initial public
offering price. In addition, the stock market has, and the market prices of
securities of electronic commerce companies in particular have, experienced
extreme volatility. These market fluctuations may cause our stock price to fall
regardless of our performance.
OUR INVESTMENT OF THE NET PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We plan to use approximately 6%, or $2.4 million, of the proceeds for
capital expenditures primarily associated with the expansion and placement of
our network operations center in a secure location separate from our corporate
headquarters and for lease commitments. We believe the remainder will be used
for working capital, including approximately 59%, or $23.9 million, for sales
and marketing expenses, approximately 20%, or $8.1 million, for general and
administrative expenses and approximately 15%, or $6.1 million, for product
development expenses. This allocation is preliminary and is subject to change
based upon market conditions, the effectiveness of our marketing campaigns and
other factors. We may use the proceeds in ways with which you do not agree or
that prove to be disadvantageous to our stockholders. We may not be able to
invest the proceeds of this offering in our operations or external investments
to yield a favorable return.
13
<PAGE>
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS, WHOSE INTERESTS MAY CONFLICT WITH YOURS, WILL CONTROL
APPROXIMATELY 69.6% OF OUR OUTSTANDING COMMON STOCK.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own approximately 69.6% of our
outstanding common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, which
could have the effect of delaying or preventing a third party from acquiring
control over or merging with us. We also plan to reserve up to 5% of the shares
offered in this offering under a directed share program in which our executive
officers, directors, principal stockholders, employees, business associates and
related persons may be able to purchase shares in this offering at the initial
public offering price. This program may further increase the amount of stock
held by persons whose interests are closely aligned with management's interests.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
The following provisions of our certificate of incorporation and bylaws, and
of Delaware law could limit the price that investors might be willing to pay in
the future for shares of our common stock.
Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. These provisions include:
- the issuance of preferred stock without any vote or further action by the
stockholders;
- the elimination of the right of stockholders to act by written consent
without a meeting;
- the elimination of cumulative voting in the election of directors; and
- the division of our board of directors into three classes, with each class
serving a staggered three-year term.
Provisions of Delaware law may discourage, delay or prevent someone from
acquiring or merging with us. These provisions prevent us from engaging, under
limited circumstances, in a merger or sale of more than 10% of our assets, with
a stockholder who owns 15% or more of our outstanding voting stock, as well as
affiliates and associates of stockholders, for three years following the date
that the stockholder became an owner of 15% or more of our outstanding voting
stock unless:
- the transaction is approved by the board before the date the interested
stockholder attained that status;
14
<PAGE>
- upon the closing of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced; or
- on or after the date the business combination is approved by the board and
authorized at an annual or special meeting of stockholders by at least
two-thirds of the outstanding voting stock that is not owned by the interested
stockholder.
THERE ARE A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that sales may be made, could
cause the market price of our common stock to decline. In addition, the sale of
these shares could impair our ability to raise capital through the sale of
additional equity securities. Based on shares outstanding as of December 31,
1999, following this offering, we will have 28,906,748 shares of common stock
outstanding or 29,581,748 shares if the underwriters' over-allotment is
exercised in full. Of these, 18,453,258 shares will become available for sale
180 days following the date of this prospectus upon the expiration of lock-up
agreements, subject to the restrictions imposed by the federal securities laws
on sales by affiliates. Credit Suisse First Boston Corporation, however, may
waive the lock-up restrictions at its sole discretion without notice. Credit
Suisse First Boston Corporation may choose to waive the lock-up restrictions
based on market conditions, the then-current stock price and other factors the
selection of which are at its sole discretion. In addition, another 5,953,490
shares will be available for sale, subject to the restrictions of Rule 144,
after September 30, 2000.
WE HAVE GRANTED STOCK OPTIONS AT A SIGNIFICANTLY LOWER PRICE THAN THE OFFERING
PRICE OF OUR COMMON STOCK, WHICH MAY CAUSE AN INVESTOR TO SUFFER IMMEDIATE AND
SUBSTANTIAL DILUTION.
As of December 31, 1999, we had granted options that were outstanding to
purchase an aggregate of 1,593,348 shares of common stock at exercise prices
between $0.01 and $4.86 per share, which is significantly lower than the issue
price of the common stock sold in this offering. If you purchase common stock in
this offering and these options are exercised, you will suffer substantial
dilution in the book value per share of your shares of our common stock.
WE RECENTLY SOLD STOCK AT A SIGNIFICANTLY LOWER PRICE THAN THE OFFERING PRICE OF
OUR COMMON STOCK.
In September 1999, we sold 5.9 million shares of preferred stock at a price
per share of $3.36. Accordingly, if you purchase common stock in this offering,
you will pay significantly more per share than the price at which we most
recently sold our preferred stock.
15
