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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission file number: 0-25578
SOFTWARE ARTISTRY, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1731589
(State or other jurisdiction of organization) (I.R.S. Employer
Identification Number)
9449 PRIORITY WAY WEST DRIVE, INDIANAPOLIS, IN 46240
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (317) 843-1663
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Common Stock on March 11,
1997, as reported on the NASDAQ National Market System was $27,146,304. Shares
of Common Stock held by each executive officer and director and by each person
who is known to own 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not a conclusive
determination for other purposes. As of March 11, 1997, the Registrant had
7,041,451 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
Software Artistry, Inc. (the "Company" or "Software Artistry") was formed
and incorporated in Indiana in 1988. Software Artistry develops, markets, and
supports two suites of internal and external customer support software
applications. In 1996, the Company expanded the number of applications it
markets and introduced the SA-EXPERTISE-TM- suite designation for its
Customer Relationship Management products for external customer support,
which is expected to be released in late first quarter/early second quarter
of 1997. In addition, the SA-EXPERTISE-TM- suite for Enterprise Support
Management provides organizations with an integrated solution for internal
support for employees and end users. Both EXPERTISE suites are designed to
increase operational efficiency and enhance customer satisfaction through
improved problem management and problem resolution capabilities.
BACKGROUND
Over the past year the internal and external customer support markets have
continued to mature as more organizations realize the importance of providing
assistance to employees having problems with technology and/or providing
automation tools to their external customer support organizations.
The shift from mainframe-based applications to client/server computing
continues to drive the demand for support of internal customers (i.e.,
employees and others working within the enterprise). While this shift has
delivered better performance and functionality as promised, the immaturity of
systems management tools has yielded an even greater support burden than
anticipated, leading to increasing demands on support centers. At the same
time, increased market competition is causing companies to focus on
differentiating themselves from their competitors by providing faster and
more effective responses to customer needs. Providing high-quality external
customer support is seen as a key competitive advantage.
The Company believes that the internal and external support markets are
being further defined as separate and distinct markets. The core applications
for call and problem management and resolution in both markets are very
similar; however, unique related applications have emerged to define vastly
different product "suites" for each market. For example, the typical external
customer support suite is characterized by additional products for service
dispatch, contract management, and sales and marketing management. The
internal support (often referred to as help desk) suite continues to develop,
with products for asset and change management along with integration with
popular network and systems management tools. One trend that is common to
both markets is end-user empowerment tools, which allow users (customers or
employees) to directly submit problems, inquire on their status, and even
resolve problems without a customer support analyst interaction.
THE SOFTWARE ARTISTRY SOLUTION
Software Artistry applications help companies increase customer
satisfaction, reduce time to problem resolution, allow end users to solve
problems without interfacing directly with the help desk, allow for strategic
management of corporate assets, and facilitate changes that occur in an
organization's environment.
Software Artistry is maintaining a leader position in the market for the
strategic internal help desk. The Company's flagship product SA-EXPERT
ADVISOR-TM-, for call and problem management and resolution, provides the
foundation for this leadership position. SA-EXPERT ADVISOR-TM- provides its
users both internal information technology help desk analysts and external
customer support analysts -- with a number of techniques to diagnose customer
problems and quickly provide solutions. In 1996, Software Artistry released
several revisions of related internal support products that, together, form an
integrated suite of software applications that go beyond basic call and problem
management and focus on the expanded issue of ENTERPRISE SUPPORT MANAGEMENT.
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Enterprise Support Management is a natural evolution of an organization's
desire to move from reactive support management to proactive support
management. Initially, help desk systems were used to capture, transfer, and
escalate problems and, in the case of Software Artistry customers, to provide
problem resolution technology. As help desk call volumes have continued to
increase, organizations are now looking for ways to effectively handle and/or
reduce their call volume. Software Artistry has responded to this challenge
by developing END-USER EMPOWERMENT tools which allow help desks to offer
their end users direct access to corporate knowledge.
Software Artistry has been a leader in this area by enabling an
organization to use its installed electronic mail system (for example, Lotus
cc:Mail or Microsoft Mail) as a vehicle for the forward deployment of
information. SA-EXPERT MAIL AGENT-TM- enables end users to submit problems to
the help desk, check the status of an existing problem, or even resolve
problems themselves.
In addition, the Company markets a gateway product -- SA-EXPERTVIEW-TM- --
which allows the help desk to tie into market-leading network management
platforms such as HP OpenView-TM- and IBM NetView-TM-. This tool keeps all
support analysts informed of network failures and automatically notifies
these analysts that certain corporate locations may be affected by specific
network events.
Software Artistry is also building on its successful introduction in 1995
of asset management (SA-EXPERT FOUNDATION MANAGER-TM-) and change management
(SA-EXPERT EVOLUTION-TM-) applications to its portfolio of products for
Enterprise Support Management. Expert Foundation Manager provides a vital
link in helping the enterprise track assets from initial purchase to eventual
disposition. Assets are tracked based on the location, owner, and
characteristics. This informs support analysts of the exact hardware and
software being used by any end user reporting a problem. Expert Evolution
allows an enterprise to more easily put an efficient process in place with
approval and review cycles to manage changes to the information technology
infrastructure. In addition, Expert Evolution provides the ability to assess
the impact of a change before it is implemented.
Software Artistry has an installed base of over 425 corporate customers
worldwide in a wide range of industries. Customers include over 33% of the
1996 Fortune 100 companies. No single customer or distributor accounted for
more than 10% of the Company's revenues in 1996. International revenues were
17% of total revenues in 1996 (see Geographic Operations information in Notes
to Consolidated Financial Statements section of Item 8).
STRATEGY
Software Artistry is committed to maintaining its leadership position in the
Enterprise Support Management market by enhancing current products, continuing
to add new products and services, integrating with related products, and
building additional product and services partnerships.
The Company has been able to meet the needs of certain external customer
support customers due to the strong problem resolution capabilities of Expert
Advisor. At the same time, the Company is developing product and service
offerings specifically designed for the external customer support market -- the
SA-EXPERTISE suite for Customer Relationship Management.
The underlying strategies the Company is using to meet these objectives
include:
PARTNERSHIPS WITH KEY VENDORS
The Company is actively pursuing relationships with product providers to
proactively create interfaces with the Company's products, as well as with
service providers, to provide business process reengineering, product
implementation, and customization.
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OPEN PRODUCT ARCHITECTURE
The Company is evolving the product suite to an open architecture with
well defined application programming interfaces (APIs) to allow:
- Addition of functionality without code modification.
- Ease of integration with other proprietary or packaged software.
- Rapid adoption of new technology as justified by market and/or customer
needs.
EXPAND WORLDWIDE PRESENCE
The Company has a strong direct sales channel in North America augmented
by a growing list of key partners that provide the comprehensive set of
products and services demanded by this market. The Company is moving into its
third full year of sales in Europe through a combination of a direct sales
force in the U.K. and France and distributors in the other key countries. The
Company's expansion into the Asia/Pacific region continued during 1996 after
the opening in late 1995 of a regional headquarters in Singapore and the
establishment of a direct sales organization in Australia. The Company is
expanding in this region in 1997 by adding additional distributor
relationships, the first one in Hong Kong. The Company also currently has
plans to begin sales operations in Latin America during 1997.
PROVIDE SUPERIOR SERVICES AND SUPPORT EXCELLENCE
The Company believes that providing superior support and services
(implementation, consulting, and educational) enhances its market leadership
position. The Company also believes that there is demand for additional
services surrounding the planning for, implementation of, and utilization of
its products. Consequently, the Company plans to more aggressively grow its
capabilities to address select opportunities to support in these areas.
Just as the Company's products are designed to enable its customers to
provide SUPPORT EXCELLENCE, the Company uses its own products to provide the
same level of quality service to its customers. For example, the Company is
using SA-EXPERT ADVISOR-TM- in its Customer Support Center. The Company is
also using its defect and enhancement tracking software, SA-EXPERT
QUALITY-TM-, for improved response to issues where resolution falls outside
of the support center. In 1996, the Company also made e-mail support
available over the Internet for problem submittal, status checking, and
problem resolution.
PRODUCTS
Software Artistry seeks to offer extensive, integrated product suites
that provide complete support resolution appropriate for managing an
organization's internal information technology resources as well as an
organization's external customer relationships. The Company's integrated
application suite for Enterprise Support Management (ESM) is marketed under
the umbrella name SA-EXPERTISE for ESM and the suite for Customer
Relationship Management (CRM) will be marketed under the name SA-EXPERTISE
for CRM.
CURRENTLY AVAILABLE PRODUCTS
INTERACTION AND REQUEST MANAGEMENT FOR ESM
SA-EXPERT ADVISOR (client/server version 3.5 released in 1996), the
Company's flagship product, provides the core functions of interaction and
request management. Embedded in this product is the ability to provide call
tracking, transfer, and escalation along with extensive problem resolution
through multiple diagnostic techniques. The unique aspects of Expert Advisor
include separate consideration of calls and problems, a single solutions
database, and a variety of diagnostic paradigms to address the matrix of
varying analyst experience, varying complexities of problems, and the varying
level of experience of the end users.
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NETWORK AND SYSTEMS MANAGEMENT INTERFACE
SA-EXPERTVIEW (version 1.0 released in 1996) provides an interface
between the support center and network and systems management platforms. It
gives the support analyst immediate visibility to failures on the network and
relates them to the affected department or group. When the network failure is
corrected, any "problem tickets" opened as a result of the failure will be
automatically closed, and the affected group notified.
ASSET MANAGEMENT
SA-EXPERT FOUNDATION MANAGER (version 2.0 released in 1996) provides
"cradle to grave" management of corporate assets. It allows assets to be
tracked by owner, location and type. Assets can be categorized in any
number ("n-level" hierarchies) of nested levels (e.g., Country, State, Site,
Building, Department, Office). The asset database can be populated and
updated through an interface to LAN discovery products such as Tally
NetCensus-TM-.
SA-EXPERT EVOLUTION (version 1.0 released in 1996) allows an enterprise
to manage changes to the business environment and their effects on users.
Changes can be defined along with the review and approval process required.
Models for changes can be built to facilitate changes that occur often in an
environment, and the affects of changes can be tested through impact analysis
evaluations before actual implementation.
END-USER EMPOWERMENT
SA-EXPERT MAIL AGENT (version 1.1 released in 1996) uses existing e-mail
systems to provide end users with access to the solutions database for
problem submission, status checking, and problem resolution.
SA-EXPERT WEB (version 1.0 released in 1996) is designed to allow use of
the Internet and the World Wide Web to provide end users with direct access
to the support center for problem submission, status checking, and problem
resolution using the entire set of diagnostics capabilities of Expert Advisor.
QUALITY AND PRODUCT CHANGE MANAGEMENT
SA-EXPERT QUALITY (version 1.0 released in 1995) enables a customer
support center to make better use of the suggestions it receives from
customers for enhancements to its products and/or services. Expert Quality
provides the framework for coordinating the product improvement and change
process through the departments responsible for customer support, product
development, and quality assurance. As such, it is part of the EXPERTISE
suite for CRM, along with the soon-to-be-released SA-EXPERT SUPPORT-TM-.
PLANNED 1997 PRODUCT INTRODUCTION
INTERACTION AND REQUEST MANAGEMENT FOR CRM
SA-EXPERT SUPPORT (expected release by late First Quarter/early Second
Quarter, 1997) is designed to specifically address the needs of external
customer service and support centers. It combines the industry-leading
problem resolution capabilities of Expert Advisor with expanded interaction
and request management capabilities to provide the adaptability required to
handle the vast array of combinations involved with managing customers,
products, and service level agreements.
SERVICES
As a provider of customer support software, the Company recognizes the
importance of offering quality service and support to its customers. The
Company provides service and support through its Client Services department,
which has three groups responsible for customer satisfaction: Professional
Services, Educational Services, and Support Services.
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PROFESSIONAL SERVICES
The Company's Professional Services group offers a wide range of custom
services including: project management, data conversion, custom coding,
systems integration, and host connectivity. To further expedite their
implementation projects, customers can also select from several pre-packaged
plans providing such service options as computer/telephony integration,
knowledge engineering, and specific product deployment packages.
EDUCATIONAL SERVICES
The Company offers a comprehensive education and training program to
customers on a fee basis. The Company provides on-site training on the
administration and use of its products. Additionally, customers can obtain a
comprehensive training program on the customization of the applications. The
Company also provides courses on advanced customization techniques, systems
administration, knowledge engineering, and other topics (including customized
courses).
SUPPORT SERVICES
The Company relies on the use of its own products to provide superior
service and support through its Customer Support Center. The Company provides
a 24-hour hotline telephone support, staffed with a group of experienced
professionals and supported by SA-EXPERT ADVISOR-TM- software. License fees
include inbound telephone support, BBS support, e-mail support, and the
monthly SUPPORT REPORT publication, all managed or produced within Support
Services.
SALES AND MARKETING
The Company markets and sells its software and services in North America
primarily through a direct sales organization. To support its sales force,
the Company conducts comprehensive marketing programs which include public
relations, direct mail, advertising, telemarketing, seminars, trade shows,
and ongoing customer communication programs. The sales cycle begins with the
generation of a sales lead, or the receipt of a request for proposal ("RFP")
from a prospect, which is followed by the qualification of the lead, an
analysis of the customer's needs, response to an RFP (if solicited by the
customer), one or more presentations/demonstrations to the prospective
customer, contract negotiation, and commitment. While the sales cycle varies
substantially from customer to customer, it typically requires six to nine
months. The North American sales staff is based at the Company's corporate
headquarters in Indianapolis and approximately 15 field sales offices.
The Company markets its products outside North America through a
combination of direct sales and distributors. The Company operates a European
headquarters located in Windsor in the United Kingdom and an Asia/Pacific
headquarters located in Singapore. The Company has established direct sales
organizations in the United Kingdom, France, and Australia. As of December
31, 1996, the Company had distributors or a direct sales organization in the
following locations: Australia, Denmark, Germany, France, Italy, the
Netherlands, Norway, Spain, Sweden, Singapore and United Kingdom. In addition
to marketing and selling the Company's products, the distributors are
required to provide local language translations for the software as well as
educational and consulting services to customers.
Software Artistry has established multiple partnerships, with hardware
platform providers, software platform providers, technology partners, and
service providers. Hardware platform providers consist primarily of the
vendors of the computer hardware that run the Company's applications. These
relationships are integral to managing the performance and compatibility of
the Company's products with the platforms demanded by the Company's
customers.
Software platform providers include database vendors and other software
tool vendors that provide the systems software environment required to
support the Company's applications. These relationships are critical to
managing the installation, performance, and compatibility of the Company's
applications.
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Technology partnerships allow the Company to provide integration between
the Company's applications and related products such as systems and network
management tools, telephony systems and pre-packaged knowledge. Relationships
with service providers augment the Company's service capability to provide
business reengineering, implementation planning and assistance, custom
programming, and full systems integration. The overall purpose of these
relationships is to help the Company provide a more comprehensive solution to
its customers.
PRODUCT DEVELOPMENT
The Company, through its development and support personnel, works
closely with its customers and prospective customers to determine their
requirements and to design enhancements and new products to meet their needs.
The Company intends to continue to expand the functionality of Expert Advisor
and all other EXPERTISE products. However, there can be no assurance that the
development of these projects will be completed successfully or on time or
that they will include the features required to achieve market acceptance.
The Company has in the past experienced delays in software development and
there can be no assurance that the Company will not experience delays in
connection with its current development or future development activities.
Delays or difficulties associated with introductions of new features,
modules, and products, could have a material adverse effect on the Company's
business or results of operations.
During 1996, 1995, and 1994, the Company's product development expense,
which is net of capitalized development costs, was $4,926,000, $2,890,000,
and $1,675,000, or 15%, 11%, and 11% of total revenues, respectively. In
accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes certain development costs. During fiscal, 1996, 1995,
and 1994, the Company capitalized $845,000, $616,000, and $261,000,
respectively, or 7%, 13%, and 6%, respectively, of total product development
costs, net of amortization.
The market for the Company's applications is characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's growth and future
financial performance will depend in part upon its ability to enhance
existing applications and to develop and introduce new applications that meet
technological advances, respond to evolving customer requirements, respond to
competitive products or announcements, and achieve market acceptance. There
can be no assurance that the Company will be successful in developing and
marketing new applications or enhancements to existing applications on a
timely basis, or that its enhancements and new applications will adequately
address the changing needs of the marketplace and achieve market acceptance.
Any such failure could have a material adverse effect on the Company's
business or results of operations. Furthermore, programs as complex as those
offered by the Company may contain a number of undetected errors or bugs when
they are first introduced or as new versions are released. There can be no
assurance that, despite testing by the Company and by third-party test sites,
errors will not be found in future applications or enhancements, with the
possible result of delay in or loss of market acceptance and a material
adverse effect on the Company's business or results of operations.
COMPETITION
The market for customer support software and services is highly
competitive. The Company has a large number of competitors which range from:
(i) large information technology providers such as Computer Associates and
IBM, which have substantially greater sales and marketing, product
development, and financial resources than the Company; (ii) public and
private companies generally with $100 million or less in 1996 annual sales
(including Astea International, Inc., Clarify, Inc., Inference Corporation,
McAfee Associates, Inc., Peregrine Systems, Inc., Remedy Corporation, Scopus
Technology, Inc., and The Vantive Corporation) which, like the Company, are
attempting to provide a strategic enterprise-wide customer support software
and services solution; and (iii) a large number of small privately-held
vendors of tactical products that may address one or more aspects of customer
support.
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Both internal and external customer support markets appear to be
stratifying into a cost-driven segment and a strategic business-driven
segment. Both markets have also expanded from companies offering single
products to companies offering a product suite to meet the enterprise
requirements. This offering expansion is particularly visible in the
strategic business-driven market. In the Company's view, these product suites
can be thought of as a wheel with problem management serving as the hub and
the spokes serving as integration to various additional products on the rim.
In the Enterprise Support Management market, the key spokes lead to
asset management, change management, network and systems management, and
end-user empowerment. The Company believes it is in the unique position of
currently being only one of a few vendors that can provide the entire
Enterprise Support Management solution to customers through its own
applications and integration with other applications. Most competitors in
this market come from a position of strength in network and systems
management. Astea and McAfee Associates, Inc. have recently acquired
competing privately-held help desk vendors. McAfee has extensive experience
and a number of products for the systems management arena. The major
competitors in the external support market have also developed internal
support versions of their problem resolution applications and have introduced
interfaces to network management applications. In addition, Clarify has
introduced a change tracking module to address the service request aspect of
change management.
Competitors in the external support market also address the market from
different positions of strength. Vantive, Scopus, and Clarify, claim
comprehensive sets of applications to fill external support requirements.
Depending on the company, these sets of applications offer problem management
along with service management, service dispatch, depot repair, and data
replication products. In addition, there is a group of companies that has
focused principally on the sales force automation and service management
applications area and include customer support as part of their suite.
The competitive factors affecting the market for the Company's software
and services include: vendor and product reputation, availability of products
on "popular" computer and communications platforms, scalability, integration
with other enterprise applications, functionality and features, ease-of-use,
product quality, performance, price, quality of support, documentation, and
training. The relative importance of each of these factors depends upon the
market segment. The Company believes that it competes effectively with
respect to these factors but there can be no assurance that it will continue
to do so.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of contract, copyright, trademark,
trade secret laws, and other measures to protect its proprietary information.
The Company does not have any patents, and existing copyright laws afford
only limited protection. The Company believes that, because of the rapid pace
of technological change in the computer software industry, trade secret and
copyright protection are less significant in affecting the Company's business
and results of operations than factors such as the knowledge, ability, and
experience of the Company's employees, frequent product enhancements, and the
timeliness and quality of support services.
The Company typically provides its products to its customers under
non-exclusive, perpetual licenses which generally are nontransferable. The
Company generally licenses its products solely for the customer's internal
operations. In certain circumstances, the Company makes available site and
enterprise licenses. The Company makes source code available for certain of
the Company's products, and often enters into source code escrow agreements
for the balance of the source code. The provision of source code may increase
the likelihood of misappropriation or other misuse of the Company's
intellectual property.
The Company is not aware that its products, trademarks, or other
proprietary rights infringe the property rights of third parties. However,
there can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products or that any such assertion may not require the Company to enter into
royalty arrangements or result in costly litigation. As the number of
software products in the industry increases and the functionality of these
products further overlap, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend.
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OTHER CONSIDERATIONS
In addition to the other information set forth in this report, the
following are certain risks that should be considered with regard to the
Company and its Common Stock.
Although the Company has experienced strong growth in recent periods,
such growth rates may not be sustainable and may not be indicative of future
operating results. The Company's continued growth will depend in part upon
its ability to enhance existing applications and develop and introduce new
applications that are technologically advanced, respond to evolving customer
requirements, respond to competitive products or announcements, and achieve
market acceptance of its products; none of which can be assured.
The Company's quarterly operating results reflect distinct seasonality,
with the fourth quarter historically having the highest total revenues and
operating income. The Company believes that this pattern may repeat in the
future.
The Company may experience significant fluctuations in operating results
depending upon many factors, including, among others, the timing of new
application announcements and releases by the Company and its competitors,
budgeting cycles of its customers, demand for the Company's products, the
size and timing of customer orders, changes in the proportion of revenues
attributable to license fees versus renewal fees and services, changes in the
level of operating expenses, and general economic conditions. As a result,
the Company believes that period-to-period comparisons are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
The Company currently derives substantially all of its revenue from the
SA-EXPERTISE-TM- suites of products and related services and expects this
concentration to continue for the foreseeable future. As a result, any factor
adversely affecting the demand for, or pricing of, the SA-EXPERTISE-TM- suites
of products and related services would have a material adverse effect on the
Company's business and results of operations. The Company's future financial
performance will depend significantly on the successful development and customer
acceptance of new and enhanced versions of the SA-EXPERTISE-TM- suites of
products.
In conjunction with the license of SA-EXPERTISE-TM- applications, the
Company markets a proprietary application development environment, including
its own fourth generation language, SA-SCRIPT. In the event that the
Company's proprietary application development environment does not keep pace
with the technological changes required by its customers, there can be no
assurance that the Company would be able to modify its proprietary
application development environment or rewrite its applications, and the
inability or delays in doing so could have a material adverse effect on the
Company's business or results of operations.
Because the Company provides its licensees with the source code to certain
Company-licensed applications, licensees have the ability to customize such
applications. However, there can be no assurance that all licensees will
appropriately isolate their customizations. As a result, the Company, while not
contractually obligated, may incur additional costs for services in excess of
those that would ordinarily be required, and customer satisfaction could
diminish substantially, resulting in a material adverse effect on the Company's
business or results of operations.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly differences in the Company's operating
results, announcements of new products or technological innovations by the
Company or its competitors, as well as other events or factors. Changes in
earnings estimates made by brokerage firms and industry analysts relating to the
market in which Software Artistry does business, or relating to Software
Artistry specifically, have in the past resulted and could in the future result
in an immediate and adverse effect on the market price of the Company's Common
Stock. In addition, the stock market has from time to time experienced extreme
price and volume fluctuations, which have particularly affected the market
prices of securities of many high-technology companies and which have often been
unrelated to the operating performance of these companies. The broad market
fluctuations may adversely affect the market price of the Company's Common
Stock.
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The Company has significant investments and despite the high credit
ratings on the Company's marketable securities, there is no assurance such
agencies will not default on their obligations which could result in losses
of principal and accrued interest to the Company.
EMPLOYEES
As of December 31, 1996, the Company employed 240 people, including 67
in sales and marketing, 67 in product development, 73 in services, 31 in
general management, finance, internal information technology, and
administration, and 2 in distribution. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
good.
The Company believes that its future success will depend upon its
ability to attract, motivate, and retain qualified personnel, including key
members of senior management. Competition for such personnel is intense. The
inability to hire and retain qualified personnel could have a material
adverse effect on the Company's business or results of operations.
The growth in the Company's customer base and expansion of its
applications have placed, and are expected to continue to place, a strain on
the Company's management and other resources. The Company's future
performance will depend in part on its ability to implement and improve its
operational, financial, and management information systems and to hire,
train, and manage its employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are as follows:
NAME AGE POSITION WITH COMPANY
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W. Scott Webber. . . . . 43 President, Chief Executive Officer, and Director
Michael J. Robbins . . . 38 Sr. Vice President, Worldwide Operations
Steven M. Ehrlich. . . . 35 Vice President, ESM Business Unit
Scott McCorkle . . . . . 30 Vice President, CRM Business Unit
Thomas E. Vanneman . . . 41 Vice President, Finance, Chief Financial Officer,
Secretary, and Treasurer
W. Scott Webber has served as President and a Director of the Company
since January 1991 and as Chief Executive Officer since December 1994. From
1981 to 1990, Mr. Webber was employed by Pansophic Systems, Inc., a computer
software company, most recently as Director, North American Sales Operations.
Mr. Webber serves on the board of directors of the Indiana Software
Association. He holds a MM degree from Northwestern University and a BA
degree from Carleton University, Ottawa, Canada.
Michael J. Robbins has served as Senior Vice President, Worldwide
Operations of the Company since July 1996. From 1991 to 1994, he served as
Vice President, Domestic Sales, and from 1995 to 1996, he served as Vice
President and General Manager, European Operations. From 1986 to 1991, he was
employed by Pansophic Systems, Inc., most recently as Director, Midwest Area
Sales. From 1980 to 1986, Mr. Robbins held various positions at Xerox
Corporation and Honeywell Corporation. He holds a BA degree from the
University of Detroit.
Steven M. Ehrlich has served as Vice President, ESM Business Unit of the
Company since November 1996. Prior to that, he served as Vice President,
Client Services since May 1991. From 1986 to 1991, he was employed by
Pansophic Systems, Inc., most recently as Product Manager, Systems Software
Division. Mr. Ehrlich holds an MBA degree from Northern Illinois University
and a BA in Computer Science from Southern Illinois University at Carbondale.
Scott McCorkle has served as Vice President, CRM Business Unit of the
Company since November, 1996. He has been with the Company since 1995. From
May, 1996 to October, 1996 he was Director of Development. Prior to that he
was Manager of Information Technology from November, 1995 to April, 1996.
10
<PAGE>
Mr. McCorkle began his role at Software Artistry as an Information Systems
Analyst in August, 1995. From 1989 to 1995, he was Senior Scientific
Analyst for Lilly Research Laboratories. He has an MBA from Indiana
University and a BS from Ball State University.
Thomas E. Vanneman has served as Vice President, Finance, Chief
Financial Officer, Secretary, and Treasurer of the Company since December,
1996. From 1992 to 1996, he was Vice President and Treasurer for Acordia,
Inc. Prior to joining Acordia, Mr. Vanneman served as Assistant Treasurer
and various other management positions with Alexander and Alexander Services,
Inc. in Baltimore, Maryland, and Chicago, Illinois. He holds an MA and a BBA
degree from the University of Iowa.
ITEM 2. PROPERTIES
The Company is headquartered in Indianapolis, Indiana, where it leases
approximately 42,000 square feet of space housing product development, sales
and marketing, customer service, and administrative activities. This lease,
with the Precedent, expires in October, 2004. However, the Company has
entered into a lease with a new Landlord, Duke Realty Limited Partnership,
for a new facility to accommodate the Corporate office's growing space
requirements. In the new lease, Duke agreed to indemnify the Company from
its rental obligations under the Precedent Lease from and after the
commencement date of the new lease with Duke which was signed October 2, 1996
and commences January 1, 1998 (dependent upon the completion of construction).
The new lease term is sixteen years (with certain options to extend) and
covers 80,000 square feet (with certain expansion options available). The
aggregate annual base rental payments on the leases (not including operating
expenses, insurance, property taxes, and assessments) is $715,000 (Precedent,
1997) and $1,421,600 (Duke, thereafter). In addition, the Company leases
office space for one year or less in 25 locations in North America as well as
offices in the United Kingdom, France, Australia and Singapore. The Company
also intends to add additional remote and international offices as necessary.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1996.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the NASDAQ National Market
effective on March 3, 1995, under the symbol SWRT. Prior to that date, there
was no public market of the common stock. As of March 11, 1997, the Company
had 173 shareholders of record and approximately 2,200 beneficial holders of its
common stock.
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain all earnings to finance future
growth and therefore does not anticipate paying any cash dividends in the
foreseeable future.
The following table sets forth, for the quarter indicated, the high and
low sales prices for the common stock as reported on the NASDAQ National Market.
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
--------------------------------------------------------
1996
High $ 15.00 $ 12.00 $ 9.13 $ 10.25
Low $ 11.00 $ 6.38 $ 6.25 $ 6.13
1995
High $ 26.00 $ 28.00 $ 27.50 $ 19.25
Low $ 17.50 $ 20.00 $ 17.00 $ 12.50
The Company believes factors such as quarterly fluctuations in results
of operations and announcement of new products by the Company or by its
competitors may cause the market price of the common stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market in
general and the share prices of technology companies in particular, have
experienced extreme price fluctuations. These broad market and industry
fluctuations may adversely affect the market price of the Company's common
stock.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
(In thousands, except per share data)
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
Statement of operations data:
Total revenues $34,395 $25,628 $14,652 $ 7,494 $ 2,035
Operating income (loss) 2,479 4,940 2,471 1,504 (1,235)
Net income (loss) 1,937 3,748 1,666 1,450 (1,271)
Per share:
Primary:
Net income (loss) per share 0.26 0.52 0.33 0.30 (0.52)
Shares used in computing net income (loss)
per share 7,478 7,150 4,532 4,232 2,730
Fully diluted:
Net income (loss) per share 0.26 0.51 0.27 0.24 (0.52)
Shares used in computing net income (loss)
per share 7,478 7,393 6,050 5,752 2,730
Cash dividends declared per common share - - - - -
AS OF DECEMBER 31
Balance sheet data:
Cash, cash equivalents, and short-term
marketable securities $17,822 $18,079 $ 398 $ 1,411 $ 24
Total assets 40,077 35,494 10,357 4,790 1,047
Long-term obligations, less current portion - - 21 59 60
Accrued interest payable to stockholders - - 362 362 362
Deferred income taxes 737 462 113 - -
Redeemable convertible preferred stock - - 2,900 2,900 2,900
Redeemable preferred stock - - 563 563 563
Accumulated dividends payable on preferred
stock - - 488 322 156
Total stockholders' equity (deficit) 26,452 25,638 (1,175) (2,681) (3,964)
</TABLE>
On March 3, 1995, the Company completed its initial public offering of common
stock. The Company received net proceeds of $19.7 million, paid accrued
interest payable to stockholders, redeemable preferred stock, and accumulated
dividends, and converted redeemable convertible preferred stock to common
stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was formed in 1988 to develop, market, and support a variety
of software tools, some of which were predecessors to the Company's multiple
diagnostics for the software applications it currently markets. In 1991, the
Company introduced its first application, SA-EXPERT ADVISOR-TM- 1.0, which
incorporated call and problem management with multiple problem resolution
technologies. In 1995, the Company began marketing the SA-EXPERTISE-TM- name
as an umbrella for its evolving product suite for Enterprise Support
Management (ESM). The EXPERTISE suite for Enterprise Support Management
provides organizations with an integrated solution for internal support for
employees and end users.
In 1996, the Company expanded the number of applications it markets and
began using the SA-EXPERTISE-TM- suite designation for its Customer
Relationship Management products for external customer support. The first of
these products is SA-EXPERT SUPPORT-TM-, which is expected to be released in
late first
13
<PAGE>
quarter/early second quarter of 1997. Both EXPERTISE suites are designed to
increase operational efficiency and enhance customer satisfaction through
improved problem management and problem resolution capabilities.
RESULTS OF OPERATIONS
In 1996, the Company made a strategic decision to increase investing in
sales and marketing activities, product development activities, and general
and administrative expenses. As a result of the increased investments, sales
and marketing, product development, and general and administrative expenses
were a greater percentage of total revenues in 1996 compared to 1995.
Overall, operating income as a percentage of revenues declined to 7% in 1996
from 19% in 1995 and 17% in 1994.
The Company's quarterly operating results reflect distinct seasonality.
This seasonality, combined with uneven changes in sales and marketing
expenses, created marked fluctuations in quarterly results of operations.
Similar fluctuations may be expected in the future, although they will be
somewhat mitigated as service revenues increase as a percentage of total
revenues.
The following table sets forth certain income and expense items as a
percentage of total revenues, and the percentage change in dollar amounts of
such items, for the years ended December 31, 1996, 1995 and 1994.
Percent Increase
(Decrease)
----------------
Year Ended December 31, 1996 1995
----------------------- over over
1996 1995 1994 1995 1994
---- ---- ---- ---- ----
Revenues:
Initial license fees 68% 73% 79% 24% 62%
Renewal license fees and services 32 27 21 61 123
--- --- ---
Total revenues 100 100 100 34 75
--- --- ---
Operating expenses:
Costs of license fees 5 6 6 26 83
Cost of renewal license fees
and services 19 17 14 52 107
Sales and marketing 44 39 40 52 67
Product development 14 11 11 70 72
General and administrative 10 8 10 57 53
Nonrecurring charge 1 - 2 * *
--- --- ---
Total operating expenses 93 81 83 54 70
--- --- ---
Operating income 7 19 17 (50) 100
Interest income, net 2 3 - * *
--- --- ---
Income before taxes 9 22 17 (44) 127
Provision for income taxes 3 7 6 (44) 131
--- --- ---
Net income 6% 15% 11% (48) 125
--- --- ---
--- --- ---
* Not a meaningful number
REVENUES
The Company's revenue is derived from initial license fees, renewals of
license fees, and services. The Company recognizes initial license fee revenue
upon shipment. The Company unbundles the product support and services revenues
included in the license agreement and recognizes that as revenue in renewal
license fees and services in future periods. The Company's license agreements
do not provide a right of return. The continued use of the Company's software
typically requires the payment of a license renewal which is offered for
annual periods at approximately 18% of the then current initial license fee.
Renewal license fees include customer technical support and product
enhancements and are recognized ratably over the term of the license period.
The Company provides a comprehensive range of services, including consulting
and education; services revenue is recognized at the time the service is
provided. Allowances are maintained for potential credit losses, which have
not been significant to date.
INITIAL LICENSE FEES. Initial license fees revenue increased by $4.5
million (24%) from 1995 to 1996 and by $7.2 million (62%) from 1994 to 1995.
The increase in license revenues for the three years ended December 31, 1996,
is due to a number of factors. First, the number of initial licensees in each
year has increased to 133 in 1996, 131 in 1995 and from 114 in 1994. Second,
an increase in the number of licensees
14
<PAGE>
expanding the number of users on a previously purchased product or buying
additional products increased in 1996 to 40% of total contracted initial
license fees, up from 34% and 9% in 1995 and 1994, respectively. The number of
these license expansions has increased to 230 in 1996 from 161 in 1995 and 44
in 1994. During 1996 the Company recorded $3.6 million of revenue for the two
newly released SA-EXPERTISE-TM- applications (Expert Evolution and Expert
Web). Providing the foundation for this growth in revenues is the expansion of
marketing operations, opening of new offices in each of the three years, and
successful marketing efforts. In 1997, the Company expects the percent of
total revenue attributable to initial license fees to continue to decrease as
a percentage of total revenues.
North American initial license fees increased by $667,000 (4%) to $18.3
million in 1996 compared to an increase of $6.4 million (72%) to $17.6 million
in 1995. The decrease in the growth rate in North American license fees
reflect the effects of increased domestic competitive pressures and the impact
of the change in warranty period (discussed below in the second paragraph of
RENEWAL LICENSE FEES AND SERVICES).
Initial license fees from outside North America increased by $3.9 million
(354%) to $5.0 million, or 22% of total initial license fees revenue for 1996,
and $1.1 million, or 5%, of total initial license fees revenue for 1995. As
both the European and Asia-Pacific operations continue to mature, the Company
believes that initial license fees from outside North America will continue to
increase both in actual dollars and as a percent of total initial license
fees. The initial license fees for products are based on the number of seats
a licensee contracts to use.
RENEWAL LICENSE FEES AND SERVICES. Renewal license fees include a portion
of initial license fee amounts representing support (unbundled based on the
license renewal rates) and annual license renewals. Renewal license fees
revenue increased by $2.6 million (61%) to $6.8 million from 1995 to 1996 and
by $2.2 million (123%) to $4.2 million from 1994 to 1995. These increases are
due to an expanded user base as a result of product installations during 1996,
1995, and 1994. Of the Company's end-of-year 1995 customer base, 88%
renewed their licenses in 1996.
Beginning on April 1, 1996, the Company extended its standard warranty
period, which includes initial product support, from three months to 12
months on all contracts. As a result of extending the standard warranty
period, a larger percentage of revenues in each contract is now deferred,
which may have negatively impacted the amount of initial license fee revenues
recognized for the last nine months of 1996 and in the first quarter of 1997.
However, the impact of this change in standard warranty period cannot be
conclusively determined due to various factors involved in the contract
negotiation process.
Services revenues increased by $1.6 million (59%) to $4.3 million from
1995 to 1996 and by $1.6 million (141%) to $2.7 million from 1994 to 1995.
These increases were attributable to the initial licensing of the
SA-EXPERTISE-TM- products and an additional emphasis on providing complete
services solutions to existing customers. The Company expects services
revenue to increase in 1997.
COSTS OF LICENSE FEES
Costs of license fees consist primarily of costs of third party royalty
and commission payments, product media, documentation, duplication, shipment,
and amortization of capitalized software costs. As a percent of total
revenues, these expenses were 5% in 1996, and 6% in 1995 and 1994. The
decrease in percent of total revenues in 1996 compared to 1995 and 1994 is
principally because of lower third-party commission costs in 1996.
COST OF RENEWAL LICENSE FEES AND SERVICES
Cost of renewal license fees and services consist primarily of the costs
of providing customer technical support, consulting, and education. Cost of
renewal license fees and services constituted 19%, 17%, and 14% of total
revenues and 59%, 62% and 67% of renewal license fees and services in 1996,
1995, and 1994, respectively. The dollar increase was due primarily to the
growth in the Company's installed customer base and the growth of customer
technical support, consulting, and training staff.
SALES AND MARKETING
Sales and marketing expenses were 44%, 39%, and 40% of total revenues in
1996, 1995, and 1994, respectively. The increase in sales and marketing
expenses was primarily due to the increased number of sales representatives
reaching the higher commission brackets, expansion of the marketing staff, and
an increase in the number of trade shows and other marketing activities.
15
<PAGE>
PRODUCT DEVELOPMENT
The following table sets forth information regarding product development
costs (dollar amounts in thousands):
1996 1995 1994
------ ------ ------
Total product development costs $5,771 $3,506 $1,936
Costs capitalized 845 616 261
------ ------ ------
Product development expense $4,926 $2,890 $1,675
------ ------ ------
------ ------ ------
Amortization of capitalized software development
costs (included in costs of license fees) $ 420 $ 174 $ 137
------ ------ ------
------ ------ ------
Percentage of costs capitalized 15% 18% 13%
Percentage of costs capitalized, net of amortization 7% 13% 6%
Product development expenses were 14%, 11%, and 11% of total revenues in
1996, 1995, and 1994, respectively. The increase in amounts was due primarily
to the acceleration in the pace of product development.
The Company capitalized software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." The amounts
capitalized are dependent on the specific activities that the development
staff is engaged in during each year. Capitalized software development costs
are amortized over the estimated life of the related products (up to three
years) and amounts amortized are included in the costs of license fees.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of finance, human
resources, internal information systems, and administrative departments of the
Company. These expenses increased as a percentage of total revenues to10% in
1996 from 8% in 1995 and 10% in 1994. The dollar increase resulted primarily
from additional personnel and other costs incurred to support the growth of
the Company's operations.
NONRECURRING CHARGE
In 1996, the Company incurred severance charge amounts resulting from
certain management separations. The Company included all compensation and
benefits resulting from this separation as a nonrecurring charge in 1996.
In 1994, the Company and its former Chief Executive Officer mutually
agreed to a consulting and severance arrangement effective October 1, 1994.
The Company included all payments under this agreement as a nonrecurring
charge in 1994.
INTEREST INCOME, NET
In March 1995, the Company completed an initial public offering of common
stock. The proceeds were invested in short-term U.S. government securities,
high quality municipal issues, and interest-bearing deposits; these
investments account for substantially all of the interest income generated in
1995 and 1996. In 1994 and prior, interest income and expense was not
significant to operating results. The decrease in interest income in 1996 is
partially a result of the Company repurchasing 242,500 shares of its common
stock for $2.0 million. In January 1997, the Company announced the
discontinuation of its stock repurchase program.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate was 38.9% and 33.9% in 1996 and
1995, respectively, The increase in effective income tax rate was due to the
Company not being able to utilize the benefit from foreign losses resulting
from international start up and expansion efforts 1996. The Company
anticipates the effective income tax rate in 1997 to decrease.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In 1996 and 1995, the Company financed its operations through cash
generated from operations. In 1994 and prior, the Company funded its
operations primarily through Company founders' investments, private
investments in preferred stock, and cash generated from operations.
Cash provided by operations was $5.6 million, $1.6 million, and $1.2
million for the years ended December 31, 1996, 1995, and 1994, respectively.
The increase in cash provided by operating activities in 1996 compared to
1995 was due to an increase in deferred revenue and accounts payable and a
less significant increase in accounts receivable in 1996 compared to 1995.
The increase in cash provided by operating activities in 1995 compared to
1994 was due primarily to net income and an increase in deferred revenue
offset by an increase in accounts receivable.
Accounts receivable increased to $13.8 million from $12.4 million and
deferred revenues increased to $7.6 million from $5.9 million on December 31,
1996 and 1995, respectively. The increase in accounts receivable and deferred
revenue is primarily attributable to the increase in licensing activity and
the concentration of such activity in the final month of each period. The
Company calculates days sales outstanding as (i) the amount of accounts
receivable at quarter end (ii) divided by the sum of quarterly revenues and
the change in deferred revenues (iii) multiplied by 90. The Company believes
this calculation to be relevant because deferred revenues (in addition to
recognized revenues) are typically billable, and therefore contribute to the
increase in accounts receivable each period. Days sales outstanding were 88
days as of December 31, 1996 and 104 days as of December 31, 1995. The
decrease in such days is partially attributable to increased collection
efforts, shorter payment terms on contracts, and use of outside financing
sources. Because of the concentration of licensing activity at the end of
each year, the Company expects that accounts receivable and days sales
outstanding may continue to be substantial in the foreseeable future.
The Company used $4.6 million, $4.9 million, and $2.2 million for
investment activities in 1996, 1995, and 1994, respectively. In 1996, 1995,
and 1994 the Company expended $3.8 million, $2.0 million and $1.9 million,
respectively, for purchases of property and equipment. Due to planned
business expansion, additions to property and equipment are expected to
continue, including the purchase of equipment for new employees, upgrading
equipment for existing employees, and expansion of Company facilities. As of
December 31, 1996, the Company had no material commitments for capital
expenditures. In 1996, the Company used $2.0 million to repurchase 242,500
shares of its own stock. The stock repurchase plan was discontinued in
January 1997. The Company intends to utilize the repurchased shares to
satisfy future exercises of stock options.
As of December 31, 1996, the Company had $15.6 million of cash and cash
equivalents, $2.2 million of marketable securities, and working capital of
$20.2 million. In addition, at December 31, 1996, the Company had a working
capital line of credit of $2.0 million.
Management believes that existing cash balances and marketable
securities, cash flow from operations, and the line of credit commitment will
be sufficient to meet the Company's currently anticipated working capital,
and capital expenditure requirements.
BUSINESS ENVIRONMENT AND RISK FACTORS
Although the Company has experienced strong growth in recent periods,
such growth rates may not be sustainable and may not be indicative of future
operating results. The Company's continued growth will depend in part upon
its ability to enhance existing applications and develop and introduce new
applications that are technologically advanced, respond to evolving customer
requirements, respond to competitive products or announcements, and achieve
market acceptance of its products, including its new external customer
support product. There is no assurance this will occur.
The Company's quarterly operating results fluctuate from quarter to
quarter with the fourth quarter historically having the highest total
revenues and operating income. The Company believes that this pattern will
repeat in the future.
The Company may experience significant fluctuations in operating results
depending upon many factors, including, among others, the timing of new
application announcements and releases by the Company and its competitors,
budgeting cycles of its customers, demand for the Company's products, the
size and timing of customer orders, changes in the proportion of revenues
attributable to license fees versus renewal fees and services, changes in the
level of operating expenses, and general economic conditions. As a result,
the Company
17
<PAGE>
believes that period-to-period comparisons are not necessarily meaningful and
should not be relied upon as an indication of future performance.
The Company has significant investments and despite the high credit
ratings on the marketable securities held by the Company, there is no
assurance such agencies will not default on their obligations which could
result in losses of principal and accrued interest to the Company.
This report includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results or those anticipated. In this report, the
words "believes, "plans," "expects," or similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only
as of the date hereof. The Company undertakes no obligation to update this
discussion except as may be legally required in its reporting statements.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
December 31,
------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $15,606 $15,816
Marketable securities 2,216 2,263
Trade account receivables, net of allowance for doubtful accounts of
$480 in 1996 and $394 in 1995 13,785 12,442
Other receivables 366 -
Prepaid expenses 870 672
Deferred income taxes 262 103
------- -------
Total current assets 33,105 31,296
Property and equipment, net 5,676 3,318
Capitalized software development costs, net 1,245 820
Other assets 51 60
------- -------
Total assets $40,077 $35,494
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 22
Accounts payable and accrued liabilities 2,556 1,095
Accrued compensation and related expenses 1,898 1,527
Income taxes payable 874 877
Deferred revenue 7,560 5,873
------- -------
Total current liabilities 12,888 9,394
Deferred income taxes 737 462
------- -------
Total liabilities 13,625 9,856
------- -------
Stockholders' equity:
Common stock, no par value; 10,000,000 shares authorized,
6,985,708 shares issued and outstanding at December 31, 1996;
6,777,148 shares issued and outstanding at December 31, 1995 24,091 23,103
Treasury stock; 242,500 shares at December 31, 1996 (2,028) -
Accumulated translation adjustments (83) -
Retained earnings 4,472 2,535
------- -------
Total stockholders' equity 26,452 25,638
------- -------
Total liabilities and stockholders' equity $40,077 $35,494
------- -------
------- -------
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues:
Initial license fees $23,246 $18,722 $11,548
Renewal license fees and services 11,149 6,906 3,104
------- ------- -------
Total revenues 34,395 25,628 14,652
------- ------- -------
Operating expenses:
Costs of license fees 1,873 1,490 815
Costs of renewal license fees and services 6,547 4,303 2,083
Sales and marketing 14,973 9,850 5,892
Product development 4,926 2,890 1,675
General and administrative 3,390 2,155 1,412
Nonrecurring charge 207 - 304
------- ------- -------
Total operating expenses 31,916 20,688 12,181
------- ------- -------
Operating income 2,479 4,940 2,471
Interest income, net 693 728 25
------- ------- -------
Income before income taxes 3,172 5,668 2,496
Provision for income taxes 1,235 1,920 830
------- ------- -------
Net income $ 1,937 $ 3,748 $ 1,666
------- ------- -------
------- ------- -------
Per share amounts:
Primary:
Net income per share $ 0.26 $ 0.52 $ 0.33
------- ------- -------
------- ------- -------
Shares used in computing net income per share 7,478 7,150 4,532
------- ------- -------
------- ------- -------
Fully diluted:
Net income per share $ 0.26 $ 0.51 $ 0.27
------- ------- -------
------- ------- -------
Shares used in computing net income per share 7,478 7,394 6,050
------- ------- -------
------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
Common Stock Treasury Stock
-------------------- --------------------
Retained
Accumulated Earnings
Number of Number of Translation (Accumulated
Shares Amount Shares Amount Adjustments Deficit)
--------- -------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 2,500,000 $ 1 - $ - $ - $ (2,682)
Dividends on preferred stock - - - - - (166)
Exercise of common stock options 9,375 6 - - - -
Net income - - - - - 1,666
--------- -------- ------- -------- -------- --------
Balances, December 31, 1994 2,509,375 7 - - - (1,182)
Dividends on preferred stock - - - - - (31)
Conversion of preferred stock 2,470,321 2,900 - - - -
Issuance of common stock, net 1,563,750 19,741 - - - -
Exercise of common stock options 233,702 220 - - - -
Income tax benefit of stock option
exercises - 235 - - - -
Net income - - - - - 3,748
--------- -------- ------- -------- -------- --------
Balances, December 31, 1995 6,777,148 23,103 - - - 2,535
Issuance of common stock, net 7,859 56 - - - -
Exercise of common stock options 200,701 387 - - - -
Income tax benefit of stock option
exercises - 545 - - - -
Treasury stock - - 242,500 (2,028) - -
Accumulated translation
adjustments - - - - (83) -
Net income - - - - - 1,937
--------- -------- ------- -------- -------- --------
Balances, December 31, 1996 6,985,708 $ 24,091 242,500 $ (2,028) $ (83) $ 4,472
--------- -------- ------- -------- -------- --------
--------- -------- ------- -------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
21
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,937 $ 3,748 $ 1,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment 1,432 676 267
Amortization of software development costs 420 174 137
Change in allowance for doubtful accounts 86 219 100
Disposition of furniture and equipment 50 13 30
Amortization of financing costs - 1 5
Changes in assets and liabilities:
Trade accounts receivable (1,429) (5,526) (4,668)
Prepaid expenses (564) (493) (80)
Accounts payable and accrued liabilities 1,461 (148) 817
Accrued compensation and related expenses 371 272 607
Income taxes payable (3) 162 652
Deferred revenue 1,687 2,038 1,767
Deferred income taxes 116 444 (55)
-------- -------- --------
Net cash provided by operating activities 5,564 1,580 1,245
Investing activities:
Purchase of marketable securities (9,456) (12,575) -
Sale of marketable securities 1,375 1,603 -
Maturities of marketable securities 8,128 8,709 -
Purchase of property and equipment (3,840) (1,971) (1,931)
Capitalization of software development costs (845) (616) (261)
(Increase) decrease in other assets 9 (28) (11)
-------- -------- --------
Net cash used in investing activities (4,629) (4,878) (2,203)
Financing activities:
Proceeds from issuance of common stock, net
of issuance costs 56 19,741 -
Proceeds from exercise of stock options 387 220 6
Income tax benefit of stock option exercises 545 235 -
Purchase of treasury stock (2,028) - -
Redemption of Series D preferred stock - (563) -
Payment of accumulated dividends on preferred stock - (519) -
Payment of interest payable to stockholders - (362) -
Principal payments on equipment obligations (22) (36) (61)
-------- -------- --------
Net cash provided (used) by financing activities (1,062) 18,716 (55)
Accumulated translation adjustments (83) - -
-------- -------- --------
Change in cash and cash equivalents (210) 15,418 (1,013)
Cash and cash equivalents, beginning of year 15,816 398 1,411
-------- -------- --------
Cash and cash equivalents, end of year $ 15,606 $ 15,816 $ 398
-------- -------- --------
-------- -------- --------
Supplemental disclosures:
Cash paid for:
Interest expense $ 10 $ 19 $ 10
Income taxes 570 1,079 120
Noncash investing and financing activities:
Conversion of redeemable convertible preferred
stock to common stock - 2,900 -
Accrued dividends on preferred stock - 31 166
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Software Artistry, Inc. (the Company) develops, internationally markets,
and supports a family of internal and external customer support software
applications. The Company does not have a concentration of credit risk in
any one industry, geographic region, or customer.
A significant portion of the Company's revenues in 1996 were derived
from licenses of Expert Advisor, a complete problem management system to
resolve customer problems.
The market for the Company's applications is characterized by rapid
technological advances, changes in customer requirements, and frequent new
product introductions and enhancements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: Software Artistry, Inc., Software
Artistry Europe, Inc., Software Artistry International, Inc., Software
Artistry UK LTD, Software Artistry SARL, Software Artistry Asia Pacific Pte
Ltd, and Software Artistry Asia Pacific Pty Ltd. All significant intercompany
balances and transactions have been eliminated.
CASH, CASH EQUIVALENTS, AND
MARKETABLE SECURITIES
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. Cash equivalents and marketable
securities consist primarily of U.S. government securities, municipal issues
and interest-bearing deposits with major banks.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company classifies all of its marketable debt securities as available-for-sale
securities. These securities are valued at their fair value. There was no
significant difference between cost and fair value at December 31, 1996 and
1995.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the related assets. Equipment under capital leases is amortized using the
straight-line method over the life of the lease.
SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed." Costs
associated with the planning and designing phase of software development,
including coding and testing activities necessary to establish technological
feasibility, are classified as product development and expensed as incurred.
Once technological feasibility has been determined, additional costs incurred
in development, including coding, testing, and product quality assurance, are
capitalized.
Amortization is provided on a product-by-product basis over the
estimated economic life of the software, not to exceed three years, using the
straight-line method. This method results in greater amortization than the
ratio of current year gross product revenues to current and anticipated
future gross product revenue method. Amortization commences when a product
is available for general release to customers. Unamortized capitalized costs
determined to be in excess of the net realizable value of a product are
expensed at the date of such determination.
REVENUE RECOGNITION
Initial license fee revenues are derived from initial licenses of Expert
Advisor and related software applications developed by the Company. Renewal
license fees and services revenues are derived from renewal licenses of
Expert Advisor and related software applications, consulting, and education.
23
<PAGE>
Initial contracts include the use of the software as well as the first
year support. Software license revenues are recognized when a noncancellable
license agreement is signed, the product is shipped and all significant
contracted obligations are satisfied. Since April 1, 1996, the Company's
standard licensing agreement provides for one year of customer support and
product updates. The portion of the initial contract
24
<PAGE>
associated with support is deferred for revenue recognition purposes and
recognized in renewal license fees and services.
Renewal license fees from agreements for maintaining, supporting and
providing periodic upgrades are recognized monthly on a straight-line basis
over the renewal period, which in most instances is one year. Revenues for
consulting and education services are recognized as services are performed.
NET INCOME PER SHARE
Primary net income per share is computed based upon the weighted average
number of common and common equivalent shares outstanding and gives effect to
certain adjustments. Common equivalent shares include outstanding stock
options and, in 1995 and 1994, Series A redeemable convertible preferred
stock. Common equivalent shares are included in the per share calculation
using the modified treasury stock method. In accordance with Securities and
Exchange Commission requirements, common and common equivalent shares issued
during the twelve-month period immediately preceding the filing of the
initial public offering have been included in the calculation of earnings per
share as if they were outstanding for all periods, using the treasury stock
method and an assumed initial public offering price.
Fully diluted net income per share is computed in the same manner as
primary net income per share, except that, in 1995 and 1994, all outstanding
shares of Series B and C redeemable convertible preferred stock are assumed
to have been converted to common stock at the time of issuance.
USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING FOR STOCK OPTIONS
In 1996, the Company adopted the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". In accordance
with SFAS No. 123, the Company uses the intrinsic value method to account for
stock options, consistent with the existing rules established by Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation expense has been recognized for stock options
granted to employees.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the 1996 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following amounts (in thousands):
1996 1995
------ ------
Leasehold improvements $ 260 $ 236
Computer equipment 4,105 2,193
Furniture and equipment 1,928 1,529
Software 1,950 506
------ ------
8,242 4,464
Less accumulated depreciation
and amortization 2,567 1,146
------ ------
$5,676 $3,318
------ ------
------ ------
25
<PAGE>
3. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consists of the following amounts
(in thousands):
1996 1995
------ ------
Capitalized costs $1,838 $1,004
Less accumulated amortization 593 184
------ ------
$1,245 $ 820
------ ------
------ ------
During 1996 and 1995, the Company eliminated $11,000, and $256,000 of
cost and related accumulated amortization for fully amortized capitalized
software development costs, respectively.
4. CREDIT AGREEMENT
The Company has a revolving line of credit arrangement with a bank that
provides for borrowings of up to $2,000,000. Borrowings under this line of
credit bear interest at the bank's prime rate and are collateralized by trade
accounts receivable and property and equipment. The facility will expire on
April 30, 1997. No amounts were outstanding at December 31, 1996 and 1995.
The line of credit agreement contains restrictive covenants, the most
significant of which relate to minimum defined stockholders' equity and cash
flow coverage ratio. At December 31, 1996 and 1995, the Company was in
compliance with such covenants.
5. INCOME TAXES
The components of income (loss) from operations before income taxes are
as follows (in thousands):
1996 1995 1994
------ ------ ------
United States $3,837 $6,224 $2,638
Foreign (665) (555) (142)
------ ------ ------
$3,172 $5,668 $2,496
------ ------ ------
------ ------ ------
The provision for income taxes is as follows (in thousands):
1996 1995 1994
------ ------ ----
Current:
Federal $ 830 $1,176 $725
State 145 300 160
Foreign 144 - -
------ ------ ----
$1,119 1,476 885
------ ------ ----
Deferred:
Federal 91 404 (45)
State 25 40 (10)
------ ------ ----
116 444 (55)
------ ------ ----
$1,235 $1,920 $830
------ ------ ----
------ ------ ----
26
<PAGE>
The provision for income taxes differs from the federal statutory tax
rate as follows (in thousands):
1996 1995 1994
------ ------ -----
Federal tax at statutory rate $1,079 $1,927 $ 848
State income tax, net of federal tax benefit 143 224 99
Tax credits generated (159) (132) (118)
Non-taxable interest income (166) (170) -
Foreign subsidiary losses 289 - -
Tax credits carried forward - - (25)
Other 49 71 26
------ ------ -----
$1,235 $1,920 $ 830
------ ------ -----
------ ------ -----
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and income
tax purposes. The income tax effects of these temporary differences are as
follows (in thousands):
1996 1995
----- -----
Deferred tax assets:
Accounts receivable allowance $ 182 $ 150
Deferred revenue 80 76
----- -----
262 226
----- -----
Deferred tax liabilities:
Development costs capitalized (473) (287)
Depreciation (264) (175)
----- -----
(737) (462)
----- -----
Valuation allowance - (123)
----- -----
$(475) $(359)
----- -----
----- -----
Undistributed earnings of the Company's foreign subsidiaries amounted to
less than $1 million at December 31, 1996. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of
the amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credit carry-forwards would be available to
reduce some portion of the U.S. liability.
In 1995, due to the uncertainty surrounding the timing of realizing the
benefits of its favorable tax attributes in future tax returns, the Company had
a valuation allowance against a portion of its deferred tax assets.
6. COMMITMENTS
The Company rents its corporate office space under a ten-year
noncancellable operating lease which expires in October 2004. The Company has
entered into a lease for a new facility to accommodate the Corporate office's
growing space requirements. The Landlord, Duke Realty Limited Partnership, has
agreed to indemnify the Company from its rental obligations under the current
lease from and after the commencement date of the new lease, January 1, 1998
(dependent upon the completion of construction). The new lease term is sixteen
years.
27
<PAGE>
Future minimum required rent payments for the corporate office and other
operating leases outstanding with initial terms of more than one year as of
December 31, 1996, are summarized as follows (in thousands):
Payable in:
1997 $ 715
1998 1,330
1999 1,449
2000 1,422
2001 1,422
Thereafter 15,756
-------
$22,094
-------
-------
The Company also rents office space for sales offices under month-to-month
leases and leases with terms generally less than three years.
Total rent expense for office leases was $1,421,000, $908,000, and $441,000
in 1996, 1995, and 1994, respectively.
7. STOCKHOLDERS' EQUITY
In March 1995, the Company completed an initial public offering of
1,563,750 shares of common stock at $14.00 per share, resulting in total
proceeds of $19,741,000 after deducting underwriting discounts and commissions
and other expenses. All issued and outstanding Series A, B, and C convertible
preferred stock was automatically converted to common stock in accordance with
the underlying agreements. All issued and outstanding Series D redeemable
preferred stock was redeemed in accordance with the underlying agreements.
STOCK OPTION PLANS
As of December 31, 1996 and 1995, the Company had two stock option plans
under which options to purchase common stock may be granted to its employees,
officers, directors and others. One of these plans is qualified under the
Internal Revenue Code while the other is a nonqualified plan.
Generally, options granted before December 31, 1996 under the qualified
plan become vested over a five-year period, 20% each year, and are subject to
the employee's continued employment. Options granted on or after December 31,
1996 under the qualified plan generally become vested over a two-year period,
25% each six months, and are also subject to the employee's continued
employment. Stock options are issued at the full fair market value at the date
of grant. The vesting of the options will be accelerated in the event of
certain occurrences including the sale of the Company or a significant merger.
The plans terminate in 2001 but may be terminated earlier by the Board of
Directors at any time.
Under the amended Nonstatutory Stock Option Plan approved by the
stockholders in 1996, options are granted to independent directors for 6,000
shares each year, at the fair market value on the date of grant; with 2,000
shares vested every 12 months for three years, while continuing as a director of
the Company. At December 31, 1996, 1,875,000 and 312,500 shares of common stock
were reserved for purchase under the incentive and nonstatutory stock option
plans, respectively.
In January 1996 and April 1996, the Board of Directors approved the
cancellation and repricing of 558,238 options with the condition that all
repriced options would begin vesting on the date of repricing. The average
price before repricing was $15.38 per share. These options were repriced at
$6.88 per share, the fair market value on the date of repricing.
28
<PAGE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
1996 1995 1994
---------------------------------------------
Weighted-
Average
Exercise
Options Price Options Options
---------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,357,858 $ 4.99 1,309,748 928,801
Granted (1) 1,196,788 8.71 306,373 390,322
Exercised (200,701) 1.92 (233,077) (9,375)
Canceled (1) (737,338) 13.39 (25,186) 0
---------------------------------------------
Outstanding at end of year 1,616,607 $ 4.29 1,357,858 1,309,748
---------------------------------------------
---------------------------------------------
Price range of grants $6.88-$15.00 $7.39-$24.25 $.53-$7.35
Price range of exercised options $.48-$7.39 $.48-$7.39 $.48-$2.65
Weighted-average fair value of options
granted $2.81
Available for grant at December, 31 1996 127,740
</TABLE>
(1) The 1996 amounts include the cancellation and repricing of 558,238
options.
The following table summarizes information about the fixed price stock
options outstanding at December 31, 1996.
Options Outstanding Options Exercisable
--------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1996 Life Price 1996 Price
- --------------------------------------------------------------------------------
$0.0480 - $ 1.2400 474,294 5 years $0.49545 474,294 $0.495
$2.4100 - $ 6.0300 310,337 6 years $2.51658 302,948 $2.501
$6.0600 - $ 6.8800 434,613 9 years $6.87985 350 $6.163
$7.1300 - $17.7500 397,363 10 years $7.39547 30,699 $8.767
-----------------------------------------------------------
$0.4800 - $17.750 1,616,607 8 years $4.29549 808,291 $1.563
--------- -------
--------- -------
Pro forma information regarding net income and earnings per share is
required by Financial Accounting Statement No. 123, which also requires that
the information be determined as if the Company has accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rates of 5.5%; a dividend yield of 0%; volatility factors of the
expected market price of the Company's common stock of .75; and an expected life
of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
29
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
1996 1995
------ ------
Pro forma net income $1,147 $3,327
Pro forma earnings per share
Primary $0.16 $0.45
Fully diluted $0.16 $0.44
Because Statement 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1997.
EMPLOYEE STOCK PURCHASE PLAN
Also, in January 1996, the Board of Directors proposed and in April
1996, the stockholders adopted the Employee Stock Purchase Plan and reserved
100,000 shares of the Company's common stock for issuance. Under the
Purchase Plan, employees are granted the right to purchase shares of common
stock at a price per share that is 85% of the lesser of: (i) the mean market
price on the Offering Commencement Date, or (ii) the mean market price on the
Offering Termination Date. During 1996, shares totaling 7,859 were issued
under the Purchase Plan at an average price of $6.00 per share.
The Company intends to utilize the repurchased treasury shares to
satisfy future exercises of stock options.
8. NONRECURRING CHARGE
The Company incurred severance charges resulting from certain management
separations in 1996; all payments under this arrangement were included as a
nonrecurring charge in the second quarter 1996.
The Company and its former Chief Executive Officer mutually agreed to a
consulting and severance agreement effective October 1, 1994. Under the terms
of this agreement, the former Chief Executive Officer received certain
previously established incentive and other consulting payments through the end
of 1995. The Company included all payments under this agreement as a
nonrecurring charge in the fourth quarter of 1994.
9. RETIREMENT PLAN
The Company has a retirement plan which is qualified under Section 401(k)
of the Internal Revenue Code. This plan covers substantially all employees who
meet minimum age requirements and allows participants to defer a portion of
their annual compensation on a pre-tax basis. Company contributions to the plan
may be made at the discretion of the Board of Directors. No Company
contributions have been made through December 31, 1996. The Board of Directors
has approved a matching contribution of 25% of the first 6% of employee
contributions, limited to $750 per employee, beginning January 1996.
The Company does not offer post-retirement or post-employment benefits.
30
<PAGE>
10. GEOGRAPHIC OPERATIONS
The following table presents information about the Company's operations by
geographical areas for each of the three years in the period ended December 31,
1996:
GEOGRAPHICAL AREAS:
- -------------------------------------------------------------------------------
Operating Operating Identifiable
Revenues Income Assets
- -------------------------------------------------------------------------------
1996
North America $28,567 $2,656 $38,007
Europe/Asia Pacific 5,828 (177) 2,070
------- ------ -------
$34,395 $2,479 $40,077
------- ------ -------
------- ------ -------
1995
North America $24,547 $5,638 $35,285
Europe/Asia Pacific 1,081 (698) 209
------- ------ -------
$25,628 $4,940 $35,494
------- ------ -------
------- ------ -------
1994
North America $14,312 $2,613 $10,324
Europe/Asia Pacific 340 (142) 33
------- ------ -------
$14,652 $2,471 $10,357
------- ------ -------
------- ------ -------
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Software Artistry, Inc.
We have audited the accompanying consolidated balance sheets of Software
Artistry, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Software Artistry, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 27, 1997
32
<PAGE>
QUARTERLY FINANCIAL INFORMATION
The Company believes that fourth quarter revenues and expenses are affected
by a number of seasonal factors, including the Company's sales compensation
plans. The Company believes that these seasonal factors are common in the
computer software industry. Such factors historically have resulted in first
quarter revenues in any year being lower than revenues in the immediately
preceding fourth quarter. The Company expects this trend to repeat in the first
quarter of fiscal 1997.
<TABLE>
Quarter Ended March 31 June 30 September 30 December 31 Year
- -----------------------------------------------------------------------------------------
(unaudited -- in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1996
- ----
Total revenues $6,072 $7,526 $8,261 $12,536 $34,395
Income (loss) from operations (399) (58) 266 2,670 2,479
Net income (loss) (148) 86 310 1,689 1,937
Net income (loss) per share:
Primary $(0.02) $ 0.01 $ 0.04 $ 0.23 $ 0.26
Fully diluted $(0.02) $ 0.01 $ 0.04 $ 0.23 $ 0.26
1995
- ----
Total revenues $4,234 $5,707 $6,433 $ 9,254 $25,628
Income from operations 391 1,120 1,178 2,251 4,940
Net income 294 861 912 1,681 3,748
Net income per share:
Primary $ 0.05 $ 0.11 $ 0.12 $ 0.22 $ 0.52
Fully diluted $ 0.04 $ 0.11 $ 0.12 $ 0.22 $ 0.51
1994
- ----
Total revenues $1,981 $3,013 $3,809 $ 5,849 $14,652
Income from operations 108 576 638 1,149 2,471
Net income 75 389 433 769 1,666
Net income per share:
Primary $ 0.01 $ 0.08 $ 0.09 $ 0.16 $ 0.33
Fully diluted $ 0.01 $ 0.07 $ 0.07 $ 0.13 $ 0.27
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the sections
captioned "Board of Directors - Nominees for Director" and "Voting Securities
and Principal Holders - Exchange Act Compliance" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 25, 1997
(the "Proxy Statement"), and is incorporated herein by reference.
Information with respect to Executive Officers of the Company is set forth
under the caption "Executive Officers of the Registrant" in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in the section captioned
"Executive Compensation" of the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the section captioned
"Executive Compensation" of the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company did not engage in any transaction or business relationship
requiring disclosure under the Securities Exchange Act of 1934, as amended.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
The following information appears in Item 8 of this Form 10-K:
<TABLE>
PAGE(S)
-------
<S> <C>
- Consolidated Balance Sheets as of December 31, 1996 and 1995...... 18
- Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994............................... 19
- Consolidated Statements of Stockholders' Equity (Deficit) for
the Years Ended December 31, 1996, 1995 and 1994................ 20
- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994............................... 21
- Notes to Consolidated Financial Statements........................ 22-29
- Report of Independent Auditors.................................... 30
</TABLE>
2. Financial Statement Schedules
The following financial statement schedule is included in this
report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not
applicable, or the required information is otherwise shown in the
consolidated financial statements or the notes thereto.
3. Exhibits
Exhibit
No. Document
-------- --------
3.1* Articles of Amendment to the Third Amended and Restated
Articles of Incorporation of Software Artistry, Inc. and
Amendments.
3.2* Amended and Restated Code of By-Laws of Software
Artistry, Inc.
4.1* Form of Certificate for Common Stock.
10.1** Form of Software License Agreement.
10.2* Form of Nondisclosure Agreement.
10.3* Lease Agreement with the Precedent, dated January 10,
1994, and addendum I and II.
10.4** Amended and Restated Line of Credit Loan Agreement with
Society National Bank, Indiana dated April 28, 1995.
10.5* Employment Agreement with Michael J. Robbins dated
December 27, 1991.
10.6* Employment Agreement with Steven M. Ehrlich dated July 8,
1991.
10.7* Employment Agreement with W. Scott Webber dated February
28, 1991.
10.8** October 18, 1995 Amendment to the Amended and Restated
Nonstatutory Stock Option Incentive Plan, dated December
9, 1994.
10.9** Form of Nonstatutory Stock Option Incentive Agreement.
10.10* Amended and Restated Incentive Stock Option Plan, dated
December 9, 1994.
10.10a Amendment to the Incentive Stock Option Plan, adopted by
the board January 15, 1997.
10.11* Form of Incentive Stock Option Agreement.
10.12* Salary Deferral [401(k)] and Savings Prototype Profit
Sharing Plan and Trust.
36
<PAGE>
10.13* Registration Rights Agreement, dated March 16, 1990, as
amended January 22, 1992.
10.14* Form of Employee Agreement Regarding Competitive
Activities.
10.15 Lease Agreement with Duke, dated October 2, 1996.
11.1 Statements re Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
24.1 Power of Attorney of Jerry Baker.
24.3 Power of Attorney of Lawrence W. Olson.
24.4 Power of Attorney of Joseph A. Piscopo.
27.1 Financial Data Schedule
* Incorporated herein by reference to the Registration Statement
on Form S-1 of Software Artistry, Inc. with Registration No.
33-88622 declared effective March 2, 1995.
** Incorporated herein by reference to the 1995 Annual Report on
Form 10-K filed on March 30, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SOFTWARE ARTISTRY, INC.
DATE: MARCH 21, 1997 By: /s/ W. Scott Webber
----------------------------------
W. Scott Webber
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
Signature Title (Capacity) Date
--------- ---------------- ----
<S> <C> <C>
/s/ W. Scott Webber President, Chief Executive Officer, March 21, 1997
- ------------------------------- and Director
W. Scott Webber (Principal Executive Officer)
/s/ Thomas E. Vanneman Vice President, Finance, Chief Financial March 21, 1997
- ------------------------------- Officer, Treasurer, and Secretary
Thomas E. Vanneman (Principal Financial and
Accounting Officer)
*
- ------------------------------- Director March 21, 1997
Jerry Baker
*
- ------------------------------- Director March 21, 1997
Lawrence W. Olson
*
- ------------------------------- Chairman of the Board of Directors March 21, 1997
Joseph A. Piscopo
</TABLE>
* By /s/ W. Scott Webber
---------------------------
W. Scott Webber
ATTORNEY-IN-FACT
38
<PAGE>
<TABLE>
SOFTWARE ARTISTRY, INC.
Schedule II - Valuation and Qualifying Accounts
Col. A Col. B Col. C Col D. Col E.
- -------------------------------------- ---------- ------------------------------------- --------------------- --------------
Additions
Balance at -------------------------------------
Beginning Charged to Costs Charged to Other Balance at End
Description of Period and Expenses Accounts - Describe Deductions - Describe of Period
- -------------------------------------- ---------- ---------------- ------------------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts: $(477,976)(2)
Allowance for doubtful accounts. . $394,296 $300,464 $368,230(1) (105,014)(3) $480,000
-------- -------- -------- --------- --------
Total. . . . . . . . . . . . . . $394,296 $300,464 $368,230 $(582,990) $480,000
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
Year ended December 31, 1995:
Deducted from asset accounts: $(123,215)(2)
Allowance for doubtful accounts. . $175,000 $258,700 $271,120(1) (187,309)(3) $394,296
-------- -------- -------- --------- --------
Total. . . . . . . . . . . . . . $175,000 $258,700 $271,120 $(310,524) $394,296
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts. . $ 75,000 $138,000 $ - $ (38,000)(2) $175,000
-------- -------- -------- --------- --------
Total. . . . . . . . . . . . . . $ 75,000 $138,000 $ - $ (38,000) $175,000
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
- ----------------------
(1) Represents allowance established for non-renewals of license renewal fees; amounts charged to license renewal fees revenue.
(2) Uncollectible accounts written off.
(3) Non-renewals written off.
</TABLE>
<PAGE>
EXHIBITS TO FORM 1996 10-K
<TABLE>
Exhibit Page
No. Document No.
- ------- -------- ----
<S> <C> <C>
10.10a Amendment to the Incentive Stock Option Plan, adopted by the board
January 15, 1997. 02-03
10.15 Lease Agreement with Duke, dated October 2, 1996. 04-38
11.1 Statements re Computation of Per Share Earnings. 39
21.1 Subsidiaries of the Registrant. 40
23.1 Consent of Ernst & Young LLP. 41
24.1 Power of Attorney of Jerry Baker. 42
24.3 Power of Attorney of Lawrence W. Olson. 43
24.4 Power of Attorney of Joseph A. Piscopo. 44
27.1 Financial Data Schedule. 45
</TABLE>
<PAGE>
Exhibit 10.10a AMENDMENT TO THE INCENTIVE STOCK OPTION PLAN, ADOPTED BY THE
BOARD JANUARY 15, 1997.
Shareholders are being asked to approve an increase in the number of shares
of Common Stock authorized for issuance pursuant to the Company's Amended and
Restated Incentive Stock Option Plan ("Incentive Plan"). The Incentive Plan
currently provides that options to acquire an aggregate of 1,875,000 shares of
Common Stock may be granted thereunder. The Incentive Plan was amended and
restated on December 9, 1994, and approved by the shareholders of the
Corporation December 9, 1994.
SUMMARY OF AMENDMENT
The Board of Directors has amended the Incentive Plan to provide for the
issuance of options to acquire an additional 200,000 shares of Common Stock
(for an aggregate of 2,075,000 shares of Common Stock) and directed that this
amendment be submitted to the shareholders of the Corporation for their
approval. As of December 31, 1996, options to purchase 1,795,067 shares of
Common Stock have been granted under the Incentive Plan. The approval of the
increase in the number of shares of Common Stock available for grant under the
Incentive Plan will require the affirmative vote of a majority of the shares of
Common Stock and entitled to vote at the Annual Meeting. If not approved by
shareholders at the Annual Meeting, certain grants made under the Incentive Plan
during and after the last fiscal year may be null and void. Under the Incentive
Plan, stock options may be granted only to full-time employees of the Company
and its subsidiaries, including officers.
SUMMARY OF MATERIAL PROVISIONS OF THE INCENTIVE PLAN
GENERAL. The Incentive Plan is intended to provide continuing long-term
incentives to selected eligible key employees, including officers, to provide a
means of rewarding outstanding performance by such individuals, and to enable
the Company to attract and retain key personnel. See also "Executive
Compensation."
ADMINISTRATION. The Incentive Plan is administered by the Board of
Directors or a committee appointed thereby, a majority of the members of which
must be members of the Board and none of whom are eligible to participate in the
Incentive Plan. The Board or committee may interpret the Incentive Plan and,
subject to its provisions, may prescribe, amend and rescind rules and make all
other determinations necessary or desirable for the administration of the
Incentive Plan. Subject to certain limits set forth in the Incentive Plan, the
Board or committee has complete discretion to select participants, establish
the manner in which options are granted and exercised, and otherwise prescribe
all of the terms and provisions of options granted under the Incentive Plan.
ELIGIBILITY. Only full-time employees, including officers, of the Company
and its subsidiaries are eligible to participate in the Incentive Plan. As of
December 31, 1996, the Company and its subsidiaries had approximately 237
full-time employees.
STOCK SUBJECT TO INCENTIVE PLAN. The Incentive Plan covers an aggregate of
1,875,000 shares of Common Stock (as adjusted for a 5 for 4 stock split in
January 1995). As of December 31, 1996, options for 1,795,067 shares of Common
Stock had been granted under the Incentive Plan. The Board of Directors shall
make appropriate adjustments in the number of shares subject to the Incentive
Plan and outstanding options in the event of a recapitalization,
reclassification, stock split, combination of shares (reverse stock split) or
dividend or other distribution payable in Common Stock after the Incentive Plan
becomes effective.
VESTING AND TERM. Before December 10, 1996, options granted under the
Incentive Plan generally vest and become exercisable at the rate of 20% of the
option shares on the first, second, third, fourth and fifth anniversary date of
the grant conditioned upon continued employment with the Company. Options
granted after December 10, 1996 are exercisable over a two year period, 25%
every six months. Vesting is accelerated and options become exercisable in the
event of a "change of control" of the Company as defined in the Incentive Plan.
2
<PAGE>
The options generally have a term of ten years (five years for employees owning
more than 10% of the Company's Common Stock) from the date of grant.
AMENDMENT. The Incentive Plan may be amended by the Board of Directors
except that, without shareholder approval, no amendment shall increase the
number of shares available under the Incentive Plan except for certain specified
adjustments, change the designation of the class of persons eligible to be
granted options under the Incentive Plan, or materially increase the benefits
accruing to participants under the Incentive Plan.
FEDERAL TAX CONSEQUENCES. Options under the Incentive Plan are intended to
qualify as "incentive stock options" within the meaning of section 422 of the
Internal Revenue Code. In accordance with section 422 of the Code, the term of
any option granted under the Incentive Plan may not exceed ten (10) years. With
respect to any employee who owns stock possessing more than ten percent (10%) of
the voting power of the outstanding stock of the Company, the term of any option
may be no longer than five (5) years. The aggregate fair market value of the
Common Stock (determined at the date of the option grant) with respect to which
incentive stock options are exercisable for the first time by any individual
during any calendar year may not exceed $100,000. The exercise price of all
options granted under the Incentive Plan must not be less than the fair market
value per share on the date of grant (unless the Optionee owns ten percent (10%)
or more of the voting power of the outstanding stock of the Company in which
case the exercise price must not be less than one hundred ten percent (110%) of
the fair market value per share on the date of grant).
The grant and exercise of an option under the Incentive Plan does not result in
taxable income to the Optionee provided that the Optionee observes the following
holding periods and restrictions. In order for the option to be a qualified
incentive option, the Optionee must hold the stock acquired pursuant to the
option for a period of two (2) years from the date of the option grant and one
(1) year from the date of the option exercise. Any failure to satisfy the
holding periods and restrictions results in the loss of the qualified status of
the option and such option would be treated as a nonqualified option. Provided
that the Optionee observes the aforementioned holding periods, the sale of the
option stock by the Optionee results in taxable long-term capital gain income to
the Optionee in an amount equal to the difference between the option sales and
the option exercise price.
The Incentive Plan is not a stock bonus, pension or profit-sharing plan and
is not subject to or qualified under section 401(a) of the Internal Revenue
Code or any or the provisions of the Employment Retirement Income Security Act
of 1974 ("ERISA").
BOARD OF DIRECTORS RECOMMENDATION
The Board of Directors believes that the Company's future success depends
upon its ability to attract and retain the highest caliber personnel and to
use their capabilities to the fullest extent possible by encouraging their
dedication to the Corporation's interest and welfare. The Board believes
that one of the best ways to attain these objectives is to give key employees
an opportunity to acquire a proprietary interest in the Corporation by
purchasing shares of Common Stock through the exercise of options granted
under arrangements such as the Incentive Plan.
3
<PAGE>
EXHIBIT 10.15 LEASE AGREEMENT WITH DUKE, DATED OCTOBER 2, 1996.
OFFICE LEASE
Duke Realty Limited Partnership, as Landlord
and
Software Artistry, Inc., as Tenant
4
<PAGE>
OFFICE LEASE INDEX
Article 1 - Lease of Premises
Section 1.01 - Lease of Premises
Section 1.02 - Basic Lease Provisions
Article 2 - Term and Possession
Section 2.01 - Term
Section 2.02 - Construction Obligations
Section 2.03 - Tenant's Acceptance of the Leased Premises
Section 2.04 - Surrender of the Premises
Section 2.05 - Holding Over
Article 3 - Rent
Section 3.01 - Base Rent
Section 3.02 - Annual Rental Adjustment
A. Definitions
1. Annual Rental Adjustment
2. Operating Expenses
3. Building Expense Percentage
4. Landlord's Share of Operating Expenses
5. Tenant's Proportionate Share of Operating Expenses
B. Payment Obligation
1. Payment of Estimated Annual Rental Adjustment
2. Increases in Estimated Annual Rental Adjustment
3. Adjustment to Actual Annual Rental Adjustment
4. Tenant Verification
Section 3.03 - Contribution for Certain Tenant Finish Improvements
Section 3.04 - Late Charges
Article 4 - Intentionally Omitted
Article 5 - Occupancy and Use
Section 5.01 - Occupancy
Section 5.02 - Covenants of Tenant Regarding Use
Section 5.03 - Landlord's Rights Regarding Use
Section 5.04 - Access to and Inspection of the Leased Premises
Article 6 - Utilities and Other Building Services
Section 6.01 - Services to be Provided
Section 6.02 - Additional Services
Section 6.03 - Interruption of Services
Article 7 - Repairs, Maintenance, Alterations, Improvements and Fixtures
Section 7.01 - Repair and Maintenance of Building
5
<PAGE>
Section 7.02 - Repair and Maintenance of Leased Premises
Section 7.03 - Alterations or Improvements
Section 7.04 - Trade Fixtures
Article 8 - Fire or Other Casualty; Casualty Insurance
Section 8.01 - Substantial Destruction of the Building or the Leased
Premises
Section 8.02 - Partial Destruction of the Leased Premises
Section 8.03 - Casualty Insurance
Section 8.04 - Waiver of Subrogation
Article 9 - General Public Liability, Indemnification and Insurance
Section 9.01 - Tenant's Responsibility
Section 9.02 - Tenant's Insurance
Section 9.03 - Landlord's Responsibility
Article 10 - Eminent Domain
Article 11 - Liens
Article 12 - Rental, Personal Property and Other Taxes
Article 13 - Assignment and Subletting
Article 14 - Transfers by Landlord
Section 14.01 - Sale and Conveyance of the Building
Section 14.02 - Subordination
Article 15 - Defaults and Remedies
Section 15.01 - Defaults by Tenant
Section 15.02 - Remedies of Landlord
Section 15.03 - Default by Landlord and Remedies of Tenant
Section 15.04 - Limitation of Landlord's Liability
Section 15.05 - Non-Waiver of Defaults
Section 15.06 - Attorneys' Fees
Article 16 - Intentionally Omitted
Article 17 - Notice and Place of Payment
Section 17.01 - Notices
Section 17.02 - Place of Payment
Article 18 - Miscellaneous General Provisions
Section 18.01 - Condition of Premises
Section 18.02 - Insolvency or Bankruptcy
Section 18.03 - Common Areas
Section 18.04 - Choice of Law
Section 18.05 - Successors and Assigns
Section 18.06 - Name
Section 18.07 - Examination of Lease
Section 18.08 - Time
Section 18.09 - Defined Terms and Marginal Headings
Section 18.10 - Prior Agreements
Section 18.11 - Payment of and Indemnification for Leasing Commissions
6
<PAGE>
Section 18.12 - Severability of Invalid Provisions
Section 18.13 - Definition of the Relationship between the Parties
Section 18.14 - Estoppel Certificate
Section 18.15 - Force Majeure
Article 19 - Tenant's Responsibility Regarding Environmental Laws and Hazardous
Substances
Section 19.01 - Definitions
Section 19.02 - Compliance
Section 19.03 - Restrictions on Tenant
Section 19.04 - Notices, Affidavits, Etc.
Section 19.05 - Landlord's Rights
Section 19.06 - Tenant's Indemnification
Article 20 - Additional Provisions
Section 20.01 - Financial Statements
Section 20.02 - Representation and Indemnifications
Section 20.03 - Tenant's Representations and Warranties
Section 20.04 - Signage
Section 20.05 - Option to Expand I
Section 20.06 - Option to Expand II
Section 20.07 - Satellite Dish
Section 20.08 - Discretionary Allowance
Section 20.09 - Contingency
Exhibits:
A-1 - Legal Description
A-2 - Leased Premises
A-3 - Expansion Space I
B-1 - Shell Plans and Specifications
B-2 - Interior Plans and Specifications
B-3 - Project Schedule
C - Rules and Regulations
D - Estoppel Certificate
OFFICE LEASE
THIS LEASE is made this ____ day of ______________, 1996, by and between
DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership ("Landlord"),
and SOFTWARE ARTISTRY, INC., an Indiana corporation ("Tenant").
W I T N E S S E T H:
ARTICLE 1 - LEASE OF PREMISES
7
<PAGE>
SECTION 1.01. LEASE OF PREMISES. Landlord hereby leases to Tenant and
Tenant hereby leases from Landlord, subject to all of the terms and
conditions hereinafter set forth, office space in the office building (the
"Building") to be constructed in accordance with EXHIBIT B-1 attached hereto
and located on a site consisting of approximately 13.5 acres (the "Land"),
which is described in EXHIBIT A-1 attached hereto, in Marion County, Indiana,
for the term hereinafter specified. The space in the Building hereby leased
to Tenant is set forth in Item A of the Basic Lease Provisions and is
outlined in red on EXHIBIT A-2 attached hereto (the "Leased Premises").
Elevators shall not be leased to Tenant and shall remain under Landlord's
control.
SECTION 1.02. BASIC LEASE PROVISIONS.
A. *Building Address: _______________________________, Indianapolis, Indiana,
________; Floors: 1, 3 and 4; Suite: ________;
B. **Rentable Area: approximately 80,000 square feet;
Landlord shall use commercially reasonable standards, consistently applied,
in determining the Rentable Area and the rentable area of the Building.
The Rentable Area shall include the area within the Leased Premises plus a
pro rata portion of the area covered by the common areas within the
Building. The add-on factor to be used in the calculation of Rentable Area
shall be approximately five percent (5%) and shall be finalized upon
completion of final plans and specifications. Landlord's determination of
Rentable Area made in good faith shall conclusively be deemed correct
absent obvious error for all purposes hereunder, including without
limitation the calculation of Tenant's Building Expense Percentage and
Tenant's Minimum Annual Rent.
C. **Building Expense Percentage: 80%;
D. **Minimum Annual Rent:
Year 1 $1,303,133.37
Years 2-15 $1,421,600.04 (per year)
Year 16 $ 118,466.67 (one month)
E. **Monthly Rental Installments:
Month 1 $ 0.00
Months 2-181 $118,466.67
________________________________________________________________
* (to be completed when address is established)
** (to be adjusted if necessary after construction of the Building and
the Leased Premises is completed)
F. Term: Fifteen (15) years and one (1) month;
G. Target Commencement Date: January 1, 1998;
H. Security Deposit: N/A;
I. Brokers: Duke Realty Limited Partnership representing Landlord and
Meridian Real Estate Services representing Tenant;
J. Permitted Use: General office purposes;
8
<PAGE>
K. Working Drawings Approval Date: ______________________ , 1996;
L. Address for payments and notices as follows:
Landlord: Duke Realty Limited Partnership
8888 Keystone Crossing, Suite 1200
Indianapolis, IN 46240
With Rental Duke Realty Limited Partnership
Payments to: P.O. Box 66259
Indianapolis, IN 46266
Tenant:
Prior to
Commencement Date: Software Artistry, Inc.
9449 Priority Way West Drive
Indianapolis, IN 46240
After Commencement
Date: Software Artistry, Inc.
____________________________
____________________________
MEMORANDUM OF ACTUAL COMMENCEMENT AND EXPIRATION DATES
Commencement Date_________ Expiration Date__________________
ARTICLE 2 - TERM AND POSSESSION
SECTION 2.01. TERM. The term of this Lease shall be the period of time
specified in Item F of the Basic Lease Provisions ("Original Term") and shall
commence on (i) the Target Commencement Date as provided in Item G of the
Basic Lease Provisions; or (ii) such earlier date as Tenant takes possession
or commences use of the Leased Premises; or (iii) such later date upon
Substantial Completion of the tenant finish improvements in accordance with
EXHIBIT B-2, provided, however, that the Commencement Date shall not be
extended as a result of any delays. The date of commencement as defined
above, hereinafter called the "Commencement Date," and the "Expiration Date"
shall be confirmed by Tenant as provided in Section 2.03. As used in this
Lease, "Lease Term" shall include the Original Term and any renewal thereof.
SECTION 2.02. CONSTRUCTION.
A. SHELL WORK. The scope of the work for the shell improvements
("Shell Work") to be performed by Landlord shall be set forth in the
preliminary plans and specifications and written descriptions thereto all of
which shall be attached hereto as PRELIMINARY EXHIBIT "B-1". Landlord will
prepare final plans and specifications which upon completion shall be
substituted and attached hereto as EXHIBIT "B-1" ("Shell Plans and
Specifications"). Landlord, at its sole cost and expense, shall construct in
a good and workmanlike manner all of the improvements and supply all work,
labor, materials and equipment necessary to complete the Shell Work in
accordance with the Shell Plans and Specifications, which shall include,
without limitation, the installation of landscaping, parking lots, driveways
and all improvements as shown on the Shell Plans and Specifications for the
benefit of the Leased Premises.
Notwithstanding anything contained herein to the contrary, Landlord hereby
agrees that Tenant shall have the right to approve the preliminary plans and
specifications for the Shell Work within five (5)
9
<PAGE>
business days after Tenant's receipt thereof, which approval shall not be
unreasonably withheld. Tenant's failure to respond within five (5) business
days after receipt of such preliminary plans and specifications shall be
deemed to be an approval of the same. Landlord shall provide such
preliminary plans and specifications to Tenant on or before September 25,
1996. In the event Landlord and Tenant cannot reasonably agree on such
preliminary plans and specifications on or before September 30, 1996, either
party shall have the right to terminate this Lease by providing written
notice to the other party on or before September 30, 1996. Upon such
termination, both parties shall be released from further liability under this
Lease.
Landlord hereby further agrees that the Shell Plans and Specifications shall
be materially consistent with the approved preliminary plans and specifications.
In the event the Shell Plans and Specifications are not materially consistent
with the approved preliminary plans and specifications, Tenant shall have the
right to terminate this Lease upon ten (10) days prior written notice to
Landlord. Upon such termination, both parties shall be released from further
liability under this Lease.
B. TENANT FINISH IMPROVEMENTS AND ALLOWANCES. Landlord agrees to
perform and complete the work on the tenant finish improvements in the Leased
Premises in accordance with Tenant's plans and specifications which shall be
mutually agreed upon by both Landlord and Tenant and which, upon completion,
shall be attached hereto as EXHIBIT B-2 ("Interior Plans and Specifications").
Both Landlord and Tenant shall be reasonable and work together in good faith
to mutually agree upon the Interior Plans and Specifications. Landlord shall
provide Tenant with a tenant finish improvement allowance in an amount not to
exceed One Thousand Four Hundred Eighty Thousand Dollars ($1,480,000.00)
("Landlord's Allowance") which shall be applied solely toward the cost of
constructing and completing the tenant finish improvements in the Leased
Premises in accordance with the Interior Plans and Specifications. Any costs
of construction in excess of Landlord's Allowance shall be Tenant's
responsibility. Tenant may amortize up to Three Dollars and Fifty Cents
($3.50) per rentable square foot of the Leased Premises of such excess costs
over the initial term of the Lease, which shall result in an increase in
Minimum Annual Rent of Eleven Cents ($0.11) per rentable square foot for each
One Dollar ($1.00) per rentable square foot of such excess costs amortized.
Any such excess costs which are not amortized in accordance with the
foregoing sentence shall be paid to Landlord by Tenant as additional rent
within thirty (30) days of Tenant's receipt of an invoice therefor.
Tenant's architect shall prepare the Interior Plans and Specifications and
all related documents and provide the same to Landlord, along with a copy on
computer disk, in accordance with the Project Schedule described below.
Landlord shall provide Tenant with an allowance not to exceed One Dollar and
Twenty-five Cents ($1.25) per useable square foot of the Leased Premises to
be used exclusively for Tenant's cost of preparing and reviewing the Interior
Plans and Specifications (the "A & E Allowance"). Such allowance shall be
paid within (30) days of Landlord's receipt of an invoice from Tenant's
architect for such costs. Tenant shall be solely responsible for any and all
fees and expenses associated with the Interior Plans and Specifications in
excess of the A & E Allowance.
Landlord and Tenant hereby agree that all work on the initial and any
subsequent tenant finish improvements in the Leased Premises and any
expansion space shall be performed in a good and workmanlike manner by Duke
Construction Services Limited Partnership as Landlord's general contractor
("Duke"). Duke will competitively bid all tenant finish improvements and
manage the entire construction process.
C. PROJECT SCHEDULE AND PERMITS. The Shell Plans and Specifications
and the Interior Plans and Specifications shall be finalized and the Shell
Work and tenant finish improvements shall be constructed by Landlord in
accordance with the Project Schedule attached hereto as EXHIBIT "B-3".
Landlord shall apply for and obtain, as expeditiously as possible, all
permits, licenses and certificates necessary for the construction of the
Shell Work and tenant finish improvements and for the occupancy of the Leased
Premises by Tenant. Landlord agrees to use commercially reasonable efforts
to Substantially Complete the Shell Work and the tenant finish improvements
in the Leased Premises on or before January 1, 1998, subject to force majeure
and Tenant Caused Delay delays.
In the event Landlord fails to Substantially Complete the Shell Work and
the tenant finish improvements in the Leased Premises on or before January
1, 1998, subject to force majeure and Tenant Caused Delays, Minimum Annual
Rent and the Annual Rental Adjustment shall abate one (1) day for each day of
delay in Substantial Completion after January 1, 1998 (as the same may be
extended by force majeure or Tenant Caused Delays) and
10
<PAGE>
the Commencement Date shall be postponed for the period of such delay to the
extent the delay is caused by force majeure.
In the event Landlord fails to substantially complete the Shell Work and
the tenant finish improvements in the Leased Premises on or before February
1, 1998, subject to force majeure and Tenant Caused Delays, Minimum Annual
Rent and the Annual Rental Adjustment shall abate two (2) days for each day
of delay in Substantial Completion after February 1, 1998 (as the same may be
extended by force majeure or Tenant Caused Delays) and the Commencement Date
shall be postponed for the period of such delay to the extent the delay is
caused by force majeure.
In the event Landlord fails to Substantially Complete the Shell Work and
the tenant finish improvements in the Leased Premises on or before June 30,
1998, for any reason except for Tenant Caused Delays, Tenant shall have the
right to terminate this Lease by providing written notice to Landlord prior
to the date of Substantial Completion. Upon such termination, both parties
shall be released from further liability under this Lease.
D. NOTICE AND FIXTURING. Landlord shall give Tenant written notice of
the anticipated date of Substantial Completion of the tenant finish
improvements in the Leased Premises. Landlord hereby agrees to allow Tenant
the right and privilege of going into the Leased Premises at least thirty
(30) days prior to the Commencement Date, in compliance with the terms of
Section 7.03 and in accordance with the following terms and conditions, to
install telephone and computer wiring and cabling and to complete interior
decoration work including the installation of office furniture. Tenant shall
provide Landlord with its proposed relocation schedule and sequencing,
showing all areas to be fixtured prior to the Commencement Date, on or before
tenant improvement construction which begins on September 1, 1997. In
addition, prior to Tenant's entry into the Leased Premises as set forth
above, Tenant shall arrange its schedule with Landlord so as not to interfere
with or delay other work of Landlord in the Leased Premises. Tenant shall be
responsible for removing offsite, on a daily basis, all packaging and waste
material related to Tenant's fixturing so as not to interfere with Landlord's
work in the Leased Premises. Landlord shall have no liability whatsoever for
any loss or damage to any of Tenant's fixtures, equipment or any other items
brought into the Leased Premises prior to the Commencement Date.
E. SUBSTANTIAL COMPLETION. Substantial Completion shall be defined as
and The Leased Premises shall be deemed "Substantially Completed" upon the
occurrence of all of the following: (i) construction by Landlord of the
Leased Premises in accordance with the plans and specifications listed on
EXHIBIT B-1 (Shell Plans and Specifications) and B-2 (Interior Plans and
Specifications) attached hereto, and delivery to Tenant by Lessor's architect
of a certificate to that effect; (ii) the utility services contemplated by
such plans and specifications, including, if applicable, storm and sanitary
sewer, water, gas and electricity, have been fully installed and are
operational for use by Tenant; (iii) all proposed means of ingress and
egress, parking and loading areas are available for use by Tenant; (iv)
Landlord has given Tenant no less then twenty (20) days prior written notice;
and (v) the remaining work to be done to render the Leased Premises fully
completed shall consist solely of minor details of construction, mechanical
adjustments or decoration, which will not interfere with Tenant's use and
enjoyment of the Leased Premises. Tenant's taking total or partial occupancy
of the Leased Premises, or Landlord's Substantially Completing the Leased
Premises, shall not relieve Landlord of its obligation to proceed diligently
to fully complete the Leased Premises and to complete all punch-list items
which shall be accomplished within sixty (60) days after the date of
Substantial Completion, provided, however, that Landlord shall not be in
default hereunder if Landlord commences correction of any such defects within
said sixty (60) day period and thereafter diligently pursues the same to
completion.
F. TENANT CAUSED DELAYS. Tenant Caused Delays shall mean any material
delay caused by or resulting from the following or any combination of the
following: (1) failure of Tenant to comply with the Project Schedule; (2)
any change orders requested by Tenant; (3) failure of Tenant to timely or
properly arrange its furnishings or be present for any scheduled walk-through
of the Leased Premises in order to obtain the architect's certificate of
Substantial Completion once the Leased Premises are otherwise substantially
complete; (4) failure of Tenant to cooperate with Landlord and respond
promptly to any reasonable request of Landlord; or (5) Tenant's fixturing of
the Leased Premises prior to the Commencement Date.
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SECTION 2.03. TENANT'S ACCEPTANCE OF THE LEASED PREMISES. Upon delivery of
possession of the Leased Premises to Tenant as hereinbefore provided, Tenant
shall execute a letter of understanding acknowledging (i) the Commencement
Date and Expiration Date of this Lease, and (ii) that Tenant has accepted the
Leased Premises for occupancy and that the condition of the Leased Premises,
including the tenant finish improvements constructed thereon, and the
Building was at the time satisfactory and in conformity with the provisions
of this Lease in all respects, except for any patent defects as to which
Tenant shall give written notice to Landlord within sixty (60) days after
such delivery, and except for any latent defects as to which Tenant shall
give written notice to Landlord within one hundred eighty (180) days after
such delivery. Landlord shall promptly thereafter correct all such defects.
Such letter of understanding shall become a part of this Lease. If Tenant
takes possession of and occupies the Leased Premises, Tenant shall be deemed
to have accepted the Leased Premises in the manner described in this Section
2.03, even though the letter of understanding provided for herein may not
have been executed by Tenant.
SECTION 2.04. SURRENDER OF THE PREMISES. Upon the expiration or earlier
termination of this Lease, or upon the exercise by Landlord of its right to
re-enter the Leased Premises without terminating this Lease, Tenant shall
immediately surrender the Leased Premises to Landlord, together with all
alterations, improvements and other property as provided elsewhere herein, in
broom-clean condition and in good order, condition and repair, except for
ordinary wear and tear and damage which Tenant is not obligated to repair,
failing which Landlord may restore the Leased Premises to such condition at
Tenant's expense. Upon such expiration or termination, Tenant shall have the
right to remove its personal property (as described in Article 7), and shall,
upon Landlord's request, remove all computer and other equipment, signs,
satellite dishes, electronic presentation equipment, flooring, wiring and
cabling in the Leased Premises, at its sole cost and expense. Any property
remaining in the Leased Premises after the expiration or termination of this
Lease shall be deemed abandoned and Landlord shall have the right to remove
and dispose of such property at Tenant's sole cost and expense. Tenant
shall, at its expense, promptly repair any damage caused by any such removal,
and shall restore the Leased Premises to the condition existing prior to the
installation of the items so removed.
SECTION 2.05. HOLDING OVER. If Tenant retains possession of the Leased
Premises after the expiration or earlier termination of this Lease, Tenant
shall become a tenant from month to month at One Hundred Fifty Percent (150%)
of the then prevailing market rate (as determined by Landlord in its sole and
absolute discretion) for the Leased Premises in effect upon the date of such
expiration or earlier termination (subject to adjustment as provided in
Article 3 hereof and prorated on a daily basis), and otherwise upon the
terms, covenants and conditions herein specified, so far as applicable.
Acceptance by Landlord of rent after such expiration or earlier termination
shall not result in a renewal of this Lease. Notwithstanding the foregoing
provision, no holding over by Tenant shall operate to extend this Lease, and
Tenant shall vacate and surrender the Leased Premises to Landlord upon Tenant
being given thirty (30) days prior written notice from Landlord to vacate.
The foregoing provisions of this Section 2.05 are in addition to and do not
affect Landlord's right of re-entry or any other rights of Landlord hereunder
or as otherwise provided by law.
ARTICLE 3 - RENT
SECTION 3.01. BASE RENT. Tenant shall pay to Landlord as Minimum Annual
Rent for the Leased Premises the sum specified in Item D of the Basic Lease
Provisions, payable in equal consecutive Monthly Rental Installments as
specified in Item E of the Basic Lease Provisions, in advance, without
deduction or offset, on or before the first day of each and every calendar
month during the Lease Term; provided, however, that if the Commencement Date
shall be a day other than the first day of a calendar month or the Expiration
Date shall be a day other than the last day of a calendar month, the Monthly
Rental Installment for such first or last fractional month shall be prorated
on the basis of the number of days during the month this Lease was in effect
in relation to the total number of days in such month.
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SECTION 3.02. ANNUAL RENTAL ADJUSTMENT.
A. DEFINITIONS. For purposes of this Section 3.02, the following
definitions shall apply:
1. "ANNUAL RENTAL ADJUSTMENT" - shall mean the amount of Tenant's
Proportionate Share of Operating Expenses and Tenant's Proportionate
Share of Real Estate Taxes for a particular calendar year.
2. "OPERATING EXPENSES" - shall mean the amount of all of Landlord's
direct costs and expenses paid or incurred in operating and
maintaining the Building (including the Common Areas as
defined in Section 18.03 and the land described in EXHIBIT A-1)
for a particular calendar year as determined by Landlord in
accordance with generally accepted accounting principles, consistently
applied, including all additional direct costs and expenses of
operation and maintenance of the Building which Landlord reasonably
determines that it would have paid or incurred during such year if
the Building had been ninety-five percent (95%) occupied (provided,
however, that in no event shall Landlord collect more for Building
Operating Expenses than it actually expends), including by way of
illustration and not limitation: insurance premiums, water, sewer,
electrical and other utility charges other than the separately billed
electrical and other charges paid by Tenant as provided in this Lease;
service and other charges incurred in the operation and maintenance
of the elevators and the heating, ventilation and air-conditioning
system; cleaning and other janitorial services; tools and supplies;
repair costs; landscape maintenance costs; security services; license,
permit and inspection fees; commercially reasonable management fees;
wages and related employee benefits payable for the maintenance and
operation of the Building; amortization of capital improvements that
produce a reduction in operating costs together with interest at the
rate of twelve percent (12%) per annum on the unamortized balance
thereof; maintenance and repair costs, and in general all other costs
and expenses which would, under generally accepted accounting
principles, be regarded as operating and maintenance costs and
expenses, including those which would normally be amortized over a
period not to exceed five (5) years. There shall also be included in
Operating Expenses the cost or portion thereof reasonably allocable to
the Building, amortized over such period as Landlord shall reasonably
determine, together with interest at the rate of twelve percent (12%)
per annum on the unamortized balance, of any capital improvements made
to the Building by Landlord after the date of this Lease which are
required under any governmental law or regulation that was not
applicable to the Building at the time it was constructed.
3. "REAL ESTATE TAXES" - shall mean any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any
license or permit fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than federal or state inheritance, personal
income or estate taxes) imposed upon the Building and/or the Land by
any authority having the direct or indirect power to tax, including
any city, state or federal government or any school, agricultural,
sanitary, fire, street, drainage or other improvement district thereof,
including costs and expenses of contesting the validity or amount of
any such taxes.
Tenant acknowledges and agrees that it is responsible for, and assumes
and accepts the risk of, obtaining and maintaining tax abatement
deductions for the Leased Premises, including the payment of any and
all application and other fees associated therewith. Tenant shall
prepare and file any required applications, forms, resolutions,
agreements or other materials, whether for or on behalf of Tenant or
Landlord. To permit Tenant to take the actions necessary to obtain
and maintain property tax abatement deductions on the Leased
Premises, Landlord shall (i) upon reasonable notice from Tenant,
execute such tax abatement applications, forms, resolutions,
agreements, and other materials; (ii) upon reasonable notice from
Tenant, provide Tenant with information in its possession with respect
to the Leased Premises necessary to prepare such applications, forms,
resolutions, agreements, and other materials; (iii) upon reasonable
notice from Tenant, authorize Tenant to appear on behalf of Landlord
at any public hearing related to obtaining or maintaining property
tax abatement on the Leased Premises; and (iv) shall forward to Tenant
promptly upon receipt any notice of assessment or change in assessment
relating to the Leased
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Premises. Tenant further understands that it is responsible for any
and all real property taxes due or accruing during the Lease Term
with regard to the Leased Premises and agrees to indemnify and hold
harmless Landlord from and against any and all losses, claims or
damages with regard to such taxes, except for any losses, claims or
damages resulting from Landlord's failure to comply with its
obligations under this Section or under any agreement between
Landlord and Tenant and the City of Indianapolis, Indiana with respect
to tax abatement.
4. "BUILDING EXPENSE PERCENTAGE" - shall mean the percentage specified in
Item C of the Basic Lease Provisions. This percentage was determined
by dividing the rentable area in the Leased Premises by the total
rentable area in the Building. Rentable area excludes the elevators
and elevator shafts, which are reserved to Landlord.
5. "LANDLORD'S SHARE OF OPERATING EXPENSES" - shall be an amount equal to
the product of Tenant's Building Expense Percentage as provided in
Item C of the Basic Lease Provisions multiplied by the Building
Operating Expenses for the twelve (12) month period following the
Commencement Date (excluding all Real Estate Taxes).
6. "TENANT'S PROPORTIONATE SHARE OF OPERATING EXPENSES" - shall be an
amount equal to the remainder of (i) the product of Tenant's Building
Expense Percentage as provided in Item C of the Basic Lease Provisions
times the Building Operating Expenses less (ii) Landlord's Share of
Operating Expenses, provided that such amount shall not be less than
zero.
7. "TENANT'S PROPORTIONATE SHARE OF REAL ESTATE TAXES" - shall be an
amount equal to the product of Tenant's Building Expense Percentage as
provided in Item C of the Basic Lease Provisions times the Building
Real Estate Taxes.
B. PAYMENT OBLIGATION. In addition to the Minimum Annual Rent specified in
this Lease, Tenant shall pay to Landlord as additional rent for the Leased
Premises, commencing with the thirteenth (13th) month of the Lease Term
and continuing thereafter, the Annual Rental Adjustment for each such
calendar year or portion thereof.
1. PAYMENT OF ESTIMATED ANNUAL RENTAL ADJUSTMENT - The Annual Rental
Adjustment shall be estimated annually by Landlord, and written notice
thereof shall be given to Tenant at least thirty (30) days prior to
the beginning of each calendar year. In the case of the calendar year
in which the Lease Term commences, written notice of the estimated
Operating Expenses and Real Estate Taxes shall be given Tenant prior
to the Commencement Date. Tenant shall pay to Landlord each month,
at the same time the Monthly Rental Installment is due, an amount equal
to one-twelfth (1/12) of the estimated Annual Rental Adjustment.
2. INCREASES IN ESTIMATED ANNUAL RENTAL ADJUSTMENT - If Real Estate
Taxes or the cost of utility or janitorial services increase during a
calendar year, Landlord may increase the estimated Annual Rental
Adjustment during such year by giving Tenant written notice to that
effect, and thereafter Tenant shall pay to Landlord, in each of the
remaining months of such year, an amount equal to the amount of such
increase in the estimated Annual Rental Adjustment divided by the
number of months remaining in such year.
3. ADJUSTMENT TO ACTUAL ANNUAL RENTAL ADJUSTMENT - Within ninety (90)
days after the end of each calendar year, Landlord shall prepare and
deliver to Tenant a statement showing the actual Annual Rental
Adjustment. Within thirty (30) days after receipt of the
aforementioned statement, Tenant shall pay to Landlord, or Landlord
shall credit against the next rent payment or payments due from
Tenant, as the case may be, the difference between the actual Annual
Rental Adjustment for the preceding calendar year and the estimated
amount paid by Tenant during such year. If this Lease shall commence,
expire or be terminated on any date other than the last day of a
calendar year, then the Annual Rental Adjustment for such partial
calendar year shall be prorated on the basis of
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the number of days during the year this Lease was in effect in
relation to the total number of days in such year. In the event
there is a credit due to Tenant, or a payment due to Landlord from
Tenant, for the last year of the Lease Term, both parties hereby
agree to pay such amount to the other party within thirty (30) days
of delivery of Landlord's statement.
4. TENANT VERIFICATION - Tenant shall have the right to inspect Landlord's
books and records which contain the Operating Expense and Real Estate
Tax information for the Building, if written notice of such request is
given to Landlord not later than ninety (90) days following receipt
of Landlord's statement of the actual Annual Rental Adjustment by
Tenant. If the parties are unable to resolve any disagreement by
negotiation within thirty (30) days following Tenant's notice to
Landlord, Tenant may, at Tenant's sole cost and expense, cause a
qualified independent certified public accountant designated by Tenant
to audit Landlord's records with respect to the Operating Expenses,
which audit shall be completed within sixty (60) days after
Tenant's notice to Landlord. Such audit shall include but not be
limited to costs and expenses relating to real estate taxes,
insurance premiums and Building expenses. In the event the first
audit within each five (5) year period of the Lease Term
discloses (i) errors made during the prior calendar year which,
when totaled, clearly indicate that the sum overcharged to and
paid by Tenant, exceeds five percent (5%) of the Annual Rental
Adjustment amount plus Landlord's Share of Operating Expenses
(the "Total Fees"), the audit shall be at the expense of Landlord,
not to exceed Five Thousand Dollars ($5,000.00), or (ii) no errors
or an error which equals or is less than five percent (5%) of the
Total Fees, the audit shall be at the expense of Tenant.
For each subsequent audit during each five (5) year period, where
the audit discloses errors exceeding five percent (5%) of the
Total Fees, Landlord shall pay for such audit and, if the audit
discloses errors equal to or less than five percent (5%) of the
Total Fees, Tenant shall pay the costs of the audit. If Landlord
spends more than eight (8) hours to accommodate Tenant's right to
audit hereunder, Tenant shall also pay to Landlord as additional
rent One Hundred Dollars ($100.00) per hour for each hour that
Tenant's audit takes of Landlord's property manager's or asset
manager's time, provided such audit discloses no error or an
error which equals or is less than five percent (5%) of the Total
Fees. The results of the audit (regardless of the degree of the
error, if any) shall be binding upon Landlord and Tenant and
Landlord shall thereafter, if appropriate, change its method of
calculating the Operating Expenses consistent with the results of
the audit.
If no such notice requesting to inspect Landlord's books and records
is received by Landlord within ninety (90) days following receipt by
Tenant of Landlord's statement of the actual Annual Rental Adjustment,
or if Tenant shall not elect to cause an audit by written notice to
Landlord within thirty (30) days following Tenant's initial notice to
Landlord, then Landlord's statement shall be conclusively deemed to
have been approved and accepted by Tenant. Pending resolution of any
dispute with respect to statements of Tenant's Annual Rental
Adjustment, Tenant shall pay its Annual Rental Adjustment as shown on
such statement, and upon final determination of the amount of Tenant's
Annual Rental Adjustment, Landlord shall promptly refund any
overpayment to Tenant or Tenant shall promptly pay any amount due
to Landlord, as applicable.
5. LIMIT ON INCREASE IN ANNUAL RENTAL ADJUSTMENT. For purposes of this
subpart, "Capped Operating Expenses" shall mean all Operating Expenses
except real estate taxes and assessments (including all costs and
expenses of contesting the validity or amount thereof), fees and
charges imposed by any governmental entity, insurance premiums,
utility charges, snow removal charges, janitorial expenses, and
costs imposed by covenants or easements. The portion of the Annual
Rental Adjustment relating to the Capped Operating Expenses shall be
called the "Capped Portion." Notwithstanding the provisions of this
section, beginning with the calendar year following the first full
calendar year for which Tenant is obligated to pay an Annual Rental
Adjustment, Tenant shall not be obligated to pay that portion of the
Capped Portion which exceeds 107% of the greater of (i) the amount of
the Capped Portion for the immediately preceding
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calendar year, or (ii) the amount the Capped Portion for the
immediately preceding calendar year would have been had the Capped
Portion increased at the rate of 7% per annum in all previous years.
SECTION 3.03. CONTRIBUTION FOR CERTAIN TENANT FINISH IMPROVEMENTS. Tenant
shall be responsible for the cost of Tenant's tenant finish improvements in
excess of Landlord's Allowance as set forth in SECTION 2.02.
SECTION 3.04. LATE CHARGES. In the event Tenant fails to pay within thirty
(30) days after the same is due and payable any installment of Minimum Annual
Rent or any other sum or charge required to be paid by Tenant to Landlord under
this Lease, such unpaid amount shall bear interest from the due date thereof to
the date of payment at the rate of five percent (5%) above the Prime Rate per
annum or the highest rate permitted under applicable law, whichever is less,
until paid.
ARTICLE 4 - SECURITY DEPOSIT
Intentionally Omitted.
ARTICLE 5 - OCCUPANCY AND USE
SECTION 5.01. OCCUPANCY. Tenant shall use and occupy the Leased Premises for
the purposes set forth in Item J of the Basic Lease Provisions and shall not use
the Leased Premises for any other purpose whatsoever.
SECTION 5.02. COVENANTS OF TENANT REGARDING USE. In connection with its use of
the Leased Premises, Tenant agrees to do the following:
A. Tenant shall (i) use and maintain the Leased Premises and conduct its
business thereon in a safe, careful, reputable and lawful manner,
(ii) comply with the Covenants and all laws, rules, regulations, orders,
ordinances, directions and requirements of any governmental authority or
agency, now in force or which may hereafter be in force, including without
limitation those which shall impose upon Landlord or Tenant any duty with
respect to or triggered by a change in the use or occupation of, or any
improvement or alteration to, the Leased Premises, (iii) comply with and
obey all reasonable directions of the Landlord, including the Building Rules
and Regulations attached hereto as EXHIBIT C and as may be modified from
time to time by Landlord on reasonable notice to Tenant, provided, however,
that if such Rules and Regulations are inconsistent with any provision of
this Lease, the terms of this Lease shall prevail, and (iv) shall not do
or permit anything to be done in or about the Leased Premises which will
in any way obstruct or interfere with the rights of other tenants or
occupants of the Building or injure or annoy them. Landlord shall not be
responsible to Tenant for the non-performance by any other tenant or
occupant of the Building of any of the Building Rules and Regulations, but
agrees to take reasonable measures to assure such other tenant's compliance.
B. Tenant shall not overload the floors of the Leased Premises beyond their
designed weight-bearing capacity. Landlord reserves the right to direct
the positioning of all heavy equipment, furniture and fixtures which
Tenant desires to place in the Leased Premises so as to distribute properly
the weight thereof, and to require the removal of any equipment or
furniture which exceeds the weight limit specified herein.
C. Tenant shall not use the Leased Premises, or allow the Leased Premises
to be used, for any purpose or in any manner which would, in Landlord's
opinion, invalidate any policy of insurance now or hereafter carried on
the Building or increase the rate of premiums payable on any such
insurance policy. Should Tenant fail to comply with this covenant,
Landlord may, at its option, require Tenant to stop engaging in such
activity or to reimburse Landlord as additional rent for any increase in
premiums charged on the insurance carried by Landlord on the Leased Premises
and attributable to the use being made of the Leased Premises by Tenant.
D. Tenant shall not inscribe, paint, affix or display any signs, advertisements
or notices on the Building, except as provided in Section 20.04 hereof, and
except for such tenant identification information as
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Landlord permits to be included or shown on the directory board in the
main lobby and on or adjacent to the access door or doors to the
Leased Premises.
SECTION 5.03. LANDLORD'S RIGHTS REGARDING USE. In addition to the rights
specified elsewhere in this Lease, Landlord shall have the following rights
regarding the use of the Leased Premises or the Common Areas by Tenant, its
employees, agents, customers and invitees, each of which may be exercised
without notice or liability to Tenant:
A. Landlord may install such signs, advertisements or notices or tenant
identification information on the directory board or tenant access doors
as it shall deem necessary or proper.
B. Landlord shall reasonably approve or disapprove, prior to installation,
all types of drapes, shades and other window coverings used in the Leased
Premises, and may control all internal lighting that may be visible from
outside the Leased Premises.
C. Landlord shall reasonably approve or disapprove all sign painting and
lettering, used on the Leased Premises and the Building, including the
suppliers thereof.
D. Landlord may grant to any person the exclusive right to conduct any business
or render any service in the Building, provided that such exclusive right
shall not operate to limit Tenant from using the Leased Premises for the
use permitted in Item J of the Basic Lease Provisions. Notwithstanding
anything contained herein to the contrary, Landlord hereby agrees not to
lease any space in the Building to another tenant whose primary business is
the development or sale of computer software without Tenant's prior written
approval. In addition, Landlord hereby agrees not to lease any space in
the Building to a governmental agency, telemarketing company, or other
tenant whose business generates substantially more walk-in traffic than
other general office tenants in similar office buildings, without Tenant's
prior written approval which shall not be unreasonably withheld. Landlord
hereby agrees to give Tenant prior written notice of any tenant to which
Landlord intends to lease space in the Building and Tenant shall have
five (5) business days after receipt of such notice to deliver to Landlord
a written objection to such tenant in accordance with the foregoing
provisions. If tenant does not respond within such five (5) business day
period, Tenant shall have waived the right to object to the lease of space
in the Building to such tenant.
E. Landlord may control the Common Areas in such manner as it deems necessary
or proper, including by way of illustration and not limitation, requiring
all persons entering or leaving the Building to identify themselves and
their business in the Building to a security guard; excluding or expelling
any peddler, solicitor or loud or unruly person from the Building; and
closing or limiting access to the Building or any part thereof, including
entrances, corridors, doors and elevators, during times of emergency,
repairs or after regular business hours.
SECTION 5.04. ACCESS TO AND INSPECTION OF THE LEASED PREMISES.
Landlord, its employees and agents and any mortgagee of the Building shall have
the right to enter any part of the Leased Premises at reasonable times and with
reasonable notice, except in the event of an emergency, in which case no notice
shall be required, for the purposes of examining or inspecting the same, showing
the same to prospective purchasers, mortgagees or tenants and making such
repairs, alterations or improvements to the Leased Premises or the Building as
Landlord may deem necessary or desirable. In the event Landlord exercises its
right hereunder to enter any secured areas of the Leased Premises, Landlord
shall be accompanied by a representative of Tenant, which representative shall
be made reasonably available to Landlord; provided, however, that no Tenant
representative shall be required in the event of an emergency. If
representatives of Tenant shall not be present to open and permit such entry
into the Leased Premises at any time when such entry is necessary or permitted
hereunder, Landlord and its employees and agents may enter the Leased Premises
by means of a master or pass key or otherwise. Landlord shall incur no
liability to Tenant for such entry, nor shall such entry constitute an eviction
of Tenant or a termination of this Lease, or entitle Tenant to any abatement of
rent therefor. In the event Landlord exercises its right to enter the Leased
Premises as provided above, Landlord hereby agrees to use commercially
reasonable efforts to minimize any interference with Tenant's business
operations.
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ARTICLE 6 - UTILITIES AND OTHER BUILDING SERVICES
SECTION 6.01. SERVICES TO BE PROVIDED. Provided Tenant is not in default,
Landlord shall furnish to Tenant, except as noted below, the following utilities
and other building services to the extent reasonably necessary for Tenant's
comfortable use and occupancy of the Leased Premises for general office use,
consistent with other Class "A" office buildings in the Indianapolis office
market, or as may be required by law or directed by governmental authority:
A. Heating, ventilation and air-conditioning between the hours of 7:00
a.m. and 6:00 p.m. Monday through Friday and 8:00 a.m. to 1:00 p.m. on
Saturday of each week except on legal holidays;
B. Subject to interruptions beyond Landlord's control, electrical current
not to exceed seven (7) watts per square foot. At all times Tenant's use
of electric current shall never exceed the capacity of the feeders to the
Building or the risers or wiring installation;
C. Water in the Common Areas for lavatory and drinking purposes;
D. Two (2) passenger elevators and one (1) service elevator;
E. Cleaning and janitorial service, including trash removal for the Leased
Premises and the supplying and installing of paper towels, toilet tissue
and soap in the Common Areas on Monday through Friday of each week except
legal holidays; provided, however, Tenant shall be responsible for carpet
cleaning other than routine vacuuming;
F. Washing of windows at intervals reasonably established by Landlord;
G. Replacement of all lamps, bulbs, starters and ballasts in Building standard
lighting as required from time to time as a result of normal usage;
H. Cleaning and maintenance of the Common Areas, including the removal of
rubbish and snow;
I. Repair and maintenance to the extent specified elsewhere in this Lease; and
J. Adequate parking consisting of a minimum of 3.75 spaces per 1,000
rentable square feet of the Leased Premises (the "Parking Ratio")
available for Tenant's use.
SECTION 6.02. ADDITIONAL SERVICES. If Tenant requests any other utilities or
building services in addition to those identified above or any of the above
utilities or building services in frequency, scope, quality or quantity
substantially greater than those which Landlord determines are normally required
by other tenants in the Building for general office use, then Landlord shall use
reasonable efforts to attempt to furnish Tenant with such additional utilities
or building services. In the event Landlord is able to and does furnish such
additional utilities or building services, the costs thereof shall be borne by
Tenant, who shall reimburse Landlord monthly for the same as additional rent at
the same time Monthly Rental Installments and other additional rent is due.
If any lights, machines or equipment (including but not limited to computers)
used by Tenant in the Leased Premises materially affect the temperature
otherwise maintained by the Building's air-conditioning system or generate
substantially more heat in the Leased Premises than that which would normally be
generated by the lights and business machines typically used by other tenants in
the Building or by tenants in comparable office buildings, then Landlord shall
have the right to install any machinery or equipment which Landlord considers
reasonably necessary in order to restore the temperature balance between the
Leased Premises and the rest of the Building, including equipment which modifies
the Building's air-conditioning system. All costs expended by Landlord to
install any such machinery and equipment and any additional costs of operation
and maintenance
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occasioned thereby shall be borne by Tenant, who shall reimburse Landlord for
the same as provided in this Section 6.02.
Tenant shall not install or connect any electrical equipment other than the
business machines and equipment typically used for general office purposes by
tenants in office buildings comparable to the Building (such as personal
computers and word processors) without Landlord's prior written consent. If
Landlord determines that the electricity used by the equipment to be so
installed or connected exceeds the designed load capacity of the Building's
electrical system or is in any way incompatible therewith, then Landlord shall
have the right, as a condition to granting its consent, to make such
modifications to the electrical system or other parts of the Building or Leased
Premises, or to require Tenant to make such modifications to the equipment to be
installed or connected, as Landlord considers to be reasonably necessary before
such equipment may be so installed or connected. The cost of any such
modifications shall be borne by Tenant, who shall reimburse Landlord for the
same (or any portion thereof paid by Landlord) as provided in this Section 6.02.
SECTION 6.03. INTERRUPTION OF SERVICES. Tenant understands, acknowledges and
agrees that any one or more of the utilities or other building services
identified in Section 6.01 may be interrupted by reason of accident, emergency
or other causes beyond Landlord's control, or may be discontinued or diminished
temporarily by Landlord or other persons until certain repairs, alterations or
improvements can be made; that Landlord does not represent or warrant the
uninterrupted availability of such utilities or building services, and that any
such interruption shall not be deemed an eviction or disturbance of Tenant's
right to possession, occupancy and use of the Leased Premises or any part
thereof, or render Landlord liable to Tenant for damages by abatement of rent or
otherwise, or relieve Tenant from the obligation to perform its covenants under
this Lease.
Notwithstanding the foregoing, Landlord shall use commercially reasonable
efforts to promptly restore utility service in the event of an interruption
thereof. If the Leased Premises are rendered untenantable (meaning that Tenant
is unable to use such space in the normal course of its business) for more than
five (5) consecutive business days after notice from Tenant to Landlord that
such service has been interrupted, and provided that such restoration of service
is within Landlord's reasonable control, Minimum Annual Rent shall abate on a
per diem basis for each day after such five (5) day period during which the
Leased Premises remain untenantable. In the event the Leased Premises are
rendered untenantable for more than thirty (30) consecutive days after notice
from Tenant to Landlord, and provided that such restoration of service is within
Landlord's reasonable control, Tenant shall have the right to terminate this
Lease. In the event the Leased Premises are rendered untenantable for more than
thirty (30) consecutive days after notice from Tenant to Landlord, whether or
not the restoration of service is within Landlord's reasonable control, Minimum
Annual Rent shall abate on a per diem basis for each day after such thirty (30)
day period during which the Leased Premises remain untenantable. In the event
the Leased Premises are rendered untenantable for more than sixty (60)
consecutive days after notice from Tenant to Landlord, whether or not the
restoration of service is within Landlord's reasonable control, Tenant shall
have the right to terminate this Lease. Upon any such termination, Tenant shall
surrender the Leased Premises to Landlord in accordance with the terms of this
Lease and each party shall be released from further liability hereunder;
provided, however, that such termination shall not affect any right or
obligation arising prior to termination or which survives termination of the
Lease.
ARTICLE 7 - REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS
AND FIXTURES
SECTION 7.01. REPAIR AND MAINTENANCE OF BUILDING. Subject to Section 7.02 and
except for any repairs made necessary by the negligence, misuse, or default of
Tenant, its employees, agents, customers and invitees, Landlord shall (i)
maintain in good working order all mechanical and electrical systems in the
Building throughout the Lease Term; and (ii) make all necessary repairs to the
exterior walls, roof and foundation, exterior doors, windows, corridors and
other common areas of the Building and the parking lot and driveways associated
with the Building, and Landlord shall keep the Building in a safe, clean and
neat condition and use reasonable efforts to keep all equipment used in common
with other tenants, such as elevators, plumbing, heating, air conditioning and
similar equipment, in good condition and repair. Except as provided in Article
8 and Article 10 hereof, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's
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business arising from the making of any repairs, alterations or improvements
in or to any portion of the Building or the Leased Premises or in or to any
fixtures, appurtenances and equipment therein or thereon.
SECTION 7.02. REPAIR AND MAINTENANCE OF LEASED PREMISES. Landlord shall keep
and maintain the Leased Premises in good order, condition and repair. Except
for ordinary wear and tear and damage which Tenant is not obligated to repair as
provided elsewhere in this Lease or damage caused by Landlord or its employees
or agents, the cost of all repairs and maintenance to the Leased Premises shall
be borne by Tenant, who shall be separately billed and shall reimburse Landlord
for the same as additional rent, or as a part of Operating Expenses.
SECTION 7.03. ALTERATIONS OR IMPROVEMENTS. Tenant shall not make or permit
alterations of or upon any part of the Leased Premises or additions to the
Leased Premises without first obtaining the written consent of Landlord. Tenant
shall at its sole expense and cost, ensure that all permitted alterations and
additions which are made or necessitated thereby (whether inside or outside the
Leased Premises) shall be made in accordance with all applicable laws, rules,
codes, ordinances and regulations in a good and workmanlike manner and in
quality equal to or better than the original construction of the Leased Premises
or Building, and Tenant shall comply with such requirements as Landlord
considers necessary or desirable. Landlord's consent to any such alterations or
additions shall create no responsibility or liability on the part of Landlord
for the completeness, design, sufficiency, or compliance with laws, rules,
codes, ordinances, or regulations of such alterations or additions or the plans,
specifications or working drawings therefor. Tenant shall promptly pay all
costs attributable to such alterations and additions and shall promptly repair
any damage to the Leased Premises, Building or Common Areas caused by or
resulting from such alterations and additions. Any such alterations and
additions shall remain for the benefit of Landlord, provided, however, that
Landlord may elect upon fifteen (15) days prior written notice to Tenant to
require that Tenant, at its expense, remove at the expiration or earlier
termination of this Lease all or a portion of the alterations or additions made
by Tenant and repair any damage caused by such removal. Tenant's obligations
under this Section shall survive the expiration or earlier termination of this
Lease. Notwithstanding the foregoing, Tenant shall have the right, without
Landlord's consent, and in compliance with all other provisions of this Section
and the Lease, to make any non-structural alteration to the Leased Premises, the
aggregate cost of which does not exceed Twenty-five Thousand Dollars
($25,000.00) for any such alteration project, provided, however, that Tenant may
not exercise this right more than three (3) times during any Lease year and
further provided that Tenant shall give Landlord prior written notice of any
such alteration, along with copies of all plans and specifications relating
thereto. Non-structural alteration shall be defined as any aesthetic alteration
which does not affect the structure or systems of the Building or the Leased
Premises, such as carpet, paint or wall covering.
Tenant shall indemnify and save harmless Landlord from all costs, loss or
expense in connection with any construction or installation of any alteration by
Tenant under this Section. No person shall be entitled to any lien directly or
indirectly derived through or under Tenant or through or by virtue of any act or
omission of Tenant upon the Leased Premises for any improvements or fixtures
made thereon or installed therein or for or on account of any labor or material
furnished to the Leased Premises or for or on account of any matter or thing
whatsoever; and nothing in this Lease contained shall be construed to constitute
a consent by Landlord to the creation of any lien. In the event any lien is
filed against the Leased Premises, or any part thereof, for work claimed to have
been done for or material claimed to have been furnished to Tenant, Tenant shall
cause such lien to be discharged of record within thirty-five (35) days after
filing by bonding or as provided or required by law or in any other lawful
manner. Tenant shall indemnify and save harmless Landlord from all costs,
losses, expenses, and attorneys' fees in connection with any such lien.
SECTION 7.04. TRADE FIXTURES. Any trade fixtures installed on the Leased
Premises by Tenant at its own expense, such as movable partitions, counters,
shelving, showcases, mirrors and the like, may, and, at the request of Landlord,
shall be removed on the expiration or earlier termination of this Lease,
provided that Tenant is not then in default, that Tenant bears the cost of such
removal, and further that Tenant repairs at its own expense any and all damage
to the Leased Premises resulting from such removal. If Tenant fails to remove
any and all such trade fixtures from the Leased Premises on the expiration or
earlier termination of this Lease, all such trade fixtures shall become the
property of Landlord unless Landlord elects to require their removal, in which
case Tenant shall, at its expense, promptly remove the same and restore the
Leased Premises to their prior condition.
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ARTICLE 8 - FIRE OR OTHER CASUALTY; CASUALTY INSURANCE
SECTION 8.01. SUBSTANTIAL DESTRUCTION OF THE BUILDING OR THE LEASED PREMISES.
If either the Building or the Leased Premises should be substantially destroyed
or damaged (which as used herein, means destruction or material damage to at
least 50% of the Building or the Leased Premises) by fire or other casualty,
then Landlord or Tenant may, at its option, terminate this Lease by giving
written notice of such termination to the other party within thirty (30) days
after the date of such casualty. In such event, rent shall be apportioned to
and shall cease as of the date of such casualty. If neither party exercises
this option, then the Leased Premises shall be reconstructed and restored, at
Landlord's expense, to substantially the same condition as they were prior to
the casualty; provided however, that Landlord's obligation hereunder shall be
limited to the reconstruction of such of the tenant finish improvements as were
originally required to be made by Landlord in accordance with EXHIBIT B-2,
including any excess tenant finish improvements paid for and installed by
Landlord at the time of the original build-out of the Leased Premises; and
further provided that if Tenant has made any additional improvements pursuant to
Section 7.03, Tenant shall reimburse Landlord for the cost of reconstructing the
same. In the event of such reconstruction, rent shall be abated from the date
of the casualty until Substantial Completion of the reconstruction repairs; and
this Lease shall continue in full force and effect for the balance of the Term.
In the event neither Landlord nor Tenant exercises its right to terminate
hereunder, Landlord shall use due diligence in completing such reconstruction.
If Landlord fails to substantially complete such reconstruction within one
hundred eighty (180) days from the date of casualty, Tenant shall have the
option to terminate this Lease by delivering to Landlord ten (10) days prior
written notice thereof. Upon such termination, Tenant shall surrender the
Leased Premises to Landlord in accordance with the terms of this Lease and each
party shall be released from further liability hereunder; provided, however,
that such termination shall not affect any right or obligation arising prior to
termination or which survives termination of the Lease.
SECTION 8.02. PARTIAL DESTRUCTION OF THE LEASED PREMISES. If the Leased
Premises should be damaged by fire or other casualty insured or required to be
insured under the fire and extended coverage insurance provided by Landlord in
accordance with Section 8.03 hereof, but not substantially destroyed or damaged
to the extent provided in Section 8.01, then such damaged part of the Leased
Premises shall be reconstructed and restored, at Landlord's expense, to
substantially the same condition as it was prior to the casualty; provided
however, that Landlord's obligation hereunder shall be limited to the
reconstruction of such of the tenant finish improvements as were originally
required to be made by Landlord in accordance with EXHIBIT B-2, including any
excess tenant finish improvements paid for and installed by Landlord at the time
of the original build-out of the Leased Premises; and further provided that if
Tenant has made any additional improvements pursuant to Section 7.03, Tenant
shall reimburse Landlord for the cost of reconstructing the same.
Notwithstanding the foregoing, in the event any mortgagee has superior rights to
any insurance proceeds payable upon the occurrence of any such casualty and such
mortgagee does not make such proceeds available to Landlord for the
reconstruction, Landlord shall not be obligated to reconstruct the Leased
Premises as provided hereunder and either party shall have the right to
terminate this Lease upon ten (10) days prior written notice to the other party.
Upon such termination, both parties shall be released from all liability
hereunder, except for any right or obligation arising prior to the date of such
termination or which survives termination hereof.
Landlord shall notify Tenant in writing within thirty (30) days of the date of
casualty whether or not Landlord intends to reconstruct the Leased Premises
based upon the availability of such insurance proceeds. Landlord further agrees
that in the event Landlord enters into a mortgage secured by the Building,
Landlord shall use commercially reasonable efforts in negotiating any such
mortgage documents to eliminate or limit mortgagee's right to restrict the use
of insurance proceeds for reconstructing the Leased Premises in event of
casualty as provided hereunder.
In the event of such casualty, if the damage is expected to prevent Tenant from
carrying on its business in the Leased Premises to an extent exceeding 30% of
its normal business activity, rent shall be abated in the proportion which the
approximate area of the damaged part bears to the total area in the Leased
Premises from the date of the casualty until Substantial Completion of the
reconstruction repairs; and this Lease shall continue in full force and effect
for the balance of the Term. Landlord shall use due diligence in completing
such reconstruction repairs, but in the event Landlord fails to complete the
same within one hundred eighty (180) days from the date of the
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casualty, Tenant may, at its option, terminate this Lease by giving Landlord
written notice of such termination, whereupon both parties shall be released
from all further obligations and liability hereunder; provided, however, that
such termination shall not affect any right or obligation arising prior to
termination or which survives termination of the Lease.
SECTION 8.03. CASUALTY INSURANCE. Landlord shall at all times during the Lease
Term carry a policy of insurance which insures the Building, including the
Leased Premises, for full replacement value, against loss or damage by fire or
other casualty (namely, the perils against which insurance is afforded by a
standard fire insurance policy and extended coverage endorsement); provided,
however, that Landlord shall not be responsible for, and shall not be obligated
to insure against, any loss of or damage to any personal property of Tenant or
which Tenant may have in the Building or the Leased Premises or any trade
fixtures installed by or paid for by Tenant on the Leased Premises or any
additional improvements which Tenant may construct on the Leased Premises, and
Landlord shall not be liable for any loss or damage to such property, regardless
of cause, including the negligence of Landlord and its employees, agents,
customers and invitees. If any alterations or improvements made by Tenant
pursuant to Section 7.03 result in an increase in the premiums charged during
the Lease Term on the casualty insurance carried by Landlord on the Building,
then the cost of such increase in insurance premiums shall be borne by Tenant,
who shall reimburse Landlord for the same as additional rent after being
separately billed therefor.
SECTION 8.04. WAIVER OF SUBROGATION. Landlord and Tenant hereby release each
other and each other's employees, agents, customers and invitees from any and
all liability for any loss of or damage or injury to person or property
occurring in, on or about or to the Leased Premises, the Building or personal
property within the Building by reason of fire or other casualty or any other
risk which is or which is required to be insured against under this Lease,
regardless of cause, including the negligence of Landlord or Tenant and their
respective employees, agents, customers and invitees, and agree that all
insurance carried by either of them shall contain a clause whereby the insurer
waives its right of subrogation against the other party. Because the provisions
of this Section 8.04 are intended to preclude the assignment of any claim
mentioned herein by way of subrogation or otherwise to an insurer or any other
person, each party to this Lease shall give to each insurance company which has
issued to it one or more policies of fire and extended coverage insurance notice
of the provisions of this Section 8.04 and have such insurance policies properly
endorsed, if necessary, to prevent the invalidation of such insurance by reason
of the provisions of this Section 8.04.
ARTICLE 9 - GENERAL PUBLIC LIABILITY, INDEMNIFICATION AND INSURANCE
SECTION 9.01. TENANT'S RESPONSIBILITY. Tenant shall assume the risk of, be
responsible for, have the obligation to insure against, release Landlord from,
and indemnify Landlord and hold it harmless from any and all liability for any
loss of or damage or injury to any person (including death resulting therefrom)
or property occurring in, on or about the Leased Premises, regardless of cause,
except for any loss or damage from fire or other casualty as provided in Section
8.03 and except for that caused directly by the sole negligence of Landlord and
its employees, agents, customers and invitees. Tenant's obligation to indemnify
Landlord hereunder shall include the duty to defend against any claims asserted
by reason of such loss, damage or injury and to pay any judgments, settlements,
costs, fees and expenses, including attorneys' fees, incurred in connection
therewith. Notwithstanding anything herein to the contrary, Tenant shall bear
the risk of any loss or damage to its property as provided in Section 8.03 so
long as such loss is insured or required to be insured hereunder.
SECTION 9.02. TENANT'S INSURANCE. Tenant, in order to enable it to meet its
obligation to insure against the liabilities specified in this Lease, shall at
all times during the Lease Term carry, at its own expense, one or more policies
of general public liability and property damage insurance, issued by one or more
insurance companies reasonably acceptable to Landlord, with the following
minimum coverages:
A. Worker's Compensation -- minimum statutory amount.
B. Commercial General - Not less than $1,000,000
Liability Insurance, Combined Single Limit
including Blanket, Con- for both bodily injury
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tractual Liability, and property damage.
Broad Form Property
Damage, Personal Injury,
Completed Operations,
Products Liability,
Fire Damage.
C. Fire and Extended Coverage, Vandalism and Malicious Mischief, and Sprinkler
Leakage insurance, for the full cost of replacement of Tenant's property.
Such insurance policy or policies shall protect Tenant and Landlord as their
interests may appear, naming Landlord and Landlord's managing agent and
mortgagee as additional insureds and shall provide that they may not be
cancelled on less than thirty (30) days prior written notice to Landlord.
Tenant shall furnish Landlord with Certificates of Insurance evidencing such
coverage within thirty (30) days after a request to do so. Should Tenant fail
to carry such insurance and furnish Landlord with such Certificates of
Insurance, Landlord shall have the right, but not the obligation, to obtain such
insurance and collect the cost thereof from Tenant as additional rent.
SECTION 9.03. LANDLORD'S RESPONSIBILITY. Landlord shall assume the risk of, be
responsible for, have the obligation to insure against, release Tenant from, and
indemnify Tenant and hold it harmless from, any and all liability for any loss
of or damage or injury to person (including death resulting therefrom) or
property (other than Tenant's property as provided in Section 8.03) occurring
in, on or about the Common Areas, regardless of cause, except for that caused by
the sole negligence of Tenant and its employees, agents, customers and invitees.
Landlord's obligation to indemnify Tenant hereunder shall include the duty to
defend against any claims asserted by reason of such loss, damage or injury and
to pay any judgments, settlements, costs, fees and expenses, including
attorneys' fees, incurred in connection therewith.
ARTICLE 10 - EMINENT DOMAIN
If the whole or any part of the Leased Premises or Building, including parking
areas, shall be taken for public or quasi-public use by a governmental or other
authority having the power of eminent domain or shall be conveyed to such
authority in lieu of such taking, and if such taking or conveyance shall cause
the remaining part of the Leased Premises to be untenantable and inadequate for
use by Tenant for the purpose for which they were leased, then either Landlord
or Tenant may, at their respective option, terminate this Lease as of the date
Tenant is required to surrender possession of the Leased Premises by giving
written notice of such termination to the other party. If a part of the Leased
Premises shall be taken or conveyed but the remaining part is tenantable and
adequate for Tenant's use, then this Lease shall be terminated as to the part
taken or conveyed as of the date Tenant surrenders possession; Landlord shall
make such repairs, alterations and improvements as may be necessary to render
the part not taken or conveyed tenantable to the extent the condemnation award
proceeds received by Landlord are sufficient therefor; and the rent shall be
reduced in proportion to the part of the Leased Premises so taken or conveyed.
All compensation awarded for such taking or conveyance shall be the property of
Landlord without any deduction therefrom for any present or future estate of
Tenant, and Tenant hereby assigns to Landlord all its right, title and interest
in and to any such award. However, Tenant shall have the right to recover from
such authority, but not from Landlord, such compensation as may be awarded to
Tenant on account of moving and relocation expenses and depreciation to and
removal of Tenant's property.
ARTICLE 11 - LIENS
If, because of any act or omission of Tenant or any person claiming by, through,
or under Tenant, any mechanic's lien or other lien shall be filed against the
Leased Premises or the Building or against other property of Landlord (whether
or not such lien is valid or enforceable as such), Tenant shall, at its own
expense, cause the same to be discharged of record or bonded within thirty-five
(35) days after the date of filing thereof, and shall also indemnify Landlord
and hold it harmless from any and all claims, losses, damages, judgments,
settlements, costs and expenses, including attorneys' fees, resulting therefrom
or by reason thereof. If Tenant fails to discharge or bond over any such lien,
Landlord may, but shall not be obligated to, pay the claim upon which such lien
is based
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so as to have such lien released of record; and, if Landlord does so,
then Tenant shall pay to Landlord, as additional rent, upon demand, the amount
of such claim, plus all other costs and expenses incurred in connection
therewith, plus interest thereon at the rate of twelve percent (12%) per annum
until paid.
ARTICLE 12 - RENTAL, PERSONAL PROPERTY AND OTHER TAXES
Tenant shall pay before delinquency any and all taxes, assessments, fees or
charges, including any sales, gross income, rental, business occupation or other
taxes, levied or imposed upon Tenant's business operations in the Leased
Premises and any personal property or similar taxes levied or imposed upon
Tenant's trade fixtures, leasehold improvements or personal property located
within the Leased Premises. In the event any such taxes, assessments, fees or
charges are charged to the account of, or are levied or imposed upon the
property of Landlord, Tenant shall reimburse Landlord for the same as additional
rent. Notwithstanding the foregoing, Tenant shall have the right to contest in
good faith any such item and to defer payment until after Tenant's liability
therefor is finally determined.
If any tenant finish improvements, trade fixtures, alterations or improvements
or business machines and equipment located in, on or about the Leased Premises,
regardless of whether they are installed or paid for by Landlord or Tenant and
whether or not they are affixed to and become a part of the realty and the
property of Landlord, are assessed for real property tax purposes at a valuation
higher than that at which other such property in other leased space in the
Building is assessed, then Tenant shall reimburse Landlord as additional rent
for the amount of real property taxes shown on the appropriate county official's
records as having been levied upon the Building or other property of Landlord by
reason of such excess assessed valuation.
ARTICLE 13 - ASSIGNMENT AND SUBLETTING
Tenant may not assign this Lease or sublet the Leased Premises or any part
thereof, without the prior written consent of Landlord, which consent shall not
be unreasonably withheld; and any attempted assignment or subletting without
such consent shall be invalid. In the event of a permitted assignment or
subletting, Tenant shall nevertheless at all times remain fully responsible and
liable for the payment of rent and the performance and observance of all of
Tenant's other obligations under the terms, conditions and covenants of this
Lease. No assignment or subletting of the Leased Premises or any part thereof
shall be binding upon Landlord unless such assignee or subtenant shall deliver
to Landlord an instrument (in recordable form, if requested) containing an
agreement of assumption of all of Tenant's obligations under this Lease. Upon
the occurrence of an event of default, if all or any part of the Leased Premises
are then assigned or sublet, Landlord, in addition to any other remedies
provided by this Lease or by law, may, at its option, collect directly from the
assignee or subtenant all rent becoming due to Landlord by reason of the
assignment or subletting. Any collection by Landlord from the assignee or
subtenant shall not be construed to constitute a waiver or release of Tenant
from the further performance of its obligations under this Lease or the making
of a new lease with such assignee or subtenant.
Landlord may, in its reasonable discretion, refuse to give its consent to any
proposed assignment or subletting for any reason, including, but not limited to
Landlord's determination that its interest in the Lease or the Leased Premises
would be adversely affected by (i) the financial condition, creditworthiness or
business reputation of the proposed assignee or subtenant, or (ii) the proposed
use of the Leased Premises by, or business of, the proposed assignee or
subtenant. If Landlord refuses to give its consent to any proposed assignment
or subletting, Landlord may, at its option, within thirty (30) days after
receiving notice of the proposal, terminate this Lease by giving Tenant thirty
(30) days prior written notice of such termination, whereupon each party shall
be released from all further obligations and liability hereunder.
All reasonable costs incurred by Landlord in connection with any request for
consent to a proposed assignment or sublease, including costs of investigation
and attorneys' fees, shall be paid by Tenant upon demand as a further condition
of any consent which may be given.
ARTICLE 14 - TRANSFERS BY LANDLORD
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SECTION 14.01. SALE AND CONVEYANCE OF THE BUILDING. Landlord shall have the
right to sell and convey the Building at any time during the Lease Term, subject
only to the rights of Tenant hereunder; and such sale and conveyance shall
operate to release Landlord from liability hereunder after the date of such
conveyance as provided in Section 15.04, except with respect to claims arising
prior to the date of such conveyance.
SECTION 14.02. SUBORDINATION. Tenant's rights under this Lease are and shall
always be subordinate to the operation and effect of any mortgage, deed of
trust, ground lease or master lease now or hereafter placed upon or governing
the Building or the tract of land described in EXHIBIT A-1 hereto or any part or
parts thereof by Landlord. This clause shall be self-operative, and no further
instrument of subordination shall be required. In confirmation thereof, Tenant
shall execute such further assurance as may be required. Any mortgagee, ground
lessor or trustee under any such mortgage, deed of trust, ground lease or master
lease may elect that this Lease shall have priority over its mortgage, deed of
trust, ground lease or master lease; and upon notification to Tenant of such
election by such mortgagee, ground lessor or trustee, this Lease shall be deemed
to have priority over said mortgage, deed of trust, ground lease or master lease
whether this Lease is dated prior to or subsequent to the date of such mortgage,
deed of trust, ground lease or master lease. Notwithstanding the foregoing, no
default by Landlord under any such mortgage, deed of trust, ground lease or
master lease shall affect Tenant's rights hereunder so long as Tenant is not in
default under this Lease. Tenant hereby attorns to any successor to Landlord's
interest in this Lease and shall recognize such successor as Landlord hereunder.
Tenant agrees to execute, within ten (10) days after Landlord's request, all
instruments as may be reasonably required by such successor to confirm such
attornment.
ARTICLE 15 - DEFAULTS AND REMEDIES
SECTION 15.01. DEFAULTS BY TENANT. The occurrence of any one or more of the
following events shall be a default under and breach of this Lease by Tenant:
A. Tenant shall fail to pay any Monthly Rental Installment of Minimum
Annual Rent or the Annual Rental Adjustment within ten (10) days
after the same shall be due and payable, or any other amounts due
Landlord from Tenant as additional rent or otherwise including
any amounts owed by Tenant for tenant finish improvements within
thirty (30) days after the same shall be due and payable.
In the event of a default under subparagraph (A) above, Landlord shall
provide Tenant with written notice of such default two (2) times
during each successive twelve (12) month period of the Lease Term
and Tenant shall have an additional five (5) days to cure such
default before Landlord shall declare a default or exercise its
remedies herein.
B. Tenant shall fail to perform or observe any term, condition, covenant
or obligation required to be performed or observed by it under
this Lease for a period of thirty (30) days after notice thereof
from Landlord; provided, however, that if the term, condition,
covenant or obligation to be performed by Tenant is of such
nature that the same cannot reasonably be performed within such
thirty-day period, such default shall be deemed to have been
cured if Tenant commences such performance within said thirty-day
period and thereafter diligently undertakes to complete the same
and does so complete the required action within a reasonable
time.
C. A trustee or receiver shall be appointed to take possession of
substantially all of Tenant's assets in, on or about the Leased
Premises or of Tenant's interest in this Lease (and Tenant does
not regain possession within sixty (60) days after such
appointment); Tenant makes an assignment for the benefit of
creditors; or substantially all of Tenant's assets in, on or
about the Leased Premises or Tenant's interest in this Lease are
attached or levied under execution (and Tenant does not discharge
the same within sixty (60) days thereafter).
D. A petition in bankruptcy, insolvency, or for reorganization or
arrangement is filed by or against Tenant pursuant to any federal
or state statute (and, with respect to any such petition filed
against it, Tenant fails to secure a stay or discharge thereof
within sixty (60) days after the filing of the same).
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SECTION 15.02. REMEDIES OF LANDLORD. Upon the occurrence of any event of
default set forth in Section 15.01, Landlord shall have the following rights and
remedies, in addition to those allowed by law, any one or more of which may be
exercised without further notice to or demand upon Tenant:
A. Landlord may re-enter the Leased Premises and cure any default of
Tenant, in which event Tenant shall reimburse Landlord as
additional rent for any costs and expenses which Landlord may
incur to cure such default; and Landlord shall not be liable to
Tenant for any loss or damage which Tenant may sustain by reason
of Landlord's action, regardless of whether caused by Landlord's
negligence or otherwise.
B. 1. Landlord may terminate this Lease as of the date of such default,
in which event (i) neither Tenant nor any person claiming
under or through Tenant shall thereafter be entitled to
possession of the Leased Premises, and Tenant shall
immediately thereafter surrender the Leased Premises to
Landlord; (ii) Landlord may re-enter the Leased Premises and
dispossess Tenant or any other occupants of the Leased
Premises by any means permitted by law, and may remove their
effects, without prejudice to any other remedy which
Landlord may have for possession or arrearages in rent; and
(iii) notwithstanding the termination of this Lease,
Landlord shall be entitled to recover from Tenant the value
at the time of such termination of the amount of rent and
other charges equivalent to rent reserved in this Lease for
the remainder of the Lease Term, less the net amount of such
rent and other charges for the remainder of the Lease Term
which Tenant proves could reasonably be recovered by
Landlord from reletting the Leased Premises under then-
current and reasonably anticipated market conditions,
together with all loss or damage which Landlord may sustain
by reason of such termination, it being expressly understood
and agreed that the liabilities and remedies specified in
this subsection B 1 of Section 15.02 shall survive the
termination of this Lease; or
2. Landlord may, without terminating this Lease, re-enter the Leased
Premises and re-let all or any part of the Leased Premises
for a term different from that which would otherwise have
constituted the balance of the Lease Term and for rent and
on terms and conditions different from those contained
herein, whereupon Tenant shall be obligated to pay to
Landlord as liquidated damages the difference between the
rent provided for herein and that provided for in any lease
covering a subsequent re-letting of the Leased Premises, for
the period which would otherwise have constituted the
balance of the Lease Term, together with all of Landlord's
reasonable costs and expenses for preparing the Leased
Premises for re-letting, including without limitation, all
repairs, tenant finish improvements, brokers' and attorneys'
fees, and all loss or damage which Landlord may sustain by
reason of such re-entry and re-letting.
C. Landlord may sue for injunctive relief or to recover damages for any
loss resulting from the breach.
SECTION 15.03. DEFAULT BY LANDLORD AND REMEDIES OF TENANT. It shall be a
default under and breach of this Lease by Landlord if it shall fail to perform
or observe any term, condition, covenant or obligation required to be performed
or observed by it under this Lease for a period of thirty (30) days after notice
thereof from Tenant; provided, however, that if the term, condition, covenant or
obligation to be performed by Landlord is of such nature that the same cannot
reasonably be performed within such thirty-day period, such default shall be
deemed to have been cured if Landlord commences such performance within said
thirty-day period and thereafter diligently undertakes to complete the same.
Upon the occurrence of any such default, Tenant may sue for injunctive relief or
to recover damages for any loss resulting from the breach, but Tenant shall not
be entitled to terminate this Lease or withhold or abate any rent due hereunder,
except as otherwise provided in this Lease.
SECTION 15.04. LIMITATION OF LANDLORD'S LIABILITY. If Landlord shall fail to
perform or observe any term, condition, covenant or obligation required to be
performed or observed by it under this Lease as provided in Section 15.03 and if
Tenant shall, as a consequence thereof, recover a money judgment against
Landlord, Tenant agrees that it shall look solely to Landlord's right, title and
interest in and to the Building including rents and net proceeds of any sale of
the Building (subject to prior rights of any mortgagee) for the collection of
such judgment;
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and Tenant further agrees that no other assets of Landlord shall be subject to
levy, execution or other process for the satisfaction of Tenant's judgment and
that Landlord shall not be liable for any deficiency.
The references to "Landlord" in this Lease shall be limited to mean and include
only the owner or owners, at the time, of the fee simple interest in the
Building. In the event of a sale or transfer of such interest (except a
mortgage or other transfer as security for a debt), the "Landlord" named herein,
or, in the case of a subsequent transfer, the transferor, shall, after the date
of such transfer, be automatically released from all liability for the
performance or observance of any term, condition, covenant or obligation
required to be performed or observed by Landlord hereunder; and the transferee
shall be deemed to have assumed all of such terms, conditions, covenants and
obligations accruing after the date of transfer.
SECTION 15.05. NON-WAIVER OF DEFAULTS. The failure or delay by either party
hereto to exercise or enforce at any time any of the rights or remedies or other
provisions of this Lease shall not be construed to be a waiver thereof, nor
affect the validity of any part of this Lease or the right of either party
thereafter to exercise or enforce each and every such right or remedy or other
provision. No waiver of any default and breach of the Lease shall be deemed to
be a waiver of any other default and breach. The receipt by Landlord of less
than the full rent due shall not be construed to be other than a payment on
account of rent then due, nor shall any statement on Tenant's check or any
letter accompanying Tenant's check be deemed an accord and satisfaction, and
Landlord may accept such payment without prejudice to Landlord's right to
recover the balance of the rent due or to pursue any other remedies provided in
this Lease. No act or omission by Landlord or its employees or agents during
the Lease Term shall be deemed an acceptance of a surrender of the Leased
Premises, and no agreement to accept such a surrender shall be valid unless in
writing and signed by Landlord.
SECTION 15.06. ATTORNEYS' FEES. In the event either party defaults in the
performance or observance of any of the terms, conditions, covenants or
obligations contained in this Lease and the non-defaulting party employs
attorneys (including any in-house attorneys) to enforce all or any part of this
Lease, including in the case of Landlord to collect any rent due or to become
due or to recover possession of the Leased Premises, the defaulting party agrees
to reimburse the non-defaulting party for the attorneys' fees incurred thereby
whether or not suit is actually filed.
ARTICLE 16 - LANDLORD'S RIGHT TO RELOCATE TENANT
Intentionally Omitted.
ARTICLE 17 - NOTICE AND PLACE OF PAYMENT
SECTION 17.01. NOTICES. Any notice required or permitted to be given under
this Lease or by law shall be deemed to have been given if it is written and
delivered in person or by a recognized overnight delivery service obtaining a
confirmation of delivery, or mailed by Registered or Certified mail, postage
prepaid, to the party who is to receive such notice at the address specified in
Item L of the Basic Lease Provisions. When so mailed, the notice shall be
deemed to have been given as of the date it was mailed. The address specified
in Item L of the Basic Lease Provisions may be changed by giving written notice
thereof to the other party.
SECTION 17.02. PLACE OF PAYMENT. All rent and other payments required to be
made by Tenant to Landlord shall be delivered or mailed to Landlord's management
agent at the address specified in Item L of the Basic Lease Provisions or any
other address Landlord may specify from time to time by written notice given to
Tenant.
ARTICLE 18 - MISCELLANEOUS GENERAL PROVISIONS
SECTION 18.01. CONDITION OF PREMISES. Tenant acknowledges that neither
Landlord nor any agent of Landlord has made any representation or warranty with
respect to the Leased Premises or the Building or with respect to the
suitability or condition of any part of the Building for the conduct of Tenant's
business except as provided in this Lease.
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SECTION 18.02. INSOLVENCY OR BANKRUPTCY. In no event shall this Lease be
assigned or assignable by operation of law, and in no event shall this Lease be
an asset of Tenant in any receivership, bankruptcy, insolvency, or
reorganization proceeding.
SECTION 18.03. COMMON AREAS. The term "Common Areas," as used in this Lease,
refers to the areas of the Building and the land described in EXHIBIT A-1 which
are designed for use in common by all tenants of the Building and their
respective employees, agents, customers, invitees and others, and includes, by
way of illustration and not limitation, entrances and exits, hallways and
stairwells, elevators, restrooms, sidewalks, driveways, parking areas,
landscaped areas and other areas as may be designated by Landlord as part of the
Common Areas of the Building. Tenant shall have the non-exclusive right, in
common with others, to the use of the Common Areas, subject to such
nondiscriminatory rules and regulations as may be adopted by Landlord including
those set forth in Section 5.02 and EXHIBIT C of this Lease.
SECTION 18.04. CHOICE OF LAW. This Lease shall be governed by and construed
pursuant to the laws of the State of Indiana.
SECTION 18.05. SUCCESSORS AND ASSIGNS. Except as otherwise provided in this
Lease, all of the covenants, conditions and provisions of this Lease shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns.
SECTION 18.06. NAME. Tenant shall not, without the written consent of
Landlord, use the name of the Building or the development for any purpose other
than as the address of the business to be conducted by Tenant in the Leased
Premises, and in no event shall Tenant acquire any rights in or to such names.
SECTION 18.07. EXAMINATION OF LEASE. Submission of this instrument for
examination or signature to Tenant does not constitute a reservation of or
option for Lease, and it is not effective as a Lease or otherwise until
execution by and delivery to both Landlord and Tenant.
SECTION 18.08. TIME. Time is of the essence of this Lease and each and all of
its provisions.
SECTION 18.09. DEFINED TERMS AND MARGINAL HEADINGS. The words "Landlord" and
"Tenant" as used herein shall include the plural as well as the singular. If
more than one person is named as Tenant, the obligations of such persons are
joint and several. The marginal headings and titles to the articles of this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof.
SECTION 18.10. PRIOR AGREEMENTS. This Lease and the exhibits attached hereto
and the letter of understanding executed pursuant to Section 2.03 hereof contain
all of the agreements of the parties hereto with respect to any matter covered
or mentioned in this Lease, and no prior agreement, understanding or
representation pertaining to any such matter shall be effective for any purpose.
No provision of this Lease may be amended or added to except by an agreement in
writing signed by the parties hereto or their respective successors in interest.
SECTION 18.11. PAYMENT OF AND INDEMNIFICATION FOR LEASING COMMISSIONS. The
parties hereby acknowledge, represent and warrant that the only real estate
broker or brokers involved in the negotiation and execution of this Lease is
that, or are those named in Item I of the Basic Lease Provisions; that Landlord
is obligated to pay to it or them or for their benefit a leasing commission
under its Leasing Agreement with Duke Realty Limited Partnership; and that no
other broker or person is entitled to any leasing commission or compensation as
a result of the negotiation or execution of this Lease. Each party shall
indemnify the other party and hold it harmless from any and all liability for
the breach of any such representation and warranty on its part and shall pay any
compensation to any other broker or person who may be deemed or held to be
entitled thereto. Landlord will not pay a broker commission to any broker
representing Tenant for any extensions of the Lease Term and/or expansions of
the Leased Premises outside the original term of the Lease.
Landlord hereby agrees to pay a brokerage fee in the amount of Two Hundred
Thirty Thousand Dollars ($230,000.00) to Meridian Real Estate Services within
fifteen (15) days of the later to occur of (i) Tenant's
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approval of the Shell Plans and Specifications as provided in Section 2.02.A.;
or (ii) Landlord's completion of the acquisition of the Land as provided in
Section 20.09. The brokerage fee is in consideration of Tenant leasing the
Leased Premises from Landlord for the full term of this Lease.
SECTION 18.12. SEVERABILITY OF INVALID PROVISIONS. If any provision of this
Lease shall be held to be invalid, void or unenforceable, the remaining
provisions hereof shall not be affected or impaired, and such remaining
provisions shall remain in full force and effect.
SECTION 18.13. DEFINITION OF THE RELATIONSHIP BETWEEN THE PARTIES. Landlord
shall not, by virtue of the execution of this Lease or the leasing of the Leased
Premises to Tenant, become or be deemed a partner of or joint venturer with
Tenant in the conduct of Tenant's business in the Leased Premises or otherwise.
SECTION 18.14. ESTOPPEL CERTIFICATE. Tenant shall, within ten (10) days
following receipt of a written request from Landlord, execute, acknowledge and
deliver to Landlord or to any lender, purchaser or prospective lender or
purchaser designated by Landlord a written statement, in the form attached
hereto as EXHIBIT D or in such other form as Landlord may reasonably request,
certifying (i) that this Lease is in full force and effect and unmodified (or,
if modified, stating the nature of such modification), (ii) the date to which
rent has been paid, (iii) that there are not, to Tenant's knowledge, any uncured
defaults (or specifying such defaults if any are claimed), and (iv) any other
matters or state of facts reasonably required respecting the Lease or Tenant's
occupancy of the Leased Premises. Any such statement may be relied upon by any
prospective purchaser or mortgagee of all or any part of the Building. Tenant's
failure to deliver such statement within such period shall be conclusive upon
Tenant that this Lease is in full force and effect and unmodified, and that
there are no uncured defaults in Landlord's performance hereunder.
SECTION 18.15. FORCE MAJEURE. Notwithstanding any other provision contained
in this Lease or elsewhere, Landlord and Tenant each shall not be chargeable
with, liable for, or responsible to the other party for anything or in any
amount for any failure to perform or delay caused by fire, earthquake,
explosion, flood, hurricane, tornado, the elements, acts of God or the public
enemy, action, restrictions, limitations, or interference of governmental
authorities or agents, war, invasion, insurrection, rebellion, riots, strikes or
lockouts or any other cause whether similar or dissimilar to the foregoing which
is beyond the reasonable control of such party and any such failure or delay due
to said causes or any of them shall not be deemed a breach of or default in the
performance of this Lease provided that either such party shall have used
reasonable efforts to minimize the impact of any such event. Notwithstanding
the foregoing, the foregoing force majeure events shall not relieve Tenant of
its obligation to pay rent or any other sums due pursuant to the terms hereof.
ARTICLE 19 - TENANT'S RESPONSIBILITY REGARDING ENVIRONMENTAL LAWS AND HAZARDOUS
SUBSTANCES
SECTION 19.01. DEFINITIONS.
a. "Environmental Laws" - All federal, state and municipal laws,
ordinances, rules and regulations applicable to the environmental and ecological
condition of the Leased Premises, including, without limitation, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; the Federal Resource Conservation and Recovery Act; the Federal Toxic
Substance Control Act; the Clean Air Act; the Clean Water Act; the rules and
regulations of the Federal Environmental Protection Agency, or any other
federal, state or municipal agency or governmental board or entity having
jurisdiction over the Leased Premises.
b. "Hazardous Substances" - Includes:
(i) Those substances included within the definitions of "hazardous
substances," "hazardous materials," "toxic substances" "solid waste" or
"infectious waste" in any of the Environmental Laws; and
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(ii) Such other substances, materials and wastes which are or become
regulated under applicable local, state or federal law, or which are classified
as hazardous, toxic or infectious under present or future Environmental Laws or
other federal, state, or local laws or regulations.
SECTION 19.02. COMPLIANCE. Tenant, at its sole cost and expense, shall
promptly comply with the Environmental Laws which shall impose any duty upon
Tenant with respect to the use, occupancy, maintenance or alteration of the
Leased Premises. Tenant shall promptly comply with any notice from any source
issued pursuant to the Environmental Laws or with any notice from any insurance
company pertaining to Tenant's use, occupancy, maintenance or alteration of the
Leased Premises, whether such notice shall be served upon Landlord or Tenant.
SECTION 19.03. RESTRICTIONS ON TENANT. Tenant shall not cause or permit to
occur:
a. Any violation of the Environmental Laws related to environmental
conditions on, under, or about the Leased Premises, or arising from Tenant's use
or occupancy of the Leased Premises, including, but not limited to, soil and
ground water conditions.
b. The use, generation, release, manufacture, refining, production,
processing, storage or disposal of any Hazardous Substances on, under, or about
the Leased Premises, or the transportation to or from the Leased Premises of any
Hazardous Substances, except as necessary and appropriate for general office use
in which case the use, storage or disposal of such Hazardous Substances shall be
performed in compliance with the Environmental Laws and the highest standards
prevailing in the industry.
SECTION 19.04. NOTICES, AFFIDAVITS, ETC.
a. Tenant shall immediately notify Landlord of (i) any violation by
Tenant, its employees, agents, representatives, customers, invitees or
contractors of the Environmental Laws on, under or about the Leased Premises, or
(ii) the presence or suspected presence of any Hazardous Substances on, under or
about the Leased Premises and shall immediately deliver to Landlord any notice
received by Tenant relating to (i) and (ii) above from any source.
b. Tenant shall execute affidavits, representations and the like from
time to time, within five (5) days of Landlord's request therefor, concerning
Tenant's best knowledge and belief regarding the presence of any Hazardous
Substances on, under or about the Leased Premises.
SECTION 19.05. LANDLORD'S RIGHTS.
a. Landlord and its agent shall have the right, but not the duty, upon
advance notice (except in the case of emergency when no notice shall be
required) to inspect the Leased Premises and conduct tests thereon at any time
to determine whether or the extent to which there has been a violation of
Environmental Laws by Tenant or whether there are Hazardous Substances on, under
or about the Leased Premises. In exercising its rights herein, Landlord shall
use reasonable efforts to minimize interference with Tenant's business but such
entry shall not constitute an eviction of Tenant, in whole or in part, and
Landlord shall not be liable for any interference, loss, or damage to Tenant's
property or business caused thereby.
b. If any governmental agency shall ever require testing to ascertain
whether there has been a release of Hazardous Substances on, under or about the
Leased Premises or a violation of the Environmental Laws, and such requirement
arose in whole or in part because of an act or omission on the part of Tenant,
then the reasonable costs thereof, to the extent such costs are the direct
result of an act or omission on the part of Tenant, shall be reimbursed by
Tenant to Landlord upon demand as Additional Rent.
SECTION 19.06. TENANT'S INDEMNIFICATION. Tenant shall indemnify and hold
harmless Landlord and any affiliated managing agent of Landlord from any and all
claims, loss, liability, costs, expenses or damage, including attorneys' fees
and costs of remediation, incurred by Landlord in connection with any breach by
Tenant of its obligations
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under this Article 19. The covenants and obligations of Tenant under this
Article 19 shall survive the expiration or earlier termination of this Lease.
SECTION 19.07. LANDLORD'S REPRESENTATION. Landlord represents and warrants
that, to the best of Landlord's actual knowledge, without independent
investigation, as of the date of execution of this Lease, there are no Hazardous
Substances in, on or about the Land in excess of legally allowable limits.
Landlord will provide Tenant with a copy of a Phase I Environmental Assessment
Report respecting the Land upon Landlord's receipt of said Report.
SECTION 19.08. LANDLORD'S INDEMNIFICATION. In the event that Landlord shall
dispose of or incorporate any Hazardous Substances within the Building or Leased
Premises in violation of the Environmental Laws, Landlord shall indemnify and
hold Tenant harmless from and against any and all costs and expenses of removing
such Hazardous Substances from the Building or Leased Premises.
ARTICLE 20 - ADDITIONAL PROVISIONS
SECTION 20.01. FINANCIAL STATEMENTS. During the Lease Term and any extensions
thereof, Tenant shall provide to Landlord, within fifteen (15) days of
Landlord's request therefor, a copy of Tenant's most recent Annual Report. In
the event Tenant's corporate status changes at any time during the Lease Term or
any extensions thereof, and Tenant is no longer a publicly held company, Tenant
shall provide to Landlord, within fifteen (15) days of Landlord's request
therefor, a copy of Tenant's most recent certified and audited financial
statements prepared as of the end of Tenant's most recent fiscal year. Such
financial statements shall be prepared in conformity with generally accepted
accounting principles, consistently applied. Landlord agrees to maintain all
financial statements provided by Tenant hereunder on a confidential basis.
SECTION 20.02. REPRESENTATIONS AND INDEMNIFICATIONS. Any representations and
indemnifications of Landlord contained in the Lease shall not be binding upon
(i) any mortgagee having a mortgage presently existing or hereafter placed on
the Building, or (ii) a successor to Landlord which has obtained or is in the
process of obtaining fee title interest to the Building as a result of a
foreclosure of any mortgage or a deed in lieu thereof.
SECTION 20.03. TENANT'S REPRESENTATIONS AND WARRANTIES. The undersigned
represents and warrants to Landlord that (i) Tenant is duly organized, validly
existing and in good standing in accordance with the laws of the state under
which it was organized; (ii) all action necessary to authorize the execution of
this Lease has been taken by Tenant; and (iii) the individual executing and
delivering this Lease on behalf of Tenant has been authorized to do so, and such
execution and delivery shall bind Tenant. Tenant, at Landlord's request, shall
provide Landlord with evidence of such authority.
SECTION 20.04. SIGNAGE. Provided that Tenant complies with all zoning and
other municipal and county regulations, Tenant may, at its own cost and expense,
have the right to erect up to three (3) signs ("Signs") identifying its business
upon the terms and conditions set forth herein. Tenant may erect two (2)
illuminated (backlit) Signs upon the exterior of the Building and one (1)
monument Sign, provided, however, that Tenant shall only be entitled to erect
two (2) out of the three (3) Signs until such time as Tenant validly exercises
Expansion Option I pursuant to Section 20.05 of this Lease. Tenant shall have
the exclusive right to erect signage upon the exterior of the Building. If
Tenant does not exercise Expansion Option I, Landlord shall have the right to
allow other tenants in the Building to have signage included on the monument
Sign. The location, style and size of the Signs shall be subject to Landlord's
prior written approval. Tenant agrees to maintain such Signs in first-class
condition and in compliance with all zoning and building codes throughout the
Lease Term. Upon expiration or early termination of the Lease Term, Tenant
shall remove the Signs and repair all damage to the Building or Common Areas
caused thereby. Landlord does not warrant the availability of such Signs to
Tenant. Any language in the Lease notwithstanding, Tenant shall indemnify and
hold harmless Landlord from any and all liability for any loss of or damage or
injury to any person (including death resulting therefrom) or property connected
with or arising from the Signs or the rights granted Tenant herein.
SECTION 20.05. OPTION TO EXPAND I. Provided that (i) Tenant has not been in
default hereunder, after any applicable notice and cure period, at any time
during the Lease Term, (ii) the creditworthiness of Tenant has not substantially
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diminished, and (iii) Tenant originally named herein remains in possession of
and has been continuously operating in the entire Leased Premises throughout the
Lease Term, Tenant shall have the option, during the first eighteen (18) months
of the Lease Term, to expand the Leased Premises ("Expansion Option I"), to
include the remaining space in the Building as outlined in blue on EXHIBIT A-3
attached hereto (the "Expansion Space I"). In the event Tenant elects to
exercise its Expansion Option I, Tenant shall provide Landlord with written
notice of its desire to expand within the first eighteen (18) months of the
Lease Term. Landlord and Tenant shall then work together in good faith, and in
accordance with a reasonable project schedule to be established by Landlord, to
prepare mutually agreeable plans and specifications for the tenant finish
improvements in Expansion Space I and Landlord shall construct and substantially
complete such improvements within a reasonable time. The term for Expansion
Space I shall be coterminous with the term for the original Leased Premises and
shall commence upon Substantial Completion of the tenant finish improvements in
Expansion Space I. Tenant's Minimum Annual Rent per square foot for Expansion
Space I shall be Fifteen Dollars and Fifty-seven Cents ($15.57). The tenant
finish improvement allowance and architectural and engineering allowance for
Expansion Space I shall also be the same per square foot as the allowances
provided by Landlord for the original Leased Premises as set forth in Section
2.02 hereof. Landlord and Tenant will execute an amendment to the Lease
incorporating Expansion
Space I.
SECTION 20.06. OPTION TO EXPAND II.
a. Provided that (i) Tenant has not been in default hereunder, after any
applicable notice and cure period, at any time during the Lease Term, (ii) the
creditworthiness of Tenant has not substantially diminished, and (iii) Tenant
originally named herein remains in possession of and has been continuously
operating in the entire Leased Premises throughout the Lease Term, and subject
to the terms of paragraph c. of this Section and to Landlord's receipt of all
necessary governmental approvals, Tenant shall have the exclusive option to
expand the Leased Premises for a period of five (5) years from the Commencement
Date of this Lease ("Expansion Option II"), in increments of not less than
approximately 35,000 rentable square feet and totaling in the aggregate not more
than 225,000 square feet (collectively, the "Expansion Space II"), in a building
design and location mutually agreed upon between Landlord and Tenant. In the
event Tenant elects to exercise its Expansion Option II, Tenant shall provide
Landlord with written notice of its desire to expand within five (5) years from
the Commencement Date of this Lease. Landlord and Tenant shall then work
together in good faith, and in accordance with a reasonable project schedule to
be established by Landlord, to prepare mutually agreeable plans and
specifications for the completion of any Expansion Space II. Landlord shall use
commercially reasonable efforts to substantially complete any Expansion Space
II within twelve (12) months from the completion of mutually agreeable plans and
specifications. The term for any Expansion Space II shall be for a minimum of
twelve (12) years, and the term for the original Leased Premises shall be
extended, if necessary, to be coterminous with the term for any Expansion Space
II.
b. The Minimum Annual Rent for any Expansion Space II shall be equal to
the rate calculated based upon the total project cost multiplied by an
investment constant. The total project cost shall be defined as all costs
necessary to construct a building comparable to the original Building including
but not limited to shell costs, land, tenant finish improvements, interest
carry, infrastructure, and typical soft costs associated with a similar
commercial office project. The investment constant will be equal to the then
current twenty-five (25) year Treasury Strip yield plus two percent (2%),
assuming a twenty-five (25) year amortization schedule, times a coverage factor
of 1.175. This resulting investment constant will be multiplied by the total
project cost to determine the annual net rental rate to be paid by Tenant for
any Expansion Space II during the twelve (12) year term. Tenant shall also pay
all actual Operating Expenses and Real Estate Taxes for any Expansion Space II.
Tenant's Minimum Annual Rent for any extended term for the original Leased
Premises shall be an amount equal to Fifteen Dollars and Fifty-seven Cents
($15.57) per square foot of the original Leased Premises, plus Tenant's share of
the increase in actual Operating Expenses and Real Estate Taxes above Landlord's
Share of Operating Expenses for the original Leased Premises. Landlord and
Tenant will execute an amendment to the Lease incorporating any Expansion Space
II.
c. Notwithstanding anything to the contrary herein,Landlord may require,
at Landlord's option, that Tenant lease Expansion Space I prior to exercising
this Expansion Option II. If Landlord exercises its option provided in the
preceding sentence and Tenant may still exercise Expansion Option I, then Tenant
shall lease Expansion Space I pursuant to the terms and conditions provided in
Section 20.05. In the event Landlord
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exercises its option provided herein and Tenant's Expansion Option I has
expired, the terms and conditions for Expansion Space I shall be as provided
in the remainder of this Section 20.06c. The term for such Expansion Space I
shall be coterminous with the term for the original Leased Premises and shall
commence upon Substantial Completion of the tenant finish improvements in
Expansion Space I. Landlord and Tenant shall work together in good faith, and
in accordance with a reasonable project schedule to be established by
Landlord, to prepare mutually agreeable plans and specifications for the
tenant finish improvements in Expansion Space I and Landlord shall construct
and Substantially Complete such improvements within a reasonable time.
Tenant's Minimum Annual Rent for Expansion Space I shall be equal to the
Minimum Annual Rent then being quoted by Landlord to prospective new tenants
of the Building for Expansion Space I, excluding free rent and other
concessions; provided, however, that in no event shall the Minimum Annual Rent
for Expansion Space I be less than the highest Minimum Annual Rent payable for
the original Leased Premises. Landlord and Tenant will execute an amendment
to the Lease incorporating Expansion Space I.
SECTION 20.07. SATELLITE DISH.
a. Provided Tenant is not in default under the Lease, and provided
further that Tenant complies with all zoning and other municipal and county
rules and regulations, Tenant shall have the right during the Lease Term, at its
own cost and expense, to install, operate and maintain on the roof of the
Building, a microwave satellite dish ("Dish"), upon the terms and conditions set
forth herein. Tenant shall be solely responsible for obtaining any necessary
permits and licenses required to install and operate the Dish. Copies of such
permits and licenses shall be provided to Landlord.
b. The size, location, design and manner of installation of the Dish and
all related wiring and equipment shall be designated and approved by Landlord,
which approval shall not be unreasonably withheld. After obtaining written
approval of Landlord, Tenant shall have reasonable access to the roof for
installation and maintenance of the Dish and shall have the right to install all
reasonable wiring related thereto. However, unless otherwise approved by
Landlord in writing, in no event shall Tenant be permitted to penetrate the roof
in connection with the installation or maintenance of the Dish.
c. Tenant represents and warrants that the installation and maintenance
of the Dish will not cause any damage to the structural portions of the
Building. Tenant shall be responsible for repairing any such damages to the
structure.
d. Tenant shall install, operate and maintain the Dish in accordance with
all federal, state and local laws and regulations. Prior to installation of the
dish, Tenant shall, on behalf of the installer, provide Landlord with a
certificate of insurance reasonably satisfactory to Landlord.
e. Tenant reserves the right to discontinue its use of the Dish at any
time prior to the termination of the Lease or any renewal or extension thereof
for any reason whatsoever, provided that Tenant gives thirty (30) days prior
written notice thereof to Landlord. Tenant shall be responsible for all costs
of removal and for restoring the Building to its original condition after such
removal. Notwithstanding the foregoing, Tenant shall remove the Dish and all
related wiring and equipment upon the expiration or early termination of the
Lease and shall restore the Building to its original condition after such
removal, at Tenant's sole cost and expense. Such removal shall be in accordance
with all of the terms and conditions set forth herein. If Tenant elects not to
remove the Dish from the Building upon expiration or earlier termination of this
Lease, the Dish shall be deemed abandoned by Tenant and shall become the
property of Landlord.
f. Any language in the Lease notwithstanding, Landlord shall not be
liable and Tenant shall indemnify, defend and hold Landlord harmless from and
against any and all liability, damages (including but not limited to personal
injury, death, or property damages), costs, expenses, and attorneys' fees
incurred by Landlord arising from any Dish related cause whatsoever, including
those arising from the installation, use, maintenance and removal thereof,
except for that caused by the gross negligence or willful misconduct of
Landlord.
33
<PAGE>
g. If Tenant fails to comply with the terms stated herein, or if removal
of the Dish is required by any governmental authority having jurisdiction
thereof, Tenant shall remove the Dish and all related wiring and equipment and
restore the Building to its original condition in accordance herewith within
five (5) days of its receipt of written notice requiring the same.
SECTION 20.08. DISCRETIONARY ALLOWANCE. Landlord shall provide Tenant with an
allowance in the amount of Two Hundred Thousand Dollars ($200,000.00) to be used
by Tenant for costs associated with its relocation to the Leased Premises. Such
allowance shall be paid to Tenant within fifteen (15) days of Landlord's receipt
of an executed Estoppel Certificate from Tenant, which Estoppel Certificate
shall be provided to Tenant on the Commencement Date.
In addition, Landlord shall provide Tenant with an allowance in the amount of
One Hundred Eighty-six Thousand Four Hundred Dollars ($186,400.00), which shall,
at Tenant's option, either (i) be paid to Tenant within fifteen (15) days of
Landlord's receipt of an executed Estoppel Certificate from Tenant, which
Estoppel Certificate shall be provided to Tenant on the Commencement Date, or
(ii) be credited toward costs incurred by Tenant as a part of this Lease
transaction.
In the event Tenant exercises its option to expand pursuant to Section 20.05
and/or Section 20.06 hereof, Landlord agrees to pay Tenant an allowance equal to
two percent (2%) of the gross value of such expansion, based on the rental rate
for such expansion space, the rentable square footage of the expansion space,
and the number of months remaining in the original Lease Term as of the
effective date of such expansion, to be paid within fifteen (15) days of
Landlord's receipt of an executed Estoppel Certificate from Tenant relating to
the expansion space, which Estoppel Certificate shall be provided to Tenant on
the commencement date of such expansion space.
SECTION 20.09. CONTINGENCY. Landlord and Tenant hereby acknowledge and agree
that this Lease shall be and is contingent upon Landlord successfully completing
the acquisition of the Land described in EXHIBIT A-1 attached hereto. Landlord
shall notify Tenant when this contingency has been satisfied. In the event the
acquisition of the Land has not been completed on or before February 24, 1997,
either Landlord or Tenant shall have the right to terminate this Lease upon ten
(10) days prior written notice to the other party. Upon such termination, both
parties shall be released from further liability hereunder. Landlord hereby
agrees that the closing on the acquisition of the Land shall occur within four
(4) business days after final approval of the rezoning of the Land sought by
Landlord.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and year first above written.
LANDLORD:
DUKE REALTY LIMITED PARTNERSHIP,
an Indiana limited partnership
By: Duke Realty Investments, Inc.,
as general partner
By:
-------------------------------
Wayne H. Lingafelter
Vice President
Indiana Office Group
ATTEST: TENANT:
- ---------------------------
SOFTWARE ARTISTRY, INC., an
- --------------------------- Indiana corporation
By:
-------------------------------
Printed:
--------------------------
Title:
----------------------------
STATE OF _______________)
) SS:
COUNTY OF ______________)
Before me, a Notary Public in and for said County and State, personally
appeared ____________________________ and ______________________, by me known
and by me known to be the _____________________ and _____________________,
respectively, of Software Artistry, Inc., an Indiana corporation, who
acknowledged the execution of the foregoing "Office Lease" on behalf of said
corporation.
WITNESS my hand and Notarial Seal this _____ day of _______________, 1996.
----------------------------------
Notary Public
----------------------------------
(Printed Signature)
My Commission Expires:
------------
My County of Residence:
-----------
35
<PAGE>
RULES AND REGULATIONS
l. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or used for any purpose
other than ingress and egress.
2. No awnings or other projections shall be attached to the outside walls
of the Building. No curtains, blinds, shades or screens shall be attached to or
hung in, or used in connection with, any window or door of the Leased Premises
other than Landlord standard drapes without Landlord's prior written approval.
All electric ceiling fixtures hung in offices or spaces along the perimeter of
the Building must be fluorescent, of a quality, type, design and bulb color
approved by Landlord. Neither the interior nor the exterior of any windows
shall be coated or otherwise sunscreened without written consent of Landlord.
3. No sign, advertisement, notice or handbill shall be exhibited,
distributed, painted or affixed by any tenant on, about or from any part of the
Leased Premises or the Building without the prior written consent of Landlord.
In the event of the violation of the foregoing by any tenant, Landlord may
remove or stop same without any liability, and may charge the expense incurred
in such removal or stopping to Tenant. Standard interior signs on doors and
directory tablet shall be inscribed, painted or affixed for each Tenant by the
Landlord, at the expense of such Landlord, and shall be of a size, color and
style acceptable to Landlord. The directory tablet will be provided exclusively
for the display of the name and location of Tenants only, and Landlord reserves
the right to exclude any other names therefrom. Nothing may be placed on the
exterior of corridor walls or corridor doors other than Landlord's standard
lettering.
4. The sashes, sash doors, windows, and doors that reflect or admit light
and air into halls, passageways or other public places in the Building shall not
be covered or obstructed by any Tenant, nor shall any bottles, parcels or other
articles be placed on the window sills.
5. The water and wash closets and other plumbing fixtures shall not be
used for any purpose other than those for which they were constructed, and no
sweepings, rubbish, rags, or other substances shall be thrown therein. All
damages resulting from any misuse of the fixtures shall be borne by the Tenant
who, or whose subtenants, assignees or any of their servants, employees, agents,
visitors or licensees shall have caused the same.
6. No Tenant shall mark, paint, drill into, or in any way deface any part
of the Leased Premises or the Building. No boring, cutting or stringing of
wires or laying of linoleum or other similar floor coverings shall be permitted,
except with the prior written consent of the Landlord and as the Landlord may
direct.
7. No bicycles, vehicles, birds or animals of any kind shall be brought
into or kept in or about the Leased Premises, and no cooking shall be done or
permitted by any Tenant on the Leased Premises, except that microwave cooking
and the preparation of coffee, tea, hot chocolate and similar items for Tenants
and their employees shall be permitted provided power shall not exceed that
amount which can be provided by a 30 amp circuit. No Tenant shall cause or
permit any unusual or objectionable odors to be produced or permeate the Leased
Premises.
8. The Leased Premises shall not be used for manufacturing or for the
storage of merchandise except as such storage may be incidental to the permitted
use of the Leased Premises. No Tenant shall occupy or permit any portion of the
Leased Premises to be occupied as an office for the manufacture or sale of
liquor, narcotics, or tobacco in any form, or as a medical office, or as a
barber or manicure shop, or as an employment bureau without the express written
consent of Landlord. The Leased Premises shall not be used for lodging or
sleeping or for any immoral or illegal purpose.
9. No Tenant shall make, or permit to be made any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring buildings
or premises or those having business with them, whether by the use of any
musical instrument, radio, phonograph, unusual noise, or in any other way. No
Tenant shall throw anything out of doors, windows or down the passageways.
36
<PAGE>
10. No Tenant, subtenant or assignee nor any of its servants, employees
agents, visitors or licensees, shall at any time bring or keep upon the Leased
Premises any inflammable, combustible or explosive fluid, chemical or substance.
11. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or the mechanism thereof. Each Tenant must upon the termination of his
tenancy, restore to the Landlord all keys of stores, offices, and toilet rooms,
either furnished to, or otherwise procured by, such Tenant and in the event of
the loss of keys so furnished, such Tenant shall pay to the Landlord the cost of
replacing the same or of changing the lock or locks opened by such lost key if
Landlord shall deem it necessary to make such changes.
12. All removals or the carrying in or out of any safes, freight,
furniture, or bulky matter of any description must take place during the hours
which Landlord shall reasonably determine from time to time. The moving of
safes or other fixtures or bulky matter of any kind must be done upon previous
notice to the superintendent of the Building and under his supervision, and the
persons employed by any Tenant for such work must be acceptable to Landlord.
Landlord reserves the right to inspect all safes, freight or other bulky
articles to be brought into the Building and to exclude from the Building all
safes, freight or other bulky articles which violate any of these Rules and
Regulations or the Lease of which these Rules and Regulations are a part. The
Landlord reserves the right to prescribe the weight and position of all safes,
which must be placed upon supports approved by Landlord to distribute the
weight.
13. No Tenant shall purchase janitorial or maintenance or other like
services, from any person or persons not approved by Landlord.
14. Landlord shall have the right to prohibit any advertising by any
Tenant which, in Landlord's opinion tends to impair the reputation of the
Building or its desirability as an office location, and upon written notice from
Landlord any Tenant shall refrain from or discontinue such advertising.
15. Landlord reserves the right to exclude from the Building between the
hours of 6 p.m. and 8 a.m. and at all hours on Sunday and legal holidays all
persons who do not present a pass to the Building approved by Landlord.
Landlord will furnish passes to persons for whom any Tenant requests the same in
writing. Each Tenant shall be responsible for all persons for whom he requests
passes and shall be liable to Landlord for all acts of such persons. Landlord
shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In case of an
invasion, mob riot, public excitement or other circumstances rendering such
action advisable in Landlord's opinion, Landlord reserves the right without any
abatement of rent to require all persons to vacate the Building and to prevent
access to the Building during the continuance of the same for the safety of the
Tenants and the protection of the Building and the property in the Building.
16. Any persons employed by any Tenant to do janitorial work shall, while
in the Building and outside of the Leased Premises, be subject to and under the
control and direction of the superintendent of the Building (but not as an agent
or servant of said superintendent or of the Landlord), and Tenant shall be
responsible for all acts of such persons.
17. All doors opening onto public corridors shall be kept closed, except
when in use for ingress and egress.
18. The requirements of Tenant will be attended to only upon application
to the Landlord.
19. Canvassing, soliciting and peddling in the Building are prohibited,
and each Tenant shall report and otherwise cooperate to prevent the same.
20. All office equipment of any electrical or mechanical nature shall be
placed by Tenant in the Leased Premises in settings approved by Landlord to
absorb or prevent any vibration, noise and annoyance.
37
<PAGE>
21. No air-conditioning unit or other similar apparatus shall be installed
or used by any Tenant without the written consent of Landlord.
22. There shall not be used in any space, or in the public halls of the
Building, either by any Tenant or others, any hand trucks except those equipped
with rubber tires and rubber side guards.
23. All Tenant move-ins are to be scheduled after 5:00 p.m. Monday
through Friday or anytime Saturday or Sunday. Please contact the Landlord as
soon as a date has been determined in order to ensure there are no other
tenants moving simultaneously.
38
<PAGE>
EXHIBIT 11.1 STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
Software Artistry, Inc.
Exhibit 11 -- Statement Re: Computation of Earnings Per Share
(dollars in thousands, except per share amounts)
<TABLE>
Year Ended
December 31,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Primary:
Average shares outstanding 6,742,244 5,968,685 2,500,633
Add common shares to be issued upon conversion
of Series A Redeemable Preferred Stock -- 210,121 1,144,688
Net effect of dilutive stock options issued within
one year of January 17, 1995 (date of filing of
initial public offering) -- based on the treasury
stock method using the higher of mid-point of
the proposed offer price or actual market price -- 282,349 230,197
Net effect of dilutive stock options not included
above -- based on the modified treasury stock
method using the average market price 735,613 689,334 656,371
---------- ---------- ----------
Total 7,477,857 7,150,489 4,531,889
---------- ---------- ----------
---------- ---------- ----------
Net income $ 1,937 $ 3,748 $ 1,666
Deduct dividends on Series B, C, and D
Redeemable Preferred Stock -- (31) (166)
---------- ---------- ----------
Adjusted net income $ 1,937 $ 3,717 $ 1,500
---------- ---------- ----------
---------- ---------- ----------
Per share amount $ 0.26 $ 0.52 $ 0.33
---------- ---------- ----------
---------- ---------- ----------
Fully diluted:
Average shares outstanding 6,742,244 5,968,685 2,500,633
Add common shares to be issued upon conversion
of Series A, B, and C Redeemable Preferred
Stock -- 453,456 2,470,321
Net effect of dilutive stock options issued
within one year of January 17, 1995 (date of
filing of initial public offering) -- based
on the treasury stock method using the higher
of mid-point of the proposed offer price,
actual market price, or period end market price -- 267,457 230,197
Net effect of dilutive stock options not included
above -- based on the modified treasury stock
method using the period end market price 735,613 704,314 848,549
---------- ---------- ----------
Total 7,477,857 7,393,912 6,049,700
---------- ---------- ----------
---------- ---------- ----------
Net income $ 1,937 $ 3,748 $ 1,666
Deduct dividends on Series D Redeemable
Preferred Stock -- (8) (42)
---------- ---------- ----------
Adjusted net income $ 1,937 $ 3,740 $ 1,623
---------- ---------- ----------
---------- ---------- ----------
Per share amount $ 0.26 $ 0.51 $ 0.27
---------- ---------- ----------
</TABLE>
39
<PAGE>
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
The following are wholly owned subsidiaries of Software Artistry, Inc.:
LEGAL NAME PLACE OF INCORPORATION
---------- ----------------------
Software Artistry Europe, Inc. Indiana
Software Artistry International, Inc., Barbados
Software Artistry UK LTD United Kingdom
Software Artistry SARL France
Software Artistry Asia Pacific Pte Ltd Singapore
Software Artistry Asia Pacific Pty Ltd Australia
40
<PAGE>
EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP.
CONSENT OF ERNST & YOUNG LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-90802) pertaining to Software Artistry's Incentive Stock Option Plan,
in the Registration Statement (Form S-8 No. 33-90808) pertaining to Software
Artistry's Nonstatutory Stock Option Incentive Plan and in the Registration
Statement (Form S-8 No. 33-32830) pertaining to Software Artistry's 1996
Employee Stock Purchase Plan of our report dated January 27, 1997, with respect
to the consolidated financial statements and schedule included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
March 17, 1997
41
<PAGE>
EXHIBIT 24.1 POWER OF ATTORNEY OF JERRY BAKER.
POWER OF ATTORNEY
Know all by these presents, that the undersigned hereby constitutes and
appoints each of W. Scott Webber and Thomas Vanneman, signing singly, his/her
true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned Forms 3, 4 and 5 and in
accordance with Section 16(a) of the Securities Exchange Act of 1934 and
the rules thereunder;
(2) do and perform any and all acts for and on behalf of the undersigned
which may be necessary or desirable to complete the execution of any such
Form 3, 4 or 5 and the timely filing of such form with the United States
Securities and Exchange Commission and any other authority; and
(3) take any other action of any type whatsoever in connection with the
foregoing which, in the opinion of such attorney-in-fact, may be of benefit
to, in the best interest of, or legally required by, the undersigned, it
being understood that the documents executed by such attorney-in-fact on
behalf of the undersigned pursuant to this Power of Attorney shall be in
such form and shall contain such terms and conditions as such attorney-in-
fact may approve in his/her discretion.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform all and every act and thing whatsoever requisite,
necessary and proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, hereby ratifying and confirming all that such
attorney-in-fact shall lawfully do or cause to be done by virtue of this power
of attorney and the rights and powers herein granted. The undersigned
acknowledges that the foregoing attorneys-in-fact, in serving in such capacity
at the request of the undersigned, are not assuming any of the undersigned's
responsibilities to comply with Section 16 of the Securities Exchange Act of
1934.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed this 26 day of FEBRUARY, 1997.
/s/
------------------------------
Signature
Jerry Baker
------------------------------
Print Name
42
<PAGE>
EXHIBIT 24.3 POWER OF ATTORNEY OF LAWRENCE W. OLSON.
POWER OF ATTORNEY
Know all by these presents, that the undersigned hereby constitutes and
appoints each of W. Scott Webber and Thomas Vanneman, signing singly, his/her
true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned Forms 3, 4 and 5 and in
accordance with Section 16(a) of the Securities Exchange Act of 1934 and
the rules thereunder;
(2) do and perform any and all acts for and on behalf of the undersigned
which may be necessary or desirable to complete the execution of any such
Form 3, 4 or 5 and the timely filing of such form with the United States
Securities and Exchange Commission and any other authority; and
(3) take any other action of any type whatsoever in connection with the
foregoing which, in the opinion of such attorney-in-fact, may be of benefit
to, in the best interest of, or legally required by, the undersigned, it
being understood that the documents executed by such attorney-in-fact on
behalf of the undersigned pursuant to this Power of Attorney shall be in
such form and shall contain such terms and conditions as such attorney-in-
fact may approve in his/her discretion.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform all and every act and thing whatsoever requisite,
necessary and proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, hereby ratifying and confirming all that such
attorney-in-fact shall lawfully do or cause to be done by virtue of this power
of attorney and the rights and powers herein granted. The undersigned
acknowledges that the foregoing attorneys-in-fact, in serving in such capacity
at the request of the undersigned, are not assuming any of the undersigned's
responsibilities to comply with Section 16 of the Securities Exchange Act of
1934.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed this 26 day of FEBRUARY, 1997.
/s/
------------------------------
Signature
Lawrence W. Olsen
------------------------------
Print Name
43
<PAGE>
EXHIBIT 24.4 POWER OF ATTORNEY OF JOSEPH A. PISCOPO.
POWER OF ATTORNEY
Know all by these presents, that the undersigned hereby constitutes and
appoints each of W. Scott Webber and Thomas Vanneman, signing singly, his/her
true and lawful attorney-in-fact to:
(1) execute for and on behalf of the undersigned Forms 3, 4 and 5 and in
accordance with Section 16(a) of the Securities Exchange Act of 1934 and
the rules thereunder;
(2) do and perform any and all acts for and on behalf of the undersigned
which may be necessary or desirable to complete the execution of any such
Form 3, 4 or 5 and the timely filing of such form with the United States
Securities and Exchange Commission and any other authority; and
(3) take any other action of any type whatsoever in connection with the
foregoing which, in the opinion of such attorney-in-fact, may be of benefit
to, in the best interest of, or legally required by, the undersigned, it
being understood that the documents executed by such attorney-in-fact on
behalf of the undersigned pursuant to this Power of Attorney shall be in
such form and shall contain such terms and conditions as such attorney-in-
fact may approve in his/her discretion.
The undersigned hereby grants to each such attorney-in-fact full power and
authority to do and perform all and every act and thing whatsoever requisite,
necessary and proper to be done in the exercise of any of the rights and powers
herein granted, as fully to all intents and purposes as the undersigned might or
could do if personally present, hereby ratifying and confirming all that such
attorney-in-fact shall lawfully do or cause to be done by virtue of this power
of attorney and the rights and powers herein granted. The undersigned
acknowledges that the foregoing attorneys-in-fact, in serving in such capacity
at the request of the undersigned, are not assuming any of the undersigned's
responsibilities to comply with Section 16 of the Securities Exchange Act of
1934.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be
executed this 26 day of FEBRUARY, 1997.
/s/
------------------------------
Signature
JOSEPH A. PISCOPO
------------------------------
Print Name
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 8 OF
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,606
<SECURITIES> 2,216
<RECEIVABLES> 14,265
<ALLOWANCES> 480
<INVENTORY> 0
<CURRENT-ASSETS> 33,105
<PP&E> 8,242
<DEPRECIATION> 2,567
<TOTAL-ASSETS> 40,077
<CURRENT-LIABILITIES> 12,888
<BONDS> 0
0
0
<COMMON> 24,091
<OTHER-SE> 2,361
<TOTAL-LIABILITY-AND-EQUITY> 40,077
<SALES> 23,246
<TOTAL-REVENUES> 34,395
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,172
<INCOME-TAX> 1,235
<INCOME-CONTINUING> 1,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,937
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
