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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 000-22059
QUALIX GROUP, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0261239
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1900 S. NORFOLK ST., SUITE 224
SAN MATEO, CA 94403-1151
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(650) 572-0200
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check [X] whether the Company (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
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 Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of August 31, 1997 there were 10,234,740 shares of the Company's Common
Stock outstanding, and the aggregate market value of such shares held by non-
affiliates of the Company (based upon the closing sale price of such shares on
the Nasdaq National Market on August 29, 1997) was approximately $37,647,883.
Shares of Common Stock held by each executive officer and director and by each
entity affiliated with such persons have been excluded from such calculation
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Company's definitive Proxy Statement for the 1997
Annual Meeting of Stockholders to be held on November 12, 1997 are
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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TABLE OF CONTENTS
PART I
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<C> <S> <C>
Item 1. Business...................................................... 3
Item 2. Facilities.................................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Market for the Company's Common Equity and Related Stockholder
Item 5. Matters....................................................... 26
Item 6. Selected Financial Data....................................... 27
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations..................................... 28
Item 8. Consolidated Financial Statements and Supplementary Data...... 33
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure...................................... 48
PART III
Item 10. Directors and Executive Officers of the Company............... 48
Item 11. Executive Compensation........................................ 48
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 48
Item 13. Certain Relationships and Related Transactions................ 48
PART IV
Exhibits, Financial Statement Schedule and Reports on Form 8-
Item 14. K............................................................. 49
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PART I
ITEM 1. BUSINESS.
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this item under the
heading "Risk Factors."
OVERVIEW
Qualix is a leading provider of reliability software for UNIX and Windows NT
applications and servers in distributed computing environments. The Company's
reliability solutions are designed to minimize the impact of system failures
on business-critical applications. The Company offers software products for
high availability, security and storage management. Although a substantial
majority of the Company's historical revenue has come from products licensed
from third parties, the Company has recently increased its focus on internally
developed or acquired products.
The Company began operating primarily as a distributor, value-added reseller
(VAR) and publisher of licensed third party client/server software products.
In 1993, the Company focused on the reliability market by introducing
QualixHA, its first high availability product for the UNIX operating
environment. QualixHA was based on a licensed core software engine. In May
1996, the Company acquired substantially all of the assets and assumed certain
liabilities of Anthill Incorporated ("Anthill"), including technology relating
to a hierarchical storage management product under development. In August
1996, the Company merged with Octopus Technologies, Inc. ("Octopus
Technologies") which had developed high availability and remote data mirroring
products for the Windows NT operating environment. Additionally, the Company
successfully completed an initial public offering in February 1997.
In October 1996, the Company introduced QualixHA+, which is based on an
internally developed core software engine. A key element of the Company's
strategy is to increase substantially the percentage of revenues derived from
internally developed or acquired products that typically have higher gross
margins than licensed products. Pursuant to this strategy, the Company ceased
marketing Qualix HA in February 1997. The Company is developing several
additional systems management products. See "Risk Factors--Recent Transition
to New Business Model," "Uncertainty of Success of Recently Introduced and
Planned Products" and "--Dependence on Licensed Products."
INDUSTRY BACKGROUND
Historically, large organizations depended on host-based computing utilizing
mainframes and mini computers for most business applications and for
centralized data storage. Given the importance of these applications, systems
management software evolved to ensure the availability, performance and
integrity of host-based computing systems. Functions addressed by systems
management software include reducing downtime in the event of system failure,
ensuring that the system is secure and protecting against data loss.
In recent years, distributed computing, also known as client/server
computing, has been increasingly adopted by many businesses for their
enterprise computing needs. Distributed computing solutions, based primarily
on UNIX and increasingly on Windows NT, are being used for a growing number of
business-critical applications. These include financial reporting, inventory
control, sales order processing, transaction processing, customer support,
intranet applications and Internet access. The adoption of distributed
computing for these business-critical applications has created a need for
systems management software that is both an extension of, and a significant
evolution beyond, systems management software for host-based computing. It
must perform
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many of the same functions required in the host-based environment. Moreover,
it must provide significantly enhanced functionality because distributed
computing systems are inherently more complex and dynamic than host-based
computing systems. In particular, distributed computing systems are often
widely distributed, with servers, databases, applications and users spread
over multiple locations, and heterogeneous, with hardware, databases and
software from multiple vendors.
The Company divides systems management software for distributed computing
systems into three categories: operations management, resource and
applications management, and reliability management. Operations management
software automates the day-to-day operating tasks previously performed by
system administrators. Resource and applications management software addresses
management of critical software and user resources. Reliability software
addresses the system's need to ensure that servers, data and applications are
consistently available and secure. These categories are illustrated below:
[LOGO OF SYSTEMS MANAGEMENT SOFTWARE]
Qualix believes that companies are increasingly focused on the need for
reliability software as more and more business-critical applications are
deployed in distributed computing environments. By ensuring that systems are
highly available, reliability software provides users with access to the
computer power, data and applications they need. By ensuring that systems are
secure, reliability software protects against unauthorized use and corruption.
By managing storage requirements, reliability software provides real-time
backup and data fault tolerance.
High Availability. As organizations migrate or consider migrating business-
critical applications to distributed computing environments, they frequently
need to ensure that such applications are fully operational around the clock.
In many cases, system failures result in lost revenues or damaged customer
relations when these applications are not available. Although large-scale,
fault tolerant hardware systems can be used to ensure that systems operate
continuously, they are expensive and are not designed to work with
heterogeneous hardware and software components. As a result, there is a
significant need for high availability software that works with existing
systems to prevent systems and applications from going down due to
malfunction, human error, sabotage or natural disasters.
Security. Protecting against unauthorized use and corruption has become more
difficult as distributed computing systems become larger and more complex,
perform more computing functions and are linked to the Internet and corporate
intranets. As a result, there is an increased need for security products that
address a variety of security needs. These products include firewalls that
protect a company's data and systems from unauthorized use and/or sabotage,
and security management products that ensure users only access what they are
authorized to access.
Storage Management and Data Protection. Organizations have also increasingly
focused on the adequacy of their data protection and storage capabilities in
distributed computing systems, particularly as data-intensive applications and
databases with dramatically increased data storage requirements are deployed
on these systems. As a result, there is an increasing need for storage
management products that cost-effectively protect against data loss and
improve data management.
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Given these trends, the Company believes that the need for reliability
software will grow as more business-critical applications are deployed on
distributed systems and as applications typically found on UNIX and Windows NT
servers, such as e-mail, intranet applications and Internet access, are
increasingly considered business-critical.
QUALIX SOLUTION
Qualix is a leading provider of reliability software for distributed
computing systems. The Company provides products that address each of the
following three segments of the reliability market:
High Availability. In the second quarter of fiscal 1997, the Company
introduced QualixHA+, its high availability clustering product for UNIX.
QualixHA+ is fully based on internally developed proprietary clustering
technology. The Company believes that this product is the leading
commercially available software-based solution that allows multiple servers
working together in a variety of configurations to provide applications-
oriented monitoring and recovery in the event of system failures. The
Company also offers OctopusHA+, which the Company believes is the leading
high availability product for Windows NT.
Security. The Company resells and supports a network firewall security
product licensed from CheckPoint Software Technologies Ltd. ("CheckPoint").
The Company also offers a combined product that integrates its licensed
firewall product with its high availability product to provide firewall
security with nearly continuous uptime. In addition, the Company is
developing a network security scanning and testing product.
Storage Management and Data Protection. The Company offers a remote real-
time mirroring product for data and applications on Windows NT and UNIX.
The Company's reliability solutions generally have a number of key
attributes. They are based on leading-edge technologies that are designed to
be used separately or integrated with other products developed by the Company
or its strategic partners, thereby allowing users to define integrated
solutions. They are designed to work with multiple hardware and software
platforms and related industry standards, to be adaptable as these platforms
change and to be scaleable by providing the same functionality across a broad
range of network sizes. In addition, they are designed to be installed quickly
and easily (typically within hours) without affecting the operation of
business-critical applications. The Company supports its products with a high
level of maintenance, consulting services and training services. Based on the
breadth and functionality of its product line, the size and diversity of its
customer base and its name recognition within the reliability software market,
the Company believes that its reliability products have achieved a leading
market position which is critical for promoting brand awareness and customer
acceptance of its products.
STRATEGY
The Company's objective is to be the leading provider of reliability
solutions for medium to large organizations with distributed computing
systems. To achieve this objective, the Company's strategy includes the
following key elements:
Focus on Reliability Solutions. The Company plans to focus on providing
leading-edge reliability solutions for distributed computing systems. Because
reliability products typically support business-critical applications, the
Company believes users generally want established products that have been
adopted at key reference accounts. Accordingly, the Company believes that
maintaining and enhancing a leading market position is critical for achieving
broad customer acceptance of its products.
Maintain and Enhance Direct Customer Relationships. Through its field sales
force, the Company has established a large customer base that includes a
number of important reference accounts. The Company's strategy is to be
market-oriented and to cultivate long-term customer relationships that foster
ongoing and additive purchases of its reliability products. A key element of
this strategy is to focus on satisfying customer needs. For example, its
products are designed to work alone or with other products, to work with
multiple hardware and software platforms, and to be scaleable, easy to install
and non-invasive. In addition, the Company
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offers comprehensive maintenance, support, consulting, integration and
training services. Moreover, the Company believes that its customers have
great insight into future market needs and product direction which it draws on
in enhancing and expanding its product line.
Focus on Internally Developed Products. Although Qualix has historically
derived a substantial portion of its revenues from licensed products, the
Company's strategy is to increase significantly the percentage of revenues
derived from internally developed or acquired products that typically have
higher gross margins. Accordingly, the Company plans to leverage its expertise
in reliability technology and its knowledge of user requirements by investing
substantial resources to increase its internal development efforts. In
addition to developing and/or enhancing reliability products internally, the
Company will continue to evaluate acquiring or licensing products and
technologies that support and expand its product offerings.
Expand Worldwide Distribution Capability. The Company intends to devote
significant resources to expanding its sales force, which currently consists
of 21 sales offices staffed by 32 field sales representatives, 11 sales
engineers and 8 telesales representatives. The Company has begun to sell its
lower-priced reliability products through its Qualix Direct telesales
organization, which has historically focused on selling third party products.
The Company also intends to expand its international sales and marketing
programs, which generated 17% of total revenue for fiscal 1997 and 1996. In
addition, the Company plans to expand sales of its products through indirect
distribution channels, including distributors, system integrators and VARs.
Maintain and Enhance Strategic Relationships. A key objective of the Company
is to expand joint development and marketing relationships with systems
management software vendors to provide complementary solutions and to
establish relationships with hardware and software OEMs to incorporate
reliability solutions in their products. The Company believes that it is
essential to form strategic relationships with other network computing vendors
to effectively market and sell reliability products. The Company works with
hardware providers such as Hewlett-Packard, IBM and Sun Microsystems to ensure
that its reliability products are fully integrated into their hardware
environments, and major software vendors such as Oracle, Sybase, Informix,
CA-Ingres, Microsoft and Tivoli to provide complementary solutions.
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RELIABILITY SOFTWARE PRODUCTS
The Company offers a broad range of products focused on the reliability
market for network computing environments. The Company's services, including
support, consulting and training, are priced separately. Prices vary according
to number and type of servers as well as other factors and exclude support and
consulting services. The Company's products can be categorized as follows:
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PRODUCT DESCRIPTION PLATFORM DATE OF FIRST RELEASE
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HIGH AVAILABILITY
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QualixHA+ High availability software for Sun Solaris October 1996
UNIX environments. Clustering HP-UX 10.0
technology provides scaleability IBM AIX
for up to sixteen servers.
OctopusHA+ Automatic switch-over for Windows Windows NT October 1995
NT servers.
SECURITY
FireWall-1* Network security products that Sun Solaris May 1994
enable connectivity to the HP-UX
Internet with security and Windows NT
manageability.
QualixHA+ for High availability firewall product Sun Solaris October 1996
Firewalls* that enables security of a HP-UX
networked environment with
continuous uptime.
STORAGE MANAGEMENT AND DATA PROTECTION
Octopus DataStar Real-time, local or remote Windows NT April 1994
mirroring for NT data and
applications.
Qualix DataStar Real-time, remote mirroring for Sun Solaris April 1997
UNIX data and applications.
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* Includes a licensed product.
High Availability
QualixHA+. QualixHA+ is a failover and recovery management product for UNIX
designed to minimize the impact of failures caused by system malfunction,
human error, sabotage or natural disasters. QualixHA+ is designed to monitor
and support a variety of UNIX-based operating systems, hardware platforms,
disk configurations, networks, applications and databases. QualixHA+ includes
the Company's proprietary clustering technology.
The clustering technology that QualixHA+ uses is based on a peer-to-peer
architecture that allows multiple servers to work together to provide
applications-oriented monitoring and recovery in the event of a system
failure. If a server goes down, or for any reason stops providing service to
an application, QualixHA+ uses an intelligent decision-making process to
promptly "elect" another server to carry on service. Using this transparent
election process, QualixHA+ can determine which server has the highest
priority and should therefore begin providing the service in place of the
primary server. In addition, QualixHA+ can provide load balancing which
ensures that no server is overused in the cluster.
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The following diagram illustrates how QualixHA+ operates in a three-server,
six-application environment.
[LOGO OF QUALIXHA+]
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If Server C should go down, Server A and Server B will assume
responsibility for Server C's applications, thereby keeping the
applications available to all users.
QualixHA+ can be configured to provide the degree of availability that best
suits a user's enterprise needs. The software is easily installable and does
not modify the core operating system already installed. System administrators
simply map out possible failure scenarios and establish the desired failover
paths for individual services prior to configuration. This process creates a
form of pre-defined balancing that ensures only a single active server
provides specific services to the network at any one time.
QualixHA+ consists of three components:
QualixHA+ Cluster Management Software provides services for maintaining
communications between servers as well as monitoring system resources and
application services. This clustering technology is scaleable, providing the
enterprise the ability to start small and add on components or servers as
needs increase, without changing the core product.
QualixHA+ Environment is designed to facilitate easy installation, flexible
integration as well as monitoring for critical system-level resources to
assure "end-to-end" availability of all business-critical components.
QualixHA+ modules allow QualixHA+ to provide monitoring and recovery
management for individual applications, such as databases, systems management
applications and business function applications, in addition to protecting the
entire server. QualixHA+ modules allow the Company to tailor its solutions for
specific applications and engage in co-marketing programs with strategic
partners. The Company currently ships modules for databases from Oracle,
Sybase, Informix and CA-Ingres. The Company also ships modules that support
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Tivoli's SNMP and Netscape's server software and has developed a module that
supports Tivoli's TME software. The Company is currently working with other
companies and products to create additional modules that will allow QualixHA+
to be tailored to vertical market needs.
OctopusHA+. The OctopusHA+ software solution is a real-time data protection
and a high availability switchover package. This product, which was awarded
Byte Magazine's Best Utility award at Comdex 1996, provides high availability
for Windows NT servers. If a failure occurs at the source system, the target
system can automatically assume the role of the failed system, so users can
seamlessly continue to access their data and applications. Similar to
QualixHA+ for UNIX, the goal of OctopusHA+ is to provide continuous up-time
for Windows NT servers and data. OctopusHA+ supports multiple configurations,
including many-to-one.
Security
FireWall-1. FireWall-1, which is licensed from CheckPoint, is the leading
Internet firewall product. FireWall-1 is designed to enable companies to
connect to the Internet while keeping their data and applications secure from
unauthorized users.
QualixHA+ for Firewalls. Once a company installs a firewall, it becomes a
critical part of the security for the company's network and data. Most
firewalls are set up so that if the firewall (or the server it is on) goes
down, the connection to the Internet is terminated, and employees and
customers can no longer access the internal network. If Internet access is
critical to a business' strategy, it cannot afford any downtime in its
firewall. To address the needs of these companies, Qualix has created
QualixHA+ for Firewalls. This product has three components: FireWall-1,
QualixHA+, and the QualixHA+ Module for FireWall-1 to monitor and failover the
FireWall-1 software. With QualixHA+ for Firewalls, businesses have more
reliable connections to the Internet.
[LOGO OF QUALIXHA+ FOR FIREWALLS]
All communications into the company's internal network must go through the
Firewall. If Firewall A stops functioning, Qualix HA+ for Firewalls will
automatically re-route all traffic to Firewall-B, therefore keeping all
communications up and running.
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Storage Management and Data Protection Products
Qualix provides storage management products based on data fault tolerance
and data access technologies.
Octopus DataStar. Octopus DataStar is a real-time data mirroring product for
Windows NT systems. Octopus DataStar automatically mirrors changes to user-
specified files, rather than entire disks, from a source disk to a target
disk. These changes can be mirrored via a local area network, or
geographically dispersed over a wide area network. In the event of data loss
or hardware failure at the source location, up-to-date copies of mirrored
files are available on a real-time basis on the target systems. Octopus
DataStar can be configured to provide multiple backup sites anywhere in the
world for maximum protection of crucial business data. In addition to
providing immediate back-up data, Octopus DataStar also provides for the
distribution of data for localized processing, the consolidation of data for
decision-based processing, and the physical relocation of data for disaster
recovery contingencies. The Company believes that its Octopus remote mirroring
product is the leading solution for data fault tolerance in the Windows NT
market.
[LOGO OF OCTOPUS DATASTAR]
Each of the remote sales offices in this diagram is mirroring its data
to the headquarters sales server by using Octopus DataStar. In this way,
the headquarters server has an up-to-the minute copy of all data.
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Qualix DataStar. Qualix DataStar is a high-performance continuous data
protection solution that speeds disaster recovery, data backup and data
migration for UNIX systems. The product mirrors a company's vital data by
capturing changes to disks on a local UNIX system in realtime and continuously
copying the changes to a target system across any TCP/IP network. In the event
of a disaster, such as a fire or complete loss of power, a current mirror of
the data is available at the second system. This significantly reduces data
loss, shortens data recovery time from days or hours to minutes, and speeds
the resumption of business operations in the event of a system failure or
disaster. Qualix DataStar's continuous mirroring can also increase up time for
production systems by enabling data backups from the secondary system and
enabling flash cutovers when moving or upgrading systems.
QUALIX DIRECT
Through its Qualix Direct telesales organization, the Company provides a
diverse product line of add-on hardware, software and accessories for
distributed computing systems. As part of the Company's strategy of expanding
distribution channels for its reliability products, during the fourth quarter
of fiscal 1997, Qualix Direct successfully transitioned into selling the
Company's Octopus line of products, the Company's reliability products for
Windows NT applications. Qualix Direct also resells products from
approximately 50 vendors including firewalls, Ethernet adapters, printers,
workstation add-ons and software applications. These products are typically
resold in low unit volumes and generally range in price from $1,000 to
$10,000. Qualix Direct has no long-term supply contracts with its vendors and
many resold products are acquired pursuant to purchase orders or contracts
that can be terminated with little or no notice. In addition, Qualix Direct
has little or no control over the marketing, support and enhancement of its
resold products by its vendors and faces significant competition from
distributors and other distribution channels. See "Risk Factors--Dependence on
Qualix Direct" and "--Sales and Marketing --Qualix Direct."
CUSTOMER SUPPORT
The Company believes that a high level of customer service is required to
successfully sell reliability products for distributed computing systems.
Accordingly, an essential part of the Company's business is providing
comprehensive maintenance, technical support, consulting and training services
for its customers. Most of the Company's customers have support and
maintenance agreements with the Company that are typically for 12 months.
The Qualix Technical Services Group ("QTSG") consists of 20 people which the
Company supplements with outside consultants for some support requirements.
These consultants are trained and provide service on-site in the same capacity
as a Qualix employee. QTSG provides the following services:
Maintenance and Technical Support. The Company offers two levels of
support packages: (i) support during normal business hours and (ii) 24-
hour, 7 day-a-week support. Both levels include e-mail and fax customer
support and new software releases. Prices for maintenance and technical
support, which is mandatory for the first year for most of the Company's
products, typically range from 15% to 30% of the price of the product.
Consulting. QTSG includes the Qualix Professional Services Group which is
responsible for on-site consulting as well as development work done for
specific customers. Consulting services include implementation planning,
project management, project customization and upgrade management. For
example, this group develops QualixHA+ modules for the Company's products.
Consulting services are generally performed on a fee-basis by day or by
project. These consulting services are used to leverage the Company's
products so they can be better implemented at a customer site. A majority
of the Company's new high availability customers purchase the Company's
consulting services.
Training. The Company offers comprehensive training classes to its
customers, distributors, systems integrators and VARs both on-site and at
Qualix headquarters. The training program includes instruction in the
installation, customization and optimization of the Company's products on
their specific environment.
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SALES AND MARKETING
The Company's target customers include both public and private sector
organizations that have deployed (or are deploying) distributed computing
systems. Target customers are medium to large sized companies who have their
business-critical applications running on UNIX or Windows NT servers. The
Company's customers are in a variety of industries, including
telecommunications, finance, manufacturing and energy. The Company markets its
software and services primarily through its field sales organization
complemented by other sales channels, including systems integrators, OEMs,
VARs and international distributors.
Field Sales. As of June 30, 1997, Qualix's field sales force consisted of 48
personnel, including 32 sales representatives and 11 sales engineers that
provide technical sales assistance. The Company currently has 21 sales
offices, most of which are staffed with both sales and technical pre-sales
personnel. The Company uses a consultative sales approach for selling to major
accounts. This model entails the collaboration of technical and sales
personnel to formulate proposals that address the specific requirements of the
customer. The Company focuses its initial sales efforts on senior MIS
department personnel, and works closely with system and network administrators
for evaluation and deployment.
Qualix Direct. Qualix Direct is the Company's telesales organization located
in San Mateo, California and is aligned with the field sales force, providing
support for field sales representatives and their resellers. Qualix Direct
also resells add-on software, hardware and accessories for distributed
computing systems. Qualix Direct uses direct mailings, catalogs and Web
promotions to market its products. As of June 30, 1997, Qualix Direct had
eleven sales and marketing personnel. Qualix Direct has historically sold
third party products that require a less consultative sales approach and are
sold in smaller transactions that typically generate lower gross margins. As
part of the Company's strategy of broadening distribution channels for its
reliability markets, Qualix Direct has successfully transitioned into selling
the Company's reliability products for Windows NT and firewall products.
Expanding the Qualix Direct product line to include reliability and security
products has resulted in more favorable gross margins.
Indirect Distribution Channels. As of June 30, 1997, Qualix had over 100
VARs, resellers and systems integrators of its reliability products. These
resellers are generally responsible for managing the sales and installation
process in each customer situation. In selected opportunities, the Company's
support personnel often work with the reseller to provide technical support.
This approach enables the Company to cost effectively achieve broader market
coverage, while maintaining close contact with customers in order to gauge
product direction and to monitor customer satisfaction.
International. Qualix has been expanding its international distributors, and
at June 30, 1997 had approximately 60 distributors in Europe, Asia, Africa and
South America. International revenue from sales outside the United States
accounted for 17%, 17% and 9% of total revenue in fiscal 1997, 1996 and 1995,
respectively. The Company's sales and marketing strategy includes expanding
its international sales and marketing infrastructure to generate an increasing
percentage of revenue through international sales. Accordingly, the Company is
recruiting both sales and technical personnel for Europe and Asia.
Strategic Alliances and OEMs. A key objective of the Company is to expand
its joint development and marketing relationships with systems management
software vendors to provide complementary solutions and to establish
relationships with hardware and software OEMs to incorporate reliability
solutions in their products. The Company works with hardware providers such as
Hewlett-Packard, IBM and Sun Microsystems and software vendors such as Oracle,
Sybase, Informix, CA-Ingres, Microsoft and Tivoli. The Company has an
agreement with Intergraph Computer Systems as an OEM partner. In this
agreement, Intergraph will bundle Octopus DataStar on its high availability NT
servers. In addition, the Company is currently in active discussions with
several systems management software vendors and software OEMs to form
additional strategic relationships in which the Company's reliability products
would be marketed and sold as an added feature to their client/server
packages. There can be no assurance that the Company will successfully
consummate any of these arrangements.
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Marketing Programs. In support of its domestic sales force and international
distributors, the Company conducts comprehensive marketing programs intended
to position, promote and market its family of reliability products. Marketing
personnel engage in a variety of activities in support of the sales force and
resellers, including public relations and product seminars, trade shows,
direct mailings, preparing marketing materials and coordinating the Company's
participation in industry programs and forums. In addition to setting up and
managing distribution channels, recently introduced programs have positioned
the marketing staff to provide better support for key vertical markets, such
as financial and telecommunications.
PRODUCT DEVELOPMENT
The Company has historically derived a substantial majority of its revenues
from the sale of products that are licensed or incorporate technology that is
licensed from third parties. In fiscal 1997, 1996 and 1995, the Company's
product development expenses were $2,272,000, $620,000 and $257,000,
respectively. The Company has increased substantially its commitment to
product development and anticipates that it will incur substantially higher
product development expenses in absolute dollars and as a percentage of total
revenue in the future.
The Company believes that small, focused product development teams are the
most efficient method of developing new products, enhancing existing products
and supporting them. These teams are able to provide more focus on customer
requirements and work together with outside industry experts when necessary to
release quality products and enhancements. For example, the QualixHA+
development team, which started in January 1996, was lead by two Qualix
employees, but used an additional nine consultants as specific experts in
development, quality assurance and documentation to create the product.
QualixHA+ was released in October 1996. As of June 30, 1997, the Company had
11 employees and three consultants working on product development and
engineering.
The Company currently has three internal development teams:
QualixHA+. This team is based in San Mateo, California and focuses on
developing and enhancing UNIX-based high availability products. The team
relies primarily on Qualix employees for core development supplemented by
consultants for product development, specifications and documentation. It
is currently focused on enhancing the Company's proprietary QualixHA+
clustering technology and developing additional modules to support
application-specific failover and recovery management.
Data Availability and Protection. Based in Boulder, Colorado, this team
has significant expertise in data migration and storage management. The
team is currently focused on enhancing Qualix DataStar, which is designed
to provide remote real-time mirroring for UNIX servers, and developing
Anthill storage management products, which are designed to provide storage
management for UNIX servers. These storage management products are designed
to allow users to transfer data from a primary server and disk drive/RAID
array to a backup disk, tape or optical drive and transparently access the
data from the remote disk via normal commands. This allows more expensive
devices (e.g., RAID arrays) to be used for data that is constantly
accessed, and less expensive back-up storage devices to be used to store
data that is accessed less frequently.
Octopus Technologies. This team is based in Langhorne, Pennsylvania and
is responsible for the Octopus family of NT reliability products. They have
significant expertise in remote data mirroring and failover in the Windows
NT operating environment. They are currently focused on adding features to
OctopusHA+, including features utilizing technology developed for
QualixHA+. These features include application failover and support for
Microsoft Cluster Server.
In addition to its own development teams, the Company works with outside
technology providers to create products for the Company to market and sell.
For example, the Company has contracted with consultants who are developing a
security scanning and testing product.
The Company believes that its future success will depend in large part on
its ability to enhance its current product line, develop new products,
maintain technological leadership and satisfy an evolving range of customer
requirements for reliability applications. The Company is continuing to
increase the size and depth of its own internal development organizations as
well as look for strategic acquisitions of technology.
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COMPETITION
The market for reliability software for distributed computing environments
is intensely competitive, fragmented and characterized by rapid technological
developments, evolving standards and rapid changes in customer requirements.
To maintain and improve its position in this market, the Company must continue
to enhance current products and develop new products in a timely fashion.
Although the Company believes that the reliability segment of the market is in
the early stages of development, the Company competes with four types of
vendors:
Independent Vendors that Provide Reliability Products. These companies
offer standalone products that provide specific reliability solutions.
These companies include third parties that license their technology or
products to Qualix. For example, CheckPoint sells FireWall-1, a security
product that the Company resells and incorporates into QualixHA+ for
Firewalls, its high availability firewall product.
Host-Based Systems Management Software Companies Migrating Their Products
to the Distributed Computing Market. These vendors, such as BMC and
Computer Associates, have built large businesses based upon selling systems
management tools primarily into the mainframe market. These vendors may
develop or acquire reliability products that compete directly with the
Company's products.
Distributed Computing Systems Management Software Companies That
Incorporate Reliability Products as a Part of Integrated System Management
Solutions. A number of companies have introduced products addressing
various segments of the distributed computing systems management market.
For example, Legato Systems offers storage management products and may
develop or acquire products that enable it to move into the reliability
area.
Hardware and Operating Systems Vendors That Incorporate Reliability
Solutions Into Their Products. Companies such as Sun Microsystems and
Microsoft continue to add features to their operating systems and thereby
reduce the need for their customers to purchase products providing these
features from independent vendors. For example, Sun Microsystems recently
introduced a version of its database clustering product that includes high
availability features and Microsoft recently introduced Microsoft Cluster
Server ("MSCS")as a built-in feature of Microsoft Windows NT Server,
Enterprise Edition. A key element of the Company's strategy is to form OEM
relationships with hardware and software vendors to provide them with
reliability solutions for heterogeneous network computing environments.
The Company believes that the principal competitive factors affecting its
market include brand name recognition, product performance and functionality
(such as heterogeneity, scaleability, performance and ease of installation and
use), quality, price, customer service and support and the effectiveness of
sales and marketing efforts. Although the Company believes that its products
currently compete favorably with respect to certain of these factors, there
can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources
than the Company. The Company's future success will depend significantly on
its ability to continue to enhance its existing products and introduce new
products more rapidly and less expensively than its existing and potential
competitors and to persuade hardware and software vendors to license the
Company's products rather than to develop their own reliability products.
Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. The Company's current and future competitors could introduce
products with more features, higher scaleability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring
or forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result
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in price reductions, reduced gross margins and loss of market share, any of
which could materially and adversely affect the Company's business, operating
results and financial condition. Any material reduction in the price of the
Company's products would negatively affect gross margins and would require the
Company to increase software unit sales in order to maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is at an early state of
development. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure
to do so would have a material adverse effect upon the Company's business,
financial condition and results of operations.
PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology. The
Company has no issued patents and relies on a combination of copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect its proprietary rights relating to its
licensed and internally developed products. The Company's rights to market and
sell licensed products are generally governed by license agreements of
specified duration. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Risk Factors," "--Dependence on Qualix
Direct" and "--Dependence on Licensed Products." Although the Company has
applied for a United States patent covering certain aspects of the technology
included in its Octopus Technologies data mirroring product, the claims in the
patent application have been rejected by the U.S. Patent and Trademark Office,
and there can be no assurance that a patent will be issued, that any issued
patent will provide meaningful protection for the Company's technology, that
any issued patent will provide the Company with any competitive advantages or
will not be challenged by third parties. Moreover, there can be no assurance
that the Company will develop additional proprietary products or technologies
that are patentable or that the patents of others will not have an adverse
effect on the Company's ability to do business. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and
license agreements with respect to its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology
independently. Policing unauthorized use of the Company's products is
difficult and, although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In selling its products, the Company relies on "shrink
wrap" licenses for sales of certain products that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain jurisdictions.
In addition, effective protection of intellectual property rights is
unavailable or limited in certain foreign countries. There can be no assurance
that the Company's protection of its proprietary rights, including any patent
that may be issued, will be adequate or that the Company's competitors will
not independently develop similar technology, duplicate the Company's products
or design around any patents issued to the Company or other intellectual
property rights.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. In October 1996, the
Company received correspondence from a French company asserting that it has
registered "Octopus" as a trademark in France and that the Company's use of
the mark "Octopus" infringes its trademark rights. The Company has not been
successful in obtaining a license to use the Octopus mark in France and has
determined that it must adopt a new trademark to replace the Octopus mark in
France. Qualix does not believe that this action will have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition, the Company expects that software product developers
will increasingly be subject to such claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or
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without merit, could result in costly litigation that could absorb significant
management time, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Such claims might
require the Company to enter into royalty or license agreements. Such royalty
or license agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "--
Legal Proceedings."
LEGAL PROCEEDINGS
On October 25, 1996, the Company sued Veritas Software Corporation
("Veritas") in the Santa Clara County California Superior Court alleging
breach of contract, unfair competition and intentional interference with
prospective economic advantage in connection with a contract dated as of April
10, 1995 (the "Master Agreement") between the Company and Veritas. The Master
Agreement was entered into following Veritas' acquisition of a company whose
high availability product the Company previously had the right to sell. The
Master Agreement granted the Company the right to market and support
FirstWatch, a product which formed the core software engine of QualixHA, a
high availability product for UNIX environments previously sold by the
Company, but which is not part of QualixHA+. The Master Agreement, and
therefore the Company's right to market QualixHA, terminated on February 28,
1997. The Company sought unspecified compensatory and punitive damages.
Veritas filed a cross-complaint on October 29, 1996 alleging that the Company
engaged in unfair competition, false advertising, breach of contract, fraud
and negligent misrepresentation as a result of various alleged activities.
Veritas sought unspecified compensatory and punitive damages and injunctive
relief including requiring Qualix to divulge certain customer information. On
October 29, 1996, the court granted the Company a temporary restraining order
enjoining Veritas from stating that the Master Agreement had been terminated.
The court also granted Veritas an order enjoining the Company from stating
that QualixHA+ is an upgrade to FirstWatch or that QualixHA+ is the FirstWatch
product. On November 14, 1996, the court issued a preliminary injunction
against Veritas on substantially similar terms as the temporary restraining
order and indicated that it would, upon submission of an order by Veritas,
issue a preliminary injunction enjoining the Company from stating that
QualixHA+ is an upgrade to FirstWatch. Veritas never submitted such an order.
In November 1996, the Company and Veritas began arbitration of the dispute
pursuant to the Master Agreement.
On August 11, 1997 the Company and Veritas entered into a Mutual Settlement
Agreement and Settlement of Claims in connection with all legal actions and
arbitration proceedings between the companies. All licensing agreements
between the companies, including the Master Agreement, have been terminated
and all claims between the companies relating to the dispute have been
dismissed with prejudice. See "Risk Factors--Dependence on Proprietary Rights;
Risk of Infringement."
EMPLOYEES
As of June 30, 1997, the Company had 123 employees. Of the total, 72 were
engaged in sales and marketing (including the Qualix Direct telesales
organization), 11 in product development and engineering, 21 in customer
service and support and 19 in administration and finance. The Company's future
success depends in significant part upon the continued service of its key
technical and senior management personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that
the Company can retain its key managerial and technical employees or that it
can attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good. See "Risk
Factors--Dependence On Key Personnel;--Management of Growth" and "--Need to
Expand Product Development and Engineering Capability."
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RISK FACTORS
Recent Transition to New Business Model. The Company originally began
operating primarily as a distributor, value-added reseller ("VAR") and
publisher of licensed third party client/server software products. In 1993,
the Company focused on the reliability market by introducing QualixHA, its
first high availability product for the UNIX operating environment. QualixHA
is based on a core software engine licensed from Veritas. In August 1996, the
Company merged with Octopus Technologies, which had developed high
availability and remote data mirroring products for the Windows NT operating
environment. In October 1996, the Company introduced QualixHA+, which is based
on an internally developed core software engine. The Company's strategy is to
increase substantially the percentage of revenues derived from internally
developed or acquired products that typically have higher gross margins than
licensed products. Pursuant to this strategy, the Company ceased marketing
Qualix HA in February 1997. There can be no assurance that the Company will
successfully implement this strategy. The Company's future profitability, if
any, will be heavily dependent on the successful development and/or
acquisition, introduction and enhancement of its own reliability products. See
"--Uncertainty of Success of Recently Introduced and Planned Products" and "--
Dependence on Qualix Direct."
Risk of Significant Fluctuations in Quarterly Operating Results. The Company
has experienced, and expects to continue to experience, significant
fluctuations in operating results, on an annual and a quarterly basis, as a
result of a number of factors, many of which are outside the Company's
control, including the size and timing of orders; lengthy sales cycles;
customer budget changes; introduction or enhancement of products by the
Company or its competitors; changes in pricing policy of the Company or its
competitors; the mix of products sold, including particularly the mix of
owned, licensed and resold products; increased competition; technological
changes in computer systems and environments; the ability of the Company to
timely develop or acquire, introduce and market new products; quality control
of products sold; market readiness to deploy reliability products for
distributed computing environments; market acceptance of new products and
product enhancements; seasonality of revenue; customer order deferrals in
anticipation of new products and product enhancements; the Company's success
in expanding its sales and marketing programs; personnel changes; foreign
currency exchange rates; mix of sales channels; acquisition costs or other
nonrecurring charges in connection with the acquisition of companies, products
or technologies; and general economic conditions. The Company's operating
results have historically fluctuated significantly as a result of nonrecurring
items, including a nonrecurring $763,000 gain on sale of stock in the quarter
ended September 30, 1995, a $740,000 writeoff of purchased in-process
technology in the quarter ended June 30, 1996, $595,000 of merger expenses
relating to the Octopus Technologies merger in the quarter ended September 30,
1996 and a nonrecurring $528,000 gain on sale of investments in the quarter
ended June 30, 1997.
The Company believes that operating results over at least the next few
quarters will be particularly dependent upon achieving significant market
acceptance of its OctopusHA+ and recently introduced QualixHA+ products, the
amount of any price reduction for such products, the timing of large orders
for such products, the level of revenues from lower margin products resold
through the Qualix Direct telesales organization and the level of research and
development expenses in connection with the Company's ongoing and planned
product development program. The Company's gross margin will be affected by a
number of factors, including the mix of owned, licensed and resold products,
the percentage of total revenue from service contracts, product pricing, the
percentage of total revenue from direct sales and indirect distribution
channels and the percentage of sales by the Qualix Direct telesales
organization. Internally developed or acquired products generally have higher
gross margins than licensed products because lower or no royalties must be
paid. Service revenues generally have lower margins than revenues from sales
of owned products because of the costs incurred to generate service revenues.
Revenues from products resold by the Qualix Direct telesales organization
generally have lower gross margins than revenues from owned and licensed
products sold by the Company's other direct and indirect distribution
channels.
Large sales of certain reliability products, including QualixHA+, often have
long cycles and are subject to a number of significant risks over which the
Company has little or no control. The timing of large sales can cause
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significant fluctuations in the Company's operating results, and delivery
schedules may be canceled or delayed. Because sales orders are typically
shipped shortly after receipt, order backlog as of any particular date is not
necessarily indicative of the Company's future revenues. Accordingly, total
revenues in any quarter are substantially dependent on orders booked and
shipped during that quarter. Historically, the Company has often recognized a
significant portion of its revenues in the last weeks, or even days, of a
quarter. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of, a particular quarter. In
addition, the Company's expense levels are based in significant part on
expectations as to future revenues and as a result are relatively fixed in the
short run. If revenues are below expectations in any given quarter, net income
is likely to be disproportionately affected, particularly because the Company
relies heavily on a relatively high cost direct sales channel.
Based upon all of the foregoing, the Company believes that the Company's
annual and quarterly revenues, expenses and operating results are likely to
vary significantly in the future, that period-to-period comparisons of its
results of operations are not necessarily meaningful and that, in any event,
such comparisons should not be relied upon as indications of future
performance. In addition, it is likely that in future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would be
materially and adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Intense Competition. The market for reliability software for distributed
computing environments is intensely competitive, fragmented and characterized
by rapid technological developments, evolving standards and rapid changes in
customer requirements. To maintain and improve its position in this market,
the Company must continue to enhance current products and develop new products
in a timely fashion. Although the Company believes that the reliability
segment of the market is in the early stages of development, the Company
competes, or may compete, with four types of vendors: (i) independent vendors
that provide reliability products; (ii) host-based systems management software
companies migrating their products to the distributed computing market; (iii)
distributed computing systems management software companies that incorporate
reliability products as a part of integrated systems management solutions; and
(iv) hardware and operating system vendors that incorporate reliability
solutions into their products.
Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. The Company's current and future competitors could introduce
products with more features, higher scaleability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring
or forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. Any material reduction in the price of the Company's
products would negatively affect gross margins and would require the Company
to increase software unit sales in order to maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is in an early stage of
development. There can be no assurance that the Company will be able to
compete successfully against current and future
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competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources than the Company, and the
failure to do so would have a material adverse effect upon the Company's
business, financial condition and results of operations.
Dependence on Qualix Direct. Through its Qualix Direct telesales
organization, the Company has historically derived and expects to continue to
derive a significant portion of its total revenue from reselling ancillary
software and hardware products for distributed computing systems. Qualix
Direct accounted for 33% and 32% of total revenue in fiscal 1997 and fiscal
1996, respectively. The Company's reliance on Qualix Direct entails a number
of risks. Qualix Direct's product line is updated frequently in response to
changes in vendor offerings. Qualix Direct has no long-term supply contracts
with its vendors and many resold products are acquired pursuant to purchase
orders or contracts that can be terminated with little or no notice. In
addition, Qualix Direct generally has little or no control over the marketing,
support and enhancement of its resold products by its vendors and faces
significant competition from distributors and other distribution channels.
Moreover, gross margins on products resold by Qualix Direct are generally
lower than gross margins on owned and licensed products sold by the Company's
field sales organization. In addition, the Company's net revenues may be
adversely impacted if sales by Qualix Direct decline or do not grow at
anticipated rates, even though the Company's gross margins may be less
significantly impacted. Although the Company has recently begun to sell its
lower priced reliability products through Qualix Direct, there can be no
assurance that it will be successful or that such activities will not create
conflicts with the Company's other direct or indirect distribution channels.
Any adverse development at Qualix Direct could have a material adverse impact
on the Company's business, financial condition and results of operations.
Uncertainty of Success of Recently Introduced and Planned Products. A key
element of the Company's strategy is to increase substantially the percentage
of revenues derived from higher margin owned reliability software products. In
August 1996, the Company acquired and introduced high availability and remote
data mirroring products for Windows NT based systems upon merging with Octopus
Technologies and in October 1996 introduced QualixHA+, its high availability
product for UNIX based systems, which is based on an internally developed core
software engine. Version 2.0 of this product, which includes a GUI and
additional clustering features, is expected to ship during the second quarter
of fiscal 1998. In April, 1997 the Company introduced DataStar, a network-
based data duplication and remote mirroring software for UNIX environments. In
addition, the Company is developing additional reliability products. There are
a number of risks associated with the successful development or acquisition
and introduction of the Company's existing and planned products. The Company
needs to significantly expand and enhance its product development and
engineering resources in order to successfully implement its product
development program. See "--Need to Expand Product Development and Engineering
Capability." The Company has in the past experienced delays in the development
of new products and enhancements to existing products. There can be no
assurance that the Company can successfully develop any additional products or
enhance existing products. Even if developed or acquired, such products or
enhancements may contain undetected difficulties or defects that are not
discovered before they are released. See "--Risk of Software Defects." In
addition, there can be no assurance that the Company can successfully market
and sell any such products or enhancements or that they will achieve
significant market acceptance. Failure of the Company to successfully develop,
market and sell existing and planned products or enhancements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Licensed Products. The Company has historically derived a
substantial majority, and expects to continue to derive a portion, of its
total revenue from the sale of products that are licensed or incorporate a
significant amount of technology that is licensed from third parties
(collectively, "licensed products"). There are a number of disadvantages and
risks associated with the sale of licensed products. The Company is frequently
unable to obtain exclusive rights to sell a licensed product, in which case
the Company competes against the licensor and potentially other third party
licensees. The licenses are typically for a specified period. For example, the
Company's right to sell FireWall-1 (and QualixHA+ for Firewalls, which
incorporates FireWall-1) is subject to annual renewal. The Company must
typically pay a significant per copy
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royalty that reduces gross margins realized by the Company from the sale of
licensed products and may put the Company at a competitive disadvantage
against the licensor or other third parties licensees paying lower royalty
rates. In addition, the Company may have little or no control over the timing,
functionality and quality of enhancements and upgrades to the product and may
be restricted in the method and manner, including distribution channels, by
which the Company may sell the product. The Company may from time to time need
to enforce its rights under licenses. See "--Legal Proceedings."
Notwithstanding these factors, the Company anticipates it will derive a
significant percentage of its revenues from licensed products for the
foreseeable future. Any loss in the right to sell licensed products or any
adverse change in the terms upon which it sells licensed products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Product Concentration. The Company currently derives the majority of its
revenues from the sale of reliability products and related services for
distributing computing environments. Broad market acceptance of the Company's
reliability products is therefore critical to the Company's future success.
Demand for the Company's reliability products will depend in large part on
increasing market acceptance of distributed computing systems, particularly
for business-critical applications, and the need for reliability systems
management software products and services for these computing systems. There
can be no assurance that market acceptance of distributed computing systems
will increase for business-critical applications or that market acceptance of
reliability products and services will increase. If reliability products fail
to achieve broad market acceptance in distributed computing environments, the
Company's business, operating results and financial condition would be
materially and adversely affected. During recent years, segments of the
computer industry have experienced significant economic downturns
characterized by decreased product demand, production overcapacity, price
erosion, work slowdowns and layoffs. The Company's financial performance may
in the future experience substantial fluctuations as a consequence of such
industry patterns. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need to Expand Product Development and Engineering Capability. The Company's
future success is critically dependent on expanding and integrating its
product development and engineering capability. In addition to recently
introducing QualixHA+, the Company is also developing storage management
products as a result of acquiring the technology of Anthill in May 1996. In
order to maintain its market and technological leadership, the Company must
maintain and upgrade its products and develop new products. To successfully
implement its product development program, the Company must, among other
things, successfully integrate its recently hired senior manager for product
development, hire additional software engineers, continue integrating its
Octopus Technologies and Anthill development teams with its QualixHA+
development team, enhance its product development policies and procedures and
substantially increase expenditures on product development and engineering.
There can be no assurance that the Company's product development efforts will
be successful or that future products will be available on a timely basis or
at all or achieve market acceptance. Moreover, expansion of the Company's
product development program will increase the Company's operating expenses,
and there can be no assurance that actual spending increases will not exceed
anticipated amounts or that such increases will result in sufficient revenues
to justify such increases. Failure to successfully implement the Company's
product development program would have a material adverse effect on its
business, financial condition and results of operations.
Dependence on Indirect Distribution Channels. An important element of the
Company's sales and marketing strategy is to continue to sell its products and
services through indirect distribution channels, including distributors,
system integrators, VARs, systems management software vendors and OEMs.
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements
may be hindered. Marketing products through the Company's field sales force
and through indirect distribution channels may result in distribution channel
conflicts. There can be no assurance that channel conflicts will not
materially adversely affect its field sales efforts as well as its
relationships with existing or future distributors, system
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integrators, VARs, systems management software vendors and OEMs. The Company's
reliance on indirect distribution increases the risks associated with the
introduction of new products, including risks of delays in adoption and the
risk that resellers will evaluate and potentially adopt competitive products.
There can be no assurance that the Company's current resellers will adopt or
successfully market any of the Company's new products. In addition, these
relationships are frequently terminable at any time without cause. Therefore,
there can be no assurance that any such party will continue to represent the
Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Legal Proceedings. On October 25, 1996, the Company sued Veritas Software
Corporation ("Veritas") in the Santa Clara County California Superior Court
alleging breach of contract, unfair competition and intentional interference
with prospective economic advantage in connection with a contract dated as of
April 10, 1995 (the "Master Agreement") between the Company and Veritas. The
Master Agreement was entered into following Veritas' acquisition of a company
whose high availability product the Company previously had the right to sell.
The Master Agreement granted the Company the right to market and support
FirstWatch, a product which formed the core software engine of QualixHA, a
high availability product for UNIX environments previously sold by the
Company, but which is not part of QualixHA+. The Master Agreement, and
therefore the Company's right to market QualixHA, terminated on February 28,
1997. The Company sought unspecified compensatory and punitive damages.
Veritas filed a cross-complaint on October 29, 1996 alleging that the Company
engaged in unfair competition, false advertising, breach of contract, fraud
and negligent misrepresentation as a result of various alleged activities.
Veritas sought unspecified compensatory and punitive damages and injunctive
relief including requiring Qualix to divulge certain customer information. On
October 29, 1996, the court granted the Company a temporary restraining order
enjoining Veritas from stating that the Master Agreement had been terminated.
The court also granted Veritas an order enjoining the Company from stating
that QualixHA+ is an upgrade to FirstWatch or that QualixHA+ is the FirstWatch
product. On November 14, 1996, the court issued a preliminary injunction
against Veritas on substantially similar terms as the temporary restraining
order and indicated that it would, upon submission of an order by Veritas,
issue a preliminary injunction enjoining the Company from stating that
QualixHA+ is an upgrade to FirstWatch. Veritas never submitted such an order.
In November 1996, the Company and Veritas began arbitration of the dispute
pursuant to the Master Agreement.
On August 11, 1997 the Company and Veritas entered into a Mutual Settlement
Agreement and Settlement of Claims in connection with all legal actions and
arbitration proceedings between the companies. All licensing agreements
between the companies, including the Master Agreement, have been terminated
and all claims between the companies relating to the dispute have been
dismissed with prejudice. See "Risk Factors--Dependence on Proprietary Rights;
Risk of Infringement."
Integration of Acquisitions. The Company has made acquistions and may make
additional acquisitions in the future. Acquisitions of companies, products or
technologies entail numerous risks, including an inability to successfully
assimilate acquired operations and products, diversion of management's
attention, loss of key employees of acquired companies and substantial
transaction costs. Some of the products acquired may require significant
additional development before they can be marketed and may not generate
revenue at levels anticipated by the Company. There can be no assurance that
the Company will not incur these problems in the future. Moreover, future
acquisitions by the Company may result in dilutive issuances of equity
securities, the incurrence of additional debt, large one-time write-offs and
the creation of goodwill or other intangible assets that could result in
amortization expense. Any such problems or factors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel; Management of Growth. The Company's future
operating results depend significantly on the continued service of its key
technical and senior management personnel. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. The Company's future success is
particularly dependent on increasing its product development personnel. See
"--Need to Expand Product Development and Engineering Capability." The Company
has relied in the past on consultants as well as employees for its product
development programs.
21
<PAGE>
Competition for such personnel is intense, and there can be no assurance that
the Company will retain its key managerial and technical employees or that it
will be successful in attracting or retaining other highly qualified technical
and managerial employees and consultants in the future. The Company has at
times experienced difficulty in recruiting qualified personnel, and there can
be no assurance that the Company will not experience such difficulties in the
future. If the Company were to experience such difficulties in the future, it
may have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the growth in the Company's
business has placed, and is expected to continue to place, a significant
strain on the Company's management and operations. To manage its future
growth, if any, effectively, the Company must continue to strengthen its
operational, financial and management information systems and expand, train
and manage its employee work force. Failure to do so effectively and on a
timely basis could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends in part upon its proprietary technology. The Company has no
issued patents and relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and licensing arrangements to
establish and protect its proprietary rights relating to its licensed and
internally developed products. The Company's rights to market and sell
licensed products are generally governed by license agreements of specified
duration. See "--Dependence on Qualix Direct" and "--Dependence on Licensed
Products." Although the Company has applied for a United States patent
covering certain aspects of the technology included in its Octopus
Technologies data mirroring product, the claims in the patent application have
been rejected by the U.S. Patent and Trademark Office, and there can be no
assurance that a patent will be issued, that any issued patent will provide
meaningful protection for the Company's technology, that any issued patent
will provide the Company with any competitive advantages or will not be
challenged by third parties. Moreover, there can be no assurance that the
Company will develop additional proprietary products or technologies that are
patentable or that the patents of others will not have an adverse effect on
the Company's ability to do business. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or, if patents are issued to the Company, design around the
patents issued to the Company. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and corporate partners, and license agreements with respect to
its software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. Policing unauthorized use of the
Company's products is difficult and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In selling its products,
the Company relies on "shrink wrap" licenses for sales of certain products
that are not signed by licensees and, therefore, may be unenforceable under
the laws of certain jurisdictions. In addition, effective protection of
intellectual property rights is unavailable or limited in certain foreign
countries. There can be no assurance that the Company's protection of its
proprietary rights, including any patent that may be issued, will be adequate
or that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around any patents
issued to the Company or other intellectual property rights.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. In October 1996, the
Company received correspondence from a French company asserting that it has
registered "Octopus" as a trademark in France and that the Company's use of
the mark "Octopus" infringes its trademark rights. The Company has not been
successful in obtaining a license to use the Octopus mark in France and has
determined that it must adopt a new trademark to replace the Octopus mark in
France. Qualix does not believe that this action will have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition, the Company expects that software product developers
will increasingly be subject to such claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation that could absorb significant
management time, which could have a material adverse effect on the Company's
business, operating results and financial condition. Such claims might
22
<PAGE>
require the Company to enter into royalty or license agreements. Such royalty
or license agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, financial condition and operating results. See "--Legal
Proceedings."
International Sales. Net revenue from customers outside the United States
was 17%, 17% and 9% of total revenue for fiscal years 1997, 1996 and 1995,
respectively. The Company intends to continue to expand its operations outside
of the United States and enter additional international markets, which will
require significant management attention and financial resources. There can be
no assurance, however, that the Company will be able to maintain or increase
international market demand for the Company's products. The Company's
international revenues are currently denominated in U.S. dollars. An increase
in the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in foreign markets. Additional risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, adverse tax consequences, restrictions on
repatriating earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
material adverse effect upon the Company's future export revenues and,
consequently, the Company's business, financial condition and results of
operations.
Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Despite testing
by the Company and by current and potential customers, there can be no
assurance that defects and errors will not be found in existing products or in
new products, versions or enhancements after commencement of commercial
shipments. Any such defects and errors could result in adverse customer
reactions, particularly because the Company focuses on selling reliability
products, delays in market acceptance, expensive product changes or loss of
revenue, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Product Liability. The Company's license agreements with customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims. A significant portion of the Company's products are
licensed pursuant to "shrink wrap" licenses. To the extent the Company relies
on "shrink wrap" licenses that are not signed by licensees and, therefore, may
be unenforceable under the laws of certain jurisdictions, the limitation of
liability provisions contained in such license agreements may not be
effective. The Company's products generally provide systems management
software that is used for business-critical applications, and, as a result,
the sale and support of products by the Company may entail the risk of product
liability claims. Although the Company maintains errors and omissions product
liability insurance, a successful liability claim brought against the Company
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
Potential Volatility of Stock Price. The Company completed its initial
public offering in February 1997. As a newly public company, the market price
for the Company's stock has been subject to significant fluctuations and may
be volatile in the future. The Company believes that factors such as actual or
anticipated fluctuations in the Company's results of operations, announcements
of technological innovations, new products by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the distributed computing environment and other
technology industries, general market conditions and other factors may affect
the market price for the Company's stock. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of
technology companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
financial condition and results of operations.
23
<PAGE>
Control by Directors, Executive Officers and Principal Stockholders. The
present directors, executive officers and principal stockholders, and their
affiliates and related persons, beneficially own approximately 35% of the
outstanding shares of the Company's Common Stock. These stockholders are able
to elect all of the Company's directors, have the voting power to approve all
matters requiring stockholder approval, and continue to exert significant
influence over the affairs of the Company. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company.
ITEM 2. FACILITIES.
The Company's principal administrative sales, marketing and development
facility is located in a building providing approximately 9,140 square feet of
available space in San Mateo, California. This facility is leased through
2000. The Company occupies 18 other domestic regional sales offices throughout
the United States as well as international offices in Canada and Holland. In
June 1997, the Company entered into a five-year operating lease agreement for
a new headquarters facility and plans to move to the new facility in San
Mateo, California, when the leasehold improvements are completed in December
1997. The Company does not anticipate significant penalties for early
termination of the existing headquarters lease agreement.
ITEM 3. LEGAL PROCEEDINGS.
On October 25, 1996, the Company sued Veritas Software Corporation
("Veritas") in the Santa Clara County California Superior Court alleging
breach of contract, unfair competition and intentional interference with
prospective economic advantage in connection with a contract dated as of April
10, 1995 (the "Master Agreement") between the Company and Veritas. The Master
Agreement was entered into following Veritas' acquisition of a company whose
high availability product the Company previously had the right to sell. The
Master Agreement granted the Company the right to market and support
FirstWatch, a product which formed the core software engine of QualixHA, a
high availability product for UNIX environments previously sold by the
Company, but which is not part of QualixHA+. The Master Agreement, and
therefore the Company's right to market QualixHA, terminated on February 28,
1997. The Company sought unspecified compensatory and punitive damages.
Veritas filed a cross-complaint on October 29, 1996 alleging that the Company
engaged in unfair competition, false advertising, breach of contract, fraud
and negligent misrepresentation as a result of various alleged activities.
Veritas sought unspecified compensatory and punitive damages and injunctive
relief including requiring Qualix to divulge certain customer information. On
October 29, 1996, the court granted the Company a temporary restraining order
enjoining Veritas from stating that the Master Agreement had been terminated.
The court also granted Veritas an order enjoining the Company from stating
that QualixHA+ is an upgrade to FirstWatch or that QualixHA+ is the FirstWatch
product. On November 14, 1996, the court issued a preliminary injunction
against Veritas on substantially similar terms as the temporary restraining
order and indicated that it would, upon submission of an order by Veritas,
issue a preliminary injunction enjoining the Company from stating that
QualixHA+ is an upgrade to FirstWatch. Veritas never submitted such an order.
In November 1996, the Company and Veritas began arbitration of the dispute
pursuant to the Master Agreement.
On August 11, 1997 the Company and Veritas entered into a Mutual Settlement
Agreement and Settlement of Claims in connection with all legal actions and
arbitration proceedings between the companies. All licensing agreements
between the companies, including the Master Agreement, have been terminated
and all claims between the companies relating to the dispute have been
dismissed with prejudice. See "Risk Factors--Dependence on Proprietary Rights;
Risk of Infringement."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
24
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are biographical summaries of the current executive officers
of the Company, as of June 30, 1997:
Richard G. Thau, 50, Chairman of the Board, President and Chief Executive
Officer, co-founded the Company in September 1990. From September 1985 to
January 1990, he was employed at MicroMRP, a company that develops
microcomputer-based manufacturing, planning and control software, where he
served as President and Chief Executive Officer from November 1985 to January
1990 and as Vice President, Sales and Marketing from September 1985 to
November 1985. From January 1984 to July 1985, he served as Vice President,
Sales and Marketing for General Parametrics, a hardware and software-based
business presentation systems company. Mr. Thau received a B.S. in Engineering
Sciences from State University of New York at Stony Brook in 1968 and attended
the M.B.A. program at the University of Santa Clara.
Jean A. Kovacs, 41, Executive Vice President and a director, co-founded the
Company in September 1990. From July 1988 to February 1990, Ms. Kovacs was
Director of Market Development for Frame Technology Inc., a document
publishing software company. From August 1985 to July 1988, she was a Product
Manager and Sales Account Manager for Sun MicroSystems, Inc., a computer
hardware and software company. Before that, she spent ten years at
Compugraphic Corporation in a variety of sales, marketing and support roles.
Ms. Kovacs received a B.S. in Finance from Northeastern University in 1983 and
an M.B.A. from Harvard Business School in 1985.
Bruce C. Felt, 39, Vice President, Finance and Chief Financial Officer,
joined the Company in March 1994. From July 1992 to March 1994, he was an
independent consultant. From June 1989 to July 1992, Mr. Felt was Chief
Financial Officer at Renaissance Software Inc., a trading systems software
company that he co-founded. Mr. Felt received a B.S. in Accounting from the
University of South Carolina in 1980 and an M.B.A. from Stanford University,
Graduate School of Business in 1989. Mr. Felt is a Certified Public
Accountant.
Arlington C. Glaze, 55, Vice President, Sales, joined the Company in January
1992. From October 1990 to December 1991, Mr. Glaze was director of telesales
at Clarity, Inc., a UNIX software developer. He received a B.S. in Business
Administration from San Jose State University in 1974 and an M.B.A. from the
University of Southern California in 1975.
George J. Symons, 37, Vice President, Engineering/Technical Services, joined
the Company in April 1996. From May 1995 to April 1996, Mr. Symons was an
independent consultant. From April 1993 to April 1995, he was Vice President
of Marketing at Software Research, Inc., a software testing tools company.
From January 1993 to March 1993 he served as an independent consultant. From
September 1990 to December 1992, he was Vice President, Marketing at PROCASE
Corp., a development software manufacturer. From April 1986 to May 1990, he
held various management positions at Sun MicroSystems, Inc. Mr. Symons
received a B.A. in Management Science and a B.A. in Computer Science in 1981
from the University of California, San Diego and an M.B.A. in 1983 from the
University of California, Los Angeles.
25
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company made its initial public offering on February 12, 1997 at a price
of $8.00 per share. The Company's Common Stock is traded on the over-the-
counter market and is quoted on the Nasdaq National Market under the symbol
QLIX. The following table sets forth, for the periods indicated, the range of
high and low sale prices per share of Common Stock of the Company as reported
on the Nasdaq Market System:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1997
Third Quarter (from February 12, 1997).................. $ 9.250 $ 5.250
Fourth Quarter.......................................... $ 9.000 $ 5.375
Fiscal 1998
First Quarter (through September 5, 1997)................ $ 6.250 $ 4.500
</TABLE>
As of August 27, 1997, there were 146 stockholders of record of the Company.
The Company believes that a significant number of beneficial owners of its
Common Stock hold shares in street name.
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to pay cash dividends in the foreseeable future. In
addition, the Company anticipates entering into a bank credit agreement that
will prohibit it from paying cash dividends without the bank's consent.
During fiscal 1997, the Company issued and sold the following securities (as
adjusted to reflect the 1 for 2.5 reverse split of Common Stock effected in
January 1997 but not giving effect to the conversion of each share of
Preferred Stock into Common Stock at the closing of its IPO):
(i) The Company granted stock options to purchase 422,080 shares of
Common Stock at exercise prices ranging from $0.80 to $8.50 per share to
employees, consultants and directors. In addition the Company assumed the
stock option plan of Octopus Technologies pursuant to the Octopus
Technologies Merger and issued options to purchase 149,590 shares of its
Common Stock to 13 former Octopus Technologies' option holders at exercise
prices ranging from $0.725 to $21.65 per share.
(ii) The Company issued and sold an aggregate of 107,174 shares of its
Common Stock to employees, consultants and directors for an aggregate cash
consideration of approximately $21,566 pursuant to exercises of outstanding
options.
(iii) In August 1996, the Company issued 4,970,403 shares of Common Stock
upon the conversion of an aggregate of 1,656,801 shares of Series A, B, C
and D Preferred Stock.
(iv) On August 28, 1996, in connection with the merger with Octopus
Technologies, the Company (a) issued to the 35 Octopus Technologies
shareholders an aggregate of 280,673 shares of its Series E Preferred Stock
in exchange for Octopus Technologies Preferred Stock at an approximate
exchange ratio of .1871163-to-1, and 1,597,173 shares of its Common Stock
in exchange for Octopus Technologies Common Stock at an exchange ratio of
.034639835-to-1 and (b) assumed the Octopus Technologies stock option plan
as discussed in paragraph (i) above.
(v) In December 1996, the Company issued 49,502 shares of Common Stock to
seven stockholders upon the exercise of outstanding warrants for an
aggregate cash consideration of $99,006.
The issuances described in clauses (i) and (ii) above were deemed exempt
from registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance upon Rule 701. The issuances of Common Stock to
the Company's Preferred Stockholders described in clause (iii) above were
deemed exempt from
26
<PAGE>
registration under the Securities Act in reliance upon Section 3(a)(9)
thereof. The issuances to Octopus shareholders described in clause (iv) above
were deemed exempt from registration under the Securities Act in reliance upon
Section 3(a)(10) thereof. The issuances described in clause (v) above were
deemed exempt from registration under the Securities Act in reliance upon
section 4(1) thereof. The recipients of securities in the transactions
described in clauses (iii) to (v) above represented their intentions to
acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through their relationships with the
Company, to information about the Company.
ITEM 6. SELECTED FINANCIAL DATA.
The Consolidated Statement of Operations data for the fiscal years ended
June 30, 1997, 1996 and 1995 and the Consolidated Balance Sheet data as of
June 30, 1997 and 1996 are derived from the audited Consolidated Financial
Statements of the Company that are included elsewhere in this Report on Form
10-K. The Consolidated Statement of Operations data for the fiscal years ended
June 30, 1994 and 1993 and the Consolidated Balance Sheet data as of June 30,
1995, 1994 and 1994 are derived from audited Consolidated Financial Statements
included within the Company's other reports filed with the Securities and
Exchange Commission ("SEC").
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1997(1) 1996 (2) 1995 1994 1993
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Reliability software........ $16,868 $8,965 $ 3,573 $ 536 $ --
Other products.............. 10,336 5,360 4,723 4,868 3,694
Support, maintenance and
consulting................. 4,942 2,210 1,107 649 363
------- ------ -------- -------- --------
Total revenue............. 32,146 16,535 9,403 6,053 4,057
Cost of revenue:
Cost of reliability
software................... 3,738 3,640 1,619 291 --
Cost of other products...... 7,289 3,781 3,332 3,396 2,533
Cost of support, maintenance
and consulting............. 1,871 1,021 610 475 264
------- ------ -------- -------- --------
Total cost of revenue..... 12,898 8,442 5,561 4,162 2,797
------- ------ -------- -------- --------
Gross profit.................. 19,248 8,093 3,842 1,891 1,260
Operating expenses:
Sales and marketing......... 11,280 5,101 3,463 2,490 2,311
General and administrative.. 2,878 1,920 1,239 1,528 541
Research and development.... 2,272 620 257 419 103
Merger expenses............. 595 -- -- -- --
Purchased in-process
technology................. -- 740 -- -- --
------- ------ -------- -------- --------
Total operating expenses.. 17,025 8,381 4,959 4,437 2,955
------- ------ -------- -------- --------
Income (loss) from operations. 2,223 (288) (1,117) (2,546) (1,695)
Gain on sale of investments. 528 763 -- -- --
Other income (expense), net. 362 83 (63) (16) 1
------- ------ -------- -------- --------
Income (loss) before
income taxes............. 3,113 558 (1,180) (2,562) (1,694)
Provision for income
taxes.................... 406 -- -- -- --
------- ------ -------- -------- --------
Net income (loss)......... $ 2,707 $ 558 $ (1,180) $ (2,562) $ (1,694)
======= ====== ======== ======== ========
Net income per share (3).. $ .29 $ .07
======= ======
Shares used in per share
computation (3).......... 9,312 8,177
======= ======
</TABLE>
(continued on next page)
27
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------
1997 (1) 1996(2) 1995 1994 1993
-------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and temporary
cash investments..................... $ 19,158 $ 3,587 $ 2,629 $ 331 $ 671
Total assets.......................... 26,334 6,903 4,455 1,851 2,008
Long-term obligations, less current
portion.............................. 191 290 153 10 58
Stockholders' equity.................. 20,103 2,846 2,479 100 948
</TABLE>
- --------
(1) Excluding $595,000 for merger expenses relating to the Octopus
Technologies merger and the $528,000 gain on sale of investments, net
income would have been $2,774,000.
(2) Excluding the $740,000 write-off for purchased in-process technology and
the $763,000 gain on sale of investments, net income would have been
$535,000.
(3) See Note 1 to Consolidated Financial Statements for an explanation of the
number of shares used in computing net income per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes.
This Form 10-K contains forward-looking statements written in the meaning of
section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve a number of risks and uncertainties. Such risks and
uncertainties include, but are not limited to, those discussed in this Form
10-K and in the Company's other filings with the SEC, including the Company's
prospectus dated February 12, 1997. The actual results that the Company
achieves may differ materially from any anticipated results described in the
forward-looking statements due to such risks and uncertainties. See
"Business--Risk Factors."
The Company has used various sentences within this Form 10-K which contain
such forward-looking statements, and words such as "believes", "anticipates",
"expects", "intends", and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of denoting the
same. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may arise after
the date of this report. Readers are urged to carefully review and consider
various disclosures made by the Company in this report and in the Company's
other reports filed with the SEC that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
OVERVIEW
The Company began operating primarily as a distributor, value-added reseller
and publisher of licensed third party client/server software products. In
1993, the Company focused on the reliability market by introducing QualixHA,
its first high availability product for the UNIX operating environment.
QualixHA is based on a licensed core software engine. In August 1996, the
Company merged with Octopus Technologies, which had developed high
availability and remote data mirroring products for the Windows NT operating
environment. More recently, in October 1996, the Company introduced QualixHA+,
which is based on an internally developed core software engine. In April, 1997
the Company introduced Qualix DataStar, which provides real-time, remote
mirroring for UNIX data and applications. A key element of the Company's
strategy is to increase substantially the percentage of revenues derived from
internally developed or acquired products that typically have higher gross
margins than licensed products. Pursuant to this strategy, the Company ceased
marketing Qualix HA in February 1997. The Company is developing several
additional systems management products. See "Business--Risk Factors--Recent
Transition to New Business Model," "--Uncertainty of Success of Recently
Introduced and Planned Products" and "--Dependence on Licensed Products."
28
<PAGE>
Prior to the Octopus Technologies merger and prior to developing QualixHA+,
the Company had minimal research and development expenditures and a
correspondingly high cost of product revenue. The Company expects its research
and development expenditures to increase substantially in the future as a
result of its increasing focus on internal development of products. See
"Business--Risk Factors--Need to Expand Product Development and Engineering
Capability."
The Company markets and sells reliability software through a combination of
its field sales organization and indirect distribution channels. In addition,
the Company sells other third party software and hardware products through its
Qualix Direct telesales organization, which has recently begun to sell the
Company's lower priced reliability products.
In May 1996, the Company acquired substantially all the assets and assumed
certain of the liabilities of Anthill, including its data access management
product. The Company acquired Anthill's technology in order to develop Qualix
DataStar remote mirroring software. The Anthill acquisition resulted in a
$740,000 writeoff of in-process technology in the fourth quarter of fiscal
1996.
In August 1996, Qualix merged with Octopus Technologies, whose product line
consisted of remote data mirroring and high availability products for Windows
NT. The merger was accounted for as a pooling-of-interests. Approximately
$595,000 of costs directly attributable to the business combination, primarily
professional fees associated with investment bankers, attorneys and
accountants, were incurred by the Company during the first quarter of fiscal
1997. All financial statements contained herein have been restated to reflect
the Octopus Technologies transaction.
The Company generally recognizes revenue from license agreements upon
shipment of the software, if no significant future obligations remain and
collection of the resulting receivable is probable. Maintenance and technical
support revenue is recognized over the term of the agreement, typically 12
months. Consulting and training revenue is recognized as services are
provided. See Note 1 to Consolidated Financial Statements.
The Company was incorporated in 1990 and accordingly has a very limited
operating history, which makes the prediction of future results difficult or
impossible. The Company has incurred significant net losses since its
inception and had an accumulated deficit of approximately $4.5 million as June
30, 1997. There can be no assurance that the Company will be profitable on an
annual or quarterly basis. See "Business--Risk Factors--Limited Operating
History; No Assurance of Profitability."
29
<PAGE>
RESULTS OF OPERATIONS
Selected elements of the Company's Consolidated Statements of Operations are
shown below for the last three fiscal years as a percentage of total revenues
and as a percentage change from year to year.
<TABLE>
<CAPTION>
% INCREASE
-----------------
1997 1996
YEARS ENDED JUNE 30, COMPARED COMPARED
------------------- TO TO
1997 1996 1995 1996 1995
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Reliability software................. 52.5% 54.2% 38.0 % 88% 151%
Other products....................... 32.2 32.4 50.2 93 13
Support, maintenance and consulting.. 15.3 13.4 11.8 124 100
----- ----- ----- ---- ----
Total revenue...................... 100.0 100.0 100.0 94 76
Cost of revenue:
Cost of reliability software......... 11.6 22.0 17.2 3 125
Cost of other products............... 22.7 22.9 35.4 93 14
Cost of support, maintenance and
consulting.......................... 5.8 6.2 6.5 83 67
----- ----- ----- ---- ----
Total cost of revenue.............. 40.1 51.1 59.1 53 52
----- ----- ----- ---- ----
Gross profit........................... 59.9 48.9 40.9 138 111
Operating expenses:
Sales and marketing.................. 35.1 30.8 36.8 121 47
General and administrative........... 9.0 11.6 13.3 50 55
Research and development............. 7.1 3.7 2.7 266 141
Merger expenses...................... 1.8 -- -- -- --
Purchased in-process technology...... -- 4.5 -- (100) --
----- ----- ----- ---- ----
Total operating expenses........... 53.0 50.6 52.8 103 69
----- ----- ----- ---- ----
Income (loss) from operations.......... 6.9 (1.7) (11.9) 872 74
Gain on sale of investments.......... 1.7 4.6 -- (31) --
Other income (expense), net.......... 1.1 0.5 (0.7) 336 (232)
----- ----- ----- ---- ----
Income (loss) before income taxes...... 9.7 3.4 (12.6) 458 147
----- ----- ----- ---- ----
Provision for income taxes............. 1.3 -- -- -- --
----- ----- ----- ---- ----
Net income (loss)...................... 8.4% 3.4% (12.6)% 385% 147%
===== ===== ===== ==== ====
</TABLE>
REVENUE
Reliability Software. Revenue from the sale of reliability software
increased 88% to $16.9 million in fiscal 1997 from $9.0 million in fiscal 1996
and increased 151% in fiscal 1996 from $3.6 million in fiscal 1995. The
increase in fiscal 1997 is primarily attributable to the introduction of
QualixHA+, the Company's UNIX-based high-availability clustering software
product. The increase also reflects the continuing broad market acceptance of
high availability products for the UNIX and Windows NT operating environments,
the increase in sales personnel and the expansion of the field sales and
telemarketing organization. The increase from fiscal 1995 to fiscal 1996 was
primarily attributable to the broad market acceptance of high availability
products for the UNIX and Windows NT operating environments, the increase in
field sales offices and personnel and the expansion of the telesales and
telemarketing organization. Prior growth rates in the Company's reliability
software revenues are not necessarily indicative of future reliability
software revenue growth rates and may not be sustainable in the future.
Other Products. Revenue from the sale of other products, which consist
primarily of ancillary hardware and software products that are resold by
Qualix Direct, increased 93% to $10.3 million in fiscal 1997 from $5.4 million
in fiscal 1996 and increased 13% in fiscal 1996 from $4.7 million in fiscal
1995. These increases
30
<PAGE>
primarily reflect the expansion of the Qualix Direct telesales and
telemarketing operation, including expanded product offerings and increased
sales personnel. Prior growth rates in the Company's other product revenues
are not necessarily indicative of future growth rates of revenue from other
products and may not be sustainable in the future.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue increased 124% to $4.9 million in fiscal 1997 from $2.2 million in
fiscal 1996 and increased 100% in fiscal 1996 from $1.1 million in fiscal
1995. The growth in support, maintenance and consulting revenue has been
primarily attributable to increased sales of services and support contracts on
new license sales and, to a lesser extent, on increasing renewals of these
contracts as the Company's installed base of licenses has increased. The
percentage increases in support, maintenance and consulting were higher than
the percentage increases in reliability product revenue in fiscal 1997 because
of support contract renewals from the Company's installed base and because the
Octopus installed base historically had purchased minimal amounts of support.
Prior growth rates in the Company's support, maintenance and consulting
revenues are not necessarily indicative of future support, maintenance and
consulting revenue growth rates and may not be sustainable in the future.
COST OF REVENUE
Cost of Reliability Software. Cost of revenue from the sale of reliability
software increased 3% to $3.7 million in fiscal 1997 from $3.6 million in
fiscal 1996 and increased 125% in fiscal 1996 from $1.6 million in fiscal
1995. Gross margin was 78% in fiscal 1997, 59% in fiscal 1996 and 55% in
fiscal 1995. The increase in gross margin on reliability software in fiscal
1997 is due to increased sales volumes of higher margin internally developed
reliability products, primarily QualixHA+ and OctopusHA+, rather than licensed
products. The increase in gross margin in fiscal 1996 primarily resulted from
increasing percentages of revenue from higher margin reliability software,
including both QualixHA and OctopusHA+.
Cost of Other Products. Cost of revenue from the sale of other products
increased to $7.3 million in fiscal 1997 from $3.8 million in fiscal 1996 and
$3.3 million in fiscal 1995. Gross margin remained constant at 29% in fiscal
1997, 1996 and 1995. In general, margins for resold products are decreasing,
however these decreases were partially offset by the refocused efforts of the
Qualix Direct telesales organization on higher margin products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance
and consulting revenue increased to $1.9 million in fiscal 1997 from $1.0
million in fiscal 1996 and $610,000 in fiscal 1995. This is a result of
increased personnel-related costs as the Company continues to build its
customer support and training organizations. Gross margin on support,
maintenance and consulting revenue was 62% in fiscal 1997, 54% in fiscal 1996
and 45% in fiscal 1995. The increasing margin in both fiscal 1997 and fiscal
1996 was due to the higher average selling prices, increases in the Company's
support staff and a corresponding reduction in the use of outside consultants.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $11.3 million
in fiscal 1997 from $5.1 million in fiscal 1996 and $3.5 million in fiscal
1995. Sales and marketing expenses and increased as a percentage of revenue to
35.1% in fiscal 1997 from 30.8% in fiscal 1996 and increased in fiscal 1996
from 36.8% in fiscal 1995. The increases on both an absolute and a percentage
basis from fiscal 1996 to fiscal 1997 were primarily a result of the expanded
infrastructure to support the Company's growing global presence, including the
opening of eleven new sales offices worldwide, and the added personnel to
expand the Company's marketing and distribution capabilities. The increase in
absolute dollars from fiscal 1995 to fiscal 1996 is primarily related to
growth in the Company's domestic sales and marketing infrastructure through
the increase in the number of employees and the opening of seven sales offices
throughout the United States. The Company believes that sales and marketing
expenses will increase in absolute dollars and as a percentage of revenues as
the Company continues to expand its sales and marketing staff and its
marketing and distribution capabilities.
31
<PAGE>
Research and Development. Research and development increased to $2.3 million
in fiscal 1997 from $620,000 in fiscal 1996 and $257,000 in fiscal 1995.
Research and development expenses increased as a percentage of total revenue
to 7.1% in fiscal 1997 from 3.7% in fiscal 1996 and 2.7% in fiscal 1995. These
increases were primarily attributable to increased staffing and related
expenses required to support new product development activities, including the
development of QualixHA+, the Company's UNIX-based high-availability
clustering software product, Qualix DataStar, the Company's UNIX remote data
mirroring application, OctopusHA+, the Company's Windows NT-based high-
availability clustering software product, and Octopus DataStar, the Company's
Windows NT remote data mirroring application. The Company believes that
research and development expenses will continue to increase in absolute
dollars and as a percentage of revenues from the levels experienced in fiscal
1997 as the Company continues to invest in developing new products,
applications and product enhancements.
General and Administrative. General and administrative expenses increased to
$2.9 million in fiscal 1997 from $1.9 million in fiscal 1996 and $1.2 million
in fiscal 1995. General and administrative expenses as a percentage of revenue
were 9.0%, 11.6% and 13.3% in fiscal 1997, 1996 and 1995, respectively. These
increases in absolute dollars are attributable to the costs associated with
additional personnel in the general and administrative functions and the
finance organization and the associated expenses required to manage and
support the Company's growth. Increases in 1997 expenses also reflect
additional costs associated with being a public company. The decreases in
percentage of total revenues are due to the fixed nature of some of these
costs. The Company expects that general and administrative expenses will
increase in absolute dollars as the Company expands its support staff.
Merger Expenses. Merger expenses of $595,000 were incurred in connection
with the acquisition of Octopus Technologies in the first quarter of fiscal
1997. Merger expenses consisted primarily of investment banking, legal and
accounting fees.
Purchased In-Process Technology. Approximately $740,000 of the purchase
price of Anthill represented the value of in-process technology which was
charged to the Company's operations in the fourth quarter of fiscal 1996.
NON-OPERATING ITEMS.
Gain on Sale of Investments. In May 1995, the Company received shares of
Veritas common stock pursuant to a merger agreement between Veritas and
Tidalwave Technologies, Inc. In September 1995, the Company sold 75% of the
shares and realized a gain of $763,000. In June 1997, the Company sold the
remaining 25% of the shares and realized a gain of $528,000.
Income Taxes. The Company had an effective tax rate of 13% for fiscal 1997,
compared to 0% for fiscal 1996 and 1995. This increase is a result of the
Alternative Minimum Tax imposed by the Internal Revenue Service and state
income taxes. Due to the Company's utilization of net operating loss
carryforwards, the effective tax rate is lower than the statutory rate. There
was no provision for income taxes in fiscal 1996 which reflects the reversal
of the valuation reserve against deferred income taxes to the extent of
current period earnings. In fiscal 1995, the Company did not provide for
income taxes due to the Company's net losses. The Company has provided a
valuation allowance against deferred tax assets representing expenses from
acquisition of in-process technology and assets relating to pre-acquisition
activities of Octopus Technologies, which have certain limitations on their
realizability. The effective tax rate for fiscal 1998 would be expected to
more closely approximate the statutory rates of the jurisdictions in which the
Company operates. See Note 6 to Consolidated Financial Statements.
BUSINESS ENVIRONMENT
The Company was incorporated in 1990 and accordingly has a very limited
operating history, which makes the prediction of future results difficult or
impossible. The Company has incurred significant net losses since its
32
<PAGE>
inception and had an accumulated deficit of approximately $4.5 million as of
June 30, 1997. Although the Company has achieved nine consecutive quarters of
operating income before giving effect to nonrecurring gains and expenses,
there can be no assurance that the Company will be profitable on an annual or
quarterly basis in the future, and recent operating results should not be
considered indicative of future financial performance. The Company is subject
to the risks inherent in the operation of a new business enterprise, and there
can be no assurance that the Company will be able to successfully address
these risks. See "Business--Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $19.2 million in cash, cash equivalents
and temporary cash investments, compared to $3.6 million at June 30, 1996, an
increase of $15.6 million. The increase was primarily provided by the initial
public offering of the Company's Common Stock in February 1997. The Company
sold 2.2 million shares of Common Stock, resulting in net proceeds to the
Company (after deducting underwriting discounts, commissions and offering
expenses) of approximately $15.1 million. The Company purchased $21.2 million
and sold $12.2 million of short-term investments in fiscal 1997. At June 30,
1997, the Company had working capital of $18.7 million compared to $2.8
million at June 30, 1996.
The Company is currently negotiating with selected financial institutions to
obtain a line of credit facility.
In June 1997, the Company entered into a five-year operating lease agreement
for a new headquarters facility and plans to move to the new facility in San
Mateo, California, when the leasehold improvements are completed in December
1997. The Company does not anticipate significant penalties for early
termination of the existing headquarters lease agreement.
The Company believes that cash, cash equivalents and temporary cash
investments and cash flows from operations will be sufficient to fund
operations, purchases of capital equipment and research and development
programs currently planned at least through fiscal 1998.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. 34
Consolidated Balance Sheets at June 30, 1997 and 1996..................... 35
Consolidated Statements of Operations for Years Ended June 30, 1997, 1996
and 1995................................................................. 36
Consolidated Statements of Stockholders' Equity for Years Ended June 30,
1997, 1996 and 1995...................................................... 37
Consolidated Statements of Cash Flows for Years Ended June 30, 1997, 1996
and 1995................................................................. 38
Notes to Consolidated Financial Statements................................ 39
</TABLE>
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts............................ 51
</TABLE>
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
Qualix Group, Inc.:
We have audited the accompanying consolidated balance sheets of Qualix
Group, Inc. and subsidiary ("the Company") as of June 30, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. Our
audits also included the consolidated financial statement schedule listed in
the Index at Item 8. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Qualix Group, Inc. and
subsidiary as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
San Jose, California
July 24, 1997
(August 11, 1997 as to Note 10)
34
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.................................. $ 9,617 $ 3,102
Temporary cash investments................................. 9,541 485
Accounts receivable, less allowance for doubtful accounts
($386 in 1997 and $256 in 1996)........................... 5,147 2,805
Inventories................................................ 194 108
Prepaid expenses........................................... 276 60
------- -------
Total current assets..................................... 24,775 6,560
Property and equipment, net.................................. 1,559 343
------- -------
Total assets............................................. $26,334 $ 6,903
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable........................................... $ 1,280 $ 997
Accrued liabilities........................................ 2,748 1,415
Deferred revenue and advances.............................. 1,795 1,087
Income taxes payable....................................... 91 --
Current portion of long-term obligations................... 126 268
------- -------
Total current liabilities................................ 6,040 3,767
------- -------
Long-term obligations (Note 7)............................... 191 290
Commitments and contingencies (Note 7)
Stockholders' Equity:
Convertible preferred stock--par value $0.001; 5,000,000
shares authorized; shares outstanding: none in 1997 and
3,978,993 in 1996......................................... -- 8,031
Common stock--par value $0.001; 20,000,000 shares
authorized; shares outstanding: 10,305,605 shares in 1997
and 2,943,502 in 1996..................................... 24,862 1,747
Notes receivable from sale of stock........................ (175) (169)
Net unrealized gain (loss) on available-for-sale
securities................................................ (43) 485
Accumulated deficit........................................ (4,541) (7,248)
------- -------
Total stockholders' equity............................... 20,103 2,846
------- -------
Total liabilities and stockholders' equity............... $26,334 $ 6,903
======= =======
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Revenue:
Reliability software............................... $16,868 $8,965 $ 3,573
Other products..................................... 10,336 5,360 4,723
Support, maintenance and consulting................ 4,942 2,210 1,107
------- ------ -------
Total revenue.................................... 32,146 16,535 9,403
------- ------ -------
Cost of revenue:
Cost of reliability software....................... 3,738 3,640 1,619
Cost of other products............................. 7,289 3,781 3,332
Cost of support, maintenance and consulting........ 1,871 1,021 610
------- ------ -------
Total cost of revenue............................ 12,898 8,442 5,561
------- ------ -------
Gross profit......................................... 19,248 8,093 3,842
Operating expenses:
Sales and marketing................................ 11,280 5,101 3,463
General and administrative......................... 2,878 1,920 1,239
Research and development........................... 2,272 620 257
Merger expenses.................................... 595 -- --
Purchased in-process technology.................... -- 740 --
------- ------ -------
Total operating expenses......................... 17,025 8,381 4,959
------- ------ -------
Income (loss) from operations........................ 2,223 (288) (1,117)
Other income (expense):
Gain on sale of investments........................ 528 763 --
Interest income.................................... 403 88 20
Interest expense................................... (41) (5) (83)
------- ------ -------
Total other income (expense)..................... 890 846 (63)
------- ------ -------
Income (loss) before income taxes.................... 3,113 558 (1,180)
Provision for income taxes........................... 406 -- --
------- ------ -------
Net income (loss)................................ $ 2,707 $ 558 $(1,180)
======= ====== =======
Net income per common and equivalent shares.......... $ 0.29 $ 0.07
======= ======
Common and equivalent shares used in computing per
share amount........................................ 9,312 8,177
======= ======
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
CONVERTIBLE NOTES GAIN (LOSS)
PREFERRED STOCK COMMON STOCK RECEIVABLE ON AVAILABLE-
------------------ ------------------ FROM SALE FOR-SALE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OF STOCK SECURITIES DEFICIT TOTAL
---------- ------ ---------- ------- ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1994.. 3,157,947 $6,086 1,250,910 $ 647 $ (6) $ -- $(8,626) $ 101
Issuance of Series D
preferred stock, net
of issuance costs of
$16................... 504,160 1,193 -- -- -- -- -- 1,193
Conversion of promis-
sory notes for Series
D preferred stock, net
of issuance costs of
$8.................... 253,553 600 -- -- -- -- -- 600
Issuance of common
stock, net of issuance
costs of $21.......... -- -- 1,042,659 731 -- -- -- 731
Exercise of stock op-
tions................. -- -- 6,972 1 -- -- -- 1
Issuance of common
stock for services
rendered.............. -- -- 23,783 17 -- -- -- 17
Accrued interest....... -- -- -- -- (2) -- -- (2)
Net unrealized gain on
available-for-sale se-
curities.............. -- -- -- -- -- 1,018 -- (1,018)
Net loss............... -- -- -- -- -- -- (1,180) (1,180)
---------- ------ ---------- ------- ----- ----- ------- -------
Balances, June 30, 1995. 3,915,660 7,879 2,324,324 1,396 (8) 1,018 (7,806) 2,479
Exercise of Series C
preferred stock op-
tions................. 23,333 56 -- -- (56) -- -- --
Exercise of Series D
preferred stock op-
tions................. 40,000 96 -- -- (96) -- -- --
Conversion of short-
term notes for common
stock, net of issuance
costs of $11.......... -- -- 457,246 319 -- -- -- 319
Exercise of stock op-
tions................. -- -- 99,172 20 (9) -- -- 11
Issuance of common
stock for services
rendered.............. -- -- 62,760 12 -- -- -- 12
Net unrealized gain on
available-for-sale se-
curities.............. -- -- -- -- -- (533) -- (533)
Net income............. -- -- -- -- -- -- 558 558
---------- ------ ---------- ------- ----- ----- ------- -------
Balances, June 30, 1996. 3,978,993 8,031 2,943,502 1,747 (169) 485 (7,248) 2,846
Conversion of preferred
stock................. (3,978,993) (8,031) 4,774,791 8,031 -- -- -- --
Initial public offer-
ing, net of issuance
costs of $1,433....... -- -- 2,201,981 14,950 -- -- -- 14,950
Exercise of stock op-
tions................. -- -- 112,419 26 (6) -- -- 20
Exercise of stock war-
rants................. -- -- 272,912 108 -- -- -- 108
Net unrealized gain on
available-for-sale se-
curities.............. -- -- -- -- -- (528) -- (528)
Net income............. -- -- -- -- -- -- 2,707 2,707
---------- ------ ---------- ------- ----- ----- ------- -------
Balances, June 30, 1997. -- $ -- 10,305,605 $24,862 $(175) $ (43) $(4,541) $20,103
========== ====== ========== ======= ===== ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 2,707 $ 558 $(1,180)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 323 85 125
Amortization of discount on long-term obligations. 36 -- --
Amortization of software development costs........ -- 2 15
Gain on sale of available-for-sale securities..... (528) (763) --
Purchased in-process technology................... -- 740 --
Changes in:
Accounts receivable............................. (2,342) (1,300) (469)
Inventories..................................... (86) (5) 120
Prepaid expenses................................ (216) (14) (2)
Accounts payable................................ 283 250 110
Accrued liabilities............................. 1,333 572 255
Income taxes payable............................ 91 -- --
Deferred revenue and advances................... 708 735 140
Liability under employment termination
agreement...................................... (151) (72) (17)
------- ------ -------
Net cash provided by (used in) operating
activities....................................... 2,158 788 (903)
------- ------ -------
Cash flows from investing activities:
Purchases of property and equipment, net............ (1,539) (267) (86)
Purchase of temporary cash investments.............. (21,240) 847 --
Proceeds from temporary cash investments............ 12,185 -- --
Business acquisition................................ -- (617) --
Other assets, net................................... -- -- (12)
------- ------ -------
Net cash used in investing activities............. (10,594) (37) (98)
------- ------ -------
Cash flows from financing activities:
(Repayments) borrowings on bank line of credit,
net................................................ -- -- (200)
Issuance of convertible promissory notes............ -- 315 609
Repayments of capital lease obligations, net........ (1) (7) (62)
Issuance of long-term obligations................... -- 405 --
Repayment of long-term obligations.................. (125) -- --
Proceeds from issuance of preferred and common
stock, net......................................... 15,077 27 1,934
------- ------ -------
Net cash provided by financing activities......... 14,951 740 2,281
------- ------ -------
Net increase in cash................................. 6,515 1,491 1,280
Cash and cash equivalents, beginning of year......... 3,102 1,611 331
------- ------ -------
Cash and cash equivalents, end of year............... $ 9,617 $3,102 $ 1,611
======= ====== =======
Noncash investing and financing activities:
Conversion of preferred shares to common stock...... $ 8,031 $ -- $ --
======= ====== =======
Exercise of options for stockholder notes
receivable......................................... $ 10 $ 161 $ --
======= ====== =======
Conversion of promissory notes for stock, net of
issuance costs..................................... $ -- $ 315 $ 600
======= ====== =======
Issuance of common stock for services rendered...... $ -- $ 13 $ 17
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.............. $ 41 $ 28 $ 114
======= ====== =======
Cash paid during the year for income taxes.......... $ 314 $ -- $ --
======= ====== =======
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Qualix Group, Inc. ("the Company") was incorporated in
Delaware in September 1990. The Company develops or acquires, markets and
supports reliability software for distributed computing systems based on Unix
and Windows NT operating systems. The Company markets its products through its
direct sales force, which is focused on organizations located in the United
States, Europe and the Far East.
Basis of Presentation. The Company acquired Octopus Technologies, Inc.
("Octopus") on August 27, 1996. The acquisition was accounted for as a
pooling-of-interests. All financial data of the Company has been restated to
include the historical financial information of Octopus.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. Intercompany
accounts and transactions have been eliminated in consolidation.
Financial Statement Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
allowance for potentially uncollectible accounts receivable, the valuation
allowance on deferred tax assets and certain reserves and accruals. Actual
results could differ materially from those estimates.
Cash Equivalents. Cash equivalents include highly liquid investments with
original maturities of 90 days or less at the time of acquisition. The
recorded carrying amounts of cash equivalents approximate their fair market
value.
Temporary Cash Investments. Temporary cash investments consist of short-term
investments acquired with maturities exceeding three months and are classified
as "available-for-sale securities". The investments are reported at fair value
with unrealized gains or losses excluded from earnings and reported as a
separate component of shareholders' equity, net of applicable taxes. Any gains
or losses on sales of investments are computed on a specific identification
basis.
Inventories. Inventories consist of computer products, software and
component parts purchased for resale. Inventories are stated at the lower of
cost (first-in, first-out method) or market.
Property and Equipment. Property and equipment, including equipment under
capital lease and leasehold improvements, are stated at cost. Depreciation and
amortization are computed using the straight-line method over the shorter of
the estimated useful lives, generally three to seven years, or the lease term,
as appropriate.
Software Development Costs. Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs are capitalized. Such costs, which have not
been material to date, are amortized on a straight-line basis over the lives
of the product, generally two years. All costs have been fully amortized as of
June 30, 1996.
Revenue Recognition. Revenue from software licenses is generally recognized
upon shipment. Revenue is recognized only when no significant vendor or post-
contract support obligations remain. Product revenue is recognized upon
shipment. Revenue from separately priced software support, maintenance and
consulting contracts is deferred and recognized ratably over the term of the
agreement, which is typically one year.
39
<PAGE>
Warranty. The Company generally warrants its products for 30 days. The
Company has no provision for warranty costs at June 30, 1997 as historically
costs have not been significant.
Income Taxes. Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to account for income taxes
and requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
Stock-Based Compensation. The Company accounts for employee stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and, accordingly, does not generally recognize compensation cost in
connection with its stock option and purchase plans.
Net Income (Loss) Per Share. Net income (loss) per share is computed using
the weighted average number of common shares and common equivalent shares
outstanding during the periods. Prior to the Company's initial public offering
in February 1997, common equivalent shares include preferred stock and certain
warrants (using the "if converted" method) and stock options and the remaining
warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is antidilutive, except that,
pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletins and staff policy, such computations include all common and common
equivalent shares issued within the 12 months preceding the initial filing
date as if they were outstanding for all periods prior to the initial filing
date. In addition, all outstanding preferred stock and warrants that were
converted in the initial public offering are included in the computation as
common equivalent shares even when the effect is anti-dilutive.
Certain Significant Risks and Uncertainties. Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, temporary cash investments and
accounts receivable. The Company invests in a variety of financial instruments
with an investment credit rating of AA and better. The Company, by policy,
limits the amount of credit exposure with any one financial instrument or
commercial issuer. The Company also places its investments for safekeeping
with high-credit-quality financial institutions. The Company sells its
products primarily to companies in diversified industries in North America,
Europe and the Far East, and generally does not require its customers to
provide collateral or other security to support accounts receivable. To reduce
credit risk, management performs ongoing credit evaluations of its customers'
financial condition. While the Company maintains allowances for potential bad
debt losses, actual losses to date have not been material. No customers
accounted for greater than 10% of accounts receivable in 1997 or 1996. No
customer accounted for greater than 10% of total revenue in 1997, 1996 and
1995. Export sales from the United States represented 17% of total revenue in
both fiscal 1997 and 1996. In 1995, export sales represented 9% of total
revenue.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse
effect on the Company's future financial position or results of operations:
advances and trends in new technologies; competitive pressures in the form of
new products or price reductions on current products; changes in product mix;
changes in the overall demand for products and services offered by the
Company; changes in certain strategic partnerships or customer relationships;
litigation or claims against the Company based on intellectual property,
patent, product, regulatory or other factors; risks associated with changes in
domestic and international economic and/or political conditions or
regulations; availability of necessary components; and the Company's ability
to attract and retain employees necessary to support its growth.
Recently Issued Accounting Standards. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). This standard replaces
current earnings per share (EPS) reporting requirements and requires a dual
presentation of basic and diluted EPS. As basic EPS excludes dilution by
dividing net income by only the weighted average of
40
<PAGE>
common shares outstanding for the period, it will result in a higher value
than the historically reported primary EPS. Diluted EPS under SFAS 128 is not
expected to be significantly different than fully diluted EPS reported
historically. This standard will be effective for the Company beginning in the
second quarter of fiscal 1998 and will require restatement of prior periods.
In June 1997, the FASB adopted SFAS No.130, "Reporting Comprehensive
Income", which requires that an enterprise report, by major components and as
a single total, the change in its net assets during the period from nonowner
sources; and SFAS No.131, "Disclosures about Segments of an Enterprise and
Related Information", which establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows. Both statements are effective for the
Company beginning July 1, 1997, with earlier application permitted.
2. BUSINESS COMBINATIONS
Purchase of Anthill Incorporated. On May 1, 1996, the Company acquired
substantially all of the assets and assumed certain of the liabilities of
Anthill Incorporated ("Anthill"). The purchase price totaled approximately
$675,000, of which $175,000 was paid at the closing of the transaction with
the remaining purchase price to be paid in four annual installments of
$125,000 each (see Note 7). Anthill is engaged in the development of a
hierarchical storage management product.
The acquisition was accounted for as a purchase, and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The aggregate purchase of $675,000, plus
$116,000 of costs directly attributable to the completion of the acquisition,
has been allocated to the assets and liabilities acquired. Approximately
$740,000 of the total purchase price represented the value of in-process
technology which had no future alternative use and was charged to the
Company's operations in the fourth quarter of fiscal 1996.
Merger with Octopus Technologies, Inc. On August 27, 1996, the Company
acquired Octopus by issuing 1,597,173 shares of its common stock and 280,673
shares of Series E preferred stock in exchange for all of the outstanding
common stock and preferred stock of Octopus. The Company also assumed and
exchanged all options to purchase Octopus stock for options to purchase an
aggregate of 149,590 shares of the Company's common stock with an average
exercise price of $2.60 per share. The merger was accounted for as a pooling-
of-interests. Octopus develops, markets and supports real time data protection
software throughout the United States and internationally. Approximately
$595,000 of costs directly attributable to the business combination, primarily
professional fees associated with investment bankers, attorneys and
accountants, were incurred by the Company.
The following table presents the results of consolidated operations as
restated for the periods prior to the combination of Qualix and Octopus. No
significant adjustments were required to conform the accounting policies of
the Company and Octopus.
<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net revenue:
Qualix................................................. $ 9,056 $14,610
Octopus................................................ 347 1,925
------- -------
Combined............................................... $ 9,403 $16,535
======= =======
Net income (loss):
Qualix................................................. $ (522) $ 481
Octopus................................................ (658) 77
------- -------
Combined............................................... $(1,180) $ 558
======= =======
</TABLE>
41
<PAGE>
3. TEMPORARY CASH INVESTMENTS
Available-for-sale securities at June 30, 1997 consist of (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial paper...................... $3,935 $-- $ -- $3,935
Municipal auction rate securities..... 3,605 -- (5) 3,600
Corporate bonds....................... 1,015 -- (18) 997
Agency securities..................... 1,029 -- (20) 1,009
------ --- ---- ------
$9,584 $-- $(43) $9,541
====== === ==== ======
</TABLE>
At June 30, 1997, the estimated market value of available-for-sale
securities with maturities over ten years was $3.6 million, with the remainder
maturing within one year.
At June 30, 1995, the Company held 46,121 shares of common stock of a public
company which were subject to certain holding restrictions. During 1996, the
Company sold 34,590 shares and realized a gain of $763,000, net of legal costs
of $84,500. In June 1997, the Company sold the remaining shares and realized a
gain of $828,000. The gain on the sale of stock was recorded net of legal
costs of $300,000. The Company realized no material gains or losses from the
sale of securities in fiscal 1995.
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30 consist of (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Computer equipment and software............................. $2,250 $777
Furniture and fixtures...................................... 67 41
Office equipment............................................ 14 8
Leasehold improvements...................................... 39 10
------ ----
2,370 836
Less accumulated depreciation and amortization.............. (811) (493)
------ ----
Property and equipment--net................................. $1,559 $343
====== ====
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities at June 30 consist of (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Compensation, bonuses and related benefits................. $ 988 $ 377
Royalties payable and costs associated with product
acquisition............................................... 666 547
Other accrued liabilities.................................. 1,094 491
------ ------
Total.................................................... $2,748 $1,415
====== ======
</TABLE>
42
<PAGE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal................................................. $ 83 $-- $--
State................................................... 367 -- --
---- --- ---
450 -- --
---- --- ---
Deferred:
Federal................................................. -- -- --
State................................................... (44) -- --
---- --- ---
(44) -- --
---- --- ---
$406 $-- $--
==== === ===
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal rate to the income (loss) before income taxes as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Taxes computed at federal statutory rate............ 35.0% 35.0% (35.0)%
State taxes net of federal income tax benefit....... 6.0 6.1 (2.7)
Nondeductible merger and other costs................ 6.7 6.6 1.7
Change in valuation allowance....................... (36.2) (50.0) 37.0
Other............................................... 1.5 2.3 (1.0)
----- ----- -----
Total provision................................... 13.0% --% --%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to deferred taxes
were as follows at June 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ------
<S> <C> <C>
Deferred tax assets:
Expenses not currently deductible for tax purposes........ $144 $ 179
Tax net operating loss carryforwards...................... 292 2,174
Tax credit carryforward................................... 87 --
Purchased in-process technology........................... 278 300
---- ------
Total deferred tax assets............................... 801 2,653
Valuation allowance....................................... (757) (2,653)
---- ------
Net deferred tax assets................................. $ 44 $ --
==== ======
</TABLE>
Deferred tax assets are presented within prepaid expenses on the
Consolidated Balance Sheet as of June 30, 1997. The Company has provided a
valuation allowance against deferred tax assets representing expenses from
acquisition of in-process technology and assets relating to pre-acquisition
activities of Octopus Technologies which have certain limitations imposed on
their realizability. The valuation allowance decreased $1,896,000 in fiscal
1997 due to the realization of the benefit of certain tax loss carryforwards.
7. COMMITMENTS AND CONTINGENCIES
Anthill Acquisition. In connection with the Anthill acquisition, the Company
has a remaining obligation to pay three annual installments of $125,000 each
(see Note 2). The present value of the obligation is discounted at 9% and the
aggregate of approximately $316,000 is recorded in the balance sheet within
long-term obligations. The Company has granted a security interest in the
software technology acquired from Anthill in order to secure the obligation.
The payments may be accelerated to May 1, 1998 if cumulative license revenues
for certain products exceed specified levels as of May 1, 1998.
43
<PAGE>
Operating Leases. The Company leases certain office facilities under
noncancellable operating leases. The future minimum annual rental payments
under these leases are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year
1998............................ $ 582
1999............................ 682
2000............................ 650
2001............................ 626
2002............................ 598
Thereafter...................... 150
------
$3,288
======
</TABLE>
Rental expense under operating leases was approximately $441,000, $243,000
and $137,000 for fiscal years 1997, 1996 and 1995, respectively. In June 1997,
the Company entered into a five-year operating lease agreement for a new
headquarters facility. The existing headquarters' lease expires in March 2000,
however the Company plans to move to the new facility in San Mateo,
California, when the leasehold improvements are completed in December 1997.
The Company does not anticipate significant penalties for early termination of
the existing headquarters lease agreement. Lease commitments under both
agreements have been included in the above amounts.
Contingency. The industry in which the Company operates is characterized by
frequent litigation regarding patent and other intellectual property rights.
In October 1996, the Company received correspondence from a French company
asserting that it has registered "Octopus" as a trademark in France and that
the Company's use of the mark "Octopus" infringes its trademark rights. The
Company has not been successful in obtaining a license to use the Octopus mark
in France and has determined that it must adopt a new trademark to replace the
Octopus mark in France. Management does not believe that this action will have
a material adverse effect on the Company's business, financial condition or
results of operations.
8. STOCKHOLDERS' EQUITY
Stock Split. Effective January 1997, the Board of Directors approved a one
for two and one-half reverse split of all outstanding shares of common stock.
All shares and per-share amounts have been adjusted to reflect this split. In
addition, the par value of common stock was changed to $.001.
Initial Public Offering. In February 1997, the Company completed its initial
public offering and issued 2,000,000 shares of common stock to the public at a
price of $8.00 per share. As a result of this offering, the Company received
$14,950,000, net of underwriting discounts, commissions, offering costs and
expenses payable by the Company. Simultaneously, all outstanding preferred
shares were automatically converted into common stock.
Shareholder Rights Plan. In July 1997, the Company's Board of Directors
approved a stock purchase rights plan which provides a dividend distribution
of one common stock purchase right for each outstanding share of its common
stock. The rights become exercisable based on certain limited conditions
related to acquisitions of stock, tender offers and certain business
combination transactions of the Company. In the event one of the limited
conditions is triggered, each right entitles the registered holder to purchase
for $60 one-thousandth of a Preferred Share of Qualix Series A Junior
Participating Preferred Stock with a par value of $.001 per share. The rights
are redeemable at the Company's option for $0.01 per right and expire on July
30, 2007.
Employee Stock Purchase Plan. The Company has an employee stock purchase
plan, under which employees may, subject to certain restrictions, purchase
shares of common stock at a price not less than 85 percent of the lower of the
fair market value as of the beginning or the end of the offering period. No
shares have been issued under this Plan to date as of June 30, 1997. At June
30, 1997, 350,000 shares were reserved for future issuance.
44
<PAGE>
Restricted Stock. During 1994, an officer of the Company was granted
nonstatutory stock options to purchase 48,000 shares of common stock at $.20
per share and 40,000 shares of Series D preferred stock at $2.40 per share. In
May 1996, the holder exercised the options in exchange for a full recourse
promissory note, bearing interest at 6.83% per annum, due May 2006 and secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
During 1996, an officer of the Company was granted a nonstatutory stock
option to purchase 23,333 shares of Series C preferred stock at $2.40 per
share. The option was exercised in exchange for a full recourse promissory
note which bears interest at 7.04% per annum, is due May 2006 and is secured
by the underlying stock. The preferred shares subsequently were converted to
common shares in connection with the Company's initial public offering in
February 1997. The related shares of common stock are subject to repurchase by
the Company at the original purchase price per share upon termination of
employment prior to vesting of such shares. These restricted shares vest over
four years in accordance with the terms of the original stock options.
In July 1996, two officers exercised unvested stock options to purchase
50,266 shares of common stock at $0.20 per share with full recourse promissory
notes which bear interest at 6.74% per annum. The related shares of common
stock are subject to repurchase by the Company at the original purchase price
per share upon termination of employment prior to vesting of such shares.
These restricted shares vest over four years in accordance with the terms of
the original stock options.
At June 30, 1997, 51,091 outstanding shares of such common stock were
subject to repurchase.
Stock Option Plans. The Company has stock option plans (the "Plans") under
which shares are reserved for issuance to employees, consultants and
directors. The Plans authorize the direct award or sale of common stock or the
grant of incentive and nonstatutory stock options. Incentive stock options are
granted at fair market value (as determined by the Board of Directors) at the
date of grant; nonstatutory options and stock sales may be offered at not less
than 85% of fair market value. Options become exercisable over four years and
expire ten years after the date of grant.
A summary of option transactions under the plans are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Balance, June 30, 1994 140,479 $0.45
Granted..................................... 128,281 0.42
Exercised................................... (6,972) 0.15
Cancelled................................... (28,948) 0.19
-------- -----
Balance, June 30, 1995........................ 232,840 0.47
Granted (weighted average fair value of
$0.08)..................................... 478,078 0.59
Exercised................................... (51,172) 0.20
Cancelled................................... (56,151) 0.20
-------- -----
Balance, June 30, 1996........................ 603,595 0.61
Granted (weighted average fair value of
$3.23)..................................... 500,400 5.92
Exercised................................... (112,419) 0.23
Cancelled................................... (56,983) 2.66
-------- -----
Balance, June 30, 1997........................ 934,593 $3.38
======== =====
</TABLE>
At June 30, 1997, options for 741,347 shares were exercisable under the
Plans and 296,003 shares were available for future grant.
45
<PAGE>
The following table summarizes information concerning options outstanding
and exercisable as of June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.08-$ 0.73........... 369,833 8.91 $0.27 317,823 $0.26
$0.80-$ 5.38........... 200,710 9.08 2.63 128,524 2.79
$5.63-$ 8.00........... 236,234 9.42 6.02 182,824 5.63
$8.13-$21.65........... 127,816 9.51 8.66 112,716 8.72
------- ---- ----- ------- -----
934,593 9.16 $3.38 741,347 $3.31
======= ==== ===== ======= =====
</TABLE>
Stock Based Compensation. The Company uses the intrinsic value method
specified by Accounting Principles Board Opinion No. 25 to calculate
compensation expense associated with issuing stock options and, accordingly,
has recorded no such expense through June 30, 1997, as such issuances have
been at the fair value of the Company's common stock at the date of grant.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of the year ended June 30, 1996. Under SFAS 123, the fair value of
stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum
value method prior to the initial public offering and the Black-Scholes option
pricing model thereafter, with the following weighted average assumptions:
expected option life, 6 months following vesting; 80% stock price volatility;
risk free interest rates, 6.1% for options granted during the year ended June
30, 1997 and 5.9% for options granted during the year ended June 30, 1996; and
no dividends during the expected term. The Company's calculations are based on
a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the fiscal 1997 and 1996 awards had been
amortized to expense, pro forma net income would have been $2,302,000 ($0.25
per share) in fiscal 1997 and $554,000 ($0.07 per share) in fiscal 1996. The
impact of outstanding non-vested stock options granted prior to fiscal 1996
has been excluded from the pro forma calculation; as such, the fiscal 1997 and
1996 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit-Sharing Plan (the Plan) for all
employees. Participants may contribute between 1% and 15% of their annual
compensation on a before-tax basis, but not to exceed the amount allowable as
a deduction for federal income tax purposes. Participants vest immediately in
their contributions. The Company is not required to contribute, nor has it
contributed, to the Plan for the fiscal years ended June 30, 1997, 1996 and
1995.
10. SUBSEQUENT EVENT
On October 25, 1996, the Company sued Veritas Software Corporation
("Veritas") in the Santa Clara County California Superior Court alleging
breach of contract, unfair competition and intentional interference with
prospective economic advantage in connection with a contract dated as of April
10, 1995 (the "Master Agreement") between the Company and Veritas. The Master
Agreement was entered into following Veritas' acquisition of a company whose
high availability product the Company previously had the right to sell. The
46
<PAGE>
Master Agreement granted the Company the right to market and support
FirstWatch, a product which formed the core software engine of QualixHA, a
high availability product for UNIX environments previously sold by the
Company, but which is not part of QualixHA+. The Master Agreement, and
therefore the Company's right to market QualixHA, terminated on February 28,
1997. The Company sought unspecified compensatory and punitive damages.
Veritas filed a cross-complaint on October 29, 1996 alleging that the Company
engaged in unfair competition, false advertising, breach of contract, fraud
and negligent misrepresentation as a result of various alleged activities.
Veritas sought unspecified compensatory and punitive damages and injunctive
relief including requiring Qualix to divulge certain customer information. On
October 29, 1996, the court granted the Company a temporary restraining order
enjoining Veritas from stating that the Master Agreement had been terminated.
The court also granted Veritas an order enjoining the Company from stating
that QualixHA+ is an upgrade to FirstWatch or that QualixHA+ is the FirstWatch
product. On November 14, 1996, the court issued a preliminary injunction
against Veritas on substantially similar terms as the temporary restraining
order and indicated that it would, upon submission of an order by Veritas,
issue a preliminary injunction enjoining the Company from stating that
QualixHA+ is an upgrade to FirstWatch. Veritas never submitted such an order.
In November 1996, the Company and Veritas began arbitration of the dispute
pursuant to the Master Agreement.
On August 11, 1997 the Company and Veritas entered into a Mutual Settlement
Agreement and Settlement of Claims in connection with all legal actions and
arbitration proceedings between the companies. All licensing agreements
between the companies, including the Master Agreement, have been terminated
and all claims between the companies relating to the dispute have been
dismissed with prejudice. The resolution of this matter did not have a
material adverse effect on the Company's financial position or results of
operations.
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information regarding directors is incorporated herein by reference from
the section entitled "Election of Directors" of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, for the Company's Annual Meeting of Stockholders to
be held on November 12, 1997 (the "Proxy Statement"). The Proxy Statement is
anticipated to be filed within 120 days after the end of the Company's fiscal
year ended June 30, 1997.
For information regarding Executive Officers of the Company, see the
information appearing under the caption "Executive Officers of the Company" in
Part I, Item 4a of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding compensation of the Company's Executive Officers is
incorporated herein by reference from the section entitled "Executive
Compensation" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of the Company as set forth under Item
8 are filed as part of this Annual Report on Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and Qualifying Accounts is filed on page 51 of this
Form 10-K.
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the accompanying notes.
(a)(3) EXHIBITS
See exhibit index at page 52 of this Report on Form 10-K.
(B) REPORTS ON FORM 8-K
None.
49
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT ON FORM 10-K TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THIS
17 DAY OF SEPTEMBER 1997.
Qualix Group, Inc.
/s/ Richard G Thau
By __________________________________
RICHARD G. THAU
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER (DULY AUTHORIZED
OFFICER AND PRINCIPAL EXECUTIVE
OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON SEPTEMBER 17, 1997
ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURES TITLE
/s/ Richard G. Thau Chairman, President and Chief
_____________________________________ Executive Officer (principal
RICHARD G. THAU executive officer)
/s/ Jean A. Kovacs Executive Vice President,
_____________________________________ Secretary and Director
JEAN A. KOVACS
/s/ Bruce C. Felt Vice President, Finance and Chief
_____________________________________ Financial Officer (principal
BRUCE C. FELT financial officer)
/s/ Francis L. Serafin Controller (principal
_____________________________________ accounting officer)
FRANCIS L. SERAFIN
/s/ William Hart Director
_____________________________________
WILLIAM HART
/s/ William D. Jobe Director
_____________________________________
WILLIAM D. JOBE
/s/ Charles L. Minter Director
_____________________________________
CHARLES L. MINTER
/s/ Peter L. Wolken Director
_____________________________________
PETER L. WOLKEN
50
<PAGE>
QUALIX GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING COSTS AND END OF
FISCAL YEAR ENDED OF PERIOD EXPENSES DEDUCTIONS (A) PERIOD
- ----------------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C>
June 30, 1997.................... $256 239 109 386
June 30, 1996.................... $ 87 216 47 256
June 30, 1995.................... $164 78 155 87
</TABLE>
- --------
a) Amounts determined not to be collectible, net of recoveries.
51
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1* --Agreement and Plan of Reorganization among the Company, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. dated July 14, 1996.
2.2* --Articles of Merger between and among the Company, Qualix Subsidiary,
Inc. and Octopus Technologies, Inc. filed August 30, 1996.
3.1* --Amended and Restated Certificate of Incorporation of the Company, as
currently in effect.
3.2* --Form of Amended and Restated Certificate of Incorporation of the
Company (to be filed prior to the closing of the offering made
pursuant to this Registration Statement).
3.3* --Form of Amended and Restated Certificate of Incorporation of the
Company (to be filed upon the closing of the offering made pursuant
to this Registration Statement).
3.4* --Bylaws of the Company, as currently in effect.
4.1* --Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* --Specimen Common Stock certificate.
4.3* --Series D Preferred Stock and Warrant Purchase Agreement dated April
11, 1995.
10.1* --Form of Indemnification Agreement.
10.2* --1995 Stock Option Plan.
10.3* --1997 Stock Option Plan.
10.4* --Employee Stock Purchase Plan.
10.5* --Senior Managers Bonus Plan.
10.6* --Series A Preferred Stock Purchase Agreement dated November 15, 1990.
10.7* --Series B Preferred Stock Purchase Agreement dated December 27, 1991.
10.8* --Series C Preferred Stock Purchase Agreement dated October 20, 1992.
10.9* --Series C Preferred Stock Purchase Agreement dated November 16, 1993.
10.10* --Note and Warrant Purchase Agreement dated August 26, 1994.
10.11* --Asset Purchase Agreement between Anthill Incorporated and The
Company dated May 1, 1996.
10.12* --Employment Agreement between The Company and Richard G. Thau dated
November 15, 1990.
10.13* --Employment Agreement between The Company and Jean A. Kovacs dated
November 15, 1990.
10.14* --Employment Agreement between The Company and Bruce C. Felt dated
March 25, 1994.
10.15* --Promissory Notes of Bruce A. Felt dated May 17, 1996 and May 17,
1996 in the principal amounts of $96,000 and $9,600, respectively.
10.16*+ --Distributor Agreement between The Company and StereoGraphics
Corporation dated March 27, 1996.
10.17*+ --Letter Agreement between The Company and Silicon Graphics, Inc.
dated June 6, 1994.
10.18* --[This item intentionally left blank.]
10.19*+ --Master Agreement between The Company and Veritas Software
Corporation dated April 10, 1995.
10.20* --Reseller Agreement between The Company and Check Point Software
Technologies Ltd. dated June 3, 1994.
10.21* --Lease Agreement between The Company and Norfolk Atrium, a California
Limited Partnership dated April 1, 1995.
10.22 --Lease Agreement between The Company and Cassiopea Venture
Corporation dated June 13, 1997.
10.23 --OEM License Agreement between The Company and Intergraph Corporation
dated July 31, 1996.
10.24 --Amendment to OEM License Agreement between The Company and
Intergraph Corporation dated May 21, 1997.
10.25+ --Mutual Settlement Agreement and Release of Claims between the
Company and Veritas Software Corporation dated August 11, 1997.
21.1* --Subsidiary of the Company.
23.1 --Independent Auditors' Consent.
23.2* --Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* --Power of Attorney (see page II-4).
27 --Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference from an exhibit to the Company's Registration
Statement on Form S-1, as amended, (File No. 333-17529) declared effective by
the Commission on February 12, 1997.
+ Confidential treatment requested.
52
<PAGE>
EXHIBIT 10.22
TENANT: Qualix Group SUBJECT PROPERTY: Bovet Office Centre, Suite 200
177 Bovet Road, San Mateo, California
LANDLORD: Casiopea Venture Corporation DATE: April 24, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION PAGE
<S> <C>
1. LEASE OF PREMISES............................................... 3
2. USES............................................................ 4
3. CONDITION OF THE PREMISES....................................... 5
4. RENT............................................................ 5
5. PAYMENT OF TAXES, ASSESSMENTS, AND OPERATING EXPENSES........... 6
6. SECURITY........................................................ 11
7. HAZARDOUS SUBSTANCES............................................ 11
8. NO LIGHT, AIR OR VIEW EASEMENT.................................. 12
9. ALTERATIONS..................................................... 12
10. REPAIR OBLIGATIONS.............................................. 15
11. LIENS........................................................... 15
12. SIGNS; NAMES OF BUILDING AND FACILITY........................... 15
13. ASSIGNMENT AND SUBLETTING....................................... 16
14. INDEMNIFICATION; INSURANCE; ALLOCATION OF RISK.................. 19
15. SECURITY SERVICES............................................... 23
16. BUILDING SERVICES............................................... 23
17. FORCE MAJEURE................................................... 24
18. RULES AND REGULATIONS........................................... 24
19. HOLDING OVER.................................................... 24
20. SUBORDINATION................................................... 26
21. ENTRY BY LANDLORD............................................... 26
22. DEFAULTS AND REMEDIES........................................... 26
23. DAMAGE OR DESTRUCTION........................................... 27
24. EMINENT DOMAIN.................................................. 29
25. SALE BY LANDLORD................................................ 31
26. ESTOPPEL CERTIFICATES........................................... 31
27. REQUIREMENTS OF LANDLORD'S LENDERS.............................. 31
28. SUBSTITUTION OF PREMISES........................................ 32
29. ATTORNEYS' FEES................................................. 32
30. NON-WAIVER...................................................... 32
31. NOTICES......................................................... 32
32. JOINT AND SEVERAL LIABILITY..................................... 33
33. TIME............................................................ 33
34. SUCCESSORS...................................................... 33
35. ENTIRE AGREEMENT................................................ 33
36. RESTRICTIONS ON OPTIONS......................................... 33
37. RECORDING....................................................... 35
38. AUTHORIZATION TO SIGN LEASE..................................... 35
39. BROKER PARTICIPATION............................................ 35
40. SURVIVAL OF CERTAIN RIGHTS AND OBLIGATIONS...................... 35
41. PARKING......................................................... 35
42. SEVERABILITY.................................................... 36
43. CERTAIN RIGHTS RESERVED BY LANDLORD............................. 36
44. WAIVER OF JURY TRIAL............................................ 36
45. INTERPRETATION.................................................. 36
46. COOPERATION WITH GOVERNMENT SPONSORED PROGRAMS.................. 37
47. PARTIES TO ACT REASONABLY AND IN GOOD FAITH..................... 37
48. OFFER........................................................... 37
49. DUAL REPRESENTATION............................................. 37
50. CONTINGENCY AND OPTION TO RELOCATE.............................. 37
</TABLE>
LIST OF ATTACHMENTS:
Addendum A
Lease Rider No. 1
Lease Rider No. 2
Exhibit A-1: Site Plan.
Exhibit A-2: Floor Plan of the Premises.
Exhibit B: Work Letter.
Exhibit C: Rules and Regulations.
Exhibit D: Standards for Utilities and Services.
Exhibit E: Acknowledgment of Commencement of Term.
Exhibit F: Adjustments to Monthly Rent.
This Lease, between the parties named below as Landlord and Tenant, is dated
April 24, 1997, for reference purposes only.
SALIENT LEASE TERMS AND DEFINITIONS.
1.1 Salient Lease Terms.
Page 1 of 38.
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a. Rent Payment Address:
c/o Birtcher Property Services
177 Bovet Road, Suite 200
San Mateo, CA 94402
b. Parties and Notice Addresses:
Landlord:
Casiopea Venture Corporation
c/o Birtcher Property Services
177 Bovet Road, Suite 200
San Mateo, CA 94402
Tenant:
Qualix Group, Inc.
1900 Norfolk Avenue
San Mateo, CA 94404
c. Premises:
1. Name and Location of Facility where the Building is located:
Bovet Office Centre
2. Street Address of Building: 177 Bovet Road
3. Suite No. of Premises: 200, located on the second floor of
the Building and Suite 110 on the ground floor.
4. Approximate No. of net rentable square feet:
i. the Premises: 18,886;
ii. the Building: 92,099
d. Term:
1. A period of 5 years.
2. Scheduled to commence on July 1, 1997, or upon substantial
completion of tenant improvements whichever is later; and end
60 months after the commencement date subject to paragraph
50.
e. Monthly Rent:
1. Initial Monthly Rent: $46,270.70/month (subject to adjustment
per Exhibit F)
2. Prepaid Rent: $46,270.70
f. Deposit: $46,270.70
g. Permitted Uses: The Premises shall be used solely for the following
uses: General Office use and incidental uses directly related thereto.
h. Tenant's Percentage Share: 20.5% (Subsection 5.1)
i. Base Years: The Base Expense Year for Operating Expenses shall be
calendar year 1997, and the Base Tax Year shall be the fiscal tax year
commencing 1996, and ending 1997.
j. Landlord's Broker: Cornish & Carey Commercial
Tenant's Broker: Cornish & Carey Commercial
k. Vehicle Parking Privileges Allocated to Tenant: 62
l. Contents: This Lease consists of:
Pages 1 through 37, and Sections 1 through 50
Addendum A
Exhibits:
Addendum A
Lease Rider No. 1
Lease Rider No. 2
Exhibit A-1: Site Plan.
Exhibit A-2: Floor Plan of the Premises.
Exhibit B: Work Letter.
Page 2 of 38.
<PAGE>
Exhibit C: Rules and Regulations.
Exhibit D: Standards for Utilities and Services.
Exhibit E: Acknowledgment of Commencement of Term.
Exhibit F: Adjustments to Monthly Rent.
1.2 Definitions. For the convenience of the parties, a listing of certain
defined terms used in this Lease is set forth below:
Term Section Where Defined
ALTERATIONS Subsection 10.1
ASSESSMENTS Subsection 6.2.2
BASE EXPENSE YEAR Subsection 1.1(i)
BASE TAX YEAR Subsection 1.1(i)
BUILDING Subsection 2.2
CASUALTY Subsection 24.2
CLAIMS Subsection 15.1
COMMENCEMENT DATE Subsection 2.2
DEPOSIT Subsection 7.1
ENVIRONMENTAL REQUIREMENTS Subsection 8.1
EVENT OF DEFAULT Subsection 23.1.1
FACILITY Subsection 2.2
FORCE MAJEURE Section 18
GROSS RENT Subsection 14.5.1(iii)
HAZARDOUS SUBSTANCE Subsection 8.1
LANDLORD PARTIES Subsection 15.1
LAWS Subsection 3.2
MINIMUM MONTHLY RENT Subsection 5.1
OPERATING EXPENSES Subsection 6.3.1
OPTION Subsection 37.1
PERSONAL PROPERTY Subsection 10.3.2
PREMISES Subsection 2.2
REAL PROPERTY Subsection 2.2
READY FOR OCCUPANCY Exhibit B
RENT Subsection 5.3
RULES AND REGULATIONS Section 19
SCHEDULED COMMENCEMENT DATE Subsection 2.2
TAXES Subsection 6.2.1
TENANT DELAYS Exhibit B
TENANT IMPROVEMENTS Exhibit B & Subsection 10.1
TENANT PARTIES Subsection 11.1
TENANT'S PERCENTAGE SHARE Subsection 6.1
TERM Subsection 2.2
TRANSFER Subsection 14.1
1. LEASE OF PREMISES:
1.1 Demising Clause. Landlord hereby leases to Tenant, and Tenant leases
from Landlord, the Premises for the entire Term upon and subject to the
terms, covenants, and conditions set forth in this Lease, including the
Salient Terms and Definitions in Section 1 and the attached exhibits.
Tenant covenants as a material part of the consideration for this Lease
to keep and perform each and all of said terms, covenants, and conditions
applicable to Tenant hereunder. This Lease is made upon the condition of
such performance. Landlord reserves to Landlord the areas beneath and
above the Premises and the use thereof together with the right to
install, maintain, use, repair and replace pipes, ducts, conduits, wires,
and structural elements leading through the Premises and serving other
parts of the Facility, so long as such items are concealed by walls,
flooring or ceilings. Such reservation shall in no way affect the
maintenance obligations imposed herein.
1.2 Description. As used herein, the following capitalized terms shall
have the indicated meanings:
a. The "Facility" shall mean that certain real property (including the
building(s), parking facilities, if any, and other improvements now
located and/or subsequently constructed thereon) owned by Landlord and
described in Exhibit A-1 attached hereto, said real property being
described generally in Subsection 1.1(c)(1) above.
Page 3 of 38.
<PAGE>
b. The "Building" shall mean that certain building in which the
Premises are located, said Building being a part of the Facility and
being more particularly described in Subsection 1.1(c)(2) above.
c. The "Premises" shall mean that certain space located in the
Building and described in Subsection 1.1(c)(3) above and delineated on
Exhibit A-2 attached hereto, which space consists of the approximate
amount of rentable square footage specified in said Subsection
1.1(c)(4).
d. The "Term" shall mean the term of this Lease, which, subject to the
provisions of this Lease concerning early occupation, early
termination, and extensions, shall be for the period of time specified
in Subsection 1.1(d)(1) above and shall commence on the earliest of
(a) the date that the Tenant Improvements are substantially completed
and the Premises are Ready For Occupancy (as defined in Exhibit B) or
(b) the date the Tenant Improvements would have been substantially
completed and the Premises would have been Ready For Occupancy except
for Tenant Delays or (c) the date that Tenant, or any person occupying
any of the Premises with Tenant's permission, commences business
operations from the Premises (the "Commencement Date"). The
anticipated commencement date of the Term of this Lease is specified
in Subsection 1.1(d)(2) (the "Scheduled Commencement Date"). If the
Term commences prior to the Scheduled Commencement Date, the length of
the initial Term shall be extended to include such early occupancy
period and the initial Term shall end on the scheduled termination
date set forth in Subsection 1.1(d)(2). If the Term commences after
the Scheduled Commencement Date, the initial Term shall expire on the
last day of the calendar month in which the period of time specified
in Subsection 1.1(d)(1) elapses.
1.3 Delivery of Premises. The Premises shall be delivered to Tenant when
the Tenant Improvements (as defined in Exhibit B) have been completed and
the Premises are Ready For Occupancy. Delay of the Commencement Date to
the extent not caused by Tenant Delays shall be Tenant's sole remedy for
any delay in constructing the Tenant Improvements or making the Premises
Ready For Occupancy.
1.4 Notice of Commencement Date. Landlord shall send Tenant notice of the
occurrence of the Commencement Date in the form of the attached Exhibit
E, which notice Tenant shall acknowledge by executing a copy of the
notice and returning it to Landlord. If Tenant fails to sign and return
the notice to Landlord within ten (10) days after receipt of the notice
from Landlord, the notice as sent by Landlord shall be deemed to have
correctly set forth the Commencement Date. Failure of Landlord to send
such notice shall have no effect on the Commencement Date.
2. USES:
2.1 Permitted Uses. Except as otherwise expressly provided herein, the
Premises shall be used only for the Permitted Uses specified in
subsection 1.1(g) and for no other use or purpose.
2.2 Restriction on Use. Without limitation to the generality of the
foregoing use restriction, Tenant specifically covenants and agrees that
it shall not (a) do, bring, or keep, or permit to be done, brought, or
kept, anything in or about the Premises that will in any way (1) obstruct
or interfere with the rights of any other tenants or occupants of the
Facility or injure or annoy them, (2) cause a weight load or stress on
the floor or any other portion of the Premises in excess of the weight
load or stress that the floor or other portion of the Premises is
designed to bear, (3) increase the existing rate of, or adversely affect,
any fire or other insurance upon the Building or its contents, or (4)
violate any of Landlord's Rules and Regulations; (b) use the Premises, or
allow them to be used, for any residential or disreputable purpose; (c)
commit or suffer to be committed any waste in or upon the Premises or the
Facility; or (d) provided such exclusive does not prohibit Tenant from
primarily using the Premises for the Permitted Uses specified in
Subsection 1.1(g), Tenant shall not conduct or permit to be conducted on
or from the Premises activities that violate any exclusive use right
presently or subsequently granted by Landlord to another tenant. Tenant,
at Tenant's sole cost, shall comply with all laws, statutes, rules,
regulations, ordinances, codes, licenses, permits, orders, decrees,
judgments, approvals, plans, authorizations, and similar items of any
local, state, or federal
Page 4 of 38.
<PAGE>
governmental or quasi-governmental authority (collectively, "Laws," or
individually, a "Law") affecting the Premises, and with the requirements
of any Board of Fire Underwriters or other similar body now or hereafter
instituted, and shall also comply with any order, directive or
certificate of occupancy, issued pursuant to any Laws, that affects the
condition, use, or occupancy of the Premises, including, but not limited
to, any requirements of structural changes related to or affected by
Tenant's acts or use of the Premises.
2.3 Compliance by Other Tenants. Upon Landlord's receipt of Tenant's
written notice that another tenant or occupant of the Facility is
engaging in conduct prohibited by this Section, to the material detriment
of Tenant, Landlord agrees to use commercially reasonable efforts,
consistent with Landlord's rights under the lease of such other tenant or
occupant, to cause such party to desist from such prohibited conduct.
Notwithstanding the foregoing, Landlord shall not be liable to Tenant for
any such conduct on the part of other tenants or occupants of the
Building.
3. CONDITION OF THE PREMISES:
Except as otherwise expressly provided in Exhibit B attached hereto, it is
specifically understood and agreed that (a) Landlord has no obligation and has
made no promises to alter, remodel, improve, repair, decorate, or paint the
Premises or any part thereof, (b) Landlord has made no representations to Tenant
respecting the condition of the Premises or the Building or the suitability or
legality of the Premises for the uses contemplated by this Lease, and (c) by
accepting possession of the Premises after substantial completion of the work
(if any) to be performed by Landlord pursuant to such Exhibit B, Tenant
acknowledges that the Premises are in good condition, and with such acceptance
of possession Tenant waives any claim against Landlord or Landlord's agents or
contractors for the condition or functioning of any improvements within or about
the Premises.
4. RENT:
4.1 Monthly Rent. From and after the Commencement Date, Tenant shall pay
to the Landlord, for each calendar month of the Term, the Monthly Rent
set forth in Subsection 1.1(e)(1), as the same may be adjusted from time
to time as provided in Section 4.2. Monthly Rent shall be due and payable
to Landlord in lawful money of the United States, in advance, on the
first (1st) day of each calendar month of the Term, without abatement,
deduction, claim or offset, and without prior notice, invoice or demand,
at Landlord's address set forth in Subsection 1.1.(a) or at such place as
Landlord may from time to time designate. Tenant's payment of Monthly
Rent for the first (1st) month of the Term shall be delivered to Landlord
concurrently with Tenant's execution of this Lease.
4.1.1 Adjustments. Monthly Rent shall be adjusted from time to time as
provided in Exhibit F.
4.2 In the event that Landlord is unable to deliver to Tenant the notice
of the increased Minimum Monthly Rent at least five (5) business days
prior to the Adjustment Date, Tenant shall commence to pay the increased
Minimum Monthly Rent on the first day of the month following the receipt
of such notice, which notice must be sent at least five (5) business days
prior to the first day of such month ("Payment Date"), and shall also
pay, together with the first payment of the increased Minimum Monthly
Rent, an amount determined by multiplying the amount of the increase in
Minimum Monthly Rent times the number of months which have elapsed
between the Adjustment Date and the Payment Date. Should the Bureau
discontinue the publication of the Index, or publish the same less
frequently, or alter the same in some other manner, Landlord, in its
discretion, shall adopt a substitute index or procedure that reasonably
reflects and monitors consumer prices.
4.3 Definition of "Rent"; Prorations. Any and all payments of Minimum
Monthly Rent and any and all taxes, assessments, fees, charges, costs,
expenses, insurance obligations, late charges, Common Area Costs, and all
other payments, disbursements, or reimbursements that are attributable
to, payable by or the responsibility of Tenant under this Lease shall
constitute "rent" for all purposes of this Lease and any applicable
unlawful detainer statute. Any rent payable to Landlord by Tenant for any
fractional month shall be prorated based upon the actual number of days
in such calendar month.
Page 5 of 38.
<PAGE>
4.4 Place and Manner of Payment. All rent shall be paid by Tenant to
Landlord in lawful money of the United States of America at Landlord's
address set forth in Subsection 1.1(a) above, or to such other person or
at such other place as Landlord may from time to time designate. All
payments of rent shall be payable without prior notice or demand and
shall be paid without deduction, setoff or counterclaim for any reason
whatsoever.
4.5 Late Charges. Tenant acknowledges that the late payment of rent will
cause Landlord to incur damages, the exact amount of which would be
impractical and extremely difficult to ascertain. Such damages may
include, without limitation, processing, accounting, and other
administrative costs, loss of use of the overdue funds, and late charges
that may be imposed on Landlord by the terms of any encumbrance and note
secured by any encumbrance covering the Premises. Landlord and Tenant
agree that if Landlord does not receive a payment of rent within ten (10)
days after such payment becomes due, Tenant shall pay to Landlord a late
charge in an amount equal to five percent (5%) of such overdue rent. If
Landlord does not receive a payment of rent within thirty (30) days after
such payment becomes due, Tenant shall pay to Landlord additional late
charges computed at the interest rate of ten percent (10%) per annum or,
if lower, the maximum interest rate allowed by law. Such interest shall
begin to accrue as of such 30th day after such rent payment became due.
The parties agree that such late charges represent a fair and reasonable
estimate of the cost that Landlord will incur by reason of late payment
by Tenant. Acceptance of any late charge by Landlord shall not cure or
waive Tenant's default, nor prevent Landlord from exercising, before or
after such acceptance, any of the rights and remedies for a default
provided by this Lease or at law. Tenant shall be liable for late charges
regardless of whether Tenant's failure to pay the rent when due
constitutes an Event of Default under this Lease.
4.6 Time of Payment; Disputed Amounts. Tenant agrees to pay all rent
required under this Lease within the applicable time limits set forth in
this Lease. If no such time period is elsewhere specified herein for
payment of a particular amount, then such amount shall be paid within ten
(10) days after Landlord's delivery of an invoice or demand therefor. If
Tenant receives from Landlord an invoice or statement, sent by Landlord
in good faith, and Tenant in good faith disputes whether all or any part
of such rent is due and owing, Tenant shall nevertheless pay to Landlord
the amount of the rent indicated on the invoice or statement until such
time as the dispute is resolved by mutual agreement of the parties or by
final judgment from a court of competent jurisdiction (or when
arbitration is permitted or required, by a final award from an
arbitrator) relieving or mitigating Tenant's obligation to pay such rent.
Failure by Tenant to pay any disputed amounts when due (as if there were
no dispute) shall constitute an Event of Default under this Lease, and
Landlord's rights shall be as provided for in Section 22 (Defaults and
Remedies). In such instance where Tenant disputes its obligations to pay
all or part of the rent indicated on such invoice or statement, Tenant
shall, concurrently with the payment of such rent, provide Landlord with
a written notice specifying in detail why Tenant is not required to pay
all or part of such rent. Tenant shall be deemed to have waived its right
to contest any past payment of rent unless it has filed a lawsuit against
Landlord (or when arbitration is permitted or required, filed for
arbitration) and has served Landlord with notice of such filing within
one (1) year after such payment.
4.7 Partial Payments. Any partial payment of rents outstanding hereunder
shall be allocated to such outstanding rental charges as Landlord may
elect. In the absence of a contrary election made by Landlord, payments
by Tenant shall be applied against the then outstanding rental charges
that first became due.
5. PAYMENT OF TAXES, ASSESSMENTS, AND OPERATING EXPENSES;
5.1 Tenant's Percentage Share. In addition to paying the Minimum Monthly
Rent, Tenant shall pay to Landlord the percentage set forth in subsection
1.1(h) ("Tenant's Percentage Share") of the amounts set forth below in
Subsections 5.2 and 5.3. Tenant's Percentage Share has been calculated by
dividing the number of square feet of rentable area of the Premises by
the number of square feet of rentable area in the Building, based upon
the best information available to Landlord as of the execution of this
Lease. Said Tenant's Percentage Share shall not be subject to correction
or recalculation, except in the event the rentable area of the Building
is changed due to events of damage, destruction, demolition, or
construction. Tenant
Page 6 of 38.
<PAGE>
hereby approves and accepts Landlord's calculations of the Tenant's
Percentage Share as set forth in Subsection 1.1(h).
5.2 Taxes and Assessments
5.2.1 Tenant shall pay to Landlord an amount equal to Tenant's
Percentage Share of any increase in Taxes above the amount of Taxes
levied or assessed for the Base Tax Year set forth in Subsection
1.1(i), either by way of increase in the rate or in the assessed
valuation of the Real Property (or any portion thereof) or by
imposition of any such charges by ordinance or statute of any
authority having jurisdiction. As used in this Section 5, the term
"Taxes" shall mean all taxes, excises, penalties (unless due solely to
Landlord's negligence or willful misconduct), fees (including, without
limitation, all license, permit and inspection fees), and other
charges (but excluding Assessments, as defined in Subsection 5.2.2
below) assessed, levied, charged, confirmed, or imposed by any
federal, state, or local government, any political subdivision, public
corporation, district, or other political or public entity or public
authority (a) on the Real Property (or any portion thereof), (b) on
Landlord with respect to the Real Property (or any portion thereof),
(c) on the act of leasing or entering into leases of space in the Real
Property, (d) on or measured by the rent payable under leases of
space, or in connection with the business of leasing space, in the
Real Property, or (e) on personal property of Landlord used in the
operation of the Real Property (or any portion thereof). Such Taxes
may be general or specific, ordinary or extraordinary, or of any kind
or nature whatsoever, whether or not now customary or within the
contemplation of the parties to this Lease. Notwithstanding the
foregoing, documentary transfer taxes, gift, inheritance, succession,
and estate taxes, and federal and state income taxes computed on
Landlord's income shall not be included as Taxes, nor shall the
computation of increases in Taxes for which Tenant shall pay Tenant's
Percentage Share include any amounts paid by Tenant under Subsections
5.2.3 and 5.2.4 or any amounts separately billed to a particular
tenant of the Real Property with respect to similar matters (other
than as its percentage share of increases in Taxes or Assessments).
5.2.2 Tenant shall also pay to Landlord an amount equal to Tenant's
Percentage Share of any increase in Assessments above the amount of
Assessments levied or assessed against the Real Property for the Base
Tax Year. As used in this Section 5, the term "Assessments" shall mean
all assessments, transit charges, housing charges, and levies
assessed, charged, levied, confirmed, or imposed by any federal,
state, or local government, any political subdivision, public
corporation, district, or other political or public entity or public
authority on or with respect to any of the items described in clauses
(a) through (e) of Subsection 5.2.1 or with respect to the use,
occupancy, management, maintenance, alteration, repair, or operation
of the Real Property (or any portion thereof) or any services or
utilities furnished or consumed in connection therewith.
5.2.3 In addition to paying Tenant's Percentage Share of increases in
the Taxes and Assessments described in Subsections 5.2.1 and 5.2.2,
Tenant shall pay one hundred per cent (100%) of the following, as
reasonably determined by Landlord: any increase in Taxes or
Assessments caused by the improvements described in Exhibit B or any
other improvements or installations at any time made to the Premises
by or at the sole instance of Tenant. The total amounts due under this
Subsection 5.2.3 shall be paid to Landlord on or before the date full
payment of such Taxes or Assessments shall become due, or if payable
in installments, the date payment of the first installment of such
Taxes or Assessments shall become due. In the event such Taxes or
Assessments are paid by Landlord, Tenant forthwith upon demand
therefor shall reimburse Landlord for all amounts of such Taxes or
Assessments chargeable against Tenant pursuant to this Subsection
5.2.3.
5.2.4 Tenant shall pay, before delinquency, any and all levied or
assessed taxes that become payable during or with respect to the Term
upon Tenant's equipment, furnishings, fixtures, and other personal
property located in the Premises, including carpeting installed by or
at the instance of Tenant, even though said carpeting has become a
part of the Premises. In the event said taxes are paid by Landlord,
Tenant
Page 7 of 38.
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forthwith upon demand therefor shall reimburse Landlord for all such
taxes paid by Landlord.
5.2.5 Any Taxes or Assessments that may be paid over more than a one-
year period shall be apportioned evenly over the maximum period of
time permitted by Law and only the portion thereof attributable to a
given year shall be included in Taxes or Assessments for that year. In
the event that Landlord contests the amount of any Taxes or
Assessments and receives a refund or credit as a result thereof, then
Landlord shall pay Tenant its pro rata share of such refund to the
extent that the refund relates to Taxes or Assessments that have been
paid by Tenant. Upon Tenant's request, Landlord shall provide a copy
of all applicable tax bills.
5.3 Operating Expense Increases
5.3.1 Tenant shall pay to Landlord an amount equal to Tenant's
Percentage Share of any increase in Operating Expenses above the
Operating Expenses for the Base Expense Year. As used in this Section
5, the term "Operating Expenses" shall mean all costs and expenses
paid or incurred by Landlord in connection with the operation,
management, or maintenance of the Real Property (which costs shall be
accounted for under generally accepted accounting principles and shall
be amortized when and as required thereunder), excluding, however, the
items described in Subsection 5.3.2 below, which items shall not be
included in Operating Expenses for purposes of this Lease. By way of
illustration but not limitation, Operating Expenses shall include
(subject to the specific exclusions described in Subsection 5.3.2
below) all (a) costs for heating, cooling, ventilation, fuel, and
utilities; (b) costs and expenses for maintenance, ordinary and
extraordinary repairs and replacements, testing, and operation of
building systems and components; (c) costs and expenses for security,
landscaping, refuse disposal, janitorial services, labor, supplies,
materials, equipment, and tools, including any sales, use, or excise
taxes thereon; (d) reasonable management fees and other costs of
managing the Real Property, whether managed by Landlord or an
independent contractor; (e) the wages, salaries, bonuses, employee
benefits and payroll burden of all Landlord's (or its agents') on-site
employees engaged in the operation, maintenance, management, or
security of the Real Property, including employers' payroll, social
security, workers' compensation, unemployment, and similar taxes with
respect to such employees; (f) all insurance premiums paid or incurred
by Landlord with respect to the Real Property and all amounts paid in
connection with claims or losses that are less than the amount of such
deductibles or self-insured retentions as Landlord may have deemed
reasonable for its insurance policies; (g) all costs and expenses of
contesting by appropriate proceeding the amount or validity of any
Taxes or Assessments; (h) the cost of any capital improvements or
capital assets constructed, made, purchased, or installed in order to
comply with the requirements of any governmental or quasi-governmental
law or authority, or constructed, made, purchased, or installed in
order to conserve energy or reduce other Operating Expenses, amortized
over the useful life of such capital improvements or capital assets,
as reasonably determined by Landlord, together with such interest and
finance charges as Landlord may pay in financing such costs or (if
such financing is not obtained) interest on the unamortized balance of
such costs accruing at an annual interest rate equal to the interest
rate from time to time publicly announced by the San Francisco Main
office of Bank of America, NT&SA (or any successor bank thereto), as
its prime annual interest rate (or "reference rate") charged to
substantial commercial borrowers for 90-day loans; (i) the fair market
rental value of the building office and other space in the building
occupied by Landlord or its manager in connection with the operation
or management of the Real Property; and (j) and all other costs and
expenses that under generally accepted accounting principles and
practices would clearly be included in operating expenses.
5.3.2. The following costs and expenses shall be excluded from the
definition of "Operating Expenses" for purposes of this Lease: (a) any
and all Taxes and Assessments, as defined in Subsections 5.2.1, 5.2.2,
and 5.2.3 above; (b) any costs or expenses separately billed to a
particular tenant of the Real Property and not billed as such tenant's
percentage share of costs or expenses of that type (provided, however,
Tenant's Percentage Share, as applied to such cost categories, shall
be recomputed to exclude the
Page 8 of 38.
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rentable area of premises of tenants being so billed separately); (c)
costs for tenant improvements and leasing commissions; (d)
depreciation on the Building and the equipment therein; (e) costs of
capital improvements, other than such as are specifically described
and included as Operating Expenses in Subsection 5.3.1 above; (f) any
costs recovered from condemnation or insurance proceeds; (g)
depreciation, amortization, and interest on and capital retirement of
debt, except to the extent such costs shall have been elsewhere
expressly included in the definition of Operating Expenses; (h)
attorneys' fees, costs and disbursements and other expenses incurred
in connection with negotiations or disputes with tenants, other
occupants, or prospective tenants or other occupants of the Building;
(i) costs of Landlord's general administration, other than as
specifically described and set forth in Subsection 5.3.1; (j) costs
incurred in advertising and promotional activities for marketing of
the Building to persons other than the then occupants of the Building;
(k) when and if any service (such as janitorial service) that is
normally provided by Landlord to tenants of the Building is not
provided by Landlord to Tenant in the Premises pursuant to agreement
with Tenant under the specific terms of this Lease, then in
determining Operating Expenses for Tenant, the cost of that service
(except as it relates to common areas) shall be excluded; and (l)
unless specifically included under Subsection 5.3.1 above, any other
expense that under generally accepted accounting principles and
practice would clearly be excluded from operating expenses;
5.3.3. If at any time less than ninety-five percent (95%) of the
rentable area of the Building is occupied, the Operating Expenses
shall be reasonably adjusted by Landlord to approximate such operating
and maintenance costs as would have been incurred if the Building had
been at least ninety-five percent (95%) occupied.
5.4 Allocations of Certain Costs. If any Taxes, Assessments, or Operating
Expenses paid in one year relate to more than one calendar year, Landlord
shall allocate such Taxes, Assessments, or Operating Expenses among the
appropriate calendar years. If the Term ends other than on December 31,
Tenant's obligations to pay Tenant's Percentage Share of estimated and
actual amounts of increases in Taxes, Assessments, and Operating Expenses
for such final calendar year shall be prorated to reflect the portion of
such year included in the Term. Such proration shall be made by
multiplying the total estimated or actual (as the case may be) Taxes,
Assessments, and Operating Expenses for such calendar year by a fraction,
the numerator of which shall be the number of days of the Term during
such calendar year, and the denominator of which shall be 365. Landlord
may, but shall not be required to, calculate prorations with regard to
when during a calendar year particular items of Taxes, Assessments, and
Operating Expenses were incurred. If any Taxes, Assessments, or Operating
Expenses are not separately assessed against or separately charged to the
Real Property, but are (a) jointly assessed against or charged to the
Real Property and other land or improvements in the Facility, or (b)
assessed against or charged to land or improvements in the Facility that
are used as common areas for the benefit of the Building and one or more
other buildings in the Facility, an equitable portion, as reasonably
determined by Landlord, of such Taxes, Assessments, or Operating Expenses
shall be allocated to the Real Property for purposes of this Section 5.
5.5 Estimated Payments. Landlord shall notify Tenant of the estimated
monthly amount of Tenant's Percentage Share of increases in Taxes,
Assessments, or Operating Expenses and Tenant shall pay Landlord such
estimated amount at the same time as and together with Tenant's Minimum
Monthly Rent. Landlord may from time to time, by notice to Tenant,
change such estimated monthly or quarterly amounts based upon Landlord's
actual or projected Taxes, Assessments, or Operating Expenses.
5.6 Statement of Expenses. Landlord shall, after December 31 of each
year, determine and furnish to Tenant a notice containing a computation
of the charge or credit to Tenant for any difference between (a) Tenant's
allocable share of the actual Taxes, Assessments, and Operating Expenses
and (b) the estimated portion(s) thereof paid by Tenant for the preceding
calendar year, and the amount of any underpayment shall be paid by Tenant
within ten (10) days after delivery of said notice. Such notice shall
contain a line item detail setting forth by categories the actual
Operating Expenses incurred by Landlord for the previous year. In the
event of overpayment by Tenant, Landlord shall credit such overpayment in
full against Tenant's payment of rent next coming due hereunder. Upon
expiration or sooner termination
Page 9 of 38.
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of this Lease, if Tenant was not in material default hereunder
immediately prior thereto, Landlord shall refund to Tenant any
overpayment.
5.7 Non-Waiver of Rights. Without limitation to the provisions of Section
30 (Non-Waiver), no failure or determination of Landlord in any one year
to include or exclude certain items in its computation of Taxes,
Assessments, or Operating Expenses or to invoice Tenant for the full
amount of Tenant allocable share of Taxes Assessments, or Operating
Expenses shall be construed as depriving Landlord of the right to include
such items as Taxes, Assessments, or Operating Expenses or to invoice
Tenant for the full amount of Tenant's allocable share thereof in any
subsequent year in strict accordance with the provisions of this Section
5.
5.8 Right to Audit:
5.8.1 The good-faith determination of the accountant then serving
Landlord shall be conclusive and determinative of what constitutes a
Tax, Assessment, or Operating Expense each year. During the 30-day
period commencing upon Tenant's receipt of any statement provided by
Landlord under Subsection 5.6 above, Tenant shall have the right, at
Tenant's expense and upon not less than forty-eight (48) hours' prior
notice to Landlord, to inspect at reasonable times Landlord's books
and records for the Facility for the calendar year covered by such
statement, for purposes of verifying Landlord's calculation of Taxes,
Assessments, and Operating Expenses. Such inspection may only be done
by an accounting firm which is generally considered to be one of the
ten (10) largest accounting firms headquartered in the United States.
If Tenant shall not have availed itself of such inspection, Tenant
shall be deemed to have accepted as final and determinative the
amounts shown on the statement of expenses. If Tenant shall have
availed itself of its right to inspect the books and records, and then
disputes the accuracy of the information set forth in Landlord's books
and records with respect to the statement of expenses, Tenant shall
nevertheless continue to pay the amounts as required by the provisions
of this Section 5; provided however, that no later than six (6) months
after receipt of the statement of expenses, Tenant must (or its right
to contest such charges shall be deemed waived) institute arbitration
proceedings against Landlord, in an arbitration proceeding governed by
the rules of the American Arbitration Association, to collect and
recover any overpayment made by Tenant resulting from errors in the
books and records of Landlord; and provided further, that Tenant
shall, within ten (10) days after filing of the complaint, serve
Landlord with a copy of the complaint filed in any such proceeding.
Tenant shall be precluded from contesting Taxes, Assessments, or
Operating Expenses, or Landlord's computations of the amounts payable
by Landlord or Tenant pursuant to this Section 5, unless an
arbitration complaint is filed and served within such six (6) month
period. Should the arbitrator find errors in excess of ten percent
(10%) of the statement of expenses, then Landlord shall be responsible
for all reasonable fees incurred by Tenant with respect to the
arbitration proceeding. Should the arbitrator find errors of less than
four percent (4%) of the statement, then Tenant shall be responsible
for all the reasonable fees incurred by Landlord with respect to the
arbitration proceeding. Should the arbitrator find errors of between
four percent (4%) and ten percent (10%) of the statement, then each
party shall be responsible for all fees incurred by it with respect to
the arbitration proceeding.
5.8.2 If Tenant institutes such arbitration procedures, then the
arbitrator shall determine whether or not Tenant was over-charged for
Tenant's Percentage Share of increases in Taxes, Assessments, or
Operating Expenses or undercharged for its share of increases. At the
conclusion of the arbitration, the arbitrator shall issue a ruling as
to what the Taxes, Assessments, and Operating Expenses, and Tenants
Percentage Share of increases therein, should have been had Landlord
strictly complied with the provisions of this Lease. If Landlord
overcharged Tenant for increases in Taxes, Assessments, or Operating
Expenses, the amount of the overcharge shall be returned to Tenant
within thirty (30) days following the conclusion of the arbitration.
If the arbitrator determines that Tenant was undercharged for
increases in Taxes, Assessments, or Operating Expenses, Tenant shall
pay the amount of such undercharge to Landlord within thirty (30) days
following the issuance of the arbitration ruling.
Page 10 of 38.
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6. SECURITY:
6.1 Deposit. Concurrently with the execution of this Lease, Tenant shall
deposit with Landlord the amount specified in Subsection 1.1(f) (the
"Deposit"), which shall be held by Landlord as security for the full and
faithful performance of Tenant's covenants and obligations under this
Lease. The Deposit is not an advance Minimum Monthly Rent deposit, an
advance payment of any other kind, or a measure of Landlord's damages in
case of Tenant's default. If Tenant fails to comply with the full and
timely performance of any or all of Tenant's covenants and obligations
set forth in this Lease, then Landlord may (but shall not be required
to), from time to time, without waiving any other remedy available to
Landlord, use the Deposit, or any portion of it, to the extent necessary
to cure or remedy such failure or to compensate Landlord for all damages
sustained by Landlord resulting from Tenant's failure to comply fully and
timely with its obligations pursuant to this Lease. No acceptance of such
payment shall be construed as an admission that Tenant has performed all
of its obligations hereunder. If Landlord elects to make such application
of all or any portion of the Deposit, Landlord shall notify Tenant of the
nature and amount thereof and Tenant shall within ten (10) days
thereafter deposit with Landlord an amount sufficient to increase the
Deposit to an amount equal to one hundred ten percent (110%) of the
amount thereof set forth in Subsection 1.1(f), as the same may have been
increased by prior applications of this Subsection 6.1, and any Tenant
failure to immediately do so shall constitute an Event of Default under
this Lease. If Tenant is in compliance with this Lease's covenants and
obligations as of the sixtieth (60th) day after the expiration or earlier
termination of this Lease and Tenant's vacating of the Premises, Landlord
shall thereupon return to Tenant the unused portion of the Deposit and
any advance rent paid by Tenant. Each time the Minimum Monthly Rent shall
increase pursuant to the provisions of this Lease, within five (5)
business days thereafter, Tenant shall pay to Landlord as additional
Deposit an amount equal to the difference between the new Minimum Monthly
Rent and the Minimum Monthly Rent in effect immediately prior to such
increase. Landlord's obligations with respect to the Deposit are those of
a debtor and not a trustee. Landlord shall not be required to maintain
the Deposit separate and apart from Landlord's general or other funds,
and Landlord may commingle the Deposit with any of Landlord's general or
other funds. Tenant shall not at any time be entitled to interest on the
Deposit.
6.2 No Bar or Defense to Other Remedies. No security or guaranty that may
now or hereafter be furnished to Landlord for the payment of the rent
herein reserved or for performance by Tenant of the other covenants or
conditions of this Lease shall in any way be a bar or defense to any
action in unlawful detainer, or for the recovery of the Premises, or to
any action that Landlord may at any time commence for a breach of any of
the covenants or conditions of this Lease.
7. HAZARDOUS SUBSTANCES:
7.1 Definitions. As used herein, "Hazardous Substance" shall mean any
substance, material, or waste that is or becomes regulated by any
federal, state, or local governmental authority because of its toxicity,
infectiousness, radioactivity, explosiveness, ignitability,
corrosiveness, or reactivity; and "Environmental Requirements" shall mean
all Laws relating to industrial hygiene, protection of human health,
warnings, hazard communication, employee rights-to-know, environmental
protection, or any Hazardous Substance.
7.2 Consent Required for Hazardous Substances. Tenant shall not cause or
permit any Hazardous Substance to be brought upon, generated, produced,
kept or used in or about the Facility by Tenant or any Tenant Parties
unless (a) such Hazardous Substance is necessary for Tenant's business
(and such business is a Permitted Use) and (b) Tenant first obtains the
consent of Landlord if such Hazardous Substance is other than (i) an
"Article" (as defined in 29 C.F.R. (S)1910.1200) that is free of asbestos
(whether friable or nonfriable) and polychlorinated biphenyls (PCBs) or
(ii) a consumer product that is used on the Premises in quantities that
would not require any notification or reporting under any Environmental
Requirement, or any warnings to any persons located anywhere outside the
Premises, if the entire quantities were released into the environment.
Any request by Tenant for such consent shall be in writing and shall
demonstrate to the reasonable satisfaction of Landlord that such
Hazardous Substance will be stored, used, and disposed of in a manner
that complies with all
Page 11 of 38.
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Environmental Regulations applicable to such Hazardous Substance. Such
consent shall not be unreasonably withheld, but Landlord shall in no case
be obligated to consent to the presence of any Hazardous Substance that
will increase the likelihood or magnitude of Landlord's liability, or to
any treatment, storage, or disposal upon the Premises or the Facility of
any Hazardous Substance whose treatment, storage, or disposal requires a
permit or variance under applicable Environmental Requirements. In no
event shall Landlord ever be obligated to execute any application for any
such permit or variance.
7.3 Notices. Tenant shall promptly deliver to Landlord copies of any
reports made to any environmental agency arising out of or relating to
any Hazardous Substances in, on, or from the Premises and copies of all
hazardous waste manifests reflecting the legal and proper disposal of all
hazardous wastes removed by Tenant from the Facility. If at any time
Tenant shall become aware, or have reasonable cause to believe that any
Hazardous Substances, other than those already known by Landlord or
permitted under this Lease, have come to be located in or about the
Premises, or that any known Hazardous Substances have been, are being, or
threaten to be released into the environment, Tenant shall, immediately
upon discovering same, give notice of that condition to Landlord.
7.4 Compliance with Environmental Requirements. Without limitation to the
generality of Subsection 2.2 (Restriction on Use), Tenant shall at its
own expense fully comply with all Environmental Requirements, prudent
industry practices, and Landlord's Rules and Regulations regarding use,
handling, disturbance, management, or disposal of Hazardous Substances,
except as otherwise provided in Subsection 7.5 below. Except as
discharged into the sanitary sewer in strict accordance and conformity
with all applicable Environmental Requirements, Tenant shall cause any
and all Hazardous Substances removed from the Premises (or from any other
portion of the Facility, if their removal is at the instance or direction
of Tenant) to be removed and transported solely by duly licensed haulers
to duly licensed facilities for final disposal of such materials and
wastes. Upon expiration or earlier termination of the Term, Tenant shall
cause to be removed from the Premises and the Facility all Hazardous
Substances that Tenant or any Tenant Parties caused or permitted to be
located there. If the presence of Hazardous Substances brought onto the
Facility by any of such persons results in contamination of any portion
of the Facility, Tenant shall be solely responsible, at its sole expense,
for taking any and all necessary steps to return the affected portion of
the Facility to its condition prior to such contamination, as reasonably
determined by Landlord; provided, however, that Tenant shall not take any
remedial action (except in emergencies) in response to the presence of,
nor enter into any settlement agreement, consent decree, or other
compromise in respect to any claims relating to, any Hazardous Substance
in any way connected with the Facility, without first notifying Landlord
of Tenant's intention to do so and affording Landlord ample opportunity
to appear, intervene, or otherwise appropriately assert and protect
Landlord's interest with respect thereto; and further provided, that
Landlord shall have the right (but not the obligation) to perform any
such remediation on Tenant's behalf, in which event Tenant shall
reimburse Landlord for all of Landlord's reasonable costs and expenses
incurred in connection therewith.
7.5 Landlord's Obligation. Subject to Landlord's right to reimbursement
of certain costs or expenses under other provisions of this Lease,
Landlord agrees to use commercially reasonable efforts to comply with all
applicable Environmental Requirements regarding the use, management, or
disposal of Hazardous Substances (a) that were existing on the Premises
as of the date Tenant originally took occupancy thereof under a prior
lease or (b) that were otherwise brought upon or kept or used in or about
the Facility by Landlord, its agents, employees, or contractors.
8. NO LIGHT, AIR OR VIEW EASEMENT:
No diminution or shutting off of light, air, or view by any structure that may
be erected on the lands of the Facility or other nearby lands shall in any way
affect this Lease, abate any rent hereunder, or otherwise impose any liability
on Landlord.
9. ALTERATIONS:
9.1 Tenant's Right to Make Alterations. Tenant shall not make or suffer
to be made any alterations, additions, improvements, or utility
installations of an amount greater than TEN
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THOUSAND DOLLARS ($10,000.00) (collectively, "Alterations") to the
Premises or any part thereof without the prior consent of Landlord.
Tenant specifically acknowledges that it shall not be unreasonable for
Landlord to withhold approval of any proposed contractor or subcontractor
of Tenant on the grounds that Landlord believes that the performance of
work in the Building by such contractor or subcontractor could result in
labor disputes with Landlord's own contractors or Building employees of
Landlord or Landlord's contractors. Landlord may, at any time during the
Term, require Tenant to remove any or all Alterations made without
Landlord's consent or otherwise made in material violation of any of the
provisions of this Section 9. In no event shall Landlord be required to
consent to any Alterations that would not be normal for the Permitted
Uses, that might adversely affect the utility or value of the Premises or
the Building for future tenants, that would alter the exterior appearance
of the Building, that would be of a structural nature, that could
adversely affect the plumbing, mechanical, or electrical systems
servicing the Facility, that would be excessively expensive to remove, or
that would otherwise be prohibited under this Lease. All permitted
Alterations shall be made in conformity with the requirements of
Subsection 9.2 below. Once any such Alterations have been completed,
whether prior to or during the Term of this Lease, they shall thereafter
be included in the designation of the Tenant Improvements.
9.2 Installation of Alterations. Any Alterations installed by Tenant
during the Term shall be done in strict compliance with all of the
following requirements:
9.2.1 No such work shall proceed without Landlord's prior written
approval of (i) Tenant's contractor(s); (ii) certificates of insurance
from a company or companies approved by Landlord, furnished to
Landlord by Tenant's contractor, for combined single limit bodily
injury and property damage insurance covering comprehensive general
liability and automobile liability, in an amount not less than One
Million Dollars ($1,000,000) per occurrence and endorsed to show
Landlord, Landlord's property manager, and each general partner of
Landlord (if Landlord is a partnership) as additional insureds, and
for workers' compensation as required by law, endorsed to show a
waiver of subrogation by the insurer to any claims Tenant's contractor
may have against Landlord (provided, however, nothing in this
Subsection 9.2.1 shall release Tenant of its other insurance
obligations hereunder); and (iii) detailed plans and specifications
for such work. Any changes in, deviations from, modifications of, or
amendments to the approved plans and specifications shall also require
Landlord's prior written approval.
9.2.2 Tenant shall cause its contractor(s) to coordinate with
Landlord's building management all construction and installation
activities covered by this Subsection 9.2. All such work shall be done
in a skillful and first class workmanlike manner, consistent with high
quality practices and standards of the construction industry, and
shall be pursued diligently and continuously until completed, always
in conformity with the approved plans and specifications. All
materials, equipment, and articles incorporated into the Alterations
shall be new, and of recent manufacture, and of the most suitable
grade for the purpose intended.
9.2.3 No Alterations shall be commenced without Tenant first having
obtained a valid building permit and/or all other permits or licenses
when and where required, copies of which shall be furnished to
Landlord before the work is commenced. Any work not acceptable to any
governmental authority or agency having or exercising jurisdiction
over such work, or not reasonably satisfactory to Landlord, shall be
promptly replaced and corrected at Tenant's expense. Landlord's
approval or consent to any such work shall not impose any liability
upon Landlord. No work shall commence until and unless Landlord has
received at least ten (10) days' notice that such work is to commence.
9.2.4 Tenant shall immediately reimburse Landlord for any expense
greater than FIVE HUNDRED DOLLARS ($500.00) incurred by Landlord in
reviewing and approving the plans and specifications (and any
modifications thereto) for such work or the work itself.
9.2.5 If the estimated cost of the Alterations exceeds Five Thousand
Dollars ($5,000.00), then (a) Tenant shall obtain any bonds required
by Landlord pursuant to Section 11
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below and (b) during all such times as the work is being performed,
Tenant shall carry, or cause its approved contractors to carry,
builder's risk completed value insurance, in an amount approved by
Landlord.
9.2.6 Prior to undertaking any physical work in or around the
Premises, Tenant shall notify Landlord, in writing, of the exact
nature and location of the proposed work and shall promptly supply
such additional information regarding the proposed work as Landlord
shall request. After receipt of Tenant's notice, Landlord may, to the
extent appropriate, supply Tenant with the Building regulations and
procedures for working in areas where there is a risk of coming into
contact with materials or building systems that, if not properly
handled, could cause health or safety risks or that could damage such
systems and/or the Building. Tenant shall cause its contractors, at
Tenant's sole cost and expense, strictly to comply with all such
Building regulations and procedures established by Landlord and with
all applicable Laws. Landlord shall have the right at all times to
monitor the work for compliance with the Building regulations and any
applicable Laws. If Landlord determines that any applicable Law or any
Building regulations and/or procedures are not being strictly complied
with, Landlord may immediately require the cessation of all work being
performed in or around the Premises until such time as Landlord is
satisfied that the applicable Laws and Building regulations and
procedures will be observed. Neither Landlord's review and approval of
the plans and specifications nor Landlord's monitoring of any work in
or around the Premises shall not be deemed a certification by Landlord
of compliance with any applicable Laws or with the Building
regulations and procedures or a waiver by Landlord of its right to
require strict compliance with such Laws, regulations, or procedures,
nor shall such monitoring relieve Tenant from any liabilities relating
to such work.
9.2.7 Upon completion of any Alterations, Tenant shall provide
Landlord with "as built" plans, copies of all construction contracts,
and proof of payment for all labor and materials.
9.3 Tenant Improvements--Treatment at End of Lease
9.3.1 All Tenant Improvements (and all Alterations, upon their
completion) made by or for Tenant, whether temporary or permanent in
character, and whether made by Landlord or Tenant, shall be Landlord's
property, and shall be surrendered to Landlord in good order,
condition, and repair (ordinary wear and tear excepted), broom clean,
upon the expiration or earlier termination of the Term, and Tenant
shall not be entitled to any compensation therefor; provided however,
that at the election of Landlord, exercisable by notice to Tenant,
Tenant shall, at Tenant's sole expense, prior to the expiration of the
Term, remove from the Premises all Tenant Improvements and Alterations
(or such portion thereof as Landlord may require to be removed) and
repair all damage to the Premises caused by such removal. At least
thirty (30) days prior to the termination of this Lease, Tenant shall
submit by notice to Landlord a written request of Landlord for
instructions as to whether or not Landlord elects to require any such
removal of Tenant Improvements or Alterations. Any damage or
deterioration of the Premises or any Tenant Improvements that could
have been prevented by good maintenance practices shall not be deemed
to be ordinary wear and tear.
9.3.2 All of Tenant's furniture, furnishings, trade fixtures,
equipment not attached to the Building or the Premises, other personal
property, and all trash and debris (collectively, the "Personal
Property"), shall be completely removed by Tenant on or prior to the
expiration of the Term; provided, however, that Tenant shall repair
all damage caused by such removal prior to the expiration of the Term,
and provided further, that any of Tenant's Personal Property not so
removed shall, at the option of Landlord, automatically become the
property of Landlord. Thereafter, Landlord may retain or in any manner
dispose of said Personal Property not so removed, without liability to
Tenant.
9.4 Other Improvements in the Building. If as a result of any Alterations
or Tenant Improvements or as a result of Tenant's particular use of the
Premises, Landlord shall be required by any applicable Law to make other
improvements (including, without limitation, upgrading of installations
of life safety systems or compliance with standards for
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handicapped persons) in or upon the Premises or any other portion of the
Building or Facility, then Landlord shall have the right to charge Tenant
for the cost of such other improvements.
10. REPAIR OBLIGATIONS:
10.1 Tenant's Obligations. Except as otherwise provided in Section 9
(Alterations), Section 16 (Building Services). and Section 23 (Damage or
Destruction), Tenant, at its sole cost and expense, shall keep the
Premises and every part thereof in good, clean, pest-free, and sanitary
condition and repair at all times during the Term. All damage, injury or
breakage to any part or portion of the Premises or the Facility caused by
the willful or negligent act or omission of Tenant or any of its
officers, directors, trustees, partners, agents, contractors, employees,
licensees, invitees, visitors, customers, or trespassers (collectively,
the "Tenant Parties") shall be promptly repaired at Tenant's sole cost
and expense, to the satisfaction of Landlord; provided, however, that
Tenant shall be entitled to receive reimbursement for such expense to the
extent that the cost of any such repair is covered by insurance obtained
by Landlord as part of Operating Expenses. Landlord shall have the right
to perform such repair work. Tenant shall be solely responsible for the
design and function of all of Tenant Improvements, whether or not
installed by Landlord at Tenant's request. Tenant waives all rights to
make repairs to the Premises or to the Facility at the expense of
Landlord, or to deduct the cost of such repairs from any payment owed to
Landlord under this Lease.
10.2 Landlord's Obligations. Provided that no Event of Default shall have
occurred and then remain uncured, Landlord shall keep in good condition
and repair the foundations, exterior walls, structural condition of the
interior bearing walls, and the roof of the Building, as well as any
parking lots, parking structures, walkways, driveways, landscaping,
fences, signs, and utility installations of the common areas. Landlord
will make repairs at times and in such a manner as not to unreasonably
disrupt Tenant's use. Landlord shall not, however, be obligated to paint
the Facility; nor shall Landlord be required to maintain, repair, or
replace windows, skylights, doors, or plate glass of the Premises.
Landlord's obligations under this Subsection shall not apply to any non-
insured damage or wear and tear caused by any breach or default by Tenant
under this Lease or by any negligent or willful act or omission of Tenant
or the Tenant Parties. Landlord shall not be obligated to perform repairs
for which Tenant has expressly assumed responsibility under other
provisions of this Lease. Landlord shall have no obligation to make any
repairs under this Subsection until a reasonable time after receipt of
notice from Tenant of the need for such repairs. Tenant hereby
acknowledges that the foregoing description of certain obligations and
rights of Landlord is not intended to limit or restrict Landlord's rights
under other provisions of this Lease to reimbursement for costs and
expenses incurred in connection with such matters.
11. LIENS:
Tenant shall keep the Premises, the Building, and the rest of the Facility free
from liens arising out of any work or materials actually or allegedly performed
or furnished, or obligations incurred, by or for Tenant. At any time Tenant
either desires or is required to make any Alterations whose estimated cost is
greater than $5,000.00, Landlord may, without limitation to the provisions of
Section 9 (Alterations) above, (a) require Tenant, at Tenant's sole cost and
expense, to obtain and provide to Landlord a completion or performance bond, in
a form and by a surety acceptable to Landlord and in an amount not less than one
and one-half (1-1/2) times the estimated cost of such Alterations, to insure
Landlord against liability from mechanics' and materialmen's liens and to insure
completion of the work, and (b) require such additional items or assurances as
Landlord in its sole discretion may deem reasonable or desirable. Tenant agrees
to indemnify and hold Landlord harmless from and against any and all claims for
mechanics', materialmen's or other liens in connection with any Alterations,
repairs, or any work performed, materials furnished, or obligations incurred by
or for Tenant. In the event any such lien is filed or asserted, Tenant shall
immediately post any bond required to release the Premises and the Facility
therefrom.
12. SIGNS; NAMES OF BUILDING AND FACILITY:
Except for a sign (which shall comply with Landlord's building standard
criteria) placed on the entry door to the Premises, Tenant shall not place any
logo, sign, advertisement, announcement, warning, or notice upon or in front of
the Premises or any common areas. Tenant shall not use any name, insignia, or
logotype of the Building or Facility for any purpose. Tenant shall not use any
picture of the Building or
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Facility in its advertising or stationery or in any other manner. Landlord
expressly reserves the right, in Landlord's sole and absolute discretion, at any
time to change the name, insignia, logotype, or street address of the Building
or the Facility without in any manner being liable to Tenant.
13. ASSIGNMENT AND SUBLETTING:
13.1 "Transfer" Defined. As used herein, the term "Transfer" shall mean
any assignment of this Lease (including, without limitation, assignment
by operation of law--e.g., death of an individual tenant or merger,
dissolution, consolidation, or other reorganization of a corporate
tenant), subletting of all or any part the Premises, or transfer of
possession, or right of possession or contingent right of possession of
all or any portion of the Premises, including without limitation,
concession, mortgage, encumbrance, devise, hypothecation, agency,
franchise, or management agreement, or to suffer any other person (the
agents and employees of Tenant excepted) to occupy or use the said
Premises or any portion thereof. If Tenant is a corporation that is not
deemed a public corporation, or is an unincorporated association or
partnership, or if Tenant consists of more than one party, the transfer,
assignment (including, without limitation, assignment by operation of
law), or hypothecation of any stock of or interest in Tenant in the
aggregate in excess of forty percent (40%), shall also be deemed to be a
"Transfer." If Tenant is a partnership or consists of more than one
party, then any of the foregoing events with respect to any such party
comprising Tenant, or with respect to any general partner of Tenant or
any such party, shall also be deemed to be a "Transfer." Notwithstanding
the foregoing, occupancy of all or part of the Premises by parent,
subsidiary, or affiliated companies of Tenant shall not be deemed a
"Transfer," provided that such parent, subsidiary or affiliated companies
were not formed as a subterfuge to avoid the obligations of this Section
13.
13.2 No Transfer Without Consent. Tenant shall not, either voluntarily or
by operation of law or otherwise, suffer a Transfer without the prior
written consent of Landlord, which consent shall not be unreasonably
withheld, except as otherwise expressly provided below. Landlord's
consent to one Transfer shall not be deemed to be a consent to any
subsequent Transfer; nor shall Landlord's consent constitute an
acknowledgment that no default then exists under this Lease of the
obligations to be performed by Tenant; nor shall such consent be deemed a
waiver of any then existing default, except as may be otherwise stated in
writing by Landlord at the time; nor shall Landlord's acceptance of rent
from any person be deemed a waiver by Landlord of any provision of this
Section 13. If Landlord's approval or consent for any agreement or
instrument is required hereunder, then no amendment or modification shall
be made thereto without Landlord's prior consent. Any Transfer that is
not in compliance with the provisions of this Section 13 shall be
voidable at Landlord's election.
13.3 Procedure for Assignment and Subletting/Landlord's Recapture Rights.
Tenant shall advise Landlord by written notice of (a) Tenant's intent to
make a Transfer, (b) the name of the proposed transferee, and evidence
reasonably satisfactory to Landlord that such proposed transferee is
comparable in reputation, stature and financial condition to the other
tenants then leasing comparable space in the Facility (such evidence
shall include, without limitation, [i] a description of the proposed
transferee's business background and experience, [ii] the past two year's
Federal Income Tax returns of the proposed transferee, [iii] the proposed
transferee's audited annual Balance Sheets and Profit and Loss Statements
for the past two year, certified correct by a Certified Public
Accountant, [iv] banking references of the proposed transferee, and [v]
at least five business and three personal references for the proposed
transferee), and (c) the terms of the proposed assignment or subletting
(including the financial terms and the intended use of the Premises),
together with a copy of the proposed Transfer documents. Landlord need
not commence its review of any proposed Transfer, or respond to any
request by Tenant with respect to such, unless and until Landlord has
received all of the foregoing documentation from Tenant. Landlord shall,
within thirty (30) days after receipt of such notice and documentation,
and any additional information reasonably requested by Landlord, elect
one of the following:
(i) Consent to such proposed Transfer;
(ii) Refuse such consent, which refusal shall be on reasonable
grounds, subject to the provisions of Subsection 13.4 below; or
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(iii) Elect to terminate this Lease in the event of an assignment, or
in the case of a sublease, terminate this Lease as to the portion of
the Premises proposed to be sublet for the proposed term of the
sublease. If Landlord exercises such termination option, then (A) this
Lease shall terminate as to all or such portion, as the case may be,
of the Premises effective as of the date on which the proposed
Transfer was intended to have become effective, or in the event of a
sublease the Lease shall be deemed suspended as to the sublet premises
for the period of the proposed sublease, (B) Tenant shall vacate such
portion of the Premises prior to such date, and (C) Landlord and
Tenant shall have no further liability to each other under this Lease
from and after such date, except as otherwise provided in Section 41
(Survival of Certain Rights and Obligations). If this Lease is
terminated as to less than all of the Premises pursuant to the
preceding sentence, the rent under this Lease shall be equitably
adjusted by Landlord on the basis that the rentable area of the
portion of the Premises remaining bears to the rentable area of the
entire Premises. No failure of Landlord to exercise its termination
option hereunder shall be deemed a waiver of the right to terminate
this Lease subsequently in accordance with the terms hereof, as it is
intended that this option to terminate shall continue to exist during
the entire Term.
13.4 Conditions to Approval
13.4.1 It is understood and agreed that, without limiting Landlord's
right of consent as provided herein, Landlord's withholding consent
shall be deemed reasonable if the proposed assignment or sublease
fails to meet any one or more of the following criteria: (i) neither
the proposed Transfer nor the proposed use of the Premises by the
proposed transferee shall conflict with or result in a breach of
Subsections 2.2 (Restriction on Use), 7.2 (Consent Required for
Hazardous Substances), or 13.8 (Non-Competition), or any other
provision of this Lease, nor shall it violate any exclusivity
arrangement that Landlord may then have with any other tenant of the
Facility; (ii) the proposed transferee shall not be a governmental
entity; (iii) if Tenant's obligations under this Lease have been
guaranteed by one or more third parties, then each such guarantor's
written consent to the proposed Transfer shall have been furnished to
Landlord; (iv) the tenancy of the proposed transferee shall not have a
disadvantageous impact on the Common Areas or the other occupants of
the Facility; (v) the occupation of the proposed transferee in the
Premises shall not cause a diminution in the reputation of the
Facility or the other businesses located therein; (vi) the proposed
transferee shall be at least comparable in reputation, stature and
financial condition to the other tenants then leasing comparable space
in the Facility; and (vii) the rent payable by any proposed assignee
or subtenant be at least at the then current rental rates for the
Premises or comparable premises in the Facility, but not less than the
then current Minimum Monthly Rent under this Lease.
13.4.2 In the event that Landlord shall consent to a proposed
Transfer, or shall reasonably disapprove a proposed Transfer (other
than in connection with an exercise of Landlord's recapture rights
under Subsection 13.3), pursuant to the provisions of this Section 13,
Tenant shall pay Landlord's processing costs and attorneys' fees
(including reasonable costs of Landlord's in-house counsel) not
greater than ONE THOUSAND DOLLARS ($1,000.00) incurred in connection
with such matter, as reasonably determined by Landlord.
13.5 Landlord's Right to Bonus Rentals
13.5.1 If Tenant at any time duly assigns this Lease (including,
without limitation, a sale of all or substantially all of Tenant's
assets or corporate stock) or subleases the Premises or any part
thereof, then Tenant shall pay to Landlord, immediately upon Tenant's
receipt thereof, ninety percent (90%) of the "Rent Differential"
received by Tenant in connection with or in respect to such assignment
or subletting. For purposes of this Subsection, the following
definitions shall apply:
(i) the term "Rent Differential" shall mean the excess of (a)
any and all "Proceeds" payable to Tenant over (b) Tenant's
"Allowed Costs";
Page 17 of 38.
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(ii) the term "Proceeds" shall mean any and all fees, rents,
charges, payments, or other sums or consideration payable or
deliverable to Tenant in connection with such assignment or
subletting, regardless of whether any or all of such Proceeds
are deemed to be allocable to the leasehold or to Tenant's
corporate stock or to Tenant's business at the Premises or to
Tenant's trade fixtures, equipment, furnishings, accounts
receivable, or inventory at the Premises or to any other
tangible or intangible personal property of Tenant connected
with the Premises or Tenants business there conducted; and
(iii) the term "Allowed Costs" shall mean (a) reasonable
attorneys' fees and reasonable broker's commissions and fees
paid by Tenant to nonaffiliated attorneys or brokers in
connection with such assignment or subletting, plus (b) the
reasonable costs of constructing any tenant improvements Tenant
is required to furnish to such assignee or subtenant, plus (c)
in the case of an assignment, all of the Gross Rent, or in the
case of a subletting, the proportionate amount of the Gross Rent
allocable to the portion of the Term and portion of the Premises
(if less than all) covered by such subletting, as reasonably
determined by Landlord, plus (d) the lesser of (1) the fair
market value, as reasonably determined by Landlord, of any of
Tenant's trade fixtures, equipment, furniture, accounts
receivable, and/or tangible or intangible personal property sold
to such subtenant or assignee in connection with such assignment
or subletting or (2) the actual consideration therefor received
by Tenant. For purposes of this Lease, the term "Gross Rent"
shall mean Minimum Monthly Rent and the sums payable pursuant to
Subsections 5.1, 5.2.1, 5.2.2, 5.2.3, 5.3.1, and 5.5 of this
Lease.
13.5.2 In the event the Proceeds are paid in installments (e.g.,
monthly subrent), then the Allowed Costs shall be amortized over the
scheduled number of installment payments, and Landlord's share of the
Rent Differential shall be payable at the same time such installment
payments are made.
13.5.3 Tenant covenants that any allocation of payments or other
consideration payable or deliverable to Tenant in connection with any
subletting of the Premises or assignment of this Lease shall be made
in good faith and not with a purpose to avoid Tenant's obligation to
pay 90% of the Rent Differential to Landlord.
13.6 Joint and Several Obligations. Each permitted subtenant or assignee
shall assume all obligations of Tenant under this Lease with respect to
the Premises, or such portion thereof as may be covered by the sublease,
and shall be and remain jointly and severally liable with Tenant for the
payment of Minimum Monthly Rent and additional rent and the performance
of all of the terms, covenants, conditions, and agreements herein
contained on Tenant's part to be performed with respect to such space;
provided, however, that without limiting the obligations of Tenant under
this Lease, such subtenant shall be liable to Landlord for rent only in
the amount set forth in the sublease, unless otherwise agreed in writing
by the parties thereto. No Transfer shall be valid and no transferee
shall take possession of the Premises or any part thereof unless, within
ten (10) days after the execution of the documentary evidence thereof,
Tenant shall deliver to Landlord a duly executed duplicate original of
the Transfer instrument in a form satisfactory to Landlord that (i)
provides that the transferee assumes Tenant's obligations for the payment
of rent and for the full and faithful observance and performance of the
covenants, terms and conditions contained herein, applicable to the
Premises in the event of an assignment or applicable to the subleased
space in the event of a sublease, (ii) provides that the transferee will,
at Landlord's election, attorn directly to Landlord in the event Tenant's
Lease is terminated for any reason on the terms set forth in the
instrument of transfer, and (iii) contains such other assurances as
Landlord reasonably deems necessary. The failure or refusal of a
transferee to execute such an instrument of assumption shall not release
or discharge the assignee from its obligations set forth above.
13.7 Assignment of Subrents. Tenant hereby assigns and transfers to
Landlord all of Tenant's interest in any rentals or other income arising
from any sublease heretofore or hereafter made by Tenant. Landlord may
collect such rentals and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until an Event of
Default shall have occurred, Tenant shall be entitled to receive,
collect, and enjoy such rentals and income,
Page 18 of 38.
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subject to the provisions of Subsection 13.5 above. Landlord shall not,
by reason of this or any other assignment of any sublease to Landlord,
nor by reason of any collection of rentals from a subtenant, be deemed
liable to such subtenant for any failure of Tenant to perform or comply
with any of Tenant's obligations to such subtenant under its sublease.
Tenant hereby irrevocably authorizes and directs any such subtenant, upon
receipt of a written notice from Landlord stating that an Event of
Default has occurred under this Lease, to pay to Landlord the rentals due
and to become due under the sublease. Tenant agrees that such subtenant
shall have the right to rely upon any such statement and request from
Landlord, and that such subtenant shall pay such rents to Landlord
without any obligation or right to inquire as to whether such Event of
Default has occurred and notwithstanding any notice from or claim from
Tenant to the contrary. Tenant shall have no right or claim against such
subtenant or Landlord for any such rentals so paid by such subtenant to
Landlord.
13.8 Non-Competition. In no event shall Tenant, without Landlord's prior
consent, assign this Lease or sublet the Premises or any portion thereof
to any then tenant or occupant of space in the Facility, or any
prospective tenant with whom to the best of Tenant's knowledge and
without inquiry. Landlord is then, or has within six (6) months prior
thereto, engaged in lease negotiations or discussions that included the
delivery of written correspondence concerning same by at least one of the
parties thereto, or by its broker agent or representative to the best of
Tenant's knowledge and without inquiry.
13.9 No Merger. The voluntary or other surrender of this Lease by Tenant
or mutual cancellation of this Lease shall not work a merger. At the
option of Landlord, any such surrender or cancellation of this Lease
shall either terminate any and all then existing subleases or
subtenancies or operate as an assignment to Landlord of Tenant's interest
in any and all such subleases or subtenancies.
13.10 Landlord's Right to Assign. Landlord shall have the right to sell,
encumber, convey, transfer, and/or assign any of its rights and
obligations under this Lease.
14. INDEMNIFICATION; INSURANCE; ALLOCATION OF RISK:
14.1 Indemnification. Except as to any Claims (as defined below) from
which Landlord releases Tenant from liability pursuant to Subsection 14.5
below, Tenant shall at its expense defend (by counsel reasonably approved
by Landlord), protect, indemnify, and hold harmless Landlord and
Landlord's subsidiaries, affiliates, partners, and agents, their
respective directors, officers, stockholders, trustees, attorneys,
employees, successors, and assigns (collectively, the "Landlord Parties")
from and against any and all Claims for injury (including death and
physical, psychological, and emotional injuries) to any person or damage
to any property whatsoever, arising from or caused by (whether in whole
or in part, directly or indirectly) any of the following occurrences or
circumstances:
(i) any occurrence in, on, or about the Premises or any part thereof,
arising from any cause whatsoever, except to the extent caused by the
sole or gross negligence or willful misconduct of Landlord and/or the
Landlord Parties, unless covered by insurance obtained by Tenant, in
which event such indemnification and agreement to hold harmless shall,
to the extent of such insurance, apply even if Landlord or the
Landlord Parties were solely negligent or engaged in gross negligence
and/or willful misconduct;
(ii) any occurrence in, on, or about any part of the Facility, the use
of which Tenant may have in conjunction with other tenants or
occupants of the Facility, to the extent such injury or damage shall
be caused in whole or in part by Tenant or any Tenant Parties;
(iii) any Hazardous Substances that Tenant or any Tenant Parties
caused or permitted to be used, analyzed, stored, transported,
disposed, deposited, generated, discharged, or released in, on, under,
to, from, or about the Facility or any nearby property; or
(iv) any misrepresentation, breach, or default under this Lease by
Tenant.
Page 19 of 38.
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As used herein, the term "Claims" shall mean claims, liabilities,
penalties, fines, judgments, forfeitures, losses (including, without
limitation, diminution in the value of the Facility, and damages for the
loss or restriction on use of rentable or usable space or of any amenity
of the Facility), expenses (including, without limitation, reasonable
attorneys' fees, consultant fees, expert fees, and court costs), and
costs, including, without limitation, and whether foreseeable or
unforeseeable, any and all costs incurred in connection with any
investigation of site conditions, and any and all costs of any required
or necessary repair, cleanup, detoxification, decontamination, or other
remedial work concerning the Facility. BY SIGNING ITS INITIALS BELOW,
TENANT ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND
RAMIFICATIONS OF THE PROVISIONS SET FORTH IN THIS SUBSECTION AND FURTHER
ACKNOWLEDGES THAT SUCH PROVISIONS WERE SPECIFICALLY NEGOTIATED.
_____________ TENANT'S INITIALS
14.2 Tenant's Insurance. Tenant shall have the following insurance
obligations:
14.2.1 Liability Insurance. Tenant shall, at Tenant's expense, obtain
and keep in force at all times during the Term, a policy of commercial
general liability and property damage insurance (including automobile
liability). The minimum limits of liability shall be a combined single
limit of not less than ONE MILLION DOLLARS ($1,000,000.00) per
occurrence. The policy shall state that Landlord and the Landlord
Parties are named as additional insureds and are entitled to recovery
for the negligence of Tenant. The policy shall also provide for
severability of interest; shall provide that an act or omission of one
of the insured or additional insureds that would void or otherwise
reduce coverage shall not void or reduce coverages as to other insured
or additional insureds; shall insure performance by Tenant of the
indemnity provisions of this Lease; and shall afford coverage after
the Term of this Lease (by separate policy or extension if necessary)
for all claims based on acts, omissions, injury or damage that
occurred or arose in whole or in part during the term of this Lease.
The policy shall be primary coverage for Tenant and Landlord for any
liability arising out of Tenant's and the Tenant Parties' use,
occupancy or maintenance of the Premises and all areas appurtenant
thereto. The limits of said insurance shall not, however, limit any
liability of Tenant under Subsection 14.1.
14.2.2 Personal Property Insurance. Tenant shall maintain in full
force and effect on all of its fixtures, personal property, and
equipment in the Premises a policy or policies of fire and casualty
insurance in "all risk" form (including water damage) to the extent of
at least ninety percent (90%) of their replacement cost (without
deduction for depreciation), or that percentage of the replacement
cost required to negate the effect of a coinsurance provision,
whichever is greater. No such policy shall have a deductible in a
greater amount than FIVE HUNDRED DOLLARS ($500.00). Tenant shall also
insure in the same manner the physical value of all its leasehold
improvements, if any, in the Premises. The "full replacement value" of
the improvements to be insured under this Subsection 14.2.2 shall be
determined by the company issuing the insurance policy at the time the
policy is initially obtained. Not less frequently than once every
three (3) years, Landlord shall have the right to notify Tenant that
it elects to have the replacement value redetermined by an insurance
company or insurance consultant. The redetermination shall be made
promptly and in accordance with the rules and practices of the Board
of Fire Underwriters, or a like board recognized and generally
accepted by the insurance company, and each party shall be promptly
notified of the results by the company. The insurance policy shall be
adjusted according to the redetermination. During the Term, the
proceeds from any such policy or policies of insurance shall be used
for the repair or replacement of the fixtures, equipment, and
leasehold improvements so insured. Landlord shall have no interest in
said insurance, and will sign all documents necessary or proper in
connection with the settlement of any claim or loss by Tenant. Tenant
shall also maintain insurance for all plate glass upon the Premises.
All such insurance shall contain waivers of subrogation to the extent
available on a commercially reasonable basis.
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14.2.3 Worker's Compensation Insurance. Tenant shall carry and
maintain Workers Compensation and Employer's Liability insurance as
required by applicable Laws.
14.2.4 Business Interruption. Tenant shall maintain loss of income and
business interruption insurance in such amounts as will reimburse
Tenant for direct or indirect loss of earnings attributable to all
perils commonly insured against by prudent tenants or attributable to
prevention of access to the Premises or to the Building as a result of
such perils, but in no event in an amount less than the Gross Rent
payable hereunder for six (6) months. All such insurance shall contain
waivers of subrogation to the extent available on a commercially
reasonable basis.
14.2.5 Other Coverage. Not more frequently than every three (3) years,
if, in the reasonable opinion of Landlord's lender or of the insurance
consultant retained by Landlord, the amount of public liability and
property damage insurance coverage at that time is not adequate, or
additional coverages not specified above should be obtained, Tenant,
at its cost, shall increase such insurance coverage, and/or obtain
such additional coverages, as required by either Landlords's lender or
Landlord's insurance consultant, consistent with the then prevailing
custom for new leases of similar space in the business district where
the Facility is located.
14.2.6 Insurance Criteria. All the insurance required to be carried by
Tenant (except Tenant's Personal Property Insurance and Workers
Compensation Insurance) hereunder shall:
(i) Be issued by insurance companies that are qualified and
admitted to do business in the State where the Facility is
located and that carry a designation in "Best's Insurance
Reports," as issued from time to time throughout the Term, as
follows: Policy holders' rating of A; financial rating of not
less than X;
(ii) Be issued in a form acceptable to Landlord.
(iii) Contain an endorsement requiring thirty (30) days' written
notice from the insurance company to both parties and to
Landlord's lender before cancellation or expiration or decrease
in the coverage, scope, or amount of any policy.
(iv) Waive subrogation, as required by Subsections 14.2.2,
14.2.4, and 14.5, with respect to property loss or damage by fire
or other casualty.
(v) Name Landlord and its property manager as additional
insureds and, at Landlord's request, shall carry a lender's loss
payee endorsement in favor of Landlord's lender and such other
endorsement(s) as Landlord may reasonably require from time to
time.
14.2.7 Evidence of Coverage. An executed copy of each insurance
policy, or a certificate thereof with the actual policy attached,
shall be delivered to Landlord prior to Tenant's commencing remodeling
work in or taking occupancy of the Premises, and Tenant shall keep
each such policy in full force and effect throughout the Term. Renewal
policies or certificates thereof shall be delivered to Landlord at
least thirty (30) days in advance of the expiration dates of the
expiring policies.
14.2.8 Tenant Insurance Default. In the event that Tenant fails to
deliver to Landlord any policy, certificate, or renewal notice
hereunder required within the prescribed time period, or if any such
policy is canceled or modified during the Term without Landlord's
consent, Landlord may at its option, but shall not be obligated to,
obtain such insurance on behalf of Tenant and bill Tenant, as
additional rent, for the cost thereof. The provisions of this Section
14 are for the benefit of Landlord and its lenders only and are not
nor shall they be construed to be for the benefit of any employee of
Tenant, any other tenant or occupant of the Building or the Facility,
or any other person whatsoever.
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14.3 Landlord's Insurance. Landlord shall maintain policies of insurance
covering loss of or damage to the Building in the full amount of its
replacement cost. Such policies shall provide protection (subject to
reasonable deductibles) against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), sprinkler leakage, and any other
perils (e.g., flood and earthquake) that Landlord reasonably deems
appropriate. Landlord shall not obtain insurance for Tenant's trade
fixtures or equipment.
14.4 Exculpation. Except to the extent otherwise expressly provided below
in this Subsection, Tenant hereby waives all Claims against Landlord and
the Landlord Parties for any loss, theft, or damage to Tenant's business
or Personal Property or injury (including death and physical,
psychological, and emotional injuries) to persons, in, upon or about the
Premises and/or the Facility from any cause whatsoever, including,
without limitation, the active or passive negligence of Landlord or the
Landlord Parties. Without limiting the generality of the foregoing,
Tenant specifically acknowledges that such waived Claims includes
injuries, losses, and damage resulting from the following causes:
Fire; smoke; explosion; falling plaster, ceiling tiles, fixtures, or
signs; broken glass; steam; gas; fumes; vapors; odors; dust; dirt;
grease; acid; oil; any other Hazardous Substance; debris; noise; air or
noise pollution; vibration; theft; breakage; vermin; electricity;
computer or electronic equipment or systems malfunction or stoppage;
water; rain; flooding; freezing; windstorm; snow; sleet; hail; frost;
ice; excessive heat or cold; sewage; sewer backup; toilet overflow; leaks
or discharges from or into the Premises or any other part of the
Facility, or from any pipes, sprinklers, appliances, equipment
(including, without limitation, heating, ventilating, and air-
conditioning equipment); electrical or other wiring; plumbing fixtures;
roofs; windows; skylights; doors; trapdoors; the surface or subsurface of
any floor or ceiling of any part of the Facility; dampness or climatic
conditions; maintenance, repair, or construction activities; renovation
work; and any interruption, cessation, or failure of any public or other
utility service.
The foregoing notwithstanding, neither Landlord nor the Landlord Parties
shall be released from liability for their own gross negligence or
willful misconduct or Landlord's negligent failure to respond to written
notice from Tenant of deficiencies that result in such loss, damage, or
injury (provided that the correction of such deficiencies is the
obligation of Landlord hereunder). However, Landlord's liability shall be
subject to the further limitations set forth in Subsection 22.6. BY
SIGNING ITS INITIALS BELOW, TENANT ACKNOWLEDGES THAT IT HAS READ AND
UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THE PROVISIONS SET FORTH IN
THIS SUBSECTION AND FURTHER ACKNOWLEDGES THAT SUCH PROVISIONS WERE
SPECIFICALLY NEGOTIATED.
_____________ TENANT'S INITIALS
14.5 Allocation of Insured Risks/Subrogation.
14.5.1 Landlord and Tenant release each other from any Claims of
whatever nature for damage, loss, or injury to the Premises, the
Building, and/or the Facility, or to the other's property in, on, or
about the Premises and the Facility, to the extent of any insurance
proceeds that are received or receivable (or that would have been
receivable but for such releasing party's breach or default of its
obligations under this Lease), even if such damage, loss, or injury
shall have been caused by the fault or negligence (but not willful
misconduct) of the other party or anyone for whom such party may be
responsible. Landlord and Tenant shall each cause their respective
insurance policies to provide that the insurance company waives all
right of recovery by way of subrogation against either Landlord or
Tenant in connection with any damage covered by any policy. To the
extent of any insurance proceeds actually received, or that would have
payable but for a breach of this Lease, neither Landlord nor Tenant
shall be liable to the other for any damage caused by fire or any of
the risks insured against under any insurance policy required by this
Lease.
14.5.2 If an insurance policy cannot be obtained with a waiver of
subrogation, or is obtainable only by the payment of an additional
premium charge above that charged by
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insurance companies issuing policies without waiver of subrogation,
the party undertaking to obtain the insurance shall notify the other
party of this fact. The other party shall have a period of ten (10)
days after receiving the notice either to place the insurance with a
company that is reasonably satisfactory to the other party and that
will carry the insurance with a waiver of subrogation, or to agree to
pay the additional premium if such a policy is obtainable at
additional cost. If the insurance cannot be obtained or the party in
whose favor a waiver of subrogation is desired refuses to pay the
additional premium charged, the other party is relieved of the
obligation to obtain a waiver of subrogation with respect to the
particular insurance involved.
15. SECURITY SERVICES:
15.1 Landlord's Obligation to Furnish Security Services. Landlord may,
but shall not be obligated to, furnish security services for the Premises
and/or the Building and/or the Facility as Landlord deems appropriate in
its sole and absolute discretion. In the event Landlord does furnish or
contract to furnish any such services, Tenant shall nevertheless have
sole responsibility for the protection of itself, the Tenant Parties and
all property of Tenant and the Tenant Parties located in, on, or about
the Premises or the Building or the Facility, and the provisions of
Section 14 shall nevertheless continue in full force and effect.
15.2 Tenant's Right to Install Security System. If Tenant wishes to
establish or install any automated and/or non-automated security system
in, on, or about the Premises, Tenant shall first notify Landlord of
Tenant's plan for any such system, and Landlord shall have the right to
review and approve or disapprove said plan in Landlord's discretion;
however, Landlord's approval will not be unreasonably withheld. If
Landlord approves any such plan and Tenant establishes or installs any
automated and/or non-automated security system in, on, or about the
Premises, and should such system adversely affect the Premises or the
Facility or the desirability of the Premises or the Facility as
commercial space for its then current uses, or have an adverse effect on
other tenants, respectively, Landlord shall subsequently have the right
to review Tenant's security system from time to time and request Tenant
to make such changes in personnel and/or equipment. Tenant shall make
said requested changes immediately thereafter.
16. BUILDING SERVICES:
16.1 Standard Building Services. Subject to the full performance by
Tenant of all of Tenant's obligations under the Lease, Landlord shall
furnish the Premises with the standard building services and utilities as
set forth in the attached Exhibit D.
16.2 Additional Services. Tenant shall not, without the consent of
Landlord, (a) use any equipment, apparatus, or device in the Premises
that will in any way increase the amount of electricity, cooling
capacity, or water usually furnished or supplied for use of the Premises
for general office purposes or (b) connect with electric current, except
through existing electrical outlets in the Premises, or connect to water
pipes, any apparatus or device for the purpose of using electric current
or water. Tenant agrees to pay immediately upon demand all reasonable
charges imposed by Landlord from time to time for all building services
and utilities supplied to or used by Tenant in excess of or in addition
to those standard building services and utilities described in Exhibit D.
Such excess and additional building services and utilities are
hereinafter referred to as "Additional Services." Landlord may at any
time cause a switch and/or metering system to be installed at Tenant's
expense (which expense Tenant shall pay within ten (10) working days
after receipt of an invoice from Landlord covering the installment cost
of such switch or metering system) to measure the amount of building
services, utilities, and/or Additional Services consumed by Tenant or
used in the Premises.
16.3 Conservation. Tenant shall cooperate fully with Landlord to effect
conservation of all utilities in the Building and shall use reasonable
efforts to minimize its use of water, heat, electricity, and air
conditioning.
16.4 Landlord's Right to Cease Providing Services. Landlord reserves the
right, in its sole and absolute discretion with respect to item (a)
below, and in its reasonable discretion and with reasonable notice with
respect to item (b) below, to reduce, interrupt, or cease service of the
heating, air conditioning, ventilation, elevator, plumbing, electrical
systems, telephone
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systems, and/or utility services of the Premises, the Building, or the
Facility, for any of the following reasons or causes:
(a) any accident, emergency, Law, or Force Majeure (as defined in
Section 17); or
(b) the making of any repairs, additions, alterations, or improvements
to the Premises, the Building, or the Facility, until such repairs,
additions, alterations, or improvements shall have been completed.
No such interruption, reduction, or cessation of any such building
services or utilities shall constitute an eviction or disturbance of
Tenant's use or possession of the Premises or common areas, or a breach
of Landlord's obligations hereunder, or render Landlord liable for any
damages (including, without limitation, any damages, compensation, or
claims arising from any interruption or cessation of Tenant's business),
or entitle Tenant to be relieved from any of its obligations under the
Lease, or result in any abatement of rent. However, Landlord shall use
commercially reasonable diligence to restore such service, and to
minimize any disturbance to Tenant, where it is within Landlord's
commercially reasonable control to do so.
17. FORCE MAJEURE:
Except as otherwise expressly provided elsewhere in this Lease with respect to
Tenant's right to abatement of Gross Rent under certain circumstances, Landlord
shall not be chargeable with, liable for, or responsible to Tenant for anything
or in any amount for any failure to perform or delay caused by any of the
following events (collectively, "Force Majeure"): fire; earthquake; explosion;
flood; hurricane; the elements; acts of God or the public enemy; actions,
restrictions, limitations or interference of governmental or quasi-governmental
authorities or agents; war; invasion; insurrection; rebellion; riots; strikes or
lockouts; inability to obtain necessary materials, goods, equipment, services,
utilities or labor; accident; breakage; or any other cause whether similar or
dissimilar to the foregoing which is beyond the reasonable control of Landlord;
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 by Landlord.
18. RULES AND REGULATIONS:
Tenant, its agents, employees, and servants and those claiming under Tenant will
at all times observe, perform, and abide by all of the general rules and
regulations promulgated by Landlord as set forth in Exhibit C, and as reasonably
modified, supplemented, or amended by Landlord from time to time (the "Rules and
Regulations"). Landlord shall not be responsible to Tenant for the
nonperformance by any other tenant or occupant of the Facility of any of said
rules and regulations, and Landlord reserves the right to make reasonable
exceptions for specific tenants or occupants with respect to the application of
certain rules and regulations. Subject to the foregoing, Landlord agrees to use
commercially reasonable efforts, consistent with Landlord's rights under
applicable leases, to apply the Rules and Regulations in a fair, responsible,
and equitable manner. If there is a conflict between the Rules and Regulations
and any provision of this Lease, the provisions of this Lease shall prevail.
19. HOLDING OVER:
19.1 Surrender of Possession. Tenant shall surrender possession of the
Premises immediately upon the expiration of the Term or termination of
this Lease. If Tenant retains possession of the Premises or any part
thereof after the expiration or earlier termination of the Term, whether
with or without Landlord's consent, all of the provisions of this Lease
pertaining to the obligations of Tenant and the rights of Landlord during
the Term shall apply to such holdover period, except as expressly
modified by this Section 19.
19.2 Holding Over With Consent. If Tenant, with Landlord's consent,
retains possession of the Premises after the expiration of the Term,
Tenant shall become a tenant from month-to-month, at a monthly rental
equal to one hundred fifty percent (150%) of the Minimum Monthly Rent
applicable immediately prior to the expiration of the Term. Such month-
to-month tenancy shall be terminable in the manner provided by law.
19.3 Holding Over Without Consent. If Tenant, without Landlord's consent,
retains possession of the Premises after the expiration or earlier
termination of Term (or, in the case
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of a month-to-month tenancy under Subsection 19.2, after the duly noticed
termination date of such tenancy), then Tenant shall pay to Landlord
monthly rental equal to two hundred percent (200%) of the Minimum Monthly
Rent applicable immediately prior to the expiration or earlier
termination of the Term, and Tenant shall indemnify Landlord from and
against all losses, costs, claims, liabilities, and expenses (including,
without limitation, reasonable attorneys' fees and disbursements)
sustained by Landlord by reason of such retention (including, without
limitation, claims for damages by any other person to whom Landlord may
have agreed to lease all or any part of the Premises effective on or
after the date Tenant was obligated to surrender possession of the
Premises). No acceptance by Landlord of rent during any such holding over
without Landlord's approval shall reinstate, continue, or extend the Term
of this Lease or shall affect any notice of termination given to Tenant
prior to the payment of such money, it being agreed that after the
service of such notice or the commencement of any suit by Landlord to
obtain possession of the Premises, Landlord may receive and collect when
due any and all payments owed by Tenant under this Lease, and otherwise
exercise its rights and remedies. The making of any such payments by
Tenant shall not waive such notice, or in any manner affect any pending
suit or judgment obtained.
20. SUBORDINATION:
This Lease shall, at Landlord's sole option, be subject and subordinate at all
times to the lien of any mortgages or deeds of trust in any amounts whatsoever
now or hereafter placed on or against the Facility (or any portion thereof) or
on or against Landlord's interest or estate therein without the necessity of
having further instruments on the part of Tenant to effectuate such
subordination. Notwithstanding such subordination, Tenant's right to quiet
possession of the Premises shall not be disturbed as a result of any foreclosure
or deed in lieu of any mortgage or deed of trust hereafter placed on or against
the Facility, if and so long as Tenant is not in default of any of its
obligations under this Lease, unless this Lease is otherwise terminated pursuant
to its terms. If any mortgagee, trustee or ground lessor shall elect to have
this Lease deemed to be prior to the lien of its mortgage, deed of trust, or
ground lease, and shall give written notice thereof to Tenant, then this Lease
shall be deemed to be prior to such instrument, regardless of whether this Lease
is dated prior or subsequent to the execution or recording date thereof. Tenant
covenants and agrees to execute and deliver, upon demand, such further
instruments evidencing such subordination of this Lease as may be required by
Landlord, provided that said instruments recognize that Tenant's right to quiet
possession of the Premises shall not be disturbed if and so long as Tenant is
not in default of its obligations under this Lease. Tenant hereby irrevocably
appoints Landlord the attorney-in-fact of Tenant to execute and deliver any such
instruments for or in the name of Tenant.
21. ENTRY BY LANDLORD:
21.1 Landlord reserves and shall have the right to enter the Premises at
any and all reasonable times to inspect the same, to verify Tenant's
compliance with its obligations under this Lease, to post notices of non-
responsibility (if permitted by the Laws of the State where the Facility
is located), to post any notices Landlord reasonably believes are
required by law to be posted on the Premises, to deliver notices to
Tenant or any subtenant or occupant of any portion of the Premises, to
supply any service to be provided by Landlord to Tenant hereunder, to
submit the Premises to prospective lender, purchasers, investors, or
tenants. Landlord may, during the last six (6) months of the Term, place
"For Lease" signs on or about the Premises.
21.2 Landlord also reserves and shall have the right to enter the
Premises, upon reasonable prior written notice (except in emergencies),
to alter, improve, renovate, or repair the Premises and any portion of
the Facility or its mechanical systems, and Landlord may for such
purposes erect scaffolding and other appropriate structures where
reasonably required by the character of the work to be performed. In the
event that any such entry by Landlord into the Premises, or such work
performed by Landlord at the Facility, prevents Tenant from gaining
access to all or any significant portion of the Premises for more than
five (5) consecutive business days, then Minimum Monthly Rent shall be
abated in proportion to the part of the Premises (if less than all) to
which Tenant shall have been denied access, but there shall be no
abatement of rent by reason of all or any portion of the Premises being
inaccessible for a period of five (5) or fewer consecutive business days.
Further, Tenant shall not be entitled to any abatement of rent on account
of any noise, vibration, or other disturbance to Tenant's business at the
Premises that may arise out of any such entry by Landlord into the
Premises or out of Landlord's performance of any such work at the
Facility,
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and under no circumstances shall any such noise, vibration, disturbance,
work, or entry by Landlord be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises or an eviction of
Tenant from the Premises or any portion thereof. Landlord shall use
commercially reasonable efforts (which shall not include any obligation
to employ labor at overtime rates) to avoid or minimize disruption of
Tenant's business during any such entry or work by Landlord.
21.3 Landlord shall have the right to use any and all means that Landlord
may deem appropriate to open any doors in an emergency in order to obtain
entry to the Premises.
22. DEFAULTS AND REMEDIES:
22.1 Events of Default
22.1.1 Definition. In addition to those events designated as Events of
Default in other provisions of this Lease, each of the following shall
constitute an "Event of Default" by Tenant and a material breach of
this Lease:
(1) Tenant's failure to make any payment owed by Tenant under
this Lease, as and when due, where such failure is not cured
within three (3) days following Tenant's receipt of Landlord's
written notice thereof; or
(2) Tenant's failure to observe, keep, or perform any of the
terms, covenants, agreements, or conditions under this Lease
that Tenant is obligated to observe or perform, other than that
described in subdivision (1) above, for a period of ten (10)
days after delivery of notice to Tenant of said failure;
provided however, that if the nature of Tenant's default is such
that more than ten (10) days are reasonably required for its
cure, then Tenant shall not be deemed to be in default under
this Lease if Tenant shall commence the cure of such default so
specified within said ten (10) day period and diligently
prosecute the same to completion; or
(3) Landlord's discovery that any financial statement given to
Landlord by Tenant, by any assignee or subtenant of Tenant, by
any successor in interest of Tenant, or by any guarantor of any
obligations of Tenant under this Lease, was materially false,
where Tenant fails, within ten (10) days after delivery of
Landlord's written demand, to give Landlord such additional
assurances or security for the full and faithful performance of
all Tenant's obligations under this Lease as Landlord shall
reasonably have demanded; or
(4) The occurrence of any of the events described in Subsection
36.5 (Events of Bankruptcy) below with respect to any guarantor
of any obligations of Tenant under this Lease, where Tenant
fails to furnish a substitute guarantor, or alternative
security, satisfactory to Landlord within ten (10) days after
Landlord's delivery of Landlord's written demand therefor.
22.1.2 Notice of Default. The notices of default provided for in
Subsection 22.1.1(1) and (2), and the written demands provided for in
Subsection 22.1.1(3) and (4), shall in each case be in lieu of, and
not in addition to, any notice required under applicable unlawful
detainer Laws;
22.2 Remedies. Upon the occurrence of any Event of Default, Landlord may
exercise any one or more of the termination rights and other remedies
described in Addendum A, in addition to all other rights and remedies now
or hereafter provided at law or in equity.
22.3 Right to Cure. All covenants and agreements to be performed by
Tenant under this Lease shall be performed by Tenant at Tenant's sole
cost and expense. If Tenant shall fail to perform any act on its part to
be performed under this Lease, and such failure shall continue for three
(3) days after notice thereof to Tenant (except that no notice shall be
required in cases of emergency), Landlord may, but shall not be obligated
to do so, without waiving or releasing Tenant from any obligations of
Tenant, perform any such act on Tenant's part to be
Page 26 of 38.
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performed as provided in this Lease. All costs incurred by Landlord with
respect to any such performance by Landlord (including reasonable
attorneys' fees) shall be paid by Tenant to Landlord immediately upon
demand.
22.4 Waiver of Redemption. Tenant hereby waives, for itself and all
persons claiming by and under Tenant, all rights and privileges which it
might have under any present or future law to redeem the Premises or to
continue the Lease after being dispossessed or ejected from the Premises.
22.5 Remedies Cumulative. All remedies of Landlord under this Lease are
cumulative. Efforts by Landlord to mitigate the damages caused by
Tenant's default shall not constitute a waiver of Landlord's right to
recover damages, nor shall Landlord have any obligation to mitigate
damages, except to the extent otherwise provided by applicable Laws.
22.6 Default by Landlord. In no event shall Landlord be deemed to be in
default of any obligation hereunder unless and until thirty (30) days
have expired after delivery of notice of such deficiency to Landlord and
to anyone else, or to any lien holder, to whom Landlord has instructed
Tenant to send duplicative notices, specifying in detail Landlord's
failure to perform, to Landlord and to the holder of any recorded
interest pertaining to the Building; provided, however, that if such
deficiency cannot be cured or corrected within such 30-day period
Landlord shall not be in default if Landlord or anyone on behalf of
Landlord commences such cure or correction within such 30-day period and
thereafter diligently prosecutes the same to completion. If Landlord is
deemed to be in default under the provisions of this Subsection, Tenant
shall be entitled to bring an action for declaratory judgment or specific
performance, or for damages (subject to the provisions of this Lease
limiting Landlord's liability) shown by Tenant to have been proximately
caused by such default. Notwithstanding anything to the contrary in this
Lease, Tenant agrees that, in the event that it becomes entitled to
receive damages from Landlord, Tenant shall not be allowed to recover
from Landlord consequential damages or damages in excess of the out-of-
pocket expenditures incurred by Tenant as a result of a default by
Landlord. Landlord's liability to Tenant for damages resulting from
Landlord's breach of any provision or provisions of the Lease shall not
exceed the value of Landlord's equity interest in the Facility. Tenant
hereby expressly waives its rights under any and all Laws, now or
hereafter in effect, to terminate this Lease (whether prior to or after
the commencement of the Term) or to withhold any payment owed by Tenant
under this Lease, on account of any damage, condemnation, destruction, or
state of disrepair of the Premises, or any part thereof, it being the
parties' intent that the provisions of this Lease shall govern the
parties' rights and obligations with respect to such matters.
23. DAMAGE OR DESTRUCTION:
23.1 Total or Substantial Destruction. In the event that the Facility or
Building shall be destroyed to the extent of forty percent (40%) or more
of the replacement cost thereof, Landlord may elect to terminate this
Lease, whether the Premises be damaged or not, upon written notice to
Tenant not later than the 60th day after the date of such destruction.
23.2 Loss Covered by Insurance. If, at anytime prior to the expiration or
termination of this Lease, (a) all or any portion of the Premises, or any
portion of the Common Areas whose use is required for Tenant's business,
shall be wholly or partially damaged or destroyed by fire or other
casualty or peril (collectively, a "Casualty"), and (b) at least ninety
percent (90%) of the total costs of performing the necessary repairs and
replacements under then applicable Law will be fully covered and paid for
by available proceeds of insurance maintained by Landlord, and (c) such
damage or destruction shall render the Premises totally or partially
inaccessible or unusable by Tenant in the ordinary conduct of Tenant's
business, then:
23.2.1 Repairs That Can Be Completed Within One Hundred Eighty Days.
Within sixty (60) days after the date of Tenant's notice to Landlord
of such damage or destruction (the "Damage Notice Date"), Landlord
shall give Tenant notice of Landlord's good faith determination of
whether the damage or destruction can be repaired under applicable
Laws, without the payment of overtime or other premiums, within one
hundred eighty (180) days after the date such determination of
Landlord is made. If all such repairs to the
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Premises and/or such portions of the Common Areas can, in Landlord's
good faith judgment, be substantially completed in such manner within
such one hundred eighty (180) day period, Landlord shall undertake
such repairs and this Lease shall remain in full force and effect.
23.2.2 Repairs That Cannot Be Completed Within One Hundred Eighty
Days. In the event that Landlord ever determines that such repairs to
the Premises or to such portions of the Common Areas cannot, in
Landlord's good faith judgment, be substantially completed under
applicable Laws, without the payment of overtime or other premiums,
within one hundred eighty days after the date of such determination,
then Landlord shall notify Tenant of such determination. In such
notice Landlord shall either agree to undertake such repairs (in which
even the notice shall include Landlord's estimate of the time required
to complete same) or elect to terminate this Lease. If Landlord so
agrees to undertake repairs, but states that the required repairs will
not be completed within 180 days after delivery of such notice, then
Tenant shall have an option, exercisable by written notice thereof
delivered to Landlord not later than the tenth (10th) after Landlord's
delivery of Landlord's notice that the repairs will not be completed
within such 180-day period, to terminate this Lease. If neither
Landlord nor Tenant exercise such a right of termination following
Landlord's determination that repairs will take more than 180 days,
then Landlord shall diligently undertake to repair such damage or
destruction.
23.3 Loss Not Covered By Insurance. If, at anytime prior to the
expiration or termination of this Lease, (a) all or any portion of the
Premises, or any portion of the Common Areas whose use is required for
Tenant's business, is wholly or partially damaged or destroyed by a
Casualty, and (b) less than ninety percent (90%) (if any) of the total
costs of performing the necessary repairs and replacements will be fully
covered and paid for by available proceeds of insurance maintained by
Landlord, and (c) such damage or destruction renders the Premises totally
or partially inaccessible or unusable by Tenant in the ordinary conduct
of Tenant's business, then:
23.3.1 Landlord shall deliver to Tenant, within sixty (60) days after
the Damage Notice Date, a written notice whereby Landlord shall either
(a) elect to terminate this Lease or (b) agree to undertake such
repairs, in which latter event such notice shall include a statement
of Landlord's good faith estimate of the number of days required in
order to achieve substantial completion, under applicable Laws, of
such repair and restoration work. If Landlord does not elect by such
notice to Tenant to repair such damage, this Lease shall be deemed to
have been terminated by Landlord.
23.3.2 If pursuant to Subsection 23.3.1 Landlord elects to undertake
such repairs, but states that the required repairs will not be
completed within 180 days after delivery of such notice, then Tenant
shall have an option, exercisable by written notice thereof delivered
to Landlord not later than the tenth (10th) after Landlord's delivery
of Landlord's notice that the repairs will not be completed within
such 180-day period, to terminate this Lease. If neither Landlord nor
Tenant exercise such a right of termination with respect to a Casualty
covered by this Subsection 23.3, then Landlord shall diligently
undertake to repair such damage or destruction.
23.4 Destruction During Final Year. Notwithstanding anything to the
contrary contained in Subsections 23.1 or 23.2, if the Premises or the
Building or a portion of the Common Areas required for Tenant's business
are wholly or partially damaged or destroyed within the final twelve (12)
months of the Term of this Lease, and no renewal rights have been
exercised prior to such damage or destruction, and if as a result of such
damage or destruction Tenant is denied access or use of the Premises for
the conduct of its business operations for a period of ten (10)
consecutive business days, Landlord or Tenant may, at its option, by
giving the other written notice prior to substantial completion of the
repairs, and in no event later than the 60th day after the Damage Notice
Date, elect to terminate this Lease.
23.5 Effective Date of a Lease Termination. Any notice of Tenant's
election to terminate under this Section 23 shall include a statement of
the effective date of such termination, which shall not be more than
sixty (60) days after the date such notice is delivered. Any notice of
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Landlord's election to terminate under this Section 23 shall be effective
(a) on the tenth (10th) day after delivery of the notice, if the damage
or destruction shall have prevented Tenant from conducting business at
the Premises, or (b) on the sixtieth (60th) day after delivery of the
notice, in the event that Tenant shall not have been so prevented from
conducting business at the Premises.
23.6 Abatement of Gross Rent. In the event that all or any portion of the
Premises shall be rendered inaccessible or unusable to Tenant, and unused
by Tenant, for a period of more than ten (10) consecutive days as a
result of any damage or destruction caused by any Casualty (and provided
that such Casualty shall not have arisen in whole or in part out of any
gross negligence or willful misconduct on Tenant), then Gross Rent shall
be reduced proportionately for such portion of the Premises as shall be
rendered inaccessible or unusable to Tenant, and unused by Tenant, during
the period of time that such portion is unusable or inaccessible to
Tenant, and unused by Tenant.
23.7 Destruction of Tenant's Personal Property, Tenant Improvements or
Property of the Tenant Parties. In the event a Casualty causes damage to
or destruction of the Premises or the Building or the Facility, under no
circumstances shall Landlord be required to repair damage to, or make any
repairs to or replacements of, Tenant's Personal Property. However, as
part of Common Area Costs, Landlord shall cause to be insured Tenant
Improvements and Alterations that do not consist of Tenant's Personal
Property and shall cause proceeds of such insurance to be applied to the
cost of repairing or restoring such Tenant Improvements and Alterations,
but Tenant shall pay for such portion of those costs as may be uninsured
or be subject to a deductible. Landlord shall have no responsibility for
any contents placed or kept in or on the Premises or the Building or the
Facility by Tenant or the Tenant Parties.
23.8 Exclusive Remedy. The remedies provided for in this Section 23 shall
be Tenant's sole and exclusive remedy in the event a Casualty causes
damage to or destruction of all or any portion of the Premises, Building,
or Facility, and Tenant, as a material inducement to Landlord's entering
into this Lease, irrevocably waives and releases the provisions of any
Law that would automatically terminate this Lease or otherwise be
contrary to the provisions of this Section in the event of any such
damage or destruction.
24. EMINENT DOMAIN:
24.1 Definitions. The following terms shall have the indicated
definitions as used herein: (a) "Condemnation" or "Taking" means (i) the
exercise of any governmental or power, whether by legal proceedings or
otherwise, by a Condemnor and/or (ii) a voluntary sale or transfer by
Landlord to any Condemnor, either under threat of eminent domain or while
legal proceedings for eminent domain are pending; (b) "Date of Taking"
means the date the Condemnor has the right to possession of the property
being condemned; (c) "Award" means all compensation, sums, or anything of
value awarded, paid, or received on a total or partial Condemnation; and
(d) "Condemnor" means any public or quasi-public authority, or private
corporation or individual, having the power of eminent domain.
24.2 Permanent Taking
24.2.1 Total Taking. If the Premises are totally taken by
Condemnation, this Lease shall terminate on the Date of Taking.
24.2.2 Partial Taking; Common Areas
24.2.2.1 If any portion of the Premises is taken by
Condemnation, this Lease shall remain in effect, except that
Tenant shall have the right to elect to terminate this Lease if
forty percent (40%) or more of the rentable square footage of
the Premises is taken, or if the portion taken renders the
remainder of the Premises economically unusable by Tenant, as
determined by Landlord's architect. To be effective, such
election to terminate must be made by written notice delivered
to Landlord within twenty (20) days after Tenant's obtaining
knowledge of the impending acquisition of such portion of the
Premises by Condemnation. Tenant shall be deemed to have
knowledge of such impending acquisition if Tenant enters into
negotiations with the
Page 29 of 38.
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Condemnor's representatives, on receipt of service of complaint
and summons or order for immediate possession, or on receipt of
a letter of inquiry from Landlord advising Tenant of the
impending acquisition and requesting notice of Tenant's
resulting elections and contentions. Tenant's notice shall
contain a clear and unequivocal statement of its election to
terminate, and its reasons for this election.
24.2.2.2 If any part of the Common Areas of the Facility is
taken by Condemnation, this Lease shall remain in full force and
effect so long as there is no material interference with the
access to the Premises. If such a Taking materially interferes
with access to the Premises, either party shall have the
election to terminate this Lease pursuant to this Section 24.
24.2.2.3 If forty percent (40%) or more of the Building or the
Facility is taken by Condemnation (whether or not any Portion of
the Premises shall have been taken), Landlord shall have the
election to terminate this Lease in the manner prescribed
herein.
24.2.3 Termination or Abatement. If either party elects to
terminate this Lease under the provisions of Subsection 24.2.2
(such party is hereinafter referred to as the "Terminating
Party"), it must terminate by giving notice to the other party
(the "Nonterminating Party") within twenty (20) days after the
nature and extent of the Taking have been finally determined
(the "Decision Period"). The Terminating Party shall notify the
Nonterminating Party of the date of termination, which date
shall not be earlier than sixty (60) days after the Terminating
Party has notified the Nonterminating Party of its election to
terminate, nor later than the Date of Taking. If such notice of
termination is not given within the Decision Period, this Lease
shall continue in full force and effect except that the Gross
Rent shall be reduced by subtracting therefrom an amount
calculated by multiplying the Gross Rent in effect prior to the
Taking by a fraction the numerator of which is the square
footage taken from the Premises and the denominator of which is
the square footage in the Premises prior to the Taking.
24.2.4 Restoration. If there is a partial Taking of the Premises
and this Lease remains in full force and effect pursuant to this
Section 24, Landlord, at its cost, shall accomplish all
necessary restoration so that the Premises are returned as near
as practical to their condition immediately prior to the Date of
Taking, but in no event shall Landlord be obligated to expend
more for such restoration than the extent of funds actually paid
to Landlord by the Condemnor.
24.2.5 Award. Any Award arising from the Condemnation or the
settlement thereof shall belong to and be paid to Landlord and
Tenant hereby assigns to Landlord any right of Tenant thereto,
except that Tenant shall receive from the Award compensation for
the following, if specified by amount in the Award by the
Condemnor, so long as it does not reduce Landlord's Award in
respect of the real property: Tenant's trade fixtures, tangible
personal property, goodwill, loss of business, and relocation
expenses. Tenant shall have the right to participate in
condemnation proceedings for the purposes permitted under this
Section 24 and to complain against the Condemnor authority for a
separate award for such losses. At all events, Landlord shall be
solely entitled to all Awards in respect of the real property,
including the bonus value of the leasehold. Tenant shall not be
entitled to any Award until Landlord has received the total
amount to which Landlord is entitled hereunder.
24.3 Temporary Taking. No temporary taking of the Premises or any part of
the Premises and/or of Tenant's rights to the Premises or under this
Lease shall terminate this Lease or give Tenant any right to any
abatement of any rents owed to Landlord pursuant to this Lease. Any award
made to Tenant by reason of such temporary taking shall belong entirely
to Tenant.
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25. SALE BY LANDLORD:
In the event Landlord shall sell, assign, convey, or transfer all or a part of
its interest in the Facility or any part of the Facility, Tenant agrees to
attorn to such transferee, assignee, or new owner. If all of Landlord's interest
in the Facility shall be sold, assigned, conveyed, or transferred, then upon
consummation of such sale, assignment, conveyance, or transfer, Landlord shall
automatically be freed and relieved from all liability and obligations accruing
or to be performed from and after the date of such sale, assignment, transfer,
or conveyance, and in such event Tenant agrees to look solely to the
responsibility of such transferee, assignee, or new owner. In the event of such
sale, assignment, transfer, or conveyance, Landlord shall transfer, or in lieu
thereof grant a credit at closing, to such transferee, assignee, or new owner of
the Facility the balance of the Deposit, if any, remaining after lawful
deductions and in accordance with applicable Law, after notice to Tenant, and
Landlord shall thereupon be relieved of all liability with respect to the
Deposit.
26. ESTOPPEL CERTIFICATES:
Upon either party's prior request from time to time, the other party shall
execute, acknowledge, and deliver to the requesting party, not later than ten
(10) days after such request, a statement (i) certifying the date of
commencement of this Lease, (ii) stating that this Lease is unmodified and in
full force and effect (or if there have been modifications, that this Lease is
in full force and effect as modified and the date and nature of such
modifications), (iii) stating the dates to which rent has been paid, (iv)
acknowledging that there are not, to the certifying party's knowledge, any
uncured defaults on the part of the other party, or specifying each such default
if any are claimed, and (v) setting forth such other matters as may reasonably
be requested. Landlord and Tenant intend that any such statement delivered
pursuant to this Section may be relied upon by any permitted subtenant,
assignee, or lender of Tenant, by the mortgagee or the beneficiary of any deed
of trust, or by any purchaser or prospective purchaser of the Real Property. If
Tenant's failure to deliver such statement within the required time is not cured
within three (3) days after Landlord's delivery of written notice of such
default, such failure to deliver the statement shall, at Landlord's option, be
an Event of Default under this Lease by Tenant, or it shall be conclusive upon
Tenant that (a) this Lease is then in full force and effect, without
modification except as may be represented by Landlord, (b) there are no uncured
defaults in Landlord's performance, and (c) not more than one month's rent has
been paid in advance. Tenant further agrees, from time to time upon Landlord's
request, promptly to furnish to Landlord financial statements reflecting
Tenant's then current financial condition and, if rendered in the ordinary
course of conducting Tenant's business, a copy of Tenant's then most current
certified financial statements.
27. REQUIREMENTS OF LANDLORD'S LENDERS:
27.1 Financing Condition. Landlord may from time to time desire to
mortgage all or a portion of the Facility for the purpose of securing
financing from an institutional lender. In the event such institutional
lender requires, as a condition of granting Landlord such financing, that
this Lease be amended or modified, then Tenant shall, within ten (10)
days after Landlord's request, consent to and execute any such reasonable
amendment or modification of this Lease; provided, however, that such
modification or amendment only concerns (a) the lender's right to
notification, (b) the lender's right to cure defaults by Landlord, (c)
requirements for the lender's consent or approval when Landlord's consent
or approval is required hereunder, (d) requirements for the lender's
prior consent or approval for any amendment, modification, or early
termination of the Lease, for any waiver of any of the terms or
conditions of the Lease to be performed or observed by Tenant, or for any
estoppel certificate to be provided by Landlord, (e) restrictions on
prepayments of rent, (f) the lender's right to require that rents be paid
directly to the lender, (g) the resolution of ambiguities or correction
or errors or omissions contained in this Lease, and/or (h) such other
matters as Tenant may consent to, which consent shall not be unreasonably
withheld. At Landlord's option, Tenant's failure to execute and deliver
such a Lease modification or amendment within the required time shall be
an Event of Default under this Lease by Tenant, without any further
notice to Tenant.
27.2 Mortgagee Protection. Tenant agrees to give any present or future
mortgagee and/or trust deed holders, by registered mail, a copy of any
notice of default served upon Landlord, provided that prior to such
notice Tenant has been notified, in writing (by way of notice of
assignment of rents and leases, or otherwise), of the address of such
mortgagee and/or trust deed holder. Tenant further agrees that if
Landlord shall have failed to cure such default within the time provided
for in this Lease (if any), then the mortgagees and/or trust deed
Page 31 of 38.
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holders shall have an additional thirty (30) days within which to cure
such default or if such default cannot be cured within that time, then
such additional time as may be necessary if, within such thirty (30)
days, any mortgagee and/or trust deed holder has commenced and is
diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure), in which event this Lease shall not be
terminated while such remedies are being diligently pursued.
28. SUBSTITUTION OF PREMISES:
Landlord hereby reserves the right, from time to time prior to the Commencement
Date or during the Term, to relocate Tenant to other premises in the Facility on
the following terms and conditions: (a) the new premises shall be substantially
the same in size, dimensions, configuration, decor, and quality as the Premises
described in this Lease, and shall be placed in that condition by Landlord at
its cost; (b) the physical relocation of the Premises shall be accomplished by
Landlord at its cost; (c) Landlord shall give Tenant at least sixty (60) days'
notice of Landlord's intention to relocate the Premises; (d) the physical
relocation of the Premises shall take place on a weekend, if practicable, and
shall be accomplished as quickly as reasonably practicable; (e) all reasonable
actual out-of-pocket costs incurred by Tenant as a result of the relocation,
including, without limitation, costs incurred in changing addresses on
stationery, business cards, directories, advertising, and other such items, but
excluding any lost revenues or any intangible costs, shall be paid by Landlord;
(f) if the relocated premises are smaller than the Premises as they existed
before the relocation, Gross Rent shall be reduced to a sum computed by
multiplying the Gross Rent specified in Sections 4 and 5 by a fraction, the
numerator of which shall be the total number of rentable square feet in the
relocated premises, and the denominator of which shall be the total number of
rentable square feet in the Premises before relocation; and (g) from and after
the date of such relocation and substitution, the term "Premises" as used in
this Section shall mean the substituted premises in the Facility, and Landlord
and Tenant shall execute an amendment to this Lease stating the relocation of
the Premises and the reduction of Gross Rent, if any.
29. ATTORNEYS' FEES:
In the event either party requires the services of an attorney in connection
with enforcing the terms of this Lease (including an action or proceeding
between one party and the trustee or debtor in possession while the other party
is a debtor in a proceeding under the Bankruptcy Code (Title 11 of the United
States Code or any successor statute to such Code)), or in the event suit is
brought for the recovery of any amount due and owing under this Lease, the
prevailing party shall be entitled to recover all its costs and expenses in
connection therewith (including court costs and reasonable attorneys' fees,
costs and disbursements) from the unsuccessful party, whether or not such
action, proceeding or appeal is prosecuted to judgment or other final
determination. The term "prevailing party" shall include, without limitation, a
party who obtains legal counsel or brings an action against the other party by
reason of the other party's breach or default and obtains substantially the
relief sought, whether by compromise, settlement, or judgment. If such
prevailing party shall recover in any such action, proceeding, or appeal, such
costs and expenses (including court costs and reasonable attorneys' fees, costs
and disbursements) shall be included in and as a part of such judgment.
30. NON-WAIVER:
The waiver by Landlord or Tenant of any term, covenant, agreement or condition
contained in this Lease shall not be deemed to be a waiver of any subsequent
breach of the same or of any other term, covenant, agreement, condition or
provision of this Lease. Nor shall any consent by Landlord or Tenant in any one
instance dispense with necessity of consent in any subsequent or other instance.
Nor shall any custom or practice that may develop between the parties in the
administration of this Lease be construed to waive or lessen the right of
Landlord or Tenant to insist upon performance by the other in strict accordance
with all of the terms, covenants, agreements, conditions, and provisions of this
Lease. The subsequent acceptance by Landlord of any payment owed by Tenant to
Landlord under this Lease, or the payment of rent by Tenant, shall not be deemed
to be a waiver of any preceding breach by Tenant of any term, covenant,
agreement, condition, or provision of this Lease, other than the failure of
Tenant to make the specific payment so accepted by Landlord, regardless of
Landlord's or Tenant's knowledge of such preceding breach at the time of the
making or acceptance of such payment.
31. NOTICES:
All notices, notifications, demands, requests, consents, approvals,
designations, elections, and waivers that may or are required to be given by
either party to the other hereunder shall be in writing and shall be deemed to
have been duly given when delivered personally, or one business day after such
notice or demand is sent by a reliable overnight courier service, or three (3)
business days after it is sent by United
Page 32 of 38.
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States certified or registered mail, in each case with postage prepaid and the
notice or demand addressed to the other party at its address set forth in
Subsection 1.1(b) of this Lease, or to such other place as such party may from
time to time by like notice designate. Written notice given in any other manner
shall have been duly given when actually received by Landlord's manager of the
Facility (in the case of notice to Landlord) or by any of the undersigned
representatives of Tenant or any other executive level employee or officer of
Tenant. If there is more than one tenant under this Lease, then notice to any
one of them shall constitute notice to all and notice from any one of them shall
constitute notice from all.
32. JOINT AND SEVERAL LIABILITY:
If Tenant consists of more than one person or other entity, Tenant's obligations
hereunder shall be joint and several as between such persons and/or entities.
33. TIME:
Subject to provisions of Section 17 (Force Majeure), time is of the essence of
this Lease and each and all of its provisions.
34. SUCCESSORS:
Subject to the provisions of Section 13 (Assignment and Subletting) and Section
25 (Sale by Landlord), and except as otherwise provided to the contrary in this
Lease, the terms, covenants, and conditions herein contained shall apply to,
bind, and inure to the benefits of the heirs, successors, executors,
administrators, and permitted assigns of the respective parties hereto.
35. ENTIRE AGREEMENT:
This Lease (including the exhibits, riders, addenda, and schedules referred to
herein and made a part hereof) embodies the entire agreement between, and
understanding of, the parties and supersedes all prior agreements and
understandings (oral or written) between the parties with respect to the subject
matter hereof. This Lease shall not be modified by any oral agreement, either
express or implied, and all modifications hereof shall be in writing and signed
by both Landlord and Tenant.
36. RESTRICTIONS ON OPTIONS:
36.1 Definition. As used in this Section 36, the word "Option" shall mean
any of the following rights or options of Tenant, if any such rights or
options are granted pursuant to an addendum or other modification to this
standard lease form: (1) any right or option to extend the term of this
Lease, (2) any option or any right of first refusal or first offer to
lease the Premises or any other space within the Facility or other
property of Landlord or its affiliates, and (3) any right or option of
Tenant to terminate or cancel this Lease prior to the last day of the
initial Term contemplated by Subsection 1.2(d).
36.2 Options Personal. Each Option, if any, granted to Tenant in this
Lease is personal to the original Tenant and may be exercised only by the
original Tenant while directly (and not through subleases) occupying more
than sixty percent (60%) of the Premises, and may not be exercised or
assigned, voluntarily or involuntarily, by or to any person or entity
other than the original Tenant. If the original Tenant consists of more
than one person or other entity, each such person or entity must join in
the exercise of the Option in order for it to be effective. The Options,
if any, herein granted to Tenant are not assignable separate and apart
from this Lease, nor may any Option be separated from this Lease in any
manner, by reservation or otherwise.
36.3 Multiple Options. In the event that Tenant has multiple Options to
extend or renew the term of this Lease, a later Option cannot be
exercised unless the prior Option to extend or renew this Lease has been
so exercised.
36.4 Strict Enforcement of Conditions and Limitations Upon Options
36.4.1 Tenant hereby specifically acknowledges and agrees that the time
limitations upon the exercise of any Option will be strictly enforced,
that any attempt to exercise such Option at any other time shall be void
and of no force or effect, and that if any such Option is not exercised
within the applicable time period, Landlord intends immediately
thereafter to undertake appropriate efforts relating to the marketing or
management of the space affected
Page 33 of 38.
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by the Option. The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Tenant's inability to
exercise such Option because of the provisions of this Subsection or for
any other reason whatsoever.
36.4.2 Tenant further agrees that if Tenant is in default hereunder on
the date of giving the required notice of exercise of such Option, such
notice shall be totally ineffective, and if Tenant is in default
hereunder on the date any extension or renewal of the term of this Lease
was to commence, such extension or renewal of the term shall not
commence, and this Lease shall expire at the end of the Term as
theretofore in effect. Notwithstanding any provision of this Lease to the
contrary, all Options shall automatically be void, and shall have no
further effect, upon the commencement of any holdover by Tenant after the
expiration or earlier termination of the Term.
36.4.3 Tenant further agrees that if (a) more than once during the twelve
(12) month period immediately preceding delivery of a notice of exercise
of Option Tenant shall have failed to make timely payment of any rent or
any Event of Default shall have occurred, or (b) more than three (3)
times during the twenty-four (24) month period immediately preceding
delivery of such notice Tenant shall have failed to make timely payment
of rent or any Events of Defaults shall have occurred, then such Option
of Tenant shall at once be void and of no further effect, notwithstanding
Tenant's timely exercise of such Option.
36.5 Events of Bankruptcy. In addition to those events and occurrences
constituting defaults or Events of Default under other provisions of this
Lease, the occurrence of any of the following events shall also
constitute a default and Event of Default for purposes of Subsection
36.4:
36.5.1. Filing by Tenant of a voluntary petition under any applicable
bankruptcy Law, or the issuance of an order for relief entered under any
applicable bankruptcy Law, or the filing by Tenant of any petition or
answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief for Tenant
under the present or any future applicable Law relative to bankruptcy,
insolvency, or other relief for debtors, or Tenant's consent to or
acquiescence in the appointment of any trustee, receiver, conservator, or
liquidator of Tenant or of all or any substantial part of its properties
or its interest in the Premises (the term "acquiesce," as used in this
clause, includes but is not limited to the failure to file a petition or
motion to vacate, appeal, or discharge any order, judgment, or decree
within ten (10) days after entry of such order, judgment, or decree);
36.5.2. Issuance or entry, by a court of competent jurisdiction, of any
order, judgment, or decree approving a petition filed against Tenant
seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future
applicable Law relating to bankruptcy, insolvency, or other relief for
debtors, and acquiescence by Tenant in the entry of such order, judgment,
or decree; or the failure of such order, judgment, or decree to be
vacated or stayed within an aggregate of thirty (30) days (whether or not
consecutive) after the date of entry thereof; or the appointment, without
the consent or acquiescence of Tenant, of any trustee, receiver,
conservator, or liquidator of Tenant or of all or any substantial part of
its properties or its interest in the Premises and the failure of such
appointment to be vacated or stayed within an aggregate of thirty (30)
days (whether or not consecutive);
36.5.3. The inability of Tenant, or Tenant's admitting in writing its
inability, to pay its debts as they mature;
36.5.4. Tenant's giving notice to any governmental body of Tenant's
insolvency or pending insolvency, or suspension or pending suspension of
operations; or
36.5.5. Tenant's making a general arrangement or general assignment for
the benefit of creditors or taking any other similar action for the
protection or benefit of creditors.
Page 34 of 38.
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37. RECORDING:
Tenant shall not record this Lease or any memorandum hereof without Landlord's
prior consent.
38. AUTHORIZATION TO SIGN LEASE:
If Tenant is a corporation, each individual executing this Lease on behalf of
Tenant represents and warrants that he/she is duly authorized to execute and
deliver this Lease on behalf of Tenant in accordance with a duly adopted
resolution of Tenant's Board of Directors, and that this Lease is binding upon
Tenant in accordance with its terms, and Tenant shall, concurrently with its
execution of this Lease, deliver to Landlord upon its request a certified copy
of a resolution of its Board of Directors authorizing the execution of this
Lease. If Tenant is a partnership or trust, each individual executing this Lease
on behalf of Tenant represents and warrants that he/she is duly authorized to
execute and deliver this Lease on behalf of Tenant in accordance with the terms
of such entity's partnership agreement or trust agreement, respectively, and
that this Lease is binding upon Tenant in accordance with its terms, and Tenant
shall, concurrently with its execution of this Lease, deliver to Landlord upon
its request such certificates or written assurances from the partnership or
trust as Landlord may request authorizing the execution of this Lease. If Tenant
consists of more than one legal entity, the foregoing representations,
warranties, and covenants shall apply to any such entity that is a corporation
or partnership, as the case may be. Each individual signing this Lease on behalf
of Tenant shall personally indemnify, defend, and hold harmless Landlord from
and against any claim arising out of any actual or alleged breach or inaccuracy
of any of the foregoing representations and warranties or any loss suffered by
reason thereof.
39. BROKER PARTICIPATION:
In consideration for brokerage services rendered to Landlord in this
transaction, Landlord shall pay its licensed real estate broker named in
Subsection 1.1(j) a commission as set forth in a separate agreement between
Landlord and said broker. Tenant's broker, if any is named in Subsection 1.1(j),
will be paid its commission from a portion of the commission paid to Landlord's
Broker, as set forth in a separate agreement between Landlord's Broker and
Tenant's Broker. Except as otherwise set forth in the preceding sentence, each
party agrees to indemnify, defend, and hold harmless the other party from any
claim or loss arising out of any actual or alleged dealings of the indemnifying
party with any real estate broker, agents or finder in connection with this
transaction.
40. SURVIVAL OF CERTAIN RIGHTS AND OBLIGATIONS:
The respective parties' remedies, payment obligations, indemnities, waivers and
releases under this Lease, with respect to Tenant's use or possession of the
Premises during the Term and any holdover period, and with respect any cost or
expense incurred during or with respect to the Term or any holdover period,
shall survive the termination of this Lease.
41. PARKING:
Landlord shall have the right, by written notice to Tenant, to designate
specific areas of the Facility for employee parking. If Landlord designates an
employee parking area, then automobiles of Tenant, its employees, and agents
shall not park within the parking area except in areas delineated by Landlord as
"employee parking." Subject to the foregoing, Tenant shall be entitled to use,
in common with other tenants and Landlord, the number of undesignated vehicle
parking spaces allocated to Tenant in Subsection 1.1(k). Tenant's use of such
parking spaces shall be subject to payment by Tenant of such standard monthly
parking rates, if any, as may be charged from time to time to persons other than
the officers and employees of Landlord and its affiliates, and subject to such
rules and regulations as may be established or altered from time to time by
Landlord or its manager of such parking facilities. At Landlord's request,
Tenant (or its designated employees with parking privileges) shall enter into
parking licenses or lease agreements or other arrangements then in use by
Landlord (or Landlord's operator of the parking facilities) with respect to such
monthly parking. Tenant agrees not to overburden the parking facilities and
agrees to cooperate with Landlord and other tenants in the use of parking
facilities. Landlord reserves the right, in its absolute discretion, to
determine whether parking facilities are becoming crowded and, in such event, to
allocate and assign parking spaces among Tenant and other tenants. Upon request,
Tenant shall provide Landlord with the license plate numbers of all vehicles
used at the Facility by Tenant's employees. In the event that, pursuant to any
modification or amendment to this standard form lease, Tenant is at any time
given any right to the exclusive use of any designated parking stalls or
facilities, Landlord shall nevertheless have the right from time to time to
substitute other designated parking stalls or facilities therefor, so long as
such substitute stalls or facilities are, in Landlord's judgment, reasonably
comparable. If Tenant parks more vehicles in the Facility's parking area than
are permitted under this Section, Landlord shall have the right, without
limitation to Landlord's
Page 35 of 38.
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other remedies under this Lease, to collect from Tenant a daily charge, to be
determined by Landlord, for each such additional vehicle.
42. SEVERABILITY:
Should any provision of this Lease be illegal, void, invalid, inoperative, or
unenforceable, no other provision of this Lease shall be affected thereby, and
the remainder of this Lease shall be effective as though such illegal, void,
invalid, inoperative, or unenforceable provision had not been included herein.
43. CERTAIN RIGHTS RESERVED BY LANDLORD:
Landlord hereby expressly reserves the rights set forth in the Subsections of
this Section 43. Such rights shall be exercisable (a) without notice, (b)
without liability to Tenant for damage or injury to property, persons, or
business, (c) without effecting a constructive or actual eviction of Tenant or
disturbance of Tenant's use, possession, or enjoyment of its Premises, and (d)
without giving rise to any claim for setoff or abatement of rent. The
enumeration of such rights of Landlord in the following Subsections is not
intended to limit any other rights of Landlord, whether expressed or implied, at
law or under other provisions of this Lease.
43.1 Landlord shall have the right to decorate and make repairs,
alterations, additions, changes, and/or improvements, whether structural
or otherwise, in and about the Building and elsewhere in the Facility,
including, without limitation, construction of additional buildings or
other new improvements and changes in the location, size, shape, and
number of driveways, entrances, parking spaces, parking areas, loading
and unloading areas, ingress, egress, direction of traffic, landscaped
areas, sidewalks, and walkways. For such purposes Landlord may enter upon
the Premises and, during the continuance of any such work, temporarily
close doors, entryways, public space and corridors in the Building or
elsewhere in the Facility, to interrupt or temporarily suspend building
services and facilities and to change the arrangement and location of
entrances, or passageways, doors and doorways, corridors, elevators,
stairs, toilets, or other public parts of the Building or Facility, all
without abatement of rent and without affecting any of Tenant's
obligations hereunder, except as otherwise expressly provided in this
Lease (e.g., Subsections 21.2 and 23.6).
43.2 Landlord shall have the right to designate additional land outside
the current boundaries of the Facility to be a part of the Common Areas.
43.3 Landlord shall have the right to take all such reasonable measures
as Landlord may deem advisable for the security of the Building or the
Facility and their occupants, including, without limitation, the search
or any person entering or leaving the Building, the evacuation of the
Building (or any part thereof) for cause, suspected cause, or for drill
purposes, the temporary denial of access to the Building (or any part
thereof), and the closing of the Building after normal business hours and
on Sundays and holidays, subject, however, to Tenant's right to
admittance, when the Building is so closed, under such reasonable
regulations as Landlord may prescribe from time to time.
44. WAIVER OF JURY TRIAL:
EACH PARTY HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS LEASE. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY TENANT AND TENANT
ACKNOWLEDGES THAT NEITHER LANDLORD NOR ANY PERSON ACTING ON BEHALF OF LANDLORD
HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR
IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. TENANT FURTHER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE
SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO
DISCUSS THIS WAIVER WITH COUNSEL. TENANT FURTHER ACKNOWLEDGES THAT IT HAS READ
AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION AND AS
EVIDENCE OF THIS FACT SIGNS ITS INITIALS.
________________ TENANT'S INITIALS
45. INTERPRETATION:
The words "Landlord" and "Tenant" as used herein shall include the plural as
well as the singular and, when appropriate, shall refer to action taken by or on
behalf of Landlord or Tenant by their respective
Page 36 of 38.
<PAGE>
employees, agents, or authorized representatives. Words in masculine gender
include the feminine and neuter. The titles of the Sections, Subsections, and
other provisions of this Lease are for convenience only and they shall not in
any way limit or amplify the terms or provisions of this Lease. All provisions,
whether covenants or conditions, on the part of Tenant shall be deemed to be
both covenants and conditions. In the event of variation or discrepancy, the
duplicate original of this Lease (including Exhibits, if any) held by Landlord
shall control. This Lease shall in all respects be governed by and construed and
enforced in accordance with the Laws of the State where the Facility is located,
and any litigation concerning this Lease between the parties hereto shall be
initiated in the county where the Facility is located.
46. COOPERATION WITH GOVERNMENT SPONSORED PROGRAMS:
Tenant hereby covenants and agrees, at its sole cost and expense, to participate
in and cooperate with the requirements of any and all government promulgated or
sponsored programs adopted for the Building or the Facility concerning
transportation system management, child care facilities, recycling, energy or
water conservation, safety, or the like.
47. PARTIES TO ACT REASONABLY AND IN GOOD FAITH:
Except in those instances where this Lease provides for a contrary standard,
whenever in this Lease the consent or approval of the Landlord or Tenant is
required, such consent or approval shall not be unreasonably withheld or delayed
(except, however, with respect to any Landlord consent, for matters which could
possibly have an adverse effect on the Building's plumbing, heating, mechanical,
life safety, ventilation, air conditioning, or electrical systems, which could
affect the structural integrity of the Building, or which could affect the
exterior appearance of the Building, Landlord may withhold such consent or
approval in its sole discretion but shall act in good faith). Except in those
instances where a contrary standard or right is set forth in this Lease,
whenever the Landlord or Tenant is granted a right to take action, exercise
discretion, or make an allocation, judgment, or other determination, such party
shall act reasonably and in good faith and take no action that might result in
the frustration of the reasonable expectations of a sophisticated tenant and a
sophisticated landlord concerning the benefits to be enjoyed under this Lease.
48. OFFER:
Preparation of this Lease by Landlord or Landlord's agent and submission of same
to Tenant shall not be deemed an offer to lease and neither party shall act in
reliance on said Lease being thereafter signed. This Lease shall become binding
upon Landlord and Tenant only when fully executed by both Landlord and Tenant;
provided, however, that in the event Landlord or Landlord's agent permits Tenant
to take occupancy of all or any portion of the Premises without Landlord first
having executed this Lease, then in the event that Landlord elects not to
execute this Lease, Tenant's occupancy of the Premises shall automatically be
deemed to be a tenancy-at-will, subject to all the terms, provisions, and
conditions of this Lease, except those terms, provisions, and conditions
pertaining to the Term. Any such tenancy-at-will may be terminated by Landlord
or Tenant upon five (5) days' prior notice to the other party.
49. DUAL REPRESENTATION:
Lessor and Lessee acknowledge that Cornish & Carey Commercial represents both
Lessor and Lessee, and Lessor and Lessee consent thereto.
50. CONTINGENCY AND OPTION TO RELOCATE
50.1 Notwithstanding anything contained in this Lease, this Lease and
each of Landlord's and Tenant's obligations, liabilities and duties is
conditioned and contingent upon agreement by (PruCare) no later than June
1, 1997 that (PruCare) will release and relinquish that portion of
(PruCare's) premises at the Facility which are to become a part of the
Premises. Unless Landlord notifies Tenant that (PruCare) has released and
relinquished (or shall release and relinquish) such space on or before
August 1, 1997, then this Lease shall have no force or effect. If,
however, Landlord timely provides notice that (PruCare) has timely
released and relinquished (or shall release and relinquish) the required
space, then this Lease shall continue in full force and effect. Tenant
agrees to acknowledge receipt of Landlord's notice under this Section
50(a) by return notice to Landlord given by Tenant within five days of
Tenant's receipt of Landlord's notice hereunder. However, any failure of
Tenant to acknowledge such receipt shall not affect Tenant's obligations
and liabilities under this Lease in the event that Landlord timely gives
the notice contemplated hereby. In the event that Landlord timely gives
the required notice and Tenant does not timely acknowledge receipt
Page 37 of 38.
<PAGE>
thereof, Tenant acknowledges and agrees that Landlord may delay any
obligation or liability hereunder one day for each day that Tenant's
acknowledgment is delayed, including without limitation any obligation or
liability of Landlord to perform or complete tenant improvements or
deliver the Premises.
50.2 In the event that (PruCare) releases and relinquishes space on the
first (i.e., ground) and third or fourth floors of the Building, rather
than a ground and second floors of the Building prior to the commencement
of the tenant improvement construction contemplated by this Lease, then
the Premises and Subsection 1.1.c, at provisions 3 and 4, shall be
modified to be as follows:
Suite Nos. of Premises:
Suite 300 (or Suite 400), located on the third or fourth floor
of the Building and Suites 110 and 150 on the ground floor.
Approximate No. of Net Rentable Square Feet:
(i) The Premises: 18,886; and
(ii) The Building: 92,099.
Landlord shall advise Tenant of whether the Premises shall be as set forth in
Subsection 1.1.c or this Section 50(b) as soon as reasonably possible (but in
any event on or before June 1, 1997).
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first
set forth above, acknowledging that each party has carefully read each and every
provision of this Lease, that each party has freely entered into this Lease of
its own free will and volition, and that the terms, conditions, and provisions
of this Lease are commercially reasonable as of said date.
LANDLORD: CASIOPEA VENTURE CORPORATION
BY: BIRTCHER PROPERTY SERVICES, its authorized agent
By: _____________________________ Date:________________________________________
TENANT: QUALIX GROUP, INC.
By: _____________________________ Date:________________________________________
Rick Thau
---------
Page 38 of 38.
<PAGE>
ADDENDUM A
ATTACHED TO AND MADE A PART OF THIS LEASE
a. Unlawful Detainer Notice. Tenant hereby specifically agrees that any
notice of default provided for in Subsection 22.1 of the Lease shall be
in lieu of, and not in addition to, any notice required under Section
1161 of the California Code of Civil Procedure.
b. Additional Remedies of Landlord. Upon the occurrence of any Event of
Default described in Subsection 22.1 of this Lease, Landlord may exercise
any one or more of the following remedies, in addition to all other
rights and remedies provided elsewhere in this Lease or now or hereafter
provided at law or in equity:
(i) Right To Terminate. Landlord shall have the right, in addition to
all other rights available to Landlord under this Lease or now or
later permitted by law or equity, to terminate this Lease by providing
Tenant with a notice or termination. Upon termination, Landlord may
recover any damages proximately caused by Tenant's failure to perform
under the Lease, including, without limitation, any amount expended or
to be expended by Landlord in an effort to mitigate damages
(including, without limitation, any amount expended or to be expended
by Landlord in an effort to mitigate damages (including, without
limitation, advertising costs, brokerage fees, attorneys' fees, and
costs for maintaining the Premises and putting them into good order,
condition, and repair, and performing such remodeling, renovations, or
alterations as may be desirable to prepare the Premises for
reletting), as well as any other damages to which Landlord is entitled
to recover under any Law now or hereafter in effect.
(ii) Right to Recover Rent as it Becomes Due. Landlord may exercise
the remedy described in California Civil Code Section 1951.2 (Landlord
may continue lease in effect after tenant's breach and abandonment,
and recover rent as it becomes due, if tenant has right to sublet or
assign, subject only to reasonable limitations). Tenant hereby
specifically acknowledges and agrees that the limitations on its right
to sublet or assign, as set forth in Section 13 of the Lease, are
reasonable.
(iii) Right to Remove Personal Property. Upon any reentry by Landlord
into the Premises under this Section, Landlord shall have the right to
cause any movable furniture, equipment, trade fixtures, or other
personal property left on the Premises to be removed and stored in a
public warehouse or elsewhere at Tenant's sole cost and expense,
and/or to dispose of or sell such property and apply the proceeds
therefrom pursuant to applicable Law. In the event Landlord stores
such property at premises owned or leased by Landlord, Landlord may
charge Tenant for such storage at such reasonable rates as Landlord
shall from time to time determine. The foregoing notwithstanding,
nothing set forth in this paragraph or elsewhere in this Lease shall
impose on Landlord any obligation for the care or preservation of such
property so left upon the Premises, except to the extent otherwise
expressly provided by applicable Laws.
c. Waiver Of Certain California Code Sections. The parties understand and
agree that the provisions of this Lease shall govern the parties rights
and obligations with respect to the matters addressed in the statutory
provisions described below. Accordingly, and without limitation to the
generality of the provisions of the Lease concerning the waiver of
certain statutory provisions, Tenant hereby specifically waives its
rights under the following provisions of California law:
(i) Civil Code Sections 1932 and 1933(4), concerning the termination
of a lease (whether prior to or after the commencement of the lease
term) on account of the condition of the premises;
(ii) Civil Code Sections 1941 and 1942, concerning the making of
repairs at a landlord's expense;
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(iii) Code of Civil Procedure Section 1265.130, concerning the right
to petition the Superior Court to terminate a lease in the event of a
partial taking of the premises by condemnation; and
(iv) Code of Civil Procedure Sections 473 and 1179 and Civil Code
Section 3275, concerning rights of redemption or reinstatement of a
tenant after being dispossessed from its premises.
d. Landlord's Disclosure Regarding Hazardous Substances. By signing this
Lease, Tenant represents that Tenant has read and understood the
statutorily required disclosures, if any, of Landlord set forth in
Schedule 1 attached to this Addendum, which disclosures relate to certain
Hazardous Substances known or suspected to exist at the Premises,
Building, or Facility.
40
<PAGE>
LEASE RIDER NO. 1
This Lease Rider is attached to and made a part of that certain Standard Form
Lease dated April 24, 1997, by and between Casiopea Venture Corporation, as
("Landlord") and Qualix Group, Inc., as ("Tenant") for the Premises known as 177
Bovet Road, Suite 200, San Mateo, California.
The capitalized terms used and not otherwise defined herein shall have the same
definitions as set forth in the Lease. The provisions of this Lease Rider shall
supersede any inconsistent or conflicting provisions of the Lease.
1. Option To Extend Term:
a. Grant of Option. Landlord hereby grants to Tenant the option (the
"Option") to extend the Term of the Lease for an additional consecutive
term of five (5) years ( the "Extension"), on the same terms and
conditions as set forth in the Lease, except the Monthly Rent shall be
the amount determined as set forth below. The Option shall be exercised
only by written notice delivered to Landlord at least 180 days before the
expiration of the initial Term of the Lease. If Tenant fails to deliver
to Landlord written notice of the exercise of the Option within the time
period prescribed above, the Option shall be exercisable by Tenant on the
express conditions that (i) at the time of the exercise of the Option,
and thereafter at all times prior to the commencement of the Extension,
an Event of Default shall not have occurred and be continuing under the
Lease, and (ii) Tenant has not been 10 or more days late in the payment
of Rent more than a total of three times during the Term of the Lease. If
Tenant properly exercises to Option, "Term," as used herein and in the
Lease, shall be deemed to include the Extension, unless specified
otherwise herein or in the Lease.
The parties shall have 30 days after Landlord receives the option notice
in which to agree on minimum monthly rent during the extended term. If
the parties agree on the minimum monthly rent for the extended term
during that period, they shall immediately execute an amendment to this
Lease stating the minimum monthly rent for the extended term.
If the parties are unable to agree on the minimum monthly rent for the
extended period within that period, the option notice shall be of no
effect and this Lease shall expire at the end of the term. Neither party
to this Lease shall have the right to have a court or other third party
set the minimum monthly rent.
Tenant shall have no other right to extend the term beyond the extended
term.
b. Personal Option. The Option is personal to Tenant. If Tenant subleases
or assigns or otherwise transfers any interest under the Lease prior to
the exercise of the Option, the Option shall lapse. If Tenant subleases
or assigns or otherwise transfers any interest of Tenant under the Lease
after the exercise of the Option but prior to the commencement of the
Extension, the Option shall lapse and the Term of the Lease shall expire
as if the Option were not exercised.
41
<PAGE>
LEASE RIDER NO. 2
This Lease Rider is attached to and made a part of that certain Standard Form
Lease dated April 24, 1997, by and between Casiopea Venture Corporation, as
("Landlord,") and Qualix Group, Inc., as ("Tenant,") for the Premises known as
177 Bovet Road, Suite 200, San Mateo, California.
The capitalized terms used and not otherwise defined herein shall have the same
definitions as set forth in the Lease. The provisions of this Lease Rider shall
supersede any inconsistent or conflicting provisions of the Lease.
1. First Opportunity To Lease Additional Space.
Provided Tenant is not in default and has performed all of its
obligations hereunder and subject to, but only to, existing rights held
by existing tenants Tenant shall have a one-time first right to lease
contiguous space to the Premises on the third floor of the building
provided such contiguous space becomes available for leasing during the
Lease Term ("First Opportunity") at the then prevailing fair market
rental rates and upon such other terms and conditions as are then being
offered by Landlord to the general public for such space. Upon
notification in writing by Landlord that such space is available, Tenant
shall have ten (10) business days in which to elect in writing so to
lease such space, in which event negotiations will the lease for same
shall commence not more than thirty (30) days from Tenant's notification
of its intent to lease such space. In the event Tenant declines or fails
to elect so to lease such space, then the First Opportunity hereby
granted shall automatically terminate and shall thereafter be null and
void as to such space. It is understood that this First Opportunity shall
not be construed to prevent any tenant in the Building from extending or
renewing its lease.
42
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LEASE RIDER NO. 3
This Lease Rider is attached to and made a part of that certain Standard Form
Lease dated _____________, by and between Casiopea Venture Corporation, as
("Landlord,") and _____________________, as ("Tenant,") for the Premises known
as _____ Bovet Road, Suite _____, San Mateo, California. Except as otherwise set
forth in this Rider, all terms used in this Rider shall have the same meaning as
when used in the foregoing portion of the Lease. To the extent of any
inconsistencies between the foregoing provisions of the Lease and the provisions
of this Rider, the former are hereby amended.
ARTICLE I: LETTER OF CREDIT
1. Landlord Costs.
Landlord and Tenant acknowledge and agree that the Landlord is investing at
least _____________________ ( $_________________ ) towards constructing
improvements to the Premises and broker's commissions ("Landlord Costs").
2. Obligation To Pay For Landlord's Costs.
In the event of a termination of this Lease prior to the expiration of its Term,
due to default by Tenant, Tenant shall pay to Landlord, within five (5) days
after the effective date of such termination (the "Termination Date"),
_____________________ ( $_________________ ) paid by Landlord for Landlord's
Costs, prorated by the remaining term of the Lease.
3. Security Of Payment Of Landlord's Costs.
a. Contemporaneously with the execution of this Lease, Tenant shall cause
to be delivered to Landlord, as security for Tenant's obligation to pay
Landlord's Costs as set forth in Section 1 of this Rider, in addition to
Monthly Rent for Month 1 and Month 24 and funds otherwise deposited with
the Landlord as Tenant's Security Deposit pursuant to the terms of this
Lease, an irrevocable straight Letter of Credit issued by Borel Bank in
the amount of _____________________ ( $_________________ ). Said Letter
of Credit shall include the following language:
(i) Upon Landlord's written certification to Issuer:
(a) Stating that the Lease has been terminated by reason of events
other than Landlord's default, and the effective date of such
termination ("Termination Date"); and
(b) stating that there is due and owning from Tenant to Landlord,
that amount which is equal to Landlord's Costs'.
Issuer shall thereupon pay to Landlord an amount equal to the entire
Unpaid Balance of Landlord's Costs thereon from the Termination Date, as
certified to the Issuer by Landlord.
b. Provided tenant has not defaulted in the performance of any of it
obligations under the Lease; at any time during the second year of the
Term, Tenant may reduce the face amount of the Letter of Credit to
_____________________ ( $_________________ ); and at any time during the
third year of the Term, Tenant may reduce the face amount of the Letter
of Credit to _____________________ ( $_________________ ). After the
third lease year the Letter of Credit requirement will be waived by the
Landlord if:
(a) Tenant has not been in default anytime during the previous
three years; and
(b) Tenant has successfully sold its initial public offering of
common stock.
If any letter of credit issued by reason of the provisions of this Rider
should expire sooner than the Expiration Date of the Lease, then in such
case, not later than fifteen (15) days prior to the expiration date of
the then-existing Letter of Credit, Tenant shall replace said Letter of
Credit with anew Letter of Credit meeting the requirements specified this
Rider.
TENANT: ____________________________
By: __________________________________________ Date: __________________________
43
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LANDLORD: CASIOPEA VENTURE CORPORATION
By: __________________________________________ Date: __________________________
44
<PAGE>
EXHIBIT A-1
Site Plan or Legal Description of the Facility
45
<PAGE>
EXHIBIT A-2
Floor Plan of the Premises
46
<PAGE>
EXHIBIT B
WORK LETTER
This Exhibit "B" is attached to and made a part of that certain Lease dated
March 15, 1997, by and between Casiopea Venture Corporation, ("Landlord"), and
Qualix Group, Inc., ("Tenant") for the Premises known as Bovet Office Centre,
177 Bovet Road, Suite 200, San Mateo, California 94404
1. APPLICATION OF EXHIBIT
Capitalized terms used and not otherwise defined herein shall have the same
definitions as set forth in the Lease. The provisions of this Work Letter shall
apply to the planning and completion of leasehold improvements requested by
Tenant (the "Tenant Improvements") for the fitting out of the initial Premises,
as more fully set forth herein.
2. LANDLORD AND TENANT PRE-CONSTRUCTION OBLIGATIONS
a) Preliminary Space Plans. Attached to this Work Letter as Schedule "1"
-----------------------
are preliminary space plans for the Tenant Improvements ("the Preliminary Space
Plans"), which include without limitation, sketches and/or drawings showing
locations of doors, partitioning, electrical fixtures, outlets and switches,
plumbing fixtures and other requirements, mutually agreed upon by Landlord and
Tenant and determined by Tenant as required for its use of the Premises.
Landlord acknowledges that the Preliminary Space Plans have been prepared by
Tenant's Architect after consultation and cooperation between Tenant and
Tenant's Architect regarding the proposed Tenant Improvements and Tenant's
requirements and that the Preliminary Space Plans are complete with respect
thereto. Landlord and Tenant's Architect shall be entitled, in all respects, to
rely upon all information supplied by Tenant to the best of their knowledge
regarding the Tenant Improvements.
b) Working Drawings. Within twenty-one (21) days following full execution
----------------
of this Lease by both Landlord and Tenant and removal of contingency by existing
Tenant, Tenant's Architect shall prepare working drawings ("the Working
Drawings") for the Tenant Improvements based upon the approved Preliminary Space
Plans. The Working Drawings shall include architectural drawings for the Tenant
Improvements based on the Preliminary Space Plans. Notwithstanding the
Preliminary Space Plans, in all cases the Working Drawings (i) shall be subject
to Landlord's final approval, which approval shall not be unreasonably withheld,
(ii) shall not be in conflict with building codes for the City or County or with
insurance requirements for a fire resistive Class A office building, and (iii)
shall be in a form satisfactory to appropriate governmental authorities
responsible for issuing permits and licenses required for construction.
c) Approval of Working Drawings. Tenant or Tenant's Architect shall
----------------------------
submit the Working Drawings to Tenant and Landlord for Landlord's review and to
confirm compliance with the Preliminary Space Plan. Tenant and Landlord shall
notify Tenant's Architect within five (5) business days, after delivery thereof
of any requested revisions. Within five (5) days after receipt of Tenant's
notice, Tenant's Architect shall make all approved revisions to the Working
Drawings and submit two copies thereof to Tenant for its final review and
approval, which approval shall be given within three (3) business days
thereafter. Concurrently with the above review and approval process, Landlord
may submit all plans and specifications to City or other governmental agencies
in an attempt to expedite City approval and issuance of all necessary permits
and Licenses to construct the Tenant Improvements as shown on the Working
Drawings. Any changes which are required by City or other governmental agencies
shall be immediately submitted to Tenant and Landlord for their review and
reasonable approval, and Landlord shall promptly notify Tenant of such changes.
d) Schedule of Critical Dates. Set forth below is a schedule of
--------------------------
certain critical dates relating to Landlord's and Tenant's respective
obligations for the design and construction of the Tenant Improvements. Such
dates and the respective obligations of Landlord and Tenant are more fully
described elsewhere in the Work Letter. The purpose of the following schedule is
to provide a reference for Landlord and Tenant and to make certain the Final
Approval Date occurs as set forth herein. Following the Final Approval Date,
Tenant shall be deemed to have released Landlord to commence construction of the
Tenant Improvements as set forth in Section 4 below.
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<TABLE>
<CAPTION>
Reference Date Due Responsible Party
- --------- -------- ------------------
<C> <S> <C> <C>
A. "Preliminary Space Plan Contemporaneously with Lease execution Tenant & Landlord
Approval"
B. "Working Drawings Completion" Twenty-one (21) days after full Tenant
execution of the Lease and removal of
contingency by existing Tenant
C. "Working Drawing Review" Five (5) business days after Tenant & Landlord
Architect submits Working Drawings to
Tenant and Landlord
D. "Working Drawing Revisions" Five (5) business days after Tenant Tenant
returns Working Drawings to Landlord
E. "Final Approval Date" Three (3) business days after Tenant & Landlord
Architect submits revised Working
Drawings to Tenant and Landlord
F. "Cost Proposal Date" 10 business days after Final Approval Landlord
Date
</TABLE>
3. BUILDING PERMIT
After the Final Approval Date has occurred, Landlord shall, if Landlord has
not already done so, submit the Working Drawings to the appropriate governmental
body or bodies for final plan checking and a building permit. Landlord, with
Tenant's cooperation, shall cause to be made any change in the Working Drawings
necessary to obtain the building permit; provided, however, after the Final
Approval Date, no changes shall be made to the Working Drawings without the
prior written approval of both Landlord and Tenant, and then only after
agreement by Tenant to pay any excess costs resulting from changes required by
either Tenant and Landlord.
4. COST PROPOSAL
After the Approved Working Drawings are signed by Landlord and Tenant,
Landlord shall solicit bids from the Bidding Contractors for the construction of
the Tenant Improvements and on the Cost Proposal Date shall provide Tenant with
a cost proposal from each Bidding Contractor in accordance with the Approved
Working Drawings, which cost proposals shall include, as nearly as possible, the
cost of all Tenant Improvements to be incurred in connection with the design and
construction of the Tenant Improvements. Landlord shall approve and select the
cost proposal ("Cost Proposal") of the Bidding Contractor whom Landlord elects
for Landlord to retain to construct the Tenant Improvements ("Contractor") and
Landlord shall deliver the selected Cost Proposal and notice of its selection of
Contractor to Tenant within five business days of the receipt of the cost
proposals. Upon receipt of the same by Landlord, Landlord shall be released by
Tenant to purchase the items set forth in the Cost Proposal and to commence the
construction relating to such items. The date by which Tenant must approve and
deliver the Cost Proposal to Landlord shall be known hereafter as the "Cost
Proposal Delivery Date".
5. CONSTRUCTION OF TENANT IMPROVEMENTS
After the Final Approval Date has occurred and a building permit for the
work has been issued, Landlord shall, through a construction contract
("Construction Contract") with a qualified licensed contractor selected by
Landlord, cause the construction of the Tenant Improvements to be carried out in
substantial conformance with the Working Drawings in a good and workmanlike
manner using first-class
48
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materials. The costs associated with the construction of the Tenant Improvements
shall be paid as set forth in Section 6 of this Work Letter. Landlord shall see
that the construction complies with all applicable building, fire, health, and
sanitary codes and regulations, the satisfaction of which shall be evidenced by
a certificate of occupancy for the Premises. Landlord or Contractor shall
maintain a comprehensive general liability insurance policy with a limit of not
less than One Million Dollars ($1,000,000.00) to insure against bodily injury
and property damage during the construction work prior to the Lease Commencement
Date.
6. TENANT IMPROVEMENT ALLOWANCE
Landlord shall provide Tenant with a Tenant Improvement Allowance of
$260,000.00 towards the cost of the design and construction of the Tenant
Improvements, including without limitation design, engineering, and consulting
fees exclusive of demolition costs to bring to shell condition which costs shall
be borne by Landlord (collectively, the "Tenant Improvement Costs"). Tenant and
Landlord acknowledge that Tenant Improvement Costs will exceed Landlord's
contribution. Prior to commencement of construction, Tenant shall deliver to
Landlord cash in an amount (the "Over-Allowance Amount") equal to the difference
between (i) the amount of the Cost Proposal and (ii) the amount of the Tenant
Improvement Allowance. The Over-Allowance Amount shall be disbursed by Landlord
pursuant to the same procedure as the Tenant Improvement Allowance. In the event
that, after the Cost Proposal Delivery Date, any revision, changes, or
substitutions shall be made to the Construction Drawings or the Tenant
Improvements, any additional costs which arise in connection with such
revisions, changes or substitutions or any other additional costs shall be paid
by Tenant to Landlord immediately upon Landlord's request as an addition to the
Over-Allowance Amount. The combination of Landlord and Tenant contribution shall
be used for payment of the following Tenant Improvement Costs:
(i) Preparation by Tenant's Architect of the Preliminary Space Plans and
the Working Drawings as provided in Section 2 of this Work Letter, including
without limitation all fees charged by City (including without limitation fees
for building permits and plan checks) in connection with the Tenant Improvements
work in the Premises;
(ii) Construction work for completion of the Tenant Improvements as
reflected in the Construction Contract;
(iii) All contractor's charges, general conditions, performance bond
premiums and construction fees; and
(iv) Tenant Improvements as shown on the approved Preliminary Space Plans
attached hereto as Schedule "A-2".
In the event that Tenant does request modifications, changes or alterations
of the Tenant Improvements from what is shown on said approved Preliminary Space
Plans, or causes any Tenant Delays as defined in Section 7 or this Work Letter,
then all associated costs shall be borne by Tenant. If Tenant does seek to
modify change or alter the Tenant Improvements from the approved Preliminary
Space Plans, or does cause a Tenant Delay, Tenant shall pay to Landlord any
excess costs resulting therefrom in accordance with Section 6 of this Work
Letter.
7. CHANGE ORDERS
Tenant may from time to time request and obtain change orders before or
during the course of construction provided that: (i) each such request shall be
reasonable, shall be in writing and signed by or on behalf of Tenant, and shall
not result in any structural change in the Building, as reasonably determined by
Landlord, (ii) all additional charges and costs, including without limitation
architectural and engineering costs, construction and material costs, and
processing costs of any governmental entity shall be the sole and exclusive
obligation of Tenant, and (iii) any resulting delay in the completion of the
Tenant Improvements shall be deemed a Tenant Delay and in no event shall extend
the Commencement Date of the Lease. Upon Tenant's request for a change order,
Landlord shall as soon as reasonably possible submit to Tenant a written
estimate of the increased or decreased cost and anticipated delay if any,
attributable to such requested change. Within three (3) business days of the
date such estimated cost adjustments and delays are delivered to Tenant, Tenant
shall advise Landlord whether it wishes to proceed with the change order, and if
Tenant elects to proceed with the change order, Tenant shall remit,
49
<PAGE>
concurrently with Tenant's notice to proceed, the amount of the increased costs,
if any, attributable to such change order. Unless Tenant includes in its initial
change order request that the work in process at the time such request is made
be halted in whole or in part pending approval and execution of a change order,
Landlord shall not be obligated to stop construction of the Tenant Improvements,
whether or not the change order relates to the work then in process or about to
be started.
8. TENANT DELAYS
In no event shall the Commencement Date of the Lease be extended or delayed
due or attributable to delays due to the fault of Tenant ("Tenant Delays").
Tenant Delays shall include, but are not limited to, delays caused by or
resulting from any one or more of the following:
a) Tenant's failure to timely review and reasonably approve the Working
Drawings;
b) Tenant's request for or use of special materials, finishes or
installations which are not readily available, provided that Landlord
shall notify Tenant in writing that the particular material, finish,
or installation is not readily available promptly upon Landlord's
discovery of same;
c) Change orders requested by Tenant;
d) Interference by Tenant or by Tenant's Agents with Landlord's
construction activities;
e) Tenant's failure to approve any other item or perform any other
obligation in accordance with and by the dates specified herein or in
the Construction Contract;
f) Tenant's requested changes in the Preliminary Space Plans, Working
Drawings or any other plans and specifications after the approval
thereof by Tenant or submission thereof by Tenant to Landlord;
g) Tenant's failure to approve written estimates of costs in accordance
with this Work Letter; and
h) Tenant's obtaining or failure to obtain any necessary governmental
approvals or permits for Tenant's intended use of the Premises.
If the Commencement Date of the lease is delayed by any Tenant delays, whether
or not within the control of Tenant, then the Commencement Date of the Lease and
the payment of Rent shall be accelerated by the number of days of such delay.
Landlord shall give Tenant written notice within a reasonable time of any
circumstance that Landlord believes constitute a Tenant Delay.
9. TRADE FIXTURES AND EQUIPMENT
Tenant acknowledges and agrees that Tenant is solely responsible for
obtaining, delivering and installing in the Premises all necessary and desired
furniture, trade fixtures, equipment and other similar items, and that Landlord
shall have no responsibility whatsoever with regard thereto. Tenant further
acknowledges and agrees that neither the Commencement Date of the Lease nor the
payment of Rent shall be delayed for any period of time whatsoever due to any
delay in the furnishing of the Premises with such items.
10. FAILURE OF TENANT TO COMPLY
Any failure of Tenant to comply with any of the provisions contained
in this Work Letter within the times for compliance herein set forth
shall be deemed a default under the Lease. In addition to the remedies
provided to Landlord in this Work Letter upon the occurrence of such a
default by Tenant, Landlord shall have all remedies available at law or
equity to a landlord against a defaulting tenant pursuant to a written
lease, including but not limited to those set forth in the Lease.
50
<PAGE>
EXHIBIT F
ADJUSTMENTS TO MONTHLY RENT
Fixed Adjustment
This Exhibit is attached to and made a part of that certain Standard Form Lease
dated April 24, 1997, by and between Casiopea Venture Corporation c/o Birtcher
Property Services as "Landlord", and Qualix Group, as "Tenant", for the Premises
known as Bovet Office Centre, 177 Bovet Road, Suite 200, San Mateo, California.
The capitalized terms used and not otherwise defined in this Exhibit shall have
the same definitions as set forth in the Lease. The provisions of this Exhibit
shall supersede any inconsistent or conflicting provisions of this Lease.
The Monthly Rent shall be adjusted, as of the commencement of the dates set
forth below, in accordance with the following schedule:
<TABLE>
<CAPTION>
Months From Commencement Date Monthly Rent
<S> <C>
1--12 $46,270.70
13--24 $47,215.00
25--36 $48,159.30
37--48 $49,103.60
49--60 $50,047.90
</TABLE>
51
<PAGE>
EXHIBIT 10.23
OEM LICENSE AGREEMENT
---------------------
THIS AGREEMENT is entered into on this the 31st of July, 1996, by and
----
between:
Intergraph Corporation and its subsidiaries, distributors
and affiliated companies
Huntsville, Alabama 35894-0001
(hereinafter referred to as "Licensee")
and
Octopus Technologies, Inc.
301 Oxford Valley Drive
Suite 102A
Yardley, Pennsylvania 19067
(hereinafter referred to as "Licensor")
WHEREAS Licensor is the owner of certain application software
products, listed herein as Exhibit B, and
WHEREAS Licensee is the developer and supplier of interactive graphics
software, and
WHEREAS Licensor has its software applications running on the
WindowsNT/WindowsNT Server platform and would like to license its software to
Licensee's customers, and
WHEREAS Licensee is prepared to license Licensor's software to its
customers in order to enhance the utility of its product offering.
WITNESSETH:
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS AND PROMISES
CONTAINED HEREIN, LICENSEE AND LICENSOR DO HEREBY AGREE AS FOLLOWS:
1
<PAGE>
1. DEFINITIONS
1.1 The term "Licensed Programs" shall mean the object code
versions of the software and shall include any modifications or improvements
thereof made by Licensor, and any other materials which are provided for use in
connection with said object code. As delivered from Licensor, tile Licensed
Programs package shall, at a minimum, include a software license agreement,
product documentation, media and registration information.
1.2 The term "Licensed Programs Source Code" shall mean the human-
readable version of the Licensed Programs, including without limitation,
associated flowcharts, algorithms comments and other written instructions and
technical documentation.
1.3 The term "use" shall include, without limitation, copying any
portion of the Licensed Programs, including copying into a computer, or
transmitting any portion or the Licensed Programs, including transmission to a
computer for processing of the instructions or statements contained therein.
1.4 The term "End User License" shall mean an agreement, in writing,
between Licensor and the End User containing the operative terms set forth in
Exhibit A hereto.
1.5 The term "End User" shall mean any person or entity who has
entered into an "End User License" as a licensee of Licensor.
2. OWNERSHIP OF LICENSED PROGRAMS
------------------------------
Licensee acknowledges and agrees that:
(a) Title and all rights of ownership to the Licensed Programs, and
all copies of all or any part thereof, are and remain with Licensor and possibly
other parties ("Other Owners") to whom Licensor has obligations to protect such
title and ownership rights;
(b) Licensor has represented that the Licensed Programs are comprised
of Licensor's and the Other Owner's trade secrets and proprietary information;
and
(c) Licensee will not lend, sell, lease, hypothecate, or otherwise
dispose of the Licensed Programs except as expressly authorized by this
Agreement.
2
<PAGE>
3. LICENSE
-------
3.1 Licensor hereby agrees to provide Licensee with five full
Licensed Programs kits and also grants Licensee the right to make a total of
thirty (30) copies of (lie Licensed Programs. Licensee agrees us (he
aforementioned copies solely for demonstration, training and customer support
usage. Licensee shall pay Licensor a fee (total) of $250 to cover the costs of
(lie kits provided under this Section.
3.1 As part of the demonstration to potential end users, Licensor
shall provide a demonstration version of the Licensed Programs and this shall be
on a fee-free basis. Licensee will be responsible for reproducing the end user
demonstration product. All end user loans shall be limited to evaluation
purposes and at the sole expense of Licensee, and copies used for productive
purposes shall be specifically excluded from this provision.
3.3 Licensor hereby grants to Licensee a personal non-exclusive and
non-transferable license to grant End User Licenses.
3.4 Licensor grants Licensee the right to license the Licensed
Programs as an independent product or bundled with other products provided by
Licensee to End Users.
3.5 Licensee assures Licensor that it shall abide by and fully comply
with the Export Administration Regulations issued by the U.S. Department of
Commerce.
3.6 At the request of Licensee, Licensor shall provide Licensee with
all available Test Suites for the Licensed Programs and these Test Suites shall
be provided at no additional charge.
4. FEES AND REPORTS
----------------
4.1 Licensee agrees to purchase Licensed Programs from Licensor in a
kit format and act a minimum, the kit shall include: the Licensed Programs (2
floppy disks), Licensed Programs User Manuals, Software License Agreement, and
Registration Information, and the kit costs shall be in accordance with Exhibit
B. Licensor does not agree to accept product returns. The United States
Government requires us to maintain a minimum set of payment records; and in
keeping with these requirements, Licensor must complete Exhibit C. Licensee
cannot make payments to Licensor without the complete information required by
Exhibit C. In the event Licensor does not complete Exhibit C on a timely basis,
Licensee cannot be held liable for late payments.
3
<PAGE>
4.2 A fee is not payable for the transfer of the Licensed Programs
from one End User to another End User, provided the first End User does not
retain any portion of the Licensed Programs after such transfer, and that, prior
to the transfer, the second End User has entered into an End User License.
Additionally, a fee is not payable for the transfer or the Licensed Programs
from one node to a second node provided that no portion of the Licensed Programs
remains with the first node and the second node is properly licensed. This right
shall also covers transfers to competing operating Systems on like hardware
platforms.
4.3 The End User will be granted a fee free right to move the
Licensed Programs from one node to another within a Local Area Network (LAN).
4.4 The fees referred to in Paragraphs 4.1 hereto do not include
local, state or federal sales, use, excise, personal property or other similar
taxes or duties, and any such taxes or duties shall be assumed and paid by
Licensee. If Licensor shall pay such taxes or duties, Licensee shall reimburse
Licensor within thirty (30) days of receiving a written request that it do so.
Licensor's federal and state income and tangible property taxes, if any, shall
remain (he sole responsibility of Licensor.
4.5 Licensee agrees it shall maintain complete, clear and accurate
records of each End User License granted.
4.6 Within thirty (30) days after receipt and acceptance of the
Licensed Programs, Licensee shall pay Licensor according to the kit costs
referenced in Exhibit B. A 1.5% per month late penalty fee shall be paid by
Licensee for late payments.
5. TRAINING
--------
5.1 Licensor shall send act least one of its training personnel to
Licensee's office in Huntsville, Alabama to present a training class on the
Licensed Programs. Licensee shall be responsible for providing adequate
classroom space and the required equipment. Licensor shall provide training
personnel knowledgeable in the subject. The training dates and length of
training sessions shall be as mutually agreed between the parties. Licensee
shall provide Licensor's training personnel with airline tickets and for the
duration of the training class, a company apartment.
6. ACCEPTANCE
----------
6.1 The Licensed Programs shall be considered acceptable when they
can successfully execute all tests in Licensor's test suites, as set forth in
Exhibit D, and also successfully execute tests that Licensee develops and
delivers to Licensor on or before __________. The Licensed Programs must pass
the acceptance tests prior to distribution.
4
<PAGE>
6.2 Upon receipt of the Licensed Programs Licensee shall evaluate
whether such Licensed Programs successfully execute all applicable test suites.
Licensee shall accept or reject such Licensed Programs, in writing, within
twenty (20) business days after receipt of such Licensed Programs ("the
Acceptance Period"). If Licensee fails to accept or reject such Licensed
Programs in writing within the Acceptance Period, tile Licensed Programs shall
be deemed to be accepted by Licensee. If Licensee rejects any Licensed Programs
within the Acceptance Period, Licensee shall identify in writing and in detail
the basis for the rejection, the relevant test suites upon which such rejection
is based, and if known to Licensee, the specific software portion which Licensee
asserts to be unacceptable with respect to the relevant test suites.
6.3 If the Licensed Programs are deemed unacceptable to Licensee in
accordance herewith, Licensor shall exercise its best efforts to correct all
non-conformities and to redeliver the corrected Licensed Programs to Licensee
within twenty (20) business days of a rejection in conformance with this
Agreement.
6.4 Upon acceptance of the Licensed Programs, Licensee shall provide
Licensor with a written Acceptance Certification in the form attached hereto as
Exhibit D. If Licensee does not reject the Licensed Programs in writing within
the Acceptance Period, Licensee shall provide Licensor with a written Acceptance
Certification for the Licensed Programs upon written request therefore by
Licensor
6.5 In the event that Licensor fails to deliver Licensed Programs to
Licensee which) execute substantially all test suites as set forth herein, after
two (2) attempts to correct the same non-conformity, Licensee may at its option
terminate this Agreement. In the event of any such election to terminate,
Licensee shall have no right to use or retain, and shall return to Licensor, all
Licensed Programs and Deliverables as set forth in Section 8.1 hereof; and/or
portions thereof (including any and all copies). If, on the initial release,
this Agreement is terminated as defined above. Licensee shall be entitled to a
full refund of any monies paid.
7. END USERS
---------
Licensee agrees to take all reasonable steps (including terminating End User
Licenses) to enforce the provisions of each End User License. In the event
Licensor requests legal action be initiated against an End User for breach of
the End User License and Licensee declines to initiate or continue such action,
Licensee shall, upon Licensor's request, and at Licensor's expense, take all
steps deemed necessary as mutually agreed by Licensor's and Licensee's counsel
to permit Licensor to initiate and/or prosecute the action including, without
limitation, to assign the cause of action to Licensor or permit Licensor to
prosecute the action.
5
<PAGE>
8. DOCUMENTATION
-------------
8.1 Deliverables
For each Licensed Programs release, Licensor shall deliver to Licensee
five (5) sets of documentation, including subsequent documents and revisions, in
human-readable form and one (1) set of documentation in Word or FrameMaker
format. This documentation shall describe tile Licensed Programs' functional
specifications and shall provide detailed reference information.
9.1 NONDISCLOSURE
-------------
By virtue of this Agreement, each party may have access to information of the
other party which is considered confidential and proprietary. For convenience,
all such information will be called "Proprietary Information."
Proprietary Information shall include source code materials, if any, and all
other information provided by either party in written or other tangible form and
clearly marked as proprietary or confidential. Notwithstanding the foregoing,
Proprietary Information shall not include information which a) is or becomes
part of the public domain through no act or omission of the receiving party; b)
was in the receiving party's lawful possession prior to the disclosure and had
not been subject to limitations on disclosure; c) is lawfully disclosed
hereafter to the receiving party by a third party who did not acquire the
information directly or indirectly from the disclosing party; or d) is
independently developed by the other party.
The parties agree, both during the term of this Agreement and for a period of
three (3) years after termination or expiration of this Agreement, that all
Proprietary Information owned solely by one party and disclosed to the other
party shall remain solely the property of the disclosing party, and its
confidentiality shall be maintained and protected by the other party with the
same effort used to protect its own confidential information. Except to the
extent required by this Agreement, both parties agree not to duplicate in any
manner the other's Proprietary Information for any purpose other than the
implementation of this Agreement. Nothing in this Agreement shall be construed
to limit either party's right to independently develop software which is
functionally similar to the other party's products, so long as proprietary
information of the other party is not used in such development. Results of
benchmark, performance, or timing tests involving Licensee's hardware and /or
software platform and run by Licensor may not be disclosed unless Licensee
consents to such disclosure in writing.
Licensee and Licensor shall not disclose the terms and conditions of this
Agreement; provided however, that either party may disclose such terms and
conditions (a) when required by law, and (b) to its professional advisors and
financial professionals. For news release or public announcements regarding this
Agreement, each party will obtain consent from the other party prior to
publication. Such consent shall not be unreasonably withheld.
6
<PAGE>
10. MAINTENANCE AND SUPPORT
-----------------------
10.1 During the term of this Agreement, Licensee shall provide the
first line of support to End Users and this shall consist of the following:
a) Placing the Licensed Programs in Licensee's software delivery
program and being responsible for distribution to Licensee's End Users.
b) Entering into software maintenance contracts with Licensee's End
Users.
c) Taking all initial support calls from Licensee's End Users.
d) Consolidating problems/errors in the Licensed Programs and
providing to Licensor.
e) Providing all fixes, patches and work-arounds to End Users.
f) Providing Licensed Programs upgrades to End Users under
maintenance contract with Licensee.
and
g) Where upgrades are made available as separately purchasable items,
selling upgrades licenses to existing End Users. Under this scenario, End Users
will not necessarily he under a maintenance contract
10.2 During the warranty period and as long as Licensee is under
maintenance coverage, Licensor shall correct any program errors in the Licensed
Programs brought to its attention with written, documented reports from
Licensee, except those resulting from any alteration or misuse of the Licensed
Programs.
10.3 During the warranty period and as long as Licensee is under
maintenance coverage Licensor shall make available to Licensee, any improvements
to the Licensed Programs that are announced during that time period. As a
minimum, Licensor shall make changes as necessary so the Licensed Programs shall
remain current with the evolution of the target platform operating system and
the required changes, if any, shall be made available, on a best efforts basis,
within thirty (30) days of the operating systems commercial release.
7
<PAGE>
10.4 The annual maintenance fee shall be as stipulated in Exhibit B.
Maintenance fee(s) shall be payable on the first anniversary of this Agreement
and every year thereafter, during which this Agreement remains in force.
Licensor agrees to provide a one (1) year warranty. The definition of
"Maintenance" includes support and upgrades. Licensee retains the right to
cancel the maintenance program.
10.5 Program Errors shall be handled as follows:
Upon Licensor's receipt of an error report from Licensee's designated
technical contact, Licensor shall, on a best efforts basis, take corrective
action so as to remedy the reported problems within the following time schedule:
<TABLE>
<CAPTION>
Classification Licensor's Remedy
- -------------- -----------------
First Level Second Level Final Level
----------- --------------- -----------
<S> <C> <C> <C>
X 16 hours* Constant Within 60**
effort until days
relief provided
A l6 hours* 8 days** 70 days**
B 48 hours* l2 days l00 days**
C l0 days** N/A l50 days**
</TABLE>
The bugs/errors are classified by Licensee and are as follows:
Classification
- --------------
X Fatal: errors preventing all useful work from being done.
A Severe Impact: errors which disable major functions from being
performed.
B Degraded Operations: errors disabling only certain non- essential
functions.
C Minimal Impact: All other errors
8
<PAGE>
If Licensor detects a problem that it is limited to the Intergraph) hardware
platform, Licensee shall, on a best efforts basis, provide Licensor access to
the required Intergraph hardware platform. Licensee will be responsible for
expenses relating to hardware provision and travel, if any, of the Licensor
personnel.
The remedies for each error classification at each, level specified above are:
Remedy Level
- ------------
First Level: Acknowledgment of receipt of error report with written
confirmation delivered to Licensee during the next business day.
Second Level:Patch or work around, temporary fix, or update or major release,
including applicable document changes.
Final Level: Official fix, update or major release, including applicable
documentation changes.
* If received on a business day during the hours of 9:00 am to 5:00 pm, during
Licensor's local time at its Yardley, Pennsylvania office, Monday through
Friday, excluding Licensor observed holidays; otherwise, times commence on
the next business day.
** A day is defined as a 24-hour period, regardless of whether work is
scheduled during that period.
It is intended that Licensee and Licensor will work within the framework of the
Maintenance and Support guidelines. In the event that an exceptional
circumstance arises, the parties will discuss the circumstances and mutually
agree on the correct course of action to take. Exceptions may include, but not
be limited to, impossibility of Licensor to perform, severe impact on one of
Licensee's major customers or potential sales, or availability of a more
efficient approach.
10.6 Licensor agrees to provide support, in addition to that
specified herein, based upon Licensee's request, in an expeditious manner, and
at charges to he paid by Licensee which shall not exceed those Licensor charges
its most favored customer for similar services.
11. WARRANTY
--------
11.1 Licensor warrants that the Licensed Programs, when properly installed
and used by Licensee and end users, will substantially conform with the
specifications in the related documentation in effect at the then current time.
11.2 Licensor warrants each change made pursuant to 10.2 and 10.3
11.3 In the event of any failure to meet specifications Licensee shall
make necessary changes to conform to specifications at Licensee's expense asset
forth in Section 10.
9
<PAGE>
12. PATENT OR COPYRIGHT INFRINGEMENT AND INDEMNITY
----------------------------------------------
12.1 Licensor will defend, indemnify and hold harmless Licensee against a
claim the Licensed Programs were created in part by violation of the protected
trade secret of another or infringe a patent or copyright and will pay resulting
costs, damages and attorney's fees provided that:
(a) Licensee promptly notifies Licensor of the claim;
(b) Licensee cooperates with Licensor in the defense; and
(c) Licensor has sole control of the defense and all related settlement
negotiations.
12.2 If such claim occurs, or in Licensor's opinion is likely to occur,
Licensee agrees to permit Licensor, at its option and expense, either to procure
for Licensee the right to continue using the Licensed Programs or to replace or
modify the same so that it becomes noninfringing.
12.3 Licensor shall have no obligation to defend Licensee or pay costs,
damages or attorney's tees for any claim based upon use of other than a current,
unaltered release of the Licensed Programs if such infringement would have been
avoided by the use of a current, unaltered release of the Licensed Programs.
12.4 Licensor represents and warrants it is not aware the Licensed
Programs were created in part by violation of the protected trade secret of
another or that the Licensed Programs infringe any patent or copyright.
13. TERM
This Agreement shall be valid for an initial three (3) year term and shall
automatically renew for one (1) year periods thereafter.
14. TERMINATION
-----------
14.1 Non-Renewal - Licensee shall have the right to terminate this
Agreement as of the end of the initial term or any renewal term by providing
written notice to Licensor prior to the expiration of the then current term.
14.2 Mutual Consent - This Agreement may be terminated at any time by
written agreement executed by both parties.
14.3 Breach - If either party shall he in material breach of its
obligations herein and shall have failed or been unable to remedy such breach
within thirty (30) days after receipt of written notice from the other party
specifying such breach, said other party may terminate this Agreement by giving
written notice of termination, effective upon the date of its sending.
10
<PAGE>
14.4 Bankruptcy - If a receiver is appointed over the whole or part of the
assets of either party, or if any petition is filed by or against either party
initiating any bankruptcy reorganization proceeding or if either party makes an
assignment for the benefit or creditors, or if any order is made or resolution
is adopted for the dissolution of either party (unless such order or resolution
is part of a scheme of recapitalization, merger or consolidation) then such
party shall immediately notify the other party of such event, and the other
party may terminate this Agreement by written notice thereof, effective upon the
date of its sending.
14.5 In the event of Licensor becoming bankrupt or insolvent, or by its
own decision ceases to do business, if Licensor decides to stop support of the
Licensed Programs, or if this Agreement is terminated due to default on the part
of Licensor, Licensor shall deliver to Licensee the current version of the
Licensed Programs' source code and any and all documentation related to such
source code (including without limitation, all programmers materials and notes).
Licensee shall also have a continuing right to use the source code in order to
license and support the Licensed Programs to Licensee's customers, in its
original form or as modified by Licensee. In the event source code is turned
over to Licensee, the royalty fee for the first year shall be 50% of the royalty
rate stipulated in Exhibit B and each year thereafter shall be royalty-free.
14.6 Upon termination of this Agreement) at the end of its term, Licensee
shall return to Licensor or destroy the Licensed Programs and all copies and
portions thereof, in any form whatsoever, and shall erase from all computer,
electronic, or other storage devices or otherwise destroy all images or copies
of the Licensed Programs and all portions thereof except as required to provide
continuing support of the then current End Users.
11
<PAGE>
15. MISCELLANEOUS
-------------
15.1 All notices, requests and demands given to or made upon the parties
hereto shall, except as otherwise specified herein, be in writing and may be
personally delivered, mailed or faxed to the party at its address which:
1) In the case of Licensor shall be
Octopus Technologies Inc.
301 Oxford Valley Road
Suite 102A
Yardley, Pennsylvania 19067
Attention: Frank Serafin
-------------
Phone: 215-321-8750
------------
FAX: 215-321-8755
------------
2) In the case of Licensee shall be
Intergraph Corporation
Huntsville, Alabama 35894-0001
Attention: Manager, Third Party Software
Phone: (205)730-2000
FAX: (205)730-2620
Any party may, by notice hereunder to all parties, designate a changed
address for such party. Any notice, if mailed, properly addressed, postage
prepaid, registered or certified mail or -any fax, on date of fax, if receipt
verified by telephone, shall be deemed received on the registered date stamped
on the certified mail receipt.
15.2 The various headings in this Agreement are inserted for convenience
only and shall not affect the meaning or interpretation of this Agreement or any
Paragraph or provision hereof. References in this Agreement to any Paragraph are
to the applicable Paragraph or this Agreement.
15.3 All covenants, stipulations and promises in this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors, and legal representatives Neither party shall have the right to
assign or otherwise transfer this Agreement or any rights or obligations
hereunder without the express written consent of the other provided, however,
that a successor in interest by merger, consolidation, operation of law,
assignment, purchase, or otherwise, of the entire business of either party,
shall acquire all interests of such party hereunder without the written consent
of the other.
12
<PAGE>
15.4 This Agreement may be executed in any number or counterparts, each
and all of which shall be deemed to be an original and all or which shall
constitute together one and the same Agreement. Each and every person named a
party hereto may execute this Agreement by signing any such counterpart.
15.5 This Agreement shall be deemed to be a contract made under the laws
of the State of Alabama and for all purposes it, plus any related or
supplemental documents and notices, shall be construed in accordance with and
governed by the laws of such state, conflict of law rules notwithstanding
15.6 Wherever possible, each provision of this Agreement and each related
document shall be interpreted in such a manner as to be effective and valid
under applicable law. However, if any provision of this Agreement or any related
document shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or the remaining provisions
of this Agreement or such related document.
15.7 No failure on the part of either party to exercise any right, power
or privilege under this Agreement, or under any instrument executed pursuant
hereto, shall operate as a waiver. No single or partial exercise of any right,
power or privilege shall preclude any other, or further exercise of any other
right, power or privilege. All rights and remedies granted herein shall be in
addition to other rights and remedies to which the parties may be entitled at
law or in equity. No waiver of any of the provisions hereof shall be effective
unless in writing and signed by the party charged with such waiver. No waiver
shall be deemed a continuing waiver, or a waiver in respect of any breach or
default whether similar or different in nature unless expressly so stated in
writing.
15.8 This Agreement cannot he, and shall not be deemed or construed to
have been, modified, amended, rescinded, canceled or waived, in whole or in
part, except by a written instrument signed by the parties hereto.
13
<PAGE>
15.9 Any dispute arising out of this Agreement or Amendments hereto which
cannot be settled by Licensor and Licensee through friendly negotiations shall
be settled, at the option of either party, by arbitration.
If arbitration is chosen to settle the dispute, the arbitration shall be
conducted by three arbitrators who are knowledgeable in the subject matter of
this Agreement. Licensor and Licensee shall each choose one arbitrator and the
two arbitrators shall choose a third arbitrator. The third arbitrator shall be
an active attorney knowledgeable in the applicable laws of contract, rules of
evidence and rules of procedure. Should the two arbitrators fail to agree upon a
third arbitrator, the third arbitrator shall be chosen by the American
Arbitration Association. The arbitration shall be conducted in accordance with
the rules of the American Arbitration Association, except as modified herein.
The decision of the arbitration panel shall be final and binding, and the award
so rendered shall he entered in any court having jurisdiction thereof. Licensor
and Licensee shall each pay their own costs, expenses and attorneys' fees
incurred during the arbitration process. For purposes of the arbitration,
Licensee and Licensor agree to submit to the jurisdiction and venue of a
mutually acceptable neutral location.
Pending final disposition of any dispute under this Agreement, Licensor
shall, at the option of the Licensee, proceed diligently with the performance of
this Agreement.
15.10 This Agreement supersedes all other quotation, proposal, prior
agreements or representations, oral or written, and all other communications
between the parties related to the subject matter of this Agreement, and same
are merged herein.
15.11 Neither party shall he liable for any failure to perform or observe
any of its obligations under this Agreement for as long as and to the extent
that such performance is prevented or hindered by any circumstances beyond its
reasonable control. By way of example and not limitation, such causes may
include acts of God or public enemies; labor disputes; ads of local, state, or
national governments or public agencies; utility or communications failure;
fire; flood; epidemics; riots; or strikes. The time for performance of any right
or obligation delayed by such events will be postponed for a period equal to the
delay.
14
<PAGE>
15.12 Due to security reasons, government agencies frequently require that
source code be provided for all software products sold to the Government. When
required, Licensor agrees to provide security only copies of the Licensed
Programs source code to the government agency.
15.13 The Licensor acknowledges he has read this Agreement, understands
it, and agrees to be bound by its terms and conditions.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE DULY
EXECUTED AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN.
INTERGRAPH CORPORATION OCTOPUS TECHNOLOGIES
- ---------------------- --------------------
By: By:
------------------------------ --------------------------
Name: Milton H. Legg Name: David Crocker
-------------- -------------
Title: Third Party Software Title: President
-------------------- ---------
Date: July 31, 1996 Date: July 31, 1996
------------- -------------
15
<PAGE>
EXHIBIT A
Software License Agreement
16
<PAGE>
EXHIBIT B
A. LICENSED PROGRAMS
-----------------
The Licensed Programs are listed below and are available on the listed
platforms:
1. Octopus Server with Auto Switch Over (ASO)
A. Intergraph Intel Based Workstations And File Servers
As new applications become available, Licensee reserves the right to include the
new products in time definition of Licensed Programs.
B. ROYALTIES
---------
Licensee shall pay Licensor a kit cost of $624 or 50% of the then current
Licensor's U.S. list price. At contract execution, Licensee agrees to purchase,
for resale fifty (50) copies of time Licensed Programs.
C. MAINTENANCE
-----------
Licensee agrees to pay Licensor a per unit annual maintenance fee of $100. This
fee is applicable only for End User licenses under current full service
maintenance coverage. End User licenses under maintenance coverage for less than
the entire year shall be prorated to the Agreement anniversary date. All
maintenance fees shall be payable on the anniversary date of this Agreement.
Licensed Programs are provided with one free upgrade and ninety (90) days free
support.
17
<PAGE>
EXHIBIT C
VENDOR REMITTANCE AND TAX IN FORMATION
ALL VENDORS:
Federal law requires us to obtain specific information from each vendor. Prior
to payment of any monies due, the following must be completed. Vendors based
outside the United States are requested to complete all applicable blanks.
REMITTANCE ADDRESS/CONTACT
- --------------------------
Octopus Technologies
- --------------------
Company Name
301 Oxford Valley Drive
- -----------------------
Street Address
Suite 102A
- -----------------
Suite/Room Number
Yardley, PA 19067
- -----------------
City/State/Zip Code
Frank Serafin
- ------------------
Remittance Contact
215-321-8750
- -------------------------------
Remittance Contact Phone Number
23-2714426
- --------------------------
Federal Taxpayer ID Number
If you are doing business as an
individual, please list your
social security number.
Pennsylvania
- ----------------------
State of Incorporation
18
<PAGE>
EXHIBIT D
ACCEPTANCE CERTIFICATION
Licensee hereby give notice to Licensor pursuant to Section 6.4 of the OEM
License Agreement that the Licensed Programs identified in Exhibit B for
delivery on have been received and evaluated by time
-------------------------
Licensee and that such Licensed Programs are hereby accepted by Licensee.
The accepted Licensed Programs are identified with particularity below:
Intergraph Corporation
By:
Title:
Date:
-------------------------
19
<PAGE>
Exhibit 10.24
INTERGRAPH / QUALIX AGREEMENT AMENDMENT
On this the day of May, 1997 this Amendment is entered into by and
---------
between Intergraph Corporation, hereinafter referred to as "Licensee," and
Qualix Group (and Octopus Technologies, as a division of Qualix Group)
hereinafter referred to as "Licensor."
WHEREAS, the parties hereto entered into an OEM License Agreement dated July 31,
1996, and they desire to amend said License from the date of the signing of this
amendment until December 31,1997.
WHEREAS, Licensee agrees to bundle Licensor's Octopus Server with Super
Automatic Switch Over with all of Licensee's high availability servers (models
identified in Amendment Exhibit A below), and
WHEREAS, Licensee has the right to bundle Octopus Server with Super Automatic
Switch Over with all other Intergraph Intel Based servers and workstations, and
has the right to sell Octopus Server with Super Automatic Switch Over as
standalone product to existing Intergraph customers for installation only with
Intergraph servers. Or Intergraph's OEM customers servers.
NOW THEREFORE, in consideration of the mutual covenants and promises contained
herein, Licensee and Licensor hereby agree that the existing OEM License
Agreement between Licensee and Licensor shall be amended as follows:
1. Licensee shall agree to ship Licensor's Octopus Server with Super Automatic
Switch Over product on all units of Licensee's high availability servers (as
defined in Amendment Agreement Exhibit A) for the lessor of: a royalty of
$300.00 U.S. per unit or 20% of the published list price of the product.
Licensee agrees to report shipments monthly and pay 30 days post receipt of
product, as dictated in original OEM agreement
2. Licensee has the right to ship Licensor's Octopus Server with Super Automatic
Switch Over product with all other Intergraph Intel Based servers and
workstations and has the right to sell Octopus Server with Super Automatic
Switch Over as standalone product to existing Intergraph customers for
installation only with Intergraph servers, or Intergraph OEM customer
servers. The same royalty of $300.00 US per unit, or 20% of the published
list price of the product, applies for these systems. Licensee agrees to
report shipments monthly and pay 30 days post receipt of product, as dictated
in original OEM agreement.
3. Licensee agrees to pay Licensor a per unit annual maintenance fee of $100 for
maintenance for Octopus Server with Super Automatic Switch Over. This fee
will be paid to Licensor upon Licensee selling a maintenance agreement on
Octopus Server with Super Automatic Switch Over, Licensee agrees to report
maintenance units and pay the royalty on a quarterly basis (due within 15
days after the end of a quarter), Product upgrades, bug fixes and version
releases are only provided to Licensee upon payment of the maintenance
royalty amount. Licensor agrees to continue to provide second tier support to
Intergraph.
4. Licensee has the right to ship Licensor's Octopus WinStation product with all
Intergraph Intel Based servers and workstations, or Intergraph OEM customer
servers, for the lessor of: a royalty of $100 per unit or 20% of the
published list price of the product. Licensee agrees to report shipments
monthly and pay 30 days post receipt of product, as dictated in original OEM
agreement Licensor agrees to pay Licensor a per unit annual maintenance fee
of $33 for maintenance for Octopus WinStation product. Licensee agrees to
report maintenance units and pay the royalty on a quarterly basis (due within
15 days after the end of a quarter). Product upgrades, bug fixes and version
releases are only provided upon payment of the maintenance royalty amount.
Licensor agrees to provide second tier support to Intergraph.
5. Licensee agrees to purchase all of the following from Licensor:
1) A minimum of $100,000 in product or maintenance by June 30, 1997. Products
can include: Octopus Server with Super Automatic Switch Over, Octopus
WinStation or maintenance.
05/21/97 Agreement Amendment to Intergraph 1
and Octopus OEM Licensense Agreement
<PAGE>
2) A minimum of $250,000 in product or maintenance between July 1, 1997 and
September 30, 1997. Products can include: Octopus Server with Super Automatic
Switch Over, Octopus WinStation or maintenance.
6. Licensee agrees to actively market the integrated failover solution, starting
with a press release announcing the agreement. Licensee agrees to communicate
joint-marketing activity to be spent on promoting the integrated failover
solution to Licensor on a quarterly basis.
7. This amendment to the agreement applies world-wide. Licensee will agree to
observer local Licensor pricing at a minimum.
8. Licensee will give Licensor per copy unit breakdowns by State (US) and
Country(WW). If possible, License will give Licensor per copy unit breakdown
by zip code.
9. Licensor will ship to Intergraph a "Gold CD" and documentation (manuals as
requested) for integrated distribution with Licensee's high availability
servers. Licensor will ship Intergraph retail product as ordered for
standalone product purchases for use with Intergraph servers (or Intergraph
OEM customer servers).
The OEM License Agreement, other than as amended herein, shall remain in effect
and this, along with the amendment herein, and shall constitute the amended OEM
License Agreement.
INTERGRAPH CORPORATION QUALIX GROUP (Octopus Technologies as a
division of Qualix Group)
By: By:
----------------------------- --------------------------
Name: Milton H. Legg Name: Bruce Felt
-------------- ----------
Title: Executive Manager Title: CFO
------------------ ---
Date: Date:
--------------------------- ------------------------
05/21/97 Agreement Amendment to Intergraph 2
and Octopus OEM Licensense Agreement
<PAGE>
AMENDMENT AGREEMENT EXHIBIT A
-----------------------------
HIGH AVAILABILITY SERVERS DEFINED
---------------------------------
INTERGRAPH HIGH AVAILABILITY SERVERS DEFINED TO BE MODELS: INTERGRAPH AGREES TO
BUNDLE OCTOPUS SERVER WITH SUPER AUTOMATIC SWITCH OVER WITH ALL OF THESE MODELS
1. InterServe 635
2. InterServe 645
3. InterServe 650
4. InterServe 660
THE FOLLOWING MODELS WILL BE OFFERED AS BOTH HIGH AVAILABILITY MODELS AND NON
HIGH AVAILABILITY MODELS.
INTERGRAPH AGREES TO BUNDLE OCTOPUS SERVER WITH SUPER AUTOMATIC SWITCH OVER
WITH THESE MODELS WHEN DESIGNED "HIGH AVAILABILITY" MODELS
1. InterServe 650Tx
2. InterServe 660Tx
05/21/97 Agreement Amendment to Intergraph 3
and Octopus OEM Licensense Agreement
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-21743 of Qualix Group, Inc. on Form S-8 of our report dated July 24, 1997,
appearing in this Annual Report on Form 10-K of Qualix Group, Inc. for the
year ended June 30, 1997.
San Jose, California
September 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF QUALIX GROUP, INC. FOR THE YEAR ENDED JUNE
30, 1997 INCLUDED ELSEWHERE IN THIS REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 9,617
<SECURITIES> 9,541
<RECEIVABLES> 5,533
<ALLOWANCES> 386
<INVENTORY> 194
<CURRENT-ASSETS> 24,775
<PP&E> 2,370
<DEPRECIATION> 811
<TOTAL-ASSETS> 26,334
<CURRENT-LIABILITIES> 6,040
<BONDS> 0
0
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<COMMON> 24,862
<OTHER-SE> (4,759)
<TOTAL-LIABILITY-AND-EQUITY> 26,334
<SALES> 27,204
<TOTAL-REVENUES> 32,146
<CGS> 11,027
<TOTAL-COSTS> 12,898
<OTHER-EXPENSES> 17,025
<LOSS-PROVISION> 239
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 3,113
<INCOME-TAX> 406
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