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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 001-13211
INFORMATION MANAGEMENT ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1289928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Drive, Suite 400
Shelton, CT 06484
(Address and Zip Code of principal executive offices)
(203) 925-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
(Title of Class) no par value
per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant'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 [ ].
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 10, 1999: $13,260,912
Number of shares outstanding as of March 10, 1999: 9,697,088
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its Annual Meeting of
Stockholders presently scheduled for May 25, 1999 are incorporated by reference
into Part III of this report.
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TABLE OF CONTENTS
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 14
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 16
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA F-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE F-24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT F-24
ITEM 11. EXECUTIVE COMPENSATION F-24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT F-24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS F-24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K F-24
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THE COMPANY
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
small, mid-size and large-scale telephone call centers. The Company develops and
markets three primary products: The EDGE TeleBusiness software suite (EDGE), the
TELEMAR software suite (TELEMAR), and the MSM software suite (MSM). EDGE is a
suite of applications and tools that enables businesses to automate telebusiness
activities (telemarketing, telesales, account management, customer service and
customer support) on an enterprise-wide basis. TELEMAR and MSM focus on the
automation of various customer interactive business processes, including
telemarketing, sales and marketing, customer support and remote sales force
automation. The Company complements its software products by offering its
clients professional consulting, technical support and maintenance services. The
Company's software products have been licensed to over 400 customers in a range
of industries, including teleservices outsourcing,telecommunications and
financial services. Customers include Belgacom, S.A., Bose Corporation, ING
Bank, N.V., Humana Inc., Lloyd's Bank Plc, SITEL Corporation, Telefonica de
Espana, Texas Utilities Service Inc., United Parcel Service General Services
Co., United States Cellular Corporation and Wells Fargo Bank, N.A.
The Company's products are designed to provide superior functionality,
flexibility, integration, scalability and speed of deployment. Based upon an
open systems software architecture, EDGE supports multiple hardware platforms,
operating environments, database management systems, network topologies, desktop
standards, and legacy system and computer-telephony middleware. TELEMAR and MSM
support IBM's AS/400 hardware platform and are compatible with industry leading
software and computer telephony integration technologies. The Company's products
and services enable call center agents to effectively manage customer
relationships through the use of the telephone, e-mail, the World Wide Web,
documents and fax. The Company's products provide call center agents with real-
time data and guidance needed to manage increasingly complex processes for
selling products and servicing customers. For example, EDGE offers scripting to
support order-taking, cross-selling and up-selling, enables agents to track and
resolve customer service problems and facilitates the collection of valuable
customer information that can be disseminated on an enterprise-wide basis. The
Company's professional consulting, technical support and maintenance services
include application development, systems integration, systems and database
design and construction and software training. The Company believes that these
services significantly differentiate the Company from its competitors and
complement its products to provide a total solution for small, mid-size and
large-scale call centers.
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THE IMA SOLUTION
The Company's software applications and tools, coupled with the Company's
comprehensive service offerings, represent a total solution designed to enable
businesses to increase their productivity and revenue-generating capabilities by
improving the effectiveness of their interaction with customers through
telephone call centers.
The IMA solution incorporates five design tenets: functionality, flexibility,
integration, scalability and speed of deployment.
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Functionality. Customer calls are often three to five minute events which, when
handled effectively, can have a dramatic impact on a business's ability to
acquire and retain customers. The Company's products are designed to enable the
user to more effectively manage the telephone conversation with the customer
before, during and after the call by automating numerous call center activities,
providing real-time access to customer information, and providing features such
as intelligent scripting, contact management, time management, work flow
management, voice/data management and other conversation management aids. In
addition, the Company's products provide comprehensive call center reporting
tools which enable managers and supervisors to efficiently and effectively
manage call center agents and marketing campaigns.
Flexibility. EDGE includes an integrated development environment that enables a
business to rapidly develop or change applications relating to specific sales,
marketing or service activities without disrupting live operations. EDGE allows
a call center manager to tailor scripts, screen displays and workflow processes.
TELEMAR and MSM are provided in source code suitable for customization by
end-users to accomodate their specific needs. The ability to change applications
allows clients to adapt call center operations quickly in response to changing
business needs such as new product sales or marketing campaigns, special
customer service programs or crisis management events.
Integration. EDGE is designed to integrate seamlessly with other technologies to
improve call center productivity. With its component-based open architecture,
EDGE can be integrated with a wide variety of computer and telephony-based
technologies and products, including telephony devices (voice response units,
predictive dialers, automatic call distributors and private branch exchange
technology), relational databases, legacy systems, other third-party desktop
applications and facsimile technology. Focused on IBM's AS/400 hardware
platform; TELEMAR and MSM are compatible with the industry's leading software
and computer telephony integration technologies.
Scalability. The Company's products are scalable from small single-site
departmental networks to multi-site global implementations without significantly
increasing the risk of system degradation. EDGE has been deployed in client
configurations consisting of more than 1,000 users handling over 1,000,000 calls
per month.
Speed of Deployment. EDGE's integrated development environment allows businesses
to rapidly develop and deploy call center customer interaction software
solutions on an enterprise-wide basis. The ability to swiftly develop and deploy
applications enables the Company's clients to implement sales, marketing and
service programs quickly in response to changes in the business environment.
PRODUCTS AND SERVICES
EDGE Suite of Products. EDGE is based on a distributed, multi-tier client/server
open architecture which allows for the distinct separation of presentation,
application and database layers. This architecture provides the system
performance and scalability that is critical for mid-size and large-scale call
centers and permits hardware, relational database and operating system
independence to preserve and leverage existing information technology
investments. EDGE currently supports Windows 95, Windows NT workstation clients,
a wide variety of server platforms, including Unix and Windows NT, as well as
database support for Oracle Sybase, Informix and Microsoft SQL Server.
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EDGE contains numerous development and customization tools that enable the
customer to tailor its solution to meet its business needs, the most common of
these tools are:
. Intelligent Scripting--Provides dynamic screen presentation and
navigational routing based on defined business rules, historical customer
data and other input derived from the customer conversation.
. Queue Management--Provides for administration, prioritization, security
and processing of user and system workflow activities such as
calling campaigns, call backs, appointments, to-do's, incidents,
personal schedules and tasks.
. Telephony Functions--Allows control of all telephone-related functions and
interfaces such as automatic call distributors, voice response units and
predictive dialers through the application.
. Call List Processing--Provides importing, manipulation, sorting, selecting
and loading of calls into prioritized lists, which can be managed by user,
group, time of day and quota levels.
. Call Center Reporting--Provides ongoing operational results for management
analysis of call center activity in a variety of categories, including by
agent, group, department, campaign, list and time period.
. Customer Management--Allows for user-defined searching, selection and
modification of customer and company information, including system and
user-defined data.
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The Company markets as the AdvantEDGE Application Suite a suite pre-packaged
specific applications that are commonly used by its customers. The AdvantEDGE
Application Suite includes:
. Account Management--Supports call center agents during free-form
conversations with customers. Critical customer information such as
contacts, corporate hierarchy and profiles is combined with corporate
information such as product, lead source and objection handling and is
displayed in a timely manner.
. Marketing Management--Provides closed-loop lead tracking for users to
manage leads and prospects through a sales qualification process by
providing list import and segmentation facilities, lead profiling and
scoring, results tracking and management reporting.
. Telesales/Order Entry--Provides graphical, interactive telephone sales and
order capture utilizing intelligent prompts for objection handling, cross-
selling, up-selling, product and service information, campaign based
pricing and order and inventory file integration.
. Customer Service--Allows a user to track and resolve customer inquiries or
cases in single call or multiple step resolution environments, providing
closed looped case management with fast path entry, problem determination
and resolution support, predefined workflows by type and category,
escalation with proactive alerts and on-line status reports.
. Event and Seminar Management--Allows a user to create, manage and maintain
the registration of attendees of an event or seminar, track event
information by occurrence, schedule, location and mileage proximity.
. Campaign Management--Provides full featured campaign cycle tracking that
enables the management of campaigns through features that direct campaign
strategy from initial contact through tracking and final outcome while
enabling the monitoring and effectiveness of overall campaigns.
. Dynamic Scripting--Supplies efficient and effective scripting capabilities
in a simple drag and drop environment, giving customers the tools to
quickly create branched scripts in an intuitive flow chart presentation.
. Workflow--Provides a graphical user interface enabling the customer to
automatically process cases through pre-defined and/or dynamic steps that
must be completed before a case can be closed.
The Company's customers increasingly demand more flexibility in the conduct
of their business, specifically, the Company's customers seek a "virtual" call
center where teleservices representatives have access to the same customer data
without necessarily being in the same location. In response to this demand, the
Company has developed and markets CyberEDGE. CyberEDGE brings real-time web
access to applications built with EDGE, allowing enterprises to build customer
interaction applications that support both Microsoft Windows and Internet
browsers. With CyberEDGE, customers have the ability to develop and deploy self-
service applications that can be used by a call center agent, another company
employee, or a consumer, via the Internet. Web self-service increases
satisfaction of the customer by reducing or eliminating the need to make a
telephone call, allowing customers to receive service in the manner and time
that is most convenient for them. For the call center, CyberEDGE provides the
ability to support remote agents or "virtual" call centers made up of
telecommuters linked to EDGE applications via the Internet or corporate
internets.
TELEMAR and MSM Suite of Products. The Company's TELEMAR and MSM products
specifically support the AS/400 hardware platform and enable the customer to
automate critical areas within its organization that directly affect customer
relationships, such as sales, marketing, telemarketing, telesales, and customer
support. The Company's enterprise-wide approach permits access to centralized
customer data and allows all groups within an organization to handle accurate,
up to date prospect and customer information. For sales representatives working
remotely, the Company provides a seamless connection to this same data through
its TELEMAR Mobile and MSM Remote products.
TELEMAR and MSM are architected to provide system performance and scalability
that is critical for small, mid-size and large-scale call centers. TELEMAR and
MSM are compatible with the industry's leading software and computer telephony
integration technology including multiple public branch exchanges and predictive
dialers. TELEMAR and MSM can also integrate with back-end systems to allow for
a complete customer management solution.
TELEMAR and MSM provide the following functionality: Account Management, Call
Center Automation, Campaign Management, Correspondence Management, Customer
Support, Field Sales Automation, Lead Generation, Literature Fulfillment,
Marketing Research Programs, Opportunity Management, Sales Management,
Telemarketing, Telesales and Territory Management.
PROFESSIONAL SERVICES
The Company believes that its professional services are a significant
differentiating factor in its target markets and are an important component of
its software deployments. The Company provides consulting and maintenance,
customization and technical support services to its customers. The Company has
developed a comprehensive standard methodology to provide continuity from the
initial sale through the implementation of its applications. The Company's
professional services organization helps to develop and maintain long-term
customer relationships by applying specialized knowledge of industry needs,
business processes and technology to help provide the customer with a highly
functional and flexible solution. The Company's professional service department
works with strategic consulting and systems integration companies to identify
and provide services for large-scale service projects. The Company principally
relies on distributors and remarketers to provide consulting and client support
services to its international customers. As of December 31, 1998, the Company
employed 152 employees in its professional services organization. Services and
maintenance revenues as a percentage of total revenues were 50.4%, 47.4% and
49.3% in 1996, 1997 and 1998, respectively. The Company provides the following
services:
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Consulting Services. The Company provides a comprehensive range of professional
services for its customers including project management, business consulting,
application development, implementation and integration of the Company's
products with the customer's existing systems. In addition, the Company offers
training programs to meet the specific needs of its customers. The Company
maintains a large consulting services staff with extensive experience in the
implementation and deployment of complex customer interaction solutions. The
demand for the Company's consulting services has increased as the Company's
product offerings have been accepted for large-scale installations. Consulting
services fees are determined on a time and expense basis and training fees are
generally charged on a per class or per student basis.
Maintenance and Technical Support Services. The Company's maintenance and
technical support services staff provides clients with telephone and on-line
support of the Company's products. These support services include access to
technical support via the Company's telephone help-desk, customer support Web
site and e-mail. The Company offers several product support plans, including a 7
day/24 hour plan, which are generally offered for an annual fee based upon a
percentage of the license fee. The Company also provides its customers with
software upgrades, account management services, technical bulletins, status
reports and ongoing communication regarding new features and products under
development.
CUSTOMERS AND APPLICATIONS
As of December 31, 1998, the Company's software products were licensed to over
400 customers with more than 50,000 total users. In 1998, Texas Utilities
Services Inc. accounted for 12% of the Company's total revenue. In 1997, United
Parcel Service General Services Co. accounted for 10% of the Company's total
revenue. In 1996, no customer accounted for 10% or more of the Company's total
revenue.
SALES AND MARKETING
The Company markets its software and services in the United States through a
direct sales organization and through resellers. The Company's sales
representatives are focused by industry expertise and geographical location. To
support its sales efforts, the Company conducts marketing programs including
advertising, telemarketing, direct mail, seminars, public relations and trade
shows. As of December 31, 1998, the Company's sales and marketing organization
covering the United States consisted of 111 employees.
The Company's direct sales force employs a consultative sales process, working
closely with prospective customers to understand and define their needs and to
determine how those needs are best addressed by the Company's products as well
as complementary technology and services offered by strategic systems
integration and technology companies. In addition to pursuing sales
opportunities with new customers, the Company works closely with its existing
customer base to gain knowledge of their industries, and focuses on selling new
and enhanced products specifically tailored to such existing customers'
requirements, as well as licensing its products to additional users within a
customer. Because customer interaction software applications are highly visible
within an organization, the Company's sales efforts are generally directed to
the senior management of a customer.
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The Company also works closely with strategic consulting software and systems
integration companies such as American Management Systems, Converse Information
Systems, Deloitte & Touche, FileNET, IBM, ICT Group and PriceWaterhouseCoopers
to increase market awareness and acceptance of the Company's products. The
Company has worked jointly with each of these companies by providing software
and services as part of a total customer software and systems project in which
the consulting or systems integration company also provides services, software
or hardware and may be responsible for the overall coordination of the project.
Through these relationships the Company has been introduced to strategic
accounts, which has led to increased account penetration and reduced sales
cycle length. A key part of the Company's strategy is to expand and
enhance its existing relationships with leading consulting and systems
integration companies to capture additional market share.
The Company markets its software internationally in Europe, the Pacific Rim,
Canada, Mexico and Latin America through remarketing and distribution
relationships which it supplements with a direct sales force in certain regions.
The Company's principal remarketers and distributors include Aspect
Telecommunications Corporation (worldwide), Datapoint (U.K.) Limited (Europe),
TeleDynamics BV (Holland), NCR Corporation (France, Canada, Turkey and Southeast
Asia), Kawasaki Steel Systems R&D Corporation (Japan), Locus Corporation
(Korea), TKM Communications, Inc. (Canada), Communicacoes, Processamento e
Mecanismos de Automacao Ltda. (Brazil), Mitsucon Tecnologia S/A (Brazil) and
Sixtra Chile S.A.(Six Bell) (Chile). As of December 31, 1998, the Company had a
direct sales force consisting of 18 sales and marketing professionals in London,
England, Paris, France, Frankfurt, Germany and Melbourne, Australia offices, and
two sales professionals focused on Mexico and Latin America. The Company is
seeking to expand its existing international distribution network through its
indirect distribution channels and direct sales force in order to take advantage
of international growth opportunities.
PRODUCT DEVELOPMENT
The Company believes that to maintain its competitive advantage it must enhance
existing applications, introduce new products and features into the market on a
regular basis to keep pace with technological advances, meet changing customer
requirements and respond to competitors' products. To meet these goals, the
Company has invested in developing a comprehensive product development process
to define and evaluate rigorous requirements for product functionality and
quality. The Company's research and development engineers work closely with its
marketing and support personnel and its customers to design enhancements and new
products to assure that product evolution reflects developments in the
marketplace and trends in client requirements.
The Company intends to continue its product research and development efforts in
order to meet the complex and changing requirements of small, mid-size and
large-scale call centers. The Company is making long-term investments to
enhance the componentization and object orientation of EDGE's underlying
architecture. The Company is utilizing emerging industry standards such as
Microsoft COM/DCOM, CORBA compliant object technology, Java language and
supporting Java technology. The Company believes that these investments will
provide a number of important benefits including the ability to migrate easily
to new components in the future in a "plug and play" mode, to shield business
objects and customer applications from the underlying technology infrastructure,
and to seamlessly integrate with other business applications that adhere to the
same standards.
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The Company is also developing two new products that it intends to market in
1999: ChannelEDGE and BuyingEDGE.com. The ChannelEDGE product will allow an
enterprise to manage all channels of entry into the enterprise, via the web, e-
mail, and telephone. The ChannelEDGE product is targeted for beta and
availability in the second half of 1999. BuyingEDGE.com is a consumer buying
system that can be accessed through the World Wide Web whereby consumers can
make requests for goods or services and manufacturers and service providers that
have subscribed to the BuyingEDGE.com service would be able to provide bids to
the consumer. The Company intends to offer this product in the second half of
1999 after a pilot project in the second quarter of this year.
As of December 31, 1998, the Company's product development staff consisted of 70
employees. In addition, the Company augments its internal research and
development organization with the services of an outside consulting firm. The
Company's total expenses for product development for the years ended December
31, 1996, 1997, and 1998 were $6.4 million, $6.2 million, and $9.3 million
respectively, and represented 24.3%, 16.9% and 18.9% of total revenues in these
periods, respectively. The Company expects that it will continue to commit
substantial resources to product development in the future.
COMPETITION
The market for telemarketing, telesales and customer service software is
intensely competitive, rapidly evolving and highly sensitive to new product
introductions or enhancements and marketing efforts by industry participants.
The Company competes with a large number of competitors ranging from internal
information systems departments to packaged software application vendors. The
Company believes that as the United States and international software markets
continue to grow, a number of new vendors will enter the market and existing
competitors and new market entrants will attempt to develop applications
targeting additional markets.
Management believes that it competes in most of its markets with the internal
information systems departments of potential customers who desire to develop
their own customer interaction software rather than acquire software from a
third-party vendor such as the Company. The Company believes that the principal
software companies with which it competes are The Vantive Corporation, Clarify
Inc. and Siebel Systems, Inc. The Company also competes on occasion with systems
integration firms. Among the Company's current and potential competitors are
also a number of large hardware and software companies that may develop or
acquire products that compete with the Company's products. Competitors have
established and may in the future establish cooperative relationships or
alliances which may increase their ability to provide superior software
solutions or services. In addition, consolidation within the call center
customer interaction software industry could create new or stronger
competitors. Increased competition resulting from new entrants, call center
customer interaction software industry consolidation, cooperative relationships
or alliances could result in price reductions, reduced operating income or loss
of market share, any of which could materially adversely affect the Company's
business, operating results or financial condition. Many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources, generate higher
revenues and have greater name recognition than the Company. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by it or adapt more quickly
than the Company to new technologies, evolving industry trends or changing
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client requirements. There can be no assurance that the Company will be able to
compete effectively against current or future competitors or that competitive
pressures faced by the Company would not materially and adversely affect its
business, operating results or financial condition.
The Company believes that the principal competitive factors in its industry
include product performance and functionality, flexibility, ease of use,
adherence to open standards, scalability, ability to integrate external data
sources, speed of deployment, client service, customer support and price.
Although the Company believes that it currently competes favorably with respect
to such factors, there can be no assurance that it will be able to maintain its
competitive position against current and potential competitors, especially those
with greater financial, technical, marketing, service, support and other
resources than the Company, or that competitive pressures will not materially
and adversely affect the Company's business, operating results and financial
condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, nondisclosure agreements and technical measures to protect its
proprietary rights. The Company typically enters into confidentiality or license
agreements with its employees, distributors, clients and potential clients, and
limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that these steps will be
adequate to deter misappropriation or independent third-party development of its
technology or to prevent an unauthorized third party from obtaining or using
information that the Company regards as proprietary. In addition, the laws of
some foreign countries do not protect or enforce proprietary rights to the same
extent as do the laws of the United States. Policing unauthorized use of the
Company's products is difficult and, while 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. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
Although the Company believes that its products and technology do not infringe
on any existing proprietary rights of others, the use of patents to protect
software has increased, and there can be no assurance that third parties will
not assert infringement claims in the future or, if infringement claims are
asserted, that such claims will be resolved in the Company's favor. The Company
expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms favorable to
the Company or at all, which could have a material adverse effect on the
Company's business, operating results and financial condition. Any infringement
claims resolved against the Company could have a material adverse effect upon
the Company's business, operating results and financial condition. In addition,
litigation may be necessary in the future to protect the Company's trade secrets
or other intellectual property rights, or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.
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The Company has entered into agreements with a small number of its customers
requiring the Company to place its source code in escrow. These escrow
agreements typically provide that customers have a limited, non-exclusive right
to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. The escrow agreements, and any that the
Company may enter into in the future, may increase the possibility of
misappropriation by third parties. In addition, the Company utilizes a
third-party contractor for selected product development projects which may also
increase the possibility of misappropriation by third parties.
REGULATORY ENVIRONMENT
Certain uses of outbound call processing systems are regulated by federal, state
and foreign law. The Federal Telephone Consumer Protection Act required the
Federal Communications Commission to create regulations protecting residential
telephone subscribers from unwanted telephone solicitations. Certain states have
enacted similar laws limiting access to telephone subscribers who object to
receiving solicitations. Although compliance with these laws may limit the
potential use of the Company's products, the Company's products can be
programmed to operate in compliance with these laws through the use of
appropriate calling lists and calling campaign time parameters. There can be no
assurance, however, that future legislation further restricting telephone
solicitation practices, if enacted, would not materially adversely affect the
Company.
EMPLOYEES
As of December 31, 1998, the Company employed 377 employees, consisting of 70
employees in research and development, 111 employees in sales and marketing,
123 employees in consulting services, 29 employees in client support services
and 44 employees in finance and administration. Of these, 61 are located in the
United Kingdom, France, Germany and Australia and the remainder are located in
the United States. None of these employees is covered by any collective
bargaining agreements. The Company believes that its relationship with its
employees is good.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters in Shelton, Connecticut, which
consists of approximately 25,000 square feet of office space. The lease for the
Shelton, Connecticut office has a term ending on March 31, 2004. In addition,
the Company maintains an office in Irvine, California with a lease for
approximately 26,000 square feet of office space. The Company has entered into a
Lease Cancellation Agreement in connection with its current Irvine, California
lease and entered into a new lease for approximately 44,000 square feet in
Irvine. The new lease expires April 30, 2006. In support of its direct sales and
service and support operations, the Company leases offices in three other
locations in the United States, as well as offices in London, England, Paris,
France, Frankfurt Germany and Melbourne Australia. These offices comprise
between 300 and 11,000 square feet each and have lease terms ending through
2006.
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ITEM 3. LEGAL PROCEEDINGS
ITEM 1: LEGAL PROCEEDINGS
(a) In the Company's Form 10-Q for the quarter ended June 30, 1998, the
Company reported that Rockwell International Corporation, Rockwell
Semiconductor Systems, Inc. and Rockwell Telecommunications, Inc. (collectively,
"Rockwell") had filed a two count complaint against the Company. (Rockwell
International Corporation, et al. v. Information Management Associates, Inc. 97
CH 809). Rockwell's claims related to the Company's provision of a call center
solution to United States Cellular Corporation ("USCC"). Rockwell had obtained
a preliminary injunction preventing the Company from completing USCC's Call
Center Solution or doing other work for USCC. Although the Company had
contested any wrongdoing and appealed the preliminary injunction decision, the
Company decided to settle the matter quickly to enable it to resume its
relationship with USCC which included USCC's exercise of its option to license
additional software from the Company during the quarter ended September 30, 1998
for a fee of $1.75 million. Under the terms of the settlement, the litigation
was dismissed and all claims by Rockwell relating to the Company's relationship
with USCC have been released. IMA agreed to pay Rockwell $1.75 million in four
installments over one year, of which $950,000 was paid during 1998.
(b) On August 20, 1998, the Company filed a two count complaint against APAC
Teleservices, Inc. ("APAC") in the United States District Court for the Northern
District of Illinois asserting claims for breach of contract and unjust
enrichment for APAC's failure to pay $255,772 to the Company for professional
services rendered to APAC (Information Management Associates, Inc. v. APAC
Teleservices, Inc., 98C 5162) (the "Complaint" or the "Federal Action"). On
August 21, 1998, the Company filed a demand for arbitration with the American
Arbitration Association in Chicago, Illinois, asserting that APAC breached its
written agreement with the Company by failing to make payment of $575,983 for
software license and maintenance fees (Information Management Associates, Inc.
v. APAC Teleservices, Inc., No. 51 117 0036498) (the "Demand" or the
"Arbitration"). On October 8, 1998, APAC filed its answer to the Complaint,
denying that it owed the monies claimed by the Company. In connection with the
Demand, APAC also filed a counterclaim seeking an unspecified amount of damages
based on allegations that the Company's software and maintenance services were
deficient (hereinafter referred to as the "Counterclaim"). On October 30, 1998,
the Company responded to the Counterclaim, denying the material allegations,
further denying that APAC had suffered damages, and raising several affirmative
defenses. On November 10, 1998, APAC was granted leave to file a counterclaim in
the Federal Action. On December 9, 1998, APAC filed a counterclaim in the
Federal Action seeking in excess of $400,000 based upon its allegation that the
services performed by the Company were deficient (the "Federal Counterclaim").
The parties have consolidated the Arbitration and the Federal Action and both
matters are scheduled to be arbitrated in May, 1999. The Company believes that
it will prevail in its claims set forth in the Complaint and the Demand. The
Company believes that APAC's Counterclaim and the Federal Counterclaim are
without merit and intends to vigorously oppose both the Counterclaim and the
Federal Counterclaim. Nevertheless, the final outcome of any legal proceeding
is subject to a great many variables and cannot be predicted with any degree of
certainty. In the event that the Counterclaim and/or the Federal Counterclaim is
ultimately decided in favor of APAC, damages and associated cost could have a
material adverse effect on results of the Company's operations.
13
<PAGE>
From time to time, the Company is involved in litigation in the normal course of
business relating to claims arising out of its operations. The Company is not
currently involved in any litigation except as discussed above which, in
management's opinion, would have a material adverse effect on its business,
operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- --------------------------------------------------------------------------------
Albert R. Subbloie, Jr. 38 President, Chief Executive Officer
Gary R. Martino 38 Chairman of the Board, Chief Financial
Officer,
Treasurer and Assistant Secretary
Andrei Poludnewycz 39 Executive Vice President-Technology, Secretary
Paul G. Frederick 39 Senior Vice President-Professional Services
James E. Anderson 53 Vice President-Worldwide Sales
David G. Caldeira 42 Vice President-Products Division
Michael P. McGroarty 38 Vice President and General Counsel, Assistant
Secretary
Paul J. Schmidt 39 Vice President-Application Development
Kian Saneii 34 Vice President-Worldwide Marketing
Eric Montgomery 44 Vice President-Sales-North America
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the executive officers of the Company.
Mr. Subbloie has been the President and Chief Executive Officer of the
Company since its incorporation in 1990. Prior to incorporation of the Company,
Mr. Subbloie was a founding partner of the Company's predecessor, Information
Management Associates (the "Partnership") with Messrs. Martino and Poludnewycz,
which engaged in the business of consulting and development of computer
software. From 1982 to 1984, Mr. Subbloie was employed with the consulting
division of Arthur Andersen LLP, a professional accounting firm ("Arthur
Andersen"), and specialized in distribution and manufacturing consulting.
Mr. Martino has been an officer of the Company since its incorporation in
1990 and has served as Treasurer, Chief Financial Officer and Assistant
Secretary. Prior to incorporation of the Company, Mr. Martino was also a
founder of the Partnership with Messrs. Subbloie and Poludnewycz. From 1982 to
1984, Mr. Martino was employed with the consulting division of Arthur Andersen
and specialized in financial application consulting.
14
<PAGE>
Mr. Poludnewycz has been an officer of the Company since its incorporation
in 1990 and has served as Secretary of the Company since its incorporation in
1990 until January 1999 when he resigned his position of Executive Vice
President Secretary and Director. From 1992 to 1994, he served as Executive Vice
President-Products Division and subsequently served as Executive Vice
President-Technology. Prior to incorporation of the Company, Mr.
Poludnewycz was a founding partner of the Partnership with Messrs.
Subbloie and Martino. From 1982 to 1984, Mr. Poludnewycz was employed
with the consulting division of Arthur Andersen and specialized in
developing computer applications for the mid-range hardware platforms of
IBM.
Mr. Frederick has served as Senior Vice President-Professional Services of
the Company since 1995. Prior to joining the Company, he was employed from
1991 to 1995, most recently as associate partner, with a division of Andersen
Consulting LLP ("Andersen Consulting") which specialized in large
scale systems integration. Mr. Frederick's primary responsibilities with
Andersen Consulting included project and practice management.
Mr. Anderson was promoted to Vice President Worldwide Sales in November 1998,
with responsibility for all direct and channel sales worldwide through December
31, 1998. Prior to that he served as Vice President-Business Development of
the Company from 1994 to 1995 and as Vice President-International
Operations from 1996 - 1998. From 1970 to 1994, Mr. Anderson was employed by
IBM as a software product planning manager, a branch sales manager and the
Worldwide Market Development Manager for IBM's CallPath product.
Mr. Caldeira has been employed with the Company in several capacities since
its incorporation 1990. He served as Vice President-Sales from 1990 to 1992 and
as Vice President-Business Development from 1992 to 1994. He has served in his
present position of Vice President-Products Division from 1994 through
December 31, 1998. Mr. Caldeira joined the Partnership in 1989 as a Regional
Sales Manager and was formerly employed as a Senior Manager with the
consulting division of Arthur Andersen where he specialized in systems for
mid-size companies.
Mr. McGroarty joined the Company in 1996 as Vice President and General
Counsel, and also served as an Assistant Secretary through December 31, 1998.
From 1990 to 1996, Mr. McGroarty was an attorney with the law firm of Fulbright
& Jaworski L.L.P.
Mr. Schmidt has served as an officer of the Company since its incorporation
in 1990. From 1990 to 1994, he served as Vice President-Client Services. From
1995 to 1997 he served as Vice President-Applied Technologies and since 1997 he
has served as Vice President-Application Development. From 1985 to 1990, Mr.
Schmidt was employed as a Vice President at the Partnership and specialized in
client services. From 1982 to 1985, Mr. Schmidt worked for Andersen Consulting
and specialized in financial, distribution and manufacturing consulting.
Mr. Saneii has served as Vice President-Worldwide Marketing from July
1997 through December 31, 1998. Prior to joining the Company, Mr. Saneii
was employed by FileNet Corporation, a business process automation firm,
as Marketing Manager from February 1996 to July 1997. From February 1995 to
February 1996, Mr. Saneii served as President of Business Process
Innovation, a consulting firm specializing in the application of imaging and
workflow technologies. From 1987 to 1994, Mr. Saneii was Vice President,
15
<PAGE>
Corporate Development at DIS Research, a systems integration firm specializing
in the application of imaging and workflow technologies.
Mr. Montgomery has served as Vice President-Sales, North America since
December 1997. Prior to joining the Company, Mr. Montgomery was employed for
eight years by Hyperion Software, a provider of enterprise software
and analytical applications, most recently as Senior Sales Director.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Since July 30, 1997, the Common Stock has been traded on the NASDAQ
National Market under the symbol "IMAA." There was no established public trading
market for the Common Stock prior to the Company's initial public offering on
July 30, 1997.
The high and low closing sales prices of the Company's common stock, as
reported on the NASDAQ National Market for each quarter since the Company's July
30, 1997 initial public offering, are as follows:
Common Stock
------------
High Low
------ -----
Fourth Quarter - 1998 $ 7.625 $ 3.50
Third Quarter - 1998 10.0625 5.625
Second Quarter - 1998 14.00 9.6875
First Quarter - 1998 14.00 9.125
Fourth Quarter - 1997 14.75 9.375
Third Quarter - 1997 13.50 10.75
Second Quarter - 1997 N/A N/A
First Quarter - 1997 N/A N/A
The Company believes that there were approximately 101 holders of record for
the Common Stock at March 25, 1999. The Company believes that there are in
excess of 400 beneficial holders of the Common Stock.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion. The credit agreement for the
senior secured revolving credit facility of $7.5 million for which the Company
has obtained a commitment from a bank and which the Company expects to enter
into would prohibit the payment of cash dividends. See Item 7. Management's
Discussion of Financial Condition and Results of Operations for a description of
the loan commitment.
16
<PAGE>
Use of Proceeds
On July 30, 1997, the Company's Registration Statement on Form S-1 (File No.
333-22923) became effective. The net proceeds from the offering were $32.4
million. The Company disclosed the use of proceeds through September 30, 1998 on
the Company's Form 10-Q for the period ending September 30, 1998. Except as
noted below, no information has changed with respect to the use
of proceeds. The following table sets forth use of offering proceeds from the
effective date (July 30, 1997) through December 31, 1998:
Repayment of indebtedness $ 7,400,000
Working capital 10,200,000
One time settlement charge 2,200,000
Acquisition of Equipment 2,900,000
Minority Investment 1,700,000
Acquisition of MIS & TSI 1,600,000
-----------
Total $26,000,000
===========
17
<PAGE>
The Company used $250,000 of the net offering proceeds to repay in full a note
payable to Wand/IMA Investments, L.P., a beneficial owner of more than the ten
percent of the issued and outstanding shares of common stock of the Company.
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31
1994 1995 1996 1997 1998
(in thousands, except per share data)
Consolidated Statements of
Operations:
Revenues:
License fees 7,393 10,825 13,022 19,295 24,903
Total Services
and maintenance 10,959 12,984 13,255 17,377 24,190
------- ------- ------- ------- --------
Total revenues 18,352 23,809 26,277 36,672 49,093
Cost of revenues:
License fees 462 700 709 304 356
Services and
maintenance 6,268 8,225 7,191 9,428 17,420
------- ------- ------- ------- --------
Total cost of 6,730 8,925 7,900 9,732 17,776
------- ------- ------- ------- --------
revenues
Gross profit 11,622 14,884 18,377 26,940 31,317
Operating expenses:
Sales and marketing 5,857 6,844 8,055 12,580 21,419
Product development 6,106 6,802 6,382 6,190 9,266
General and
administrative 2,693 3,824 3,878 4,784 12,120
Acquired product
development costs - - - - 6,988
One time settlement
charges - - - - 2,163
Total operating
expenses 14,656 17,470 18,315 23,554 51,956
Operating income (loss) (3,034) (2,586) 62 3,386 (20,639)
Other income (expense) (917) (1,100) (1,079) 18 810
------- ------- ------- ------- --------
Income (loss) before
provision for income taxes (3,951) (3,686) (1,017) 3,404 (19,829)
Provision for income taxes 132 100 30 231 470
------- ------- ------- ------- --------
Net income (loss)
per share $(4,083) $(3,786) $(1,047) $ 3,173 $(20,299)
======= ======= ======= ======= ========
Basic $ (1.14) $ (1.18) $ (.44) $ .43 $ (2.12)
======= ======= ======= ======= ========
Diluted $ (1.14) $ (1.18) $ (.44) $ .38 $ (2.12)
======= ======= ======= ======= ========
18
<PAGE>
December 31
1994 1995 1996 1997 1998
(in thousands)
Consolidated Balance Sheet
Data:
Cash and cash equivalents $ 446 $ 1,543 $ 3,073 $ 4,816 $ 8,558
Working capital
(deficit) (3,619) (1,233) 1,210 34,213 14,295
Total assets 12,150 12,519 17,281 43,922 37,238
Short-term debt 5,499 3,871 5,444 232 73
Long-term debt 1,423 3,042 2,803 136 58
Senior redeemable
convertible preferred
stock - 4,751 9,431 - -
Redeemable common stock
warrants 1,517 2,480 2,865 - -
Total shareholders'
equity (deficit) (4,200) (9,295) (10,906) 37,030 20,922
Results of Operations
The following table sets forth the percentage of total revenues for certain
items in the Company's consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998.
Year Ended December 31
1996 1997 1998
Consolidated Statement of Operations Data:
Revenues:
License fees: 49.6% 52.6% 50.7%
Services and maintenance: 50.4 47.4 49.3
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License fees 2.7 0.8 0.7
Services and maintenance 27.4 25.7 35.5
----- ----- -----
Total cost of revenues 30.1 26.5 36.2
----- ----- -----
Gross profit 69.9 73.5 63.8
----- ----- -----
Operating expenses:
Sales and marketing 30.7 34.3 43.6
Product development 24.3 16.9 18.9
General and administrative 14.8 13.0 24.7
Acquired product development costs - - 14.2
One time settlement charges - - 4.4
----- ----- -----
Total operating expenses 69.8 64.2 105.8
----- ----- -----
Operating income (loss) 0.1 9.3 (42.0)
Other income (expense) (4.1) - 1.6
----- ----- -----
Income (loss) before provision for income taxes (4.0) 9.3 (40.4)
Provision for income taxes - 0.6 1.0
Net income (loss) (4.0)% 8.7% (41.4)%
===== ===== =====
19
<PAGE>
The following table sets forth for each component of revenue, the cost of such
revenue expressed as a percentage of such revenue for the periods indicated.
Year Ended December 31
1996 1997 1998
Cost of license fees 5.4% 1.6% 1.4%
Cost of service and maintenance: 54.3% 54.3% 72.0%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
The following discussion contains forward-looking statements and the Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Factors That May Affect Future Results".
OVERVIEW
The Company develops, markets and supports customer interaction software
designed to increase the productivity and revenue-generating capabilities of
mid-size and large-scale telephone call centers.
The Company generates revenues from licensing the rights to use its software
products directly to end users and indirectly through sublicense fees from
resellers. The Company also generates revenues from sales of software
maintenance contracts, and from consulting and training services performed for
customers who license its products. As of January 1, 1998, the Company adopted
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), which was
effective for transactions that the Company entered into after December 31,
1997. The adoption of SOP 97-2 did not have a material adverse affect on the
revenues or earnings of the Company for the year ended December 31, 1998.
Revenues from software license agreements are recognized upon the delivery of
the software to the customer if there are no significant post-delivery
obligations and collection is probable. Service revenues consist of
professional consulting, implementation and training services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of the Company's software products. Revenues from consulting and
training services are recognized as services are performed. The Company enters
into transactions which include both license and service elements. As such
service elements do not include more than minor alteration of the software, the
license fees are recognized upon delivery and the service revenues are
recognized when performed.
Software maintenance fees are recognized ratably over the term of the
maintenance period. If software maintenance fees are provided for in the
license fee or at a discount in a license agreement, a portion of the license
fee equal to the fair market value of these amounts is allocated to software
maintenance revenue based on the value established by independent sales of such
maintenance service to customers.
20
<PAGE>
The Company markets its products in the United States through a direct sales
organization and certain resellers. The Company markets its products outside the
United States in Europe, the Pacific Rim, Canada, Mexico and Latin America
through remarketing and distribution relationships which it supplements with a
direct sales force in certain regions. The Company maintains offices in the
United Kingdom, France, Germany and Australia to support its international sales
and service activities. In 1998, United States and international revenues were
approximately 64% and 36% of total revenues, respectively.
Although the Company has experienced significant growth in revenues during the
past three years, the Company does not believe prior growth is necessarily
indicative of future operating results. In addition, the Company expects
increased competition and intends to continue to invest in its business. There
can be no assurance that the Company will be profitable on a quarterly or annual
basis. Future operating results will depend on many factors, including demand
for the Company's products, the level of product competition, competitor
pricing, the size and timing of significant orders, changes in pricing policies
by the Company or its competitors, the ability of the Company to develop,
introduce and market new products on a timely basis and changes in levels of
operating expenses.
RESULTS OF OPERATION
Year Ended December 31, 1997 Compared to Year Ended December 31, 1998
Revenues
Total revenues increased 33.9% from $36.7 million in 1997 to $49.1 million in
1998.
License Fees. License fee revenues consist of revenues from initial licenses
for the Company's software products and license upgrades to existing customers
for additional users or modules. Total license fees increased 29.1% from $19.3
million, or 52.6% of total revenues, in the year ended December 31, 1997 to
$24.9 million, or 50.7% of total revenues, in the year ended December 31, 1998.
The increase in license fees was primarily attributable to an increase in the
number of licenses sold. International license revenue increased approximately
$3.6 million or 56.9% from $6.3 million in 1997 to $9.9 million in 1998. The
Company also generated license fees in 1998 from the products acquired in the
Acquisitions, from which there were no revenues in 1997.
Services and Maintenance. Services and maintenance revenues derive from
professional services associated with the implementation and deployment of the
Company's software products and maintenance fees for ongoing customer support.
Services and maintenance revenues increased 39.2% from $17.4 million, or 47.4%
of total revenues, in the year ended December 31, 1997 to $24.2 million, or
49.3% of total revenues, in the year ended December 31, 1998. The increase in
services and maintenance was attributable to the increase in software licenses,
the significant new service revenue attributable to several new major customers
such as Texas Utilities Services Inc., Lloyds TSB Bank and Dai Tokyo Royal
Insurance and continuing professional service work from existing customers such
as United Parcel Service General Services Co., and Humana Inc.
21
<PAGE>
Cost of Revenues
Cost of License Fees. Cost of license fees consists primarily of the costs of
media packaging, documentation, third-party software and software production
personnel. Cost of license fees increased 17.1% from $304,000 or 1.6% of the
related license revenues, in the year ended December 31, 1997 to $356,000, or
1.4% of the related license revenues, in the year ended December 31, 1998. The
fluctuations in the cost of license fees is primarily attributable to the
increase in the amount of third-party products resold by the Company due to the
increase in license fees.
Cost of Services and Maintenance. Cost of services and maintenance consists
primarily of salaries, bonuses, benefits, third party consulting costs and other
costs related to the installation, implementation, training and maintenance
support of the Company's software products. The cost of services and maintenance
increased 84.8% from $9.4 million, or 54.3% of service and maintenance revenues,
in the year ended December 31, 1997 to $17.4 million, or 72% of service and
maintenance revenues, in the year ended December 31, 1998. The increases in the
dollar amount of costs of services and maintenance and the amount of these costs
as a percentage of revenues were primarily attributable to an increase in third
party consulting costs which are, in certain instances, billed to the customer
on a pass through basis and increases in salary, benefits and overhead related
to the hiring of new client services staff. The increase in third party
consulting costs resulted primarily from the Company's efforts to work more
cooperatively with these third party consultants with the expectation that these
vendors would provide the Company with leads and introductions into larger
software transactions.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
commissions, salaries, bonuses and other related expenses for sales and
marketing personnel, as well as marketing, advertising and promotional expenses.
Sales and marketing expenses increased 70.3% from $12.6 million, or 34.3% of
revenues, in the year ended December 31, 1997 to $21.4 million, or 43.6% of
revenues, in the year ended December 31, 1998. The increase in sales and
marketing expenses was primarily related to the hiring of 40 additional sales
and marketing personnel, increased commissions as a result of higher license
revenues, increased use of outside third party consultants for sales and
marketing efforts and increased marketing activities, including advertising,
trade shows and promotional expenses. The Company may expand its sales and
marketing staff over the next twelve months.
Product Development. Product development expenses consist primarily of
salaries, bonuses, other related personnel expenses and consulting fees, as well
as the cost of facilities and equipment. Product development expenses increased
49.7% from $6.2 million, or 16.9% of revenues, in the year ended December 31,
1997 to $9.3 million, or 18.9% of revenues, in the year ended December 31, 1998.
The increase in product development expense was primarily due to an increase in
salaries and benefits related to the hiring of new software development staff,
an increase in third party consulting expense, the continuing development of the
Company's software products, including spending on the Company's new ChannelEDGE
and BuyingEDGE.com, and further development efforts resulting from the
in-process development projects acquired from MIS and TSI. Both new hires and
third party outside consultants are working on new product development.
22
<PAGE>
General and Administrative. General and administrative expenses represent the
costs of executive, finance and administrative support personnel, the portion of
occupancy expenses all allocable to administration, unallocated corporate
expenses such as fees for legal and auditing services and bad debt expense.
General and administrative expenses increased 153.3% from $4.8 million, or 13.0%
of revenues, in the year ended December 31, 1997 to $12.1 million, or 24.7% of
revenues, in the year ended December 31, 1998. The primary reason for the
increase in general and administrative expenses in the year ended December 31,
1998 was the increase in bad debt reserves of $6.5 million following a
comprehensive review of accounts receivable. This review took into account
continued financial weakness among teleservices outsourcing customers, the
Company's rapid growth in revenues and corresponding growth in accounts
receivable as well as certain economic uncertainties in markets in which the
Company operates, including South America, Asia Pacific. Approximately 80% of
the accounts receivable reserve increase in 1998 was attributable to
teleservices outsourcing customers. The Company has implemented stricter credit
requirements for customers in this industry.
Acquired Product Development Costs. Acquired product development costs
resulted from the March 30, 1998 acquisitions of the assets of Marketing
Information Systems, Inc. ("MIS") and Telemar Software International LLC
("TSI"). There was no similar acquisition activity for the year ended December
31, 1997. In connection with the acquisitions of MIS and TSI, the Company
allocated $7.0 million of the purchase price to in process research and
development ("R&D") projects. This allocation represented the estimated fair
value at the date of acquisition based on risk-adjusted cash flows related to
the incomplete products. At the acquisition date, the development of these
projects had not yet reached technological feasibility and the R&D in progress
had no alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
The values assigned to these assets were determined by identifying
significant research projects for which technological feasibility had not been
established, including development, engineering and testing activities
associated with the creation of SalesPath, a new product under development by
MIS, and new releases of MSM and Telemar, which were telemarketing products
marketed by MIS and TSI, respectively. Valuation of development efforts in the
future was excluded from the analysis.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products relate to the completion of all planning,
designing, prototyping, and testing activities that are necessary to establish
that the proposed technologies meet their design specifications including
functional, technical, and economic performance requirements.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology in developing
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate.
23
<PAGE>
Long-term revenue growth was deemed to be reasonable compared to growth
estimates of guideline companies in the same or similar industries facing
similar market risks. An examination of seven guideline companies indicated
that growth estimates ranged from 29% to 53% with an average long-term growth
estimate of 39%. The estimated revenue growth rates for MIS and TSI used in
determining the values of the in-process technologies were 38% and 44%,
respectively. These growth estimates were considered reasonable taking into
consideration the level of sales of the companies in 1997, $4 million and $2.4
million for MIS and TSI, respectively.
Selling, general and administrative expenses and profitability estimates
were determined based on historical indications, anticipated business changes in
the near term, as well as an analysis of the guideline companies.
The rates utilized to discount the net cash flows to their present value
were based on cost of capital calculations and several studies of investment
rates of return. Due to the nature of the forecast and the risks associated
with the projected growth, profitability and developmental projects, a discount
rate of 30% was appropriate for the business enterprises of both MIS and TSI,
25% for the existing products and technology, and 32.5 to 35% for the in-process
R&D. Because the in-process projects were such an integral part of each business
enterprise, only a moderate increase in the discount rate for the in-process
technology was deemed appropriate.
These discount rates were commensurate with MIS' and TSI's market positions,
the uncertainties in the economic estimates described above, the inherent
uncertainty surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the profitability levels of such
technology, and the uncertainty of technological advances that were unknown at
the time of acquisition.
Selection of an appropriate discount rate for each project was based on
perceived risk related to each individual project taking into consideration the
nature of the R&D effort and the stage of development. The risk of MIS achieving
the revenue from SalesPath was deemed higher than the risk of achieving revenue
from in-process releases of MSM since the MSM in-process releases were based on
an existing product. While SalesPath inherently had a higher technical risk
since it was a completely new platform, at the date of acquisition the Company
believed that this risk was lessened by the market's move away from an AS/400
based product. Further, at the date of acquisition, SalesPath had been estimated
to be greater than 80% complete, which decreased the risk of not completing the
project successfully.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results.
MIS' and TSI's in-process research and development value is comprised of two
individual on-going projects for each company. Completion dates for the projects
in progress were anticipated to occur over the two years after the acquisition
at which dates the Company expected to begin generating the economic benefits
from the technologies. Funding for such projects was expected to be obtained
from internally generated sources.
24
<PAGE>
As of December 31, 1998, development of the new releases of the Telemar
product were approximately on schedule with Telemar 6.1 having been released in
November 1998. 1998 revenues from the Telemar suite of products were not
materially different from the forecast revenues.
As of December 31, 1998, development of the new version of the MSM product
was approximately on schedule with MSM 400 having been released in September
1998. 1998 revenues from the MSM suite of products were significantly lower than
had been forecast in the valuation model.
The Company believes that the acquired SalesPath technologies are of no
material value. Although these technologies were believed to be valuable at the
time of acquisition, following the acquisition, the Company discontinued the
development of SalesPath as a stand-alone product for several reasons, including
increased demand by the Company's customers for more integrated customer
interaction software and increases in the projected time and expense to complete
development of SalesPath on a stand-alone basis. Primarily for these reasons,
the Company instead elected to pursue development of a sales force automation
component as part of its EDGE suite of products. Although the Company will
incorporate certain concept and design elements of the SalesPath technologies
into its EDGE sales force automation product, these elements are not believed to
have significant value because they will not materially reduce development time
or expense. See Note 3 to the Financial Statements.
Research and development expenses allocable to the in-process projects
related to the new releases of Telemar and MSM were not materially different
than forecast. Research and development expenses prior to the decision to
discontinue development were also not materially different than forecast.
Research and development for SalesPath as a stand-alone product were
discontinued in early August 1998.
If Telemar and MSM 400 projects are unsuccessful, the sales and profitability
of the Company may be adversely affected in future periods. Commercial results
will be subject to uncertain market events and risks, which are beyond the
Company's control, such as trends in technology, government regulations, market
size and growth, and product introduction or other actions by competitors.
One Time Settlement Charge. The one time settlement charge reflects the
total cost of the settlement of litigation against the Company by Rockwell
International Corporation, including the payment of $1.75 million to Rockwell
and approximately $413,000 in legal fees, court costs, disbursements and
expenses. This one time settlement charge represented 4.4% of revenues for the
year ended December 31, 1998.
Other Income (Expense). Other income (expense) was $18,000 for the year
ended December 31, 1997 compared to $810,000 for the year ended December
31, 1998. Other income (expense) consists primarily of interest earned
on short-term investments less interest expense on debt and equipment financing.
Interest income increased by $198,000 from $641,000 in the year ended
December 31, 1997 to $839,000 in the year ended December 31, 1998 while
interest expense decreased by $688,000 from $723,000 in the year ended
December 31, 1997 to $35,000 in the year ended December 31, 1998.
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Provision For Income Taxes. Provision for income taxes consists of foreign
and state income and withholding taxes. The provision for income taxes increased
from $231,000 in the year ended December 31, 1997 to $470,000 in year ended
December 31, 1998. At December 31, 1998, the Company had approximately $13.0
million of U.S. Federal net operating loss carryforwards, of which approximately
$4.1 million resulted from the exercise of non-qualified stock options, and
approximately $4.0 million of state net operating loss carryforwards which can
be used, subject to certain limitations, to offset future taxable income, if
any. When realized, the tax benefits of the portion of the net operating losses
attributed to the exercise of stock options will be credited directly to paid in
capital. The U.S. Federal net operating loss carryforwards expire through 2018
and the State net operating loss carryforwards expire through 2003.
In addition, the Company has United Kingdom net operating loss carryforwards
of approximately $3.5 million, which can be utilized to offset future taxable
income and which have no expiration.
The Company has recorded a full valuation allowance against its deferred tax
assets, including those resulting from net operating loss carryforwards, as a
result of uncertainties regarding the realization of the asset. Such
uncertainties result from cumulative losses in recent years and the lack of a
sufficiently quantifiable backlog given the Company's selling cycle and the
industry in which the Company operates. As the future realization of deferred
tax assets is primarily contingent upon the Company's ability to generate future
taxable income, and given the limited history of generating such taxable income,
the Company does not believe it appropriate to recognize a net deferred tax
asset based on forecasted operating results.
The IPO resulted in a change of ownership, as defined by Federal income tax
laws and regulations. As a result of this change in ownership, the amount of
U.S. Federal net operating loss carryforwards generated prior to the IPO which
can be utilized to offset Federal taxable income has an annual limitation of
approximately $4.7 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total revenues increased 39.6% from $26.3 million in 1996 to $36.7 million in
1997.
License Fees. Total license fees increased 48.2% from $13.0 million, or 49.6% of
total revenues in 1996 to $19.3 million, or 52.6% of total revenues in 1997.
EDGE license fees increased 58.4% from $12.2 million in 1996 to $19.3 million in
1997. The increase in EDGE license fees was primarily attributable to increases
in both the number of license transactions and the average price per customer
license, which the Company believes was primarily the result of greater market
awareness and acceptance of the EDGE products and expansion of the Company's
sales and marketing organization. Telemar license fees decreased from $842,000
in 1996 to $0 in 1997 due to the sale of the Telemar product line to TSI in
September 1996.
Services and Maintenance. Services and maintenance revenues increased 31.1% from
$13.3 million, or 50.4% of total revenues in 1996 to $17.4 million, or 47.4% of
total revenues in 1997. EDGE services and maintenance revenues increased 49.2%
from $11.6 million in 1996 to $17.4 million in 1997. The increase in EDGE
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services and maintenance revenues was primarily attributable to increased demand
for services and maintenance and the significant increase in EDGE software
licenses in 1997. Telemar services and maintenance revenues decreased from $1.6
million in 1996 to $0 in 1997 due to the sale of the Telemar product line in
September 1996.
Cost of Revenues
Cost of revenues increased 23.2% from $7.9 million in 1996 to $9.7 million in
1997.
Cost of License Fees. Cost of license fees is comprised of the costs of media
packaging, documentation, third party software and software production
personnel. Cost of license fees decreased 57.1% from $709,000, or 5.4% of total
license fees in 1996 to 304,000, or 1.6% of total license fees in 1997. The
higher cost of license fees in 1996 was attributable to the cost of other
vendors' products resold by the Company in connection with the Telemar product
line.
Cost of Services and Maintenance. The cost of services and maintenance consists
of salaries, wages, benefits and other costs related to installation,
implementation, training, and maintenance support of the Company's software
products. The cost of services and maintenance increased 31.1% from $7.2
million, or 54.3% of services and maintenance revenues in 1996 to $9.4 million,
or 54.3% of services and maintenance revenues in 1997. The increase in cost of
services and maintenance was primarily attributable to additional personnel
hired to meet customer needs for services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
commissions, salaries, bonuses and other related expenses for sales and
marketing personnel, as well as marketing, advertising and promotional expenses.
Sales and marketing expenses increased 56.2% from $8.1 million, or 30.7% of
total revenues in 1996 to $12.6 million, or 34.3% of total revenues in 1997.
This increase was primarily attributable to the hiring of additional sales and
marketing personnel, increased print advertisements, participation in trade
shows, travel expenses and other sales and marketing expenses.
Product Development. Product development expenses consist primarily of salaries,
bonuses, other related personnel expenses and consulting fees, as well as the
cost of facilities and equipment. Costs related to product development are
expensed as incurred. Product development expenses decreased 3.0% from $6.4
million, or 24.3% of total revenues in 1996 to $6.2 million, or 16.9% of total
revenues in 1997. However, product development expenses related to EDGE
increased 16.5% from $5.3 million to $6.2 million. The reduction in total
product development expenses was attributable to the sale of the Telemar product
line in September 1996, after which no Telemar product development expenses were
incurred.
General and Administrative. General and administrative expenses represent the
costs of executive, finance and administrative support personnel, the portion of
occupancy expenses allocable to administration, unallocated corporate expenses
such as fees for legal and auditing services and bad debt expense. The Company's
general and administrative expenses increased 23.4% from $3.9 million, or 14.8%
of total revenues in 1996 to $4.8 million, or 13.0% of total revenues in 1997.
This increase was generally attributable to increases in general and
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administrative costs associated with higher business volume, including the
hiring of administrative personnel, the leasing of additional office space,
higher legal and accounting expenses and an increase in the Company's accounts
receivable reserve.
Other Income
Interest Expense. Interest expense consists of interest on debt and equipment
financing less interest earned on cash, short term investments, notes receivable
from officers and the promissory note entered into in connection with the sale
of Telemar. Net interest expense decreased 93.0% from $1.2 million in 1996 to
$82,000 in 1997 primarily as a result of the completion of the Company's initial
public offering of Common Stock in August 1997, the repayment of all of the
Company's outstanding indebtedness with the proceeds of the offering and the
investment of the remaining proceeds in interest bearing securities. Interest
income was $641,000 and interest expense was $723,000 in 1997.
Other
In connection with the sale of Telemar, the Company received a promissory note
from TSI in the principal amount of $650,000 (the "TSI Note") payable in five
equal annual installments commencing October 1997 and which bears interest at
8.0% per annum. At the time of issuance, the Company fully reserved for the TSI
Note because collectibility, based on the start-up nature of TSI operations, was
not ascertainable at the time of sale. This note was paid off in connection with
the aquisition of TSI by the Company in March 1998. The Company had other income
of $100,000 in 1997 due to the receipt of a payment of $100,000 on the
promissory note received in connection with the sale of Telemar, compared with
other income of $92,000 in 1996, which was attributable to a gain on the sale of
Telemar assets.
Provision for Income Taxes. The increase in provision for income taxes is
primarily attributable to an increase in international withholding taxes. At
December 31, 1997, the Company had approximately 8.6 million of U.S. Federal net
operating loss carryforwards of which approximately 3.4 million resulted from
the exercise of nonqualified stock options, and approximately $2.5 million of
state net operating loss carryforwards.
Liquidity and Capital Resources
At December 31, 1998, the Company had $11.6 million in cash and cash
equivalents and $16.5 million in accounts receivable. For the year ended
December 31, 1998, the Company used net cash of $7.5 million from operating
activities. The net cash of $7.5 million used in operations resulted primarily
from the net loss of $20.3 million, offset by the $7.0 million non-cash charge
for acquired product development costs related to the acquisitions of MIS and
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TSI, depreciation and amortization of $1.8 million and an increase of $3.1
million in accounts payable and accrued liabilities and reduced by an increase
of $975,000 in accounts receivable. The fluctuations in operating assets and
liabilities were primarily due to increases in accounts receivable reserves by
approximately $6.5 million in 1998, the timing of orders, collections of
accounts receivable and the payment of accounts payable.
For the year ended December 31, 1998, the Company's primary investing
activities consisted of net proceeds from short term investments of
approximately $16.4, use of $2.3 million for purchases of computer and
office equipment to support the Company's expanding employee base, use of $1.7
million related to a minority equity investment and $1.6 million of cash paid in
connection with the acquisitions of MIS and TSI and related deal costs.
For the year ended December 31, 1998, the Company's primary financing
activities consisted of the exercise of employee stock options which provided
cash proceeds of $665,000.
In March 1999, the Company obtained a commitment from a commercial bank to
provide a $7.5 million senior secured revolving credit facility bearing interest
at a floating rate based on several rate alternatives (the "Credit Facility").
Borrowings will be limited to the lesser of $7.5 million or 80% of eligible
accounts receivable. The Credit Facility will mature two years after the closing
date and will be secured by all of the Company's assets. The Credit Facility
will contain certain affirmative and negative financial covenants. The closing
of the Credit Facility is subject to execution of a definitive credit agreement
and other customary conditions. The Company expects to formalize the Credit
Facility with the bank in April 1999.
The Company anticipates that its current cash and cash equivalents together
with cash provided by operations and borrowings under the Credit Facility will
be sufficient to meet the Company's projected working capital and other cash
requirements for the foreseeable future but there can be no assurance that the
Company will be able to generate sufficient cash to meet its requirements from
these sources. The Company's future operating and capital requirements will
depend on numerous factors, including the collection of accounts receivable, the
level of resources the Company devotes to marketing and sales activities and
internal research and development programs, advances in technology, the
successful development and introduction of new products and any acquisitions or
strategic alliances or investments which the Company may consider. In the event
that the Company were unable to meet its needs for cash from the sources
described above, the Company would need to obtain equity or debt financing or
reduce its operating expenses and capital expenditures. There can be no
assurance that equity or debt financing would be available to the Company on
favorable terms.
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Year 2000 Compliance
The following Year 2000 discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the Year 2000 discussion, the words "believe",
"expects", "estimates" and other similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it and its significant
distributors, customers and suppliers will complete the implementation and
compliance phases of the Year 2000 Plan, as well as its Year 2000 contingency
plans; its estimated costs related to the Year 2000 Plan; and the Company's
belief that its internal systems and equipment will be Year 2000 compliant in a
timely manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results. Factors that may cause these differences include, but are
not limited to, the availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date sensitive
lines of code or to replace embedded chips in affected systems or equipment;
unanticipated delays or expenses related to remediation; and the actions of
independent third-parties with respect to Year 2000 problems.
The statements in the following section include "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
The Year 2000 problem refers to the inability of software to process date
information later than December 31, 1999. Date codes in many software programs
are abbreviated to allow only two digits for the year. Software with date-
sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. When that happens, some
software will not work at all and other software will suffer critical
calculation and other processing errors. Hardware and other products with
embedded chips may also experience problems.
The Company believes that its current version of EDGE, TELEMAR and MSM
products are Year 2000 compliant. In addition, the Company tracks the version of
its products that each of its customers uses. The Company has sent a letter to
all customers advising them of the availability of its Year 2000 compliant
products.
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The Company believes that all current versions of its products will meet
basic functionality requirements, however, because all specific customer
situations and uses cannot be anticipated, IMA may be faced with warranty and
other claims as a result of the Year 2000 transition. The impact of such
customer claims could have a material adverse impact on the Company's results of
operations and financial condition.
Some customers may have written applications using the Company's products.
The Company, in its consulting capacity, also has written such applications. The
Company believes that most applications written by it are Year 2000 compliant.
The Company does not know, and has no meaningful way of determining, whether the
applications written by customers are Year 2000 compliant.
The Company is in the process of completing a comprehensive evaluation of its
internal systems and equipment that addresses both information technology
systems ("IT") (i.e. business systems and the software development environment)
and non-IT systems, (i.e. elevators, building security and HVAC systems)
including hardware, software and firmware. The Company has begun to upgrade
certain critical systems to meet with Year 2000 requirements. The Company will
be conducting transaction testing in the first half of 1999 to evaluate
compliance of the overall system infrastructure. The Company will consider the
need for remediation plans as it continues to assess the Year 2000 risk. The
Company expects to complete its evaluation by the end of the second quarter of
1999. The Company's inability to remediate non-compliant systems in its
infrastructure could have a material adverse affect on the Company's results of
operations and financial condition.
The costs incurred to date related to upgrading the Company's products to be
Year 2000 compliant were approximately $200,000 and have been funded from
operating cash flows and have not been separately accounted for partly because
the responsibilities and costs were distributed throughout the organization and
represent a small percentage of total operating costs. Expenses associated with
evaluation of the Company's internal systems for Year 2000 problems have been
approximately $100,000. The Company originally had expected to complete its
evaluation by the end of the first quarter of 1999. Staff reorganization and
relocation of the Company's Irvine office, has caused the Company to revise
this estimate. The Company now expects to complete an estimate of the
anticipated cost of upgrading internal systems by the end of the second quarter
of 1999. While the Company expects to incur additional expenses to complete
these upgrades, it does not believe the implementation of the Year 2000 programs
discussed above will have a material adverse impact on the Company's financial
condition or results of operations. The Company believes that it has sufficient
funds to satisfy costs incurred to date and future Year 2000 compliance costs.
The Company has initiated the development of a comprehensive Year 2000
contingency plan to address situations that may result if the Company is unable
to achieve Year 2000 readiness of its critical systems. The contingency plan is
expected to be completed during the second quarter of 1999.
The Company also is in the process of conducting a review of its critical
suppliers to determine that the suppliers' operations and the products and
services they provide are Year 2000 compliant or that an alternative source for
this critical product or service is available. The Company originally estimated
that this review would be completed in the first quarter of 1999. Slower than
expected responses from its critical suppliers, however, has caused the Company
to revise this estimate. The Company now believes the review of its suppliers
will be complete during the second quarter of 1999. The Company has no practical
means to verify the information provided by these independent third parties and
is still pursuing those key distributors and vendors who may not yet have
responded. Based upon this assessment and where practicable, the Company will
attempt to mitigate its risks with respect to any suppliers that may not meet
the requirements, including seeking alternative suppliers. However, there can be
no assurance that the Company will not experience disruptions in
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its ability to conduct business because of Year 2000 problems experienced by the
Company's distributors or vendors, such problems remain a possibility and could
have an adverse impact on the Company's results of operations and financial
condition.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and the Company is aware of such lawsuits against other
software vendors. Because of the unprecedented nature of such litigation, it is
uncertain whether, or to what extent, the Company may be affected. However, at
this time the Company believes that the existence of earlier versions of its
products that are not Year 2000 compliant is not likely to have a material
adverse effect on the Company or its operations. To the extent that its key
distributors or vendors experience problems relative to achieving Year 2000
compliance, the Company could suffer unanticipated revenue losses.
In addition, the Company does not currently have meaningful information
concerning the Year 2000 compliance status of its customers. As is the case
with other software companies, if significant numbers of the Company's current
or future customers fail to achieve Year 2000 compliance it could have a
material adverse effect on the Company.
Factors That May Affect Future Results
References in this section to the "Company," "Information Management
Associates, Inc.," "IMA," "we," "us," and "our" refer to Information Management
Associates, Inc.
Statements in this Form 10-K which express "belief", "anticipation" or
"expectation", as well as other statements which are not historical fact, and
statements as to product compatibility, design, features, functionality and
performance insofar as they may apply prospectively, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and the Company's actual results could differ materially from those
expressed in these forward-looking statements as a result of numerous factors,
including those set forth below, and elsewhere in this Form 10-K.
History of Operating Losses; Uncertainty of Future Operating Results. We
incurred significant net operating losses in each of 1992, 1993, 1994, 1995 and
1998. As of December 31, 1998, we had an accumulated deficit of $34.3 million.
Given our operating history, we cannot predict our future operating results with
any certainty. You should not consider our recent revenue growth as indicative
of future revenue growth or operating results. We cannot assure you that our
business strategies will be successful, nor can we assure you that we will
achieve or sustain profitability on a quarterly or annual basis.
Fluctuations in Quarterly Performance. Our quarterly operating results
have varied significantly in the past and may continue to do so depending on
several factors, many of which are beyond our control. These factors include,
among others:
. our ability to develop, introduce and market new and enhanced versions
. of our products on a timely basis;
. demand for our products;
. the lengthy sales cycle for full implementation of our products;
. the size, timing and contractual terms of significant orders;
. the timing and significance of product enhancements and new product
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announcements by us or our competitors;
. changes in our business strategies;
. the budgeting cycles of our potential customers;
. customer order deferrals in anticipation of enhancements or new
products;
changes in the mix of products and services we sell;
. changes in the amount of our revenue attributable to domestic and
international sales;
. changes in foreign currency exchange rates;
. product and price competition;
. cancellations or non-renewals of licenses or maintenance agreements;
investments to develop marketing and distribution channels; and
. changes in the level of our operating expenses.
To achieve our quarterly revenue objectives, we depend upon obtaining orders in
that quarter for delivery in that quarter. The timing of our revenue recognition
is affected by the amount of contracts executed and delivered, whether the
contract contains post delivery obligations and when our customers accept the
product. We derive a significant portion of our revenues in any quarter from
non-recurring, large license fees paid to us by a relatively small number of
customers. We expect this trend to continue for the foreseeable future.
Therefore, if a customer defers, cancels or fails to honor its contractual
obligations, our operating results could be materially adversely affected in a
given quarter. On the other hand, significant sales occurring earlier than
expected may adversely affect subsequent quarters. In addition, we have
experienced and expect to continue to experience stronger demand during the
quarters ending in June and December than during the quarters ending in March
and September. We receive a substantial portion of our orders in the last months
or weeks of any given quarter.
Because of the factors stated above, we are not able to predict our
quarterly revenues and operating results with any significant degree of
accuracy. If revenue levels fall below expectations, the shortfall would likely
materially adversely affect our business, operating results and financial
condition. As a result, we believe that you should not rely on period-to-period
comparisons of our results of operations as meaningful indicators of future
performance. We cannot assure you that we will be able to achieve or sustain
profitability on a quarterly or annual basis. We expect that in some future
quarter or quarters our total revenues or operating results will not meet the
expectations of public market analysts and investors. Our failure to meet
expectations or adverse conditions prevailing or appearing to prevail generally
or with respect to our business will likely materially adversely affect our
Common Stock price.
Ability to Integrate Acquisitions. We completed the acquisitions of
substantially all of the assets of Marketing Information Systems, Inc. ("MIS")
and Telemar Software International, LLC ("TSI") on March 30, 1998 for an
aggregate purchase price of $8.6 million. Each has product lines that focused
on the IBM AS/400 market, a platform to which IMA's flagship product EDGE has
only recently been introduced. Failure to successfully integrate the acquired
product lines, and the employees, distributors, and customers of the acquired
businesses could have a material adverse effect on our business, operating
results and financial condition.
Product Concentration. Although we now receive some revenues from MIS and
TSI products, licensing of EDGE and the provision of professional consulting,
technical support and maintenance services relating to EDGE account for
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substantially all of our revenues. We do not expect this to change in the
foreseeable future. Accordingly, factors adversely affecting the pricing of or
demand for EDGE products and services, such as competition or technological
changes, could have a material adverse effect on our business, operating results
and financial condition. Our future financial performance will depend, in
significant part, on the continued market acceptance of our EDGE products
including its new and enhanced versions. We cannot assure you that we will
continue to successfully develop and market EDGE.
Lengthy Sales and Implementation Cycles; Post-Delivery Obligations. The
following factors over which we may have little or no control may significantly
delay our sales cycle:
. significant commitment of customer resources for licensing and
implementing our products;
. significant level of education required by prospective customers
regarding the use of our products;
. lengthy customer approval process typically associated with
significant capital expenditures; and
. implementation of our products generally extends for several months
and for larger, more complex implementations, multiple quarters.
We recognize licensing fees upon delivery of the product if:
. we have no significant post-delivery obligations;
. our customer has no acceptance conditions; and
we believe that we can collect the resulting receivable.
If any of the above conditions do not exist, we will defer the revenue until all
of the conditions are satisfied.
Previously, when we have provided consulting services to implement certain
larger projects, some customers have not honored their obligations by delaying
payments of a portion of license fees until we completed implementation or
disputing the consulting fees charged for implementation. We may experience
delays, cancellations or disputes in the future. If these occur, they could
have a material adverse effect on our business, operating results and financial
condition. They could also cause our quarterly operating results to vary
significantly.
Dependence on Proprietary Technology. Our success and ability to compete
depends in part upon proprietary technology. We rely primarily on a combination
of copyright and trademark laws, trade secrets, nondisclosure agreements and
technical measures to protect our proprietary rights. We typically enter into
confidentiality or license agreements with our employees, distributors, clients
and potential clients and limit access to and distribution of our software,
documentation and other proprietary information. We cannot assure you that
these steps will adequately deter misappropriation or independent third-party
development of our technology. Also, the laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the United States.
We have placed, and may continue to place, our source code in escrow for
the benefit of a small number of our customers. The escrow agreements permit
these customers to use the source code on a limited, non-exclusive basis if:
(i) we initiate bankruptcy proceedings or bankruptcy proceedings are initiated
against us; (ii) we cease to do business; or (iii) we fail to meet our support
obligations. In addition, we use third-party contractors for selected product
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development projects. The escrow of source code and the use of a third-party
contractor may increase the possibility of misappropriation by third parties.
As the number of products and competitors in our industry segment grows and
the functionality of products in different segments overlaps, we expect that
software product developers increasingly will be subject to infringement claims.
The use of patents to protect software has increased. We believe that our
products and technology do not infringe on any existing proprietary rights.
Nevertheless, we cannot assure you that third parties will not assert successful
infringement claims. The following could have a material adverse effect upon
our business, operating results and financial condition:
. any infringement claim against us, even if unfounded, resulting in
diversion of our time and resources, costly litigation and product
shipment delays;
. any infringement claim that results in the necessity that we enter
into a royalty or licensing agreements which may not be available on
terms favorable to us;
. any infringement claim resolved against us;
. litigation to protect our trade secrets or other intellectual property
rights or to determine the validity and scope of the proprietary
rights of others resulting in substantial costs and diversion of
resources.
Dependence on Indirect Marketing and Distribution Channels; Potential
Conflicts. In addition to our own marketing efforts, we maintain relationships
with consulting and systems integration companies to increase our domestic and
international visibility. In addition to our direct sales force, we distribute
our products domestically and internationally through remarketers and
distributors. We do not maintain exclusive relationships with any of the
consultants, systems integration companies, remarketers or distributors. They
are not under our direct control. They have no minimum purchase obligations and
they may terminate their relationship with us at any time without cause. In
addition, they are free to co-market and distribute potentially competitive
products. Accordingly, we must compete for the focus and sales efforts of these
third party entities. Also, selling through indirect channels may limit our
contacts with our customers, hindering our ability to accurately forecast sales
and revenue, determine contract terms, evaluate customer credit, evaluate
customer satisfaction and recognize emerging customer needs. We cannot assure
you that co-marketers, remarketers and distributors will continue successfully
to distribute or recommend the Company's products. We may not continue to
succeed in increasing the use of these indirect channels profitably. Also, one
or more of these companies may begin to market products in competition with us,
which may adversely affect our business, operating results and financial
condition.
Our strategy of marketing our products directly to end-users and indirectly
through remarketers and distributors may result in conflicts between our direct
sales efforts and third party indirect sales efforts; and conflicts between and
among some of our resellers targeting the same customers. These conflicts could
materially adversely affect our relationships with existing remarketers and
distributors and may adversely affect our ability to attract new remarketers and
distributors.
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Need to Expand Marketing and Distribution Channels. As part of our
international strategy, we intend to increase our use of remarketers and
distributors and to expand our existing co-marketing relationships and
establish new relationships with other consulting and systems integration
companies. Also, we seek to expand our international direct sales force
to take advantage of international growth opportunities. Our ability to
achieve revenue growth depends on successful implementation of this
strategy. We have experienced, and continue to experience, difficulty in
recruiting and retaining qualified personnel. We cannot assure you that we will
successfully expand our direct or indirect sales force. Even if we are
successful, we cannot assure you that such sales force expansion will result in
increased revenues. Failure to expand our sales force could materially and
adversely affect our business, operating results and financial condition.
Emerging Markets for Call Center Customer Interaction Software; Dependence
on Increased Use of Products by Existing Customers. The market for call center
customer interaction software is relatively new. It is characterized by:
. ongoing technological developments;
. frequent new product announcements and introductions;
evolving industry standards; and
. changing customer requirements.
Our future financial performance depends in large part on continued growth in
the number of organizations adopting call center customer interaction software
products on an enterprise-wide basis and on the number of applications and
software components developed for such use. We cannot assure you that the call
center customer interaction software market will continue to grow. Failure of
this market to grow, or market growth slower than our current expectations could
materially adversely affect our business, operating results and financial
condition.
Also, some of our larger customers have licensed our software on an
incremental basis and we cannot assure you that these customers will expand
their use of our software on an enterprise-wide basis or license new or enhanced
software products as we introduce them to the market. If our customers do not
deploy our software on an enterprise-wide basis because the software has not met
their expectations or for other reasons, our business, operating results and
financial condition could be materially and adversely affected.
Rapid Technological Change. Any of the following factors which are present
in the call center customer interaction software market could render our
existing products obsolete and unmarketable:
. rapid technological change;
. frequent introductions of new products;
. changes in customer demands; and
. evolving industry standards.
These factors could rapidly diminish our position in existing and future
markets. We expect to make substantial investments from time to time in our
product development and testing although we cannot assure you that we will have
sufficient resources to make the necessary investments.
36
<PAGE>
Our customers have adopted a wide variety of hardware, software, database
and networking platforms. To gain broad market acceptance, we must continue to
support and maintain our products on a variety of such platforms and develop and
introduce enhancements to our existing products and new products on pace with
technological developments, changing customer requirements and evolving industry
standards. Our future success depends on our ability to address the
increasingly sophisticated needs of our customers. Our success may also depend,
in part, on our ability to introduce products that are compatible with the
Internet, and on the broad acceptance of the Internet as a viable customer
interaction channel. We cannot assure you that the Internet will become a
viable customer interaction channel or that the demand for Internet-related
products and services will increase in the future.
We also cannot assure you that we will be successful in developing and
marketing enhancements to our products that respond to technological
developments, changing customer requirements or evolving industry standards. We
may experience difficulties that could delay or prevent the successful
development, introduction and sale of such enhancements. Our enhancements may
not adequately meet the requirements of the marketplace and achieve any
significant degree of market acceptance. Product enhancement and new product
delays or failure to achieve market acceptance when released could materially
and adversely affect our business, operating results or financial condition. In
addition, the introduction or announcement of new product offerings or
enhancements by us, our competitors or major hardware, systems or software
vendors may cause customers to defer or forego licensing of our products, which
could have a material adverse effect on our business, operating results and
financial condition.
We also cannot assure you that we will be successful in the development and
implementation of any of our new software products, specifically our
BuyingEDGE.com product for purchasing goods and services over the Internet. Our
strategy regarding the BuyingEDGE.com system will rely on several sources of
revenue. We can not assure you that the BuyingEDGE.com product will achieve any
degree of market acceptance among consumers or manufacturers and service
providers. Internet purchasing is a rapidly evolving area of commerce with
rapid technological changes and the frequent introduction of new products and
services. These technological changes and increased competition in the Internet
commerce area could render the BuyingEDGE.com product obsolete and rapidly
diminish the Company's ability to establish a position in existing or future
markets. We can not assure you that competitors will not develop products
comparable or superior to ours or adapt more quickly than we do to new
technologies, evolving industry trends or the changing needs of consumers.
Though the Company intends to make substantial investments form time to time in
the development and testing of BuyingEDGE.com, we cannot assure you that we will
have sufficient resources to make the necessary investments. We may experience
difficulties that could delay or prevent the successful development,
introduction, and sale of the BuyingEDGE.com product. We can not assure you
that BuyingEDGE.com will adequately meet the requirements of the marketplace and
achieve any degree of market acceptance. BuyingEDGE.com product delays, the
failure to achieve market acceptance could materially and adversely affect our
business, operating results or financial condition.
We depend upon the products of other software vendors, including certain
system software vendors, such as Microsoft Corporation, and relational database
software vendors to remain competitive and respond to technological change.
37
<PAGE>
Design defects in such products or unexpected delays in their introduction,
could materially and adversely affect our business, operating results and
financial condition.
Management of Growth. We recently have experienced rapid growth. This
growth could place a significant strain on our management and other resources.
We anticipate that the growth of our company, if any, will require us to
recruit, hire, train and retain a substantial number of new and highly skilled
product development, managerial, finance, sales and marketing and support
personnel. The market for such personnel is intensely competitive and we expect
that such competition will continue for the foreseeable future. We cannot assure
you that we will be able to hire or retain such personnel.
Our ability to compete effectively and to manage future growth, if any,
depends on our ability to continue to implement and improve operational,
financial and management information systems on a timely basis and to expand,
train, motivate and manage our work force. We cannot assure you of the future
adequacy of our personnel, systems, procedures and controls. Inability to
effectively manage growth and the quality of our products could materially and
adversely affect our business, operating results and financial condition.
Competition. The market for telemarketing, telesales and customer service
software is:
. intensely competitive;
. rapidly evolving; and
. highly sensitive to new product introductions or enhancements and
marketing efforts by industry participants.
Our competitors range from internal information systems departments to packaged
software application vendors. We believe that as the United States and
international software markets continue to grow, a number of new vendors will
enter the market and existing competitors and new market entrants will attempt
to develop applications targeting additional markets. Our segment of the
software industry has experienced consolidation as certain of our larger
competitors have recently acquired other smaller competitors. In addition,
competitors have established and may in the future establish cooperative
relationships or alliances that may increase their ability to provide superior
software solutions or services.
Increased competition resulting from new entrants, consolidation of the
call center customer interaction software industry, cooperative relationships or
alliances could result in new or stronger competitors, price reductions, reduced
operating income or loss of market share, any of which could materially
adversely affect our business, operating results or financial condition. Many of
our current and potential competitors have significantly greater financial,
technical, marketing, service, support and other resources. They generate higher
revenues and have greater name recognition. We cannot assure you that our
competitors will not develop products comparable or superior to ours or adapt
more quickly than we do to new technologies, evolving industry trends or
changing client requirements. We cannot assure you that we will compete
effectively against competitors or that competitive pressures will not
materially and adversely affect our business, operating results or financial
condition.
38
<PAGE>
Dependence on Key Personnel. Our business involves the development,
marketing and installation of complex software products and the delivery of
professional services. Our success will depend in large part upon our ability
to attract, retain and motivate highly skilled employees. The market for such
employees is intense and we expect that such competition will continue for the
foreseeable future. We cannot assure you that we will hire or retain such
personnel. Failure to hire and retain sufficient numbers of highly skilled
employees could materially and adversely affect our business, operating results
and financial condition. In addition, the loss of Albert R. Subbloie, Jr., the
President and Chief Executive Officer, or Gary R. Martino, Chairman of the Board
and Chief Financial Officer, or some of our other key personnel could have a
material adverse effect on our business, operating results or financial
condition, including our ability to attract employees and secure and complete
engagements. We maintain key-man life insurance policies with respect to
certain of our executive officers, including Mr. Subbloie and Mr. Martino.
Risk of Product Defects. Software products, particularly new versions,
frequently contain errors, especially when first introduced. We conduct
extensive product testing during product development. Nevertheless, we have at
times delayed commercial release of software until we corrected problems. In
some cases, we have provided enhancements to correct errors in released
software. We could, in the future, lose revenues as a result of software errors
or defects. Despite testing by us and by current and potential customers, future
software or releases after commencement of commercial shipments may include
errors, resulting in
. loss or delay of revenue;
. delay in market acceptance;
. diversion of development resources;
. damage to our reputation; or
increased service and warranty costs.
Any of these results could materially and adversely affect our business,
operating results and financial condition.
Risks Associated with International Operations. International operations
account for a significant portion of our total revenues and we intend to
continue and expand our international sales activity. Continuation and expansion
of international operations will require significant management attention and
financial resources and will require us to establish additional foreign
operations and hire additional personnel. We may not be able to maintain or
increase international market demand for our products and failure to do so could
materially and adversely affect our business, operating results or financial
condition.
International Currency Risks. We currently denominate our international
sales in U.S. dollars with respect to sales outside of the United Kingdom,
Europe and Australia, and generally in pounds sterling with respect to sales in
the United Kingdom and Europe. An increase in the value of the U.S. dollar or
pound sterling relative to other currencies could make our products more
expensive and, therefore, potentially less competitive in foreign markets.
Currently, we have not employed currency hedging strategies to reduce this risk
although we may consider employing hedging strategies in the future based on our
assessment of exposure to fluctuations in foreign currency exchange rates. We
cannot assure you that our assessments of exposure to fluctuations in foreign
currency exchange rates will be accurate or that any hedging strategies we may
use in the future will be effective.
39
<PAGE>
International Operation and Collection Risks. The following risk factors
associated with our international business may have a material adverse effect on
our future international sales and, consequently, on our business, operating
results or financial condition:
. potentially longer payment cycles;
. difficulties in collecting international accounts receivable;
. difficulties in enforcement of contractual obligations and
intellectual property rights;
. potentially adverse tax consequences;
. increased costs associated with maintaining international marketing
efforts;
. increased costs of localizing products for foreign markets;
. tariffs, duties and other trade barriers;
. adverse changes in regulatory requirements;
. possible recessionary economies outside of the United States; and
. political and economic instability.
Dependence on Licensed Technology. We license, and expect to license in
the future, technology from other companies for use in and with our products.
Our inability to license these products or other necessary products for use in
or with our products could have a material adverse effect on our business,
operating results or financial condition. In addition, the effective
implementation of our products may depend in the future upon the successful
operation of licensed products as an integrated part of, or in conjunction with,
our products. Any undetected errors in such licensed products could impair the
functionality of our products or otherwise delay or prevent the implementation
of an installation or the introduction of new products, and injure our
reputation, which could have a material adverse effect on our business,
operating results or financial condition.
Increased Use of Third-Party Development Tools. Our EDGE products include
application development tools produced by third parties used to build and modify
our applications. Third-party application development tools may become more
widely used as a result of technological advances or customer requirements.
Wider use of third-party applications could require us to make greater use of
third-party tools in the future. This increased use would require us to enter
into license arrangements with such third parties resulting in higher royalty
payments, a loss of product differentiation and delays. Such effects or our
inability to enter into commercially reasonable licenses could have a material
adverse effect on our business, operating results or financial condition.
Dependence on Growth of Client/Server Computing Environment. We market our
products to customers:
. committed or committing their call center systems to client/server
computing environments; or
. converting legacy systems, in part or in whole, to a client/server
computing environment.
Our success will depend on further growth in the number of organizations
adopting client/server computing environments. We cannot assure you that the
anticipated client/server computing trends will occur or that we will respond
effectively to the evolving requirements of this market. Failure of the
client/server market to grow, or growth at a rate slower than experienced in the
past, could materially and adversely affect our business, operating results or
financial condition.
40
<PAGE>
Industry Concentration. We derive a substantial portion of our revenues
from customers in the teleservices outsourcing, telecommunications and financial
services industries. We intend to further develop our knowledge of the business
processes and requirements of other industries in order to establish additional
market opportunities. We may not successfully do so. Our failure to increase
our customers among a broader base of varied industries, or a downturn in one or
more of the teleservices outsourcing, telecommunications or financial services
industries could have a material adverse effect on our revenues from that
industry or the collectibility of customer obligations from that industry or
other aspects of our business, operating results or financial condition.
Product Liability. The risk of product liability claims is inherent in the
sale and support of products. Our license agreements with our customers
typically contain provisions designed to limit our exposure to potential product
liability claims. The laws of certain jurisdictions, however, may not enforce
the limitation of liability provisions contained in our license agreements. A
party could bring a successful product liability claim against us, which could
result in a material adverse effect on our business, operating results and
financial condition.
Regulatory Environment. Federal, state and foreign law regulates certain
uses of outbound call processing systems. Our systems can be programmed to
operate in compliance with these laws through the use of appropriate calling
lists and calling campaign time parameters. Compliance with these laws,
however, may limit the potential use of our products. In addition,
future legislation further restricting telephone solicitation practices, if
enacted, could adversely affect us.
Year 2000 Risks. Many computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such Year 2000
requirements. Our failure or inability to identify and correct Year 2000
problems in our products, internal information or other systems, software,
hardware or firmware could have a material, adverse effect on our business,
operating results, and financial condition. We are still reviewing the impact
the Year 2000 issue will have on our internal information systems. We plan to
take necessary actions based on the results of such analyses. If costs related
to Year 2000 are material, our business, operating results, and financial
condition could be materially adversely affected.
In certain cases, we have warranted that the use or occurrence of dates on
or after January 1, 2000 will not adversely affect the performance of our
products with respect to four digit date dependent data or the ability to
create, store, process, and output information related to such data. If any of
our licensees experience Year 2000 problems, those licensees could assert claims
for damages. Such claims, whether or not successful, could materially and
adversely affect our business, operating results and financial condition.
In addition, the purchasing patterns of our customers and potential
customers may be affected by Year 2000 issues. Many companies are expending
significant resources to correct their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase software products such as those offered by us. This may adversely
affect on our business, operating results, and financial condition.
41
<PAGE>
In addition to the "Factors That May Affect Future Results" mentioned above,
the Company's business entails a variety of additional risks, which are set
forth in the Company's filings with the Securities and Exchange Commission.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency risk. The Company's exposure to foreign currency risks has
been relatively low because of the way the Company conducts its international
business. The primary reason for the low level of exposure to foreign currency
fluctuations is that the Company generally requires payment from its
international customers outside the United Kingdom, Europe and Australia in U.S.
dollars. In the United Kingdom and Europe, the Company generally requires
payment from its international customers in pounds sterling. In addition, the
Company has no debt denominated in any foreign currency although it has entered
into equipment and real estate leases that are payable in local currency. For
the year ended December 31, 1998, the Company derived 36% of its revenues from
international operations. Approximately 73% of international revenues were from
transactions denominated in pounds sterling with substantially all of the
remaining percentage denominated in U.S. dollars. Gains and losses on
translation into U.S. dollars of foreign currency are recorded as a separate
component of shareholders' equity and do not affect results of operations.
Because of the historically low level of currency risks, the Company has not
previously engaged in foreign currency hedging programs. However, as revenues
from international operations have grown, the Company has been monitoring its
foreign exchange exposures to assess risks of fluctuations in foreign currency
exchange rates. As part of our monitoring of currency risks, the Company will
consider using foreign currency option contracts and forward contracts in the
future to hedge a portion of our exposure on anticipated transactions and firm
commitment transactions if we determine that such actions are appropriate and
cost-effective. There can be no assurance that the Company's monitoring of
foreign currency exposures or future hedging activities, if any, will
substantially reduce the impact of fluctuations in currency exchange rates on
its results of operations and financial position.
On January 1, 1999, certain member states of the European Economic Community
fixed their respective currencies to a new currency, the Single European
Currency ("Euro"). On that day the Euro became a functional legal currency
within these countries. During the three years beginning on January 1, 1999,
business in these countries will be conducted both in the existing national
currency, such as the French Franc or the Deutsche Mark, as well as the Euro.
Although we will continue to evaluate the impact of the Euro introduction over
time, based on presently available information we do not presently expect that
introduction and use of the Euro will materially increase our exposure to
foreign currency risks.
Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits and taxable fixed rate obligations of
corporations. These investments are denominated in U.S. dollars. Cash balances
in foreign currencies overseas are operating balances and are invested in
short-term time deposits of the local operating bank.
Interest income on the Company's investments is carried in "Other income
(expense)." The Company accounts for its investment instruments in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the
cash equivalents and short-term investments are treated as available-for-sale
under SFAS 115.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, the Company's future investment income may fall short of expectations
due to changes in interest rates or the Company may suffer losses in principal
if forced to sell securities which have seen a decline in market value due to
changes in interest rates. The Company's investment securities are held for
purposes other than trading. The investment securities had maturities of less
than one year. The weighted-average interest rate on investment securities at
December 31, 1998 was 4.5%. The fair value of securities held at December 31,
1998 was $3.1 million.
42
<PAGE>
PART II: OTHER INFORMATION
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
- --------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Consolidated Balance Sheets as of December 31, 1997
and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Shareholders of
Information Management Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Information
Management Associates, Inc. (a Connecticut corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Information
Management Associates, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Hartford, Connecticut
March 3, 1999
F-2
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share amounts)
1997 1998
-------- -------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4,816 $ 8,558
Short-term investments 19,455 3,091
Accounts receivable, net of allowance
for doubtful accounts of $630 in
1997 and $3,408 in 1998 14,815 16,487
Other current assets 1,420 1,985
------- -------
Total current assets 40,506 30,121
EQUIPMENT, net 2,279 3,134
NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES 24 -
OTHER ASSETS, net 1,113 3,983
------- -------
$43,922 $37,238
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of obligations
under capital leases $ 232 $ 73
Accounts payable 1,738 6,985
Accrued compensation 1,597 2,025
Other accrued liabilities 1,040 2,402
Deferred revenues 1,686 4,341
-------- --------
Total current liabilities 6,293 15,826
-------- --------
OBLIGATIONS UNDER CAPITAL LEASES, less
current maturities included above 136 58
-------- --------
OTHER LONG-TERM LIABILITIES 463 432
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 20,000,000
authorized shares, 9,236,035 and 9,697,088
shares issued and outstanding at December 31,
1997 and 1998 51,102 54,691
Shares to be issued in connection with
acquisition - 564
Cumulative translation adjustment (101) (63)
Accumulated deficit (13,971) (34,270)
-------- --------
Total shareholders' equity 37,030 20,922
-------- --------
$ 43,922 $ 37,238
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(in thousands, except per share amounts)
1996 1997 1998
-------- -------- ---------
Revenues:
License fees $13,022 $19,295 $ 24,903
Services and maintenance 13,255 17,377 24,190
------- ------- --------
Total revenues 26,277 36,672 49,093
------- ------- --------
Cost of revenues:
Cost of license fees 709 304 356
Cost of services and maintenance 7,191 9,428 17,420
------- ------- --------
Total cost of revenues 7,900 9,732 17,776
------- ------- --------
Gross profit 18,377 26,940 31,317
------- ------- --------
Operating expenses:
Sales and marketing 8,055 12,580 21,419
Product development 6,382 6,190 9,266
General and administrative 3,878 4,784 12,120
Acquired product development costs - - 6,988
One time settlement charges - - 2,163
------- ------- --------
Total operating expenses 18,315 23,554 51,956
------- ------- --------
Operating income (loss) 62 3,386 (20,639)
------- ------- --------
Other income (expense):
Interest expense (1,219) (723) (35)
Interest income 48 641 839
Other 92 100 6
------- ------- --------
Total other income (expense) (1,079) 18 810
------- ------- --------
Income (loss) before provision for
income taxes (1,017) 3,404 (19,829)
Provision for income taxes 30 231 470
------- ------- --------
Net income (loss) (1,047) 3,173 (20,299)
Accretion of preferred stock dividends (452) (452) -
Increase in fair market value of
redeemable common stock warrants (385) - -
------- ------- --------
Net income (loss) available to common
shareholders' $(1,884) $ 2,721 $(20,299)
======= ======= ========
Net income (loss) per share:
Basic $(.44) $.43 $ (2.12)
======= ======= ========
Diluted $(.44) $.38 $ (2.12)
======= ======= ========
Weighted average shares used in computing net
income (loss) per share:
Basic 4,258 6,371 9,588
======= ======= ========
Diluted 4,258 7,714 9,588
======= ======= ========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,047) $ 3,173 $(20,299)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization 1,155 1,404 1,784
Charge for acquired product development costs - - 6,988
Gain on sale of product line (92) - -
Amortization of restricted stock awards 10 10 -
Changes in operating assets and liabilities:
Accounts receivable (3,001) (4,342) (975)
Other current assets 143 (1,188) 564
Notes receivable from officers and employees (378) 548 -
Other assets, net (502) (492) 956
Accounts payable (480) (570) 5,247
Accrued compensation 109 431 428
Other accrued liabilities 973 (905) (2,592)
Deferred revenues (128) (19) 407
Other long-term liabilities (52) (57) (31)
------- --------- --------
Net Cash Used in Operations (3,290) (2,007) (7,523)
------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (1,001) (1,419) (2,323)
Cash paid in connection with acquisition - - (1,632)
and related deal costs
Minority equity investment - - (1,715)
Proceeds from short-term investing maturities - 352,106 83,784
Purchases of short-term investments - (371,515) (67,420)
------- --------- --------
Net Cash Provided by (Used in)
Investing Activities (1,001) (20,828) 10,694
------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of
issuance costs $4,049 231 32,350 -
Proceeds from exercise of stock options - 151 665
Proceeds from employee stock purchase plan - 48 105
Net proceeds from sale of preferred stock 4,228 - -
Repayment of bank term loan - (2,500) -
Net proceeds from (repayment of) bank line
of credit 1,860 (4,860) -
Repayment of obligations under capital leases (539) (269) (237)
Proceeds from sale leaseback 509 - -
Repayment of subordinated note payable to
shareholder (500) (250) -
------- --------- --------
Net Cash Provided by Financing Activities 5,789 24,670 533
------- --------- --------
Effect of exchange rate changes 32 (92) 38
------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,530 1,743 3,742
CASH AND CASH EQUIVALENTS, beginning of period 1,543 3,073 4,816
------- --------- --------
CASH AND CASH EQUIVALENTS, end of period $ 3,073 $ 4,816 $ 8,558
======= ========= ========
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 877 $ 671 $ 24
Cash paid during the period for income taxes 16 90 134
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of Series A preferred stock in
lieu of dividends 394 244 -
Accretion of Series B preferred stock in
lieu of dividends 58 208 -
Increase in fair market value of redeemable
common stock warrants 385 - -
Issuance of common stock in connection with - - 3,383
acquisitions
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
--------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Cumulative
Common Stock Translation Accumulated Comprehensive
Shares Amount Adjustment Deficit Total Income
------------ ------ ---------- ------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 4,255,195 $ 5,554 $ (41) $(14,808) $(9,295) $ --
Sale of common stock 32,400 231 - - 231
Exercise of common stock options 5,782 - - - -
Amortization of restricted stock
awards - 10 - - 10
Change in fair market value of
redeemable common stock warrants - - - (385) (385)
Accretion of Series A preferred
stock dividends - - - (394) (394)
Accretion of Series B preferred
stock dividends - - - (58) (58)
Equity adjustment from foreign
currency translation - - 32 - 32 32
Net loss - - - (1,047) (1,047) (1,047)
--------
Comprehensive loss - - - - - $ (1,015)
---------- ------- -------- --------- --------- ========
Balance, December 31, 1996 4,293,377 5,795 (9) (16,692) (10,906)
Sale of common stock, net of
issuance costs of $4,049 2,800,000 32,350 - - 32,350
Exercise of common stock options 187,957 151 - - 151
Employee stock purchase plan 5,841 48 - - 48
Amortization of restricted stock
awards - 10 - - 10
Conversion of redeemable common
stock warrants 416,699 2,865 - - 2,865
Conversion of Series A preferred
stock 920,433 5,389 - - 5,389
Conversion of Series B preferred
stock 611,728 4,494 - - 4,494
Accretion of Series A preferred
stock dividends - - - (244) (244)
Accretion of Series B preferred
stock dividends - - - (208) (208)
Equity adjustment from foreign
currency translation - - (92) - (92) (92)
Net income - - - 3,173 3,173 3,173
--------
Comprehensive income - - - - - $ 3,081
---------- ------- -------- --------- --------- ========
Balance, December 31, 1997 9,236,035 51,102 (101) (13,971) 37,030
Exercise of common stock options 185,295 665 - - 665
Employee stock purchase plan 20,917 105 - - 105
Issuance of Common Stock in
connection with acquisitions, 254,841 3,383 - - 3,383
including 42,508 shares valued
at $564 to be issued
Equity adjustment from foreign
currency translation - - 38 - 38 38
Net loss - - - (20,299) (20,299) (20,299)
--------
Comprehensive loss - - - - - $(20,261)
---------- ------- -------- --------- --------- ========
Balance, December 31, 1998 9,697,088 $55,255 $ (63) $(34,270) $ 20,922
========== ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
INFORMATION MANAGEMENT ASSOCIATES, INC. AND SUBSIDIARIES
- --------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. Nature of Operations:
--------------------
Information Management Associates, Inc. and subsidiaries (collectively, the
Company) are primarily engaged in the development, marketing and support of
software that automates customer interaction including telemarketing,
telesales, contact management, sales, marketing and customer service
functions of business organizations in a variety of industries. The Company
markets its software products in North and South America as well as Western
Europe, Asia, Australia and New Zealand.
In July 1997, the Company completed its initial public offering of its
common stock which provided proceeds of $32.4 million, net of related
underwriting discounts and expenses (see Note 5).
The Company incurred a net loss of approximately $20,300,000 for the year
ended December 31, 1998, and has an accumulated deficit of approximately
$34,270,000 as of December 31, 1998. The market for telemarketing, telesales
and customer service software is intensely competitive, rapidly evolving and
highly sensitive to new product introductions or enhancements and marketing
efforts by industry participants. The Company competes with a large number
of competitors ranging from internal information systems departments to
packaged software application vendors. Future operating results will depend
on many factors, including demand for the Company's products, the level of
product competition, competitor pricing, the size and timing of significant
orders, changes in pricing policies by the Company or its competitors, the
ability of the Company to develop, introduce and market new products on a
timely basis and management's ability to acheive profitable operations and
positive cash flow. Management's plans to address these risks include
marketing and sales efforts to increase revenues, focused research and
development investments and strict controls over discretionary expenditures.
In addition, the Company expects to formalize a line of credit agreement
with a bank in April 1999 to provide for additional liquidity (see Note 15).
The accompanying financial statements do not reflect any adjustments
resulting from the risks noted above.
2. Summary of Significant Accounting Policies:
------------------------------------------
Principles of consolidation -
---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Foreign currency transactions -
-----------------------------
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, the Company applies the current rate method to translate the
subsidiaries' financial statements into U.S. dollars. Translation
adjustments are included as a separate component of shareholders' equity in
the accompanying consolidated financial statements.
Cash and cash equivalents -
-------------------------
F-7
<PAGE>
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. As of December 31, 1997 and
1998, the Company's cash and cash equivalents are primarily deposited with
two financial institutions.
Short-term investments -
----------------------
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities. This statement requires that securities be
classified as "held to maturity," "available for sale" or "trading", and the
securities in each classification be accounted for at either amortized cost
or fair market value, depending upon their classification. Included in the
accompanying 1997 and 1998 balance sheets are short-term corporate bonds
that have original maturities of less than six months, and which are
recorded at amortized cost plus accrued interest which approximates fair
value.
Equipment -
---------
Equipment is recorded at cost and is depreciated or amortized, using the
straight-line method, over their estimated useful lives of three to seven
years.
At December 31, 1997 and 1998, property and equipment, net, consisted of the
following (in thousands):
December 31,
---------------
1997 1998
------ -------
Equipment $4,890 $ 7,235
Furniture and fixtures 1,676 2,280
Leasehold improvements 595 487
------ -------
7,161 10,002
Less Accumulated depreciation and
amortization 4,882 6,868
------ -------
$2,279 $ 3,134
====== =======
Expenditures for repairs and maintenance are charged against income as
incurred while renewals and betterments are capitalized.
Software development costs -
--------------------------
The Company expenses research and development costs as incurred. The
Company has evaluated the establishment of technological feasibility of its
products in accordance with Statement of Financial Accounting Standards No.
86, Accounting for the Costs of Computer Software To Be Sold, Leased or
Otherwise Marketed. The Company defines technological feasibility as the
completion of a working model. The Company sells products in a market that
is subject to rapid technological change, new product development and
changing customer needs. The Company has concluded that technological
feasibility is not established until the development stage of the product is
nearly complete. The time period during which costs could be capitalized
from the point of reaching technological feasibility until the time of
general product release
F-8
<PAGE>
is very short and, consequently, the amounts that could be capitalized are
not material to the Company's financial position or results of operations.
Therefore, the Company has charged all such costs to research and
development in the period incurred.
Revenue recognition -
-------------------
The Company generates revenues from licensing the rights to use its software
products directly to end users and indirectly through sublicense fees from
resellers. The Company also generates revenues from sales of software
maintenance contracts, and from consulting and training services performed
for customers who license its products. As of January 1, 1998, the Company
adopted Statement of Position 97-2, Software Revenue Recognition (SOP 97-2),
which was effective for transactions that the Company entered into after
December 31, 1997. The adoption of SOP 97-2 did not have a material adverse
affect on the revenues or earnings of the Company for the year ended
December 31, 1998.
Revenues from software license agreements are recognized upon the delivery
of the software to the customer if there are no significant post-delivery
obligations and collection is probable. Service revenues consist of
professional consulting, implementation and training services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of the Company's software products. Revenues from consulting
and training services are recognized as services are performed. The Company
enters into transactions which include both license and service elements.
As such service elements do not include more than minor alteration of the
software, the license fees are recognized upon delivery and the service
revenues are recognized when performed.
Software maintenance fees are recognized ratably over the term of the
maintenance period. If software maintenance fees are provided for in the
license fee or at a discount in a license agreement, a portion of the
license fee equal to the fair market value of these amounts is allocated to
software maintenance revenue based on the value established by independent
sales of such maintenance service to customers.
Cost of license revenues consists primarily of the cost of media on which
the product is delivered and third party software products which are resold
by the Company. Cost of service and maintenance revenues consists primarily
of salaries, benefits, subcontracted consulting costs and allocated overhead
costs related to consulting personnel and the customer support group.
Deferred revenues primarily relate to post-contract customer support which
has been paid by customers prior to the performance of the services.
Earnings per share -
------------------
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128) establishes standards for computing and presenting earnings per
share. Under SFAS 128, earnings per share is computed both under the basic
and dilutive methods. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding; dilutive earnings per share is computed by giving
effect to all dilutive potential common share equivalents that were
outstanding
F-9
<PAGE>
during the period. Dilutive common share equivalents include stock options,
warrants and convertible preferred stock.
The calculation of basic and diluted earnings per share is as follows (in
thousands, except per share amounts):
1996 1997 1998
-------- -------- ---------
Basic earnings (loss) per share:
-------------------------------
Net income (loss) applicable
to common shareholders $(1,884) $2,721 $(20,299)
======= ====== ========
Weighted average shares outstanding 4,258 6,371 9,588
======= ====== ========
Basic earnings (loss) per share $ (.44) $ .43 $ (2.12)
======= ====== ========
Diluted earnings (loss) per shares:
----------------------------------
Net income (loss) $(1,047) $3,173 $(20,299)
Accretion of Series A preferred
stock dividends (394) - -
Accretion of Series B preferred
stock dividends (58) (208) -
Increase in fair market value of
redeemable common stock warrants (385) - -
------- ------ --------
$(1,884) $2,965 $(20,299)
======= ====== ========
Weighted average shares outstanding 4,258 6,371 9,588
Weighted average shares resulting
from exercise of options,
calculated in accordance with the
treasury stock method - 397 -
Weighted average shares resulting
from conversion of redeemable
common stock warrants - 409 -
Weighted average shares resulting
from conversion of
Series A preferred stock - 537 -
------- ------ --------
4,258 7,714 9,588
======= ====== ========
Diluted earnings (loss) per share $ (.44) $ .38 $ (2.12)
======= ====== ========
The 1996 calculation of diluted earnings (loss) per share does not include
the exercise of stock options (see Note 5), the conversion of Series A and
Series B preferred stock (see Note 6) or the conversion of the redeemable
common stock warrants (see Note 7), as the effect on diluted earnings loss
per share would have been antidilutive. The 1997 calculation of diluted
earnings (loss)
F-10
<PAGE>
per share does not include the conversion of the Series B preferred stock as
the effect on diluted earnings (loss) per share would have been
antidilutive. The 1998 calculation of diluted earnings (loss) per share does
not include the exercise of stock options as the effect on diluted earnings
(loss) per share would have been antidilutive.
Comprehensive income -
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130).
SFAS 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
stockholders' equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. The
Company has disclosed comprehensive income for all periods presented in the
accompanying consolidated statements of shareholder's equity.
Income taxes -
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). SFAS 109 requires the Company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and the tax
basis of the assets and liabilities and the net operating loss carryforwards
available for tax reporting purposes, using applicable tax rates for the
years in which the differences are expected to reverse.
Long-lived assets -
-----------------
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
requires a company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. As of December 31, 1998, the Company has
determined that no material adjustment to the carrying value of its long
lived assets is required.
Concentration of credit risk -
----------------------------
Financial instruments which potentially subject the Company to concentration
of credit risk consists principally of cash, short term investments and
trade receivables. As of December 31, 1998, one customer accounted for 11%
of accounts receivables. No one customer accounted for greater than 10% of
accounts receivable as of December 31, 1997.
Use of estimates in the preparation of financial statements -
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
Reclassifications -
-----------------
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements in order for them to be presented in conformity with
the 1998 consolidated financial statements.
Recently Issued Accounting Standards -
------------------------------------
The Company is required to adopt Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) for the year ending December 31, 1999. SFAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because the Company currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
SFAS 133 is not expected to have any material impact on the Company's
financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP
98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is not
expected to have any material impact on The Company's financial condition or
results of operations.
3. Business Acquisitions and Investments:
-------------------------------------
On March 30, 1998, the Company acquired substantially all of the net assets
of Marketing Information Systems, Inc. ("MIS") and Telemar Software
International, LLC ("TSI") ("the Acquisitions"), each of which markets
proprietary call center software focused on the IBM AS/400 user market.
The final adjusted aggregate purchase price of $8,656,000 consisted of
$1,247,000 of cash, 254,841 shares of common stock valued at $3,383,000,
$3,641,000 of net assumed liabilities and $385,000 of transaction costs. Of
the 254,841 shares, 42,508 shares (valued at $564,000) have been placed in
escrow and will be released from escrow no later than March 30, 1999,
subject to the satisfactory collection of accounts receivable and the
absence of any indemnification claims. The value of the common stock was
determined based on the average trading price of the Company's common stock
for the two days prior to, the day of, and the two days after, the date that
the terms of the Acquisitions were announced.
The Acquisitions have been accounted for under the purchase method of
accounting and the aggregate purchase price was allocated to the acquired
F-12
<PAGE>
assets and assumed liabilities based on their estimated fair value. Of the
aggregate purchase price, $6,988,000 was allocated to acquired product
development costs and charged to operations at the date of acquisition,
$1,389,000 was allocated to purchased software and will be amortized over
three years and $279,000 was allocated to goodwill and will be amortized
over seven years.
Of the $6,988,000 allocated to acquired product development costs,
approximately $5,180,000 related to MIS technologies and $1,808,000 related
to TSI technologies. The Company had originally allocated $2,478,000 to
the TSI acquired product development costs based on its initial valuation at
the time of acquisition. However, the Company subsequently adjusted its
initial valuation and reduced the amount allocated to the TSI acquired
product development costs by $670,000 to reflect certain adjustments in the
valuation methodology resulting from a reallocation of a portion of future
cash flows from the TSI acquired product development to the TSI purchased
software. The adjustment to increase the value of the TSI purchased software
and decrease the value of the TSI acquired product development costs was
recorded by the Company during its fiscal quarter ended December 31, 1998.
The MIS technologies were comprised of two separate projects: SalesPath, a
sales force automation tool valued at approximately $4,860,000 and MSM, a
telemarketing tool valued at approximately $320,000. Subsequent to the
acquisition date, the Company determined that the acquired SalesPath
technologies were of no material value. Although the SalesPath technologies
were believed to be valuable at the time of acquisition, subsequently, the
Company discontinued the development of SalesPath as a standalone product
and decided to pursue development of a sales force automation component as
part of its current suite of products.
The operating results of the Acquisitions have been included in the
consolidated statement of operations from the date of acquisition. The
unaudited pro forma results below assume the acquisition occurred on January
1 of each year:
(Unaudited)
-----------
1997 1998
---- ----
Revenues $42,975 $ 50,359
Operating income (loss) $(4,876) $(21,089)
Net Income (loss) $(5,155) $(20,320)
Net income per share:
Basic $ (0.85) $ (2.11)
Diluted $ (0.85) $ (2.11)
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
had the acquisition been consummated at the beginning of fiscal 1997 or 1998
or of future operations of the combined companies under the ownership and
management of the Company.
4. Equity Investment:
-----------------
During 1998, the Company acquired 19.8% of the common stock of Mitsucon
Tecnologia S/A., a Brazilian software and services company that acts as a
distributor for the Company, for a purchase price of approximately
$1,715,000 in cash, including transaction costs. This investment is being
accounted for under the cost method of accounting and is included in other
assets in the accompanying 1998 consolidated balance sheet.
F-13
<PAGE>
5. Shareholders' Equity
--------------------
Common stock -
------------
In connection with its initial public offering (see below), the Company
amended its Certificate of Incorporation to increase the number of
authorized shares of common stock from 5,000,000 to 20,000,000 and to give
effect to a 2.25-for-1 split of the Company's common stock. The
accompanying financial statements have been restated to reflect this stock
split and change in authorized shares.
In July 1997, the Company completed its initial public offering (IPO) of
3,900,000 shares of its common stock, of which 2,800,000 shares were issued
and sold by the Company and 1,100,000 shares were issued and sold by certain
selling shareholders. As a result of this offering, the Company recorded
proceeds of $32,400,000, net of related underwriting discounts and offering
expenses of $4,100,000. In connection with the offering, the Company's
Series A and Series B preferred stock were converted into 1,532,161 shares
of common stock (see Note 6), 416,669 shares of common stock were issued in
connection with the exercise of the redeemable common stock warrants (see
Note 7) and 154,934 stock options were exercised.
Restricted stock awards -
-----------------------
During 1990, the Company granted 160,875 shares of common stock to certain
key employees in consideration of future services to be performed. The
awards required the recipients to be employed or engaged as a consultant by
the Company for seven years in order to retain ownership of the stock. The
related compensation was recognized ratably over the 7-year vesting period.
During each of 1996 and 1997, $10,000 of compensation expense was recognized
in connection with these restricted stock awards. These shares became fully
vested in 1997.
Stock option plans -
------------------
The Company has stock option plans which provide for the issuance of both
incentive and nonqualified stock options. In March 1998, the Company adopted
the 1998 Employee and Consultant Stock Option Plan, (The 1998 Plan) which
provides for the issuance of up to 800,000 shares of common shares for both
incentive and nonqualified stock options. In March 1996, the Company adopted
both the 1996 Employee and Consultant Stock Option Plan, which provides for
the issuance of up to 900,000 shares of common shares for both incentive and
nonqualified stock options, and the 1996 Non-Employee Directors' Stock
Option Plan, which provides for the issuance of up to 135,000 shares of
common stock (collectively, The 1996 Plans). Under the provisions of The
1998 and 1996 Plans, the exercise price of each option shall not be less
than 100% of the fair market value of a share of common stock at the time of
grant, as defined, and the options may vest immediately or over time. The
1998 and 1996 Plans shall be adjusted for future changes in the
capitalization of the Company or as designated by the Board of Directors.
Previous to The 1996 Plans, the Company had established a stock option plan
which provided for the issuance of up to 900,000 shares of common stock for
both incentive and nonqualified stock options. Under the provisions of this
plan, the exercise price of each option was not to be less than 100% of the
fair market value of a share of common stock, as defined, and the options
could vest immediately or over time.
F-14
<PAGE>
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS No. 123), requires the measurement of the fair
value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company
has determined that it will continue to account for stock-based compensation
for employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS 123. The Company has computed the Pro
forma disclosures required under SFAS 123 for options granted in 1996, 1997
and 1998 using the Black-Scholes option pricing model prescribed by SFAS
123. The weighted average assumptions used are as follows:
1996 1997 1998
---- ---- ----
Risk free interest rate 6.15-6.94% 5.77%-6.30% 4.65%-5.56%
Expected dividend yield None None None
Expected lives 8 years 5 years 5 years
Expected volatility 72% 56% 78%
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates of awards under these plans
consistent with the method of SFAS 123, the Company's net income (loss) and
net income (loss) per share would have been as follows (in thousands except
for per share data):
1996 1997 1998
-------- ------ ---------
Net income (loss):
As reported $(1,047) $3,173 $(20,299)
Pro forma $(2,563) $2,215 $(20,745)
Basic net income (loss) per common share:
As reported $ (.44) $ .43 $ (2.12)
Pro forma $ (.80) $ .28 $ (2.16)
Diluted net income (loss) per common share:
As reported $ (.44) $ .38 $ (2.12)
Pro forma $ (.80) $ .23 $ (2.16)
F-15
<PAGE>
A summary of the status of the Company's stock option plans at December 31,
1996, 1997 and 1998 and changes during the years then ended is presented in
the table and narrative below :
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 894,606 $2.97 1,336,349 $4.62 1,509,548 $6.23
Granted 502,875 7.51 409,626 9.56 966,185 7.55
Exercised (5,782) .04 (187,957) 1.13 (185,295) 3.41
Expired (55,350) 4.61 (48,470) 9.81 (682,067) 9.73
--------- --------- ---------
Outstanding, end of year 1,336,349 4.62 1,509,548 6.23 1,608,371 5.87
========= ========= =========
Exercisable, end of year 854,282 3.42 896,335 4.74 739,971 5.22
========= ========= =========
Weighted average fair value
of options granted $5.80 $6.27 $5.90
===== ===== =====
</TABLE>
The following table presents weighted average price and life information for
significant option groups outstanding at December 31, 1998:
<TABLE>
<CAPTION> Weighted-
Average
Remaining Weighted-
Number Contractual Average Number Weighted-
Outstanding Life Exercise Exercisable Average
Range of Exercise Prices at 12/31/98 (Years) Price at 12/31/98 Exercise Price
------------------------ ----------- ------- ----- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
0.04 32,447 2.8 $ 0.04 32,447 $ 0.04
$2.25- 2.94 61,274 3.9 $ 2.62 61,274 $ 2.62
$4.00- 5.75 959,952 6.3 $ 5.17 348,792 $ 4.16
$6.06- 8.00 474,998 7.5 $ 7.41 281,083 $ 7.40
$10.00- 11.75 79,700 8.0 $10.67 16,375 $10.47
--------- -------
1,608,371 739,971
========= =======
</TABLE>
Stock Purchase plan -
-------------------
On March 1, 1997, the Board of Directors approved the adoption of an
employee stock purchase plan designed to allow eligible employees of the
Company to purchase shares of common stock. The Board of Directors has
reserved 450,000 shares of Common Stock to be available under this plan.
The stock purchase plan allows eligible employees the right to purchase
common stock on a quarterly basis at the lower of 85% of the market price at
the beginning or end of each offering period. During 1998 and 1997
employees purchased 20,917 and 5,841 shares of common stock for an aggregate
purchase price of approximately $105,000 and $48,000, respectively.
F-16
<PAGE>
6. Redeemable Convertible Preferred Stock:
--------------------------------------
In March 1995, the Company issued Series A preferred stock, with a stated
value of $1,000, to certain common shareholders for proceeds of
approximately $4,475,000. In November 1996, the Company issued Series B
preferred, with a stated value of $1,000, to certain common shareholders for
proceeds of approximately $4,228,000. In connection with the initial public
offering the Series A and Series B Preferred Stock, plus accrued dividends,
were converted into shares of common stock (see Note 5).
7. Redeemable Common Stock Warrants:
--------------------------------
The Company issued redeemable warrants to purchase 433,372, shares of
commons stock, with exercise prices ranging from $.40 per share to $1.33 per
share. In connection with the initial public offering the redeemable common
stock warrants were converted into 416,699 shares of common stock (see Note
5). The Company accounted for the initial value of the warrants based on
their fair market values at the time the warrants were originally issued.
Subsequent increases in the fair market value of the warrants, as determined
by sales of the Company's common stock, resulted in adjustments to the
carrying value of the warrants through direct charges to accumulated
deficit.
8. Income Taxes:
------------
Income (loss) from operations before provision for income taxes consisted
of (in thousands):
1996 1997 1998
---- ---- ----
U.S. $ (374) $ 4,249 $ (17,481)
International (643) (845) (2,348)
------ ------ --------
$(1,017) $ 3,404 $ (19,829)
====== ====== =======
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 is as follows (in thousands):
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Current:
Foreign $ - $ 199 $ 380
Federal - - -
State 30 32 90
----- ----- -----
$ 30 $ 231 $ 470
===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial reporting and
income
F-17
<PAGE>
tax purposes. A valuation allowance has been recorded for the
deferred tax assets as a result of uncertainties regarding the realization
of the asset.
The approximate tax effects of temporary differences which give rise to
deferred tax assets and liabilities is as follows (in thousands):
December 31,
1996 1997 1998
-------- -------- --------
Current:
Allowance for doubtful accounts $ 178 $ 243 $ 943
Accrued vacation and payroll 57 65 81
Other 216 76 187
Valuation allowance (451) (384) (1,211)
------- ------- -------
$ - $ - $ -
======= ======= =======
Non-current:
Purchased software $ - $ - $ 510
Depreciation 51 71 91
Deferred compensation 23 - -
Rental obligations 154 145 155
Tax effect of net operating losses,
excluding amounts related to
stock option exercises 3,265 2,053 3,608
Valuation allowance (3,493) (2,269) (4,364)
------- ------- -------
$ - $ - $ -
======= ======= =======
The exercise price of non-qualified stock options gives rise to compensation
which is included in the taxable income of the applicable employees and
deducted by the Company for federal and state income tax purposes. As a
result of the exercise of nonqualified stock options during 1997 and 1998,
the Company has related net operating loss carryforwards of $4,051,000 which
can be used to offset future taxable income, if any. When realized, the
related tax benefits of these net operating loss carryforwards will be
credited directly to paid in capital.
F-18
<PAGE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
December 31,
1996 1997 1998
----- ----- -----
Income tax at statutory rate (34)% 34% (34)%
Other (3) 1 1
Net operating loss not benefited 37 - 33
Utilization of net operating loss
carryforwards - (35) -
---- ---- ----
0% 0% 0%
==== ==== ====
At December 31, 1998, the Company had approximately $13,000,000 of U.S.
Federal net operating loss carryforwards, of which approximately $4,051,000
resulted from the exercise of nonqualified stock options (see above), and
approximately $4,000,000 of state net operating loss carryforwards which can
be used, subject to certain limitations, to offset future taxable income, if
any. These U.S. Federal net operating loss carryforwards expire through
2018 and the state net operating loss carryforwards expire through 2003.
In addition, the Company has United Kingdom net operating loss carryforwards
of approximately $3,500,000 which can be utilized to offset future taxable
income and which have no expiration.
The Company's IPO (see Note 5) resulted in a change in ownership, as defined
by Federal income tax laws and regulations. As a result of this change in
ownership, the amount of pre IPO U.S. Federal net operating loss
carryforwards which can be utilized to offset Federal taxable income has an
annual limitation of approximately $4,700,000.
9. Related Party Transactions:
--------------------------
Notes receivable from related parties consists of net advances to
shareholders of $24,000 at December 31, 1997 which were repaid to the
Company during 1998.
10. Commitments and Contingencies:
-----------------------------
Leases -
------
The Company has entered into an agreement to lease its corporate
headquarters. This lease commenced April 1, 1994, and has a term of 10
years. Total aggregate lease payments of approximately $2,176,000 are being
amortized on a straight-line basis over the term of the operating lease,
beginning in April 1994. Accordingly, approximately $28,000 of deferred
rent expense was recorded during 1997 and 1998, respectively, related to
this lease and is included in other accrued liabilities and other long-term
liabilities in the accompanying consolidated balance sheets.
In November 1998, the Company entered into an agreement to lease office
space in Irvine, California, which is to be used as a sales, service and
product development facility. The lease will commence May 1, 1999 and has a
term of 7
F-19
<PAGE>
years. Under the terms of the lease, the Company is committed to
pay aggregate lease payments of approximately $5,860,000. In connection
with entering into this lease, the Company terminated the lease for its
previous California facility. As a result of the termination of such lease,
the Company incurred a $250,000 lease termination cost and $77,000 of
expense associated with the write off of leasehold improvements which are
reflected as a general and administrative expense in the accompanying 1998
consolidated statement of operations. Of the total lease termination charge,
$125,000 was paid by the Company upon execution of the lease and the
remaining $125,000, which will be paid when the Company vacates the current
premises in April 1999.
The Company leases other property and equipment under a number of operating
leases extended for varying periods of time. Operating lease rental expense
approximated $858,000, $1,255,000 and $1,426,000 for the years ended
December 31, 1996, 1997 and 1998, respectively. Minimum future rental
commitments under all operating leases for each of the succeeding five years
subsequent to December 31, 1998, and thereafter, are as follows (in
thousands):
Year Ending
December 31, Amount
------------ ------
1999 $1,893
2000 1,835
2001 1,785
2002 1,835
2003 1,867
Thereafter 2,060
Litigation -
----------
During 1998, the Company entered into a settlement agreement with Rockwell
International Corporation, Rockwell Semiconductor Systems, Inc. and Rockwell
Telecommunications, Inc. (collectively, "Rockwell") resulting from
Rockwell's claims related to the Company's provision of a call center
solution to United States Cellular Corporation ("USCC"). The Company decided
to settle the matter to enable it to resume its relationship with USCC which
included USCC's exercise of its option to license additional software from
the Company during the quarter ended September 30, 1998 for a fee of
$1,750,000. Under the terms of the settlement, the litigation was dismissed
and all claims by Rockwell relating to the Company's relationship with USCC
have been released. IMA agreed to pay Rockwell $1,750,000 in four
installments over one year, of which $950,000 was paid during 1998.
The Company is currently a party to other litigation arising in the normal
course of business. In the opinion of management, no claims are expected to
have a material adverse effect on the Company's operations or financial
position.
11. Employee Benefit Plan:
---------------------
The Company has a voluntary 401(k) plan. All full-time employees who have
completed six months of service are eligible to participate in the plan.
The plan provides for matching contributions and an annual profit sharing
contribution made at the discretion of the Company's Board of Directors.
During 1996, 1997 and 1998, $33,000, $57,000 and $104,000, respectively, of
matching contributions were made to the plan by the Company.
12. Disclosures about Fair Value of Financial Instruments:
-----------------------------------------------------
The carrying value of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable,
F-20
<PAGE>
accounts payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to the
Company for loans with similar terms, the carrying value of its capital
lease obligations also approximates fair value.
13. Business Segment Information:
----------------------------
Effective for the year ended December 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information which requires disclosure
of financial and descriptive information about the Company's reportable
operating segments. The operating segments reported below are the segments
for which separate financial information is available and for which
operating profit (loss) amounts are evaluated regularly by senior management
in deciding how to allocate resources and in assessing performance.
The Company operates two reportable segments: enterprise call center
software solutions and professional services. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately, based on the fundamental differences
in their operations. The enterprise call center software solution provides
software licenses of the Company's software products. The professional
services provides the professional consulting services, implementation,
training and maintenance related to the Company's enterprise call center
software solutions. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. Expenses
related to general corporate functions such as Information Technology,
Finance and Human Resources, and general and administrative costs such as
depreciation, rent and utilities are allocated to the reportable segments
based on relative headcount or relative usage. Income tax provision
(benefit) is allocated to the reportable segments in deriving segment profit
(loss) based on each segment's pro rata income or loss before income tax
provision (benefit). The Company has no intersegment sales and transfers,
and does not allocate assets to the operating segments.
For The Year Ended December 31, 1998
--------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues $ 24,903 $24,190 $ 49,093
Cost of Sales 356 17,420 17,776
Product Development 9,266 - 9,266
Depreciation & Amortization 1,085 911 1,996
Other Income(Expense), net 440 370 810
-------- ------- --------
Segment Loss $(11,915) $(8,384) $(20,299)
======== ======= ========
F-21
<PAGE>
For The Year Ended December 31, 1997
------------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues $ 19,295 $ 17,377 $ 36,672
Cost of Sales 304 9,428 9,732
Product Development 6,190 - 6,190
Depreciation & Amortization 804 602 1,406
Other Income(Expense), net 10 8 18
------- ------- -------
Segment Profit $ 2,745 $ 428 $ 3,173
======= ======= =======
For The Year Ended December 31, 1996
------------------------------------
(in thousands)
Enterprise Call Professional
Center Software Services Consolidated
--------------- ------------ ------------
Revenues $ 13,022 $ 13,255 $ 26,277
Cost of Sales 709 7,191 7,900
Product Development 6,382 - 6,382
Depreciation & Amortization 493 728 1,221
Other Income(Expense), net (435) (644) (1,079)
------- ------- -------
Segment Profit (Loss) $ 670 $ (1,717) $ (1,047)
======= ======= =======
The Company also operates in two major geographic areas: United States and
International. The United States charges the International segment a 50% royalty
on license fees recognized, which approximates the royalty fee charged to
unaffiliated resellers. In addition, certain direct costs incurred by the United
States segment, primarily related to research and development and customer
support costs, are charged to the International segment. The elimination in the
identifiable assets is for intercompany receivables (in thousands).
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATION CONSOLIDATED
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Revenues. $ 39,981 $ 12,695 $ (3,583) $ 49,093
======== ======== ======== ========
Loss from operations (18,263) (2,376) - (20,639)
======== ======== ======== ========
Identifiable assets 38,727 8,153 (9,642) 37,238
======== ======== ======== ========
Year Ended December 31, 1997
Revenues 32,345 6,086 (1,759) 36,672
======== ======== ======== ========
Income (loss) from operations 4,239 (853) - 3,386
======== ======== ======== ========
Identifiable assets 44,774 3,620 (4,472) 43,922
======== ======== ======== ========
Year Ended December 31, 1996
Revenues 22,762 4,680 (1,165) 26,277
======== ======== ======== ========
Income (loss) from operations 802 (740) - 62
======== ======== ======== ========
Identifiable assets 17,483 2,648 (2,850) 17,281
======== ======== ======== ========
</TABLE>
F-22
<PAGE>
The following table summarizes the Company's revenues by major worldwide
regions (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------- --------
United States $19,483 $26,887 $ 31,622
Canada 546 833 394
Mexico and Latin America 277 1,903 2,145
Europe 4,798 5,552 12,692
Pacific Rim 1,173 1,497 2,240
------- ------- --------
$26,277 $36,672 $ 49,093
======= ======= ========
14. Significant Customers:
---------------------
For the years ended December 31, 1996, 1997 and 1998, approximately 8%, 10%
and 12%, respectively, of the Company's revenues resulted from sales to a
single customer.
15. Subsequent Event:
----------------
In March 1999, the Company obtained a commitment letter from a bank for a
line of credit facility (Line of Credit). Borrowing under the Line of
Credit will be limited to the greater of $7,500,000 or 80% of eligible
accounts receivable, as defined. The Line of Credit, which will mature two
years from the final execution date, will contain certain financial
covenants including, but not limited to, minimum net worth, minimum working
capital, and minimum interest coverage ratios, as defined. The Company
expects to execute the Line of Credit in April 1999.
F-23
<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 REGISTRANT
The information required by Item 401 of Regulation S-K with respect to the
executive officers of the Company is included in Item 4A of this Form 10-K. The
information required by Item 401 of Regulation S-k with respect to directors of
the Company and information required by Item 405 of Regulation S-K is
incorporated by reference by the Company's definitive proxy statement (the
"Definitive Proxy Statement") which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated by
reference to the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated by
reference to the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AN RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated by
reference to the Definitive Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES
See Item 8 of this Report
(b) Reports on Form 8-K
1. A Report on Form 8-K was filed by the Company on November 3, 1998
to report under Item 5 the Company's third quarter earnings.
2. A Report on Form 8-K was filed by the Company on October 7, 1998
announcing the Company's preliminary earnings and announcing the
settlement of litigation.
(c) Exhibits
Please see the Exhibit Index to this Report which is incorporated
herein by reference.
(d) Financial Statements Excluded From Annual Report to Shareholders
Not Applicable
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Dated: March 30, 1999 /s/ Albert R. Subbloie, Jr. President, Chief Executive
------------------------------ Officer and Director
Albert R. Subbloie, Jr. (Principal Executive Officer)
Dated: March 30, 1999 /s/ Gary R. Martino Chairman of the
--------------------------- Board of Directors,
Gary R. Martino Chief Financial Officer, Treasurer
and Director (Principal Financial
Accounting Officer)
</TABLE>
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INFORMATION MANAGEMENT ASSOCIATES, INC.
By: /s/ Albert R. Subbloie, Jr.
-------------------------------------
Albert R. Subbloie, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Albert R. Subbloie, Jr. President, Chief March 30, 1999
------------------------------
ALBERT R. SUBBLOIE, JR. Executive Officer
and Director
(Principal
Executive Officer)
<PAGE>
/s/ Gary R. Martino Chairman of the March 30, 1999
------------------------------ Board of
GARY R. MARTINO Directors, Chief
Financial Officer,
Treasurer and
Director (Principal
Financial and
Accounting Officer)
/s/ Paul J. Schmidt Director
--------------------------------
PAUL J. SCHMIDT
/s/ Thomas F. Hill Director
--------------------------------
THOMAS F. HILL
/s/ Donald P. Miller Director
--------------------------------
DONALD P. MILLER
/s/ David J. Callard Director
--------------------------------
DAVID J. CALLARD
EXHIBIT INDEX
Exhibit 10.1 Lease Agreement
Exhibit 10.2 Amendment to Lease
Exhibit 23.1 Report of Independent Public Accountants on Schedule
Exhibit 23.2 Consent of Independent Public Accountants
Exhibit 27.1 Financial Data Schedule
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-32417.
Arthur Andersen LLP /s/
Hartford, Connecticut
March 31, 1998
<PAGE>
SCHEDULE II
INFORMATION MANAGEMENT ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance At Charge to Balance At
Beginning Cost and End of
Of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
January 1, 1996-December 31, 1996 $425,328 $ 390,224 $ (333,578) $ 481,974
January 1, 1997-December 31, 1997 $481,974 $1,138,614 $ (990,511) $ 630,077
January 1, 1998-December 31, 1998 $630,077 $6,721,995 $(3,943,936) $3,408,136
</TABLE>
<PAGE>
Exhibit 10.1
INDUSTRIAL LEASE
----------------
(Single Tenant; Net)
BETWEEN
THE IRVINE COMPANY
AND
INFORMATION MANAGEMENT ASSOCIATES, INC.
<PAGE>
INDUSTRIAL LEASE
----------------
(Single Tenant; Net)
THIS LEASE is made as of the _____ day of November, 1998, by and between
THE IRVINE COMPANY, a Delaware corporation, hereafter called "Landlord," and
INFORMATION MANAGEMENT ASSOCIATES, INC., a Connecticut corporation, hereinafter
called "Tenant."
ARTICLE I. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly described in Section 2.1.
Address of Building: 7505 Irvine Center Drive, Irvine, CA 92618
2. Project Description (if applicable): Irvine Business Center
3. Use of Premises: Administrative office for software company, sales and
training and any other use which does not violate applicable laws, rules
and regulations or covenants, conditions and restrictions; provided
however, that in no event may the Premises be used for retail sales.
4. Estimated Commencement Date: May 1, 1999
5. Lease Term: Eighty-Four (84) months, plus such additional days as may be
required to cause this Lease to terminate on the final day of the calendar
month.
6. Basic Rent: Sixty-One Thousand Eight Hundred Seventy-Two Dollars
($61,872.00) per month, based on $1.40 per rentable square foot.
Basic Rent is subject to adjustment as follows:
Commencing twelve (12) months following the Commencement Date, the Basic
Rent shall be Sixty-Four Thousand Five Hundred Twenty-Three Dollars
($64,523.00) per month, based on $1.46 per rentable square feet.
Commencing twenty-four (24) months following the Commencement Date, the
Basic Rent shall be Sixty-Six Thousand Seven Hundred Thirty-Three Dollars
($66,733.00) per month, based on $1.51 per rentable square foot.
Commencing thirty-six (36) months following the Commencement Date, the
Basic Rent shall be Sixty-Nine Thousand Three Hundred Eighty-Five Dollars
($69,385.00) per month, based on $1.57 per rentable square foot.
Commencing forty-eight (48) months following the Commencement Date, the
Basic Rent shall be Seventy-Two Thousand Four Hundred Seventy-Eight Dollars
($72,478.00) per month, based on $1.64 per rentable square foot.
Commencing sixty (60) months following the Commencement Date, the Basic
Rent shall be Seventy-Five Thousand One Hundred Thirty Dollars ($75,130.00)
per month, based on $1.70 per rentable square foot.
Commencing seventy-two (72) months following the Commencement Date, the
Basic Rent shall be Seventy-Eight Thousand Two Hundred Twenty-Three Dollars
($78,223.00) per month, based on $1.77 per rentable square foot.
7. Guarantor(s): N/A
8. Floor Area of Premises: approximately 44,194 rentable square feet
1
<PAGE>
9. Security Deposit: $86,045.00
10. Broker(s): Lee & Associates
11. Additional Insureds: Insignia\ESG of California, Inc.
12. Address for Payments and Notices:
LANDLORD TENANT
INSIGNIA\ESG OF CALIFORNIA, INC. INFORMATION MANAGEMENT ASSOCIATES, INC.
One Technology Drive, Suite F-207 7505 Irvine Center Drive
Irvine, CA 92618 Irvine, CA 92618
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial Operations
13. Tenant's Liability Insurance Requirement: $2,000,000.00
14. Vehicle Parking Spaces: One Hundred Fifty (150)
15. Plan Approval Date: December 1, 1998
2
<PAGE>
ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases
from Landlord the premises shown in Exhibit A (the "Premises"), including the
---------
building identified in Item 1 of the Basic Lease Provisions (which together with
the underlying real property, is called the "Building"), and containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions.
The Premises is a portion of the project shown in Exhibit Y (the "Project").
---------
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that except as
specifically set forth in this Lease neither Landlord nor any representative of
Landlord has made any representation or warranty with respect to the Premises or
the Building or the suitability or fitness of either for any purpose, including
without limitation any representations or warranties regarding zoning or other
land use matters, and that neither Landlord nor any representative of Landlord
has made any representations or warranties regarding (i) what other tenants or
uses may be permitted or intended in the Building and the Project, or (ii) any
exclusivity of use by Tenant with respect to its permitted use of the Premises
as set forth in Item 3 of the Basic Lease Provisions. Tenant further
acknowledges that neither Landlord nor any representative of Landlord has agreed
to undertake any alterations or additions or construct any improvements to the
Premises except as expressly provided in this Lease. The taking of possession
or use of the Premises by Tenant for any purpose other than construction shall
conclusively establish that the Premises and the Building were in satisfactory
condition and in conformity with the provisions of this Lease in all respects,
except for those matters which Tenant shall have brought to Landlord's attention
on a written punch list. The list shall be delivered to Landlord within sixty
(60) days after the term ("Term") of this Lease commences as provided in Article
III below. Nothing contained in this Section shall affect the commencement of
the Term or the obligation of Tenant to pay rent. Landlord shall diligently
complete all punch list items of which it is notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name
selected by Landlord from time to time for the Building and/or the Project as
any part of Tenant's corporate or trade name. Landlord shall have the right to
change the name, address, number or designation of the Building or Project
without liability to Tenant.
SECTION 2.4 LANDLORD'S RESPONSIBILITIES.
(a) Landlord shall correct, repair or replace, at Landlord's sole cost and
expense and not as a Project Cost, any non-compliance of the Building exterior
and the Common Areas with all applicable building permits and codes in effect as
of the Commencement Date, including without limitation, the provisions of Title
III of the Americans With Disabilities Act ("ADA") in effect as of the
Commencement Date. Said costs of compliance shall be Landlord's sole cost and
shall not be part of Project Costs. All other ADA compliance issues which
pertain to the Premises, including without limitation, in connection with
Tenant's construction of any alterations or other improvements in the Premises
(and any resulting ADA compliance requirements in the Common Areas), the Tenant
Improvements and the operation of Tenant's business and employment practices in
the Premises, shall be the responsibility of Tenant at its sole cost and
expense. The repairs, corrections or replacements required of Landlord or of
Tenant under the foregoing provisions of this Section 2.4 shall be made promptly
following notice of non-compliance from any applicable governmental agency.
Tenant shall promptly forward any such notice that Tenant receives to Landlord.
Further, Landlord shall, during the initial Lease Term, correct, repair or
replace, at Landlord's sole cost and expense and not as a Project Cost, any
failure of the structural components of the foundations, footings and load-
bearing walls of the Building. The corrections, repairs or replacements
required of Landlord in the preceding sentence of this Section 2.4 shall be made
promptly following notice from Tenant.
(b) Landlord warrants to Tenant that all Building systems including but not
limited to mechanical, electrical, plumbing, heating, ventilating and air
conditioning and life-fire safety shall be new and in good working order as of
the Commencement Date and shall be free from defects in workmanship or materials
for a period of twelve (12) months from the Commencement Date. Landlord shall
promptly rectify any non-compliance at its sole cost and expense and not as a
Project Cost after receipt of written notice from Tenant within such time
setting forth the nature and extent of any such non-compliance.
(c) In connection with the completion of the Tenant Improvements
pursuant to the Work Letter, Landlord shall obtain customary warranties and
guaranties from the contractor(s) performing such work and/or the manufacturers
of equipment installed but shall be under no obligation to incur additional
expense in order to obtain or extend such warranties. If after expiration of
the initial twelve (12) months of the Lease Term, Tenant is required to make
repairs to any component of the Premises or any of its systems for which
Landlord may have obtained a warranty, Landlord shall, upon request by Tenant,
use its good faith efforts to pursue its rights under any such warranties for
the benefit of Tenant. Landlord shall be under no obligation to incur any
expense in connection with asserting rights under such warranties or guaranties
against either the contractor or the manufacturer, but shall use reasonable good
faith efforts to enforce such warranties and guaranties for Tenant's benefit.
3
<PAGE>
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in Item 5 of
the Basic Lease Provisions. Subject to the provisions of Section 3.2 below, the
Term shall commence ("Commencement Date") on the earlier of (a) the date upon
which all relevant governmental authorities have approved the Tenant
Improvements in accordance with applicable building codes, as evidenced by
written approval thereof in accordance with the building permits issued for the
Tenant Improvements or issuance of a temporary or final certificate of occupancy
for the Premises, or (b) the date Tenant commences its business activities in
the Premises. Within ten (10) days after possession of the Premises is tendered
to Tenant, the parties shall memorialize on a form provided by Landlord the
actual Commencement Date and the expiration date ("Expiration Date") of this
Lease. Tenant's failure to execute that form shall not affect the validity of
Landlord's determination of those dates.
SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever,
cannot deliver possession of the Premises to Tenant on or before the Estimated
Commencement Date, this Lease shall not be void or voidable nor shall Landlord
be liable to Tenant for any resulting loss or damage. However, Tenant shall not
be liable for any rent and the Commencement Date shall not occur until Landlord
delivers possession of the Premises and the Premises are in fact available for
Tenant's occupancy with any Tenant Improvements that have been approved as per
Section 3.1(a) above, except that if Landlord's failure to so deliver possession
on the Estimated Commencement Date is attributable to any action or inaction by
Tenant (including without limitation any Tenant Delay described in the Work
Letter, if any, attached to this Lease), then the Commencement Date shall not be
advanced to the date on which possession of the Premises is tendered to Tenant,
and Landlord shall be entitled to full performance by Tenant (including the
payment of rent) from the date Landlord would have been able to deliver the
Premises to Tenant but for Tenant's delay(s). Notwithstanding anything to the
contrary contained in this Section 3.2, however, if for any reason other than
"Tenant Delays" (as defined in the Work Letter) the Commencement Date has not
occurred by the date that is two hundred seventy (270) days following the
Estimated Commencement Date, then Tenant may, by written notice to Landlord
given at any time thereafter but prior to the actual occurrence of the
Commencement Date, elect to terminate this Lease.
SECTION 3.3. RIGHT TO EXTEND THIS LEASE. Provided that Tenant is not in
default under any provision of this Lease after notice and expiration of
applicable cure periods, either at the time of exercise of the extension rights
granted herein or at the time of the commencement of such extension, and
provided further that Tenant is then occupying not less than seventy-five
percent (75%) of the rentable area of the Premises, both at the time of exercise
and at the time of commencement of such extension, Tenant may extend the Term of
this Lease for one (1) period of sixty (60) months. Tenant shall exercise its
right to extend the Term by and only by (i) delivering to Landlord, not less
than nine (9) months or more than twelve (12) months prior to the expiration
date of the Term, Tenant's written notice of its commitment to extend (the
"Commitment Notice"); and (ii) returning to Landlord, within fifteen (15) days
after receipt, an executed amendment to this Lease (to be prepared by Landlord
upon receipt of the Commitment Notice) setting forth the Basic Rent and other
charges payable during the extension term. The Basic Rent payable under the
Lease during the extension of the Term shall be at the prevailing market rental
rate (including periodic adjustments) for comparable and similarly improved
space within the Project as of the commencement of the extension period. In no
event shall the monthly Basic Rent payable for the extension period be less than
the Basic Rent payable during the month immediately preceding the commencement
of such extension period. Within thirty (30) days after receipt of Tenant's
Commitment Notice, Landlord shall provide Tenant with its written opinion of the
prevailing market rental rate together with an estimate of additional rent for
the first year of the extension term. If Tenant objects to Landlord's opinion,
the parties shall attempt to agree upon the prevailing market rental rate. In
the event that the parties are not able to agree on the prevailing market rental
as described above within one hundred twenty (120) days prior to then-current
expiration date of the Term, then either party may elect, by written notice to
the other party, to cause said rental, including subsequent adjustments, to be
determined by appraisal as follows:
Within ten (10) days following receipt of such appraisal election, the
parties shall attempt to agree on a single appraiser to determine the prevailing
market rental. If the parties are unable to agree in that time, then each party
shall designate an appraiser within ten (10) days thereafter. Should either
party fail to so designate an appraiser within that time, then the appraiser
designated by the other party shall determine the prevailing rental value.
Should each of the parties timely designate an appraiser, then the two
appraisers so designated shall appoint a third appraiser who shall acting alone,
determine the fair rental value of the Premises. Any appraiser designated
hereunder shall have an M.A.I. certification with not less than five (5) years
experience in the valuation of industrial buildings in Orange County,
California.
Within thirty (30) days following the selection of the appraiser, such
appraiser shall determine the prevailing market rental value, including
subsequent adjustments of the Premises. In determining such value, the
appraiser shall consider rental comparables for comparable and similarly
improved space in buildings within the triangular geographic area bounded by the
I-5, I-405 and State Route 133 freeways. The fees of the appraiser(s) shall be
shared equally by both parties.
Within twenty (20) days after the determination of the prevailing
market rental, Landlord shall prepare a reasonably appropriate amendment to this
Lease for the applicable extension period and Tenant shall execute and return
same to Landlord within ten (10) days. Should the prevailing market rental not
be established by the commencement of the then-current extension period, then
Tenant shall continue paying rent at the rate in effect during
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the month immediately preceding the commencement of such extension period, and a
lump sum adjustment shall be made promptly upon the determination of such new
rental.
If Tenant fails to timely comply with any of the provisions of this
Section, Tenant's right to extend the Term shall be extinguished and the Lease
shall automatically terminate as of the expiration date of the Term, without any
extension and without any liability to Landlord. Except with respect to an
assignment for which Landlord's consent is not required pursuant to Section 9.4
hereof, any attempt to assign or transfer any right or interest created by this
Section shall be void from its inception. Tenant shall have no other right to
extend the Term beyond the single sixty (60) month extension created by this
Section. Unless agreed to in a writing signed by Landlord and Tenant, any
extension of the Term, whether created by an amendment to this Lease or by a
holdover of the Premises by Tenant, or otherwise, shall be deemed a part of, and
not in addition to, any duly exercised extension period permitted by this
Section.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant
shall pay to Landlord without deduction or offset, Basic Rent for the Premises
in the total amount shown (including subsequent adjustments, if any) in Item 6
of the Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be
deemed to occur on the specified monthly anniversary of the Commencement Date,
whether or not that date occurs at the end of a calendar month. The rent shall
be due and payable in advance commencing on the Commencement Date (as prorated
for any partial month) and continuing thereafter on the first day of each
successive calendar month of the Term. No demand, notice or invoice shall be
required for the payment of Basic Rent. An installment of rent in the amount of
one (1) full month's Basic Rent at the initial rate specified in Item 6 of the
Basic Lease Provisions shall be delivered to Landlord concurrently with Tenant's
execution of this Lease and shall be applied against the Basic Rent first due
hereunder.
SECTION 4.2. OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, "Building Costs"
and "Property Taxes," as those terms are defined below, incurred by Landlord in
the operation of the Building and Project. For convenience of reference,
Property Taxes and Building Costs shall be referred to collectively as
"Operating Expenses".
(b) Commencing prior to the start of the first full "Expense Recovery
Period" (as defined below) of the Lease, and prior to the start of each full or
partial Expense Recovery Period thereafter, Landlord shall give Tenant a written
estimate of the amount of Operating Expenses for the Expense Recovery Period.
Tenant shall pay the estimated amounts to Landlord in equal monthly
installments, in advance, with Basic Rent. If Landlord has not furnished its
written estimate for any Expense Recovery Period by the time set forth above,
Tenant shall continue to pay cost reimbursements at the rates established for
the prior Expense Recovery Period, if any; provided that when the new estimate
is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any
accrued cost reimbursements based upon the new estimate. For purposes hereof,
"Expense Recovery Period" shall mean every twelve month period during the Term
(or portion thereof for the first and last lease years) commencing July 1 and
ending June 30.
(c) Within one hundred twenty (120) days after the end of each Expense
Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Operating Expenses incurred by Landlord
during the period, and the parties shall within thirty (30) days thereafter make
any payment or allowance necessary to adjust Tenant's estimated payments, if
any, to Tenant's actual owed amounts as shown by the annual statement. Any
delay or failure by Landlord in delivering any statement hereunder shall not
constitute a waiver of Landlord's right to require Tenant to pay Operating
Expenses pursuant hereto. Any amount due Tenant shall be credited against
installments next coming due under this Section 4.2, and any deficiency shall be
paid by Tenant together with the next installment. If Tenant has not made
estimated payments during the Expense Recovery Period, any amount owing by
Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance
with Article XVI. Should Tenant fail to object in writing to Landlord's
determination of actual Operating Expenses within one hundred eighty (180) days
following delivery of Landlord's expense statement, Landlord's determination of
actual Operating Expenses for the applicable Expense Recovery Period shall be
conclusive and binding on the parties and any future claims to the contrary
shall be barred.
Provided Tenant is not then in default of this Lease beyond any applicable
cure period herein provided, then Tenant shall have the right to have Tenant's
financial officer or other agent or consultant who is a certified public
accountant audit Landlord's Operating Expenses, subject to the terms and
conditions hereof. In no event, however, shall such auditor be compensated by
Tenant on a "contingency" basis, or on any other basis tied to the results of
said audit. Tenant shall give notice to Landlord of Tenant's intent to audit
within one hundred eighty (180) days following delivery of Landlord's expense
statement for each of the Expense Recovery Periods. Following at least ten (10)
business days notice to Landlord, such audit shall be conducted at a mutually
agreeable time during normal business hours at the office of Landlord or its
management agent where the records are maintained in Orange County, California.
Landlord agrees to make such personnel available to Tenant as is reasonably
necessary for Tenant's employees and agents to conduct such audit. Landlord
shall make such records available to Tenant's employees and agents, for
inspection during normal business hours. Tenant's employees and agents shall be
entitled to make photostatic copies of such records, provided Tenant bears the
expense of such copying, and further provided that Tenant keeps such copies in a
confidential manner and does not discuss, display or distribute such copies to
any other third party. If Tenant's audit determines that actual Operating
Expenses have been overstated by more than five percent (5%), then subject to
Landlord's right to review
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and/or contest the audit results, Landlord shall reimburse Tenant for the
reasonable out-of-pocket costs of such audit. Tenant's Basic Rent shall be
appropriately adjusted to reflect any overstatement in Operating Expenses. In
the event of a dispute between Landlord and Tenant regarding the results of such
audit, such dispute shall be submitted to and resolved by JAMS as provided in
Section 22.7 of this Lease.
All of the information obtained by Tenant and/or its auditor in
connection with such audit, as well as any compromise, settlement, or adjustment
reached between Landlord and Tenant as a result thereof, shall be held in strict
confidence and, except as may be required by law or pursuant to litigation,
shall not be disclosed to any third party, directly or indirectly, by Tenant or
its auditor or any of their officers, agents or employees. Landlord may require
Tenant's auditor to execute a separate confidentiality agreement affirming the
foregoing as a condition precedent to any audit.
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Operating Expenses for the
Expense Recovery Period in which the Lease terminates, Tenant shall upon notice
pay the entire increase due over the estimated expenses paid. Conversely, any
overpayment made in the event expenses decrease shall be rebated promptly by
Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then the estimate of Operating Expenses shall be increased for the month
in which such rate(s) or amount(s) becomes effective and for all succeeding
months by an amount equal to the increase. Landlord shall give Tenant written
notice of the amount or estimated amount of the increase, the month in which the
increase will become effective, and the month for which the payments are due.
Tenant shall pay the increase to Landlord as a part of Tenant's monthly payments
of estimated expenses as provided in paragraph (b) above, commencing with the
month in which effective.
(f) The term "Building Costs" shall include all expenses of operation
and maintenance of the Building and of the Building's proportionate share of the
Project, if applicable (determined as the rentable square footage of the
Building divided by the rentable square footage of all space in the Project), to
the extent such expenses are not billed to and paid directly by Tenant, and
shall include the following charges by way of illustration but not limitation:
water and sewer charges; insurance premiums or reasonable premium equivalents
should Landlord elect to self-insure any risk that Landlord is authorized to
insure hereunder; license, permit, and inspection fees; heat; light; power; air
conditioning; supplies; materials; equipment; tools; the cost of any
environmental, insurance, tax or other consultant utilized by Landlord in
connection with the Building and/or Project; establishment of reasonable
reserves for replacements and/or repair of Common Area improvements (if
applicable), equipment and supplies; costs incurred in connection with
compliance of any laws or changes in laws applicable to the Building or the
Common Areas of the Project; the cost of any capital investments (other than
tenant improvements for specific tenants) to the extent of the amortized amount
thereof over the useful life of such capital investments calculated at a market
cost of funds, all as reasonably determined by Landlord, for each such year of
useful life during the Term; labor; reasonably allocated wages and salaries,
fringe benefits, and payroll taxes for administrative and other personnel
directly applicable to the Building and/or Project, including both Landlord's
personnel and outside personnel; any expense incurred pursuant to Sections 6.1,
6.2, 6.4, 7.2, and 10.2; and a reasonable overhead/management fee for the
professional operation of the Building and Project. Notwithstanding anything to
the contrary contained herein, the amount of such overhead/management fee to be
charged to Tenant shall be determined by multiplying the actual fee charged
(which from time to time may be with respect to the entire Project, a portion of
the Project only, the Building only, or the Project together with other
properties owned by Landlord and/or its affiliates and leased to third parties)
by a fraction, the numerator of which is the floor area of the Premises (as set
forth in Item No. 8 of the Basic Lease Provisions) and the denominator of which
is the total square footage of space charged with such fee. It is understood
that Building Costs shall include competitive charges for direct services
provided by any subsidiary or division of Landlord. Notwithstanding the
provisions of this Section 4.2 to the contrary, Operating Expenses shall not
include any cost or expense identified as the responsibility of Landlord and not
an Operating Expense or a Project Cost by the express terms of this Lease, and
shall not include any of the following:
(1) Leasing commissions, space planning costs, attorneys' fees,
costs, disbursements and other expenses incurred by Landlord or its agents in
connection with negotiations for leases with tenants, other occupants or
prospective tenants or other occupants of the Project, and similar costs
incurred in connection with disputes with and/or enforcement of any lease with
tenants, other occupants, or prospective tenants or other occupants of the
Project;
(2) "Tenant allowances", "tenant concessions", work letter
payments, and other costs or expenses (including permit, license and inspection
fees) incurred in completing, fixturing, furnishing, renovating or otherwise
improving, decorating or redecorating space for tenants or other occupants of
the Project, or vacant, leasable space in the Project, including space
planning/interior design fees for same;
(3) Depreciation and other "non-cash" expense items;
(4) Services, items and benefits for which Tenant or any other
tenant or occupant of the Project specifically reimburses Landlord or for which
Tenant or any other tenant or occupant of the Project pays third persons or
services, items or benefits which are not generally made available to Tenant as
an occupant of the Building or the Project;
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(5) Costs or expenses (including fines, penalties and legal
fees) incurred due to the violation by Landlord of any terms and conditions
(other than by Tenant) of this Lease or of the leases of other tenants in the
Project, that would not have incurred but for such violation by Landlord;
(6) Penalties for late payment of any Operating Expenses by
Landlord, including, without limitation, with respect to taxes, equipment
leases, etc.;
(7) Payments in respect of overhead and/or profit to any
subsidiary or Affiliate (hereinafter defined) of Landlord, as a result of a non-
competitive selection process for services (other than the management fee) on or
to the Project, or for goods, supplies or other materials, to the extent that
the costs of such services, goods, supplies or materials exceed the costs that
would have been paid if the services, goods, supplies or materials had been
provided by parties unaffiliated with Landlord, of similar skill, competence and
experience, on a competitive basis;
(8) Payments of principal, finance or refinance charges or
interest on debt or amortization on any deed of trust or other debt encumbering
the Project, and rental payments (or increases in same) under any ground or
underlying lease or leases encumbering the Project (except to the extent the
same may be made to pay or reimburse, or may be measured by Property Taxes);
(9) Except for a management fee which is reasonable and
commercially competitive for similar projects in the Irvine Spectrum area, costs
of Landlord's general overhead and general administrative expenses (individual,
partnership or corporate, as the case may be) and wages, salaries and other
compensation and benefits (as well as adjustments thereto) for all employees and
personnel of Landlord above the level of manager for the Project, which costs
would not be chargeable to Operating Expenses in accordance with generally
accepted accounting principles, consistently applied;
(10) Rentals and other related expenses, if any, incurred in
leasing air conditioning systems or other equipment ordinarily considered to be
of a capital nature, except equipment which is used in providing janitorial
services and which is not affixed to the Project and equipment which is leased
on a temporary basis in emergency situations;
(11) Advertising and promotional expenses;
(12) Costs or expenses for the acquisition of sculpture,
paintings or other works of art, but not the reasonable expenses of maintaining,
repairing and insuring same;
(13) Costs for which Landlord is compensated through or
reimbursed by insurance including premium refunds;
(14) Contributions to operating expense reserves (including tax
reserves), except for reasonable reserves for the roof of the Building;
(15) Contributions to political or charitable organizations;
(16) Costs incurred in removing the property of former
tenants and/or other occupants of the Project.
(17) Any bad debt loss, rent loss, or reserves for bad debt
or rent loss;
(18) Any expenses associated with Common Areas that are
totally within other Buildings in the Project.
(g) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease or to the
Building and/or the Project, and any improvements, fixtures and equipment and
other property of Landlord located in the Building and/or the Project, except
that general net income and franchise taxes imposed against Landlord shall be
excluded; and (iii) all assessments and fees for public improvements, services,
and facilities and impacts thereon, including without limitation arising out of
any Community Facilities Districts, "Mello Roos" districts, similar assessment
districts, and any traffic impact mitigation assessments or fees; (iv) any tax,
surcharge or assessment which shall be levied in addition to or in lieu of real
estate or personal property taxes, other than taxes covered by Article VIII; and
(v) costs and expenses incurred in contesting the amount or validity of any
Property Tax by appropriate proceedings.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of
this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9
of the Basic Lease Provisions, to be held by Landlord as security for the full
and faithful performance of Tenant's obligations under this Lease (the "Security
Deposit"). Subject to the last sentence of this Section, the Security Deposit
shall be understood and agreed to be the property of Landlord upon Landlord's
receipt thereof, and may be utilized by Landlord in its discretion towards the
payment of all prepaid expenses by Landlord for which Tenant would be required
to reimburse Landlord under this Lease, including without limitation
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brokerage commissions and Tenant Improvement costs. Upon any default by Tenant,
including specifically Tenant's failure to pay rent or to abide by its
obligations under Sections 7.1 and 15.3 below, whether or not Landlord is
informed of or has knowledge of the default, the Security Deposit shall be
deemed to be automatically and immediately applied, without waiver of any rights
Landlord may have under this Lease or at law or in equity as a result of the
default, as a setoff for full or partial compensation for that default. If any
portion of the Security Deposit is applied after a default by Tenant, Tenant
shall within five (5) days after written demand by Landlord deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its original
amount. Landlord shall not be required to keep this Security Deposit separate
from its general funds, and Tenant shall not be entitled to interest on the
Security Deposit. If Tenant fully performs its obligations under this Lease, the
Security Deposit or any balance thereof shall be returned to Tenant (or, at
Landlord's option, to the last assignee of Tenant's interest in this Lease)
after the expiration of the Term, provided that Landlord may retain the Security
Deposit to the extent and until such time as all amounts due from Tenant in
accordance with this Lease have been determined and paid in full.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities.
The parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief in
addition to any other available remedy. Tenant, at its expense, shall procure,
maintain and make available for Landlord's inspection throughout the Term, all
governmental approvals, licenses and permits required for the proper and lawful
conduct of Tenant's permitted use of the Premises. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
interfere with the rights of other occupants of the Building or the Project, or
use or allow the Premises to be used for any unlawful purpose, nor shall Tenant
permit any nuisance or commit any waste in the Premises or the Project. Tenant
shall not do or permit to be done anything which will invalidate or increase the
cost of any insurance policy(ies) covering the Building, the Project and/or
their contents, and shall comply with all applicable insurance underwriters
rules and the requirements of the Pacific Fire Rating Bureau or any other
organization performing a similar function. Tenant shall comply at its expense
with all present and future laws, ordinances, restrictions, regulations, orders,
rules and requirements of all governmental authorities that pertain to Tenant or
its use of the Premises, including without limitation all federal and state
occupational health and safety requirements, whether or not Tenant's compliance
will necessitate expenditures or interfere with its use and enjoyment of the
Premises. Tenant shall comply at its expense with all present and future
covenants, conditions, easements or restrictions now or hereafter affecting or
encumbering the Building and/or Project, and any amendments or modifications
thereto, including without limitation the payment by Tenant of any periodic or
special dues or assessments charged against the Premises or Tenant which may be
allocated to the Premises or Tenant in accordance with the provisions thereof.
Tenant shall promptly upon demand reimburse Landlord for any additional
insurance premium charged by reason of Tenant's failure to comply with the
provisions of this Section, and shall indemnify Landlord from any liability
and/or expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Provided Tenant continues to occupy the entire
Premises, Tenant shall have the exclusive right to install two (2) building-top
signs on the exterior of the Building, subject to Landlord's prior approval that
such exterior signage is in compliance with the Signage Criteria (defined
below). Except as provided in the foregoing, or as otherwise approved in
writing by Landlord, in its sole discretion, Tenant shall have no right to
maintain identification signs in any location in, on or about the Premises, the
Building or the Project and shall not place or erect any signs, displays or
other advertising materials that are visible from the exterior of the Building.
The size, design, graphics, material, style, color and other physical aspects of
any permitted sign shall be subject to any covenants, conditions or restrictions
encumbering the Premises, Landlord's signage program for the Project, as in
effect from time to time and approved by the City of Irvine ("Signage
Criteria"), and any applicable municipal or other governmental permits and
approvals. Tenant acknowledges having received and reviewed a copy of the
current Signage Criteria for the Project. Tenant shall be responsible for the
cost of any permitted sign, including the fabrication, installation, maintenance
and removal thereof. If Tenant fails to maintain its sign, or if Tenant fails
to remove same upon termination of this Lease and repair any damage caused by
such removal, Landlord may do so at Tenant's expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance or
matter under any statutory or common law theory, and (iii) any substance or
matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous Materials to be
brought upon, stored, used, generated, released or disposed of on, under, from
or about the Premises (including without limitation the soil and groundwater
thereunder) without the prior written consent of Landlord. Notwithstanding the
foregoing, Tenant shall have the right, without obtaining prior written consent
of Landlord, to utilize within the Premises standard office products that may
contain Hazardous Materials (such as photocopy toner, "White Out", and the
like), provided however, that (i) Tenant shall maintain such products in their
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original retail packaging, shall follow all instructions on such packaging with
respect to the storage, use and disposal of such products, and shall otherwise
comply with all applicable
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laws with respect to such products, and (ii) all of the other terms and
provisions of this Section 5.3 shall apply with respect to Tenant's storage, use
and disposal of all such products. Landlord may, in its sole discretion, place
such reasonable conditions as Landlord deems appropriate with respect to any
such Hazardous Materials, and may further require that Tenant demonstrate that
any such Hazardous Materials are necessary or useful to Tenant's business and
will be generated, stored, used and disposed of in a manner that complies with
all applicable laws and regulations pertaining thereto and with good business
practices. Tenant understands that Landlord may utilize an environmental
consultant to assist in determining conditions of approval in connection with
the storage, generation, release, disposal or use of Hazardous Materials by
Tenant on or about the Premises, and/or to conduct periodic inspections of the
storage, generation, use, release and/or disposal of such Hazardous Materials by
Tenant on and from the Premises, and Tenant agrees that any reasonable costs
incurred by Landlord in connection therewith shall be reimbursed by Tenant to
Landlord as additional rent hereunder upon demand.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B attached
---------
hereto. The completed Environmental Questionnaire shall be deemed incorporated
into this Lease for all purposes, and Landlord shall be entitled to rely fully
on the information contained therein. On each anniversary of the Commencement
Date until the expiration or sooner termination of this Lease, Tenant shall
disclose to Landlord in writing to the best of Tenant's knowledge the names and
amounts of all Hazardous Materials which were stored, generated, used, released
and/or disposed of on, under or about the Premises for the twelve-month period
prior thereto, and which Tenant desires to store, generate, use, release and/or
dispose of on, under or about the Premises for the succeeding twelve-month
period. In addition, to the extent Tenant is permitted to utilize Hazardous
Materials upon the Premises, Tenant shall promptly provide Landlord with
complete and legible copies of all the following environmental documents
relating thereto: reports filed pursuant to any self-reporting requirements;
permit applications, permits, monitoring reports, workplace exposure and
community exposure warnings or notices and all other reports, disclosures, plans
or documents (even those which may be characterized as confidential) relating to
water discharges, air pollution, waste generation or disposal, and underground
storage tanks for Hazardous Materials; orders, reports, notices, listings and
correspondence (even those which may be considered confidential) of or
concerning the release, investigation of, compliance, cleanup, remedial and
corrective actions, and abatement of Hazardous Materials; and all complaints,
pleadings and other legal documents filed by or against Tenant related to
Tenant's use, handling, storage, release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises and/or the soil or
groundwater thereunder at any time to determine whether Tenant is complying with
the terms of this Section 5.3, and in connection therewith Tenant shall provide
Landlord with full access to all relevant facilities, records and personnel. If
Tenant is not in compliance with any of the provisions of this Section 5.3, or
in the event of a release of any Hazardous Material on, under or about the
Premises caused or permitted by Tenant, its agents, employees, contractors,
licensees or invitees, Landlord and its agents shall have the right, but not the
obligation, without limitation upon any of Landlord's other rights and remedies
under this Lease, to immediately enter upon the Premises without notice and to
discharge Tenant's obligations under this Section 5.3 at Tenant's expense,
including without limitation the taking of emergency or long-term remedial
action. Landlord and its agents shall endeavor to minimize interference with
Tenant's business in connection therewith, but shall not be liable for any such
interference. In addition, Landlord, at Tenant's expense, shall have the right,
but not the obligation, to join and participate in any legal proceedings or
actions initiated in connection with any claims arising out of the storage,
generation, use, release and/or disposal by Tenant or its agents, employees,
contractors, licensees or invitees of Hazardous Materials on, under, from or
about the Premises.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises or the Project caused or permitted by Tenant or its agents,
employees, contractors, licensees or invitees results in (i) injury to any
person, (ii) injury to or any contamination of the Premises or the Project, or
(iii) injury to or contamination of any real or personal property wherever
situated, Tenant, at its expense, shall promptly take all actions necessary to
return the Premises and the Project and any other affected real or personal
property owned by Landlord to the condition existing prior to the introduction
of such Hazardous Materials and to remedy or repair any such injury or
contamination, including without limitation, any cleanup, remediation, removal,
disposal, neutralization or other treatment of any such Hazardous Materials.
Notwithstanding the foregoing, Tenant shall not, without Landlord's prior
written consent, take any remedial action in response to the presence of any
Hazardous Materials on, under or about the Premises or the Project or any other
affected real or personal property owned by Landlord or enter into any similar
agreement, consent, decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided however, Landlord's prior
written consent shall not be necessary in the event that the presence of
Hazardous Materials on, under or about the Premises or the Project or any other
affected real or personal property owned by Landlord (i) imposes an immediate
threat to the health, safety or welfare of any individual or (ii) is of such a
nature that an immediate remedial response is necessary and it is not possible
to obtain Landlord's consent before taking such action. To the fullest extent
permitted by law, Tenant shall indemnify, hold harmless, protect and defend
(with attorneys acceptable to Landlord) Landlord and any successors to all or
any portion of Landlord's interest in the Premises and the Project and any other
real or personal property owned by Landlord from and against any and all
liabilities, losses, damages, diminution in value, judgments, fines, demands,
claims, recoveries, deficiencies, costs and expenses (including without
limitation attorneys' fees, court costs and other professional expenses),
whether foreseeable or unforeseeable, arising directly or indirectly out of the
use, generation, storage, treatment, release, on- or off-site disposal or
transportation of Hazardous Materials on, into, from, under or about the
Premises, the Building and the Project and any other real or personal property
owned by Landlord caused or permitted by Tenant, its agents, employees,
contractors, licensees or invitees, specifically including without limitation
the cost of any required or necessary repair, restoration,
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cleanup or detoxification of the Premises, the Building and the Project and any
other real or personal property owned by Landlord, and the preparation of any
closure or other required plans, whether or not such action is required or
necessary during the Term or after the expiration of this Lease. If Landlord at
any time discovers that Tenant or its agents, employees, contractors, licensees
or invitees may have caused or permitted the release of a Hazardous Material on,
under, from or about the Premises or the Project or any other real or personal
property owned by Landlord, Tenant shall, at Landlord's request, immediately
prepare and submit to Landlord a comprehensive plan, subject to Landlord's
approval, specifying the actions to be taken by Tenant to return the Premises or
the Project or any other real or personal property owned by Landlord to the
condition existing prior to the introduction of such Hazardous Materials. Upon
Landlord's approval of such cleanup plan, Tenant shall, at its expense, and
without limitation of any rights and remedies of Landlord under this Lease or at
law or in equity, immediately implement such plan and proceed to cleanup such
Hazardous Materials in accordance with all applicable laws and as required by
such plan and this Lease. The provisions of this subsection (e) shall expressly
survive the expiration or sooner termination of this Lease.
(f) If the release of any Hazardous Materials on, under, from or about
the Premises or the Project caused by Landlord, its authorized agents or
employees, and not introduced by Tenant, its agents, employees, contractors,
licensees, or invitees results in (i) injury to any person, or (ii) injury to or
any contamination of the Premises or the Project at levels which require clean-
up or remediation under applicable laws, Landlord, at its expense (which shall
not be included in Operating Expenses), shall promptly take all actions
necessary to return the Premises and the Project to the condition existing prior
to the introduction of such Hazardous Materials, or to such condition as is
satisfactory to all governmental agencies asserting jurisdiction, and to remedy
or repair any such injury or contamination, including, without limitation, any
clean-up, remediation, removal, disposal, neutralization or other treatment of
any such Hazardous Materials.
(g) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Project known
by Landlord to exist as of the date of this Lease, as more particularly
described in EXHIBIT C attached hereto. Tenant shall have no liability or
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responsibility with respect to the Hazardous Materials facts described in
EXHIBIT C, nor with respect to any Hazardous Materials which were not caused or
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knowingly permitted by Tenant, its agents, employees, contractors, licensees or
invitees. Landlord shall take responsibility, at its sole cost and expense, for
any governmentally-ordered clean-up, remediation, removal, disposal,
neutralization or other treatment of Hazardous Materials conditions described in
this Section 5.3(g). The foregoing obligation on the part of Landlord shall
include the reasonable costs (including, without limitation, reasonable
attorney's fees) of defending Tenant (with attorneys reasonably acceptable to
Tenant) from and against any legal action or proceeding instituted by any
governmental agency in connection with such clean-up, remediation, removal,
disposal, neutralization or other treatment of such conditions, provided that
Tenant promptly tenders such defense to Landlord. Tenant agrees to notify its
agents, employees, contractors, licensees, and invitees of any exposure or
potential exposure to Hazardous Materials at the Premises that Landlord brings
to Tenant's attention.
(h) The obligations on the part of Landlord contained in Sections
5.3(f) and 5.3(g) above are personal to Landlord and shall not be binding on,
nor inure against any successor in interest to Landlord as of the owner of the
Premises, including without limitation, any lender acquiring the Premises by
foreclosure of its mortgage or deed of trust or deed in lieu of foreclosure.
ARTICLE VI. COMMON AREAS; SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and
shall pay promptly, directly to the appropriate supplier, all charges for water,
gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used by
Tenant in, on or about the Premises during the Term, together with any taxes
thereon. Landlord shall not be liable for damages or otherwise for any failure
or interruption of any utility or other service furnished to the Premises, and
no such failure or interruption shall be deemed an eviction or entitle Tenant to
terminate this Lease or withhold or abate any rent due hereunder. Landlord shall
at all reasonable times have free access to all electrical and mechanical
installations of Landlord. Notwithstanding the foregoing, if as a result of the
actions of Landlord, its agents, contractors or employees or the inactions of
Landlord if Landlord is required to act under this Lease, for more than three
(3) consecutive business days following written notice to Landlord there is no
HVAC service or electricity service to all or a portion of the Premises, or such
an interruption of other essential utilities and building services, such as fire
protection or water, so that all or a portion of the Premises cannot be used by
Tenant, then Tenant's obligation to pay Basic Rent and Operating Expenses (or an
equitable portion of such Basic Rent and Operating Expenses to the extent that
less than all of the Premises are affected) shall thereafter be abated until the
Premises are again useable by Tenant; provided, however, that if Landlord is
diligently pursuing the repair of such utilities or services and Landlord
provides substitute services reasonably suitable for Tenant's purposes, as for
example, bringing in portable air-conditioning equipment, then there shall not
be an abatement of Basic Rent or Operating Expenses. Any disputes concerning the
foregoing shall be resolved by JAMS arbitration pursuant to Section 22.7 of this
Lease. The foregoing provisions shall not apply in case of damage to, or
destruction of, the Premises, which shall be governed by the provisions of
Article XI of the Lease. Landlord shall at all reasonable times have free access
to all electrical and mechanical installations of Landlord.
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SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term,
Landlord shall operate all Common Areas within the Project. The term "Common
Areas" shall mean all areas which are not held for exclusive use by persons
entitled to occupy space, and all other appurtenant areas and improvements
provided by Landlord for the common use of Landlord and tenants and their
respective employees and invitees, including without limitation parking areas
and structures, driveways, sidewalks, landscaped and planted areas, hallways and
interior stairwells not located within the premises of any tenant, common
electrical rooms and roof access entries, common entrances and lobbies,
elevators, and restrooms not located within the premises of any tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the Premises
shall include the use of the Common Areas in common with Landlord and with all
others for whose convenience and use the Common Areas may be provided by
Landlord, subject, however, to compliance with all rules and regulations as are
prescribed from time to time by Landlord. Landlord shall operate and maintain
the Common Areas in the manner Landlord may determine to be appropriate. All
costs incurred by Landlord for the maintenance and operation of the Common Areas
shall be included in Building Costs unless any particular cost incurred can be
charged to a specific tenant of the Project. Landlord shall at all times during
the Term have exclusive control of the Common Areas, and may restrain any use or
occupancy, except as authorized by Landlord's rules and regulations. Tenant
shall keep the Common Areas clear of any obstruction or unauthorized use related
to Tenant's operations. Landlord may temporarily close any portion of the Common
Areas for repairs, remodeling and/or alterations, to prevent a public dedication
or the accrual of prescriptive rights, or for any other reason deemed sufficient
by Landlord, without liability to Landlord.
SECTION 6.4. PARKING. Tenant shall be entitled to the number of vehicle
parking spaces set forth in Item 14 of the Basic Lease Provisions, which spaces
shall be unreserved and unassigned, on those portions of the Common Areas
designated by Landlord for parking. Tenant shall not use more parking spaces
than such number. Notwithstanding the foregoing, Landlord shall designate a
minimum of ten (10) stalls as "visitor" in a location reasonably determined by
Landlord to conveniently serve visitors to the Premises and such stalls shall be
included in the determination of the number of stalls used by Tenant; provided,
however, that Landlord shall not be obligated to monitor the use of such stalls.
Landlord may, in its reasonable discretion, increase the number of stalls
designated for visitors and shall upon Tenant's written request re-evaluate the
number and/or location of such stalls but shall not be obligated to change the
number or location of such stalls except in its reasonable discretion. All
parking spaces shall be used only for parking by vehicles no larger than full
size passenger automobiles or pickup trucks. Tenant shall not permit or allow
any vehicles that belong to or are controlled by Tenant or Tenant's employees,
suppliers, shippers, customers or invitees to be loaded, unloaded or parked in
areas other than those designated by Landlord for such activities. If Tenant
permits or allows any of the prohibited activities described above, then
Landlord shall have the right, without notice, in addition to such other rights
and remedies that Landlord may have, to remove or tow away the vehicle involved
and charge the costs to Tenant. Parking within the Common Areas shall be limited
to striped parking stalls, and no parking shall be permitted in any driveways,
access ways or in any area which would prohibit or impede the free flow of
traffic within the Common Areas. There shall be no overnight parking of any
vehicles of any kind unless otherwise authorized by Landlord, and vehicles which
have been abandoned or parked in violation of the terms hereof may be towed away
at the owner's expense. Nothing contained in this Lease shall be deemed to
create liability upon Landlord for any damage to motor vehicles of visitors or
employees, for any loss of property from within those motor vehicles, or for any
injury to Tenant, its visitors or employees, unless ultimately determined to be
caused by the active negligence or willful misconduct of Landlord, its agents,
servants and employees. Landlord shall have the right to establish, and from
time to time amend, and to enforce against all users all reasonable rules and
regulations that Landlord may deem necessary and advisable for the proper and
efficient operation and maintenance of parking within the Common Areas. Landlord
shall have the right to construct, maintain and operate lighting facilities
within the parking areas; to change the area, level, location and arrangement of
the parking areas and improvements therein; to restrict parking by tenants,
their officers, agents and employees to employee parking areas; to enforce
parking charges (by operation of meters or otherwise); and to do and perform
such other acts in and to the parking areas and improvements therein as, in the
use of good business judgment, Landlord shall determine to be advisable. Any
person using the parking area shall observe all directional signs and arrows and
any posted speed limits. In no event shall Tenant interfere with the use and
enjoyment of the parking area by other tenants of the Project or their employees
or invitees. Parking areas shall be used only for parking vehicles. Washing,
waxing, cleaning or servicing of vehicles, or the storage of vehicles for 24-
hour periods, is prohibited unless otherwise authorized by Landlord. Tenant
shall be liable for any damage to the parking areas caused by Tenant or Tenant's
employees, suppliers, shippers, customers or invitees, including without
limitation damage from excess oil leakage. Tenant shall have no right to install
any fixtures, equipment or personal property in the parking areas.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the
right to make alterations or additions to the Project, or to the attendant
fixtures, equipment and Common Areas. Landlord may at any time relocate or
remove any of the various buildings (other than the Building), parking areas,
and other Common Areas, and may add buildings and areas to the Project from time
to time. No change shall entitle Tenant to any abatement of rent or other claim
against Landlord, provided that the change does not deprive Tenant or materially
and adversely affect Tenant's reasonable access to or use of the Premises or
decrease the number of parking spaces available for Tenant's use.
ARTICLE VII. MAINTAINING THE PREMISES
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SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense
shall comply with all applicable laws and governmental regulations governing the
Premises and make all repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the improvements may
have been installed), excepting ordinary wear and tear, including without
limitation the electrical and mechanical systems, any air conditioning,
ventilating or heating equipment which serves the Premises, all walls, glass,
windows, doors, door closures, hardware, fixtures, electrical, plumbing, fire
extinguisher equipment and other equipment. Any damage or deterioration of the
Premises shall not be deemed ordinary wear and tear if the same could have been
prevented by good maintenance practices by Tenant. As part of its maintenance
obligations hereunder, Tenant shall, at Landlord's request, provide Landlord
with copies of all maintenance schedules, reports and notices prepared by, for
or on behalf of Tenant. Tenant shall obtain preventive maintenance contracts
from a licensed heating and air conditioning contractor to provide for regular
inspection and maintenance of the heating, ventilating and air conditioning
systems servicing the Premises, all subject to Landlord's approval. All repairs
shall be at least equal in quality to the original work, shall be made only by a
licensed contractor reasonably approved in writing in advance by Landlord and
shall be made only at the time or times reasonably approved by Landlord. Any
contractor utilized by Tenant shall be subject to Landlord's standard
requirements for contractors, as modified from time to time. Landlord shall have
the right at all times to inspect Tenant's maintenance of all equipment
(including without limitation air conditioning, ventilating and heating
equipment), and may impose reasonable restrictions and requirements with respect
to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall
apply to all repairs. Alternatively, Landlord may elect to make any repair or
maintenance of the electrical and mechanical systems and any air conditioning,
ventilating or heating equipment serving the Premises and include the reasonable
cost thereof as part of "Building Costs", and if the Tenant fails to properly
maintain and/or repair the Premises as herein provided following Landlord's
notice and the expiration of the applicable cure period, then Landlord may elect
to make any other repair or maintenance required hereunder on behalf of Tenant
and at Tenant's expense, and Tenant shall promptly reimburse Landlord for all
costs incurred upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1
and Article XI, Landlord shall provide service, maintenance and repair with
respect to the roof, foundations, and footings of the Building, all landscaping,
walkways, parking areas, Common Areas, exterior lighting, and the exterior
surfaces of the exterior walls of the Building, except that Tenant at its
expense shall make all repairs which Landlord deems reasonably necessary as a
result of the act or negligence of Tenant, its agents, employees, invitees,
subtenants or contractors. Landlord shall have the right to employ or designate
any reputable person or firm, including any employee or agent of Landlord or any
of Landlord's affiliates or divisions, to perform any service, repair or
maintenance function. Landlord need not make any other improvements or repairs
except as specifically required under this Lease, and nothing contained in this
Section shall limit Landlord's right to reimbursement from Tenant for
maintenance, repair costs and replacement costs as provided elsewhere in this
Lease. Tenant understands that it shall not make repairs at Landlord's expense
or by rental offset. Tenant further understands that Landlord shall not be
required to make any repairs to the roof, foundations or footings unless and
until Tenant has notified Landlord in writing of the need for such repair and
Landlord shall have a reasonable period of time thereafter to commence and
complete said repair, if warranted. Subject to the limitations of Section 4.2
hereof, all costs of any maintenance and repairs on the part of Landlord
provided hereunder shall be considered part of Building Costs.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold its
consent to any alterations, additions or improvements to the Premises which cost
less than One Hundred Thousand Dollars ($100,000.00) in the aggregate over the
initial Term and do not (i) affect the exterior of the Building or outside areas
(or be visible from adjoining sites), or (ii) affect or penetrate any of the
structural portions of the Building, including but not limited to the roof, or
(iii) require any substantial change to the basic floor plan of the Premises,
any change to any structural or mechanical systems of the Premises, or any
governmental permit as a prerequisite to the construction thereof, or (iv)
interfere in any manner with the proper functioning of or Landlord's access to
any mechanical, electrical, plumbing or HVAC systems, facilities or equipment
located in or serving the Building, or (v) diminish the value of the Premises in
Landlord's reasonable discretion. Landlord may impose, as a condition to its
consent, any requirements that Landlord in its discretion may deem reasonable or
desirable, including but not limited to a requirement that all work be covered
by a lien and completion bond satisfactory to Landlord and requirements as to
the manner, time, and contractor for performance of the work. Tenant shall
obtain all required permits for the work and shall perform the work in
compliance with all applicable laws, regulations and ordinances, all covenants,
conditions and restrictions affecting the Project, and the Rules and Regulations
(hereafter defined). Tenant understands and agrees that Landlord shall be
entitled to a supervision fee in the amount of three percent (3%) of the cost of
the work. If any governmental entity requires, as a condition to any proposed
alterations, additions or improvements to the Premises by Tenant, that
improvements be made to the Common Areas, and if Landlord consents to such
improvements to the Common Areas, then Tenant shall, at Tenant's sole expense,
make such required improvements to the Common Areas in such manner, utilizing
such materials, and with such contractors (including, if required by Landlord,
Landlord's contractors) as Landlord may require in its sole discretion. Under no
circumstances shall Tenant make any improvement which incorporates any Hazardous
Materials, including without limitation asbestos-containing construction
materials into the Premises. Any request for Landlord's consent shall be made in
writing and shall contain architectural plans describing the work in detail
reasonably satisfactory to Landlord. Unless Landlord otherwise agrees in
writing, all alterations, additions or improvements affixed to the Premises
(excluding moveable trade fixtures and furniture) shall become the property of
Landlord and shall be surrendered with the Premises at the end of the Term,
except that Landlord may, by notice to Tenant, require Tenant to remove by the
Expiration Date, or sooner termination date of this Lease, all or any
alterations, decorations, fixtures, additions, improvements and the like
installed either by Tenant or by Landlord at Tenant's request and to repair any
damage to the Premises arising from that removal. Except as otherwise provided
in this Lease or in any Exhibit to this
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Lease, should Landlord make any alteration or improvement to the Premises at the
request of Tenant, Landlord shall be entitled to prompt reimbursement from
Tenant for all costs incurred. Notwithstanding the foregoing, Landlord shall
have the right to require Tenant to remove (i) any Non-Standard Improvements
included in the initial Tenant Improvements to the Premises but only if Landlord
notifies Tenant that such removal will be required at the time of Landlord's
approval of the Preliminary Plan, and (ii) any subsequent alterations, additions
or improvements whether or not Landlord's consent was required unless Landlord's
written consent was obtained and unless at the time of providing its consent
Landlord notified Tenant in writing that Tenant would not have to remove such
items upon the expiration of the Lease Term.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from
any liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within sixty (60) days following the imposition of any lien, cause the lien
to be released of record by payment or posting of a proper bond, Landlord shall
have, in addition to all other available remedies, the right to cause the lien
to be released by any means it deems proper, including payment of or defense
against the claim giving rise to the lien. All expenses so incurred by Landlord,
including Landlord's attorneys' fees, and any consequential or other damages
incurred by Landlord arising out of such lien, shall be reimbursed by Tenant
promptly following Landlord's demand, together with interest from the date of
payment by Landlord at the maximum rate permitted by law until paid. Tenant
shall give Landlord no less than twenty (20) days' prior notice in writing
before commencing construction of any kind on the Premises so that Landlord may
post and maintain notices of nonresponsibility on the Premises.
SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable
times, upon written or oral notice (except in emergencies, when no notice shall
be required) have the right to enter the Premises to inspect them, to supply
services in accordance with this Lease, to protect the interests of Landlord in
the Premises, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when an uncured Tenant default exists, to prospective tenants), all
without being deemed to have caused an eviction of Tenant and without abatement
of rent except as provided elsewhere in this Lease. Landlord shall have the
right, if desired, to retain a key which unlocks all of the doors in the
Premises, excluding Tenant's vaults and safes, and Landlord shall have the right
to use any and all means which Landlord may deem proper to open the doors in an
emergency in order to obtain entry to the Premises, and any entry to the
Premises obtained by Landlord shall not under any circumstances be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or any
eviction of Tenant from the Premises.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property of
Tenant located in the Premises, against all improvements to the Premises made by
Landlord or Tenant which are above Landlord's Project standard in quality and/or
quantity for comparable space within the Project ("Above Standard
Improvements"), and against any alterations, additions or like improvements made
to the Premises by or on behalf of Tenant. When possible Tenant shall cause its
personal property, Above Standard Improvements and alterations to be assessed
and billed separately from the real property of which the Premises form a part.
If any taxes on Tenant's personal property, Above Standard Improvements and/or
alterations are levied against Landlord or Landlord's property and if Landlord
pays the same, or if the assessed value of Landlord's property is increased by
the inclusion of a value placed upon the personal property, Above Standard
Improvements and/or alterations of Tenant and if Landlord pays the taxes based
upon the increased assessment, Tenant shall pay to Landlord the taxes so levied
against Landlord or the proportion of the taxes resulting from the increase in
the assessment. In calculating what portion of any tax bill which is assessed
against Landlord separately, or Landlord and Tenant jointly, is attributable to
Tenant's Above Standard Improvements, alterations and personal property,
Landlord's reasonable determination shall be conclusive.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES.
(a) Except as specifically set forth herein, Tenant will not, either
voluntarily or by operation of law, assign, sublet, encumber, or otherwise
transfer all or any part of Tenant's interest in this lease, or permit the
Premises to be occupied by anyone other than Tenant, without Landlord's prior
written consent, which consent shall not unreasonably be withheld in accordance
with the provisions of Section 9.1.(b). No assignment (whether voluntary,
involuntary or by operation of law) and no subletting shall be valid or
effective without Landlord's prior written consent and, at Landlord's election,
any such assignment or subletting or attempted assignment or subletting shall
constitute a material default of this Lease. Landlord shall not be deemed to
have given its consent to any assignment or subletting by any other course of
action, including its acceptance of any name for listing in the Building
directory. To the extent not prohibited by provisions of the Bankruptcy Code, 11
U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section 365(f)(1),
Tenant on behalf of itself and its creditors, administrators and assigns waives
the applicability of Section 365(e) of the Bankruptcy Code unless the proposed
assignee of the Trustee for the estate of the bankrupt meets Landlord's standard
for consent as set forth in Section 9.1(b) of this Lease. If this Lease is
assigned to any person or entity pursuant to the provisions of the Bankruptcy
Code, any and all monies or other considerations to be delivered in
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connection with the assignment shall be delivered to Landlord, shall be and
remain the exclusive property of Landlord and shall not constitute property of
Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any
person or entity to which this Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed to have assumed all of the obligations
arising under this Lease on and after the date of the assignment, and shall upon
demand execute and deliver to Landlord an instrument confirming that assumption.
(b) If Tenant desires to transfer an interest in this Lease in any
transaction for which Landlord's consent is required, it shall first notify
Landlord of its desire and shall submit in writing to Landlord: (i) the name
and address of the proposed transferee; (ii) the nature of any proposed
subtenant's or assignee's business to be carried on in the Premises; (iii) the
terms and provisions of any proposed sublease or assignment, including a copy of
the proposed assignment or sublease form; (iv) evidence of insurance of the
proposed assignee or subtenant complying with the requirements of Exhibit D
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hereto; (v) a completed Environmental Questionnaire from the proposed assignee
or subtenant; and (vi) any other information requested by Landlord and
reasonably related to the transfer. Except as provided in Subsection (e) of
this Section, Landlord shall not unreasonably withhold its consent, provided:
(1) the use of the Premises will be consistent with the provisions of this Lease
and with Landlord's commitment to other tenants of the Project; (2) the proposed
assignee or subtenant has not been required by any prior landlord, lender or
governmental authority to take remedial action in connection with Hazardous
Materials contaminating a property arising out of the proposed assignee's or
subtenant's actions or use of the property in question and is not subject to any
enforcement order issued by any governmental authority in connection with the
use, disposal or storage of a Hazardous Material (unless such action has been
taken and/or order complied with so as to remediate such contamination); (3) at
Landlord's election, insurance requirements shall be brought into conformity
with Landlord's then current leasing practice; (4) any proposed subtenant or
assignee demonstrates that it is financially responsible by submission to
Landlord of all reasonable information as Landlord may request concerning the
proposed subtenant or assignee, including, but not limited to, a balance sheet
of the proposed subtenant or assignee as of a date within ninety (90) days of
the request for Landlord's consent and statements of income or profit and loss
of the proposed subtenant or assignee for the two-year period preceding the
request for Landlord's consent, and/or a certification signed by the proposed
subtenant or assignee that it has not been evicted or been in arrears in rent at
any other leased premises for the 3-year period preceding the request for
Landlord's consent;(5) the proposed assignee or subtenant is not an existing
tenant of the Project or a prospect with whom Landlord is negotiating to become
a tenant at the Project; and (6) the proposed transfer will not impose
additional burdens or adverse tax effects on Landlord. If Tenant has any
exterior sign rights under this Lease, such rights are personal to Tenant and
may not be assigned or transferred except to an assignee approved by Landlord in
accordance with this Article but only if the name proposed for such exterior
sign will not materially devalue the Project in Landlord's sole discretion.
If Landlord consents to the proposed transfer, Tenant may
within ninety (90) days after the date of the consent effect the transfer upon
the terms described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set forth
in this Section. Landlord shall approve or disapprove any requested transfer
within thirty (30) days following receipt of Tenant's written request, the
information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, in
lieu of consenting to a proposed assignment or subletting, Landlord may elect to
(i) sublease the Premises (or the portion proposed to be subleased), or take an
assignment of Tenant's interest in this Lease, upon the same terms as offered to
the proposed subtenant or assignee (excluding terms relating to the purchase of
personal property, the use of Tenant's name or the continuation of Tenant's
business), or (ii) terminate this Lease as to the portion of the Premises
proposed to be subleased or assigned with a proportionate abatement in the rent
payable under this Lease, effective on the date that the proposed sublease or
assignment would have become effective. Landlord may thereafter, at its option,
assign or re-let any space so recaptured to any third party, including without
limitation the proposed transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by
the assignee or subtenant, however described, in excess of (i) the Basic Rent
payable by Tenant hereunder, or in the case of a sublease of a portion of the
Premises, in excess of the Basic Rent reasonably allocable to such portion, plus
(ii) Tenant's direct out-of-pocket costs which Tenant certifies to Landlord have
been paid to provide occupancy related services to such assignee or subtenant of
a nature commonly provided by landlords of similar space including without
limitation reasonable legal fees, brokerage commissions, tenant improvement
costs and advertising and marketing expenses, shall be the property of Landlord
and such amounts shall be payable directly to Landlord by the assignee or
subtenant or, at Landlord's option, by Tenant. At Landlord's request, a written
agreement shall be entered into by and among Tenant, Landlord and the proposed
assignee or subtenant confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant. Such fee
is hereby acknowledged as a reasonable amount to reimburse Landlord for its
costs of review and evaluation of a proposed assignee/sublessee, and Landlord
shall not be obligated to commence such review and evaluation unless and until
such fee is paid.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with
the consent of Landlord, shall relieve Tenant of its obligation to pay rent and
to perform all its other obligations under this Lease. Moreover, Tenant shall
indemnify and hold Landlord harmless, as provided in Section 10.3, for any act
or omission by an assignee or subtenant. Each assignee, other than Landlord,
shall be deemed to assume all obligations of Tenant under this Lease and shall
be liable jointly and severally with Tenant for the payment of all rent, and for
the due performance of all of Tenant's obligations, under this Lease. No
transfer shall be binding on Landlord unless any document memorializing the
transfer is delivered to Landlord and both the assignee/subtenant and Tenant
deliver to Landlord an
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executed consent to transfer instrument prepared by Landlord and consistent with
the requirements of this Article. The acceptance by Landlord of any payment due
under this Lease from any other person shall not be deemed to be a waiver by
Landlord of any provision of this Lease or to be a consent to any transfer.
Consent by Landlord to one or more transfers shall not operate as a waiver or
estoppel to the future enforcement by Landlord of its rights under this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than
with respect to the payment of rent hereunder) is incorporated by reference into
and made a part of such sublease, with "Landlord" hereunder meaning the
sublandlord therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by
reason of this assignment or the collection of sublease rentals, be deemed
liable to the subtenant for the performance of any of Tenant's obligations under
the sublease. Tenant hereby irrevocably authorizes and directs any subtenant,
upon receipt of a written notice from Landlord stating that an uncured default
exists in the performance of Tenant's obligations under this Lease, to pay to
Landlord all sums then and thereafter due under the sublease. Tenant agrees
that the subtenant may rely on that notice without any duty of further inquiry
and notwithstanding any notice or claim by Tenant to the contrary. Tenant shall
have no right or claim against the subtenant or Landlord for any rentals so paid
to Landlord except to the extent of Tenant's portion thereof, if any, as
contemplated by Section 9.1 (d) hereof.
(c) In the event of the termination of this Lease, Landlord may,
at its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease, including without limitation
those pertaining to insurance and indemnification, shall be deemed incorporated
by reference into the sublease despite the termination of this Lease.
SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially all of
Tenant's assets (other than bulk sales in the ordinary course of business) or,
if Tenant is a corporation, an unincorporated association, or a partnership, the
transfer, assignment or hypothecation of any stock or interest in such
corporation, association, or partnership in the aggregate of twenty-five percent
(25%) (except for publicly traded shares of stock) shall be deemed an assignment
within the meaning and provisions of this Article. Notwithstanding the
foregoing, Landlord's consent shall not be required for the assignment of this
Lease as a result of a merger by Tenant with or into another entity, so long as
(i) the net worth of the successor entity after such merger is at least equal to
the greater of the net worth of Tenant as of the execution of this Lease by
Landlord or the net worth of Tenant immediately prior to the date of such
merger, evidence of which, satisfactory to Landlord, shall be presented to
Landlord prior to such merger, (ii) Tenant shall provide to Landlord, written
notice of such merger as soon as any such transaction is made public and such
assignment documentation and other information as Landlord may request in
connection therewith, and (iii) all of the other terms and requirements of this
Article shall apply with respect to such assignment.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in Exhibit D.
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Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election,
provide any or all of the following types of insurance, with or without
deductible and in amounts and coverages as may be determined by Landlord in its
discretion: "all risk" property insurance, subject to standard exclusions,
covering the Building or Project, and such other risks as Landlord or its
mortgagees may from time to time deem appropriate, including leasehold
improvements made by Landlord, and commercial general liability coverage.
Landlord shall not be required to carry insurance of any kind on Tenant's
property, including leasehold improvements, trade fixtures, furnishings,
equipment, plate glass, signs and all other items of personal property, and
shall not be obligated to repair or replace that property should damage occur.
All proceeds of insurance maintained by Landlord upon the Building and Project
shall be the property of Landlord, whether or not Landlord is obligated to or
elects to make any repairs. At Landlord's option, Landlord may self-insure all
or any portion of the risks for which Landlord elects to provide insurance
hereunder.
SECTION 10.3. JOINT INDEMNITY.
(a) To the fullest extent permitted by law, but subject to the
express limitations on liability contained in Section 10.5 of this Lease, Tenant
shall defend, indemnify, protect, save and hold harmless Landlord, its agents,
and any and all affiliates of Landlord, including, without limitation, any
corporations or other entities controlling,
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controlled by or under common control with Landlord, from and against any and
all claims, liabilities, costs or expenses arising either before or after the
Commencement Date from Tenant's use or occupancy of the Premises, the Building
or the Common Areas or from any default in the performance of any obligation on
Tenant's part to be performed under this Lease or from the conduct of its
business, or from any activity, work, or thing done, permitted or suffered by
Tenant or its agents, employees, invitees or licensees in or about the Premises,
or from any negligence or willful misconduct of Tenant or its agents, employees,
visitors, patrons, guests, invitees or licensees. In cases of alleged negligence
asserted by third parties against Landlord which arise out of, are occasioned
by, or in any way attributable to Tenant's, its agents, employees, contractors,
licensees or invitees use and occupancy of the Premises, or from the conduct of
its business or from any activity, work or thing done, permitted or suffered by
Tenant or its agents, employees, invitees or licensees on Tenant's part to be
performed under this Lease, or from any negligence or willful misconduct of
Tenant, its agents, employees, licensees or invitees, Tenant shall accept any
tender of defense for Landlord and shall, notwithstanding any allegation of
negligence or willful misconduct on the part of the Landlord, defend Landlord
and protect and hold Landlord harmless and pay all costs, expenses and
attorneys' fees incurred in connection with such litigation, provided that
Tenant shall not be liable for any such injury or damage, and Landlord shall
reimburse Tenant for the reasonable attorney's fees and costs for the attorney
representing both parties, all to the extent and in the proportion that such
injury or damage is ultimately determined by a court of competent jurisdiction
(or in connection with any negotiated settlement agreed to by Landlord) to be
attributable to the negligence or willful misconduct of Landlord. Upon
Landlord's request, Tenant shall at Tenant's sole cost and expense, retain a
separate attorney reasonably selected by Landlord to represent Landlord in any
such suit if Landlord reasonably determines that the representation of both
Tenant and Landlord by the same attorney would cause a conflict of interest;
provided, however, that to the extent and in the proportion that the injury or
damage which is the subject of the suit is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Landlord) to be attributable to the negligence or willful misconduct of
Landlord, Landlord shall reimburse Tenant for the reasonable legal fees and
costs of the separate attorney retained by Tenant. The provisions of this
Subsection 10.3(a) shall expressly survive the expiration or sooner termination
of this Lease.
(b) To the fullest extent permitted by law, but subject to the
express limitations on liability contained in this Lease (including, without
limitation, the provisions of Sections 10.4, 10.5 and 14.8 of this Lease),
Landlord shall defend, indemnify, protect, save and hold harmless Tenant, its
agents and any and all affiliates of Tenant, including, without limitation, any
corporations, or other entities controlling, controlled by or under common
control with Tenant, from and against any and all claims, liabilities, costs or
expenses arising either before or after the Commencement Date from the
operation, maintenance or repair of the Common Areas, the Project and/or the
Building by Landlord or its employees or authorized agents. In cases of alleged
negligence asserted by third parties against Tenant which arise out of, are
occasioned by, or in any way attributable to the maintenance or repair of the
Common Areas, the Project or the Building by Landlord or its authorized agents
or employees, Landlord shall accept any tender of defense for Tenant and shall,
notwithstanding any allegation of negligence or willful misconduct on the part
of Tenant, defend Tenant and protect and hold Tenant harmless and pay all cost,
expense and attorneys' fees incurred in connection with such litigation,
provided that Landlord shall not be liable for any such injury or damage, and
Tenant shall reimburse Landlord for the reasonable attorney's fees and costs for
the attorney representing both parties, all to the extent and in the proportion
that such injury or damage is ultimately determined by a court of competent
jurisdiction (or in connection with any negotiated settlement agreed to by
Tenant) to be attributable to the negligence or willful misconduct of Tenant.
Upon Tenant's request, Landlord shall at Landlord's sole cost and expense,
retain a separate attorney reasonably selected by Tenant to represent Tenant in
any such suit if Tenant reasonably determines that the representation of both
Tenant and Landlord by the same attorney would cause conflict of interest;
provided, however, that to the extent and the proportion that the injury or
damage which is the subject of the suit is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Tenant) to be attributable to the negligence or willful misconduct or
Tenant, Tenant shall reimburse Landlord for the reasonable legal fees and costs
of the separate attorney retained by Landlord. The provisions of this Subsection
10.3(b) shall expressly survive the expiration or sooner termination of this
Lease .
SECTION 10.4. LANDLORD'S NONLIABILITY. Subject to the express indemnity
obligations contained in Section 10.3(b) of this Lease, Landlord shall not be
liable to Tenant, its employees, agents and invitees, and Tenant hereby waives
all claims against Landlord for loss of or damage to any property or personal
injury, or any other loss, cost, damage, injury or liability whatsoever
resulting from fire, explosion, falling plaster, steam, gas, electricity, water
or rain which may leak or flow from or into any part of the Premises or from the
breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building, whether the damage or injury results from conditions arising in
the Premises or in other portions of the Building. Notwithstanding any
provision of this Lease to the contrary, including, without limitation, the
provisions of Section 10.3(b) of this Lease, Landlord shall in no event be
liable to Tenant, its employees, agents, and invitees, and Tenant hereby waives
all claims against Landlord, for loss or interruption of Tenant's business or
income (including, without limitation, any consequential damages and lost profit
or opportunity costs), or any other loss, cost, damage, injury or liability
resulting from, but not limited to, Acts of God (except with respect to
restoration obligations pursuant to Article XI below), acts of civil
disobedience or insurrection, acts or omissions (criminal or otherwise) of any
third parties (other than Landlord's employees or authorized agents), including
without limitation, any other tenants within the Project or their agents,
employees, contractors, guests or invitees. It is understood that any such
condition may require the temporary evacuation or closure of all or a portion of
the Building. Except as provided in Sections 6.1, 11.1 and 12.1 below, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business (including without limitation
consequential damages and lost profit or opportunity costs) arising from the
making of any repairs, alterations or improvements to any portion of the
Building, including repairs to the Premises, nor shall any related activity by
Landlord constitute an actual or constructive eviction; provided, however, that
in making repairs, alterations or improvements, Landlord shall interfere as
little as reasonably practicable
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with the conduct of Tenant's business in the Premises. Neither Landlord nor its
agents shall be liable for interference with light or other similar intangible
interests. Tenant shall immediately notify Landlord in case of fire or accident
in the Premises, the Building or the Project and of defects in any improvements
or equipment.
SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby
waives all rights of recovery against the other and the other's agents on
account of loss and damage occasioned to the property of such waiving party to
the extent only that such loss or damage is required to be insured against under
any "all risk" property insurance policies required by this Article X; provided
however, that (i) the foregoing waiver shall not apply to the extent of Tenant's
obligations to pay deductibles under any such policies and this Lease, and (ii)
if any loss is due to the act, omission or negligence or willful misconduct of
Tenant or its agents, employees, contractors, guests or invitees, Tenant's
liability insurance shall be primary and shall cover all losses and damages
prior to any other insurance hereunder. By this waiver it is the intent of the
parties that neither Landlord nor Tenant shall be liable to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage insured against under any "all-risk" property insurance policies
required by this Article, even though such loss or damage might be occasioned by
the negligence of such party, its agents, employees, contractors, guests or
invitees. The provisions of this Section shall not limit the indemnification
provisions elsewhere contained in this Lease.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building is damaged, Landlord shall repair that damage
as soon as reasonably possible, at its expense, unless: (i) Landlord reasonably
determines that the cost of repair is not covered by Landlord's fire and
extended coverage insurance plus such additional amounts Tenant elects, at its
option, to contribute, excluding however the deductible (for which Tenant shall
be responsible for Tenant's proportionate share); (ii) Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be fully
repaired by Landlord (or cannot be safely repaired because of the presence of
hazardous factors, including without limitation Hazardous Materials, earthquake
faults, and other similar dangers) within two hundred seventy (270) days after
the date of the damage; (iii) an event of default by Tenant has occurred and is
continuing at the time of such damage; or (iv) the damage occurs during the
final twelve (12) months of the Term unless Tenant has given a timely Commitment
Notice under Section 3.3. of this Lease. Should Landlord elect not to repair the
damage for one of the preceding reasons, Landlord shall so notify Tenant in
writing within sixty (60) days after the damage occurs and this Lease shall
terminate as of the date of that notice.
(b) Unless Landlord elects to terminate this Lease in accordance
with subsection (a) above, this Lease shall continue in effect for the remainder
of the Term; provided that so long as Tenant is not in default under this Lease,
if the damage is so extensive that Landlord reasonably determines that the
Premises cannot, with reasonable diligence, be repaired by Landlord (or cannot
be safely repaired because of the presence of hazardous factors, earthquake
faults, and other similar dangers) so as to allow Tenant's substantial use and
enjoyment of the Premises within two hundred seventy (270) days after the date
of damage, then Tenant may elect to terminate this Lease by written notice to
Landlord within the sixty (60) day period stated in subsection (a).
(c) Commencing on the date of any damage to the Building, and
ending on the sooner of the date the damage is repaired or the date this Lease
is terminated, the rental to be paid under this Lease shall be abated in the
same proportion that the floor area of the Building that is rendered unusable by
the damage from time to time bears to the total floor area of the Building, but
only to the extent that any business interruption insurance proceeds are
received by Landlord therefor from Tenant's insurance described in Exhibit D.
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Notwithstanding the foregoing, Tenant shall not be required to remain in any
portion of the Premises in which it cannot reasonably conduct its business
during any such repair.
(d) Notwithstanding the provisions of subsections (a), (b) and
(c) of this Section, and subject to the provisions of Section 10.5 above, the
cost of any repairs shall be borne by Tenant, and Tenant shall not be entitled
to rental abatement or termination rights, if the damage is due to the fault or
neglect of Tenant or its employees, subtenants, invitees or representatives. In
addition, the provisions of this Section shall not be deemed to require Landlord
to repair any improvements or fixtures that Tenant is obligated to repair or
insure pursuant to any other provision of this Lease.
(e) Tenant shall fully cooperate with Landlord in removing
Tenant's personal property and any debris from the Premises to facilitate all
inspections of the Premises and the making of any repairs. Notwithstanding
anything to the contrary contained in this Lease, if Landlord in good faith
believes there is a risk of injury to persons or damage to property from entry
into the Building or Premises following any damage or destruction thereto,
Landlord may restrict entry into the Building or the Premises by Tenant, its
employees, agents and contractors in a non-discriminatory manner, without being
deemed to have violated Tenant's rights of quiet enjoyment to, or made an
unlawful detainer of, or evicted Tenant from, the Premises. Upon request,
Landlord shall consult with Tenant to determine if there are safe methods of
entry into the Building or the Premises solely in order to allow Tenant to
retrieve files, data in computers, and necessary inventory, subject however to
all indemnities and waivers of liability from Tenant to Landlord contained in
this Lease and any additional indemnities and waivers of liability which
Landlord may require.
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SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
ARTICLE XII. EMINENT DOMAIN
SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of
the Premises is taken by any lawful authority by exercise of the right of
eminent domain, or sold to prevent a taking, either Tenant or Landlord may
terminate this Lease effective as of the date possession is required to be
surrendered to the authority. In the event title to a portion of the Premises
is taken or sold in lieu of taking, and if Landlord elects to restore the
Premises in such a way as to alter the Premises materially, either party may
terminate this Lease, by written notice to the other party, effective on the
date of vesting of title. In the event neither party has elected to terminate
this Lease as provided above, then Landlord shall promptly, after receipt of a
sufficient condemnation award, proceed to restore the Premises to substantially
their condition prior to the taking, and a proportionate allowance shall be made
to Tenant for the rent corresponding to the time during which, and to the part
of the Premises of which, Tenant is deprived on account of the taking and
restoration. Notwithstanding the foregoing, Tenant shall not be required to
remain in any portion of the Premises in which it cannot reasonably conduct its
business during such taking and/or restoration. In the event of a taking,
Landlord shall be entitled to the entire amount of the condemnation award
without deduction for any estate or interest of Tenant; provided that nothing in
this Section shall be deemed to give Landlord any interest in, or prevent Tenant
from seeking any award against the taking authority for, the taking of personal
property and fixtures belonging to Tenant or for relocation or business
interruption expenses recoverable from the taking authority.
SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this Lease or give Tenant any right to abatement of rent, and any
award specifically attributable to a temporary taking of the Premises shall
belong entirely to Tenant. A temporary taking shall be deemed to be a taking of
the use or occupancy of the Premises for a period of not to exceed ninety (90)
days.
SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a
taking of the parking area such that Landlord can no longer provide sufficient
parking to comply with this Lease, Landlord may substitute reasonably equivalent
parking in a location reasonably close to the Building; provided that if
Landlord fails to make that substitution within sixty (60) days following the
taking and if the taking materially impairs Tenant's use and enjoyment of the
Premises, Tenant may, at its option, terminate this Lease by written notice to
Landlord. If this Lease is not so terminated by Tenant, there shall be no
abatement of rent and this Lease shall continue in effect.
ARTICLE XIII. SUBORDINATION; ESTOPPELCERTIFICATE; FINANCIALS
SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease shall
be either superior or subordinate to all ground or underlying leases, mortgages
and deeds of trust, if any, which may hereafter affect the Premises, and to all
renewals, modifications, consolidations, replacements and extensions thereof;
provided, that so long as Tenant is not in default under this Lease, this Lease
shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in
the event of termination of any such ground or underlying lease, or the
foreclosure of any such mortgage or deed of trust, to which Tenant has
subordinated this Lease pursuant to this Section. In the event of a termination
or foreclosure, Tenant shall become a tenant of and attorn to the successor-in-
interest to Landlord upon the same terms and conditions as are contained in this
Lease, and shall execute any instrument reasonably required by Landlord's
successor for that purpose. Tenant shall also, upon written request of
Landlord, execute and deliver all instruments as may be required from time to
time to subordinate the rights of Tenant under this Lease to any ground or
underlying lease or to the lien of any mortgage or deed of trust (provided that
such instruments include the nondisturbance and attornment provisions set forth
above), or, if requested by Landlord, to subordinate, in whole or in part, any
ground or underlying lease or the lien of any mortgage or deed of trust to this
Lease.
SECTION 13.2. ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10) days
prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect) and the dates to
which the rental, additional rent and other charges have been paid in advance,
if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured
defaults on the part of Landlord, or specifying each default if any are claimed,
and (iii) setting forth all further information that Landlord may reasonably
require. Tenant's statement may be relied upon by any prospective purchaser or
encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) there are no
uncured defaults in Landlord's performance, and (iii) not more than one month's
rental has been paid in advance.
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SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of this
Lease and thereafter at any time upon Landlord's request but not more often than
once in any calendar year, Tenant's current annual audited financial statements,
certified true, accurate and complete by the chief financial officer of Tenant,
including a balance sheet and profit and loss statement for the most recent
prior year (collectively, the "Statements"), which Statements shall accurately
and completely reflect the financial condition of Tenant. Landlord agrees that
it will keep the Statements confidential, except that Landlord shall have the
right to deliver the same to any proposed purchaser or encumbrancer of the
Premises.
(b) Tenant acknowledges that Landlord is relying on the Statements in
its determination to enter into this Lease, and Tenant represents to Landlord,
which representation shall be deemed made on the date of this Lease and again on
the Commencement Date, that no material change in the financial condition of
Tenant, as reflected in the Statements, has occurred since the date Tenant
delivered the Statements to Landlord. The Statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of submission by any Statements to
Landlord.
ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of
default set forth in this Lease, the occurrence of any one or more of the
following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of five (5) days after written notice from Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure Section 1161
and 1161(a) as amended. For purposes of these default and remedies provisions,
the term "additional rent" shall be deemed to include all amounts of any type
whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of
this Lease.
(b) Except as specifically set forth in Section 9.4, any assignment,
sublease, encumbrance or other transfer of the Lease by Tenant, either
voluntarily or by operation of law, whether by judgment, execution, transfer by
intestacy or testacy, or other means, without the prior written consent of
Landlord.
(c) The discovery by Landlord that any financial statement provided by
Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or perform any of
the express or implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in any other subsection of this
Section, where the failure continues for a period of thirty (30) days after
written notice from Landlord to Tenant or such shorter period as is specified in
any other provision of this Lease; provided, however, that any such notice shall
be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature
of the failure is such that more than thirty (30) days are reasonably required
for its cure, then Tenant shall not be deemed to be in default if Tenant
commences the cure within thirty (30) days, and thereafter diligently pursues
the cure to completion.
(f) (i) The making by Tenant of any general assignment for the benefit
of creditors; (ii) the filing by or against Tenant of a petition to have Tenant
adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within sixty (60) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within sixty (60) days; (iv) the attachment, execution or
other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within sixty (60) days; or (v) Tenant's convening of a meeting of its
creditors for the purpose of effecting a moratorium upon or composition of its
debts. Landlord shall not be deemed to have knowledge of any event described in
this subsection unless notification in writing is received by Landlord, nor
shall there be any presumption attributable to Landlord of Tenant's insolvency.
In the event that any provision of this subsection is contrary to applicable
law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to
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Landlord. Such termination shall not affect any accrued obligations of Tenant
under this Lease. Upon termination, Landlord shall have the right to reenter the
Premises and remove all persons and property. Landlord shall also be entitled to
recover from Tenant:
(1) The worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which
the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that Tenant
proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by which
the unpaid rent and additional rent for the balance of the Term after the time
of award exceeds the amount of such loss that Tenant proves could be reasonably
avoided;
(4) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result from Tenant's default, including, but not limited to, the cost
of recovering possession of the Premises, refurbishment of the Premises,
marketing costs, commissions and other expenses of reletting, including
necessary repair, the unamortized portion of any tenant improvements and
brokerage commissions funded by Landlord in connection with this Lease,
reasonable attorneys' fees, and any other reasonable costs; and
(5) At Landlord's election, all other amounts in addition to
or in lieu of the foregoing as may be permitted by law. The term "rent" as used
in this Lease shall be deemed to mean the Basic Rent and all other sums required
to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum,
other than Basic Rent, shall be computed on the basis of the average monthly
amount accruing during the twenty-four (24) month period immediately prior to
default, except that if it becomes necessary to compute such rental before the
twenty-four (24) month period has occurred, then the computation shall be on the
basis of the average monthly amount during the shorter period. As used in
subparagraphs (1) and (2) above, the "worth at the time of award" shall be
computed by allowing interest at the rate of ten percent (10%) per annum. As
used in subparagraph (3) above, the "worth at the time of award" shall be
computed by discounting the amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce all
of its rights and remedies under this Lease, including the right to collect all
rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet
the Premises, or the appointment of a receiver to protect the Landlord's
interests under this Lease, shall not constitute a termination of the Tenant's
right to possession of the Premises. In the event that Landlord elects to avail
itself of the remedy provided by this subsection (ii), Landlord shall not
unreasonably withhold its consent to an assignment or subletting of the Premises
subject to the reasonable standards for Landlord's consent as are contained in
this Lease.
(b) The various rights and remedies reserved to Landlord in this Lease
or otherwise shall be cumulative and, except as otherwise provided by California
law, Landlord may pursue any or all of its rights and remedies at the same time.
(c) No delay or omission of Landlord to exercise any right or remedy
shall be construed as a waiver of the right or remedy or of any default by
Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any
preceding breach or default by Tenant of any provision of this Lease, other than
the failure of Tenant to pay the particular rent accepted, regardless of
Landlord's knowledge of the preceding breach or default at the time of
acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy
available to Landlord by virtue of the breach or default. The acceptance of any
payment from a debtor in possession, a trustee, a receiver or any other person
acting on behalf of Tenant or Tenant's estate shall not waive or cure a default
under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser
amount than the rent required by this Lease shall be deemed to be other than a
partial payment on account of the earliest due stipulated rent, nor shall any
endorsement or statement on any check or letter be deemed an accord and
satisfaction and Landlord shall accept the check or payment without prejudice to
Landlord's right to recover the balance of the rent or pursue any other remedy
available to it. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this Lease, and
the delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within five (5) days of the date when due shall bear interest at the lesser of
twelve percent (12%) per annum or the maximum rate permitted by law until fully
paid. The payment of interest shall not cure any default by Tenant under this
Lease. In addition, Tenant acknowledges that the late payment by Tenant to
Landlord of rent will cause Landlord to incur costs not contemplated
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by this Lease, the exact amount of which will be extremely difficult and
impracticable to ascertain. Those costs may include, but are not limited to,
administrative, processing and accounting charges, and late charges which may be
imposed on Landlord by the terms of any ground lease, mortgage or trust deed
covering the Premises. Accordingly, if any rent due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) days after the date
due, then Tenant shall pay to Landlord, in addition to the interest provided
above, a late charge in a sum equal to the greater of five percent (5%) of the
amount overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent
payment; provided, however, that such late charge shall be waived on the first
two (2) occasions only during the Term when rent is not paid within five (5)
days after the date due provided Tenant makes such payment within five (5) days
after written notice from Landlord. Acceptance of a late charge by Landlord
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor shall it prevent Landlord from exercising any of its other rights
and remedies.
(b) Following each second consecutive installment of rent that is not
paid within five (5) days following written notice of nonpayment from Landlord,
Landlord shall have the option to require that Tenant increase the amount, if
any, of the Security Deposit by one hundred percent (100%). Should Tenant
deliver to Landlord, at any time during the Term, two (2) or more insufficient
checks, the Landlord may require that all monies then and thereafter due from
Tenant be paid to Landlord by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements
to be performed by Tenant under this Lease shall be performed at Tenant's sole
cost and expense and without any abatement of rent or right of set-off. If
Tenant fails to pay any sum of money, other than rent, or fails to perform any
other act on its part to be performed under this Lease, and the failure
continues beyond any applicable grace period set forth in Section 14.1, then in
addition to any other available remedies, Landlord may, at its election make the
payment or perform the other act on Tenant's part. Landlord's election to make
the payment or perform the act on Tenant's part shall not give rise to any
responsibility of Landlord to continue making the same or similar payments or
performing the same or similar acts. Tenant shall, promptly upon demand by
Landlord, reimburse Landlord for all sums paid by Landlord and all necessary
incidental costs, together with interest at the lesser of twelve percent (12%)
or the maximum rate permitted by law from the date of the payment by Landlord.
Landlord shall have the same rights and remedies if Tenant fails to pay those
amounts as Landlord would have in the event of a default by Tenant in the
payment of rent.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease or
holding over of possession by Tenant after the expiration or earlier termination
of this Lease, including without limitation all costs, expenses and actual
accountants, appraisers, attorneys and other professional fees, and any
collection agency or other collection charges, shall be due and payable by
Tenant to Landlord on demand, and shall bear interest at the rate of ten percent
(10%) per annum. Should either Landlord or Tenant bring any action in
connection with this Lease, the prevailing party shall be entitled to recover as
a part of the action its reasonable attorneys' fees, and all other costs. The
prevailing party for the purpose of this paragraph shall be determined by the
trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES
THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT
TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND
KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY
CLAIM OF INJURY OR DAMAGE.
SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord do
not constitute the personal obligations of the individual partners, trustees,
directors, officers or shareholders of Landlord or its constituent partners.
Should Tenant recover a money judgment against Landlord, such judgment shall be
satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Project and out of the rent or other income from such property receivable by
Landlord or out of consideration received by Landlord from the sale or other
disposition of all or any part of Landlord's right, title or interest in the
Project, and no action for any deficiency may be sought or obtained by Tenant.
ARTICLE XV. END OF TERM
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SECTION 15.1. HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term without the prior written consent of Landlord, such
possession shall constitute a tenancy at sufferance only; such holding over with
the prior written consent of Landlord shall constitute a month-to-month tenancy
commencing on the first (1st) day following the termination of this Lease. In
either of such events, possession shall be subject to all of the terms of this
Lease, except that the monthly Basic Rent shall be one hundred seventy-five
percent (175%) of the Basic Rent for the month immediately preceding the date of
termination for the initial two (2) months of holdover by Tenant and for the
third (3rd) month and each month Tenant holds over thereafter, two hundred
percent (200%) of the Basic Rent for the month immediately preceding the date of
termination. If Tenant fails to surrender the Premises upon the expiration of
this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold
Landlord harmless from all loss or liability, including without limitation, any
claims made by any succeeding tenant relating to such failure to surrender.
Acceptance by Landlord of rent after the termination shall not constitute a
consent to a holdover or result in a renewal of this Lease. The foregoing
provisions of this Section are in addition to and do not affect Landlord's right
of re-entry or any other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
Tenant, reasonable wear and tear and repairs which are Landlord's obligation
excepted, and shall, without expense to Landlord, remove or cause to be removed
from the Premises all personal property and debris, except for any items that
Landlord may by written authorization allow to remain. Tenant shall repair all
damage to the Premises resulting from the removal, which repair shall include
the patching and filling of holes and repair of structural damage, provided that
Landlord may instead elect to repair any structural damage at Tenant's expense.
If Tenant shall fail to comply with the provisions of this Section, Landlord may
effect the removal and/or make any repairs, and the cost to Landlord shall be
additional rent payable by Tenant upon demand. If Tenant fails to remove
Tenant's personal property from the Premises upon the expiration of the Term,
Landlord may remove, store, dispose of and/or retain such personal property, at
Landlord's option, in accordance with then applicable laws, all at the expense
of Tenant. If requested by Landlord, Tenant shall execute, acknowledge and
deliver to Landlord an instrument in writing releasing and quitclaiming to
Landlord all right, title and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either party to the other may be delivered in person or by courier
or overnight delivery service to the other party, or may be deposited in the
United States mail, duly registered or certified, postage prepaid, return
receipt requested, and addressed to the other party at the address set forth in
Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from
and after the Commencement Date, at the Premises, or may be delivered by
telegram, telex or telecopy, provided that receipt thereof is telephonically
confirmed. Either party may, by written notice to the other, served in the
manner provided in this Article, designate a different address. If any notice
or other document is sent by mail, it shall be deemed served or delivered
seventy-two (72) hours after mailing. If more than one person or entity is
named as Tenant under this Lease, service of any notice upon any one of them
shall be deemed as service upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules and
Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory
---------
amendments, modifications and/or additions as may be adopted and published by
written notice to tenants by Landlord for the safety, care, security, good
order, or cleanliness of the Premises, and Project and Common Areas (if
applicable). Landlord shall not be liable to Tenant for any violation of the
Rules and Regulations or the breach of any covenant or condition in any lease by
any other tenant or such tenant's agents, employees, contractors, guests or
invitees. One or more waivers by Landlord of any breach of the Rules and
Regulations by Tenant or by any other tenant(s) shall not be a waiver of any
subsequent breach of that rule or any other. Tenant's failure to keep and
observe the Rules and Regulations shall constitute a default under this Lease.
In the case of any conflict between the Rules and Regulations and this Lease,
this Lease shall be controlling.
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ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real estate
broker or agent in connection with the negotiation of this Lease, and Tenant
agrees to indemnify and hold Landlord harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by Tenant in connection with
the negotiation of this Lease. The foregoing agreement shall survive the
termination of this Lease. If Tenant fails to take possession of the Premises
or if this Lease otherwise terminates prior to the Expiration Date as the result
of failure of performance by Tenant, Landlord shall be entitled to recover from
Tenant the unamortized portion of any brokerage commission funded by Landlord in
addition to any other damages to which Landlord may be entitled.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Premises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or
deed of trust to which this Lease is or may be subordinate, and no landlord
under a so-called sale-leaseback, shall be responsible in connection with the
Security Deposit, unless the mortgagee or holder of the deed of trust or the
landlord actually receives the Security Deposit. It is intended that the
covenants and obligations contained in this Lease on the part of Landlord shall,
subject to the foregoing, be binding on Landlord, its successors and assigns,
only during and in respect to their respective successive periods of ownership.
ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained in
this Lease shall not be a waiver of any subsequent breach of the same or any
other term, covenant or condition. Consent to any act by one of the parties
shall not be deemed to render unnecessary the obtaining of that party's consent
to any subsequent act. No breach by Tenant of this Lease shall be deemed to
have been waived by Landlord unless the waiver is in a writing signed by
Landlord. The rights
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and remedies of Landlord under this Lease shall be cumulative and in addition to
any and all other rights and remedies which Landlord may have.
SECTION 20.9. INABILITY TO PERFORM. Except as specifically set forth
herein to the contrary, in the event that either party shall be delayed or
hindered in or prevented from the performance of any work or in performing any
act required under this Lease by reason of any cause beyond the reasonable
control of that party, then the performance of the work or the doing of the act
shall be excused for the period of the delay and the time for performance shall
be extended for a period equivalent to the period of the delay. The provisions
of this Section shall not operate to excuse Tenant from the prompt payment of
rent or excuse Landlord or Tenant from the timely performance of any other
obligation under this Lease within such party's reasonable control.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further effect.
Tenant waives its rights to rely on any representations or promises made by
Landlord or others which are not contained in this Lease. No verbal agreement
or implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of
all the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement or
certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall
be effective unless in writing signed by authorized signatories of Tenant and
Landlord, or by their respective successors in interest. No actions, policies,
oral or informal arrangements, business dealings or other course of conduct by
or between the parties shall be deemed to modify this Lease in any respect.
SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
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ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and
agrees that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Project, either directly or indirectly,
without the prior written consent of Landlord, provided, however, that Tenant
may disclose the terms to prospective subtenants or assignees under this Lease.
The provisions of this Section are not intended to prevent Tenant from
disclosing the existence or terms of this Lease as may be required of a public
company in its filings with regulatory agencies.
SECTION 22.2. GUARANTY. As a condition to the execution of this Lease by
Landlord, the obligations, covenants and performance of the Tenant as herein
provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of
the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Project, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part
of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a release
or termination unless (a) Tenant has given notice by registered or certified
mail to any beneficiary of a deed of trust or mortgage covering the Premises
whose address has been furnished to Tenant and (b) such beneficiary is afforded
a reasonable opportunity to cure the default by Landlord (which in no event
shall be less than sixty (60) days), including, if necessary to effect the cure,
time to obtain possession of the Premises by power of sale or judicial
foreclosure provided that such foreclosure remedy is diligently pursued. Tenant
agrees that each beneficiary of a deed of trust or mortgage covering the
Premises is an express third party beneficiary hereof, Tenant shall have no
right or claim for the collection of any deposit from such beneficiary or from
any purchaser at a foreclosure sale unless such beneficiary or purchaser shall
have actually received and not refunded the deposit, and Tenant shall comply
with any written directions by any beneficiary to pay rent due hereunder
directly to such beneficiary without determining whether an event of default
exists under such beneficiary's deed of trust.
SECTION 22.5. COVENANTS AND CONDITIONS. All of the provisions of this
Lease shall be construed to be conditions as well as covenants as though the
words specifically expressing or imparting covenants and conditions were used in
each separate provision.
SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord
shall have no obligation whatsoever to provide guard service or other security
measures for the benefit of the Premises or the Project. Tenant assumes all
responsibility for the protection of Tenant, its agents, invitees and property
from acts of third parties. Nothing herein contained shall prevent Landlord, at
its sole option, from providing security protection for the Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Building Costs.
SECTION 22.7. JAMS.
(a) All claims or disputes between Landlord and Tenant arising out of,
or relating to, the Lease which either party is expressly authorized by a
provision hereof to submit to arbitration, shall be decided by the
JAMS/ENDISPUTE, or its successor, in Orange County, California ("JAMS"), unless
the parties mutually agree otherwise. Within ten (10) business days following
submission to JAMS, JAMS shall designate three arbitrators and each party may,
within five (5) business days thereafter, veto one of the three persons so
designated. If two different designated arbitrators have been vetoed, the third
arbitrator shall hear and decide the matter. Any arbitration pursuant to this
SECTION 22.7 shall be decided within thirty (30) days of submission to JAMS.
The decision of the arbitrator shall be final and binding on the parties. All
costs associated with arbitration shall be awarded to the prevailing party as
determined by the arbitrator.
(b) Notice of the demand for arbitration by either party to the Lease
shall be filed in writing with the other party to the Lease and with JAMS and
shall be made within a reasonable time after the dispute has arisen. The award
rendered by the arbitrators shall be final, and judgment may be entered upon it
in accordance with applicable law in any court having jurisdiction thereof. If
either party in good faith decides to join one or more third parties in an
arbitration being conducted pursuant to this Section because such party's
presence is necessary if complete relief is to be accorded in the arbitration
and such persons or entities do not agree to be joined and bound thereby, there
shall be no obligation for Landlord and Tenant to submit the dispute to
arbitration as contemplated by this Section.
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(c) The agreement herein among the parties to the Lease and any other
written agreement to arbitrate referred to herein shall be specifically
enforceable under prevailing law.
LANDLORD: TENANT:
THE IRVINE COMPANY, INFORMATION MANAGEMENT
a Delaware corporation ASSOCIATES, INC.,
a Connecticut corporation
By: /s/ Richard G. Sim By: /s/ Gary R. Mortino
-------------------------- --------------------------
Richard G. Sim, Name: Gary R. Mortino
Executive Vice President Title: Chief Financial Officer
By: /s/ Clarence W. Barker By:
-------------------------- --------------------------
Clarence W. Barker, Name:
President, Irvine Industrial Title:
Company, a division of The
Irvine Company
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INDEX TO INDUSTRIAL LEASE
(Single Tenant; Net)
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II. PREMISES
Section 2.1 Leased Premises
Section 2.2 Acceptance of Premises
Section 2.3 Building Name and Address
Section 2.4 Landlord's Responsibilities
ARTICLE III. TERM
Section 3.1 General
Section 3.2 Delay in Possession
ARTICLE IV. RENT AND OPERATING EXPENSES
Section 4.1 Basic Rent
Section 4.2 Operating Expenses
Section 4.3 Security Deposit
ARTICLE V. USES
Section 5.1 Use
Section 5.2 Signs
Section 5.3 Hazardous Materials
ARTICLE VI. COMMON AREAS; SERVICES
Section 6.1 Utilities and Services
Section 6.2 Operation and Maintenance of Common Areas
Section 6.3 Use of Common Areas
Section 6.4 Parking
Section 6.5 Changes and Additions by Landlord
ARTICLE VII. MAINTAINING THE PREMISES
Section 7.1 Tenant's Maintenance and Repair
Section 7.2 Landlord's Maintenance and Repair
Section 7.3 Alterations
Section 7.4 Mechanic's Liens
Section 7.5 Entry and Inspection
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
ARTICLE IX. ASSIGNMENT AND SUBLETTING
Section 9.1 Rights of Parties
Section 9.2 Effect of Transfer
Section 9.3 Sublease Requirements
Section 9.4 Certain Transfers
ARTICLE X. INSURANCE AND INDEMNITY
Section 10.1 Tenant's Insurance
Section 10.2 Landlord's Insurance
Section 10.3 Joint Indemnity
Section 10.4 Landlord's Nonliability
Section 10.5 Waiver of Subrogation
ARTICLE XI. DAMAGE OR DESTRUCTION
Section 11.1 Restoration
Section 11.2 Lease Governs
ARTICLE XII. EMINENT DOMAIN
Section 12.1 Total or Partial Taking
Section 12.2 Temporary Taking
Section 12.3 Taking of Parking Area
ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIAL
Section 13.1 Subordination
Section 13.2 Estoppel Certificate
Section 13.3 Financials
(i)
<PAGE>
ARTICLE XIV. DEFAULTS AND REMEDIES
Section 14.1 Tenant's Defaults
Section 14.2 Landlord's Remedies
Section 14.3 Late Payments
Section 14.4 Right of Landlord to Perform
Section 14.5 Default by Landlord
Section 14.6 Expenses and Legal Fees
Section 14.7 Waiver of Jury Trial
Section 14.8 Satisfaction of Judgment
Section 14.9 Limitation of Actions Against Landlord
ARTICLE XV. END OF TERM
Section 15.1 Holding Over
Section 15.2 Merger on Termination
Section 15.3 Surrender of Premises; Removal of Property
ARTICLE XVI. PAYMENTS AND NOTICES
ARTICLE XVII. RULES AND REGULATIONS
ARTICLE XVIII. BROKER'S COMMISSION
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
ARTICLE XX. INTERPRETATION
Section 20.1 Gender and Number
Section 20.2 Headings
Section 20.3 Joint and Several Liability
Section 20.4 Successors
Section 20.5 Time of Essence
Section 20.6 Controlling Law
Section 20.7 Severability
Section 20.8 Waiver and Cumulative Remedies
Section 20.9 Inability to Perform
Section 20.10 Entire Agreement
Section 20.11 Quiet Enjoyment
Section 20.12 Survival
ARTICLE XXI. EXECUTION AND RECORDING
Section 21.1 Counterparts
Section 21.2 Corporate and Partnership Authority
Section 21.3 Execution of Lease; No Option or Offer
Section 21.4 Recording
Section 21.5 Amendments
Section 21.6 Executed Copy
Section 21.7 Attachments
ARTICLE XXII. MISCELLANEOUS
Section 22.1 Nondisclosure of Lease Terms
Section 22.2 Guaranty
Section 22.3 Changes Requested by Lender
Section 22.4 Mortgagee Protection
Section 22.5 Covenants and Conditions
Section 22.6 Security Measures
EXHIBITS
Exhibit A Description of the Premises
Exhibit B Environmental Questionnaire
Exhibit C Landlord's Disclosures
Exhibit D Insurance Requirements
Exhibit E Rules and Regulations
Exhibit X Work Letter
Exhibit Y Project Site Plan
(ii)
<PAGE>
EXHIBIT 10.2
THIRD AMENDMENT TO LEASE
------------------------
1. PARTIES.
-------
This Third Amendment to Lease (the "Third Amendment") is executed this 31st
----
day of December , 1998, by and between LAKESHORE TOWERS LIMITED PHASE I, a
-----------
California limited partnership ("Landlord"), and INFORMATION MANAGEMENT
ASSOCIATES, INC., a Connecticut corporation ("Tenant").
2. RECITALS.
--------
A. Landlord and Tenant entered into that certain Full Service Office Lease
dated November 4, 1994, as amended by that certain First Amendment to Lease
dated January 26, 1995, and that certain Second Amendment to Lease dated July
15, 1996 (as amended, the "Lease"), covering those certain premises known as
Suites 1100 and 1240 situated within that certain office building located at
18101 Von Karman Avenue, Irvine, California, within the project commonly known
as "Lakeshore Towers" as more particularly described in the Lease (the
"Premises").
B. Tenant has requested that the Lease be amended so that the expiration
of the term of the Lease shall occur on May 2, 1999.
C. Landlord is willing to amend the Lease to provide for an expiration of
the term of the Lease to be effective as of May 2, 1999, subject to the terms
and conditions of this Third Amendment.
D. Landlord and Tenant mutually desire to enter into this Third Amendment
in order to amend the Lease to, among other things, provide for the expiration
of the term of the Lease to be effective as of May 2, 1999.
3. LEASE MODIFICATION AGREEMENT.
----------------------------
Landlord and Tenant hereby modify the Lease as follows:
a. Defined Terms. The following terms shall have the following meanings:
-------------
(i) Lease Term. "Term" means the period commencing January 20, 1995,
----------
and terminating May 2, 1999.
(ii) Expiration Date. "Expiration Date" means May 2, 1999.
---------------
b. Broker. Tenant hereby represents and warrants to Landlord that it has
------
not dealt with any real estate broker or agent in connection with this Amendment
or its negotiation except Dick Silva, Jim Snyder and Lee & Associates
(collectively "Broker"). Tenant shall pay any commission owing Broker pursuant
to and subject to certain conditions set forth in a separate written agreement
between Tenant and Broker. Except for Broker's commission which shall be paid
by Tenant, Landlord and Tenant shall each indemnify and hold the other harmless
from any cost, expense or liability (including costs of suit and reasonable
attorneys' fees) for any compensation, commissions or fees claimed by any other
real estate broker, agent or other person in connection with this Third
Amendment or its negotiation by reason of any act of the indemnifying party.
c. Early Termination Consideration. In consideration of Landlord's
-------------------------------
agreement to modify the Lease as provided herein so that the Term shall expire
on May 2, 1999, Tenant shall pay to Landlord the total sum of $250,000. Of such
sum, $125,000 shall be paid to Landlord upon the execution of this Third
Amendment by Landlord and Tenant. The remaining $125,000 shall be paid by
1
<PAGE>
Tenant to Landlord no later than April 30, 1999. Tenant hereby acknowledges
that Landlord shall, immediately upon execution of this Third Amendment by
Landlord and Tenant, commence efforts to find a tenant or tenants to occupy the
Premises. Such occupancy by a third party would not, however, occur prior to
May 31, 1999. Tenant hereby acknowledges that its failure to vacate the
Premises and return possession of the Premises to Landlord in accordance with
the terms and conditions of the Lease by May 31, 1999 could cause Landlord to
incur significant damages which may not be adequately compensated by holdover
rent.
d. Holding Over. The following is added at the end of Section 21.
------------
HOLDING OVER OF THE LEASE:
If Tenant holds over after May 2, 1999, Tenant shall pay to Landlord
rent in the amount of $4,500.00 per day for each day after April 30,
1999 through May 31, 1999 that Tenant has failed to deliver possession
of the Premises (or any part thereof) to Landlord. Such holdover rent
shall be in lieu of any other costs, damages or losses Landlord may
incur due to Tenant's holding over after May 2, 1999 through May 31,
1999. If Tenant holds over after May 31, 1999, in addition to any
other costs, damages or losses Landlord may incur due such holding
over after May 31, 1999, Tenant shall pay to Landlord rent in the
amount of $4,500.00 per day for each day after May 31, 1999 that
Tenant has failed to deliver possession of the Premises (or any part
thereof) to Landlord. Notwithstanding the foregoing, if Tenant has
delivered possession of the entire Premises to Landlord by May 2,
1999, Tenant shall be relieved of the obligation to pay Monthly Rental
or Additional Rent for the Premises for May 1 and 2, 1999.
4. MISCELLANEOUS.
-------------
a. Effect of Third Amendment. Except to the extent the Lease has been
-------------------------
modified by this Third Amendment, the remaining terms and conditions of the
Lease shall remain unmodified and in full force and effect.
b. Defined Terms. The defined terms used in this Third Amendment, as
-------------
indicated by the first letter of a word being capitalized, shall have the same
meaning in this Third Amendment as such terms and provisions have in the Lease
except as otherwise expressly provided in this Third Amendment.
5. EXECUTION.
---------
This Third Amendment has been executed and shall be deemed effective as of
the date first above written.
"TENANT" "LANDLORD"
INFORMATION MANAGEMENT LAKESHORE TOWERS LIMITED
ASSOCIATES, INC., a Connecticut PARTNERSHIP PHASE I, a
corporation California limited partnership
By: SKIPPER REALTY
CORPORATION, a Delaware
By: /s/ Gary R. Martino corporation, the sole
------------------- general partner of
Its: CFO Lakeshore Towers Limited
------------- Partnership
By: /s/ Brad Barrett
-------------------------
Its: President
-------------------------
2
<PAGE>
EXHIBIT 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
----------------------------------------------------
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Information Management Associates, Inc.
included in this Form 10-K and have issued our report thereon dated March 3,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 3, 1999
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<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,558
<SECURITIES> 3,091
<RECEIVABLES> 16,487
<ALLOWANCES> 3,408
<INVENTORY> 0
<CURRENT-ASSETS> 30,131
<PP&E> 10,002
<DEPRECIATION> (6,868)
<TOTAL-ASSETS> 37,238
<CURRENT-LIABILITIES> 15,826
<BONDS> 0
0
0
<COMMON> 55,255
<OTHER-SE> (34,270)
<TOTAL-LIABILITY-AND-EQUITY> 37,238
<SALES> 24,903
<TOTAL-REVENUES> 49,093
<CGS> 356
<TOTAL-COSTS> 17,420
<OTHER-EXPENSES> 51,956
<LOSS-PROVISION> 6,781
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (19,829)
<INCOME-TAX> 470
<INCOME-CONTINUING> (20,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (20,299)
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