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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 000-27900
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ISOCOR
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 95-4310259
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3420 OCEAN PARK BOULEVARD 90405
SANTA MONICA, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 581-8100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sale price of the Registrant's Common
Stock on the Nasdaq National Market on February 17, 1998 was approximately
$17,100,596. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There were 9,581,192 shares of Registrant's Common Stock issued and
outstanding as of February 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the Registrant's 1998 Annual Meeting of Shareholders scheduled to
be held on May 13, 1998 (the "1998 Proxy Statement").
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INTRODUCTORY STATEMENTS AND REFERENCES
References made in this Annual Report on Form 10-K to "ISOCOR," the
"Company" or the "Registrant" refer to ISOCOR and its subsidiaries. The ISOCOR
name, N-PLEX and Plexlink are registered trademarks of the Company. ISOGATE,
ISOMAIL, ISOPLEX, ISOPRO, ISOTRADE and PLEXLINK Secure are trademarks of the
Company.
This Annual Report on Form 10-K contains forward-looking statements that
are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the
introduction and market acceptance of new products offered by the Company and
its competitors, general changes in the markets in which the Company competes,
the volume and timing of large transactions with customers, the level of product
and price competition, the Company's success in expanding its direct sales force
and indirect distribution channels, the risks related to international
operations, and other risks detailed below and included from time to time in the
Company's other SEC reports and press releases, copies of which are available
from the Company upon request. The Company assumes no obligation to update any
forward-looking statements contained herein.
RISK FACTORS
Significant Fluctuations in Quarterly Results; Limited Operating History
The Company's quarterly operating results have in the past varied
significantly and are likely in the future to vary significantly based upon a
number of factors, including the introduction and market acceptance of new
products offered by the Company and its competitors, general changes in the
markets in which the Company competes, the volume and timing of large
transactions with customers, the level of product and price competition, the
Company's success in expanding its direct sales force and indirect distribution
channels and the risks related to international operations, as well as other
factors. Products are generally shipped as orders are received, and product
revenues are generally recognized as products are shipped. Consequently,
quarterly revenues and operating results depend primarily on the volume and
timing of orders during the quarter, which are difficult to forecast due to the
length of the sales cycle. Further, the Company typically generates a large
percentage of its quarterly revenues during the last few weeks of the quarter. A
significant portion of the Company's operating expenses are relatively fixed in
the short term, and planned expenditures are based on sales forecasts. If
revenue levels are below expectations, operating results are likely to be
materially adversely affected. In particular, net income, if any, may be
disproportionately affected because only a small portion of the Company's
expenses varies with revenue in the short term. There can be no assurance that
the Company will achieve revenue growth in the future or be profitable on an
operating basis in any future period. Due to the foregoing factors, the Company
believes that period-to-period comparisons of its results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, it is likely that in some future quarter the Company's revenues or
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected.
The Company was incorporated in February 1991 and recorded its first sales
in the second quarter of 1992. The Company incurred losses through 1994, during
the first two quarters of 1995, during the second quarter of 1996 and for all of
1997. As a result, the Company had an accumulated deficit of $13.6 million as of
December 31, 1997. There can be no assurance that the Company will be profitable
in the future.
Substantial Competition
The markets for the Company's products are intensely competitive and
characterized by rapid changes in technology and evolving standards. The Company
encounters competition from a number of sources, including privately held
companies which specialize in messaging products, computer hardware vendors,
customized solution vendors or systems integrators, and software companies such
as Control Data Systems, Inc., the Lotus Development Corporation subsidiary of
International Business Machines Corporation ("Lotus"), Microsoft
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Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape") and
Worldtalk Corporation. A variety of potential actions by any of the Company's
competitors, including a reduction of product prices, increased promotion,
announcement or accelerated introduction of new or enhanced products, product
giveaways, product bundling or feature integration could have a material adverse
effect on the Company's business, financial condition and results of operations.
Large companies that compete with the Company or that may compete with it in the
future have substantial technical and financial resources that allow them to
develop, enhance or acquire competitive products, and substantial marketing
resources and presence to promote these products aggressively. Moreover, the
Company's current and potential competitors may respond more quickly than the
Company to new or emerging technologies or changes in customer requirements or
distribution methods. Accordingly, it is possible that current or potential
competitors could rapidly gain significant market share. See "Item 1:
Business -- Competition."
Dependence on Commercial Use of the Internet
Particularly in light of the Company's strategic shift of focus away from
X.400-based products to products related to the Internet, the success of the
Company's products will depend in large part on increased commercial use and
acceptance of the Internet. Because commercial use of the Internet is relatively
recent and is evolving rapidly, it is difficult to predict with any assurance
whether the Internet will prove to be a viable marketplace. There can be no
assurance that the infrastructure or complementary products necessary to make
the Internet viable for broad electronic business communications and
transactions will be developed. The flat rate, time-of-day and
volume-independent pricing structure offered by Internet service providers to
organizations is currently favorable. Less favorable pricing structures may have
a material adverse impact on the commercial adoption of the Internet and
therefore on the success of the Company's products and the Company's business
prospects.
Dependence on New Products
The Company has invested significant resources into the development of new
products and expects to continue to make these investments in the future.
Additionally, the Company expects sales of its new products related to the
Internet to comprise an increasing fraction of overall sales. ISOCOR also plans
to continue to enhance its products with new releases that provide additional
features and to make its products available on additional hardware and operating
system platforms. Any quality, reliability or interoperability problems with new
or enhanced products, or any other actual or perceived problems in new or
enhanced products, could have a material adverse effect on market acceptance of
such products. There can be no assurance that such problems or perceived
problems will not arise or, that even in the absence of such problems, the new
or enhanced products will receive market acceptance. A failure of new or
enhanced products to receive market acceptance for any reason would have a
material adverse effect on the Company's business prospects. See "Item 1:
Business -- Products" and "-- Product Development."
Dependence on Expansion of North American Sales and Marketing Efforts
The Company intends to expand further its North American sales and
marketing efforts, which is a critical component of its strategy to expand
Internet-related revenues. In particular, the Company is currently pursuing
plans to increase its North American direct and indirect sales force. There can
be no assurance that the Company will be successful in attracting or retaining
qualified direct and indirect sales personnel, that the expansion of the
Company's sales and marketing efforts will result in increased sales of the
Company's products, that the cost of such expansion will not exceed the revenues
generated thereby, or that the Company's sales and marketing organization will
compete successfully against the larger and better-funded sales and marketing
organizations of the Company's competitors. A failure in any of these areas
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1: Business -- Marketing, Sales
and Distribution."
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Dependence on International Third-Party Distribution
Internationally, the Company relies significantly on resellers for certain
elements of the marketing and for the distribution of its software products. The
agreements in place with these organizations are generally non-exclusive. These
resellers are not within the control of the Company, may distribute products
other than the Company's products and are not obligated to purchase products
from the Company. There can be no assurance that these resellers will place a
high priority on the marketing of the Company's products, and they may give a
higher priority to other products which may include products of the Company's
competitors. This may result in a lower sales effort applied to the Company's
products and a consequent reduction in the Company's operating results. In
addition, because the Company's international sales are made to a large extent
through resellers, the Company often does not enter into product sales contracts
with the international end users of its products. There can be no assurance that
the Company will retain any of its resellers, and there can be no assurance that
the Company will succeed in recruiting replacement or new organizations to
represent the Company's products. Any changes in the Company's distribution
channels may adversely affect sales and consequently may adversely affect the
Company's business, financial condition and results of operations. See "Item 1:
Business -- Marketing, Sales and Distribution."
Ability to Respond to Rapid Technological Change
The Company's future success will depend significantly on its ability to
enhance continually its current software products and develop or acquire and
market new products which keep pace with technological developments and evolving
industry standards as well as respond to changes in customer needs. The market
for electronic directory and messaging infrastructure, Internet and ISO
compliant software products is characterized by rapidly changing technology,
evolving industry standards and customer demands and frequent new product
introductions and enhancements. There can be no assurance that the Company will
be successful in developing or acquiring product enhancements or new products to
address changing technologies and customer requirements adequately, that it will
introduce such products on a timely basis or that any such products or
enhancements will be successful in the marketplace. The Company's delay or
failure in the development or acquisition of technological improvements or the
adaptation of its software products to technological change could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1: Business -- Products" and "-- Product
Development."
The Company's software products are very complex as a result of market
requirements for a high level of functionality, support of diverse operating
environments and the need for interoperability and support for multiple
technological standards. These products may contain undetected errors or
failures when first introduced or as new versions are released. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance. Such
loss or delay could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1:
Business -- Products" and "-- Product Development."
Risk Associated with Software and Hardware and the Year 2000
Much of the computer hardware and software currently deployed experiences
problems handling dates beyond the year 1999. This computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers,
for handling the year 2000. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such changes, which could
have an adverse effect on future results of operations.
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Dependence on International Operations
International revenues accounted for approximately 67% of the Company's
revenues in 1997, while the European revenues accounted for approximately 86% of
the Company's international revenues in 1997. The Company expects that
international sales will continue to account for a significant portion of its
total revenues in future periods. International sales are subject to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, longer payment cycles, increased difficulties in collecting accounts
receivable and potentially adverse tax consequences. Fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to a reduction in sales
in that country. In addition, sales in Europe are adversely affected in the
third quarter of each year as many customers and end users reduce their business
activities during the summer months. These seasonal factors and currency
fluctuation risks may have an effect on the Company's quarterly results of
operations. Further, because the Company has operations in different countries,
the Company's management must address differences in regulatory environments and
cultures. Failure to address these differences successfully could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1: Business -- Marketing, Sales and
Distribution" and " -- Product Development."
Dependence on Third-party Products
Certain of the Company's products incorporate technology obtained from
third parties, including elements of the Company's directory products. Although
the Company believes that its reliance on third-party products does not pose a
significant business risk, due to the time involved in developing an internal
alternative or licensing such technology from another third party, the Company
is dependent in the short term upon the ability of such third parties to enhance
their current products, to develop new products on a timely and cost-effective
basis to meet changing customer needs, to successfully implement any programming
changes necessary for handling the year 2000 issue and to respond to evolving
industry standards and other technological changes. Although the Company
believes there are alternative sources for such third-party software, there can
be no assurance that the Company would be able to replace the functionality
provided by such third-party software in the event that such software becomes
inaccessible to the Company, obsolete or incompatible with future enhancements
of the Company's software products or that, if the Company could replace such
functionality, that such replacement could be obtained at a reasonable cost. The
absence of or any significant delay in the replacement of that functionality
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1: Business -- Products."
Currency Fluctuations
While the Company's consolidated financial statements are prepared in
United States dollars, a substantial portion of the Company's worldwide
operations have a functional currency other than the United States dollar. In
particular, the Company maintains substantial development operations in Ireland
where the functional currency is the Irish Pound, and in Germany where the
functional currency is the German Mark. A significant portion of the Company's
revenues are also denominated in currencies other than the United States dollar.
Fluctuations in exchange rates may have a material adverse effect on the
Company's results of operations and could also result in exchange losses. The
impact of future exchange rate fluctuations cannot be predicted adequately. To
date, the Company has not sought to hedge the risks associated with fluctuations
in exchange rates, but may undertake such transactions in the future. The
Company does not have a policy relating to hedging. There can be no assurance
that any hedging techniques implemented by the Company would be successful or
that the Company's results of operations will not be materially adversely
affected by exchange rate fluctuations. See "Dependence on International
Operations" and "Item 1: Business -- Marketing, Sales and Distribution."
Risks Associated with Intellectual Property
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
The
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Company generally enters into confidentiality and invention assignment
agreements with its employees and consultants. Additionally, the Company enters
into confidentiality agreements with certain of its customers and potential
customers and limits access to, and distribution of, its proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's technologies without
authorization, or to develop similar technologies independently. Furthermore,
the laws of certain countries in which the Company does business do not protect
the Company's software and intellectual property rights to the same extent as do
the laws of the United States. In its N-PLEX and NetCS Connectivity product
lines, ISOCOR has implemented a license key mechanism which disables use of the
various modules of the product unless proper number keys are provided by the
customer during the installation process. Otherwise, the Company does not
include in its software any mechanisms to prevent or inhibit unauthorized use,
but generally either requires the execution of an agreement that restricts
copying and use of the Company's products or provides for the same in a
break-the-seal license agreement. If unauthorized copying or misuse of the
Company's products were to occur to any substantial degree, the Company's
business, financial condition and results of operations could be materially
adversely affected. 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.
While the Company has not received claims alleging infringement of the
proprietary rights of third parties that the Company believes would have a
material adverse effect on the Company's business, financial condition or
results of operations, there can be no assurance that third parties will not
claim that the Company's current or future products infringe the proprietary
rights of others. Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all. See "Item 1:
Business -- Proprietary Rights."
Risk of Increased Taxation; Loss or Refund of Grant Aid
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under an incentive tax program due to
terminate in 2010, the Company is taxed in Ireland on its "manufacturing income"
at a 10% rate, which is substantially lower than United States rates. For Irish
tax purposes, most of the Company's operating income earned in Ireland is
considered "manufacturing income." To qualify for this 10% tax rate, the Company
must carry out "software development services" or "technical or consultancy
services" (as defined in the Irish Finance Act 1980) in Ireland and qualify for
an employment grant from the Industrial Authority of Ireland. If the Company
ceases to comply with these qualifications, all or a part of its taxable profits
may be subject to a 36% tax rate on its post disqualification date taxable
profits. Should this occur, or should Irish tax laws be rescinded or changed,
the Company's net income could be materially adversely affected. If the Company
could no longer qualify for this 10% tax rate, or if the Irish tax laws were
rescinded or changed, the Company's net income would be materially adversely
impacted. In addition, if United States or other international tax authorities
were to challenge successfully the manner in which profits are recognized among
the Company and its subsidiaries or if the Company were to transfer funds
relating to income generated in lower tax jurisdictions to the United States,
the Company's effective tax rate could increase, and its business, financial
condition and results of operations could be materially adversely affected.
During 1996, the Company secured Irish Industrial Development Authority
(the "IDA") grant aid in Ireland in the amount of $793,000 under an incentive
program designed to induce organizations to locate and conduct business in
Ireland. To qualify for this grant aid, the Company must satisfy various
conditions, including that the Company must maintain its current ownership
interest in its Irish subsidiary; the subsidiary must not establish or carry on
similar ventures outside Ireland; and the subsidiary must remain solvent. The
grants include remedy provisions which the IDA employs to pursue partial
revocation of amounts granted in the event the recipient of the grant
substantially vacates its presence in Ireland. While the Company's level of
employment within Ireland in 1997 declined, the Company's plans include a
commitment to a significant continuing presence in Ireland. There can be no
assurance, however, that the IDA will not seek partial revocation of prior
grants, the Company will continue to qualify for this grant aid or be eligible
for future
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grants or that the Company's results of operations will not be materially
adversely affected by the loss of grant aid.
During 1996, the Company also received grant aid from the Technological
Finance Authority -- Berlin, under an incentive program to promote research and
development in small and medium sized German-owned companies located in Berlin.
The Company is no longer eligible to receive these grants.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the continued
contributions of its key management and engineering personnel. The success of
the Company depends to a large extent upon its ability to retain and continue to
attract highly skilled personnel. Competition for employees in the software
industry is intense, and there can be no assurance that the Company will be able
to attract and retain enough qualified employees. If the business of the Company
increases, it may become increasingly difficult to hire, train and assimilate
the new employees needed. The Company's inability to retain and attract key
employees could have a material adverse impact on the Company's business,
financial condition and results of operations.
Fluctuations in Market Price of Common Stock
Announcements of new products by the Company or its competitors and
quarterly variations in financial results could cause the market price of the
Company's Common Stock to fluctuate substantially. In addition, the stock market
has experienced price and volume fluctuations from time to time that have
affected market prices of many technology based companies that are not
necessarily related to the operating performance of such companies. These broad
market fluctuations may adversely affect the price of the Company's Common
Stock.
Blank Check Preferred Stock; Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deterring or preventing a change of control of the Company
without further action by the shareholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no present
plans to issue shares of Preferred Stock. The Company's Articles of
Incorporation and Bylaws provide, among other things, for the elimination of
cumulative voting with respect to the election of directors (effective at the
first annual meeting following the annual meeting at which the Company has 800
or more shareholders of record), the prohibition of actions taken by the
Company's shareholders by written consent and certain other procedures,
including advance notice procedures with regard to the nomination of candidates
for election as directors, other than by or at the direction of the Board of
Directors which could have the effect of making it more difficult for a third
party to effect a change in the control of the Board of Directors. In addition,
these provisions could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company, and may make more
difficult or discourage a takeover of the Company.
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PART I
ITEM 1. BUSINESS
General
ISOCOR was founded and incorporated in California in February 1991. ISOCOR
develops, markets and supports off-the-shelf electronic messaging and directory
infrastructure software products and services that enable businesses to engage
in electronic communications over corporate networks, public telephone networks,
value added networks ("VANs") and the Internet. ISOCOR's products are available
either as a complete, integrated package or as individual components, and they
support the prevailing, market-driven standards for electronic information
exchange -- Internet and International Organization for Standards ("ISO")-based
standards. ISOCOR's products and services are designed to support electronic
information exchange globally in an accurate, cost-effective and secure way,
while operating seamlessly across multiple protocols and architectures.
ISOCOR's business strategy is to provide a focused range of products
offering features and performance to meet the wide range of customers' needs; to
support open architectures and legacy systems by providing solutions that are
hardware and software platform-independent and are based on open standards; to
leverage Internet-based technologies by adding enhanced Internet capabilities to
its message server product line allowing the exchange, switching and management
of traffic formatted in prevailing native Internet-based standards without any
conversions unless that traffic is directed to heterogeneous environments; and
to expand distribution channels primarily to increase its North American direct
sales force to focus on sales to large corporate customers and service
providers.
Products
Initially, the Company licensed software technology to enable it to offer
products to its customers quickly. Thereafter, the Company has developed its own
software technology in order to decrease the amount of time required to respond
to market demand, differentiate its products from those of its competitors in
terms of features and quality, and decrease its dependence on third-party
suppliers. At present, the majority of the Company's products are based upon
internally developed technology.
ISOCOR has designed its software to conform to international standards,
allowing the Company's products to interoperate with many existing products and
services. Conformance with international standards has been achieved through
application of the experience of ISOCOR employees in standards development to
the design and testing of the Company's products.
The ISOCOR solution is implemented through two major product groups:
message servers and directories. Message servers handle the interchange of any
size or type of electronic document or information across and outside of a
customer's computer network and include products that allow leading proprietary
E-mail systems to interoperate. Directory products support enterprise-wide
directory listing, access and navigation, as well as connections to external
networks like the World Wide Web.
Message Server Products
The Company's server software has been designed to provide high performance
while reducing hardware requirements. This has been achieved through a design
methodology that eliminates the overhead of protocol layering, reduces the
number of computer instructions required to perform common operations and
reduces dependence on the mechanical performance of computer peripheral devices
such as disk drives. The design also reduces the risk that messages will be lost
or will not be duplicated in the event of external system breakdowns, such as
loss of power or hardware failures. This promotes high reliability of the
electronic information exchange backbone and allows public carriers to rely upon
the software.
N-PLEX, ISOCOR's Internet server product, provide robust message
management, administrative control and secure message transfer server products
to the SMTP, POP3 and IMAP4 standards. Performance of Internet mail systems has
been enhanced by use of the ISOCOR-developed caching algorithms which
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reduces the use of time-consuming DNS directory accesses over the Internet and
makes full use of Microsoft Windows NT operating system threading facilities for
efficient utilization of multiprocessor computer systems. In addition, N-PLEX
Global has been ported to the Sun Solaris UNIX operating system and is optimized
for high levels of performance. Security holes are eliminated in the proprietary
ISOCOR design, and authentication login facilities have been added using
encryption technology to prevent unauthorized access to the mail systems.
The N-PLEX Management Center is designed to extend normal server management
capabilities to support mixed protocol backbones with Internet service, X.400
and gateways to other mail systems. It manages ISOCOR's message servers and
gateways in an integrated fashion, providing the high level of service necessary
for implementing mission-critical electronic information exchange applications.
The N-PLEX Management Center runs on the Windows NT platform, performing remote
management of components over TCP/IP, thereby allowing the administrator to
manage multiple sites simultaneously from a central management station. The
management facilities provided by the Management Center include remote
configuration, routing configuration, fault notification, performance
monitoring, system management and message tracking.
The proliferation of multiple proprietary electronic messaging systems
within organizations has created isolated islands of communication where users
on one system cannot communicate with users on other systems. To solve this
incompatibility problem, N-PLEX Hub enables users to exchange electronic
information, including attached files such as spreadsheets and word processing
documents, without complex rules or administration. This cross-communication
capability allows the rapid exchange of information across departments or
organizations. N-PLEX Hub also connects proprietary electronic messaging systems
to the ISOCOR message server and directory server products, so that the
proprietary directories reflect the availability of additional external users
via the electronic messaging backbone. N-PLEX Hub supports the exchange of data
between the most popular local mail systems including those provided by Lotus
(cc:Mail and Notes) and Microsoft. ISOGATE products also enable users to connect
to public-based systems with its X.400 and SMTP/MIME (Internet) gateways.
ISOCOR offers application programming interfaces ("APIs") for its N-PLEX
Hub products that can be used to integrate an organization's business
applications. One such application-specific gateway is the ISOTRADE EDI Server
("ISOTRADE"). ISOTRADE links the ISOCOR electronic information exchange backbone
with electronic data interchange ("EDI") translation products, such as those
made by TSI International, Ltd., Harbinger Corporation, and St. Paul Software,
Inc., and also allows the customer to create software that can directly access
the ISOTRADE APIs for electronic commerce applications.
ISOPLEX message servers store and relay messages via the X.400 standard,
allowing them to be implemented over prevailing network protocols including
TCP/IP and X.25. In addition, the Company's ISOPLEX servers run on a variety of
hardware platforms and operating systems. The management system can be used on a
remote basis over a networked set of servers, reducing the personnel required to
manage the ISOPLEX servers.
ISOCOR also offers ISOPLEX ADMD, which provides advanced features in the
areas of mail account tracking, message management and administration and system
control. With ISOPLEX ADMD, large organizations and public carriers can offer
high-end, value-added services unavailable in simpler message management
servers.
Directory Products
As systems increase in size and complexity, organizations increasingly need
to implement a central repository for the information required to communicate
across systems. The Global Directory Server ("GDS"), ISOCOR's directory product,
is designed to store and disseminate such information on both a wide area and
local area basis. This information may include e-mail addresses and
cryptographic material for digital signatures and message confidentiality that
are used invisibly by client software, as well as information that users may
access directly, such as telephone numbers, fax numbers, physical mail addresses
and pictures. The directory allows efficient and rapid updating of this
information for use at diverse locations, reducing errors and
9
<PAGE> 10
saving the time and personnel resources required to maintain and distribute this
data. This distributed application architecture allows system managers to
optimize the location of information so that information required locally is on
the local server, while users continue to have transparent access to information
on any other server in the network.
GDS is standards-based and can synchronize stored information, such as
e-mail addresses, among proprietary systems communicating across different
electronic information exchange systems. A number of client applications are
compatible with GDS, including World Wide Web browsers, and Internet clients
through the use of LDAP (Lightweight Directory Access Protocol) which can access
GDS over the wide variety of network connections including dial-up, Internet
TCP/IP and X.25. GDS can serve as an easy-to-access information source, storing
data from other sources such as corporate databases, World Wide Web servers and
other content sources.
As with other ISOCOR applications, GDS is supplemented by an integrated set
of directory tools, called the Global Directory Navigator, that allows an
administrator to exchange information with other databases, collect accounting
information and administer the system either remotely or locally.
In March 1996, the Company entered into an agreement with International
Computers Limited ("ICL") to license a portion of ICL's i500 directory server
product for incorporation with ISOCOR's own communication software technology to
create ISOCOR's Global Directory Server product. This bi-lateral crosslicensing
agreement provides for the payment of royalties by the Company based on sales of
products incorporating the licensed i500 directory server product.
In September 1997, the Company entered into an agreement with Zoomit
Corporation to resell its VIA meta-directory products and tools. This agreement
provides for the payment of royalties by the Company based on the sales of these
specific products and tools.
Marketing, Sales and Distribution
The Company sells its products both directly to end users and indirectly
through resellers, systems integrators and original equipment manufacturers
("OEMs"). In North America, ISOCOR sells its products primarily through a direct
sales organization focused on Fortune 1000 companies and service providers.
Internationally, ISOCOR sells its products primarily through a worldwide network
of resellers.
The Company's international resellers consist primarily of systems
integrators and value added resellers ("VARs"). These resellers typically range
in size from several hundred staff down to half a dozen specialists in some
smaller countries. The Company selects resellers based on general experience in
electronic messaging, data communications and systems integration, and then
trains them on the Company's software products and technologies at ISOCOR's
training centers in the U.S. and Ireland. In addition, ISOCOR sells to major
accounts worldwide, primarily to large telecommunications carriers which prefer
to deal directly with the Company for support. A number of the Company's
international public carrier backbone customers have also begun licensing
ISOCOR's products to end users as customer premises equipment. See "Introductory
Statements and References: Risk Factors -- Dependence on International
Third-party Distribution."
The Company's reseller agreements generally grant resellers non-exclusive
rights to distribute the Company's products in each reseller's defined
geographic market. Each reseller is generally responsible for supporting its
end-user customers, while ISOCOR provides technical support to the reseller. The
Company provides price protection to its resellers such that, if the Company
reduces the price of its products, resellers are entitled to a credit for the
difference between the reduced price and the price they previously paid for
products that are held in the reseller's inventory at the time of the price
reduction and that were purchased within the preceding 30 days. ISOCOR's
resellers typically stock little inventory, but instead obtain products from the
Company on an as-needed basis.
To support its sales efforts, the Company conducts marketing programs which
include direct mail, public relations, advertising (including a World Wide Web
home page on the global Internet (www.isocor.com)), worldwide trade shows and
selected joint marketing programs. The Company also sponsors an annual meeting
for its resellers to provide them additional information and skills to market
the Company's products
10
<PAGE> 11
effectively. The sales, support and service functions for the Company's products
are provided principally through the Company's Santa Monica headquarters with
the exception of the European, Middle East and African markets which are
serviced through ISOCOR sales and support offices in Berlin, Bern, Dublin,
London and Paris.
During 1997, international revenues accounted for 67% of the Company's
total revenues. Of these international revenues, 86% resulted from sales to
resellers or customers located primarily in Europe, with the remainder resulting
from sales to resellers or customers located in the rest of the world.
International sales may be subject to government controls and other risks,
including export licenses, federal restrictions on the export of critical
technology, changes in demand resulting from currency exchange fluctuations,
political instability, trade restrictions and changes in tariffs. To date, the
Company has experienced no material difficulties due to these factors. See
"Introductory Statements and References: Risk Factors -- Dependence on
International Operations" and " -- Currency Fluctuations."
Customers
ISOCOR's products are used in a variety of industries. The Company markets
its products primarily to large and medium-sized corporate customers, as well as
service providers. During 1997, no single customer accounted for more than 10%
of the Company's revenues. During 1997, the following categories of revenue
accounted for more than 10% of total revenues: server products accounted for 33%
of total revenues, gateway products accounted for 12% of total revenues,
directory products accounted for 11% of total revenues and services accounted
for 29% of total revenues.
Customer and Reseller Support and Services
The Company offers its resellers and end-user customers standard support
and upgrade services. The agreements that provide for these services vary among
end users, resellers and OEMs, but generally provide that for an annual fee the
Company will provide customer support services by electronic communication, fax
or telephone. These agreements also typically provide for software upgrades to
the licensed products as they are generally released by the Company. ISOCOR also
offers training, custom engineering and pre- and post-sale services to end users
and carriers. Professional services include network design consulting, product
installation, administrator training, custom application integration and turnkey
systems implementation. The Company has major customer support centers in Santa
Monica and Dublin. Additionally, local technical support is available at the
Company's regional offices in London, Paris and Bern. In 1997, provision by
ISOCOR of all customer and reseller support and services accounted for 29% of
ISOCOR revenues.
Product Development
The Company has invested significant resources into the development of new
products and expects to continue to make these investments in the future. ISOCOR
also plans to continue to enhance its products with new releases that provide
additional features and to make its products available on additional hardware
and operating system platforms. See "Introductory Statements and References:
Risk Factors -- Dependence on New Products" and " -- Ability to Respond to Rapid
Technological Change."
Much of the computer hardware and software currently deployed experiences
problems handling dates beyond the year 1999. This computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers,
for handling the year 2000. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such changes which could
have an
11
<PAGE> 12
adverse effect on future results of operations. See "Introductory Statements and
References: Risk Factors -- Risk Associated with Software and Hardware and the
Year 2000".
The Company has development centers located in Berlin, Copenhagen, Dublin
and Santa Monica. The largest such facility is located in Dublin in order to
take advantage of lower costs in Ireland, IDA tax incentives and grants and the
strong Irish educational structure. The presence of development facilities in
the U.S. and Europe enhances access to both American and European markets and
technology. ISOCOR invests substantial management time and resources in quality
assurance testing for all of its products. Quality assurance testing takes place
at the Company's Berlin, Dublin and Santa Monica facilities.
As of December 31, 1997, the Company employed 70 persons in the product
development function. The product development organization consists of separate
product units, each with expertise in specific areas. Engineering expenses were
$7.9 million in 1997.
Competition
The market for the Company's products is intensely competitive and subject
to rapid technological change and evolving standards. The Company believes its
long-term success will depend in part on its ability to be a leader in
developing and offering products that meet emerging industry or market
standards, to offer a broad range of high-performance, multi-platform, messaging
and directory infrastructure products requiring little customization for the
general marketplace, to maintain strong customer support and sufficient
distribution channels and to offer competitively priced products. The Company
believes that its products currently compete favorably with respect to these
factors.
The messaging and directory infrastructure market is fragmented and a
number of companies are participating in this market with a variety of product
offerings featuring varying profiles and business models. The Company's
competition includes privately held companies which specialize in messaging
products such as Data Communications Ltd., Innosoft International, Inc., and
Software.com. ISOCOR's competitors also include customized solution vendors or
systems integrators such as Control Data Systems, Inc. and publicly held
software companies such as Lotus, Microsoft, Netscape, and Worldtalk
Corporation.
Major software providers such as Microsoft, Lotus and Novell, Inc.
("Novell"), have incorporated functionality into their product offerings similar
to that provided by the Company's products. The Company's Global Directory
Server contains elements that compete directly and indirectly with components
and complete products offered by Novell and other developers of X.500 and
directory server-based software products. The Company's gateway products contain
elements that compete directly with components or complete products offered by
Control Data Systems Inc., Innosoft International, Inc., Worldtalk Corporation
and other developers of products for connectivity between dissimilar electronic
information exchange software systems. To the extent such companies provide such
functionality or products, the Company's business, financial condition and
results of operations could be materially adversely affected.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than can the
Company. Increased competition could result in price reductions, reduced
operating margins and loss of market share.
See "Introductory Statements and References: Risk Factors -- Dependence on
New Products,"
"-- Substantial Competition" and "-- Ability to Respond to Rapid Technological
Change."
Proprietary Rights
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third party
nondisclosure agreements and other methods to protect its proprietary rights.
The Company generally enters into confidentiality and invention assignment
agreements with its employees and consultants. Additionally, the Company enters
into confidentiality agreements with its customers and potential
12
<PAGE> 13
customers and limits access to, and distribution of, its proprietary
information. In its N-PLEX and NetCS Connectivity product lines, ISOCOR has
implemented a key license mechanism which disables use of the various modules of
the product unless proper number keys are provided by the customer during the
installation process. Otherwise, the Company does not include in its software
any mechanisms to prevent or inhibit unauthorized use, but generally either
requires the execution of an agreement that restricts copying and use of the
Company's products or provides for the same in a shrinkwrap license agreement.
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. See "Introductory Statements and References: Risk
Factors -- Risks Associated with Intellectual Property."
While the Company has not received claims alleging infringement of the
proprietary rights of third parties which the Company believes would have a
material adverse effect on the Company's business, financial condition and
results of operations, there can be no assurance that third parties will not
claim that the Company's current or future products infringe the proprietary
rights of others. Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all.
Manufacturing
The Company contracts with third parties to manufacture the media
containing its software, which consists of diskette and tape duplication and
printing of manuals and boxes. Assembly is performed by the Company at its
Dublin and Berlin facilities. The raw materials and services associated with
manufacturing the media are generally available through a number of sources.
Finished products are generally shipped from Ireland to customers in Europe, the
Far East, Australia, the Middle East and Africa, and to the Company's United
States facility. The Company's United States facility generally distributes
products to customers in North and South America. The NetCS Connectivity
products are generally shipped directly from Berlin to customers in Germany, and
otherwise to the Company's Irish and United States facilities for further
distribution.
Employees
As of December 31, 1997, the Company employed 215 persons, including 70 in
product development and engineering (including 10 in Berlin, three in
Copenhagen, 43 in Dublin and 14 in Santa Monica), 44 in pre-and post-sales
customer support, 15 in North American sales, 23 in international sales, 21 in
marketing, seven in assembly and 35 in administration. The Company also retains
consultants from time to time, primarily in the area of engineering, to assist
with particular areas of software development for limited periods of time. None
of the Company's employees is currently represented by a labor union, and the
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
ISOCOR's corporate offices are located in Santa Monica, California, where
the Company currently leases approximately 19,000 square feet under a sublease
expiring in 1998. The Company has entered into a new sublease agreement with
respect to the same 19,000 square feet expiring in early 2001. The Company's
Santa Monica facility houses its corporate offices and engineering, sales and
marketing departments. Additionally, the Company leases approximately 2,000
square feet in Vienna, Virginia for a sales office under a sub-lease expiring in
early 1999, and another approximately 7,500 square feet of total space in Berlin
for engineering and sales offices, including an approximately 2,000 square foot
primary space with a lease expiring in 1999, and an approximately 500 foot
satellite space leased month to month. The Company also leases office space for
its major engineering facility in Dublin, consisting of approximately 24,000
square feet under a sublease expiring in 1998. The Company has exercised its
option to extend the lease to mid-1999. In addition, the Company leases
approximately 1,000 square feet each of office facilities in London, Paris,
Copenhagen, Bern and Zurich. The Bern and Zurich facilities are sales offices,
while the offices in London and Paris perform pre-sales marketing and support.
The London, Paris and Zurich leases expire in 2002, 2003 and 2002,
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<PAGE> 14
respectively. The leases for the facilities in Copenhagen and Bern are month to
month leases. The Company believes that these facilities are adequate for the
Company's current needs and that suitable additional space, if needed, should be
available on commercially reasonable terms to accommodate expansion of the
Company's operations. See "Item 8: Financial Statements and Supplementary Data
-- Note 7."
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings in
the normal course of business. The Company is not currently involved in any
litigation 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
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
INFORMATION
(a) Market Information.
The Company completed an initial public offering of its Common Stock
on March 13, 1996, and the Company's Common Stock is traded on the NASDAQ
Stock Market under the symbol ICOR. As of February 17, 1998, the Company
had approximately 147 shareholders of record.
The following table shows the high and low closing prices of the Company's
Common Stock for each fiscal quarter during the fiscal years ended December 31,
1996 and 1997, as reported by Nasdaq:
<TABLE>
<CAPTION>
1996
------------------
HIGH BID LOW BID
-------- -------
<S> <C> <C>
First Quarter (ended 3/31/96).............................. $ 9.750 $7.500
Second Quarter (ended 6/30/96)............................. 20.000 8.750
Third Quarter (ended 9/30/96).............................. 15.000 6.625
Fourth Quarter (ended 12/31/96)............................ 7.375 5.250
</TABLE>
<TABLE>
<CAPTION>
1997
------------------
<S> <C> <C>
First Quarter (ended 3/31/97).............................. $ 6.750 $3.750
Second Quarter (ended 6/30/97)............................. 3.500 2.000
Third Quarter (ended 9/30/97).............................. 3.625 2.188
Fourth Quarter (ended 12/31/97)............................ 3.625 1.750
</TABLE>
Future stock prices may be subject to volatility, particularly on a
quarterly basis. Any shortfall in revenues or net income from amounts expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's stock.
Dividend Policy.
In 1993 and 1994, cash dividends were declared and subsequently paid by
NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in a
transaction accounted for as a "pooling of interests." The Company has not paid
dividends on its Common Stock and has no present plans to do so.
(b) Report of Offering Securities and Use of Proceeds Therefrom.
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-606 (the
"Registration Statement"), which was declared effective by the Commission
on March 13, 1996. The Company registered 2,300,000 shares of its Common
Stock, $0.001 par value per share. The offering commenced on March 14, 1996
and did not terminate until all of the registered shares had been sold. The
aggregate offering price of the registered shares was $20,700,000. The
managing underwriters of the offering were Hambrecht & Quist and Furman
Selz LLP.
The Company incurred the following expenses in connection with the
offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions................... $1,449,000
Other expenses........................................... 981,000
----------
Total Expenses................................. $2,430,000
</TABLE>
All of such expenses were direct or indirect payments to others.
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<PAGE> 16
The net offering proceeds to the Company after deducting the total expenses
above were approximately $18,300,000. From March 14, 1996 to December 31, 1997,
the Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment..... $ 2,414,000
Working capital......................................... 7,655,000
Investment in short-term, interest-bearing
obligations........................................... 6,048,000
Repayment of short-term liabilities..................... 1,368,000
Application to short-term assets........................ 815,000
-----------
Total......................................... $18,300,000
</TABLE>
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of the Registration Statement.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues................................... $ 5,460 $13,541 $20,774 $26,394 $22,018
Gross profit..................................... 3,723 10,720 16,180 21,326 16,351
Income (loss) from operations.................... (2,531) (120) 586 (33) (9,068)
Net income (loss)................................ $(2,791) $ (10) $ 319 $ 483 (7,904)
======= ======= ======= ======= =======
Net income (loss) per share...................... $ (1.88) $ (0.01) $ 0.19 $ 0.06 $ (0.83)
======= ======= ======= ======= =======
Weighted average shares outstanding.............. 1,486 1,567 1,652 7,733 9,485
======= ======= ======= ======= =======
Net income (loss) per share, assuming dilution... $ (1.88) $ (0.01) $ 0.04 $ 0.05 $ (0.83)
======= ======= ======= ======= =======
Weighted average shares outstanding and
dilutive shares............................. 1,486 1,567 7,783 9,808 9,485
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEETS DATA:
Total assets..................................... $11,482 $12,484 $19,494 $41,298 $34,223
Long-term liabilities............................ 156 110 606 187 133
Total shareholders' equity....................... $ 9,107 $ 8,697 $12,487 $33,204 $25,684
Cash dividends declared per common share (1)..... $ 0.02 $ 0.09 -- -- --
</TABLE>
- ---------------
(1) In 1993 and 1994, cash dividends were declared and subsequently paid by
NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in
a transaction accounted for as a "pooling of interests." Therefore, although
the Company has not paid dividends on its Common Stock and has no plans to
pay cash dividends to its shareholders in the near future, due to the
disclosure rules for poolings of interest which require presentation as
though the combination had been consummated for all periods presented, some
cash dividends are shown above.
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<PAGE> 18
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The consolidated financial statements of the Company contained in this
report have been retroactively restated for all periods presented to include the
financial position, results of operations and cash flows of NetCS
Informationstechnik GmbH ("NetCS") in accordance with the pooling-of-interests
method of accounting. In 1997, NetCS Informationstechnik GmbH's legal name was
changed to ISOCOR GmbH.
Revenues. Total revenues were $20.8 million, $26.4 million and $22.0
million in 1995, 1996 and 1997, respectively, representing an increase of 27% in
1996 and a decrease of 17% in 1997. The decline in product revenues in 1997 was
primarily related to the decline in demand for X.400 software solutions and
NetCS connectivity products, partially offset by an increase in demand for
software solutions related to the increased business usage of the Internet.
ISOCOR believes that the major driver for the decline in demand for X.400
software solutions was the rapid emergence and explosion of business use of the
Internet. In 1996, revenues driven by the demand for X.400 solutions were 58% of
product revenues. In 1997, these revenues fell to 31% of product revenues. While
the Company continues to see projects related to X.400 in certain parts of the
world, or in certain specific application areas, the Company believes that this
marketplace will continue to decline slowly throughout 1998.
Product revenues were $17.6 million, $21.3 million and $15.6 million in
1995, 1996 and 1997, respectively, representing an increase of 21% in 1996 and a
decrease of 27% in 1997. The increase from 1995 to 1996 resulted primarily from
increases in the volume of products sold, partially offset by an increase in the
provision for estimated future returns. The decrease from 1996 to 1997 was
mainly due to decreased volumes of, and declining prices for, the Company's
X.400 products and NetCS connectivity products, partially offset by increased
volumes in the Company's products driven by the increased demand for software
solutions as a result of the increased business usage of the Internet, as
discussed above.
On a geographic basis, revenues from North American sources accounted for
18%, 22% and 33% of total revenues, while revenues in the Company's European
marketplace accounted for 66%, 71% and 58% of total revenues in 1995, 1996 and
1997, respectively. Revenues from North American sources increased as a
percentage of revenues during these years largely due to the Company's increased
focus on this market and the growth in demand for the Company's software
solutions driven by the Internet. In 1997, this growth was partially offset by
decreased volumes of, and declining prices for, the Company's X.400 products.
Revenues from European sources decreased as a percentage of revenues in 1997
largely due to a continuing shift away from the Company's product lines driven
by a decline in the market for X.400 software solutions and NetCS connectivity
products, partially offset by increased volumes in the Company's products driven
by the increased demand for software solutions as a result of the increased
business usage of the Internet, as discussed above. International revenues from
non-European sources were positively impacted in 1995 by a single sale in Asia
in excess of $1.3 million.
Service revenues were $3.2 million, $5.1 million and $6.4 million in 1995,
1996 and 1997 respectively, representing increases of 60% and 25% in 1996 and
1997, respectively. Service revenues include software support and update fees,
training, custom engineering and installation. The increases during 1996 and
1997 were primarily due to increased volumes of software support and update
service fees.
Cost of Revenues. Cost of revenues includes both cost of product revenues
and cost of service revenues. Cost of product revenues consists primarily of
costs of hardware purchased from third-party vendors, product media duplication,
manuals, packaging materials, and third-party royalties relating to licensed
technology. Cost of service revenues consists primarily of personnel-related
costs of providing software support and update, training, custom engineering and
installation services. Cost of revenues increased year over year from 1996 to
1997 primarily as a result of increased third-party royalties on one of the
Company's product lines associated with the growth in demand driven by the
Internet, increased costs of supporting a higher level of service revenues, and
a $310,000 write-down of third-party prepaid royalties relating to a specific
product technology which the Company believes is non-strategic, which was
partially offset by a reduction in costs relating to hardware purchased from
third-party vendors as a result of decreased sales of these components. Cost of
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<PAGE> 19
revenues increased year over year from 1995 to 1996 primarily as a result of
supporting a higher level of service revenues and increased production costs
associated with higher volumes of products sold, offset by a reduction in
third-party royalties relating to licensed technology.
Gross Profit. Gross profit was $16.2 million, $21.3 million and $16.4
million, representing 78%, 81% and 74% of revenues in 1995, 1996 and 1997,
respectively.
Gross profit from product sales was $14.6 million, $18.6 million and $12.8
million in 1995, 1996 and 1997, respectively, representing 83%, 87% and 82% of
product revenues in 1995, 1996 and 1997, respectively. The absolute decrease in
gross profit from 1996 to 1997 was primarily a result of decreased product
revenues as discussed above, coupled with increased third-party royalties on one
of the Company's product lines associated with the growth in demand driven by
the Internet and a $310,000 write-down of third-party prepaid royalties relating
to a specific product technology which the Company believes is non-strategic.
The absolute increase in gross profit from 1995 to 1996 was primarily a result
of increased sales of the Company's products, coupled with a shift in the
Company's sales primarily toward higher margin products which results primarily
from the Company's decreasing reliance upon technology owned by third parties
and thus, lower royalties paid to third parties.
Gross profit from services was $1.5 million, $2.7 million and $3.6 million
in 1995, 1996 and 1997, respectively, representing 48%, 53% and 56% of services
revenues in 1995, 1996 and 1997, respectively. The increase in gross profit from
services during these years is primarily due to increased services revenues
without a corresponding increase in personnel costs associated with providing
these services.
Engineering. Engineering expenses were $7.5 million, $9.0 million and $7.9
million in 1995, 1996 and 1997, respectively, representing 36%, 34% and 36% of
revenues in 1995, 1996 and 1997, respectively. Engineering expenditures consist
primarily of personnel costs, equipment costs and related costs required to
conduct the Company's development efforts, which include costs related to
engineering, product management, technical writing and quality assurance. The
dollar decrease in engineering expenses in 1997 resulted principally from
decreased levels of personnel involved in these activities, and relate primarily
to the reduction in and stabilization of development of the Company's X.400
products. The dollar increases in engineering expenses in 1996 resulted
principally from increased levels of personnel primarily involved in these
activities, and relate primarily to the continued development and enhancement of
the N-PLEX server product family and the development of the Global Directory
Server product. During 1995, 1996 and 1997, there were approximately 105, 136
and 106 people on average, respectively, involved in engineering activities. To
date, all software development costs have been expensed as incurred, as the
impact of software development costs that qualify for capitalization under
Financial Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," have been immaterial to the
financial statements. The Company believes that significant investments in
research and development are required for the Company to remain competitive.
While the Company intends to continue to place emphasis on its research and
development efforts in the future to remain competitive, the Company anticipates
it will continue to moderate these expenses, relative to prior periods, during
1998 and that these expenses may not vary directly with the level of revenues
for that same period.
Sales and Marketing. Sales and marketing expenses were $6.8 million, $10.1
million and $14.0 million in 1995, 1996 and 1997, respectively, representing
33%, 38% and 63% of revenues in 1995, 1996 and 1997, respectively. Sales and
marketing expenses include personnel and associated costs relating to selling,
sales support and marketing activities, including marketing programs such as
trade shows and other promotional costs. In 1995, 1996 and 1997, the increases
in sales expenses resulted primarily from expansion of the Company's sales and
support organizations both in the United States and internationally. During
1995, 1996 and 1997, there were approximately 53, 74 and 80 people on average,
respectively, primarily involved in sales activities. In 1997, the Company's
marketing expenditures increased over 1996 primarily due to increased level of
personnel involved with marketing activities on a worldwide basis, as well as an
increase in marketing program costs. In 1996, the Company's marketing
expenditures increased from 1995 primarily due to an increased level of
personnel and marketing programs primarily in North America. The Company intends
to maintain a similar absolute level of spending on sales and marketing in 1998.
19
<PAGE> 20
Administration. Administration expenses were $2.1 million, $2.7 million and
$3.0 million in 1995, 1996 and 1997, respectively, representing 10% to 13% of
revenues in each of those years. The dollar increases were primarily due to
higher levels of staffing. During 1995, 1996 and 1997, there were approximately
20, 29 and 38 people on average, respectively, primarily involved in
administrative activities. The Company expects to increase the dollar amount of
its administration expenditures in the future to support potential growth and to
continue to meet the reporting requirements imposed on a public company.
Agency Grants. In 1992, 1994 and 1996 the Company secured grant aid in the
amounts of $750,000, $850,000 and $793,000, respectively, from the Industrial
Development Authority of Ireland under an incentive program designed to induce
organizations to locate and conduct business in Ireland. These grants are for
six years each and are primarily dependent upon the creation and fulfillment of
new jobs within the Company in Ireland. The Company reflected as reductions of
operating expenses $712,000, $413,000 and $69,000 relating to these grants in
1995, 1996 and 1997, respectively. The Company has decreased its level of
employment in Ireland in 1997, however, the Company is committed to retaining a
significant and continuing presence in Ireland. The Company also received grant
aid from the Technological Finance Authority -- Berlin under an incentive
program to promote research and development in small and medium-sized
German-owned companies located in Berlin. The Company reflected as reductions in
operating expenses $124,000, $87,000 and $0 relating to these grants in 1995,
1996 and 1997, respectively. As of August 31, 1996, the Company is no longer
eligible to receive grants from the Technological Finance Authority -- Berlin.
The Company expects the level of grant aid it receives from differing sources to
vary from year to year, primarily dependent upon its employment level in
Ireland.
Severance Costs. Severance costs of $681,000 in 1997 represent the costs
accrued with respect to 35 terminated employees due to the restructuring
activities completed in 1997. The total severance costs incurred were $364,000
for engineering, $190,000 for sales and marketing, and $127,000 for
administration.
Acquisition Costs. Acquisition costs of $227,000 in 1996 represent the
direct costs, primarily legal and accounting, of the business combination of
NetCS Informationstechnik GmbH and ISOCOR.
Provision for Loss on Investment. Provision for loss on investment of
$100,000 in 1995 represents the Company's estimate of a one-time loss related to
the sale of a 15% interest in a UK company, which interest the Company had held
since 1992 and subsequently liquidated in January 1996. This investment was made
to provide access to technology that is no longer strategic to the Company as a
result of the Company's internal technology development efforts.
Income (Loss) from Currency Fluctuations. Income (loss) from currency
fluctuations was $72,000, $(82,000) and $39,000 in 1995, 1996 and 1997,
respectively. The differences resulted primarily from changes in foreign
currency rates.
Interest Income. Interest income was $104,000, $1 million and $1.2 million
in 1995, 1996 and 1997, respectively. The increase in 1996 was primarily a
result of increased interest income on the Company's increased cash equivalents
and marketable securities related to the Company's initial public offering in
March 1996. The increase in 1997 resulted primarily from interest earned for the
full twelve months of 1997 on those cash equivalents and marketable securities,
partially offset by declining cash equivalents and marketable securities
balances in 1997.
Provision for Income Taxes. During 1995 and 1997, the Company did not
generate taxable income in the United States. In 1996, the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States, which resulted in a significant reduction in income tax expense
for that year. Included in provision for income taxes in 1995 is $278,000
relating to income taxes withheld by a foreign government relating to a
substantial sale in that country made from the United States. The Company also
utilized foreign operating loss carryforwards to offset $941,000 of income
otherwise subject to foreign taxation in 1995. The Company has significant
operations and generates a substantial portion of its taxable income in Ireland.
Under a tax holiday due to terminate in 2010, the Company is taxed in Ireland on
its "manufacturing income" at a 10% rate. For Irish tax purposes, most of the
Company's operating income earned in Ireland is considered "manufacturing
income." To qualify for this 10% rate, the Company must carry out "software
20
<PAGE> 21
development services" or "technical or consultancy services" (as defined in the
Irish Finance Act 1980) in Ireland and qualify for an employment grant from the
Industrial Development Authority of Ireland. If the Company ceases to comply
with these qualifications, all or a part of its taxable profits may be subject
to a 36% tax rate on its post disqualification date taxable profits. Should this
occur, or should Irish tax laws be rescinded or changed, the Company's net
income could be materially adversely affected. Because the Company utilized tax
loss carryforwards to offset income otherwise taxable in Ireland in 1995, this
reduced tax rate has not resulted in significant reductions in income tax
expense for those years.
Liquidity and Capital Resources
Prior to the Company's initial public offering in March 1996, the Company
financed its operations primarily through private sales of equity securities.
The Company received net proceeds of approximately $3.2 million and $1.8 million
in 1995 and 1996, respectively, from the private sale of equity securities. In
March 1996, the Company completed a public offering and sale of 2,300,000 shares
of its Common Stock, resulting in net proceeds to the Company of approximately
$18.4 million. Funds from the Company's equity financings continue to be used to
fund the expansion of the Company's infrastructure and internal operations,
including purchases of capital equipment and the hiring of additional personnel.
The Company generated (used) cash from operating activities of $(565,000),
$446,000 and $(4,718,000) in 1995, 1996 and 1997, respectively. Operating cash
flows in 1997 relative to 1996 were affected by a significantly increased
operating loss (net of adjustments due to depreciation and amortization and the
provision for doubtful accounts, returns and price protection), partially offset
by a decrease in accounts receivable as a result of the Company's increased
collections of accounts receivable and decreased level of revenues. Operating
cash flows in 1996 relative to 1995 were affected by increases in deferred
revenues, offset by a substantial increase in accounts receivable as a result of
the Company's increased level of revenues and a decrease in product development
obligation. Cash flow from operations can vary significantly from quarter to
quarter depending upon the timing of operating cash receipts and payments,
especially accounts receivable and accounts payable. In addition, the Company
typically generates a large percentage of its quarterly revenues during the last
few weeks of the quarter, which when coupled with payment terms in excess of 90
days on some of the larger sales tends to give rise to increases in accounts
receivable. These factors have been offset in 1997 by the Company's decreased
revenues versus 1996, yielding a decreased level of accounts receivable at
December 31, 1997. However, these same factors when coupled with the Company's
increased revenues in 1996 versus 1995, gave rise to an increase in the accounts
receivable balances at December 31, 1996. The Company expects that certain of
the Company's larger sales will continue to have longer payment terms, thus
slowing the cash flow cycle. The Company does not believe these longer payment
terms are likely to have a material adverse effect on the collectibility of the
related receivables.
The Company currently anticipates that the Company's available cash, cash
equivalents and marketable securities resources ($20.5 million as of December
31, 1997), will be sufficient to meet its working capital and capital
expenditure requirements through at least the end of 1999.
Recent Accounting Pronouncements
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This accounting standard is effective
for fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The statement will require additional disclosures for
all periods presented, but will not impact reported amounts of net income (loss)
of the Company.
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and requires
21
<PAGE> 22
restatement of earlier periods presented. The Company is currently evaluating
the requirements of SFAS No. 131.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions and is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company is currently evaluating the
requirements of SOP 97-2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Consolidated Statements of Shareholders' Equity............. 25
Consolidated Statements of Cash Flows....................... 26
Notes to Consolidated Financial Statements.................. 27
</TABLE>
22
<PAGE> 23
ISOCOR
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $13,374 $10,784
Marketable securities..................................... 11,739 9,677
Trade accounts receivable
Customer, net.......................................... 11,160 9,054
Related party.......................................... 74 46
Other current assets...................................... 1,618 1,993
------- -------
Total current assets.............................. 37,965 31,554
Property and equipment, net................................. 2,990 2,405
Other assets................................................ 343 264
Total assets...................................... $41,298 $34,223
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 819 $ 839
Accrued expenses.......................................... 3,677 3,667
Deferred revenues......................................... 2,730 3,678
Product development obligation............................ 380 --
Other current liabilities................................. 301 222
------- -------
Total current liabilities......................... 7,907 8,406
Other long-term liabilities............................... 187 133
------- -------
Total liabilities................................. 8,094 8,539
Commitments and contingencies
Shareholders' equity:
Preferred Stock, undesignated, authorized 2,000,000
shares, none issued or outstanding..................... -- --
Common stock, authorized 50,000,000 shares, issued and
outstanding 9,315,241 and 9,551,931 shares at December
31, 1996 and 1997, respectively........................ 39,047 39,359
Notes receivable from shareholders........................ (26) (56)
Accumulated deficit....................................... (5,680) (13,584)
Deferred compensation..................................... (205) (130)
Cumulative foreign currency translation adjustment........ 68 95
------- -------
Total shareholders' equity........................ 33,204 25,684
------- -------
Total liabilities and shareholders' equity........ $41,298 $34,223
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Products:
Customer............................................... $17,200 $20,785 $15,525
Related parties........................................ 381 503 95
Services:
Customer............................................... 3,122 5,045 6,340
Related parties........................................ 71 61 58
------- ------- -------
Total revenues.................................... 20,774 26,394 22,018
Cost of revenues:
Products.................................................. 2,938 2,663 2,863
Services.................................................. 1,656 2,405 2,804
------- ------- -------
Total cost of revenues............................ 4,594 5,068 5,667
------- ------- -------
Gross profit................................................ 16,180 21,326 16,351
------- ------- -------
Operating expenses:
Engineering............................................... 7,522 9,041 7,867
Sales and marketing....................................... 6,843 10,142 13,973
Administration............................................ 2,065 2,676 2,967
Agency grants............................................. (836) (500) (69)
Severance costs........................................... -- -- 681
------- ------- -------
Total operating expenses.......................... 15,594 21,359 25,419
------- ------- -------
Income (loss) from operations............................... 586 (33) (9,068)
Acquisition costs......................................... -- (227) --
Provision for loss on investment.......................... (100) -- --
Income (loss) from currency fluctuations.................. 72 (82) 39
Interest income........................................... 104 1,010 1,170
------- ------- -------
Income (loss) before income taxes......................... 662 668 (7,859)
Provision for income taxes................................ 343 185 45
------- ------- -------
Net income (loss)........................................... $ 319 $ 483 $(7,904)
======= ======= =======
Net income (loss) per share, assuming no dilution........... $ 0.19 $ 0.06 $ (0.83)
======= ======= =======
Weighted average shares outstanding......................... 1,652 7,733 9,485
======= ======= =======
Net income (loss) per share, assuming dilution.............. $ 0.04 $ 0.05 $ (0.83)
======= ======= =======
Weighted average shares outstanding and dilutive shares..... 7,783 9,808 9,485
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
ISOCOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- -------------------- ------------------ -----------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994............ 1,875,000 $ 4,846 2,036,997 $ 8,156 457,142 $ 1,951
Issuance of preferred stock, net of
offering costs:
Series B preferred stock.............. 29,658 185
Series C preferred stock.............. 400,000 2,499 150,000
Series D preferred stock.............. 653
Issuance of common stock...............
Repurchase of common stock.............
Deferred compensation..................
Payment of notes receivable............
Net income.............................
Currency translation...................
---------- ------- ---------- ------- -------- ------- -------- -----
Balances, December 31, 1995............ 1,875,000 4,846 2,066,655 8,341 857,142 4,450 150,000 653
Initial public offering (IPO), net of
offering costs of $2,430..............
Conversion of preferred stock to common
stock at IPO.......................... (1,875,000) (4,846) (2,066,655) (8,341) (857,142) (4,450) (150,000) (653)
Issuance of common stock...............
Deferred compensation..................
Payment of notes receivable............
Net income.............................
Currency translation...................
---------- ------- ---------- ------- -------- ------- -------- -----
Balances, December 31, 1996............ -- -- -- -- -- -- -- --
Issuance of common stock...............
Deferred compensation..................
Payment of notes receivable............
Net loss...............................
Currency translation...................
---------- ------- ---------- ------- -------- ------- -------- -----
Balances, December 31, 1997............ -- $ - -- $ - -- $ - -- $ -
========== ======= ========== ======= ======== ======= ======== =====
<CAPTION>
COMMON STOCK FOREIGN
------------------- CURRENCY
NUMBER OF NOTES DEFERRED ACCUMULATED TRANSLATION
SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT ADJUSTMENT TOTAL
--------- ------- ---------- ------------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994............ 1,625,947 $ 238 $(54) $ (6,482) $ 42 $ 8,697
Issuance of preferred stock, net of
offering costs:
Series B preferred stock.............. 185
Series C preferred stock.............. 2,499
Series D preferred stock.............. 653
Issuance of common stock............... 90,520 58 (26) 32
Repurchase of common stock............. (54,500) (20) 20 0
Deferred compensation.................. 325 (280) 45
Payment of notes receivable............ 15 15
Net income............................. 319 319
Currency translation................... 42 42
--------- ------- ---- ----- -------- ---- -------
Balances, December 31, 1995............ 1,661,967 601 (45) (280) (6,163) 84 12,487
Initial public offering (IPO), net of
offering costs of $2,430.............. 2,300,000 18,270 18,270
Conversion of preferred stock to common
stock at IPO.......................... 5,007,130 18,290 0
Issuance of common stock............... 346,144 1,886 1,886
Deferred compensation.................. 75 75
Payment of notes receivable............ 19 19
Net income............................. 483 483
Currency translation................... (16) (16)
--------- ------- ---- ----- -------- ---- -------
Balances, December 31, 1996............ 9,315,241 39,047 (26) (205) (5,680) 68 33,204
Issuance of common stock............... 236,690 312 312
Deferred compensation.................. (30) (30)
Payment of notes receivable............ 75 75
Net loss............................... (7,904) (7,904)
Currency translation................... 27 27
--------- ------- ---- ----- -------- ---- -------
Balances, December 31, 1997............ 9,551,931 $39,359 $(56) $(130) $(13,584) $ 95 $25,684
========= ======= ==== ===== ======== ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 319 $ 483 $(7,904)
Adjustments to reconcile income (loss) to net cash (used)
provided by operating activities:
Provision for doubtful accounts, returns and price
protection........................................... 279 1,026 (4)
Depreciation and amortization............................. 938 1,304 1,373
Amortization of deferred compensation..................... 45 75 75
Provision for loss on investment.......................... 100 -- --
Deferred rent............................................. 47 (21) (26)
(Increase)/decrease in:
Accounts receivable.................................... (4,375) (3,577) 1,185
Other current assets................................... (643) 104 (538)
Other assets........................................... 71 (81) (5)
Increase/(decrease) in:
Accounts payable....................................... 270 (220) 105
Other accrued expenses................................. 606 615 467
Deferred revenues...................................... 705 1,220 1,176
Product development obligation......................... 825 (445) (224)
Other current liabilities.............................. 199 34 (380)
Long-term liabilities.................................. 49 (71) (18)
------- -------- -------
Net cash (used) provided by operating
activities...................................... (565) 446 (4,718)
------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (1,612) (1,782) (952)
Purchase of marketable securities......................... -- (11,739) (13,669)
Sale of Marketable Securities............................. -- -- 1,000
Marketable Securities at Maturity......................... -- -- 14,731
Investments, at cost...................................... (240) -- --
Sale of minority interest in non-consolidated
subsidiary............................................. -- 547 --
------- -------- -------
Net cash (used) provided by investing
activities...................................... (1,852) (12,974) 1,110
Cash flows from financing activities:
Proceeds from the sale of stock, net...................... 3,199 22,595 285
------- -------- -------
Costs related to initial public offering.................. -- (2,430) --
------- -------- -------
Net cash provided by financing activities......... 3,199 20,165 285
------- -------- -------
Effect of exchange rate changes on cash..................... (183) (143) 733
------- -------- -------
Net increase (decrease) in cash................... 599 7,494 (2,590)
Cash and cash equivalents, beginning of year................ 5,281 5,880 13,374
------- -------- -------
Cash and cash equivalents, end of year...................... $ 5,880 $ 13,374 $10,784
======= ======== =======
Supplemental disclosure of cash flow information:
Income taxes paid......................................... $ 32 279 $ 100
Supplemental schedule of non-cash financing activities:
Series B Preferred Stock issued for acquisition........... $ 185 -- --
Deferred compensation..................................... $ 325 -- --
Common stock issued to shareholders in exchange for notes
receivable, net........................................ $ 6 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ISOCOR (the "Company") develops, markets and supports off-the-shelf
electronic messaging and directory infrastructure software products and services
that enable businesses to engage in electronic communications over corporate
networks, public telephone networks, value added networks and the Internet.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of intercompany accounts and
transactions. Investments in excess of 50% of the outstanding common stock of
the investee are consolidated. The Company has no investments of less than 50%
of investee common stock.
Use of Estimates
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 reported period. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
these instruments approximates market value because of their short maturity.
Marketable securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
Government obligations all with maturities of one year or less. All of the
Company's marketable securities have been classified as "available-for-sale"
securities and are reported at fair value based on quoted market prices as
required by Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities."
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents and
accounts receivable. The Company's accounts receivable are derived from sales
directly to customers and indirectly through resellers, systems integrators and
OEMs. The Company performs ongoing credit evaluations of its customers before
granting uncollateralized credit and to date has not experienced any unusual
credit related losses. At December 31, 1996 and 1997, United States, Ireland and
Other Europe represented 29%, 56% and 15% and 53%, 34% and 13%, respectively, of
the Company's net accounts receivable. At December 31, 1996 and 1997, the
Company had balances held in U.S. banks of approximately $2,754,000 and
$1,486,000 respectively, which exceeded federally insured limits. Cash
equivalents are managed by major investment firms in accordance with the
Company's investment policy.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of three to five years. Maintenance and repairs are expensed as incurred,
while renewals and betterments are capitalized. Upon the sale or retirement of
property
27
<PAGE> 28
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation, and any resulting gain or loss is included in operations.
Foreign currency translation
Results of operations for foreign entities are translated using the average
exchange rates during the period. Foreign entities' assets and liabilities are
translated to U.S. dollars using the exchange rates in effect at the balance
sheet date, and resulting translation adjustments are recorded in a separate
component of shareholders' equity. Actual gains or losses incurred on currency
transactions in other than the entities' functional currencies are included in
income in the current period.
Revenue recognition
The Company derives revenue from two principal and related sources:
software licenses and services. Software license revenues, designated in the
Company's financial statements as product revenues, are generated from licensing
to end users, distributors and resellers. The Company generates service revenues
primarily from software maintenance, training, support and custom engineering.
The Company generally recognizes product revenues upon shipment, net of
allowances for estimated future returns and price protection, provided that no
significant obligations of the Company remain and that collection of the
resulting receivable is deemed probable. Upon shipment, the Company accrues the
cost of any insignificant performance obligations. The Company recognizes
service revenues from customer support and maintenance fees ratably over the
term of the service period, which is typically 12 months. Payments for
maintenance fees are generally made in advance. The Company generally recognizes
service revenues from custom engineering which is separately contracted for and
priced from the software license fees, as specific milestones are met in the
respective agreements. Where customer engineering is essential to the
functionality of the software, the Company does not recognize revenue on the
underlying software until the requirements of the specific development
arrangement are satisfied. Deferred revenues represent the difference between
amounts invoiced and amounts recognized as revenues under software development
and maintenance agreements. The Company recognizes service revenues from
training activities as the services are provided. Amounts received in connection
with a product development arrangement (See Note 12) under which the Company is
committed to specific efforts are recognized as reductions in associated product
development costs as those costs are incurred.
Agency grants
Agency grants are recognized as reductions in operating expenses as earned
under the respective terms of the agreements.
Software development costs
Costs related to the conceptual formulation and design of software products
are expensed as engineering expense. Based on the Company's development process,
technological feasibility is established upon completion of a working model. To
date, costs incurred by the Company between completion of the working model and
the point at which the product is ready for general release have been
immaterial.
Excess of cost over assets acquired
The excess of cost over net assets acquired is amortized over the estimated
useful life of one to five years using the straight line method. The Company
periodically reviews and evaluates whether there has been a permanent impairment
in the value of intangibles. Factors considered in the evaluation include
current operating results, trends and anticipated undiscounted cash flows.
28
<PAGE> 29
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense represents the
tax payable in connection with the current period operations plus or minus the
change during the period in deferred tax assets and liabilities. (See Note 11).
Computation of net income (loss) per common share
The Company has adopted SFAS No. 128, "Earnings Per Share" for the year
ended December 31, 1997, and has restated earnings per common share for all
periods presented in accordance with the new standard. Basic net income (loss)
per common share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding plus the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. Potential common shares related to
stock options and preferred stock are excluded from the computation when their
effect is antidilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the years ended
December 31, 1995, 1996 and 1997 (in thousands).
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
NUMERATOR:
Net Income (loss)numerator for basic and diluted
EPS................................................ $ 319 $ 483 $(7,904)
DENOMINATOR:
Denominator for basic EPS-weighted average shares..... 1,652 7,733 9,485
Effect of dilutive securities:
Stock options.................................... 957 989 --
Preferred Stock.................................. 5,174 1,086 --
------ ------ -------
Denominator for diluted EPS-adjusted weighted average
shares and assumed conversions........................ 7,783 9,808 9,485
</TABLE>
Securities that could potentially dilute basic EPS in the future that were
not included in the computation of diluted EPS because to do so would have been
antidilutive were -0-, -0- and 2,050,265 shares in 1995, 1996 and 1997,
respectively.
All per share information has been given retroactive effect for the 1 for
2.5 reverse stock split which occurred on January 26, 1996 for all outstanding
shares of common and preferred stock. All of the 475,000 common shares of the
Company issued to effect the business combination with NetCS have been fully
weighted for all periods presented for the computation of the weighted average
number of shares outstanding as required for "pooling of interests" accounting
treatment.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 and 1997 presentation.
29
<PAGE> 30
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This accounting standard is effective
for fiscal years beginning after December 15, 1997 and requires additional
disclosures for all periods presented, but will not impact reported amounts of
net income (loss) of the Company.
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The Company is currently evaluating the requirements
of SFAS No. 131.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions and is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company is currently evaluating the
requirements of SOP 97-2.
2. INITIAL PUBLIC OFFERING
In March 1996, the Company completed the public offering and sale of
2,300,000 shares of its common stock at $9 per share resulting in net proceeds
to the Company of approximately $18,270,000 after offering costs, underwriting
discounts and commissions. The Company's shares are traded on the Nasdaq Stock
Market under the symbol "ICOR."
3. MARKETABLE SECURITIES
The Company held the following positions as of December 31, 1996 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 MATURITIES
------- ------ -------------
<S> <C> <C> <C>
Corporate notes.......................... $ 8,098 $8,182 1 - 10 months
U.S. Government obligations.............. 3,641 1,495 1 - 6 months
------- ------
$11,739 $9,677
======= ======
</TABLE>
Realized gains and losses are based on the book value of the specific
securities sold and were immaterial during the years ended December 31, 1996 and
1997. At December 31, 1996 and 1997, the difference between cost and market
value of the Company's marketable securities was not material. In 1995, the
Company had no marketable securities.
30
<PAGE> 31
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of December 31,
1996 and 1997 were (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accounts receivable...................................... $12,807 $10,563
Less: Allowance for doubtful accounts, returns and price
protection............................................. (1,647) (1,509)
------- -------
$11,160 $ 9,054
======= =======
</TABLE>
As of December 31, 1996 and 1997, approximately 72% and 56% of the
Company's trade accounts receivable were from customers located in Europe,
respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Computer equipment......................................... $4,785 $5,180
Office equipment and furniture............................. 2,010 1,876
------ ------
6,795 7,056
Less accumulated depreciation.............................. (3,805) (4,651)
------ ------
$2,990 $2,405
====== ======
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, depreciation expense
was $925,000, $1,276,000 and $1,362,000, respectively.
6. ACQUISITIONS
In October 1995, the Company acquired a 60 percent interest in a sales and
distribution company located in Europe for 29,658 shares of Series B Preferred
stock and $279,000 in cash. The transaction was recorded as a purchase and,
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based upon fair market value. The $355,000 paid in excess of the net
assets acquired is being amortized using the straight line method over an
estimated useful life of five years and is included in Other Assets in the
accompanying Consolidated Balance Sheets as of December 31, 1996 and 1997, net
of accumulated amortization of $72,000 and $122,000, respectively. At December
31, 1996 and 1997, the related 40 percent minority interest was $79,000. The
Company is required to purchase the remaining 40 percent of this sales and
distribution company within four years from the date of purchase, at a price
approximating net revenues for the year preceding the purchase of the Company's
initial 60 percent interest, subject to various adjustments and maximums. The
results of operations for this investment have been included in the Consolidated
Statements of Operations for the periods subsequent to the acquisition and were
insignificant prior to the acquisition.
Pursuant to a Stock Purchase Agreement dated August 29, 1996 by and among
ISOCOR B.V., a wholly owned subsidiary of the Company, NetCS Informationstechnik
GmbH, a corporation organized under the laws of the Federal Republic of Germany
("NetCS") and the stockholders of NetCS (the "Purchase Agreement"), the Company
acquired (the "Acquisition") all of the outstanding quota interests (shares) in
NetCS in exchange for an aggregate of 475,000 shares of the Company's common
stock. The Acquisition has been accounted for under "pooling of interests"
accounting treatment, and therefore, as required by
31
<PAGE> 32
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting Principles Board Statement No. 16, all financial statements herein
have been restated as though the Acquisition had been effected for all periods
presented. A reconciliation of the Company's previously reported revenue and
earnings to the earnings shown in these financial statements follows (dollars in
thousands):
<TABLE>
<CAPTION>
REVENUES NET INCOME (LOSS)
-------- -----------------
<S> <C> <C>
Year Ended December 31, 1995
ISOCOR only...................................... $16,501 $314
NetCS only....................................... 4,273 5
------- ----
Consolidated ISOCOR........................... $20,774 $319
======= ====
Six Months Ended June 30, 1996
ISOCOR only...................................... $10,354 $(49)
NetCS only....................................... 2,621 34
------- ----
Consolidated ISOCOR........................... $12,975 $(15)
======= ====
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases its offices and operating facilities under various
operating leases which expire at various dates through 2002. Certain leases
contain free rent periods and renewal options and provisions to increase monthly
rentals at specified intervals. The consolidated statements of operations
reflect rent expense on a straight-line basis over the term of the respective
leases.
Total rental expense for the years ended December 31, 1995, 1996 and 1997
was $1,042,000, $1,128,000 and $1,418,000, respectively.
Future minimum rental commitments under operating leases are as follows
(dollars in thousands):
<TABLE>
<S> <C>
For the year ending
1998................................................ $1,455
1999................................................ 1,125
2000................................................ 686
2001................................................ 291
2002................................................ 83
------
$3,640
======
</TABLE>
As more fully described in Note 6, the Company is committed to purchase the
remaining 40 percent interest not already owned by the Company of a sales and
distribution company located in Switzerland.
From time to time, the Company is involved in various legal proceedings in
the normal course of business. The Company is not currently involved in any
litigation which, in management's opinion, would have a material adverse effect
on its business, operating results, financial condition or cash flows.
The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers
for handling the year 2000. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased
32
<PAGE> 33
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
costs associated with, the implementation of such changes, which could have an
adverse effect on future results of operations.
8. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 were (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Salaries and related expenses.............................. $1,196 $1,197
Royalties.................................................. 556 499
Commissions................................................ 440 464
Corporate and sales taxes.................................. 347 184
Other...................................................... 1,138 1,323
------ ------
$3,677 $3,667
====== ======
</TABLE>
9. LONG-TERM LIABILITIES
Long term liabilities at December 31, 1996 and 1997 were (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Minority interest........................................... $ 79 $ 79
Deferred rent............................................... 27 6
Deferred tax liability...................................... 81 48
---- ----
$187 $133
==== ====
</TABLE>
10. SEVERANCE COSTS
In June and October 1997, the Company approved and completed a
restructuring of its United States and European operations pursuant to which
certain employees were terminated. A total of $681,000 in severance costs were
charged to operating expenses in 1997 of which $364,000 relates to engineering,
$190,000 to sales and marketing, and $127,000 to administration. The total
number of employees terminated was 35.
11. INCOME TAXES
The sources of income (loss) before income taxes for years ended December
31, 1995, 1996 and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------ ----- -------
<S> <C> <C> <C>
United States............................................ $ (881) $(182) $(1,881)
Foreign.................................................. 1,543 850 (5,978)
------ ----- -------
Income (loss) before income taxes........................ $ 662 $ 668 $(7,859)
====== ===== =======
</TABLE>
33
<PAGE> 34
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes for the years ended
December 31, 1995, 1996 and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. Federal.............................................. $ -- $ 18 $ --
State..................................................... 1 5 1
Foreign................................................... 374 254 52
---- ---- ----
375 277 53
Deferred-foreign.......................................... (32) (92) (8)
---- ---- ----
Total............................................. $343 $185 $ 45
==== ==== ====
</TABLE>
The Company's provision for income taxes is primarily attributable to
taxable income in foreign jurisdictions, as the Company did not generate taxable
income in the United States in 1995 and 1997, and in 1996 the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States. The Company also utilized foreign operating loss carryforwards to
offset $941,000 of income subject to foreign taxation in 1995. Included in
provision for income taxes in 1995 is $278,000 relating to income taxes withheld
by a foreign government relating to a substantial sale in that country made from
the United States.
The components of the Company's net deferred taxes as of December 31, 1996
and 1997 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for inventory, sales returns and doubtful
accounts............................................ $ 302 $ 320
Accrued vacation....................................... 71 63
Deferred revenues...................................... 476 954
Property and equipment................................. 131 194
Net operating loss carryforward........................ 1,533 1,258
Other.................................................. 45 36
------- -------
Total deferred tax assets...................... 2,558 2,825
Valuation allowance...................................... (2,484) (2,825)
------- -------
Net deferred tax assets........................ 74 --
Deferred tax liability, property, equipment and computer
software............................................... (81) (48)
------- -------
Net deferred taxes............................. ($ 7) ($ 48)
======= =======
</TABLE>
The valuation allowance on deferred tax assets increased by $434,000,
$67,000 and $341,000 in 1995, 1996 and 1997, respectively.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that management evaluate a variety of factors in reaching a
conclusion regarding whether a valuation allowance against deferred tax assets
is required. The Company has considered a number of factors which impact the
likelihood that the deferred tax assets will be recovered, including the
Company's history of operating losses for federal and state tax reporting
purposes and the likelihood that U.S. operations will generate taxable income
during the carryforward period for unused net operating loss carryforwards.
Management is unable to project significant taxable income from U.S. operations
during the next two years and beyond and has therefore concluded, based upon a
weighting of all available evidence, that it is more likely than not that
deferred tax assets will not be realized. Accordingly, the Company has
established a full valuation allowance against its U.S. federal deferred tax
assets. Management evaluates on a quarterly basis the recoverability of the
34
<PAGE> 35
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deferred tax assets and the level of valuation allowance. At such time as it is
determined more likely than not that deferred tax assets are realizable, the
valuation allowance would be appropriately reduced.
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $4.9
million and $2.3 million, respectively, and none remaining in foreign
jurisdictions. These carryforwards, if unused, expire in various periods from
1998 to 2010.
The overall effective tax rate differed from the statutory tax rate for the
years ended December 31, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
% OF PRETAX INCOME
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Tax provision (benefit) based on the federal statutory
rate...................................................... 34.0% 34.0% 34.0%
U.S. loss not providing current tax benefit................. (34.0) (31.3) (34.0)
Foreign taxes, net.......................................... 51.8 25.0 .6
----- ----- -----
Effective tax rate.......................................... 51.8% 27.7% .6%
===== ===== =====
</TABLE>
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under a tax holiday due to terminate in 2010,
the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. To
qualify for this 10% tax rate, the Company must carry out "software development
services" or "technical or consultancy services" (as defined in the Irish
Finance Act 1980) in Ireland and qualify for an employment grant from the
Industrial Development Authority of Ireland. If the Company ceases to comply
with these qualifications, all or a part of its taxable profits may be subject
to a 36% tax rate on its post disqualification date taxable profits. Should this
occur, or should Irish tax laws be rescinded or changed, the Company's net
income could be materially adversely affected. Because the Company utilized loss
carryforwards to offset income otherwise taxable in Ireland in 1995, this
reduced tax rate did not result in significant reductions in income tax expense
for that year.
12. SHAREHOLDERS' EQUITY
Preferred Stock
At December 31, 1997 the Company had 2,000,000 shares of undesignated
Preferred Stock but none issued or outstanding. On March 14, 1996, the date of
effectiveness of the Company's initial public offering, all outstanding shares
of the Company's Series A, B, C and D Preferred Stock were canceled upon their
automatic conversion to Common Stock.
The Series A, B, C and D Preferred Stock had stated annual dividend rates
of $.22500, $.32175, $.39375 and $.90 per share, respectively. No dividends were
ever declared or paid.
The Series A, B, C and D Preferred Stock had a $2.50, $3.575, $4.375 and
$10.00 liquidation preference over shares of Common Stock, respectively, and
were redeemable anytime after July 19, 1998, upon written consent to redemption
of a majority of the holders, at liquidation preference, plus declared and
unpaid dividends, if any.
In connection with the issuance of Series C Preferred Stock in November
1993, the Company provided the investor an option to purchase equity securities
of the Company under certain conditions associated with sales by the investor
and its affiliates of the Company's products in excess of specified minimum
levels. The investor exercised that option and purchased 39,942 shares of Common
Stock upon the closing of the initial public offering on March 14, 1996 at 80%
of the per share price of such offering.
In December 1995, the Company entered into a Series D Preferred Stock
Purchase Agreement with a strategic investor. The agreement provided for total
consideration to the Company of $3,000,000, of which $1,500,000 was received in
1995 in exchange for 150,000 shares of the Company's Series D Preferred Stock
35
<PAGE> 36
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and the Company's commitment to product development efforts estimated to cost
$825,000. These costs were accrued with the remaining proceeds of $653,000, net,
attributed to the Company's Series D Preferred Stock. Per the terms of the
agreement, the number of shares of Common Stock issued upon automatic conversion
at the initial public offering date of this Series D Preferred Stock was
calculated to provide effective per share pricing to this investor of 80% of the
price per share of Common Stock paid by the public on that date. The investor
was also committed to acquire and did acquire under the terms of the agreement,
additional shares of the Company's Series D Preferred Stock with an aggregate
purchase price of $1,500,000 at the initial public offering date of March 14,
1996. These shares also automatically converted into Common Stock such that the
effective price per share of the Common Stock was the same as the Price to
Public in the initial public offering on March 14, 1996.
13. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost other than that required to be
recognized by APB 25 for the difference between the fair value of the Company's
Common Stock at the grant date and the exercise price of the options has been
recognized. Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the grant date for awards in 1995, 1996
and 1997 consistent with the provisions of SFAS 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below (amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ --------
<S> <C> <C> <C>
Net earnings (loss) as reported......................... $ 319 $ 483 $ (7,904)
Net loss, pro forma..................................... $ 311 $ (584) $(11,068)
Net earnings (loss) per share as reported............... $0.19 $ 0.06 $ (0.83)
Net loss per share, pro forma........................... $0.19 $(0.08) $ (1.17)
Net earnings (loss) per share assuming dilution, as
reported.............................................. $0.04 $ 0.05 $ (0.83)
Net loss per share assuming dilution, pro forma......... $0.04 $(0.08) $ (1.17)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk free interest rate................................ 6.10% 6.13%
Expected lives (years)................................. 4 4
Expected volatility.................................... 70% 117%
Expected dividends..................................... 0 0
</TABLE>
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Option Plan") permits the
grant of both "incentive stock options" designed to qualify under IRC Section
422 and non-qualified stock options. A total of 2,600,000 shares of Common Stock
has been reserved for issuance under the 1992 Stock Option Plan. Incentive stock
options may only be granted to employees of the Company whereas non-qualified
stock options may be granted to employees and consultants. Each option, once
vested, allows the optionee the right to purchase one share of the Company's
Common Stock. The Board of Directors determines the exercise price of the
options based on the fair market value of such shares on the date of grant;
options granted to date generally vest ratably over four years and expire ten
years from the date of the grant. Compensation expense equal to the difference
between the assumed fair value of the Company's Common Stock at the grant date
and the exercise price of the options, if any, is recognized ratably over the
vesting period.
36
<PAGE> 37
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Directors' Stock Option Plan
In 1996, the Company adopted the 1996 Directors' Stock Option Plan (the
"Directors' Plan"). A total of 150,000 shares of Common Stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for the
grant of nonstatutory stock options to nonemployee directors of the Company
("outside directors"), including an option to purchase 10,000 shares of Common
Stock on the date on which the optionee first becomes a nonemployee director of
the Company or January 18, 1996 with respect to the Company's then current
nonemployee directors ("First Option"). Each First Option granted vests in
installments cumulatively as to 25% of the shares subject to the First Option on
each of the first, second, third and fourth anniversaries of the date of grant
of the First Option. Thereafter, each outside director will be automatically
granted an option to purchase 2,500 shares of Common Stock on the first calendar
day of the Company's fiscal year commencing in or after 1997 if, on such date,
the optionee shall have served on the Company's Board of Directors for at least
six months ("Subsequent Option"). Each Subsequent Option shall vest on the
fourth anniversary of the date of grant, subject to continued service as an
outside director. The exercise price per share of all options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option.
The following table summarizes certain information relative to the 1992
Option Plan and 1996 Directors' Stock Option Plan.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE WEIGHTED AVERAGE FAIR VALUE AT
SHARES RANGE EXERCISE PRICE GRANT DATE
--------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31,
1994....................... 655,400 $.3750 to $.6250 $0.52
Granted
Option price = Grant date
market price............ 510,403 $.6250 to $7.50 $1.86 $1.03
Exercised.................... (30,530) $.3750 to $.6250 $0.48
Canceled or expired.......... (83,886) $.3750 to $.6250 $0.60
---------
Outstanding at December 31,
1995....................... 1,051,387 $.3750 to $7.50 $0.83
=========
Granted
Option price = Grant date
market price............ 1,219,700 $6.44 to $12.50 $7.06 $4.96
Exercised.................... (139,554) $.3750 to $5.00 $0.49
Canceled or expired.......... 123,945 $.3750 to $12.50 $5.13
---------
Outstanding at December 31,
1996....................... 2,007,588 $.3750 to $12.50 $1.96
=========
Granted
Option price = Grant date
market price............ 683,000 $2.313 to $5.50 $2.86 $2.27
Option price < Grant date
market price............ 119,500 $2.625 $2.63
Exercised.................... (143,497) $.3750 to $2.625 $0.90
Canceled or expired.......... (616,326) $.3750 to $8.00 $5.75
---------
Outstanding at December 31,
1997....................... 2,050,265 $.3750 to $8.00 $2.23
=========
</TABLE>
37
<PAGE> 38
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the stock options at
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ------- -------
<S> <C> <C> <C>
Options exercisable.......................... 345,872 504,769 817,517
Options available for future grant........... 116,083 270,328 384,154
</TABLE>
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED
OPTIONS OUTSTANDING OUTSTANDING AS OF REMAINING AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ----------------- ---------------- --------------
<S> <C> <C> <C>
$0.00 to $1.99................. 576,024 5.5 $0.66
$2.00 to $3.99................. 1,436,741 8.2 $2.71
$4.00 to $5.99................. 7,500 9.0 $5.50
$6.00 to $8.00................. 30,000 8.0 $8.00
---------
2,050,265 7.4 $2.23
=========
</TABLE>
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OPTIONS EXERCISABLE EXERCISABLE AS OF AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 EXERCISE PRICE
------------------------ ----------------- --------------
<S> <C> <C>
$0.00 to $1.99................................. 477,150 $0.62
$2.00 to $3.99................................. 332,867 $2.63
$4.00 to $5.99................................. -- $ --
$6.00 to $8.00................................. 7,500 $8.00
-------
817,517 $1.50
=======
</TABLE>
Effective April 1, 1997 (the "Grant Date") all optionees under the 1992
Stock Option Plan holding stock options with exercise prices in excess of the
fair market value of the Company's Common Stock received one-for-one repricing
of their then-existing unexercised stock options with a new exercise price set
at $2.625 per share, the closing sales price and fair market value of the
Company's Common Stock on the Grant Date. The number of stock options affected
was 1,235,065. Other than the change in the exercise price, the affected options
remained the same.
1996 Employee Stock Purchase Plan
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 250,000 shares of Common Stock has been reserved
for issuance under the Purchase Plan. The Purchase Plan enables eligible
employees to purchase Common Stock at 85% of the lower of the fair market value
of the Company's Common Stock on the first day or the last day of each six-month
purchase period. As of December 31, 1996 and 1997, there were zero and 96,901
shares, respectively, issued under the Purchase Plan.
401(k) Salary Reduction Plan and Trust
In 1992, the Company adopted the ISOCOR 401(k) Salary Reduction Plan and
Trust (the "Plan") for all qualified employees electing participation in the
Plan. Employees can contribute 2%-15% of eligible earnings to the Plan, subject
to Internal Revenue Service limitations. No Company contributions were made to
the Plan for the years ended December 31, 1995, 1996 and 1997.
38
<PAGE> 39
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. GEOGRAPHICAL AREA INFORMATION
The Company operates in a single industry segment, the development,
marketing and support of off-the-shelf electronic messaging and directory
infrastructure software. The Company's operations consist of engineering, sales
and marketing, administration and support in both the United States and Europe.
Revenues and operating income for the years ended December 31, 1995, 1996,
and 1997 and identifiable assets as of December 31, 1995, 1996 and 1997,
classified by the major geographical areas in which the Company operates, were
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
United States................................. $ 7,942 $10,927 $11,077
Ireland....................................... 12,067 15,932 13,382
Other Europe.................................. 5,173 7,226 8,245
Intercompany elimination...................... (4,408) (7,691) (10,686)
------- ------- -------
$20,774 $26,394 $22,018
======= ======= =======
OPERATING INCOME (LOSS):
United States................................. $(1,298) $(1,361) $(3,384)
Ireland....................................... 1,929 1,177 (4,182)
Other Europe.................................. (45) 151 (1,502)
------- ------- -------
586 (33) (9,068)
Provision for loss on investment.............. (100) -- --
Other income.................................. 176 701 1,209
------- ------- -------
Income before income taxes.................... $ 662 $ 668 $(7,859)
======= ======= =======
IDENTIFIABLE ASSETS:
United States................................. $ 8,878 $29,304 $26,123
Ireland....................................... 7,591 9,146 5,393
Other Europe.................................. 3,025 2,848 2,707
------- ------- -------
Total............................... $19,494 $41,298 $34,223
======= ======= =======
</TABLE>
The Company's transfers between geographical areas are accounted for using
methods designed to approximate comparable arms-length transactions. Such
transfers are eliminated in the consolidated financial statements. Export sales
from the United States and Ireland for the years ended December 31, 1995, 1996
and 1997 were $3,464,000, $2,131,000 and $2,086,000, respectively. The majority
of these sales were made to Asia and South America.
The Company currently relies significantly on resellers in Europe for
certain elements of marketing and distribution of its software products. In the
event the Company is unable to retain its resellers, there is no assurance that
the Company will succeed in replacing them. Any changes in the Company's
distribution channel could have a significant impact on sales and adversely
affect operating results.
39
<PAGE> 40
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
In 1991, the Company entered into a software OEM agreement with a United
Kingdom based software company in connection with a license to use their
software products. In 1992, the Company purchased 15% of this company for
$737,668 which investment was subsequently divested in early 1996. A provision
for loss on divestiture of this investment of $100,000 was recorded in the 1995
Consolidated Statement of Operations as the terms for liquidation of the
Company's position were substantially agreed to in December 1995. During 1995
when this software company was a related party, royalty payments totaling
approximately $355,000 were made under the agreement. The Company's cost of
sales in 1995 included $210,000 of royalty costs associated with this
arrangement.
The Company made rental payments of approximately $100,000 for the year
ended December 31, 1995 to an affiliate of a shareholder in connection with the
lease of the Company's previous California offices.
Included in related party revenues for the years ended December 31, 1995,
1996 and 1997 was approximately $83,000, $272,000 and $95,000, respectively,
relating to software license and maintenance agreements with a shareholder.
Included in revenue for the year ended December 31, 1995, 1996 and 1997 was
approximately $369,000, $292,000 and $58,000 respectively relating to a software
license and maintenance agreement with an affiliate of a shareholder. Included
in accounts receivable as of December 31, 1996 and 1997 was $74,000 and $46,000,
respectively, relating to this distributor. Included in accounts payable as of
December 31, 1996 and 1997 was $0 and $96,000, respectively, relating to
consulting services.
Gross margins on related party revenues approximate those realized in
transactions with non-affiliates.
During 1996 and 1997, the Company reflected as a reduction of operating
expenses $445,000 and $380,000, respectively, relating to product development
efforts committed to and performed by the Company under the Series D Preferred
Stock Purchase Agreement discussed in Note 12 above.
16. AGENCY GRANTS
During 1992, 1994 and 1996, the IDA approved grant agreements with one of
the Company's international subsidiaries for approximately $750,000, $850,000
and $793,000, respectively, over six years. The Company reflected as reduction
of operating expenses $712,000, $413,000 and $69,000 relating to these grants
for the years ended December 31, 1995, 1996 and 1997, respectively. These grants
are based upon the Company's creation and fulfillment of new jobs in Ireland and
include remedy provisions employed by the IDA to pursue partial revocation of
amounts granted in the event the recipient of the grant substantially vacates
its presence in Ireland during a period of five to seven years from date of
grant. While the Company's level of employment within Ireland in 1997 has
declined, the Company's plans include a commitment to a significant continuing
presence in Ireland. There can be no assurance that the IDA will not seek
partial revocation of prior grants, that the Company will continue to qualify
for this grant aid or be eligible for future grants or that the Company's
results of operations will not be materially adversely affected by the loss of
grant aid. During 1993, the IDA purchased 20,000 shares of the Company's Common
Stock.
The Economic and Technological Finance Authority -- Berlin ("Authority")
makes grants to promote research and development in small and medium-sized
German-owned companies located in Berlin. The grants are paid quarterly based
upon actual development costs, including salaries, and depend upon the work
being carried out in Berlin. The Company reflected as a reduction of operating
expenses $124,000, $87,000 and $0 relating to these grants for the years ended
December 31, 1995, 1996 and 1997, respectively. Although remedy provisions exist
for the recoverability of such grants if certain conditions are not met, the
Company has been assured by the Authority that no recovery of the grants made to
NetCS is contemplated, and accordingly, no liability has been recognized in the
financial statements for this contingency. As of August 31, 1996, the Company
was no longer eligible to receive these grants in Germany.
40
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated financial statements and the financial
statement schedule of ISOCOR and subsidiaries listed in the index on page 45 of
this Form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ISOCOR and
subsidiaries as of December 31, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Los Angeles, California
February 18, 1998
41
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file its 1998 Proxy Statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A as promulgated by the U.S.
Securities and Exchange Commission for its Annual Meeting of Shareholders to be
held May 13, 1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company, and their ages
as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Andrew De Mari............. 58 Chairman of the Board of Directors
Paul Gigg.................. 44 President, Chief Executive Officer and
Director
C. Raomal Perera........... 40 Senior Vice President, Engineering
Janine M. Bushman.......... 43 Vice President, Finance and Administration,
Chief Financial Officer and Director
Alex Lazar................. 40 Vice President, North American Sales
Robert Lewin............... 54 Vice President, Marketing
John B. Stephensen......... 45 Vice President, Technology
William M. Wolfe........... 46 Vice President, Business Development
Barry Wyse................. 36 Vice President, Engineering
Jean-Michel Barbier 51 Director
(1)(2)...................
Dennis Cagan............... 53 Director
Alexandra Giurgiu (1)...... 38 Director
G. Bradford Jones (2)...... 41 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Andrew De Mari is a founder of the Company, was elected Chairman of the
Board of Directors in November 1997 and has been a member of the Board of
Directors since the Company's inception in 1991. Prior to becoming Chairman, Dr.
De Mari served as the Company's President and Chief Executive Officer since its
founding in 1991. Dr. De Mari was previously a founder and the Chairman and
Chief Executive Officer of Retix from its inception in 1985 to November 1990.
Retix develops, manufactures, markets and supports telecommunications software
through Vertel Corporation, its principal operating subsidiary. Prior to 1985,
he was Senior Vice President of Research and Development and Engineering at
Compucorp, a manufacturer of office automation products. Dr. De Mari holds
M.S.E.E. and Ph.D. degrees in Electrical Engineering from the California
Institute of Technology and Dott. Ing. Electrical Engineering from the
Politecnico di Torino, Italy.
Paul R. Gigg joined ISOCOR in January 1993. He became General Manager,
Europe in October 1995, was elected Vice President, European Marketing and Sales
in October 1996, was elected Chief Operating Officer in April 1997 and was
elected to the Board of Directors and as President and Chief Executive Officer
in November 1997. For more than five years prior to joining ISOCOR, Mr. Gigg was
Director of Marketing and Engineering at Dowty Communications (formerly Case
Communications), a developer and supplier of networking products. Mr. Gigg holds
a B.S.E.E. degree from the University of Wales, United Kingdom.
C. Raomal Perera is a founder of the Company and has had overall
responsibility for the Irish operations of ISOCOR since June 1991. He was
elected as an officer of ISOCOR in November 1992 and currently holds
42
<PAGE> 43
the position of Senior Vice President Engineering and General Manager ISOCOR
Ireland. Prior to that, he was the Software Research and Development Manager for
Artist Graphics, a manufacturer of computer peripherals, from September 1990 to
June 1991. For two years prior to that, Mr. Perera was employed by Retix as
Associate Vice President, OSI Technology Unit and prior to that, Director of
Engineering and Software Development Manager of Retix's Research and Development
Centre in Ireland. Mr. Perera holds a B.S.E.E. degree from the University of
Wales, United Kingdom.
Janine M. Bushman joined the Company in April 1993. She became the Vice
President of Operations of the Company in October 1994, was elected to the Board
of Directors in July 1995 and was elected Chief Financial Officer and Vice
President, Finance and Administration in November 1995. For almost six years
prior to joining the Company, Ms. Bushman was Controller and Corporate Secretary
for Interactive Systems Corporation, a developer and supplier of UNIX operating
systems software. Ms. Bushman holds an M.B.A. from Loyola Marymount University
and a B.S. in Accounting from the California State University at Northridge.
Alex Lazar joined the Company in November 1993 and was elected to the
position of Vice President, North American Sales in July 1997. Prior to joining
the Company, Mr. Lazar was Vice President, Sales and Support and a founder of
Isicad, a network management software company, which position he held from 1987
to 1993. Mr. Lazar holds a B.S. from DePaul University.
Robert Lewin joined the Company in December 1997 as Vice President,
Marketing. For one and a half years prior to joining ISOCOR, Mr. Lewin was
Director/Principal Analyst for the Collaborative Computing market segment for
GartnerGroup/Dataquest. For two years prior to that, he was Vice President of
Marketing and Sales for Enterprise Solutions Limited, and previous to that, was
Vice President of Marketing Operations with X/Open Company Limited for five
years. Mr. Lewin holds an M.B.A. from the University of Santa Clara and a
B.S.E.E. degree from the University of California.
John B. Stephensen joined the Company in October 1993 and became Vice
President, Technology in November 1997. Previously he was Vice President,
Product Management from July 1994 to that date. He was a co-founder of Retix
where he was Senior Vice President, Technology from June 1988 until joining the
Company. Prior to becoming Senior Vice President, Technology, Mr. Stephensen
served Retix in a number of capacities including, most recently, Vice President,
Engineering. Prior to joining Retix, Mr. Stephensen served as Director of
Systems Engineering at Compucorp, a manufacturer of office automation products.
Mr. Stephensen studied Electrical Engineering at the University of California at
Santa Barbara.
William M. Wolfe joined the Company in January 1995 as a Vice President and
currently serves as Vice President, Business Development. He was with Infonet
Services Corporation, a telecommunications firm, from November 1989 to December
1994, where he last held the position of General Manager of Enhanced Services.
Mr. Wolfe graduated with a B.S. from the University of Milwaukee.
Barry Wyse joined ISOCOR B.V. in May 1995 and became Vice President,
Engineering of the Company in December 1997. Prior to joining the Company, Mr.
Wyse served as Software Manager for Microsoft B.V., a subsidiary of Microsoft
Corporation, a commercial software provider, from April 1994 to May 1995 and as
Principal Engineer for Lotus B.V., a subsidiary of Lotus Development
Corporation, which was subsequently acquired by IBM, from December 1992 to
February 1994. Mr. Wyse holds an M. S. degree in Computer Science from
University College, Dublin, Ireland.
Jean-Michel Barbier is Directeur General of Thomson-CSF Ventures, a
corporate venture capital investor, with which he has been associated since
1987. He was elected to the Board of Directors of the Company in November 1993.
He also serves on the Board of Directors of the following companies: Geris
Consultants, Optim, Info Radio Interactive Services, Financial Architecture
Research and Resources, Thomnet, Aonix, Virtual IO, Inc., Virtual Prototypes,
Inc. and Era A.S.
Dennis Cagan has been President of CaganCo, Inc., a management consulting
firm, since 1981 and also serves as Chairman and Chief Executive Officer of
HumanRace, Inc., an Internet showcased travel adventure event. Mr. Cagan was
elected to the Board of Directors of the Company in August 1997 and currently
also
43
<PAGE> 44
serves as a consultant to the Company. Mr. Cagan also serves as a member of the
Board of Directors of Intervista Software, Inc.
Alexandra Giurgiu is President of Olivetti Management of America, Inc., an
investment subsidiary of Ing. C. Olivetti & C., S.p.A., a manufacturer of
information processing systems, which position she has held since 1991. Ms.
Giurgiu has also been a Managing Director and Executive Officer of 4C Ventures,
L.P., a venture capital partnership, since 1994. From 1984 to 1985, she was
Director of International Operations for Lifeboat Associates, a software
distribution and publishing company. She became a member of the Company's Board
of Directors in May 1993. Additionally, she currently serves on the Board of
Directors of Object Design, Wireless Access, Hands-On Technology and Alacrity
Systems.
G. Bradford Jones is a general partner in the venture capital firm of
Brentwood Venture Capital, which he joined in 1981. He became a member of the
Company's Board of Directors in July 1991. Mr. Jones also serves on the Board of
Directors of Interpore International and Onyx Acceptance Corporation.
Further information regarding Registrant's directors will be set forth
under the caption "Election of Directors -- Nominees" in the Registrant's 1998
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Compensation of
Executive Officers" in the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Company's 1998
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Certain
Relationships and Related Transactions" in the Company's 1998 Proxy Statement.
44
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
(a) (1) Consolidated Financial Statements:.......................... 22
(2) Financial Statement Schedule:............................... S-1
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item
601 of Regulation S-K):
</TABLE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1* Stock Purchase Agreement by and among Registrant, NetCS and
the stockholders of NetCS dated August 29, 1996.
2.2* Escrow Agreement dated August 29, 1996.
3.1+ Amended and Restated Articles of Incorporation of
Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
3.3 Certificate of Amendment to Bylaws of Registrant dated
November 5, 1997.
10.1+ 1992 Stock Option Plan and forms of option agreements
thereunder.
10.2+ 1996 Directors' Stock Option Plan and form of option
agreement thereunder.
10.3+ 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4+ Form of Indemnification Agreement.
10.5+ Lease dated November 11, 1994 between ISOCOR and Telos
Corporation.
10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas.
10.7+ Rights Agreement dated December 29, 1995 among the
Registrant, its Preferred shareholders and certain of its
Common shareholders, as amended.
10.8+++ International Reseller Agreement dated May 11, 1993 between
the Registrant and Syseca S.A.
10.9+ Source Code Access License Agreement dated September 15,
1993 and Amendment to the Source Code Access License
Agreement dated May 1, 1995, between the Registrant and
Syseca S.A.
10.10+++ Report of Discussions between the Registrant and Syseca S.A.
dated September 27, 1994 (translated) and Affidavit of
Translations by Abbey Translations dated January 25, 1996.
10.11+++ Master Binary License Agreement dated September 30, 1994
between the Registrant and Lir S.A.
10.12+++ Master Binary License Agreement dated December 28, 1994,
Amendment to the Master Binary Agreement dated March 2, 1995
and Amendment to the Master Binary License Agreement dated
December 28, 1995, between the Registrant and Syseca S.A.
10.13+ Product Loan Agreement between the Registrant and Syseca
S.A. dated November 1, 1995.
10.14+ Employment Agreement between the Registrant and C. Raomal
Perera dated September 9, 1992.
10.15+++ Series D Preferred Stock Purchase Agreement dated December
29, 1995 between the Registrant and Intel Corporation and
related Statement of Work and Product Requirements.
10.16 Lease dated March 3, 1998 between the Registrant and Spieker
Properties.
10.17 Letter Agreement dated December 3, 1997 between ISOCOR B.V.
and Forfas.
10.18 Agreement between Andrew De Mari and the Registrant dated
November 5, 1997.
10.19 Letter Agreement between the Registrant and Paul Gigg dated
December 9, 1997.
10.20 Consultancy Agreement between the Registrant and Cagan Co.
Inc., dated September 1, 1997 and related work orders dated
September 1, 1997 and February 11, 1998.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 47).
27.1 Financial Data Schedules
</TABLE>
45
<PAGE> 46
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
- ---------------
* Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K dated August 29,
1996.
+ Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
amendments thereto (File No. 333-606) which became effective on March 13,
1996.
+ Incorporated by reference to exhibits filed in response to Item 8, "Exhibits,"
of the Registrant's Registration Statement on Form S-8, dated July 10, 1997.
++ Confidential treatment granted by order effective March 13, 1996.
46
<PAGE> 47
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.
Date: March 31, 1998 ISOCOR
By: /s/ PAUL GIGG
------------------------------------
Paul Gigg,
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul Gigg and Janine M. Bushman, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ANDREW DE MARI Chairman of the Board of March 31, 1998
- ----------------------------------------------------- Directors
(Andrew De Mari)
/s/ PAUL GIGG President, Chief Executive March 31, 1998
- ----------------------------------------------------- Officer and Director
(Paul Gigg) (Principal Executive
Officer)
/s/ JANINE M. BUSHMAN Vice President, Finance and March 31, 1998
- ----------------------------------------------------- Administration, Chief
(Janine M. Bushman) Financial Officer and
Director (Principal
Financial and Accounting
Officer)
Director March
- ----------------------------------------------------- ,1998
(Jean Michel Barbier)
/s/ DENNIS CAGAN Director March 31, 1998
- -----------------------------------------------------
(Dennis Cagan)
/s/ ALEXANDRA GIURGIU Director March 31, 1998
- -----------------------------------------------------
(Alexandra Giurgiu)
/s/ G. BRADFORD JONES Director March 31, 1998
- -----------------------------------------------------
(G. Bradford Jones)
</TABLE>
47
<PAGE> 48
ISOCOR
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
ACCOUNT DESCRIPTION ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts, returns, and price
protection....................................... $ (294) $ (557) $ 265 $ (586)
Year ended December 31, 1996
Allowance for doubtful accounts, returns, and price
protection....................................... $ (586) $(2,771) $ 1,710 $(1,647)
Year ended December 31, 1997
Allowance for doubtful accounts, returns, and price
protection....................................... $(1,647) $(2,916) $ 3,054 $(1,509)
</TABLE>
S-1
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
2.1* Stock Purchase Agreement by and among Registrant, NetCS and
the stockholders of NetCS dated August 29, 1996.............
2.2* Escrow Agreement dated August 29, 1996......................
3.1+ Amended and Restated Articles of Incorporation of
Registrant..................................................
3.2+ Amended and Restated Bylaws of Registrant...................
3.3 Certificate of Amendment to Bylaws of Registrant dated
November 5, 1997............................................
10.1+ 1992 Stock Option Plan and forms of option agreements
thereunder..................................................
10.2+ 1996 Directors' Stock Option Plan and form of option
agreement thereunder........................................
10.3+ 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder........................................
10.4+ Form of Indemnification Agreement...........................
10.5+ Lease dated November 11, 1994 between ISOCOR and Telos
Corporation.................................................
10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas....
10.7+ Rights Agreement dated December 29, 1995 among the
Registrant, its Preferred shareholders and certain of its
Common shareholders, as amended.............................
10.8+++ International Reseller Agreement dated May 11, 1993 between
the Registrant and Syseca S.A. .............................
10.9+ Source Code Access License Agreement dated September 15,
1993 and Amendment to the Source Code Access License
Agreement dated May 1, 1995, between the Registrant and
Syseca S.A. ................................................
10.10+++ Report of Discussions between the Registrant and Syseca S.A.
dated September 27, 1994 (translated) and Affidavit of
Translations by Abbey Translations dated January 25, 1996...
10.11+++ Master Binary License Agreement dated September 30, 1994
between the Registrant and Lir S.A. ........................
10.12+++ Master Binary License Agreement dated December 28, 1994,
Amendment to the Master Binary Agreement dated March 2, 1995
and Amendment to the Master Binary License Agreement dated
December 28, 1995, between the Registrant and Syseca S.A....
10.13+ Product Loan Agreement between the Registrant and Syseca
S.A. dated November 1, 1995.................................
10.14+ Employment Agreement between the Registrant and C. Raomal
Perera dated September 9, 1992..............................
10.15+++ Series D Preferred Stock Purchase Agreement dated December
29, 1995 between the Registrant and Intel Corporation and
related Statement of Work and Product Requirements..........
10.16 Lease dated March 3, 1998 between the Registrant and Spieker
Properties.
10.17 Letter Agreement dated December 3, 1997 between ISOCOR B.V.
and Forfas..................................................
10.18 Agreement between Andrew De Mari and the Registrant dated
November 5, 1997............................................
10.19 Letter Agreement between the Registrant and Paul Gigg dated
December 9, 1997............................................
10.20 Consultancy Agreement between the Registrant and Cagan Co.
Inc., dated September 1, 1997 and related work orders dated
September 1, 1997 and February 11, 1998.....................
21.1+ Subsidiaries of Registrant..................................
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
23.1 Consent of Independent Accountants..........................
24.1 Power of Attorney (see page 47).............................
27.1 Financial Data Schedules....................................
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K dated August 29,
1996.
+ Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
amendments thereto (File No. 333-606) which became effective on March 13,
1996.
+Incorporated by reference to exhibits filed in response to Item 8, "Exhibits,"
of the Registrant's Registration Statement on Form S-8, dated July 10, 1997.
++ Confidential treatment granted by order effective March 13, 1996.
<PAGE> 1
Exhibit 3.3
CERTIFICATE OF AMENDMENT OF BYLAWS
The undersigned, Elias J. Blawie, hereby certifies that:
1. He is the duly elected and incumbent Secretary of ISOCOR (the
"Company").
2. By action taken at a meeting of the Board of Directors on November 5,
1997, the second sentence of Article III, Section 3.2 of the Bylaws of the
Company was amended to read in its entirety as follows:
"The exact number of directors shall be seven (7) until changed,
within the limits specified above, by a bylaw amending this Section 3.2,
duly adopted by the board of directors or by the shareholders."
3. The matters set forth in this certificate are true and correct of my
own knowledge.
Date: November 5, 1997
/s/ ELIAS J. BLAWIE
--------------------------------------
Elias J. Blawie, Secretary
<PAGE> 1
Exhibit 10.16
OFFICE LEASE
Project: SANTA MONICA BUSINESS PARK
Building: 3420 OCEAN PARK BOULEVARD [A]
Tenant: ISOCOR
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Article Page
<S> <C>
1 FUNDAMENTAL LEASE PROVISIONS ............................ 1
2 PREMISES ................................................ 1
3 TERM .................................................... 2
4 RENT AND EXPENSE PAYMENTS ............................... 3
5 INTENTIONALLY OMITTED ................................... 4
6 EXPENSES ................................................ 4
7 TAXES PAYABLE SOLELY BY TENANT .......................... 8
8 LATE PAYMENTS ........................................... 8
9 SECURITY DEPOSIT ........................................ 8
10 TENANT IMPROVEMENTS ..................................... 9
11 USE ..................................................... 10
12 SERVICE AND UTILITIES ................................... 10
13 ENTRY BY LANDLORD ....................................... 11
14 MAINTENANCE AND REPAIR .................................. 12
15 ALTERATIONS AND ADDITIONS ............................... 12
16 INDEMNITY ............................................... 13
17 INSURANCE ............................................... 14
18 DAMAGE AND DESTRUCTION .................................. 15
19 CONDEMNATION ............................................ 16
20 LIENS ................................................... 16
21 DEFAULTS BY TENANT ...................................... 16
22 LANDLORD'S REMEDIES ..................................... 17
23 DEFAULTS BY LANDLORD .................................... 19
24 COSTS OF SUIT ........................................... 19
25 SURRENDER OF PREMISES; HOLDING OVER ..................... 19
26 SURRENDER OF LEASE ...................................... 20
27 TRANSFER OF LANDLORD'S INTEREST ......................... 20
28 ASSIGNMENT AND SUBLETTING ............................... 20
29 ATTORNMENT .............................................. 24
30 SUBORDINATION ........................................... 24
31 ESTOPPEL CERTIFICATE .................................... 24
32 BUILDING OCCUPANCY PLANNING ............................. 25
33 QUIET ENJOYMENT ......................................... 25
34 WAIVER OF REDEMPTION BY TENANT ......................... 25
35 WAIVER OF LANDLORD, TENANT'S PROPERTY ................... 25
36 RULES AND REGULATIONS ................................... 25
37 NOTICES ................................................. 26
38 WAIVER .................................................. 26
39 MISCELLANEOUS ........................................... 26
40 INTENTIONALLY OMITTED ................................... 28
41 SECURITY INTEREST ....................................... 28
42 INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS ........... 28
43 OPTION TO EXTEND TERM ................................... 28
44 RIGHT OF FIRST OFFER .................................... 30
45 NON-DISTURBANCE AGREEMENT ............................... 31
</TABLE>
Exhibits
A Description of Premises
A-1 Description of Project
B Verification of Term and Basic Rent
C Construction Provisions
D Subordination of Lease
D-1 Subordination of Deed of Trust
E Estoppel Statement
F Building Rules and Regulations
G Intentionally Omitted
H Intentionally, Omitted
<PAGE> 2
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
After-Hours ............................................... EXHIBIT F - PAGE 2
Agreed Rate ........................................................... 27
Assign ................................................................ 29
assignment ............................................................ 20
Assigns ............................................................... 29
Assuming Tenant ....................................................... 18
Audit Notice .......................................................... 7
Bankruptcy Code ....................................................... 23
Base Year ............................................................. 5
Building .............................................................. 1
Commencement Date ..................................................... 2
Common Area ........................................................... 5
Expenses .............................................................. 4
Extended Term ......................................................... 28
Extension Rental Notice ............................................... 29
Fair Rental Market Value of the First Offer Space ..................... 30
First Offer Acceptance Notice ......................................... 30
First Offer Rejection Notice .......................................... 30
First Offer Space ..................................................... 30
First Offer Space Document ............................................ 30
gross area ............................................................ 1
gross square footage .................................................. 1
Initial Term .......................................................... 28
Landlord .............................................................. 1
Landlord's Base Year Costs ............................................ 4
Landlord's Work ............................................ EXHIBIT C - PAGE 1
Mortgagee ............................................................. 14
normal business hours ...................................... EXHIBIT F - PAGE 2
Notice of First Offer ................................................. 30
Notice to Extend Term ................................................. 29
Option to Extend Term ................................................. 28
Plans ...................................................... EXHIBIT C - PAGE 1
Premises .............................................................. 1
Project ............................................................... 2
Proposed Effective Date ............................................... 20
punch list ............................................................ 2
Rent .................................................................. 3
rentable area ......................................................... 2
rentable square footage ............................................... 2
Rental ................................................................ 3
Subsequent YEAR
substantial completion ................................................ 2
taking ................................................................ 16
Tenant ................................................................ 1
Tenant Coordinator ......................................... EXHIBIT C - PAGE 3
Tenant's Share ........................................................ 5
Tenant's Work .............................................. EXHIBIT C - PAGE 1
TI Contractor .............................................. EXHIBIT C - PAGE 2
usable area ........................................................... 2
usable square footage ................................................. 2
</TABLE>
ii
<PAGE> 3
OFFICE LEASE
This LEASE is made as of this _____ day of _______ 1998 by and between
SPIEKER PROPERTIES, L.P., a California limited partnership ("Landlord") and
ISOCOR, a California corporation ("Tenant")
In consideration of the rents and covenants hereinafter set forth,
Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the
following described Premises, upon the following terms and conditions:
1. FUNDAMENTAL LEASE PROVISIONS
<TABLE>
<S> <C> <C> <C>
1.1. PREMISES: Project: Santa Monica Business Park (Article 2)
Building: 3420 Ocean Park Boulevard [Al
Suite: 2010 Floor: 2nd
City: Santa Monica County: Los Angeles
State: California
1.2. FLOOR AREA: Rentable Area: 20,016 square feet. (Article 2)
Usable Area: 17,871 square feet.
1.3. Term: 36 months. (Article 3)
Commencement Date: April 1, 1998
(SEE Section 4.4)
1.4. BASIC RENT: Dollars Per Dollars Per (Article 4)
Months Rentable Square Foot Month
------ -------------------- -----
1-36 $ 1.80 $ 36,028.80
1.5. EXPENSES: Tenant shall pay Tenant's Share of all Expenses that (Article 6)
exceed Landlord's Base Year COSTS together with other
items of Expense as SET forth in Article 6. Tenant's
Share is 19.12%. The Base Year shall be the calendar
year 1998.
1.6. AFTER-HOURS After-Hours Charges payable by Tenant as of the (Article 12)
CHARGES: Commencement Date shall be as follows:
Air Conditioning $25.00 per unit, per hour
Ventilation only Not available
Lighting only $0.00 per hour
1.7. PREPAID Tenant shall pay the Basic Rent for the first (Article 4).
RENT: month of the term upon execution of this Lease.
1.8. SECURITY $180,000.00 (SEE Article 9). (ARTICLE 9)
DEPOSIT:
1.9. LANDLORD'S c/o TRANSPACIFIC DEVELOPMENT COMPANY (Article 37)
ADDRESS FOR 2377 Crenshaw Boulevard, Suite 300
NOTICES: Torrance, California 90501-3325
1.10. TENANT'S To the Premises. (ARTICLE 37)
ADDRESS FOR
NOTICES:
1.11. BROKER: Pacific Properties Group and Transpacific Development (Section 39-3)
Company.
</TABLE>
2. PREMISES
2.1 The approximate location of the premises (the "Premises") leased
hereunder is shown on the drawing attached hereto as Exhibit A. The Premises
consist of that certain space situated in the building (the "Building")
described in Section 1.1 hereof. The area of the Premises for all purposes
hereunder is stipulated to be the square feet of usable area and square feet of
rentable area specified at Section 1.2. As used in this Lease, the following
terms have the meanings indicated:
2.1.1. The term "gross area" or "gross square footage" means the
entire area being measured, including vertical elevator and ventilation
shafts, maintenance, telephone, mechanical
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and electrical rooms and closets, and all other public areas measured from the
exterior of exterior walls and from the center line of interior demising walls;
2.1.2. The term "usable area" or "usable square footage" means the
method of calculating usable area pursuant to the BOMA Standard Method
for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996; and
2.1.3. The term "rentable area" or "rentable square footage" means
the entire area measured in the same way within exterior Building walls
including all common or public areas of the Building allocated
proportionately to each floor of the Building but excluding public
stairwells and such vertical shafts. As to the area leased by Tenant,
the rentable area is stipulated to be the usable area of the Premises
increased by 12%.
2.2. Intentionally Omitted.
2.3. The Premises are (or when constructed will be) a part of a
business/commercial complex consisting of the Building and other buildings,
landscaping, parking facilities and other improvements described as the
"Project" in Section 1.1 hereof. The Project is generally shown on the drawing
attached hereto as Exhibit A-1 . Landlord may, in its sole discretion, change
the size, shape, location, number and extent of any or all of the improvements
in the Project without any liability to or consent of Tenant, except that no
material change in the size or location of the Premises shall be made without
Tenant's consent. Tenant does not rely on the fact nor does Landlord represent
that any specific tenant or number of tenants shall occupy any space in the
Project.
2.4. Landlord reserves the right to use the roof and exterior walls of
the Premises, and the area beneath, adjacent to and above the Premises, together
with the right to install, use, maintain and replace equipment, machinery,
pipes, conduits and wiring through the Premises, which serve other parts of the
Project, in a manner and in locations which do not unreasonably interfere with
Tenant's use of the Premises. No light, air or view easement is created by this
Lease.
2.5. Tenant hereby acknowledges that the Project is being, or may be,
constructed or reconstructed in phases, and that by reason of construction or
reconstruction activities there may be temporary incidents thereof such AS dust,
dirt, barricades, detours, equipment or material in the Building or Common
Areas. Tenant hereby agrees that so long as Landlord conducts such activities in
a reasonable manner Landlord shall not be liable for any such incidents of
construction or reconstruction.
2.6. Except as specifically provided in the "Construction Provisions"
describing the construction of leasehold improvements (if any), attached hereto
as Exhibit C, Tenant shall lease the Premises on an "As Is" basis and Landlord
shall have no obligation to improve, remodel, alter or otherwise modify the
Premises for Tenant's occupancy thereof. Landlord shall commence the
construction of the improvements under Exhibit C which are the obligation of
Landlord thereunder promptly following the Commencement Date and shall
thereafter diligently pursue the same to completion.
3. TERM
3.1. COMMENCEMENT DATE. The term of this Lease shall be for the duration
set forth in Section 1.3 hereof and shall commence on the date specified at
Section 1.3 as the Commencement Date (the "Commencement Date"). Following the
Commencement Date, Landlord shall complete and deliver to Tenant an instrument
substantially in the form set forth in Exhibit B attached hereto and Tenant
shall promptly execute and deliver the same to Landlord. Failure of Tenant to
execute Exhibit B within ten (10) days after written request from Landlord shall
be a material default hereunder. This Lease shall be a binding contractual
agreement effective upon the date of execution hereof by both Landlord and
Tenant, notwithstanding the later commencement of the term of this Lease.
3.2. SUBSTANTIAL COMPLETION. For purposes hereof, the phrase
"substantial completion" means the completion (as determined, in the event of a
dispute, by Landlord's architect or space planner in accordance with AIA
standards) of the construction work to be performed by Landlord pursuant to the
"Plans" (as defined in Exhibit C, "Construction Provisions", attached hereto),
except for such items that constitute minor defects or adjustments (so-called
"punch list" items). On or about the date when Landlord has substantially
completed all work to be performed by Landlord in the Premises, Landlord and
Tenant shall inspect the Premises and all punch list items shall be noted in
writing on Landlord's punch list form. Damage to the Premises caused by Tenant
or its agents or contractors shall not constitute punch list items. As soon
thereafter as conditions permit, Landlord shall complete all such punch list
items, provided Tenant is not then in default hereunder. Tenant shall allow
Landlord access to the Premises so that said punch list items may be completed.
Upon Landlord's completion of such punch list items, Landlord and Tenant shall
reinspect the Premises with regard to all punch list items previously noted and
shall indicate on Landlord's punch list form if such items have been
satisfactorily completed. Tenant's failure to reinspect any such punch list
items within fifteen (15) days after
2
<PAGE> 5
Landlord Is written request to do so shall constitute an acceptance by Tenant of
such items as being satisfactorily completed.
3.3. INTENTIONALLY OMITTED.
3.4. OCCUPANCY. Tenant acknowledges that, as of the date hereof, the
Premises are occupied by another tenant or occupant. Therefore, Tenant agrees
that if for any reason Landlord is unable to obtain possession of the Premises
from the said tenant or occupant and to deliver the same to Tenant on or before
April 1, 1998, this Lease shall not be void or voidable nor shall Landlord or
its agents, employees or contractors be liable therefor, monetarily or
otherwise, but the Commencement Date shall be the date Landlord delivers
possession of the Premises to Tenant. If Landlord is unable to obtain possession
of the Premises and deliver possession thereof to Tenant on or before October 1,
1998, either Landlord or Tenant may elect to terminate this Lease by written
notice to the other, which notice must be given before Tenant receives notice
from Landlord that Landlord has received possession of the Premises, whereupon
this Lease shall terminate and the parties hereto shall be discharged from any
and all further obligations or liability hereunder. Landlord shall use all
reasonable and lawful efforts to obtain possession of the Premises on April 1,
1998. Landlord acknowledges that Tenant is presently a subtenant of such
occupant and Tenant occupies all or a part of the Premises. Therefore, if
Landlord pursues any action to dispossess the said occupant from the Premises by
reason of the failure of the said occupant to redeliver possession of the
Premises to Landlord, Landlord shall not seek during such action to dispossess
Tenant from the Premises (if the same shall be permitted by the judge or agency
having jurisdiction over such action, without jeopardizing Landlord's action to
dispossess such occupant from the Premises).
3.5. TENANT'S POSSESSION DURING CONSTRUCTION. It is understood and
acknowledged by Landlord and Tenant that, as of the Commencement Date, Tenant
shall be in possession of the Premises. It is further understood and
acknowledged that the work of improvement to be undertaken by Landlord upon the
Premises, as set forth in this Lease, shall be undertaken during Tenant's
occupancy of the Premises; therefore (a) Tenant acknowledges, accepts and agrees
that Tenant, its employees, invitees and others on the Premises may be disturbed
or inconvenienced by such work and shall make no claim against Landlord
therefor, nor shall Tenant be entitled to any abatement of rent or to any right
of termination on such account, (b) Tenant shall not interfere with the progress
or completion of such work and shall be responsible for any delays, costs or
expenses incurred by Landlord due to any such interference, (c) Tenant shall
hold Landlord harmless from and indemnify Landlord for any loss or damage to
Tenant's furniture, equipment, fixtures, or merchandise and for injury to any
persons arising out of the performance of such work in the Premises unless
caused by the negligence of Landlord, its agents or contractors, (d) Tenant
shall cooperate with Landlord in the scheduling and undertaking of such work and
Tenant shall permit Landlord, its agents, contractors and employees access to
the Premises for the purpose of undertaking such work and (e) Tenant shall, at
its sale cost, move its trade fixtures, furniture and other personal property as
may be required by Landlord or its contractor in connection with the performance
of Landlord's Work.
4. RENT AND EXPENSE PAYMENTS
4.1. GENERAL. The "Rent" or "Rental" hereunder is composed of "Basic
Rent" as set forth in Section 1.4 hereof and adjustments thereto as hereinafter
provided. The term "Expenses" hereunder means all costs, expenses, fees, charges
or other amounts described in Article 6. Tenant agrees to pay to Landlord all
Rent and Expenses required under this Lease, which shall be payable monthly to
Landlord (unless expressly provided otherwise), without deduction or offset, in
lawful money of the United States of America at the office maintained by
Landlord in the Project or at such other place as Landlord may from time to time
designate in writing. Notwithstanding any contrary provisions of this Lease, all
Expenses, late payment fees, interest, "After-Hours Charges", parking fees
payable under the "Parking License Agreement" attached hereto, and all other
sums of money or charges required to be paid pursuant to this Lease shall be
deemed "Additional Rent" for the Premises; and in any notice to pay rent or quit
the Premises, Landlord may include and designate same as rent then past due and
owing, if such is the case. Any Rent or Expenses increases which are called for
hereunder, the payment of which is delayed or prevented by reason of any wage
and price control law, rent control law, or other governmental rule, law or
restriction, shall accrue and be payable together with interest thereon at the
"Agreed Rate" (as defined in Section 39.13 hereof), at the end of the Lease
term, or sooner if allowed. No acceptance by Landlord of partial payment of any
sum due from Tenant shall be deemed a waiver by Landlord of any of its rights to
the full amount due, nor shall any endorsement or statement on any check or
accompanying letter from Tenant be deemed an accord and satisfaction. Any Rent
payments or other sums received from Tenant or any other person shall be
conclusively presumed to have been paid on Tenant's behalf, unless Landlord has
been given prior written notice to the contrary by Tenant. Tenant agrees that
the acceptance by Landlord of any such payment shall not constitute a consent by
Landlord or a waiver of any of its rights under this Lease. In no event shall
the foregoing be construed as requiring Landlord to accept any Rent or other
sums from any person other than Tenant. If the term hereof begins or ends on a
day other than the last day of a month, then the Rent and Expenses for such
month shall be prorated based on a thirty (30) day month. All prorations of Rent
or Expenses under this
3
<PAGE> 6
Lease for fractional periods shall be based on a thirty (30) day month and a
three hundred sixty (360) day year.
4,2. BASIC RENT. Tenant shall pay the "Basic Rent" set forth in Section
1.4 hereof on the first day of each month in advance, beginning on the
Commencement Date. Landlord may, but shall not be obligated to, send a bill or
statement for Rent to Tenant each month, but Tenant shall be obligated to pay
Rent on the first day of each month regardless of whether or not it receives a
bill or statement.
4.3. PREPAID RENT. Tenant shall pay prepaid Basic Rent concurrently with
the execution of this Lease, as set forth in Section 1.7 hereof.
4.4. CONSTRUCTION RENT. The amount of the Excess Construction Allowance,
if any, which Tenant has elected to use pursuant to Section 3 of Exhibit C
hereto shall be amortized by Landlord over the Initial Term (as hereinafter
defined) from the Commencement Date, calculated on a monthly basis, with
interest accruing on the unpaid principal at the rate of ten percent (10%) per
annum, and the monthly sum so determined "Monthly Construction Rent") shall be
due and payable in advance on the first day of each month during the term
hereof. Landlord shall inform Tenant of the Monthly Construction Rent as soon as
the sum has been calculated by Landlord. If Tenant is not so informed by
Landlord until after the Commencement Date, then following Landlord's delivery
of such notice to Tenant, the Monthly Construction Rent shall be adjusted
retroactively to the Commencement Date and any accrued Monthly Construction Rent
shall be immediately due and payable to Tenant. The Monthly Construction Rent
shall be deemed, and shall be, Additional Rent hereunder.
5. INTENTIONALLY OMITTED
6. EXPENSES
6.1. Tenant shall pay its share of "Expenses" on the first day of each
month during the term hereof or otherwise as set forth in this Article 6. The
monthly Expenses payable by Tenant hereunder consist of the amount by which
Tenant's Share of Expenses exceeds Landlord's Base Year Costs (as such terms are
hereinafter defined), calculated as follows: Total Expenses (estimated or
actual) multiplied by Tenant's Share minus Landlord's Base Year Costs, divided
by twelve (12) months.
6.2. DEFINITIONS. As used in this Lease, the following terms have the
meanings indicated:
6.2.1. "Landlord's Base Year Costs" means the annualized dollar
amount which results from multiplying the total actual Expenses incurred
by Landlord during the Base Year by Tenant's Share Such amount
constitutes the amount per year which Landlord agrees to pay towards
Expenses allocable to the Premises, without reimbursement from Tenant.
Landlord's Base Year Costs shall be adjusted to be equal to Landlord's
reasonable estimate of Expenses assuming at least ninety-five percent
(95%) of the total rentable area of the Building was occupied for the
entire year, and assuming the Building was fully completed and fully
assessed for property tax assessment, maintenance and repair purposes.
6.2.2. The term "Expenses" means all expenses, costs and fees paid
or incurred by Landlord during any calendar year during the term here of
in connection with or attributable to the Building and Common Area (as
described hereinafter), including any parking facilities therein, for:
6.2.2.1. Electricity, water, gas, sewer, and all other
utility services to or for the Building or Common Area, including
any utility taxes, fees, charges or other similar impositions paid
or incurred by Landlord in connection therewith; and
6.2.2.2. Operation, maintenance (including reasonable
reserves), security services, replacement for normal wear and tear,
repair, restriping or resurfacing of paving, management (including
costs of on-site offices and personnel and a reasonable home-off ice
overhead allocation), insurance (including public liability and
property damage, rent continuation, boiler and machinery and
extended coverage insurance), and cleaning of the Building and
Common Area and all furnishings, fixtures and equipment therein, but
excluding the costs of special services rendered to tenants
(including Tenant) for which a separate charge is made, costs of
leasing and preparing space for new tenants in the Building, or
costs borne solely by Tenant under the Lease. The term "Expenses"
includes the annual amortization of costs (including financing at
the then prevailing rate, if any) of any equipment, device or
improvement required after the date of this Lease by governmental
authority or incurred as a labor saving measure or to reduce
operation or maintenance expenses with respect to the Building and
Common Area where such costs are amortized over the useful life
thereof, in accordance with generally accepted accounting
principles, and which do not inure primarily to the benefit of any
particular tenant; and
4
<PAGE> 7
6.2.2.3, All real property taxes and personal property taxes,
licenses, charges and assessments which are levied, assessed,
imposed or collected by any governmental authority or improvement or
assessment district during any calendar year with respect to the
Building or Common Area and the land on which the same is located,
and any improvements, fixtures, equipment and other property of
Landlord, real or personal, located in the Project and used in
connection with the operation or maintenance of the Building or
Common Area (computed on a cash basis or as if paid in permitted
installments regardless of whether actually so paid), as well as any
tax which shall be levied or assessed in addition to or in lieu of
such taxes (it being acknowledged that because of the passage of
laws which limit increases in real property taxes, government
agencies may impose fees, charges, assessments or other levies in
connection with services previously furnished without charge or at a
lesser charge and which were previously paid for in whole or in
part, directly or indirectly by real property taxes), any gross
excise tax or other similar tax, and any costs or expenses of
contesting any such taxes, licenses, charges or assessments, but
excluding any federal or state income or gift tax or any franchise,
capital stock, estate or inheritance taxes.
6.2.3. The term "Common Area" means that portion of the Project
other than the Building and other buildings for lease to tenants which
is from time to time designated and improved for nonexclusive, common
use by more than one person. The general location of the Common Area is
shown on Exhibit A-1 attached hereto and incorporated by reference. The
Common Area includes parking facilities in the Project.
Any cost or expense included in Expenses which is attributable to
Common Area shall be prorated by Landlord to the Building based on the
proportion which the total square footage of the Building bears to the
total square footage of all buildings in the Project from time to time
or by such other fair and reasonable method of allocation based on use
or benefit as Landlord may determine, except that, with regard to taxes,
Landlord may use such allocation of taxes among the various parcels in
the Project as may have been used by the taxing authority.
6.2.4. The term "Base Year" means the calendar year specified at
Section 1.5.
6.2.5. The term "Subsequent Year" means the first full calendar
year following the Base Year and each calendar year, or part thereof,
thereafter occurring during the term of this Lease.
6.2.6. "Tenant's Share" is hereby agreed by Landlord and Tenant to
be the percentage set forth in Section 1.5 hereof.
6.2.7. Notwithstanding anything to the contrary contained herein,
for purposes of this Lease the following shall be excluded from
Expenses:
6.2.7.1. Any costs due to the failure by Landlord to comply
with any laws in effect prior to the date of this Lease.
6.2.7.2. Costs to correct any defect in the construction of
the Project.
6.2.7.3. Penalties and fines not occasioned by the acts or
omissions of
Tenant. 6.2.7.4. Any costs attributable to the negligence or
willful misconduct of Landlord, its agents, employees or contractors
(however, nothing herein shall excuse Tenant from the payment of its
share of insurance premiums or deductibles).
6.2.7.5. Leasing expenses (including brokers' commissions and
attorneys' fees) and tenant improvement costs.
6.2.7.6. Debt service and financing costs, other than the
interest factor applied to amortized capital expenses as permitted
by Section 6.2.2.2.
6.2.7.7. Costs incurred to investigate or remediate hazardous
substances not released or disposed of at the Project by Tenant or
its agents.
6.2.7.8. Costs occasioned by a casualty under Article 18
hereof (other than insurance premiums and deductibles).
6.2.7.9. Costs for which Landlord has a right of
reimbursement from third parties (other than any such party's share
of Expenses) or Tenant, or which Tenant pays directly to a third
party.
5
<PAGE> 8
6.2.7.10, Overhead and profit increment paid to Landlord or
to subsidiaries or affiliates of Landlord for goods and/or services
in or to the Project to the extent the same exceeds the costs of
such goods and/or services rendered by qualified, unaffiliated third
parties on a competitive basis.
6.2.7.11. Any allocation for home-office overhead.
6.2.7.1 2. Wages, salaries and compensation for any employee
not devoting his or her services to the Project full-time except for
a pro rata share of such costs based upon time spent on the Project
and time spent on other projects.
6.2.7.1 3. Repairs to or replacements of any structural
portion of the Project, foundations, exterior and load-bearing walls
and structural roof, except for the roof membrane (however this
shall not excuse Tenant from bearing any costs associated with any
structural elements installed due to Tenant's use of the Premises
for any purpose other than general office use or for any floor-load
requirements for the Premises regardless of use).
6.2.7.14. Costs for utilities and services not available to
Tenant.
6.3. PAYMENT OF ESTIMATED EXPENSES. Tenant shall pay estimated Expenses
to Landlord as- follows:
6.3.1. Landlord shall submit to Tenant, on or before March 31 of the
first Subsequent Year or as soon thereafter as Landlord has sufficient
data, a reasonably detailed statement showing the Expenses for the Base
Year.
6.3.2. For each Subsequent Year, Landlord shall submit to Tenant,
prior to January 1 of such Subsequent Year or as soon thereafter as
practicable, a reasonably detailed statement showing the estimated
Expenses for such Subsequent Year. The determination of estimated
Expenses hereunder shall be made by Landlord based upon Landlord's
experience with actual costs and projections. Tenant shall pay monthly
to Landlord an amount equal to the excess of (a) the sum of the total
annual estimated Expenses multiplied by Tenant's Share minus (b)
Landlord's Base Year Costs, over (c) twelve (12) months. If Landlord
does not submit said statement to Tenant prior to January 1 of any such
Subsequent Year, Tenant shall continue to pay its share of estimated
Expenses at the then existing rate until such statement is submitted,
and, thereafter, at the monthly Rent payment date next following the
submittal of such statement, shall pay its share of estimated Expenses
based on the rate set forth in such statement together with any amounts
based on such rate which may have theretofore accrued from January 1 of
such Subsequent Year. Landlord may revise such estimated Expenses at the
end of any calendar quarter, and Tenant shall pay Tenant's Share of such
revised estimated Expenses after notice thereof as herein provided.
6.4. PAYMENT OF ACTUAL EXPENSES. Actual Expenses shall be reconciled
against payments of estimated Expenses as follows:
6.4.1. On or before March 31 of the second Subsequent Year and each
Subsequent Year thereafter, or as soon thereafter as Landlord has
sufficient data, Landlord shall submit to Tenant a reasonably detailed
statement showing the actual Expenses paid or incurred by Landlord
during the previous calendar year. If Tenant's Share of such actual
Expenses is less than the amount of estimated Expense's for such
previous year theretofore paid by Tenant, then Landlord shall credit the
amount of such difference against estimated and/or actual Expenses which
may thereafter be due from Tenant; provided, however, that in no event
shall Tenant receive a credit as provided herein for any amount
calculated to be less than Landlord's Base Year Costs. If Tenant's Share
of such actual Expenses is more than the amount of the estimated
Expenses for such previous year theretofore paid by Tenant, then Tenant
shall, at the monthly Rent payment date next following the submittal of
such statement to Tenant, pay to Landlord the full amount of such
difference.
6.4.2. The reconciliation of the Expenses paid by Tenant for the
calendar year in which this Lease terminates shall be made upon
Landlord's submittal to Tenant of the statement of actual Expenses for
such calendar year. The estimated and actual Expenses for such calendar
year shall be prorated based on the actual number of days in such
calendar year that this Lease was in effect, based on a 360 day year,
and shall be compared. If pursuant to such comparison it is determined
that there has been an underpayment or an overpayment by Tenant for such
calendar year, Landlord shall refund the overpayment to Tenant, or
Tenant shall pay the amount calculated as owing to Landlord, as the case
may be, within thirty (30) days after the submittal of the statement by
Landlord. This provision shall survive the expiration or termination of
the Lease. If Landlord deems it advisable, Landlord may submit partial
year statements pursuant to this
6
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Section 6.4.2 in order to cause an earlier reconciliation of
Expenses for the calendar year in which this Lease terminates.
6.4.3. TENANT"S RIGHT OF AUDIT. If Tenant should in good faith
dispute the amount of Tenant's Share of Expenses as contained in such
statement ("Disputed Statement"), Tenant shall have the right to audit
Landlord's records with respect thereto in accordance with the provision
of this Section 6.4.3:
6.4.3.1. Tenant shall give Landlord no less than thirty (30)
days' prior written notice of such dispute and of Tenant's intent to
audit ("Audit Notice"), which Audit Notice must be given to Landlord
within one hundred twenty (120) days following the date of Tenant's
receipt of the Disputed Statement. However, in no event shall Tenant
conduct an audit more than once in any calendar year.
6.4.3.2. The records relating to the Disputed Statement shall
be audited by an independent certified public accountant, who shall
not, however, be retained or compensated on a contingency fee basis.
The audit shall be conducted at the office where such records aire
maintained during regular business hours. The auditor shall deliver
a certified copy of the audit to Landlord concurrently with the
delivery of such audit to Tenant. No records or copies of records in
any form may be removed from the office where such records are
maintained.
6.4.3.3. If such audit reveals that Landlord has overcharged
or undercharged Tenant, such audit shall be subject to the
reasonable review of, and acceptance by, Landlord, and the results
of such reasonable review by Landlord shall be binding upon the
parties.
6.4.3.4. If, as a result of these audit provisions, it is
determined that Tenant was overcharged in the Disputed Statement,
then Landlord shall reimburse Tenant within thirty (30) days after
the later to occur of (a) Landlord's receipt of Tenant's written
demand therefor or (b) Landlord's receipt of the certified auditor's
report, uncontested by Landlord. If, as a result of these audit
provisions, it is determined that Tenant was undercharged in the
Disputed Statement, then notwithstanding any contrary provision
contained in this Article 6, Tenant shall pay to Landlord the
difference within thirty (30) days after written demand therefor
from Landlord.
6.4.3.5. Tenant shall pay the costs and expenses for such
audit; however, if, as a final result of these audit procedures it
is determined that (a) the difference in Expenses is in excess of
five percent (5%) and (b) Tenant was overcharged in the Disputed
Statement, then Landlord shall reimburse Tenant for the reasonable,
usual and customary costs for such audit (exclusive, however, of
travel and lodging costs and attorneys' fees), within thirty (30)
days after Landlord has received from Tenant an itemized paid
invoice from such auditor.
6.4.3.6. Tenant shall not be permitted to conduct an audit at
any time Tenant is in default of this Lease.
6.5. OTHER EXPENSE PROVISIONS.
6.5.1. Notwithstanding any provision of this Article 6 to the
contrary, if at any time during the term of this Lease any tenant,
pursuant to an express provision in its lease and with Landlord's
approval, contracts for certain Building or Common Area services to be
provided directly to it and at its expense, which services would
normally be furnished by Landlord (eg., janitorial, maintenance,
utilities, etc.), then Landlord may make an appropriate adjustment in
calculating Tenant's Share of Expenses to the end that the cost of the
remaining services provided by Landlord are shared proportionately by
all tenants receiving such services.
6.5.2. In determining the amount of Expenses hereunder, the Expenses
shall be adjusted to be equal to Landlord's reasonable estimate of
Expenses assuming at least ninety-five percent (95%) of the total
rentable area of the Building was occupied for the entire year, and
assuming the Building was fully completed and fully assessed for
property tax assesment, maintenance and repair purposes.
6.5.3. The computation of Expenses pursuant to this Article 6 is
intended to constitute a formula for an agreed sharing of costs by
tenants, and may or may not constitute an exact reimbursement to
Landlord for costs paid by Landlord, and for Landlord's administration.
6.5.4. Any delay or failure of Landlord in computing or billing for
Expenses shall not constitute a waiver of, or in any way impair, the
obligation of Tenant to pay Expenses hereunder.
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However, Tenant shall not be charged interest on unpaid Expenses which
have accrued during such time that Landlord has failed to submit a
statement for such Expenses.
7. TAXES PAYABLE SOLELY BY TENANT
7.1. In addition to the Rental and Expenses to be paid by Tenant, Tenant
shall pay before delinquency and without notice or demand by Landlord any and
all taxes levied or assessed on and which become payable by Tenant during the
term of this Lease (excluding, however, state and federal personal or corporate
income taxes measured by the income of Landlord from all sources, capital stock
taxes, and estate and inheritance taxes), whether or not now customary or within
the contemplation of the parties hereto, which are based upon, measured by or
otherwise calculated with respect to: (i)) the gross or net Rent payable under
this Lease, including, without limitation, any gross receipts tax or any other
gross income tax or excise tax levied by any taxing authority with respect to
the receipt of the Rental hereunder, (ii) the value of Tenant's equipment,
furniture, fixtures or other personal property located in the Premises; (iii)
the possession, lease, operation, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises or any portion thereof; (iv) the
value of any improvements, alterations or, additions made in or to the Premises
by or on behalf of Tenant, except for those improvements (if any) installed as
part of Landlord's Work (as hereinafter defined) or (v) this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises. Real property taxes on improvements which are installed
as part of Landlord's Work shall be deemed to be included in the taxes described
in Section 6.2.2.3 above, as to which Tenant shall pay Tenant's Share. If it is
not lawful for Tenant to reimburse Landlord for any such taxes paid or incurred
by Landlord, the Rent shall be revised so as to net Landlord the same net Rent
after imposition of such taxes as would have been payable prior to the
imposition of such taxes.
8. LATE PAYMENTS
8.1. If Tenant fails to pay to Landlord when due any Rent, Expenses or
other sums owing to Landlord pursuant to the terms of this Lease, said late
payment shall bear interest at the Agreed Rate as herein provided and, in
addition:
8.1.1. For each such late payment that is not paid within five (5)
business days after Tenant has received (or refused to receive) written
demand therefor from Landlord that such amount is due, Tenant shall pay
to Landlord a service charge equal to ten percent (10%) of the overdue
amount; provided, however, that Tenant shall be entitled to only one (1)
such notice in any calendar year and thereafter such service charge
shall be due Landlord from Tenant if such payment is not made within
five (5) business days after the date the same was due without benefit
of notice. Tenant acknowledges and agrees that such late payment by
Tenant will cause Landlord to incur costs and expenses not contemplated
by this Lease, the exact amounts of which will be extremely difficult to
ascertain, and that such service charge represents a fair estimate of
the costs and expenses which Landlord would incur by reason of Tenant's
late payment. Tenant further agrees that such service charge shall
neither constitute a waiver of Tenant's default with respect to such
overdue amount nor prevent Landlord from exercising any other right or
remedy available to Landlord; and
8.1.2. Following any three (3) consecutive late payments of Rent,
Landlord may, upon notice to Tenant, require that, beginning with the
first payment of Rent due following the date the third (3rd) late
payment was due, Rent shall no longer be paid in monthly installments
but shall be payable three (3) months in advance and, in addition or in
the alternative at Landlord's election.
9. SECURITY DEPOSIT
9.1. Upon Tenant's execution of this Lease, Tenant shall deposit with
Landlord a "Security Deposit" in the amount set forth in Section 1.8 hereof
either in cash by negotiable cheque or by a Letter of Credit pursuant to Section
9.2 following, which shall be held by Landlord as security for the faithful
performance by Tenant of all of the terms, covenants, and conditions of this
Lease, it being expressly understood and agreed that the deposit is neither an
advance Rent deposit nor a measure of Landlord's damages in case of Tenant's
default. If at any time during the term of this Lease or any extended term
thereof Tenant's Basic Rent is increased pursuant to Article 5 or otherwise, the
Security Deposit shall be increased in the same proportion and Tenant shall
deposit cash with Landlord in an amount sufficient to increase the Security
Deposit to the appropriate amount. The Security Deposit may be retained, used or
applied by Landlord to remedy any default by Tenant, to repair damage caused by
Tenant to any part of the Project, and to clean the Premises upon expiration or
earlier termination of the Lease, as well as to reimburse Landlord for any
amount which Landlord may spend by reason of Tenant's default or to compensate
Landlord for any other loss or damage which Landlord may suffer by reason of
Tenant's default. If any portion of said deposit is so used or applied, Tenant
shall, within ten (10) days after written demand therefore, deposit cash with
Landlord in an amount sufficient to restore said deposit to the full amount
required hereunder, and Tenant's failure to do so shall be a material breach of
this Lease. Landlord shall not be required to keep the Security Deposit separate
from its general funds, and
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Tenant shall not be entitled to interest on such deposit. Tenant may not elect
to use any portion of said Security Deposit as a Rental payment although
Landlord may elect to do so in the event Tenant is in default hereunder or is
insolvent. If Tenant shall fully and faithfully perform every provision of this
Lease to be performed by it, then (a) on the later of the end of the twelfth
(12th) month of the Lease term or thirty (30) days after Tenant's written
request therefor, the amount of the Security Deposit shall be decreased to
$120,000.00 and, if Tenant has deposited cash with Landlord, Landlord shall pay
to Tenant the sum of $60,000.00 from the Security Deposit, and (b) on the later
of the end of the twenty-fourth (24th) month of the Lease term or thirty (30)
days after Tenant's written request therefor, the amount of the Security Deposit
shall be decreased to $60,000.00 and if Tenant has deposited cash with Landlord,
Landlord shall pay to Tenant the sum of $60,000.00 from the Security Deposit,
and (c) the balance of the Security Deposit then remaining shall be returned to
Tenant at Tenant's last known address (or, at Landlord's option, to the last
assignee of Tenant's interest hereunder) within thirty (30) days after the Lease
term has ended and the Premises have been vacated by Tenant in the manner
required by this Lease.
9.2. Notwithstanding anything to the contrary contained in this Article
9, Tenant may provide Landlord with an irrevocable and unconditional letter of
credit in favor of Landlord and in an amount of $1 80,000.00 ("Letter of
Credit") in fulfillment of its obligation to provide cash for the full amount of
the Security Deposit; provided, however, that (a) Tenant agrees to renew or
arrange for the renewal of the Letter of Credit at least thirty (30) days prior
to the expiration date thereof and on a continuing basis throughout the Lease
Term without lapse; (b) the form, issuing bank and other matters relating to
the Letter of Credit are satisfactory to Landlord in Landlord's reasonable
discretion; (c) the issuing bank is located in the Los Angeles metropolitan area
or, in the alternative, will permit Landlord to draw on the Letter of Credit in
the Los Angeles metropolitan area; and (d) all costs and fees relating to the
Letter of Credit, of whatever nature (including, without limitation, issuance,
renewal and drawing upon the Letter of Credit), shall be at the sole cost and
expense of Tenant. In addition to its other rights under this Article 9, at law
and in equity, Landlord shall be entitled to draw down on the Letter of Credit
if a then current replacement Letter of Credit is not provided within the time
period set forth above or, if Landlord is unable to draw down on the Letter of
Credit, Tenant shall deposit in cash with Landlord, upon demand, the full amount
of the Security Deposit required hereunder. Landlord shall draw down on the
Letter of Credit, as permitted pursuant hereto, by a letter bearing the
signature of an officer of the Landlord (or an agent or employee of Landlord who
may so execute such a letter in accordance with the By-Laws or a Resolution of
the Board of Directors or similar body authorizing such agent or employee to so
execute on behalf of Landlord) and stating that such money is due Landlord under
the provisions of this Lease, including, without limitation, Landlord having not
timely received a required replacement Letter of Credit. When the Security
Deposit is decreased pursuant to subparagraphs (a) and (b) of Section 9.1
preceding and if the Security Deposit is then in the form of a Letter of Credit,
Landlord shall have no obligation to surrender the Letter of Credit to Tenant
until Landlord has first received from Tenant a replacement Letter of Credit in
the amount required and in compliance with the provisions of this Section 9.2
and the requirements of subparagraphs (a) and (b) of Section 9.1. The right of
Tenant to provide Landlord a Letter of Credit in lieu of cash as provided herein
is personal to Tenant named at Article 1 hereof and in the event Tenant assigns,
mortgages, pledges, hypothecates or encumbers this Lease or its interest in the
Premises or sublets ail of the Premises, Landlord may by written notice to
Tenant or Tenant's successor-in-interest require Tenant or Tenant's successor-in
interest to deposit cash for a Security Deposit.
9.3. The Security Deposit may be in the form of another negotiable
instrument, and upon such terms and conditions, as are acceptable to Landlord in
Landlord's sole and absolute discretion and to which Landlord has expressly
consented in writing.
10. TENANT IMPROVEMENTS
10. 1. APPLICABILITY. The provisions of the "Construction Provisions"
attached as Exhibit C hereto shall govern with regard to work to be completed at
Landlord's expense ("Landlord's Work"), if any, and work to be completed at
Tenant's expense ("Tenant's Work"), if any. Landlord has no obligation and has
made no promise to alter, remodel, decorate, paint or otherwise improve the
Premises, or any part thereof except as specifically set forth in the
Construction Provisions. To the extent Landlord is required to perform
Landlord's Work or Tenant's Work pursuant to the Construction Provisions,
Landlord shall use reasonable diligence to complete such work in a timely
manner.
10.2. EFFECT ON COMMENCEMENT DATE. No delay in undertaking or completing
construction shall affect or delay the Commencement Date or Tenant's obligation
to pay Rent or Expenses hereunder.
10.3. INTENTIONALLY OMITTED.
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11. USE
11.1 . The Premises shall be used and occupied by Tenant for general
office purposes and for no other purpose without the prior written consent of
Landlord, which Landlord may withhold in its sole discretion. Tenant
acknowledges that neither Landlord nor any agent of Landlord has made any
representation or warranty with respect to the Premises, the Building, or the
Project, with respect to the suitability thereof for the conduct of Tenant's
business. Tenant shall not do or permit anything to be done in or about the
Premises nor bring or keep anything therein which will in any way increase the
existing rate of or affect or cause a cancellation of any fire or other
insurance covering the Building, Common Area, or the Premises or any of its
contents, nor shall Tenant sell or permit to be kept, used or sold in or about
the Premises any article which may be prohibited by a standard form policy of
insurance. Tenant shall promptly upon demand reimburse Landlord for any
additional premium charged for any such insurance by reason of Tenant's failure
to comply with the provisions of this Article 1 1. Tenant agrees that it will
use the Premises in such manner as not to interfere with the rights of other
tenants of the Building or Common Area . Tenant shall neither use nor allow the
Premises, Building or Common Area to be used for any unlawful or objectionable
purpose, nor cause, maintain or permit any nuisance or waste in, on or about any
portion of the Project. Tenant will not place a load upon any floor exceeding
the floor load which such floor was designed to carry, and Landlord reserves the
right to prescribe the location of any safe or other heavy equipment in the
Premises. Tenant shall not use or allow anything to be done in or about the
Premises or the Project which will in any way conflict with any law, ordinance
or governmental regulation or requirement of any board of fire underwriters or
any duly constituted public authority now in force or hereafter enacted or
promulgated affecting the use or occupancy of the Premises, and shall promptly
comply with all such laws or requirements at its sole cost and expense. The
judgment of any court of competent jurisdiction or any admission by Tenant that
Tenant has violated any such law, statute, ordinance, rule, regulation or
requirement shall be conclusive of such fact as between Landlord and Tenant;
however, Tenant shall not be obligated to make any capital expenditure in
complying with such laws or requirements which were in effect prior to the date
of this Lease unless compliance is necessitated due to Tenant's unique or
particular use of the Premises (other than for general office use), or due to
any alterations, improvements or additions performed by Tenant or Tenant's
contractors in or to the Premises, or due to the placement of anything within
the Premises affecting the floor load. Further, Tenant shall have no obligation
to pay the cost of investigating, monitoring, remediation or other, similar
costs, or for damages resulting from, the release or disposal of hazardous
materials or substances in or about the Premises by anyone other than Tenant,
its agents, contractors, employees or business invitees.
12. SERVICE AND UTILITIES
12.1. LANDLORD'S OBLIGATIONS. Provided Tenant is not in default there
under, Landlord shall as a part of Expenses make available to the Premises
during the Building's normal business hours as set forth in Rule 17 of the
Rules and Regulations described in Article 36 hereof, such amounts of air
conditioning, heating and ventilation as may be required in Landlord's
reasonable judgment for the comfortable use of the Premises, as well as elevator
service, reasonable amounts of electric current for normal lighting by Building
Standard overhead fixtures, and water for lavatory and drinking purposes.
"Building Standard" fixtures and equipment are as described in Schedule A to
Exhibit C attached hereto or, in absence thereof, as installed in the typical
common corridor. Landlord shall as a part of Expenses replace Building Standard
light bulbs, tubes and ballasts which need replacing due to normal use.
Landlord shall also as a part of Expenses maintain and keep lighted the common
stairs, entries and toilet rooms in the Building and shall provide trash
removal, janitorial service and window washing customary for similar buildings
in the same geographical area. Except to the extent caused by Landlord's
negligence, Landlord shall not be in default hereunder or liable for any damages
directly or indirectly resulting from, nor shall the Rent be abated or shall
there be deemed a constructive or other eviction of Tenant by reason of (i) the
installation, use or interruption of use of any equipment in connection with the
furnishing of any of the foregoing utilities and services, (ii) failure to
furnish, or delay in furnishing, any such utilities or services when such
failure or delay is caused by acts of God, acts of government, labor
disturbances of any kind, or other conditions beyond the reasonable control of
Landlord, or by the making of repairs or improvements to the Premises or any
part of the Project, or (iii) governmental limitation, curtailment, rationing or
restriction on use of water, electricity or any other service or utility
whatsoever serving the Premises, Building or Common Area. Landlord shall be
entitled to cooperate with the energy conservation efforts of governmental
agencies or utility suppliers. The failure of Landlord to provide such services
if consistent with the foregoing shall not constitute a constructive or other
eviction of Tenant.
1.2.2. AFTER-HOURS CHARGES. During non-business hours Landlord shall as
a part of Expenses keep the public areas of the Building lighted and shall
provide elevator service with at least one (1) elevator, but shall not be
obligated to furnish ventilation, lighting or air conditioning to the Premises.
If Tenant requires ventilation, lighting and/or air conditioning during
non-business hours Tenant shall give Landlord at least twenty-four (24) hours
prior notice of such requirement or shall follow such other procedure for
activating the building energy management system as Landlord may advise Tenant,
and Tenant shall pay Landlord the 'After-Hours Charges' for such extra service
at the rate set forth in
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Section 1.6 hereof. Such rates are subject to increase from time to time based
on increases in Landlord's costs associated with providing such extra services.
All payment required for After-Hours Charges shall be deemed to be Additional
Rent and Landlord shall have the same remedies for a default in payment thereof
as for a default in payment of Rent.
12.3. TENANT'S OBLIGATIONS. Tenant shall pay, prior to delinquency, for
all telephone charges and all other materials and services not expressly
required to be paid by Landlord, which may be furnished to or used in, on or
about the Premises during the term of this Lease Tenant shall also pay, as
Additional Rent, all charges and fees required to be paid by Tenant by the Rules
and Regulations described in Article 36 of this Lease.
12.4. EXCESS UTILITY USAGE. Tenant will not without the prior written
consent of Landlord use any apparatus or device in the Premises, including
(without limitation) electronic data processing machines, punch card machines,
and telephone switch gear, which will materially increase the amount of cooling
or ventilation or electricity or water usually furnished or supplied for use of
the Premises as general office space; nor shall Tenant connect with electric
current (except through existing electrical outlets in the Premises) or water
pipes, any apparatus or device for the purpose of using electrical current or
water, except as may be provided in the Construction Provisions. If Tenant uses
electricity at a rate in excess of 6 kilowatt/hours per usable square foot of
the Premises per year, the cost to Landlord of any such excess use of utility
service by Tenant shall be paid by Tenant based on Landlord's reasonable
estimates and costs. If Tenant requires or uses ventilation, cooling, water or
electric current or any other resource in excess of that usually furnished or
supplied for use of the Premises as general office space, Landlord may cause a
special meter or other measuring device to be installed in or about the Premises
to measure the amount of water, electric current or other resource consumed by
Tenant. The cost of any such meter, and of the installation, maintenance and
repair thereof, shall be paid for by Tenant, and Tenant agrees to pay Landlord
promptly upon demand for all such water, electric current or other resource
consumed, as shown by said meter, at the rates charged by the local public
utility or other supplier furnishing the same, plus any additional expense
incurred by Landlord in keeping account of the foregoing and administering same
If any lights, machines or equipment (including but not limited to computers)
are used by Tenant in the Premises which materially affect the temperature
otherwise maintained by the heating, ventilation or air conditioning system, or
generate substantially more heat in the Premises than would be generated by
Building Standard lights or usual fractional horsepower office equipment,
Landlord shall have the right to install any machinery and equipment which
Landlord deems necessary to restore the temperature balance in any affected part
of the Building, including but not limited to modifications to the Building
Standard air conditioning equipment, and the cost thereof including the cost of
installation and any additional cost of operation and maintenance occasioned
thereby shall be paid by Tenant to Landlord upon demand. Any sums payable under
this Section 1 2.4 shall be considered Additional Rent, and Landlord shall have
the same remedies for a default in payment of such sum as for a default in the
payment of Rent.
13. ENTRY BY LANDLORD
13.1. Landlord and its authorized representatives shall have the right,
upon 24-hours prior written or oral notice (except in an emergency, when no
notice shall be required) to enter the Premises at all reasonable times during
normal business hours and at any time in case of an emergency (i) to determine
whether the Premises are in good condition and whether Tenant is complying with
its obligations under this Lease, if Landlord has reasonable belief or evidence
that Tenant is not so maintaining the Premises pursuant to the terms of this
Lease (ii) to maintain or to make any repair or restoration to the Building that
Landlord has the right or obligation to perform, (iii) to install any meters or
other equipment which Landlord may have the right to install, (iv) to serve,
post, or keep posted any notices required or allowed under the provisions of
this Lease, (v) to post "for sale" signs at any time during the term, and to
post "for rent" or "for lease" signs during the last three (3) months of the
term or during any period while Tenant is in default, (vi) to show the Premises
to prospective brokers, agents, buyers, tenants, or persons interested in an
exchange, (vii) to shore the foundations, footings, and walls of the Building
and to erect scaffolding and protective barricades around and about the Building
or the Premises, but not so as to prevent entry into the Premises, and (viii) to
do any other act or thing necessary for the safety or preservation of the
Premises or the Building. Landlord shall have the right at all times to have and
retain a key with which to unlock all doors in, upon and about 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 gain entry in an emergency,
and any entry to the Premises to be a forcible obtained by Landlord in
accordance with the foregoing shall not be construed or deemed or unlawful entry
into, or a detainer of, the Premises, or an eviction of Tenant from the Premises
or any portion thereof. Tenant hereby waives any claim for damages for any
injury or inconvenience to or interference with Tenant's business and any loss
of occupancy or quiet enjoyment of the Premises by reason of Landlord's exercise
of its rights of entry in accordance with this Article 1 3, and Tenant shall not
be entitled to an abatement or reduction of Rent or Expenses in connection
therewith.
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14. MAINTENANCE AND REPAIR
14.1. LANDLORD'S OBLIGATIONS. Landlord shall as part of Expenses
maintain or cause to be maintained in good order, condition and repair the
structural and common portions of the Building and all Common Areas in the
Project (except to the extent of damage caused by Tenant which shall be repaired
by Landlord at Tenant's expense). Landlord shall not be liable, and neither Rent
nor Expenses shall be abated, for any failure by Landlord to maintain and repair
areas which are being used in connection with construction or reconstruction of
improvements, or for any failure to make any repairs or perform any maintenance,
unless such failure shall persist for an unreasonable time after written notice
of the need thereof is given to Landlord by Tenant. To the extent the provisions
of this Article 14 are in conflict with any statute now or hereafter in effect
which would afford Tenant the right to make repairs at Landlord's expense or to
terminate this Lease, the provisions of this Article 14 shall govern.
14.2. TENANT'S OBLIGATIONS.
14.2.1.Tenant shall, at its sole cost and expense, except for
janitorial services furnished by Landlord pursuant to Article 12
hereof, maintain the Premises including all improvements therein in good
order, condition and repair.
14.2.2. In connection with Tenant surrendering possession of the
Premises at the end of the Lease term, Tenant agrees to repair any
damage caused by or in connection with the removal of any article of
personal property, business or trade fixtures, machinery, equipment,
cabinetwork, furniture, movable partitions or permanent improvements or
additions, including without limitation thereto, repairing the floor and
patching and painting the walls where required by Landlord to Landlord's
reasonable satisfaction, all at Tenant's sole cost and expense Tenant
shall indemnify, defend and hold Landlord harmless against any loss,
liability, cost or expense (including reasonable attorney's fees)
resulting from delay by Tenant in so surrendering the Premises. Tenant's
obligation hereunder shall survive the expiration or termination of this
Lease.
14.2.3. If Tenant fails to maintain the Premises in good order,
condition and repair, Landlord may give Tenant notice to do such acts as
are reasonably required to so maintain the Premises. If within thirty
(30) days thereafter Tenant fails to complete such work (or, if such
work cannot be reasonably completed within thirty [30] days, Tenant
fails to promptly commence such work within such thirty-day period and
diligently prosecute the same to completion), then Landlord shall have
the right to do such acts and expend such funds at the expense of Tenant
as are reasonably required to perform such work. Any amount so expended
by Landlord (together with a charge for Landlord's administration and
overhead equal to five percent (5%) thereof) shall be paid by Tenant
promptly after demand, with interest at the Agreed Rate from the date of
such work. Landlord shall have no liability to Tenant for any
inconvenience or interference with the use of the Premises by Tenant as
a result of performing any such work.
14.3. COMPLIANCE WITH LAW. Landlord and Tenant shall each do all acts
required to comply with all applicable laws, ordinances, and rules of any public
authority relating to their respective maintenance obligations as set forth
herein.
15. ALTERATIONS AND ADDITIONS
15.1. Tenant shall make no alterations, additions or improvements (a) to
the Premises or (b) to the Building or any portion of the Common Area or the
electrical, mechanical, plumbing or other systems in the Building, without
obtaining the prior written consent of Landlord in each instance. Such consent
may be granted or withheld at Landlord's sole discretion; however, Landlord
shall not unreasonably withhold its consent to any alterations, additions, or
improvements to the interior of the Premises, provided the same does not (A)
affect the exterior appearance of the Premises, the Building or the Project, or
(b) affect any structural portion of the Premises, the Building or the Project,
or (c) affect any electrical, mechanical, plumbing or other systems of the
Building, or (d) diminish the value of the Premises, and further provided Tenant
complies with the provisions this Section 15.1. Tenant shall be permitted to
select a contractor and subcontractors from Landlord's list of approved
contractors and subcontractors, or such other contractors and subcontractors as
Landlord shall approve in writing in advance of the commencement of such work;
provided, however, Landlord's designated contractors and subcontractors shall be
used for any work involving the mechanical, electrical, plumbing, heating,
ventilating and air conditioning systems and other Building systems and the
roof. Tenant may elect to have Landlord undertake such work of alterations and
additions and, provided Landlord agrees to undertake such work (which may be
granted or withheld in Landlord's sole discretion), then Tenant shall reimburse
Landlord for the cost thereof (together with a charge for Landlord's
administration and management thereof equal to five percent (5%) of the cost
incurred) within thirty (30) days after an invoice therefor is submitted to
Tenant. Landlord may impose as a condition to such consent such requirements as
Landlord may deem necessary in its sole discretion, including without limitation
the requirement that Landlord be furnished with working drawings before work
commences and that a bond be furnished, and requirements relating to the manner
in which the work is done, the contractor by
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whom it is performed, and the times during which it is accomplished. Prior to
the expiration or earlier termination of the Lease, Tenant shall, at its sole
cost and expense, remove any and all such alterations, improvements and
additions to the Premises; however, if Tenant requests in writing to Landlord
prior to the construction or installation of such additions or alterations that
Landlord stipulate that Tenant shall not be required to remove any or all of
such improvements upon the expiration or earlier termination of this Lease and
Landlord agrees thereto in writing to Tenant, then Tenant shall not be obligated
to so remove such improvements or additions. and restore the Premises to the
condition in which they were delivered to Tenant, reasonable wear and tear
excepted. Any damage done to the Premises in connection with any such removal
shall be repaired at Tenant's sole cost and expense. Landlord may, in connection
with any such removal or restoration which reasonably might involve damaging the
Premises, require that such removal be performed by a bonded contractor or other
person for which a bond satisfactory to Landlord has been furnished covering the
cost of repairing the anticipated damage. Unless so removed, all such
alterations, additions or improvements shall at the expiration or earlier
termination of the Lease become the property of Landlord and remain upon the
Premises. All such improvements, alterations, additions and restoration must be
done in a good and workmanlike manner and diligently prosecuted to completion so
that the Premises shall at all times be a complete unit except during the period
of work. Such improvements, alterations, additions and restoration shall only be
constructed by a contractor which is bondable and which shall use union
employees only, except that such contractor may use non-union employees only if
prior to the commencement of any work, Tenant obtains Landlord's written consent
which Landlord may withhold unless it is adequately protected against any and
all loss or damage that may result from labor problems or any work stoppage or
interruption arising from the use of such non-union employees. Tenant shall
deliver to Landlord upon commencement of such work a copy of the building permit
with respect thereto. Upon completion of such work, Tenant shall file for record
in the office of the County Recorder where the Project is located a Notice of
Completion, as required or permitted by law. All such work shall be performed
and done strictly in accordance with the laws and ordinances relating thereto
and shall be performed so as not to obstruct the access to the premises of any
other tenant in the Building or Project. Tenant agrees to carry insurance as
required by Article 17 covering any improvements, alterations or additions to
the Premises made by Tenant under the provisions of this Article 15, it being
expressly agreed that none of such improvements, additions or alterations shall
be insured by Landlord under the insurance Landlord may carry upon the Building,
nor shall Landlord be required under any provision for reconstruction to
reinstall any such improvements, additions or alterations. In addition, it is
expressly agreed that if any tax is imposed, or the amount of taxes on the
Building or the Project is increased, by reason of any such improvements,
alterations or additions, Tenant shall be solely responsible therefor under
Article 7.
16. INDEMNITY
16.1. INDEMNIFICATION BY TENANT. Tenant shall indemnify, defend and hold
Landlord, its agents and employees, harmless from and against any and all
claims, liability, loss, cost or expense (including reasonable attorneys' fees)
arising out of or in connection with (i) any injury or damage to any person or
property occurring in, on or about the Premises or any part thereof or the
Building or Common Area, if such injury or damage is caused in part or in whole
by any act or omission by Tenant, its agents, contractors, employees or business
invitees or (ii) any breach or default in the performance of any obligation on
Tenant's part to be performed under this Lease. If any action or proceeding is
brought against Landlord by reason of any such claim, upon notice from Landlord,
Tenant shall defend the same at Tenant's expense by counsel reasonably
satisfactory to Landlord. Tenant, as a material part of the consideration to
Landlord, hereby assumes all risk of damage to property or injury to persons in,
upon or about the Premises from any cause except Landlord's negligence or
wrongful acts, and Tenant hereby waives all claims with respect thereto against
Landlord. The foregoing provisions shall survive the termination of this Lease
16.2. EXEMPTION OF LANDLORD FROM LIABILITY. If the Premises, the
Building, or the Common Area, or any part thereof, is damaged by fire or other
cause against which Tenant is required to carry insurance pursuant to this
Lease, Landlord shall not be liable to Tenant for any loss, cost or expense
arising out of or in connection with such damage. Tenant hereby releases
Landlord, its directors, officers, shareholders, partners, employees, agents and
representatives, from any liability, claim or action arising out of or in
connection with such damage. Furthermore, Tenant shall, pursuant to Article 17,
maintain insurance against loss, injury, or damage which may be sustained by the
person, goods, wares, merchandise or property of Tenant, its agents,
contractors, employees, invitees or customers, or any other person in or about
the Premises, caused by or resulting from fire, steam, electricity, gas, water,
or rain, which may leak or flow from or into any part of the Premises or the
Building, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures of the same, whether such damage or injury results from conditions
arising within the Premises or other portions of the Building, or from other
sources, and Landlord shall not be liable therefor, unless caused by Landlord's
negligence or wrongful act, and in that event only to the extent not covered by
the insurance which Tenant is required to carry pursuant to this Lease. Landlord
shall not be liable to Tenant for any damages arising out of or in connection
with any act or omission of any other tenant in the Project or for losses due to
theft or
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burglary or other wrongful acts of third parties. Nothing contained in this
Section 16.2 shall relieve Landlord from liability for its negligent or wrongful
acts, except (a) in no event shall Landlord be liable for consequential damages,
and (b) the foregoing shall be subject to the release and waiver contained at
Section 17.7.
17. INSURANCE
17.1. GENERAL. All insurance required to be carried by Tenant hereunder
shall be issued by responsible insurance companies acceptable to Landlord and
the holder of any deed of trust or mortgage secured by any portion of the
Premises (hereinafter referred to as a "Mortgagee"). All policies of insurance
provided for herein shall be issued by insurance companies with general
policyholder's rating of not less than A and a financial rating of not less than
Class VIII as rated in the most current available "Best Insurance Reports". Each
policy shall name Landlord and at Landlord's request any Mortgagee and the
property manager of Landlord as an additional insured, as their respective
interests may appear. Tenant shall deliver certificates of such insurance to
Landlord, evidencing the existence and amounts of such insurance, at least ten
(10) days prior to Tenant's occupancy in the Premises. Failure to make such
delivery shall constitute a material default by Tenant under this Lease. All
policies of insurance delivered to Landlord must contain a provision that the
company writing said policy will give Landlord thirty (30) days prior written
notice of any cancellation or lapse in the amounts of insurance. All general
liability, property damage and other casualty insurance policies shall be
written as primary policies, not contributing with, and not in excess of
coverage which Landlord may carry. Tenant shall furnish Landlord with renewals
or "binders" of any such policy at least five (5) days prior to the expiration
thereof. Tenant agrees that if Tenant does not procure and maintain such
insurance, Landlord may (but shall not be required to) obtain such insurance on
Tenant's behalf and charge Tenant the premiums therefor together with a fifteen
percent (115%) handling charge, payable upon demand. Tenant may carry such
insurance under a blanket policy provided such blanket policy expressly affords
the coverage required by this Lease and contains a per location aggregate
endorsement and evidence thereof is furnished to Landlord as required above.
17.2. CASUALTY INSURANCE. At all times during the term hereof, Tenant
shall maintain in effect policies of casualty insurance covering (i) all
improvements in, on or to the Premises (including any Building Standard
furnishings, and any alterations, additions or improvements as may be made by
Tenant), and (ii) trade fixtures, merchandise and other personal property from
time to time in, on or upon the Premises. Such policies shall include coverage
in an amount not less than one hundred percent (100%) of the actual replacement
cost thereof from time to time during the term of this Lease. Such policies
shall provide protection against any peril included within the classification
"Fire and Extended Coverage", against vandalism and malicious mischief, theft,
sprinkler leakage and earthquake sprinkler leakage (however, Tenant shall be
obligated to obtain such earthquake sprinkler leakage insurance if and only so
long as the premiums therefor are available at commercially reasonable rates)
(and including cost of demolition and debris removal). Replacement cost for
purposes hereof shall be determined by an accredited appraiser selected by
Landlord or otherwise by mutual agreement. The proceeds of such insurance shall
be used for the repair or replacement of the property so insured. Upon
termination of this Lease following a casualty as set forth in Article 18, the
proceeds under (i) above shall be paid to Landlord, and the proceeds under (ii)
above shall be paid to Tenant.
17.3. LIABILITY INSURANCE. Tenant shall at all times during the term
hereof obtain and continue in force bodily injury liability and property damage
liability insurance adequate to protect Landlord against liability for injury to
or death of any person in connection with the activities of Tenant in, on or
about the Premises or with the use, operation or condition of the Premises. Such
insurance at all times shall be in an amount of not less than Two Million
Dollars ($2,000,000) for injuries to persons in one (1) accident, not less than
One Million Dollars ($1,000,000) for injury to any one (1) person and not less
than Five Hundred Thousand Dollars ($500,000) with respect to damage to
property. The limits of such insurance do not necessarily limit the liability of
Tenant hereunder. All general liability and property damage policies shall
contain a provision that Landlord, although named as an additional insured,
shall nevertheless be entitled to recovery under said policies for any loss
occasioned to it, its partners, agents and employees by reason of the negligence
of Tenant.
17.4. WORKERS' COMPENSATION INSURANCE. Tenant shall, at all times during
the term hereof, maintain in effect workers' compensation insurance as required
by applicable statutes.
17.5. ADJUSTMENT. Every three (3) years during the term of this Lease,
or whenever Tenant materially improves or alters the Premises, whichever is
earlier, Landlord and Tenant shall mutually agree to increases in Tenant's
insurance policy limits for the insurance to be carried by Tenant as set forth
in this Article 17. If Landlord and Tenant cannot mutually agree upon the
amounts of said increases within thirty (30) days after notice from Landlord,
then the insurance policy limits set forth in this Article 17 shall be adjusted
upward by an accredited insurance appraiser approved by Landlord to reflect
increased replacement costs and increased limits of liability then prevailing
generally in the local real estate industry for comparable property.
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1 7.6. LANDLORD'S INSURANCE. Landlord shall at all times from and after
substantial completion of the Premises maintain in effect as an item of Expense
a policy or policies of insurance covering the Common Area and the buildings in
the Project in an amount up to one hundred percent (100%) of the actual
replacement cost thereof (exclusive of the cost of excavations, foundations and
footings) from time to time during the term of this Lease, providing protection
against rental loss and any peril generally included in the classification "Fire
and Extended Coverage" which may include insurance against sprinkler damage,
vandalism, malicious mischief, earthquake and third party liability, and
including such coverages in such amounts as Landlord may designate. Landlord's
obligation to carry the insurance provided for herein may be brought within the
coverage of any so-called blanket policy or policies of insurance carried and
maintained by Landlord, provided that the coverage afforded will not be reduced
or diminished by reason of the use of such blanket policy of insurance.
17.7. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives any
and all rights of recovery against the other or against the directors, officers,
shareholders, partners, employees, agents and representatives of the other, on
account of loss or damage of such waiving party or its property, or the property
of others under its control, to the extent that such loss or damage is insured
against under any fire and extended coverage insurance policy which either may
have in force at the time of such loss or damage. Tenant. shall, upon obtaining
the policies of insurance required under this Lease, give notice to its
insurance carrier(s) that the foregoing mutual waiver of subrogation is
contained in this Lease. The waivers set forth herein shall be required to the
extent that same are available from each party's insurer without additional
premium, if an extra charge is incurred to obtain such waiver, it shall be paid
by the party in whose favor the waiver runs within fifteen (15) days after
written notice from the other party.
18. DAMAGE AND DESTRUCTION
18.1. PARTIAL DAMAGE-INSURED. If the Premises, Building or Common Area
are damaged by a risk covered under fire and extended coverage insurance
protecting Landlord, then Landlord shall restore such damage provided insurance
proceeds are available to Landlord to pay eighty percent (80%) or more of the
cost of restoration, and provided such restoration by Landlord can be completed
within six (6) months after the commencement of work, in the opinion of a
registered architect or engineer appointed by Landlord. In such event this Lease
shall continue in full force and effect so long as the Premises can be used by
Tenant, except that Tenant shall, so long as the damage is not due to the act or
omission of Tenant, be entitled to an equitable reduction of Rent and Expenses
while such restoration takes place, such reduction to be based upon the extent
to which the damage and the restoration efforts directly and materially
interfere with Tenant's use of the Premises.
18.2. PARTIAL DAMAGE-UNINSURED. If the Premises, Building or Common Area
are damaged by a risk not covered by such insurance or the insurance proceeds
available to Landlord are less than eighty percent (80%) of the cost of
restoration, or if the restoration cannot be completed within six (6) months
after the commencement of work in the opinion of the registered architect or
engineer appointed by Landlord, then Landlord shall have the option either to
(i) repair or restore such damage, this Lease continuing in full force and
effect so long as the Premises can be used by Tenant, but the Rent and Expenses
to be equitably reduced as hereinabove provided, or (ii) give notice to Tenant
at any time within ninety (90) days after such damage terminating this Lease as
of a date to be specified in such notice, which date shall be not less than
thirty (30) nor more than sixty (60) days after giving such notice. If such
notice is given, this Lease shall expire and any interest of Tenant in the
Premises shall terminate on the date specified in such notice and the Rent and
Expenses, reduced by an equitable reduction (except as hereinabove provided)
based upon the extent, if any, to which such damage directly and materially
interfered with Tenant's use of the Premises, shall be paid to the date of such
termination, and Landlord agrees to refund to Tenant any Rent or Expenses
theretofore paid in advance for any period of time subsequent to such
termination date.
18.3. TOTAL DESTRUCTION. If the Premises are totally destroyed (i.e.,
over seventy percent (70 %) of the Premises is destroyed or if Tenant cannot use
the Premises without major restoration or if in Landlord's judgment the
Premises cannot be restored as set forth above, then, notwithstanding the
availability of insurance proceeds, this Lease shall be terminated effective as
of the date of the damage.
18.4. LANDLORD'S OBLIGATIONS. Landlord shall not be required to carry
insurance of any kind on Tenant's property and shall not in the absence of
Landlord's negligence or wrongful acts be required to repair any injury or
damage thereto by fire or other cause, or to make any restoration or replacement
of any paneling, decorations, partitions, ceilings, floor covering, office
fixtures or any other improvements or property installed in the Premises by or
at the direct or indirect expense of Tenant, and Tenant shall be required to
restore or replace same in the event of damage and shall have no claim against
Landlord for any loss suffered by reason of any such damage, destruction, repair
or restoration. Notwithstanding anything to the contrary contained in this
Article 18, Landlord and Tenant shall each have the option not to repair,
reconstruct or restore the Premises with respect to damage or destruction as
described in this Article 18 occurring during the last twelve (12) months of
the term of this Lease or any extension thereof, provided, however, that if
Landlord or Tenant exercises such option this Lease
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shall be terminated upon such exercise (however, notwithstanding the preceding,
if within ten [10] days after such event of damage, Tenant exercises its Option
to Extend and Notice of Acceptance pursuant to the provisions of Article 43,
then this Lease shall not so terminate).
18.5. TENANT'S RIGHT TO TERMINATE. Notwithstanding anything to the
contrary contained in this Article 18, in the event of either an insured or an
uninsured casualty loss, Tenant shall have the right to terminate this Lease if
(a) the restoration work cannot be completed within six (6) months after the
commencement of such work, in the opinion of Landlord's registered architect or
engineer, or (b) the restoration is not completed within six (6) months after
the commencement of such work, provided that Tenant gives written notice of such
termination to Landlord within ten (10) business days after Landlord has
notified Tenant of such determination, in the case of (a)preceding, or after the
expiration of the six (6)-month period, but prior to the date restoration is
substantially complete, in the case of (b) preceding.
18.6. WAIVER BY TENANT. It is expressly agreed that this Article 18
shall govern the rights of Landlord and Tenant in the event of damage and
destruction and supersedes the provisions of any statutes with respect to any
damage or destruction of the Premises.
19. CONDEMNATION
19.1. If all or a substantial part of the Premises, Building or Common
Area is taken or appropriated for public or quasi-public use by the right of
eminent domain or otherwise by a taking in the nature of inverse condemnation,
with or without litigation, or is transferred by agreement in lieu thereof (any
of the foregoing being referred to herein as a "taking"), either party hereto
may, by written notice given to the other within thirty (30) days of receipt of
notice of such taking, elect to terminate this Lease as of the date possession
is transferred pursuant to the taking; provided, however, that before such party
may terminate this Lease for a taking, such taking shall be of such an extent
and nature as to economically frustrate its business therein, or to
substantially handicap, impede or impair its use thereof. No award for any
partial or entire taking shall be apportioned, and Tenant thereby assigns to
Landlord any and all rights of Tenant now or hereafter arising in or to the same
or any part thereof; provided, however, that Tenant may file a separate claim
for an award and nothing contained herein shall be deemed to give Landlord any
interest in, or to require Tenant to assign to Landlord, any award made to
Tenant for the taking of personal property belonging to Tenant. In the event of
a taking which does not result in a termination of this Lease, Rent and Expenses
shall be equitably reduced to the extent Tenant's business in or use of the
Premises is economically impaired as described above. No temporary taking of the
Premises or any part of the Project shall terminate this Lease, or give Tenant
any right to any abatement of Rent or Expenses hereunder, except that Rent and
Expenses shall be equitably reduced as described above during that portion of
any temporary taking lasting more than thirty (30) days. To the extent the
provisions of this Article 19 conflict with California Code of Civil Procedure
Section 1265.130 allowing either party to petition the court to terminate this
Lease for a partial taking, the provisions of this Article 19 shall govern.
20. LIENS
20.1. Tenant shall keep the Premises, the Building and the Project free
from any liens arising out of work performed, materials furnished, or
obligations incurred by Tenant, and shall indemnify, hold harmless and defend
Landlord from any liens and encumbrances arising out of any work performed or
materials furnished by or at the direction of Tenant. Tenant shall give Landlord
at least ten (10) business days' prior written notice of the expected date of
commencement of work relating to alterations, improvements, or additions to the
Premises and if requested by Landlord shall secure a completion and indemnity
bond for said work, satisfactory to Landlord, in an amount at least equal to one
and one-half (1 1/2) times the estimated cost of such work. Landlord shall have
the right at all times to keep posted on the Premises any notices permitted or
required by law, or which Landlord shall deem proper, for the protection of
Landlord and the Premises, and any other party having any interest therein,
against mechanics' and materialmen's liens. If any claim of lien is filed
against the Premises or any part of the Project or any similar action affecting
title to such property is commenced, the party receiving notice of such lien or
action shall immediately give the other party written notice thereof. If Tenant
fails, within twenty (20) days following the imposition of any lien, to cause
such lien to be released of record by payment or posting of a proper bond,
Landlord shall have, in addition to all other remedies provided herein and by
law, the right (but not the obligation) to cause the same to be released by such
means as it shall deem proper, including payment of the claim giving rise to
such lien. All such sums paid by Landlord and all costs and expenses incurred by
it in connection therewith (including reasonable attorneys' fees) shall be
payable to Landlord by Tenant on demand, with interest at the Agreed Rate from
the date of expenditure.
21. DEFAULTS BY TENANT
21.1. The occurrence of any one or more of the following events shall
constitute a material default and breach of this Lease by Tenant:
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21.1.1. The abandonment of the Premises by Tenant.
21.1.2. The failure by Tenant to make any payment of Rent or
Expenses or of any other sum required to be made by Tenant hereunder
within five (5) days after written demand therefor (which notice shall
serve as the notice required under Section 1161 of the California Code
of Civil Procedure or any similar or superseding statute).
21.1.3. The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or
performed by Tenant, if such failure is not cured within thirty (30)
days after written notice thereof from Landlord to Tenant; provided,
however, that if the nature of Tenant's default is such that it cannot
be cured solely by payment of money and more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be deemed to be
in default if Tenant commences such cure within the thirty (30) day
period and thereafter diligently prosecutes such cure to completion;
provided, further, that repeated breaches or defaults by Tenant (more
than three (3) in any twelve (12) month period) shall entitle Landlord
at its option, to terminate this Lease unless Tenant furnishes Landlord
with adequate assurances, in Landlord's sole judgment, against further
defaults; and provided, further, that violations by Tenant of the Rules
and Regulations described in Article 36 which interfere with the rights
of other tenants or which constitute a nuisance or hazard shall be cured
by Tenant within forty-eight (48) hours after written notice thereof
from Landlord, failing which Landlord may (but need not) cure same, in
which event Tenant shall pay Landlord, within ten (10) days after
written notice thereof by Landlord, the amount expended by Landlord to
effect such cure together with an administrative charge of fifteen
percent (15 %) of the amount thereof.
21.1.4. The making by Tenant of any general assignment for the
benefit of creditors, the filing by or against Tenant of a petition to
have Tenant adjudged a bankrupt or of 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) or, the appointment of a trustee or receiver to take possession
of, or 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 such seizure is not discharged
within thirty (30) days.
21.1.5. Intentionally Omitted.
21.2. Any notice required or permitted by this Article 21 is intended to
satisfy to the maximum extent possible any and all notice requirements imposed
by law on Landlord. Landlord may serve a statutory notice to quit, a statutory
notice to pay rent or quit, or a statutory notice of default, as the case may
be, to effect the giving of any notice required by this Article 21.
22. LANDLORD'S REMEDIES
22.1. In the event of any material default or breach of this Lease by
Tenant, Landlord's obligations under this Lease shall be suspended and Landlord
may at any time thereafter, without limiting Landlord in the exercise of any
other right or remedy at law or in equity which Landlord may have (all remedies
provided herein being non-exclusive end cumulative), do any one or more of the
following:
22.1.1. Maintain this Lease in full force and effect and recover the
Rent, Expenses and other monetary charges as they become due, without
terminating Tenant's right to possession irrespective of whether Tenant
shall have abandoned the Premises. If Landlord does not elect to
terminate the Lease, Landlord shall have the right to attempt to relet
the Premises at such rent and upon such conditions, and for such a term,
as Landlord deems appropriate in its sole discretion and to do all acts
necessary with regard thereto, without being deemed to have elected to
terminate the Lease, including re-entering the Premises to make repairs
or to maintain or modify the Premises, and removing all persons and
property from the Premises, which property if removed may at Landlord's
election be abandoned or stored in a public warehouse or elsewhere at
the cost of and for the account of Tenant. Reletting may be for a period
shorter or longer than the remaining term of this Lease, and for more or
less rent, but Landlord shall have no obligation to relet at less than
prevailing market rental rates. If reletting occurs, this Lease shall
terminate automatically when the new tenant takes possession of the
Premises and commences rent payment. Notwithstanding that Landlord fails
to elect to terminate the Lease initially, Landlord at any time
thereafter may elect to terminate the Lease by virtue of any uncured
default by Tenant. In the event of any such termination, Landlord shall
be entitled to recover from Tenant any and all damages incurred by
Landlord by reason of Tenant's default (including, without limitation,
the damages described in Section 22.1.2 below), as well as all costs of
reletting, including commissions, reasonable attorneys' fees,
restoration or remodeling costs, and costs of advertising.
22.1.2. Terminate Tenant's right to possession 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. In such event Landlord shall be entitled to recover from
Tenant all damages incurred by Landlord by reason of Tenant's default
including (without limitation) the following: (1) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus (2) the worth at the time of award of the amount by
which the unpaid Rent which would have been earned after termination
until the time of award exceeds the amount of such Rent loss that Tenant
proves could have been reasonably avoided; plus (3) the worth at the
time of award, of the amount by which the unpaid Rent for the balance of
the term after the time of award exceeds the amount of such Rent loss
that Tenant proves could have been reasonably avoided; plus (4) any
other amount, and court costs, necessary to compensate Landlord for all
the detriment proximately caused by Tenant's default or which in the
ordinary course of things would be likely to result therefrom
(including, without limiting the generality of the foregoing, the amount
of any commissions and/or finder's fee for a replacement tenant); plus
(5) at Landlord's election, such other amounts in addition to or in lieu
of the foregoing as may be permitted from time to time by applicable
law. As used in subparagraphs (1) and (2) of this Section 22.1.2, the
"worth at the time of award" is to be computed by allowing interest at
the then maximum rate of interest allowable under law which could be
charged Tenant by Landlord, and, as used in subparagraph (3) of this
Section 22.1.2, the "worth at the time of award" is to be computed by
discounting such amount at the discount rate of the U.S. Federal Reserve
Bank of San Francisco at the time of award, plus one percent (1%). The
term "Rent", as used in this Article 22, shall be deemed to be and to
mean all Rent, Expenses, parking fees and other monetary sums required
to be paid by Tenant pursuant to this Lease or as defined in Section 4.1
hereof. For the purpose of determining the amount of "unpaid Rent which
would have been earned after termination" or the "unpaid Rent for the
balance of the term" (as referenced in subparagraphs (2) and (3)
hereof), the amount of parking fees and Expenses shall be deemed to
increase annually for the balance of the term by an amount equal to the
average annual percentage increase in parking fees and Expenses during
the three (3) calendar years preceding the year in which the Lease was
terminated, or, if such termination shall occur prior to the expiration
of the third calendar year occurring during the term of this Lease, then
the amount of parking fees and Expenses shall be deemed to increase
monthly for the balance of the term by an amount equal to the average
monthly percentage increase in parking fees and Expenses during all of
the calendar months preceding the month in which the Lease was
terminated.
22.1.3. Collect sublease rents (or appoint a receiver to collect
such rent) and otherwise perform Tenant's obligations at the Premises,
it being agreed, however, that neither the filing of a petition for the
appointment of a receiver for Tenant nor the appointment itself shall
constitute an election by Landlord to terminate this Lease.
22.1.4. Proceed to cure the default at Tenant's sole cost and
expense, without waiving or releasing Tenant from any obligation
hereunder. If at any time Landlord pays any sum or incurs any expense as
a result of or in connection with curing any default of Tenant
(including any administrative fees provided for herein and reasonable
attorneys' fees), the amount thereof shall be immediately due as of the
date of such expenditure and, together with interest at the Agreed Rate
from the date of such expenditures, shall be paid by Tenant to Landlord
immediately upon demand, and Tenant hereby covenants to pay any and all
such sums.
22.1.5. If Tenant is not occupying the Premises, to require Tenant
to forthwith remove its trade fixtures, furniture, equipment, the
improvements and additions Tenant is required to remove, and Tenant's
personal property, and if the same are not so removed to deem them
abandoned and dispose of the same in accordance with the provisions of
Section 1980 et seq. of the California Civil Code, or of any similar or
superseding statute relating to the disposition of personal property.
22.1.6. ADDITIONAL REMEDIES. Upon the occurrence of any of the
events specified in Section 21.1.4, if Landlord shall elect not to
exercise, or by law shall not be able to exercise, its right hereunder
to terminate this Lease, then, in addition to any other rights or
remedies of Landlord under this Lease or provided by law: (i) Landlord
shall not be obligated to provide Tenant with any of the services
specified in Article 12, or otherwise specified in the Lease unless
Landlord has received compensation in advance for such services, and the
parties agree that Landlord's reasonable estimate of the compensation
required with respect to such services shall control; and (ii) neither
Tenant, as debtor in possession, nor any trustee or other person
(collectively, the "Assuming Tenant") shall be entitled to assume this
Lease, unless on or before the date of such assumption, the Assuming
Tenant (A) cures, or provides adequate assurance that such Assuming
Tenant will promptly cure, any existing default under this Lease; (B)
compensates, or provides adequate assurance that the Assuming Tenant
will promptly compensate Landlord for any loss (including, without
limitation, reasonable attorneys' fees and disbursements, including on
appeal and in connection with any bankruptcy) resulting from such
default; and (C) provides adequate assurance of future performance under
this Lease. Tenant covenants and agrees that, for such purposes (i) any
cure or compensation shall be effected by the immediate payment of any
monetary default or any required compensation, or the immediate
correction acceptable to
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Landlord of any non-monetary default; (ii) any "adequate assurance" of
such cure or compensation shall be effected by the establishment of an
escrow fund for the amount at issue or by other method acceptable to
Landlord; and (iii) "adequate assurance" of future performance shall be
effected by the establishment of an escrow fund for the amount at issue
or other method acceptable to Landlord. Provided, further, upon the
occurrence of any of the events specified in Section 21.1.4 prior to the
date fixed as the Commencement Date (whether or not such default is
cured within the time period, if any, provided in such Article), this
Lease shall ipso facto be canceled and terminated. In such event, (i)
neither Tenant nor any person claiming through or under Tenant, or by
virtue of any statute or order of any Court, shall be entitled to
possession of the Premises; and (ii) in addition to such other rights
and remedies provided in this Article 22, Landlord may retain as damages
any Rent, Security Deposit (if any) or monies received from Tenant or
others on account of Tenant. The foregoing is a material consideration
to Landlord for the execution of this Lease
22.2. All covenants and agreements to be performed by Tenant under this
Lease shall be performed by Tenant at Tenant's sole cost and expense and without
any offset to or abatement of Rent or Expenses.
23. DEFAULTS BY LANDLORD
23.1. 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
such obligation within thirty (30) days after receipt of written notice by
Tenant to Landlord specifying such failure; provided, however, that if the
nature of Landlord's default is such that more than thirty (30) days are
required for its cure, then Landlord shall not be deemed to be in default if it
commences such cure within the thirty (30)-day period and thereafter diligently
prosecutes such cure to completion. Tenant agrees to give any Mortgagee a copy,
by certified mail, of any notice of default served upon Landlord, provided that
prior to such notice Tenant has been notified in writing (by way of Notice of
Assignment of Rents and Leases, or otherwise) of the address of such Mortgagee.
Tenant further agrees that if Landlord shall have failed to cure such default
within the time provided for in this Lease, then any such Mortgagee shall have
an additional fifteen (15) days within which to have the right, but not the
obligation, to cure such default on the part of the Landlord or if such default
cannot be cured within that time, then such additional time as may be necessary
if within that fifteen (15) days the Mortgagee has commenced and is pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings, if necessary, to effect such cure), in
which event this Lease shall not be terminated while such remedies are being so
pursued. If Tenant recovers any judgment against Landlord for a default by
Landlord of this Lease, the judgment shall be satisfied only out of the interest
of Landlord in the Project and neither Landlord nor any of its partners,
shareholders, officers, directors, employees or agents shall be personally
liable for any such default or for any deficiency.
24. COSTS OF SUIT
24.1. If either party brings action for relief against the other,
declaratory or otherwise, arising out of this Lease, including any suit by
Landlord for the recovery of Rent or possession of the Premises, the losing
party shall pay the successful party its costs incurred in connection with and
in preparation for said action, including its reasonable attorneys' fees (which
costs shall be deemed to have accrued on the commencement of such action and
shall be paid whether or not such action is prosecuted to judgment, it being
agreed that to be the successful party a party need not necessarily have
recovered a judgment, but shall be the party which, in light of all the facts
and circumstances of the case, shall be deemed to be without fault or to have a
lesser degree of fault than the other party). If Landlord, without fault on
Landlord's part, is made a party to any action instituted by Tenant against a
third party or by a third party against Tenant or by or against any person
holding under or using the Premises by license of Tenant, or for the foreclosure
of any lien for labor or material furnished to or for Tenant or any such other
person, or otherwise arising out of or resulting from any act or omission of
Tenant or of any such other person, Tenant shall at its cost and at Landlord's
option defend Landlord therefrom and further, except to the extent Landlord is
found separately liable for its own negligence or wrongful acts, indemnify and
hold Landlord harmless from any judgment rendered in connection therewith and
all costs and expenses (including reasonable attorneys' fees) incurred by
Landlord in connection with such action.
25, SURRENDER OF PREMISES; HOLDING OVER
25.1. SURRENDER. On expiration or termination of this Lease, Tenant
shall surrender to Landlord the Premises, and all Tenant's improvements thereto
and alterations thereof, broom clean and in good condition (except for ordinary
wear and tear, destruction to the Premises covered by Article 18 of this Lease,
and for alterations that Tenant has the right to remove or is obligated to
remove, so long as Tenant repairs any damage to the Premises under the
provisions of this Article 25 or Article 15), and shall remove all of its
personal property including any signs, notices and displays. Tenant shall
perform all restoration made necessary by the removal of any such improvements
or alterations or personal
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property, prior to the expiration of the Lease term. If any such removal would
damage the Building structure, Tenant shall give Landlord prior written notice
thereof and Landlord may elect to make such removal at Tenant's expense or
otherwise to require Tenant to post security for such restoration. Landlord may
retain or dispose of in any manner any such improvements or alterations or
personal property that Tenant does not remove from the Premises on expiration or
termination of the term as allowed or required by this Lease and title to any
such improvements or alterations or personal property that Landlord so elects to
retain or dispose of shall vest in Landlord. Tenant waives all claims against
Landlord for any damage or loss to Tenant arising out of Landlord's retention or
disposition of any such improvements, alterations or personal property and shall
be liable to Landlord for Landlord's costs of storing, removing and disposing of
any such improvements, alterations or personal property which Tenant fails to
remove from the Premises. Tenant shall indemnify, defend and hold Landlord
harmless from all damages, loss, cost and expense (including reasonable
attorneys' fees) arising out of or in connection with Tenant's failure to
surrender the Premises in accordance with this Section 25.1.
25.2. HOLDING OVER. If Tenant holds over after the term hereof, such
tenancy shall be at sufferance only, and not a renewal hereof or an extension
for any further term, and in such case Rent shall be payable at a rental in the
amount of one hundred fifty percent (150%) of the Rent in effect as of the last
month of the term hereof and at the time specified in this Lease, and such
tenancy shall be subject to every other term, covenant and agreement contained
herein other than any provisions for rent concessions, Landlord's Work, or
optional rights of Tenant requiring Tenant to exercise same by written notice
(such as options to extend the term of the Lease). The foregoing shall not,
however, be construed as a consent by Landlord to any holding over by Tenant and
Landlord reserves the right to require Tenant to surrender possession of the
Premises upon expiration or termination of this Lease
26. SURRENDER OF LEASE
26.1. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not work as a merger. Such surrender or
cancellation shall, at the option of Landlord, terminate all or any existing
subleases or subtenancies, or may, at the option of Landlord, operate as an
assignment to it of any or all such subleases or subtenancies. The delivery of
keys to the Premises to Landlord or its agent shall not, of itself, constitute a
surrender and termination of this Lease.
27. TRANSFER OF LANDLORD'S INTEREST
27.1. If Landlord sells or transfers its interest in the Premises (other
than a transfer for security purposes) Landlord shall be released from all
obligations and liabilities accruing thereafter under this Lease, if Landlord's
successor has assumed in writing Landlord's obligations under this Lease. Any
Security Deposit, prepaid Rent or other funds of Tenant in the hands of Landlord
at the time of transfer shall be delivered to such successor and Tenant agrees
to attorn to the purchaser or assignee provided all Landlord's obligations
hereunder are assumed in writing by such successor. Notwithstanding the
foregoing, Landlord's successor shall not be liable. to Tenant for any such
funds of Tenant which Landlord does not deliver to the successor.
28. ASSIGNMENT AND SUBLETTING
28.1. LANDLORD'S CONSENT REQUIRED. Tenant shall not sell, assign,
mortgage, pledge, hypothecate or encumber this Lease (any such act being
referred to herein as an "assignment"), and shall not sublet the Premises or any
part thereof, without the prior written consent of Landlord in each instance,
which consent shall not be unreasonably withheld, and any attempt to do so
without such consent shall be voidable by Landlord and, at Landlord's election,
shall constitute a material default under this Lease.
28.2. TENANT'S APPLICATION. If Tenant desires at any time to assign this
Lease (which assignment shall in no event be for less than its entire interest
in this Lease) or to sublet the Premises or any portion thereof, Tenant shall
submit to Landlord at least thirty (30) days prior to the proposed effective
date of the transaction ("Proposed Effective Date"), in writing, a notice of
intent to assign or sublease, setting forth: (i) the Proposed Effective Date,
which shall be no less than thirty (30) nor more than ninety (90) days after the
sending of such notice; (ii) the name of the proposed subtenant or assignee;
(iii) the nature of the proposed subtenant's or assignee's business to be
carried on in the Premises; and (iv) a description of the terms and provisions
of the proposed sublease or assignment. Such notice shall be accompanied by (i)
such financial information as Landlord may request concerning the proposed
subtenant or assignee, including recent financial statements and bank
references; (ii) evidence satisfactory to Landlord that the proposed subtenant
or assignee will immediately occupy and thereafter use the affected portion of
the Premises for the entire term of the sublease or assignment agreement; (iii)
a conformed or photostatic copy of the proposed sublease or assignment
agreement; and (iv) any fee required under Section 28.9. During the time that
Landlord has in which to exercise the options available to Landlord upon the
giving of such notice, as hereinafter described, Tenant shall not sublet all or
any part of the Premises nor assign all or any part of this Lease.
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28.3. LANDLORD'S OPTION TO RECAPTURE PREMISES. If Tenant proposes to
sublease all or part of the Premises, Landlord may, at its option upon written
notice to Tenant given within twenty (20) days after its receipt of the
above-described notice from Tenant, elect to recapture such portion of the
Premises as Tenant proposes to sublease and upon such election by Landlord, this
Lease shall terminate as to the portion of the Premises recaptured. in the event
a portion only of the Premises is recaptured, the Rental payable under this
Lease, the Security Deposit, and Tenant's Share shall be proportionately reduced
based on the rentable square footage retained by Tenant and the rentable square
footage leased by Tenant hereunder immediately prior to such recapture and
termination, and Landlord and Tenant shall thereupon execute an amendment of
this Lease in accordance therewith. If Landlord recaptures only a portion of the
Premises, it shall construct and erect at its sole cost such partitions as may
be required to separate the space retained by Tenant from the space recaptured
by Landlord; provided, however, that said partitions need only be finished in
Building Standard condition. Landlord may, at its option, lease the recaptured
portion of the Premises to the proposed subtenant without liability to Tenant.
If Landlord does not elect to recapture pursuant to this Section 28.3, Tenant
may thereafter enter into a valid sublease with respect to the Premises,
provided Landlord, pursuant to this Article 28, consents thereto, and provided
further that (i) the sublease is executed within ninety (90) days after
notification to Landlord of such proposal, and (ii) the rental therefor is not
less than that stated in such notification. Any termination as provided in this
Section 28.3 shall be subject to the written consent of any Mortgagee of
Landlord. The effective date of any such termination shall be the Proposed
Effective Date so long as Tenant has complied with the provisions of Section
28.2 above, and otherwise shall be as specified in Landlord's notice of
termination.
28.4. APPROVAL/DISAPPROVAL STANDARDS. In the event that Tenant complies
with the provisions of Section 28.2, and Landlord does not exercise an option
provided to Landlord under Section 28.3, Landlord's consent to a proposed
assignment or sublease shall not be unreasonably withheld. In determining
whether to grant or withhold consent to a proposed assignment or sublease,
Landlord may consider any reasonable factor. Without limiting what may be
construed AS a reasonable factor, it is hereby agreed that any one of the
following factors will be reasonable grounds for disapproval of a proposed
assignment or sublease:
28.4.1. Tenant has not complied with the requirements set forth in
Section 28.2 above;
28.4.2. The proposed assignee or subtenant does not, in Landlord's
reasonable judgment, have sufficient financial worth, considering the
responsibility involved;
28.4.3.The proposed assignee or subtenant does not, in Landlord's
reasonable judgment, have a good reputation as a tenant of property;
28.4.4.Landlord has had prior negative leasing experience with the
proposed assignee or subtenant;
28.4.5.The use of the Premises by the proposed assignee or subtenant
will not be identical to the use permitted by this Lease;
28.4.6.In Landlord's reasonable judgment, the proposed assignee or
subtenant is engaged in a business, and the Premises, or the relevant
part thereof, will be used in a manner, that is not in keeping with the
then current standards of the Building, or that will violate any
restrictive or exclusive covenant as to use contained in any other lease
of space in the Building or the Project;
28.4.7. The use of the Premises by the proposed assignee or
subtenant will violate any applicable law, ordinance or regulation;
28.4.8.The proposed assignee or subtenant, or any person that
directly or indirectly controls, is controlled by, or is under common
control with, the proposed assignee or subtenant, or any person who
controls the proposed assignee or subtenant, is then an occupant of a
part of the Building or the Project unless no other suitable space is
available in the Project; however, notwithstanding the preceding, Tenant
may sublet up to a cumulative total of 5,000 rentable square feet of the
Premises to up to two (2) occupants of the Project.
28.4.9.The proposed assignee or subtenant is a person with whom
Landlord has entered into a letter of intent to lease space in the
Building or the Project;
28.4.10. Tenant shall have advertised or publicized the availability
of the Premises without prior notice to Landlord;
28.4.11. The proposed assignment or sublease fails to include all of
the terms and provisions required to be included therein pursuant to
this Article 28; or
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28.4.12. Tenant is then in default of any obligation of Tenant under
this Lease beyond any applicable cure period, or Tenant has defaulted
under this Lease on three (3) or more occasions during the twelve (12)
months preceding the date that Tenant shall request consent.
28.5. APPROVAL/DISAPPROVAL PROCEDURE. Landlord shall approve or
disapprove the proposed assignment or sublease by written notice to Tenant. If
Landlord shall exercise any option to recapture the Premises as herein provided,
or denies a request for consent to a proposed sublease or assignment, Landlord
shall not be liable to the proposed assignee or subtenant, or to any broker or
other person claiming a commission or similar compensation in connection with
the proposed assignment or sublease. If Landlord approves the proposed
assignment or sublease, Tenant shall, prior to the Proposed Effective Date,
submit to Landlord all executed originals of the assignment or sublease
agreement and, in the event of a sublease, Landlord's customary consent to
subletting form executed by Tenant and sublease for execution by Landlord.
Provided such assignment or sublease agreement is in accordance with the terms
approved by Landlord, Landlord shall execute each original as described above
and shall retain two originals for its file and return the others to Tenant. No
purported assignment or sublease shall be deemed effective as against Landlord
and no proposed assignee or subtenant shall take occupancy unless such document
is delivered to Landlord in accordance with the foregoing.
28.6. REQUIRED PROVISIONS. Any and all assignment or sublease agreements
shall (i) contain such terms as are described in Tenant's notice under Section
28.2 above or as otherwise agreed by Landlord; (ii) prohibit further assignments
or subleases, (iii) impose the same obligations and conditions on the assignee
or sublessee as are imposed on Tenant by this Lease except as to Rent and term
or as otherwise agreed by Landlord; (iv) be expressly subject and subordinate to
each and every provision of this Lease, (v) have a term that expires on or
before the expiration of the term of this Lease; (vi) provide that if Landlord
succeeds to sublessor's position, Landlord shall not be liable to sublessee for
advance rental payments, deposits or other payments which have not been actually
delivered to Landlord by the sublessor, and (vii) provide that Tenant and/or the
assignee or sublessee shall pay Landlord the amount of any additional costs or
expenses incurred by Landlord for repairs, maintenance or otherwise as a result
of any change in the nature of occupancy caused by the assignment or sublease.
Any and all sublease agreements shall also provide that in the event of
termination, re-entry, or dispossession by Landlord under this Lease, Landlord
may, at its option, take over all of the right, title and interest of Tenant as
sublessor under such sublease, and such subtenant shall, at Landlord's option,
attorn to Landlord pursuant to the then executory provisions of the sublease,
except that Landlord shall not: (i) be liable for any previous act or omission
of Tenant under the sublease; (ii) be subject to any offset not expressly
provided in the sublease, that theretofore accrued to the subtenant against
Tenant; or (iii) be bound by any previous modification of such sublease or by
any previous prepayment of more than one (1) month's fixed rent or any
additional rent then due.
28.7. PAYMENT OF ADDITIONAL RENT UPON ASSIGNMENT OR SUBLEASE. If
Landlord shall give its consent to any assignment of this Lease or to any
sublease of the Premises, Tenant shall, in consideration therefor, pay to
Landlord, as additional Rent:
28.7.1.In the case of an assignment, an amount equal to all sums and
other consideration paid to Tenant by the assignee for, or by reason of,
such assignment (including, without limiting the generality of the
foregoing, all sums paid for the sale of Tenant's leasehold
improvements); and
28.7.2. In the case of a sublease, one hundred percent (100%) of any
rents, additional charges, or other consideration payable under the
sublease by the subtenant to Tenant that are in excess of the rent
accruing during the term of the sublease in respect of the subleased
space (at the rate per square foot payable by Tenant hereunder) pursuant
to the terms hereof (including, without limiting the generality of the
foregoing, all sums paid for the sale or rental of Tenant's leasehold
improvements, but excluding reasonable and customary leasing commissions
paid by Tenant in connection with such transaction, the reasonable and
verifiable costs of leasehold improvements paid for by Tenant and
installed for such sublessee, and the unamortized value of Tenant's
leasehold improvements paid for by Tenant, amortized on a straight line
basis over the initial term of this Lease).
28.8. The sums payable under Section 28.7.1 above shall be paid to
Landlord upon the effective date of the assignment. The sums payable under
Section 28.7.2 above shall be paid to Landlord as and when payable by the
sublessee to Tenant. Within fifteen (15) days after written request therefor by
Landlord, Tenant shall at any time and from time to time furnish evidence to
Landlord of the amount of all such sums or other consideration received or
expected to be received.
28.9. FEES FOR REVIEW. Simultaneously with the giving of the notice
described in Section 28.2 above, Tenant shall pay to Landlord or Landlord's
designee a non-refundable fee in the amount of Three Hundred Dollars ($300.00)
as reimbursement for expenses incurred by Landlord in connection with reviewing
each such transaction. In addition to such reimbursement, if Landlord retains
the services of an attorney to review the transaction, Tenant shall pay to
Landlord the reasonable attorneys' fees
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incurred by Landlord in connection therewith; provided that in no event shall
Tenant be obligated to reimburse Tenant more than a total of $1,000.00 under
this Section 28.9, per instance. Tenant shall pay such attorneys' fees to
Landlord within fifteen (15) days after written request therefor.
28.10. NO RELEASE OF TENANT. No consent by Landlord to any assignment or
subletting by Tenant shall relieve Tenant of any obligation to be performed by
Tenant under this Lease, whether occurring before or after such consent,
assignment or subletting, including Tenant's obligation to obtain Landlord's
express prior written consent to any other assignment or subletting. In no event
shall any permitted subtenant assign its sublease, further sublet all or any
portion of its sublet space, or otherwise suffer or permit the sublet space, or
any part thereof, to be used or occupied by others, except upon compliance with,
and subject to the provisions of this Article 28. The acceptance by Landlord of
payment from any person other than Tenant shall not be deemed to be a waiver by
Landlord of any provision of this Lease or to be a consent to any subsequent
assignment or sublease, or to be a release of Tenant from any obligation under
this Lease.
28.11. ASSUMPTION OF OBLIGATIONS. Each assignee of Tenant shall assume
the obligations of Tenant under this Lease and shall be and remain liable
jointly and severally with Tenant for the payment of the Rent and the
performance of all the terms, covenants, conditions and agreements herein
contained on Tenant's part to be performed for the term of this Lease. No
assignment shall be binding on Landlord unless the assignee or Tenant delivers
to Landlord a counterpart of the instrument of assignment in recordable form
which contains a covenant of assumption by the assignee satisfactory in
substance and form to Landlord, and consistent with the requirements of this
Article 28. The failure or refusal of the assignee to execute such instrument of
assumption shall not release or discharge the assignee from its liability to
Landlord hereunder. Landlord shall have no obligation whatsoever to perform any
duty to or respond to any request from any sublessee, it being the obligation of
Tenant to administer the terms of its subleases.
28.12. CORPORATE OR PARTNERSHIP TRANSFERS. If the Tenant is a privately
held corporation, or is an unincorporated association or partnership, the
cumulative or aggregate transfer, assignment or hypothecation of fifty percent
(50%) or more of the total stock or interest in such corporation, association or
partnership shall be deemed an assignment or sublease within the meaning and
provisions of this Article. This Article shall, however, not apply to
assignments or subleases to a corporation (i) into or with which Tenant is
merged or consolidated; (ii) to which substantially all of Tenant's assets are
transferred, or (iii) that controls, is controlled by, or is under common
control with Tenant, provided that, in any of such events:
28.12.1. The successor of Tenant has a net worth, computed in
accordance with generally accepted accounting principles, at least
equal to the net worth of Tenant herein named on the date of this Lease;
28.12.2. Proof satisfactory to Landlord of such net worth shall have
been delivered to Landlord at least ten (10) days prior to the
effective date of such transaction;
28.12.3. Any such assignment or sublease shall be subject to all of
the terms and provisions of this Lease, and such assignee or sublessee
shall assume, in a written document reasonably satisfactory to Landlord
and delivered to Landlord promptly upon the assignment or sublease, all
the obligations of Tenant under this Lease;
28.12.4. Tenant shall remain fully liable for all obligations to be
performed by Tenant under this Lease; and
28.12.5. Tenant shall reimburse Landlord, promptly on demand, for
Landlord's reasonable attorneys' fees incurred in conjunction with the
processing and documentation of any such transaction.
28.13. INVOLUNTARY ASSIGNMENT. Subject to the provisions of Section
21.1.4, no interest of Tenant in this Lease shall be assignable by operation of
law (including without limitation, the transfer of this Lease by testacy or
intestacy, or in any bankruptcy or insolvency proceeding). Each of the following
acts shall be considered an involuntary assignment: (i) If Tenant is or becomes
bankrupt or insolvent, makes an assignment for the benefit of creditors, or
institutes a proceeding under any bankruptcy law in which Tenant is the
bankrupt; or, if Tenant is a partnership or consists of more than one (1) person
or entity, if any partner of the partnership or other such person or entity is
or becomes bankrupt or insolvent, or makes an assignment for the benefit of
creditors; (ii) If a writ of attachment or execution is levied on this Lease;
(iii) If, in any proceeding or action to which Tenant is a party, a receiver is
appointed with authority to take possession of the Premises; or (iv) there is
any assumption, assignment, sublease or other transfer under or pursuant to the
Bankruptcy Code, 11 U.S.C. 101 et seq. (hereinafter referred to as the
"Bankruptcy Code"). An involuntary assignment shall constitute a default by
Tenant and Landlord shall have the right to elect to terminate this Lease, in
which case this Lease shall not be treated as an asset of Tenant. If Landlord
shall elect not to exercise its right
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hereunder to terminate this Lease in the event of an involuntary assignment,
then, in addition to any other rights or remedies of Landlord under this Lease
or provided by law, the provisions of Sections 28.3, 28.6, 28.7, 28.9, 28.10,
and 28.14 shall apply to any such involuntary assignment. Such sums, if any,
payable pursuant to the referenced Sections shall be and remain the exclusive
property of Landlord and shall not constitute property of Tenant or of the
estate of Tenant within the meaning of the Bankruptcy Code. Such sums which are
not paid or delivered to Landlord shall be held in trust for the benefit of
Landlord, and shall be promptly paid or turned over to Landlord upon demand. Any
person or entity to which this Lease is assigned pursuant to the provisions of
said Code shall be deemed without further act or deed to have assumed all of the
obligations of Tenant arising under this Lease on and after the date of such
assignment. Any such assignee shall upon demand execute and deliver such
instruments and documents reasonably requested by Landlord confirming such
assumption.
28.14. ASSIGNMENT OF SUBLEASE RENTS. Tenant immediately and irrevocably
assigns to Landlord, as security for Tenant's obligations under this Lease, all
rent from any subletting of all or any part of the Premises, and Landlord, as
assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver
for Tenant appointed on Landlord's application, may collect such rents and apply
same toward Tenant's obligations under this Lease; except that, until the
occurrence of an act of default by Tenant, Tenant shall have the right and
license to collect such rents.
29. ATTORNMENT
29.1. If any proceeding is brought for default under any ground or
underlying lease to which this Lease is subject, or in the event of foreclosure
or the exercise of the power of sale under any mortgage or deed of trust made by
Landlord covering the Premises, Tenant shall attorn to the successor upon any
such foreclosure or sale and shall recognize that successor as Landlord under
this Lease, provided such successor expressly agrees in writing to be bound to
all future obligations by the terms of this Lease, and, if so requested, Tenant
shall enter into a new lease with that successor on the same terms and
conditions as are contained in this Lease (for the unexpired term of this Lease
then remaining).
30. SUBORDINATION
30.1. Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, this Lease shall be subject
and subordinate at all times to: (i) all ground or underlying leases which may
now exist or hereafter be executed affecting the Premises, and (ii) the lien of
any first mortgage or first deed of trust which may now exist or hereafter be
executed in any amount for which the Premises, such ground or underlying leases,
or Landlord's interest or estate in any of them, is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground or underlying leases or any such liens
to this Lease. If any ground or underlying lease terminates for any reason,
Tenant shall, notwithstanding any subordination, attorn to and become tenant of
the successor in interest to Landlord at the option of such successor in
interest. Tenant covenants and agrees to execute and deliver, upon demand by
Landlord and in the form requested by Landlord, any documents evidencing the
priority or subordination of this Lease with respect to any such ground or
underlying leases or the lien of any such first mortgage, or first deed of
trust, and specifically to execute, acknowledge and deliver to Landlord from
time to time within ten (10) days after written request to do so a subordination
of lease, or a subordination of deed of trust, in substantially the form set
forth in Exhibit D or Exhibit D-1, respectively, attached hereto, or such other
form as may be customarily required by any Mortgagee of Landlord, and failure of
Tenant to do so shall be a material default hereunder. Tenant hereby irrevocably
appoints Landlord as its attorney-in-fact to execute, deliver and record any
such documents in the name and on behalf of Tenant if Tenant fails to comply
with the foregoing.
31. ESTOPPEL CERTIFICATE
31.1. Tenant shall from time to time within ten (10) days after prior
written notice from Landlord execute, acknowledge and deliver to Landlord a
statement in writing in the form set forth in Exhibit E attached hereto, or such
other form as may be customarily required by Landlord's Mortgagee, (i)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to which the
Rent and other charges are paid in advance, if any; (ii) acknowledging that
there are not, to Tenant's knowledge, any uncured defaults on the part of
Landlord hereunder (or specifying such defaults if they are claimed); and (iii)
containing such other matters as are set forth in such form. Any such statement
may be conclusively relied upon by any prospective purchaser or encumbrancer of
the Premises. Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant that this Lease is in full force and effect, without
modification except as may be represented by Landlord, that there are no uncured
defaults in Landlord's performance, and that not more than one (1) month's Rent
has been paid in advance. Failure of Tenant to so deliver such statement shall
be a material default hereunder. Tenant hereby irrevocably appoints Landlord as
its attorney-in-fact to execute and deliver such statement to any third party in
the name and on behalf of Tenant if Tenant fails to comply with the foregoing.
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32. BUILDING OCCUPANCY PLANNING
32.1. Notwithstanding any contrary provision of this Lease, if Landlord
requires the Premises for use in conjunction with another suite or for other
reasons related to Landlord's occupancy plans for the Building, then upon at
least thirty (30) days' prior written notice to Tenant, Landlord shall have the
right to move Tenant to other space in the Project, and thereupon such other
space shall be deemed to be the Premises covered by this Lease. The expense of
moving Tenant, its property and equipment to the substituted space and of
improving same to a condition similar to the then current condition of the
Premises shall be borne by Landlord. If the substituted space is smaller or
larger than the Premises the Basic Rent, Security Deposit and Tenant's Share
specified in this Lease shall be adjusted proportionately, and Landlord and
Tenant shall execute an amendment to this Lease in accordance therewith.
However, if the substituted space does not meet with Tenant's approval, Tenant
may cancel this Lease upon thirty (30) days' prior written notice to Landlord,
given within ten (10) days after Tenant's receipt of Landlord's notice referred
to above.
32.2. Notwithstanding anything to the contrary contained in Section
32.1, if and so long as Tenant leases the entire second floor of the Building,
then Landlord shall not have the right to relocate Tenant from the Premises
located on the second floor of the Building.
33. QUIET ENJOYMENT
33.1. So long as Tenant pays all Rent and other sums due under this
Lease, performs its covenants and obligations under this Lease and recognizes
any successor to Landlord in accordance with the terms of this Lease, Tenant
shall lawfully and quietly have, hold and enjoy the Premises without hindrance
or molestation by Landlord or anyone claiming by, through or under Landlord,
subject, however, to all the provisions of this Lease.
34. WAIVER OF REDEMPTION BY TENANT
34.1. Tenant hereby waives for Tenant and for all those claiming under
Tenant all right now or hereafter existing to redeem by order or judgment of any
court or by any legal process or writ, Tenant's right of occupancy of the
Premises after any termination of this Lease.
35. WAIVER OF LANDLORD, TENANT'S PROPERTY
35.1. Landlord shall, within thirty (30) days after written request from
Tenant, execute and deliver to Tenant any statement in form acceptable to
Landlord as may be required by any supplier, lessor, installment seller or
chattel mortgagee in connection with the installation in the Premises of any
personal property or trade fixtures of Tenant, pursuant to which Landlord shall
agree to waive any rights it may have or may acquire with respect to any such
property, provided in all cases that such supplier, lessor, installment seller
or chattel mortgagee expressly agrees in writing that: (i) It will remove at its
sole cost and expense all such property from the Premises before the expiration
or termination of the Lease and if it fails to do so within ten (10) days after
written request from Landlord it shall be deemed to have waived any and all
rights it may have had to such property; (ii) Prior to making any such removal
it will advise Landlord in writing of the date and time of such removal and will
at the time of such removal, allow a representative of Landlord to be present;
(iii) It will promptly and diligently and at its sole cost and expense repair
any and all damage to the Premises attributable to such removal and shall
restore the Premises to substantially the same condition it was in prior to such
removal; (iv) It will allow Landlord to select the person or persons who will
effect such removal, repair and restoration, and will bear the costs and
expenses thereof; (v) It will, if Landlord chooses not to exercise its rights
under (iv) above, cause a performance and completion bond, satisfactory to
Landlord, to be furnished to Landlord with regard to the work of such removal,
repair and restoration; no it will promptly pay Landlord any costs and expenses
incurred by Landlord in connection with the enforcement of Landlord Is rights
hereunder, including attorneys' fees, and will indemnify and hold Landlord
harmless against any and all claims, loss, cost or expense arising out of or in
connection with such removal, repair and restoration; (vii) It will pay
Landlord interest on any outstanding amounts payable by it to Landlord at the
"Agreed Rate" (as hereinafter defined); (viii) It will not record such statement
without Landlord's prior written consent which Landlord may withhold in its sole
discretion and (ix) It will not assign its rights or delegate its duties under
such statement without Landlord's prior written consent.
36. RULES AND REGULATIONS
36.1. The Rules and Regulations attached hereto as Exhibit F are
expressly made a part hereof. Tenant agrees to comply with such Rules and
Regulations and any reasonable amendments, modifications or additions thereto as
may hereafter be adopted and published by notice to tenants in the Building, and
to cause its agents, contractors and employees to comply therewith, and agrees
that the violation of any of them shall constitute a default by Tenant under
this Lease. If there is a conflict between the Rules and Regulations and any of
the provisions of this Lease, the provisions of this Lease
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shall prevail. Landlord shall not be responsible to Tenant for the
non-performance by any other tenant or occupant of the Building or of the
Project of any of the Rules and Regulations.
37. NOTICES
37.1. Any notice, demand or communication required or permitted to be
given hereunder to Landlord by Tenant shall be addressed to Landlord at
Landlord's address as set forth in Section 1.9 hereof, or to such other
address(es) and/or to such other parties as Landlord may from time to time
designate and shall be (a) deposited in the United States mails, duly registered
or certified with postage fully prepaid thereon or (b) delivered by an overnight
courier service that confirms delivery. Any notice, demand or communication
required or permitted to be given hereunder to Tenant by Landlord shall be
addressed to Tenant at Tenant's address as set forth in Section 1.10 hereof, or
may be delivered to the Premises, or both, and shall be (i) personally served,
or (ii) deposited in the United States mails, duly registered or certified with
postage fully prepaid thereof or (iii) delivered by an overnight courier service
that confirms delivery. Either party may by written notice similarly given
designate a different address for notice purposes, except that Landlord may in
any event use the Premises as Tenant's address for notice purposes. Notice shall
be effective upon receipt or refusal to receive, in the event of personal
service; or upon receipt or refusal to receive (but in no event more than three
[3] days after the date first mailed in the manner herein required), in the
event of depositing notice in the United States mails; or upon receipt or
refusal to receive, in the event of delivery by overnight courier service.
38. WAIVER
38.1. No delay or omission in the exercise of any right or remedy of
Landlord for any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent
payments shall not constitute a waiver of any other default, and shall not
constitute a waiver of timely payment of the particular payment involved. No act
or conduct of Landlord, including, without limitation, the acceptance of keys to
the Premises, shall constitute an acceptance of the surrender of the Premises by
Tenant before the expiration of the term. Only an express notice to such effect
from Landlord to Tenant shall constitute acceptance of the surrender of the
Premises sufficient to terminate this Lease. Landlord's consent to or approval
of any act by Tenant requiring Landlord's consent or approval shall not
constitute a consent or approval of any subsequent act by Tenant. Any waiver by
Landlord of any default must be in writing and shall not be a waiver of any
other default concerning the same or any other provision of this Lease.
39. MISCELLANEOUS
39.1. EXECUTION BY LANDLORD. The submission of this document for
examination and negotiation does not constitute an offer to lease, or a
reservation of, or an option for, the Premises. This document becomes effective
and binding only upon execution by Tenant and by Landlord. No act or omission of
any employee or agent of Landlord or of Landlord's broker shall after, change or
modify any of the provisions hereof.
39.2, LANDLORD AND TENANT. As used in this Lease, the words "Landlord"
and "Tenant" include the plural as well as the singular. Words used in the
neuter gender include the masculine and feminine and words in the masculine or
feminine gender include the neuter. If there is more than one person or entity
constituting Landlord or Tenant, the obligations imposed hereunder upon Landlord
or Tenant are joint and several. If Tenant consists of a husband and wife, the
obligations of Tenant hereunder extend individually to the sole and separate
property of each of them as well as to their community property. The obligations
contained in this Lease to be performed by Landlord shall be binding on
Landlord's successors and assigns only during their respective periods of
ownership of the Premises.
39.3. BROKERS. Tenant shall hold Landlord harmless from all damages
(including reasonable attorneys' fees and costs) resulting from any claims that
may be asserted against Landlord by any broker, finder, or other person with
whom Tenant has or purportedly has dealt, except as set forth at Section 1.11
39.4. SIGNS. Tenant shall not place or permit to be placed in or upon
the Premises, where visible from outside the Premises, or outside the Premises
on any part of the Building or Project, any signs, notices, drapes, shutters,
blinds, or displays of any type, without the prior written consent of Landlord.
Landlord reserves the right in its sole discretion to place and locate on the
roof or exterior of the Building, and in any area of the Project not leased to
Tenant, any signs, notices, displays and similar items as Landlord deems.
appropriate. Tenant, at its sole cost and expense, shall have the right to
install a directional sign, consistent in materials, color, lettering and
appearance as Building Standard signs, displaying Tenant's name and suite number
in the second floor elevator lobby, the location, size and appearance of which
shall be subject to the Landlord's prior written approval.
39.5. NAME OF BUILDING. Tenant shall not use the name of the Building or
the Project for any purpose other than the address of the business to be
conducted by Tenant in the Premises. Tenant shall
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not use any picture of the Building or the Project in its advertising,
stationery or in any manner so as to imply that the entire Building is leased by
Tenant. Landlord expressly reserves the right at any time to change the name of
the Building or Project without in any manner being liable to Tenant therefor.
39.6. PARKING. During the term of this Lease, Tenant shall only be
entitled to such use of parking spaces in the parking areas located in the
Project as shall be confirmed in writing by the parties, and absent any written
agreement to the contrary, parking for Tenant and its employees, agents,
customers, invitees and licensees shall be on a first-come, first-served basis,
at rates and upon other terms and conditions as may be established from time to
time by Landlord or Landlord's operator of the parking areas. Parking rates may
be hourly, weekly or monthly, or such other rate system as Landlord deems
advisable, and Tenant acknowledges that its employees shall not be entitled to
park in such parking areas located in and about the Building which may from time
to time be designated for visitors of the Building. Landlord may also designate
areas for assigned, reserved or employee parking either within the parking areas
located in and about the Building, or in other areas reasonably close thereto.
Landlord shall have the right to change any such designated parking areas from
time to time. Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty as to the suitability of the
parking areas for the conduct of Tenant's business.
39.7. INTENTIONALLY OMITTED.
39.8. APPROVAL OF LANDLORD'S MORTGAGEE. Tenant acknowledges that this
Lease is subject to the approval of Landlord's Mortgagee, and Tenant agrees to
make such reasonable modifications to this Lease as may be ordinarily and
customarily requested by Landlord's Mortgagee, so long as such modifications
shall not affect the Rent payable, hereunder, increase Tenant's obligations
hereunder, or otherwise adversely affect Tenant in any material way.
39.9. NON RECORDABILITY OF LEASE. Tenant agrees that in no event shall
this Lease or a memorandum hereof be recorded without Landlord's express prior
written consent.
39.10. MATTERS OF RECORD. This Lease and Tenant's rights hereunder are
subject and subordinate in all respects to matters affecting Landlord's title
recorded in the official records of the county recorder's office for the county
in which the Project is located prior or subsequent to the date of execution of
this Lease, and is expressly subject and subordinate to the following:
Declaration of Restrictions dated September 15, 1978, and recorded on October 2,
1978, as Document No. 781093326 in the Official Records of Los Angeles County,
State of California, as amended, and Reciprocal Parking Agreement dated January
3, 1979, and recorded on January 19, 1 979, as Document No. 7986214 in the
Official Records of Los Angeles County, State of California, as amended. Tenant
agrees that as to its leasehold estate it, and all persons in possession or
holding under it, will conform with and will not violate any such covenants,
conditions and restrictions, or other matters of record.
39.11. SEVERABILITY. If any provision of this Lease shall, to any
extent, be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this LEASE shall not be affected thereby, and
every other term and provision of this LEASE shall be valid and enforceable to
the fullest extent permitted by law.
39.12. CONSTRUCTION. All provisions hereof, whether covenants or
conditions, shall be deemed to be both covenants and conditions. The definitions
contained in this Lease shall be used to interpret this Lease.
39.13. INTEREST. Except as expressly provided otherwise in this Lease,
any amount due to Landlord which is not paid when due shall bear interest from
the date due at the prime commercial rate of interest charged from time to time
by Citibank N.A. plus two percent (2%) per annum, but not to exceed the maximum
rate of interest allowable under the LAW (the "AGREED Rate"). Payment of such
interest shall not excuse or cure any default by Tenant under this Lease.
39.14. BINDING EFFECT; CHOICE OF LAW. Except as expressly provided
otherwise in this Lease, all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State of California.
39.15. WAIVER OF TRIAL BY JURY. Landlord and Tenant each hereby waive
trial by jury in any action, proceeding or counterclaim brought by either
against the other on any matter whatsoever arising out of or in any way
connected with this Lease or Tenant's use or occupancy of the Premises,
including any claim of injury or damage, and any emergency and other statutory
remedy with respect thereto. Landlord and Tenant also agree that the venue of
any such action, proceeding or counterclaim shall be in the City and County of
Los Angeles, State of California.
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39.16. TIME; RIGHTS CUMULATIVE. Time is of the essence of this Lease and
each and every provision hereof, except as may be expressly provided otherwise.
All rights and remedies of the parties shall be cumulative and non-exclusive of
any other remedy at law or in equity,
39.17. INABILITY TO PERFORM. This Lease and the obligations of Landlord
and Tenant hereunder shall not be affected or impaired because such party is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of force majeure, strike, labor
troubles, acts of God, acts of government, unavailability of materials or labor,
or any other cause beyond the control of such party, except that nothing herein
shall excuse Tenant from the timely payment of rent.
39.18. CORPORATE AUTHORITY. If Tenant is a corporation, each individual
executing this Lease on behalf of Tenant represents and warrants that he or she
is duly authorized to execute and deliver this Lease on behalf of Tenant, and
that Tenant is qualified to do business in the State of California, and shall
deliver appropriate certification to that effect if requested.
39.19. PARTNERSHIP AUTHORITY. If Tenant is a partnership, joint venture,
or other unincorporated association, each individual executing this Lease on
behalf of Tenant represents that this Lease is binding on Tenant. Furthermore,
Tenant agrees that the execution of any written consent hereunder, or of any
written modification or termination of this Lease, by any general partner of
Tenant or any other authorized agent of Tenant, shall be binding on Tenant.
39.20. SUBMITTAL OF FINANCIAL STATEMENT. At any time and from time to
time during the term of this Lease, within fifteen (15) days after request
therefor by Landlord, Tenant shall supply to Landlord and/or any Mortgagee a
current financial statement or such other financial information as may be
required by any such party.
39.21. RIDERS. Clauses, plats, addenda, and riders, if any, that are
signed by Landlord and Tenant and affixed to this Lease, are a part hereof.
40. INTENTIONALLY OMITTED
41. SECURITY INTEREST
41.1. In consideration of the covenants and agreements contained herein,
and as a material consideration to Landlord for entering into this LEASE, Tenant
hereby unconditionally grants to Landlord a continuing security interest in and
to all money and property of any kind or description, including, without
limitation, the Security Deposit, if any, and any advance Rental payment or
other deposit, now in or hereafter delivered to or coming into the possession,
custody or control of Landlord, by or for the account of Tenant, in any manner
and for any purpose, together with any increase in profits or proceeds from such
property. The security interest granted to Landlord hereunder secures payment
and performance of all obligations of Tenant under this Lease now or hereafter
arising or existing, whether direct or indirect, absolute or contingent, or due
of to become due In the event of a default under this Lease which is not cured
within the applicable grace period, if any, Landlord is and shall be entitled to
all the rights, powers and remedies granted a secured party under the California
Uniform Commercial Code and otherwise available at law or in equity, including
but not limited to, the right to retain as damages the Security Deposit and
other funds held by Landlord, without additional notice or demand regarding this
security interest. Tenant agrees that it will execute such other documents or
instrument as may be reasonably necessary to carry out and effectuate the
purpose and terms of this Article 41, or as otherwise reasonably requested by
Landlord, including without limitation, execution of a UCC-1 financing
statement. Landlord's rights and remedies under this Article 41 are in addition
to, and not in lieu of, the provisions of Article 9.
42. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS
42.1. This Lease contains all of the agreements of the parties hereto
with respect to any matter covered or mentioned in this Lease, and no prior
agreement, negotiations, brochures, arrangements, or understanding pertaining to
any such matter shall be effective for any purpose unless expressed herein. No
provisions of this Lease may be amended or added to except by an agreement in
writing signed by the parties hereto or their respective successors in interest.
43. OPTION TO EXTEND TERM
43.1. GRANT OF OPTION TO EXTEND TERM. Landlord hereby grants Tenant one
(1) option ("Option to Extend Term") to extend the initial Lease term ("Initial
Term") in accordance with the terms of this Article 43.
43.2. OPTION TERM. The Option to Extend Term shall extend the term of
the Lease for an additional thirty-six (36) months ("Extended Term") commencing
upon the expiration of the Initial Term.
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43.3. Terms. If Tenant exercises the Option to Extend Term, then all of
the terms contained in this Lease shall continue in full force and effect during
the Extended Term, except with respect to the following:
43.3.1. CALCULATION OF BASIC RENT. Basic Rent for the Extended Term
shall be adjusted on the first day of the Extended Term to the then Fair
Market Rental Value of the Premises, including escalations, but in no
event less than the Basic Rent payable immediately preceding the
Extended Term. The term "Fair Market Rental Value of the Premises" shall
be Landlord's good faith calculation of the then prevailing fair market
rental rate for the Premises as of the commencement of the Extended
Term.
43.3.2. NO FURTHER EXTENSIONS. Tenant shall have no further right to
extend the term of this Lease whether pursuant to the provisions of this
Article 43 or otherwise.
43.4. NOTICE TO EXTEND TERM. The Option to Extend shall be exercised, if
at all, only by written notice ("Notice to Extend Term") delivered by Tenant to
Landlord at least nine (9) months, but not more than twelve (12) months, prior
to the expiration of the Initial Term. If Tenant does not deliver the Notice to
Extend Term within the time period set forth herein, the Option to Extend Term
shall lapse and Tenant shall have no right to extend the Lease term.
43.5. EXTENSION RENTAL NOTICE. Within thirty (30) days after Landlord's
receipt of the Notice to Extend Term, Landlord shall provide Tenant written
notice setting forth the Fair Market Rental Value of the Premises for the
Extended Term ("Extension Rental Notice"). Within twenty (20) days following the
date Landlord delivers the Extension Rental Notice to Tenant, Tenant shall, by
written notice delivered to Landlord, either (a) accept the Fair Market Rental
Value of the Premises as stated in the Extension Rental Notice ("Notice of
Acceptance") or (b) reject the Fair Market Rental Value of the Premises as
stated in the Extension Rental Notice ("Notice of Rejection").
43.6. EFFECT OF NOTICES. If Tenant delivers the Notice of Acceptance in
the manner and within the time frames herein provided, this Lease shall be
deemed extended at the Basic Rent and upon the terms specified in this Article
43 without the need for any further notice or documentation. If Tenant does not
deliver to Landlord either the Notice of Acceptance or the Notice of Rejection
within the said twenty (20)-day period, the same shall constitute Tenant's
Notice of Rejection, which shall be deemed delivered on the said twentieth day.
If Tenant delivers, or is deemed to have delivered, the Notice of Rejection to
Landlord within the said twenty (20)-day period, then this Lease shall expire
upon the expiration date of the Initial Term, unless terminated earlier in
accordance with the provisions of this Lease. The Notice of Acceptance or Notice
of Rejection, as the case may be, shall be irrevocable, and shall be binding
upon both Landlord and Tenant without the need for any further documentation.
43.7. DOCUMENTATION. If, within thirty (30) days following Landlord's
receipt of the Notice of Acceptance, either party shall request that both
parties enter into an amendment documenting the Extended Term and Basic Rent
during the Extended Term, then Landlord shall prepare an amendment to this Lease
setting forth the Extended Term and Basic Rent for the Extended Term pursuant to
this, Article 43 ("Extended Term Amendment"). The Extended Term Amendment shall
be submitted to Tenant for execution and Tenant shall have thirty (30) days
following receipt thereof from Landlord in which to execute and deliver the
Extended Term Amendment to Landlord and Landlord shall have thirty (30) days
after receipt of the same in which to execute the Extended Term Amendment and to
deliver one fully-executed copy to Tenant. The failure of either or both
Landlord or Tenant to execute the Extended Term Amendment shall not have the
effect of nullifying Tenant's Notice of Acceptance, and the Lease shall
nevertheless be extended for the Extended Term as herein provided.
43.8. PERSONAL OPTION. The Option to Extend Term is personal to Tenant
named at page 1 of this Lease and Affiliates of Tenant (as hereinafter defined).
IF Tenant assigns, mortgages, pledges, hypothecates or encumbers this Lease or
its interest in the Premises or sublets all or any portion of the Premises to
any person or entity other than an Affiliate of Tenant ("Assigns" or "Assign"
for purposes of this Article 43 only) prior to the exercise of the Option to
Extend Term, then the Option to Extend Term shall lapse. If Tenant Assigns any
interest of Tenant in the Lease or the Premises to an entity after the exercise
of the Option to Extend Term, but prior to the commencement of the Extended
Term, the Option to Extend Term shall lapse and this Lease shall expire as if
the Option to Extend Term had not been exercised, unless such restriction is
expressly waived in writing by Landlord (which election shall be in Landlord's
sole discretion). The term "Affiliate of Tenant" shall mean any corporation that
controls, is controlled by or under common control with Isocor, a California
corporation.
43.9. ADDITIONAL CONDITIONS. The Option to Extend Term shall be
exercisable by Tenant on the express conditions that at the time of the exercise
of the Option to Extend Term and at all times prior to, and upon the date of,
the commencement of the Extended Term, Tenant shall not be in default under any
of the provisions of this Lease, unless such restriction is expressly waived in
writing by Landlord (which election shall be in Landlord's sole discretion). The
Option granted herein is subject to
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any existing or prior rights of expansion, extension, renewal, negotiation,
offer and other rights and options which third parties may have for the
Premises.
44. RIGHT OF FIRST OFFER
44.1. RIGHT OF FIRST OFFER. From and after the Commencement Date, prior to
entering into a lease with any person or entity for that certain space on the
second floor of the Building, which space is commonly referred to as of the date
of this Lease as suite 2000 containing approximately 9,176 rentable square feet,
the approximate location of which is identified on Exhibit A-2 hereof ("First
Offer Space"), Landlord shall first offer to lease to Tenant the First Offer
Space subject to, and upon all of the terms, covenants and conditions set forth
in this Article 44, and further subject to any existing or prior rights of
expansion, extension, renewal, negotiation, offer or other options or rights
thereto which third parties may have for the First Offer Space ("Right of First
Offer").
44.2. RENT FOR FIRST OFFER SPACE. The First Offer Space shall be offered
to Tenant at the Fair Market Rental Value of the First Offer Space. The term
"Fair Rental Market Value of the First Offer Space" shall mean Landlord's good
faith determination of the then prevailing fair market rental rate for the First
Offer Space.
44.3. NOTICE OF FIRST OFFER. The First Offer and the terms of the First
Offer for such First Offer Space shall be provided by Landlord to Tenant in
writing ("Notice of First Offer"). Tenant shall notify Landlord in writing of
its acceptance of the Notice of First Offer ("First Offer Acceptance Notice") or
rejection of the Notice of First Offer and, consequently, of its right to such
First Offer Space ("First Offer Rejection Notice") within five (5) days after
receiving the Notice of First Offer. If Tenant does not for any reason deliver
the First Offer Acceptance Notice or the First Offer Rejection Notice to
Landlord within the time frames herein contained, the same shall constitute
Tenant's First Offer Rejection Notice. The First Offer Acceptance Notice or the
First Offer Rejection Notice, as the case may be, shall be irrevocable, and
shall binding upon both Landlord and Tenant without the need for any further
documentation.
44.3.1. FIRST OFFER ACCEPTANCE NOTICE. If Tenant delivers the First
Offer Acceptance Notice as specified in Section 44.3, then Landlord shall
prepare a document ("First Offer Space Document") setting forth the terms
by which Tenant shall lease the First Offer Space, as set forth in this
Article 44. The First Offer Space Document shall otherwise contain the
same terms as are in this Lease, except (a) the rent shall be adjusted to
reflect the Fair Market Rental Value of the First Offer Space, (b) this
Article 44 shall be excluded therefrom, and (c) Article 43 shall be
excluded therefrom to the extent that it has already been exercised with
respect to the Premises. The First Offer Space Document shall be submitted
to Tenant for execution and Tenant shall have twenty (20) days in which to
execute and deliver to Landlord the First Offer Space Document. Landlord
shall have twenty (20) days following receipt of the First Offer Space
Document from Tenant in which to execute and deliver one (l)
fully-executed copy to Tenant. The failure of either or both Landlord or
Tenant to execute the First Offer Document shall not have the effect of
nullifying Tenant's First Offer Acceptance Notice, and the First Offer
Space shall nevertheless be leased by Tenant as herein provided.
44.3.2. FIRST OFFER REJECTION NOTICE. If Tenant delivers, or is
deemed to have delivered, the First Offer Rejection Notice as specified in
Section 44.3, then Tenant shall have no further right during the term of
this Lease, as the same may be extended, to lease the First Offer Space
pursuant to this Article 44.
44.4. EFFECT OF DEFAULT. If Tenant is in default of this Lease beyond any
applicable cure period on the date (a) Landlord is otherwise obligated to
provide Tenant with the Notice of First Offer, Landlord (in its sole discretion)
shall not be obligated to provide Tenant with the Notice of First Offer in which
case the rights of Tenant to the First Offer Space under this Article 44 shall
be void and of no further force or effect, or (b) Tenant is required to accept
delivery of possession of the First Offer Space, then Landlord (in its sole
discretion) shall not be obligated to deliver possession of the First Offer
Space to Tenant in which case the rights of Tenant to the First Offer Space
under this Article 44 shall be void and of no further force or effect. The
foregoing rights of Landlord shall be in addition to any other rights and
remedies available to Landlord at law and in equity.
44.5. FIRST OFFER PERSONAL. The First Offer granted herein is personal to
Tenant named at page 1 of this Lease and Affiliates of Tenant. If Tenant
assigns, mortgages, pledges, hypothecates or encumbers this Lease or its
interests in the Premises or sublets all or any portion of the Premises to
anyone other than an Affiliate of Tenant (a) on or before the Landlord is
otherwise obligated to provide Tenant with the Notice of First Offer, the rights
of Tenant to the First Offer Space under this Article 44 shall be void and of no
further force or effect or (b) on or before the date Tenant is required to
accept delivery of possession of the First Offer Space, then Landlord (in its
sole discretion shall not be obligated to deliver possession of the First Offer
Space to Tenant in which case the rights of Tenant,
30
<PAGE> 33
its sublessee, successor or transferee to the First Offer Space under this
Article 44 shall be void and of no further force or effect.
45. NON-DISTURBANCE AGREEMENT
45.1. Landlord shall use reasonable efforts to obtain from Landlord's
Mortgage a subordination, non-disturbance and attornment agreement within thirty
(30) days after the later to occur of (a) the execution and dating of this Lease
by Landlord, or (b) Landlord's receipt of the said agreement from Tenant
executed in recordable form by Tenant. If Tenant fails to return to Landlord a
Tenant-executed and notarized subordination, non-disturbance and attornment
agreement in the form submitted by Landlord to Tenant within thirty (30) days
following the date Landlord first delivers the same to Tenant for execution, the
same shall constitute Tenant's waiver of the rights of Tenant and obligations of
Landlord under this Article 45, and Landlord shall have no obligation to obtain
such subordination, nondisturbance and attornment agreement from Landlord's
Mortgagee.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
day and year first above written.
LANDLORD: SPIEKER PROPERTIES, L.P.,
a California limited partnership
By: Spieker Properties, Inc.,
a Maryland corporation,
its general partner
By:
--------------------------------------
Its:
---------------------------------
Date:
----------------------------------------
TENANT: ISOCOR
a California corporation
By:/s/ JANINE BUSHMAN
-------------------------------------------
Janine Bushman
Vice President, Finance and
Administration/
Chief Financial Officer
Date: 2/11/98
----------------------------------------
31
<PAGE> 34
EXHIBIT A
DESCRIPTION OF PREMISES
[FLOOR PLAN DIAGRAM]
Second Floor: Suite 2010
3420 Ocean Park Boulevard [Al
Santa Monica, California
EXHIBIT A
<PAGE> 35
EXHIBIT A-1
DESCRIPTION OF PROJECT
[DIAGRAM]
SANTA MONICA
BUSINESS PARK
Santa Monica Airport Facility
EXHIBIT A-1
<PAGE> 36
EXHIBIT A-2
RIGHT OF FIRST OFFER SPACE
[FLOOR PLAN DIAGRAM]
Second Floor: Suite 2000
3420 Ocean Park Boulevard
Santa Monica, California
EXHIBIT A-2
<PAGE> 37
EXHIBIT B
VERIFICATION OF TERM AND INITIAL RENT
RE: Lease dated ________________________ between _______________________________
___________________________________________________________________ ("Landlord")
and _________________________________________________________________ ("Tenant")
for premises in _______________________________________________________________.
Tenant hereby verifies that the information stated below is correct and further
acknowledges and accepts possession of the Premises.
Area:_________________________(rentable/usable/gross) sq. ft.
Commencement Date:________________________________________________________
Termination Date:________________________________________________________
Options:________________________________________________________
Initial Rent:________________________________________________________
Address for Notices:________________________________________________________
________________________________________________________
________________________________________________________
Billing Address:________________________________________________________
________________________________________________________
________________________________________________________
ATTN:___________________________________________________
Telephone:(___) __________________________________________________
Federal Tax ID No:________________________________________________________
By:_____________________________________________________
Title:__________________________________________________
Date:____________________________________________, 19___
EXHIBIT B
<PAGE> 38
EXHIBIT C
CONSTRUCTION PROVISIONS
1. SCOPE OF WORK. These provisions define the scope of work to be provided by
Landlord in the Premises under the terms of the Lease. Words and phrases used
herein which are defined in the Lease have the meanings set forth therein unless
provided otherwise.
2. INTENT OF EXHIBIT. It is the intent of these provisions that Tenant shall be
permitted freedom in the interior design and layout of its space so long as same
is consistent with Landlord's policies and structural requirements, applicable
building codes, and with sound architectural and construction practices, and
provided further that no interference is caused to the operation of the
Building's mechanical heating, cooling or electrical systems or structure, or
other Building operations or functions, and that no unusual increase in
maintenance, insurance, taxes, fees or utility charges will be incurred by
Landlord or other tenants in the Building as a result thereof. Any additional
cost of design, construction, operation, insurance, maintenance, taxes, fees or
utilities which results therefrom shall be charged to Tenant and paid for by
Tenant in accordance with the provisions hereof and of the Lease.
3. LANDLORD'S WORK. Landlord hereby grants Tenant a construction allowance not
to exceed $5.00 per usable square foot of the Premises ("Construction
Allowance"), which shall be used only as a credit towards the cost of the
following services and materials (hereinafter referred to as "Landlord's Work"):
3.1. The services of Landlord's space planner to prepare one (1) approved
space layout and one (1) set of approved working drawings [with five (5)
prints]. One minor revision to the original space layout will be included
without charge. All other revisions and prints as well as all interior design or
decorating fees, shall be at Tenant's sole cost and expense.
3.2. The construction of the improvements and the installation of the
items shown in Schedule A attached hereto, which shall be installed in the
Premises substantially in accordance with the Plans hereinafter defined.
3.3. Fees for engineering, construction management by Landlord's Tenant
Coordinator (as hereinafter set forth), and previously installed materials used
in the construction (if any).
3.4. Permits and license fees relating to construction of Tenant's
improvements.
In the sole discretion of Tenant, Tenant may elect to have Landlord grant to
Tenant an additional amount ("Excess Construction Allowance"), up to a maximum
of $3.00 per usable square foot of the Premises, for the work described in this
Section 3 by specifying the amount of the Excess Construction Allowance, and
Tenant's election hereunder to use such sum, in written notice delivered to
Landlord prior to the Commencement Date. If Tenant makes such timely election,
then Tenant shall reimburse Landlord therefor all as more particularly set forth
at Section 4.4 of the Lease. If Tenant does not make such timely election,
Landlord shall have no obligation to provide Tenant with any sums beyond the
Construction Allowance
4. TENANT'S WORK. All costs incurred in excess of the foregoing allowance for
improvements, services or materials required by Tenant in or for the Premises
(hereinafter referred to as "Tenant's Work") shall be for the account of Tenant
and at Tenant's sole cost and expense. Tenant shall pay building lifting charges
(if any) for Tenant's Work to the extent the same are not otherwise included in
the cost of Landlord's Work.
5. SPACE PLANNER. Tenant shall use the services of the space planner retained
by Landlord to prepare a space layout and working drawings and specifications
for all construction work in the Premises. Interior design, and details and
specifications for improvements other than Landlord's Work, shall be for the
account of Tenant and shall be paid by Tenant upon invoice therefor. Tenant
shall devote such time in consultation with Landlord's space planner as shall be
necessary to enable the planner to develop complete working drawings and
specifications (hereinafter referred to as the "Plans") for construction of
improvements in the Premises, showing thereon partitions, doors, electrical and
telephone outlets, light fixture locations, wall finishes, floor coverings and
special requirements (if any) for Tenant's review and approval. Failure of
Tenant to approve the Plans within the time limit specified in Section 7 hereof
shall be deemed disapproval. If Tenant requests or necessitates any changes or
revisions in the Plans after they have been approved, Tenant shall bear all
costs associated therewith.
6. COST ESTIMATES. As soon as practicable after Tenant's approval of the Plans,
Landlord will advise Tenant of the estimated cost payable by Tenant due to costs
for improvements, services or materials in excess of the Construction Allowance
for Landlord's Work (i.e., the estimated cost for Tenant's Work). Landlord will
have no obligation whatsoever to commence construction of any improvements in
the Premises unless Tenant approves same and pays estimated costs for Tenant's
EXHIBIT C - PAGE 1
<PAGE> 39
Work in advance, and Landlord's refusal to proceed under such circumstances
shall not defer the Commencement Date. Upon Tenant's authorization to proceed
and payment of such estimated costs, Landlord shall commence the construction of
improvements in the Premises. Upon substantial completion of the Premises (which
in the event of dispute shall be determined by Landlord's project architect
pursuant to AIA standards), Tenant shall pay the amount of actual costs in
excess of such estimated costs previously paid by Tenant or, if the actual costs
are less than such estimated costs previously paid by Tenant, Landlord shall
reimburse the difference to Tenant. If Tenant fails to make such payment within
ten (10) days after receipt of a demand therefor, Landlord shall have the same
rights and remedies as in the case of a default by Tenant in the payment of Rent
under the Lease, and interest will accrue thereon at the Agreed Rate.
7. TIME LIMITS. The following maximum time periods shall be allowed for the
indicated matters:
<TABLE>
<CAPTION>
Time Limit After Completion of
Action Preceding Item
- ------ ------------------------------
<S> <C> <C>
7.1. Tenant meets with Landlord's space planner and 5 business days after
approves initial space layout. Lease execution
7.2. Tenant furnishes all required working drawing 10 business days
information to Landlord's space planner.
7.3. Landlord's space planner submits working 15 business days
drawings to Tenant for review and approval.
7.4. Tenant gives Landlord its approval of working 5 business-days
drawings, with any required changes in detail.
7.5. Landlord quotes estimated costs to Tenant for 10 business days
Tenant's Work.
7.6. Tenant approves such estimated costs and pays 5 business days
the amount thereof to Landlord and authorizes
Landlord to proceed.
7.7. Upon substantial completion of the improvements
in the Premises (i.e., exclusive of punchlist
items) Tenant shall pay the entire then
remaining balance of actual costs in excess of
the Construction Allowance within ten (10) days
after its receipt of a billing statement from
Landlord.
</TABLE>
8. CONSTRUCTION BY LANDLORD"S CONTRACTOR. Unless otherwise agreed in writing in
this Exhibit C, all construction work in the Premises including Tenant's Work
shall be performed by the Tenant Improvement Contractor ("The Contractor")
retained by Landlord. The Contractor shall perform such work in a good and
workmanlike manner and shall construct the improvements in the Premises
substantially in accordance with the Plans. All such construction work shall be
performed in accordance with all laws, ordinances and requirements of government
agencies having jurisdiction. If Landlord shall, pursuant to this Exhibit C,
permit Tenant to have any work performed by a contractor retained by Tenant
rather than by the The Contractor, then (i) Tenant shall use only such
contractor as shall have first been approved by Landlord; (ii) such contractor
shall be bondable and shall use union employees only, except that such
contractor may use non-union employees only if prior to the commencement of any
work Tenant shall purchase and deliver to Landlord an indemnity bond fully
protecting Landlord against any and all loss or damage that may result from any
work stoppage or interruption arising from the use of such non-union employees;
(iii) Landlord will permit entry of such contractor into the Premises for the
purpose of performing such work, prior to commencement of the term of the Lease,
and while the The Contractor is working at the Premises, but only at such time
or times as Landlord shall deem feasible in the circumstances; (iv) such license
to enter before commencement of the term is expressly conditioned upon the
contractor retained by Tenant working in harmony and not interfering with the
workmen, mechanics and contractors of Landlord or of any other tenant in the
Building or the Project, and if at any time such entry or work by Tenant's
contractor shall cause any disharmony or interference, such permission to enter
may be withdrawn by Landlord immediately upon written notice in amounts to
Tenant; (v) worker's compensation, public liability and property damage
insurance, all and with companies and on forms satisfactory to Landlord, shall
be provided and at all times maintained by Tenant's contractor, and before
proceeding with the work, certificates of such insurance shall be furnished to
the Landlord; (vi) such entry shall be deemed to be under all the terms,
covenants, provisions and conditions of the Lease, except the covenant to pay
Rent and Expenses; and (vii) all
EXHIBIT C - PAGE 2
<PAGE> 40
materials, work, installations and decorations of any nature whatsoever brought
on or installed in the Premises before the commencement of the term of the Lease
shall be at Tenant's risk, and neither Landlord nor any party acting on
Landlord's behalf shall be responsible for any damage thereto or loss or
destruction thereof.
9. TENANT COORDINATOR. Landlord has designated a "Tenant Coordinator" who shall
be responsible for the management and coordination of all work to be performed
in the Premises and coordination with Tenant on all matters governed by these
Construction Provisions. The Tenant Coordinator shall be paid a fee equal to
five percent (5%) of the cost of the improvements, services and materials
furnished as part of Landlord's Work and Tenant's Work as reimbursement for the
expense of administration and coordination of such work. With regard to all
matters involving such work, Tenant shall communicate with the Tenant
Coordinator rather than the TI Contractor. Landlord shall not be responsible
for any statement, representation or agreement made between Tenant and TI
Contractor. It is hereby expressly acknowledged by Tenant that such TI
Contractor is not Landlord's agent and has no authority whatsoever to enter into
agreements on Landlord's behalf or otherwise bind Landlord. The Tenant
Coordinator will furnish Tenant with notices of substantial completion, cost
estimates for Tenant's Work, Landlord's approvals or disapprovals of Plans and
changes thereto, billings for actual costs of Tenant's Work and other similar
notices. Tenant shall deliver all payments required hereunder to the Tenant
Coordinator unless writ-ten notice is given by Landlord to the contrary.
10. CHANGES. If Tenant requests or necessitates any change, addition or deletion
to the Premises after approval of the Plans, as described in Section 7 above, a
request for the change shall be submitted to the Tenant Coordinator accompanied
by revised plans prepared by Landlord's space planner at Tenant's sole expense.
The Tenant Coordinator shall thereafter notify Tenant in writing of the
estimated cost which will be chargeable to Tenant by reason of such change,
addition or deletion. Such estimated cost shall include Landlord's cost of any
delay in completion of the Premises resulting from such change (including, but
not limited to, loss of income, additional interest, penalties, and extra labor
costs incurred in order to minimize further delay). Tenant shall within five (5)
business days thereafter notify the Tenant Coordinator in writing whether it
desires to proceed with such change. In the absence of such written
authorization and payment in full of the total estimated cost within that five
(5)-day period, Landlord shall not be obligated to perform such change and shall
be deemed to have been authorized by Tenant to proceed without making such
change.
11. SUBSTITUTIONS. Tenant may select different new materials (except exterior
window levelors which must be installed on all exterior windows, the ceiling
system, parabolic light fixtures, and the doors and frames and hardware) in
substitution for the materials specified as the Building Standard, provided the
selection is indicated on the approved Plans.
12. RESPONSIBILITY FOR DELAYS. Tenant hereby expressly agrees that if Tenant is
responsible for any delay in substantial completion of the Premises, whether by
reason of (i) failure to meet the time schedule set forth in Section 7 above,
(ii) delays in performance or completion by a party employed by Tenant, NO
building code problems arising from Tenant's design, or (iv) an unapproved
change in the work necessitated by Tenant, or (iv) any other reason, the same
shall not delay the Commencement Date.
13. INCORPORATION BY REFERENCE. This Exhibit C is and shall be incorporated by
reference in the Lease, and all of the terms and provisions of the Lease are
incorporated herein by this reference. Schedule A to this Exhibit C is hereby
incorporated by this reference in the Lease and in this Exhibit C.
14. ATTORNEYS' FEES. In the event of any action or proceeding initiated by a
party hereto for the enforcement or interpretation of the provisions contained
herein, the prevailing party shall be entitled to recover its costs incurred in
connection therewith, including its reasonable attorneys' fees.
EXHIBIT C - PAGE 3
<PAGE> 41
SCHEDULE A TO EXHIBIT C
SANTA MONICA BUSINESS PARK
3420 OCEAN PARK BOULEVARD
BUILDING STANDARD
1. INTERIOR PARTITIONS
1.1. Ceiling height, 2 1/2" metal studs at 2'0" on center with one layer
of 5/8" type "X" gypboard on each side.
2. DEMISING PARTITIONS
2.1. As above except they are full height one side with sound batt between
the studs. Openings with sound insulation for return-air plenum (include fire
dampers in fire walls).
3. DOORS
3.1. Legacy (dark brown).
4. FRAME
4.1. Timely Browntone.
5. HARDWARE
5.1. Schlage "Rhodes", cylindrical leversets, 5" backset, 6 pin "C"
keyway, #613 oil rubbed bronze finish with bronze base metal. Ball bearing
hinges.
6. CEILING
6.1. Standard 2'x4' flat grid with Armstrong "Cortega" tiles (8) 1 x 1
sections panel.
6.2. First Floor
6.2.1. Concealed spline "Sanserma" by Armstrong.
6.2.2. 2x2 Cortega tegular by Armstrong.
6.3. Second and Third Floors
6.3.1. 2x2 Second Look II
7. LIGHT FIXTURES
7.1. Standard 277V 2'x4' with prismatic lens.
7.2. Corridor - 2x2 prismatic.
8. FIRE PROTECTION
8.1. Semi-recessed sprinklers with chrome escutcheons. Fire extinguishers
as required to meet code requirements. Semi-recessed cabinets.
9. HVAC
9.1. Rooftop package units, VAV distribution system with 2'x2' perforated
supply and return grilles. Johnson pneumatic thermostats. Return air plenum.
Exterior zones cooling with hot water terminal re-heat. Interior zones cooling
only. Maximum of four (4) supply air grilles per zone. Fire dampers in all ducts
penetrating fire separation walls.
10. ELECTRICAL
10.1. Standard ivory receptacles and cover plates. Telephone subcontractor
to provide telephone/data outlet cover plates. No circuits common to adjacent
tenants.
SCHEDULE A - PAGE 1
<PAGE> 42
11. CARPET
11.1. Designweave "Tempest II" 32 oz. cut pile over 3/8" commercial
synthetic fiber pad and Burke 4" rubber base (black or brown).
12. PAINT
12.1. Sinclair Interior Colors flat (stock colors only).
13. WINDOWS
13.1. Standard 1" mini-blinds (gray).
SCHEDULE A - PAGE 2
<PAGE> 43
EXHIBIT D
SUBORDINATION OF LEASE
================================================================================
THE CHASE MANHATTAN BANK
AND
-------------------------
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
-------------------------
Dated:
Location: Santa Monica, California
================================================================================
EXHIBIT D - PAGE 1
<PAGE> 44
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
(Lease)
THIS AGREEMENT made the __________ day of __________, between THE CHASE
MANHATTAN BANK, a New York banking corporation having an office at 380 Madison
Avenue, New York, New York 10017 2591 (the "MORTGAGEE"), and ______________
having an office at ___________________ Santa Monica, California 90405 (the
"TENANT");
WITNESSETH:
WHEREAS the Mortgagee is the present owner and holder of a certain
mortgage or mortgages (the "MORTGAGE") encumbering the premises located in the
County of Los Angeles, City of Santa Monica and State of California, known as
Suite No. ___ (the "PREMISES");
WHEREAS the Tenant is the holder of a leasehold estate in a portion of the
Premises under and pursuant to the provisions of a certain lease dated
__________ with Spieker Properties, L.P., as landlord (the "LEASE"); and
WHEREAS the Tenant has agreed to subordinate the Lease to the Mortgage and
to the lien thereof and the Mortgagee has agreed to grant non-disturbance to the
Tenant under the Lease on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of Ten ($10) Dollars and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Mortgagee and the Tenant hereby covenant and agree as follows:
1. The Tenant agrees that the Lease and all of the terms, covenants and
provisions thereof and all rights, remedies and options of the Tenant thereunder
are and shall at all times continue to be subject and subordinate in all
respects to the Mortgage and all of the terms, covenants and provisions thereof
and to the lien thereof and to any and all increases, renewals, modifications,
spreaders, consolidations, replacements and extensions thereof, and to any and
all sums secured thereby, with the same force and effect as if the Mortgage had
been executed, delivered and recorded prior to the execution and delivery of the
Lease.
2. The Mortgagee agrees that if any action or proceeding is commenced by
the Mortgagee to foreclose the Mortgage or to sell the Premises, the Tenant
shall not be named as a party in any such action nor shall the Tenant be named a
party in connection with any sale of the Premises, provided that at the time of
the commencement of any such action or proceeding or at the time of any such
sale (i) the term of the Lease shall have commenced pursuant to the provisions
thereof, (ii) the Tenant shall be in possession of the premises demised under
the Lease, subject to any subleases previously approved by Mortgagee, (iii) the
Lease shall be in full force and effect, and (iv) the Tenant shall not be in
default under any of the terms, covenants or conditions of the Lease or of this
Agreement on the part of the Tenant to be observed or performed thereunder or
hereunder beyond any applicable cure periods set forth in the Lease, unless
applicable law requires the Tenant to be made a party thereto as a condition to
proceeding against the Landlord or protecting such rights and remedies. In the
latter case, the Mortgagee may join the Tenant as a defendant in such action
only for such purposes and not to terminate the Lease.
3. The Tenant agrees that if the Mortgagee or any successors in interest
to the Mortgagee shall become the owner of the Premises by reason of the
foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of
foreclosure or otherwise, the Lease shall not be terminated or affected thereby
but shall continue in full force and effect as a direct lease (including without
limitation, the right, if any, to extend the lease term or to exercise any right
of first offer) between the Mortgagee and the Tenant upon all of the terms,
covenants and conditions set forth in the Lease and in that event the Tenant
agrees to attorn to the Mortgagee and the Mortgagee agrees to accept such
attornment, provided, however, that the provisions of the Mortgage shall govern
with respect to the disposition of any casualty insurance proceeds or
condemnation awards and the Mortgagee shall not be (i) obligated to complete any
construction work required to be done by the Landlord (as hereinafter defined)
pursuant to the provisions of the Lease or to reimburse the Tenant for any
construction work done by the Tenant, (ii) liable for any accrued obligation of
the Landlord, or for any act or omission of the Landlord, whether prior to or
after such foreclosure or sale, (iii) liable under any indemnity provision of
whatever nature contained in the Lease, including, but not limited to, any
environmental indemnification, (iv) required to make any repairs to the Premises
and/or to the premises demised under the Lease as a result of fire or other
casualty or by reason of condemnation, (v) required to make any capital
improvements to the Premises and/or to the premises demised under the Lease
which the Landlord may have agreed to make, but had not completed, or to perform
or provide any services not
EXHIBIT D - PAGE 2
<PAGE> 45
related to possession or quiet enjoyment of the premises demised under the Lease
which obligations of quiet enjoyment include Landlord's obligation to repair and
maintain the Premises and the Project as more fully set forth in the Lease
arising on or after the Mortgagee becomes the owner of the Project, (vi) subject
to any offsets, claims or counterclaims which shall have accrued to the Tenant
against the Landlord prior to the date on which the Mortgagee or its successor
in interest shall become the owner of the Premises, NO liable for any security
deposit or other monies not actually received by the Mortgagee.
4. The Tenant shall not, without the prior written consent of the
Mortgagee (i) enter into any agreement amending, modifying or terminating the
Lease, (ii) prepay any of the rents, additional rents or other sums due under
the Lease for more than one (1) month in advance of the due date thereof, (iii)
voluntarily surrender the premises demised under the Lease or terminate the
Lease without cause or shorten the term thereof, or (iv) assign the Lease or
sublet the premises demised under the Lease or any part thereof; and any such
amendment, modification, termination, prepayment, voluntary surrender,
assignment or subletting, without the prior written consent of the Mortgagee
shall not be binding on the Mortgagee.
5. The Tenant hereby represents and warrants to the Mortgagee that as of
the date hereof (i) the Tenant is the owner and holder of the Tenant's interest
under the Lease, (ii) the Lease has not been modified or amended, (iii) the
Lease is in full force and effect and the term thereof commenced on _________,
pursuant to the provisions thereof, (iv) the premises demised under the Lease
have been completed and the Tenant has taken possession of the same on a rent
paying basis, (v) neither the Tenant nor the Landlord is in default under any of
the terms, covenants or provisions of the Lease and the Tenant to the best of
its knowledge knows of no event which but for the passage of time or the giving
of notice or both would constitute an event of default by the Tenant or the
Landlord under the Lease, (vi) neither the Tenant nor the Landlord to the best
knowledge of Tenant has commenced any action or given or received any notice for
the purpose of terminating the Lease, (vii) all rents, additional rents and
other sums due and payable under the Lease have been paid in full and no rents,
additional rents or other sums payable under the Lease have been paid for more
than one (1) month in advance of the due dates thereof, and (viii) there are no
offsets or defenses to the payment of the rents, additional rents, or other sums
payable under the Lease
6. The Tenant shall notify the Mortgagee of any default by the Landlord
under the Lease or any other circumstance which would entitle the Tenant to
cancel or terminate the Lease or abate the rents, additional rents or other sums
payable thereunder, and agrees that, notwithstanding any provisions of the Lease
to the contrary, no notice of cancellation, termination or abatement thereof
shall be effective unless the Mortgagee shall have received notice of the
default or other circumstance giving rise to such cancellation, termination or
abatement and shall have failed within forty-five (45) days after receipt of
such notice to cure such default or remedy such circumstance, or if such default
cannot be cured within forty-five (45) days, shall have failed within forty-five
(45) days after receipt of such notice to commence and to thereafter diligently
pursue any action necessary to cure such default or remedy such circumstance, as
the case may be
7. Anything herein or in the Lease to the contrary notwithstanding, in the
event that the Mortgagee shall acquire title to the Building, or shall otherwise
become liable for any obligations of the Landlord under the Lease, the Mortgagee
shall have no obligation, nor incur any liability, beyond the Mortgagee's then
interest, if any, in the Building and the Tenant shall look exclusively to such
interest of the Mortgagee, if any, in the Building for the payment and discharge
of any obligations imposed upon the Mortgagee hereunder or under the Lease and
the Mortgagee is hereby released or relieved of any other liability hereunder
and under the Lease. The Tenant agrees that with respect to any money judgment
which may be obtained or secured by the Tenant against the Mortgagee, the Tenant
shall look solely to the estate or interest owned by the Mortgagee in the
Building and the Tenant will not collect or attempt to collect any such judgment
out of any other assets of the Mortgagee.
8. Any notice, request, demand, statement, authorization, approval or
consent made hereunder shall be in writing and shall be sent by Federal Express,
or other reputable courier service, or by postage pre-paid registered or
certified mail, return receipt requested, and shall be deemed given when
received or refused (as indicated on the receipt) and addressed as follows:
If to the Mortgagee:
The Chase Manhattan Bank
Real Estate Finance Group
380 Madison Avenue
New York, New York 1001 7
Attention:Mr. James M. Reilly, Vice President
EXHIBIT D - PAGE 3
<PAGE> 46
With a copy to:
The Chase Manhattan Bank
Legal Department
270 Park Avenue - 40th Floor
New York, New York 10017
Attention: Michael R. Zients, Esq.
With a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard, Suite 1800
Los Angeles, California 90017
Attention: Joseph P. Heffernan, Esq.
If to the Tenant:
Attention:
With a copy to:
Attention:
It being understood and agreed that each party will use reasonable efforts to
send copies of any notices to the addresses marked "With a copy to" hereinabove
set forth; provided, however, that failure to deliver such copy or copies shall
have no consequence whatsoever to the effectiveness of any notice made to the
Tenant or the Mortgagee. Each party may designate a change of address by notice
given, as hereinabove provided, to the other party, at least fifteen (11 5) days
prior to the date such change of address is to become effective.
9. This Agreement shall be binding upon and inure to the benefit of the
Mortgagee and the Tenant and their respective successors and assigns.
10. The term "Mortgagee" as used herein shall include the successors and
assigns of the Mortgagee and any person, party or entity which shall become the
owner of the Premises by reason of a foreclosure of the Mortgage or the
acceptance of a deed or assignment in lieu of foreclosure or otherwise. The term
"Landlord" as used herein shall mean and include the present landlord under the
Lease and such landlord's predecessors and successors in interest under the
Lease. The term "Premises" as used herein shall mean the Premises, the
improvements now or hereafter located thereon and the estates therein encumbered
by the Mortgage.
11. This Agreement may not be modified in any manner or terminated except
by an instrument in writing executed by the parties hereto.
EXHIBIT D - PAGE 4
<PAGE> 47
12. This Agreement shall be governed by and construed under the laws of
the State in which the Premises are located.
IN WITNESS WHEREOF, the Mortgagee and the Tenant have duly executed this
Agreement as of the date first above written.
THE CHASE MANHATTAN BANK
By:
-----------------------------------
Vice President
(TENANT)
By:
-----------------------------------
Its:
-----------------------------------
EXHIBIT D - PAGE 5
<PAGE> 48
THE CHASE MANHATTAN BANK ACKNOWLEDGEMENT
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On __________________, before me, ___________________, a Notary Public,
personally appeared _______________________, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signatures) on the instrument the person(s), or the entity
upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ---------------------------------
Notary Public
TENANT ACKNOWLEDGEMENT
STATE OF CALIFORNIA )
) ss:
COUNTY OF )
On _____________________, before me, ________________________, a Notary Public,
personally appeared ______________________, personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signatures on the instrument the person(s), or the entity
upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
- ---------------------------------
Notary Public
EXHIBIT D - PAGE 6
<PAGE> 49
EXHIBIT D-1
SUBORDINATION OF DEED OF TRUST
_________________________________________________________________________
(hereinafter called "Lender") as owner and holder of a certain promissory note
dated ____________ in the principal sum of ____________________ Dollars
($__________) and a Deed of Trust dated of even date therewith securing said
Note, now a first lien upon the premises more particularly demised and described
in those certain leases by and between , as Landlord, and the persons named
(whose agreement hereto is evidenced by unrecorded agreements in the possession
of Landlord and Lender) in Exhibit A attached hereto and made a part hereof, as
Tenant, and upon other property, in consideration of such leasing and of the sum
of One Dollar ($1.00) and other good and valuable consideration, receipt of
which is hereby acknowledged,
DOES hereby covenant and agree that the said Deed of Trust shall be, and
the same is hereby made, SUBJECT AND SUBORDINATE to said leases with the same
force and effect as if the said leases had been executed, delivered and recorded
prior to the execution, delivery and recording of said Deed of Trust, without
regard to the date on which said leases had been executed, delivered and
recorded in relation to the date on which said Deed of Trust has become an
effective lien by the terms therein demised;
EXCEPT, HOWEVER, that this Subordination shall not affect or be applicable
to and does hereby expressly exclude:
(a) The prior right, claim and lien of the said Deed of Trust in, to and
upon any award or other compensation heretofore or hereafter to be
made for any taking by eminent domain of any part of said premises,
and to the right of disposition thereof in accordance with the
provisions of said Deed of Trust,
(b) The prior right, claim and lien of the said Deed of Trust in, to and
upon any proceeds payable under all policies of fire and rent
insurance upon the said premises and as to the right of disposition
thereof in accordance with the terms of said Deed of Trust, and
(c) Any lien, right, power or interest, if any which may have arisen or
intervened in the period between the recording of the said Deed of
Trust and the execution of the said leases, or any lien or judgment
which may arise at any time under the terms of such leases.
The subordination shall inure to the benefit of and shall be binding upon the
undersigned, its successors and assigns.
IN WITNESS WHEREOF, this Subordination has been duly signed and delivered
by the undersigned this _________ day of _______________, 19___.
"LENDER":
EXHIBIT D-1 - PAGE 1
<PAGE> 50
EXHIBIT E
ESTOPPEL STATEMENT
TENANT ESTOPPEL CERTIFICATE
The Chase Manhattan Bank
380 Madison Avenue
New York, New York 1001 7-2591
Attention: Mr. James M. Reilly Vice President
Re: Tenant Lease for
Santa Monica, California; Suite No
Ladies and Gentlemen:
We understand that you are the proposed lender to Spieker Properties,
L.P., the owner of the Santa Monica Office Park, located in Santa Monica,
California (the "Property") in which the undersigned is a tenant of the suites
referred to above. We further. understand that in connection with the loan it is
necessary that you understand the precise nature of our tenancy and in order to
so do, we hereby warrant and represent to you that, with respect to our lease,
as amended (as amended, the "Lease"), attached as Exhibit 1 and more
particularly described in the attached Schedule "A" which is hereby incorporated
(the "Schedule").
1. The Lease constitutes the entire agreement between the undersigned and
the landlord thereunder with respect to the subject matter thereof and the Lease
has not been modified, amended or supplemented in any way except by the
amendments or other agreements described in the Schedule.
2. The summary of the terms of the Lease contained in. the Schedule is
true and correct.
3. Except as provided in the Schedule, the undersigned has not assigned or
entered into a sublease for any portion of the Premises covered by the Lease and
no person or firm other than the undersigned or its employees is in possession
of such Premises or any portion thereof.
4. The undersigned is not in default (or with the giving of notice or the
passage of time, or both, will not be in default) under the Lease and the
undersigned has no current claim against, off-set, credit, defense, counterclaim
or deductions against the landlord thereunder, and to the undersigned's best
knowledge the landlord is not in default (or with the giving of notice or the
passage of time, or both, will not be in default) under the Lease and has
fulfilled all obligations with respect thereto as of the date hereof.
5. The undersigned is not a party to, and to the undersigneds best
knowledge, Tenant, its agents, contractors and invitees have not used, stored or
disposed of any hazardous or toxic wastes or substances in, on or under, or in
the vicinity of the Premises demised by the Lease except for normal and
customary off ice supplies there are no agreements for any rent concessions
which have not expired or brokerage commissions or improvement allowances which
have not been paid, relating to the Lease or the Premises for which the landlord
thereunder may be responsible.
6. The undersigned has no option, right of first refusal or otherwise to
purchase the Property or any portion thereof, or any interest therein pursuant
to the terms of the Lease or contained in any other document or agreement
(written or oral) whatsoever. The only interest of the undersigned in the
Property is that of a tenant pursuant to the terms of the Lease, as set forth in
Schedule A. The undersigned hereby waives any option, right of first refusal or
otherwise to purchase the Property or any portion thereof or interest therein
that is contained in the Lease, if any.
7. The undersigned does not engage in the generation, storage or disposal
of hazardous or toxic wastes or substances on the Property and to the best of
the undersigned's knowledge, there are no hazardous or toxic wastes or
substances located in, on, under or in the vicinity of the Premises demised by
the Lease except for normal and customary office supplies.
8. The undersigned is not the subject of any bankruptcy, insolvency,
debtor's relief, reorganization, receivership or other similar proceedings.
EXHIBIT E - PAGE 1
<PAGE> 51
9. The person(s) executing this Certificate hereby warrants and represents
that he or she has the power and authority to execute and deliver this
Certificate on behalf of the tenant named herein.
10. Tenant hereby ratifies and confirms the Lease and the tenancy created
pursuant to the terms thereof.
11. All required contributions by Lessor to Lessee on account of Lessee's
improvements have been received.
We understand that you will be securing the loan with a deed of trust of
the Property and an assignment of leases of the Property, including the Lease,
and the statements made in this Estoppel Certificate may be relied upon by you
in connection with your making of the loan.
Very truly yours,
By
-------------------------------------
Its
-------------------------------------
-----------------------------------------
Date
EXHIBIT E - PAGE 2
<PAGE> 52
SCHEDULE "A"
SUMMARY OF LEASE TERMS
<TABLE>
<S> <C> <C>
(1) Name of Tenant:
(2) Lease Date:
(3) Amendment Dates:
(4) Separate Agreements:
(5) Suite Nos.:
(6) Square Footage:
(7) Lease Commencement Date:
Expiration Date of Term:
(8) Monthly Base Rent
as of December 1, 1996: $
Monthly CAM Charges
as of December 1, 1996: $
Total Monthly Rent
as of December 1, 1996: $
(9) Tenant's Percentage Share
of Operating Costs:
(10) Base Year:
(11) Security Deposit:
(12) Prepaid Rent if
Still Unapplied:
(13) Assignees/Subtenants:
(14) Lease Guarantor(s):
(15) Free Rent Months
remaining:
</TABLE>
By
-----------------------
Date
-----------------------
EXHIBIT E - PAGE 3
<PAGE> 53
EXHIBIT 1
(Copy of Lease)
EXHIBIT E - PAGE 4
<PAGE> 54
EXHIBIT F
BUILDING RULES AND REGULATIONS
The following rules and regulations shall be applicable to the Building:
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed, or printed or affixed on or to any part of the Building or
Premises if visible from outside the Premises, without the prior written consent
of Landlord. Tenant's identification signs and lettering shall be in accordance
with Landlord's standard requirements for the Building unless otherwise approved
in writing by Landlord, and shall be printed, painted, affixed, or inscribed at
the expense of Tenant by a person approved by Landlord.
2.Tenant shall not place or maintain any window covering, blinds or drapes
on any window without Landlord's prior written approval. A breach of this rule
will directly and adversely affect the exterior appearance of the Building. Upon
request by Landlord, Tenant shall remove any window covering, or any other item
visible from outside the Premises, if installed or placed without Landlord's
written approval.
3. A directory of the Building will be provided for the display of the
name and location of tenants. Landlord will install at Tenant's expense
directory strips for Tenant's name and a reasonable number of the principal
employees thereof, and Landlord reserves the right to exclude any other names
therefrom.
4. The sidewalks, halls, passages, exits, entrances, elevators,
escalators, and stairways shall not be obstructed by Tenant or used by it for
any purpose other than for ingress to and egress from the Premises. The halls,
passages, exits, entrances, elevators, escalators, stairways, balconies and roof
are not for the use of the general public and Landlord shall in all cases retain
the right to control and prevent access thereto by all persons whose presence in
the judgment of the Landlord might be prejudicial to the safety, character,
reputation and interests of the Building and its tenants, provided that nothing
herein contained shall be construed so as to prevent such access to persons with
whom Tenant normally deals in the ordinary course of Tenant's business unless
such persons are engaged in illegal activities or are creating a nuisance. No
employee, invitee, contractor or agent of Tenant shall go upon the roof of the
Building.
5. Tenant shall be responsible for assuring that doors to the Premises are
locked during non-business hours. Such doors shall not be left open during
business hours, except while moving furniture or other items in or out of the
Premises, unless Landlord consents otherwise.
6. The toilet rooms and urinals, wash bowls and other apparatus therein
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be placed
therein; the expense of breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees,
invitees, contractors or agents, shall have caused it.
7. Except as to normal pictures and furnishings, Tenant shall not mark,
drive nails, screw or drill into partitions, woodwork or plaster or in any way
deface the Premises or any part thereof. No boring, cutting or stringing of
wires shall be permitted except with the prior written consent of Landlord and
as Landlord may direct. Tenant shall not lay linoleum, tile, carpet or other
similar floor covering so that the same shall be affixed to the floor of the
Premises in any manner except as approved by Landlord. The expense of repairing
any damage resulting from a violation of this rule or removal of any floor
covering shall be borne by Tenant.
8. Tenant shall not overload any floor of the Premises or the Building. No
furniture, freight or equipment of any kind shall be brought into the Building
by Tenant or its contractors or agents without prior consent of Landlord and all
moving of the same into or out of the Building shall be done at such time and in
such manner as Landlord shall designate. Landlord shall have the right to
prescribe the weight, size and position of all safes and other heavy objects
brought into the Building and also the time and manner of moving the same in and
out of the Building. Safes and other heavy objects shall, if considered
necessary by Landlord, stand on wood strips of such thickness as is necessary to
properly distribute weight. Landlord will not be responsible for loss or damage
to any property from any such cause, and all damage done to the Building by
moving or maintaining any such safe or other property shall be repaired at the
expense of Tenant. There shall not be used in any part of the Building any hand
truck unless it is equipped with rubber tires and side guards.
9. Tenant shall not employ any person or persons other than the janitor of
Landlord for the purpose of cleaning the Premises unless otherwise agreed to in
writing by Landlord. Except with the prior written consent of Landlord, no
person or persons other than those approved by Landlord shall
EXHIBIT F - PAGE 1
<PAGE> 55
be permitted to enter the Building for the purpose of cleaning same. Tenant
shall not cause any unnecessary labor by reason of Tenant's carelessness or
indifference in the preservation of good order and cleanliness. Landlord shall
in no way be responsible to Tenant for any loss of property on the Premises,
however occurring, or for any damage done, to the effects of Tenant or any of
its employees or other persons by the janitor of Landlord. Janitor service shall
include ordinary dusting and cleaning by the janitor assigned to such work and
shall not include clearing of carpets or rugs, except normal vacuuming, or
moving of furniture and other special services. Janitor service will not be
furnished to rooms which are occupied after 9:30 p.m. Window cleaning shall be
done only by Landlord at reasonable intervals and as Landlord deems necessary.
10. Tenant shall not use, keep or permit to be used or kept any noxious
gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business therein. No
tenant shall make or permit to be made any loud or disturbing noises or disturb
or interfere with occupants of the Building or those having business with them
whether by the use of any musical instrument, radio, phonograph, shouting or in
any other manner. Tenant shall not throw anything out of doors or down the
passageways.
11. The Premises shall not be used for the storage of merchandise except
as such storage may be incidental to the use of the Premises authorized by the
Lease. No cooking shall be done or permitted in the Premises without Landlord's
consent, except that use by Tenant of Underwriter's Laboratory approved
microwave ovens or equipment for brewing coffee or similar beverages shall be
permitted. Tenant shall not advertise for day laborers giving an address at the
Premises. The Premises shall not be used for lodging or for any illegal
purposes. Tenant shall not keep or maintain pets or animals of any type and
shall not store or keep bicycles, mopeds or motorcycles in the Premises or the
Building.
12. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline or flammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied or permitted by
Landlord.
13. Landlord will direct electricians as to where and how electrical,
telephone and telegraph wires are to be introduced to the Premises. No boring or
cutting for wires will be allowed without the prior consent of Landlord. The
location of telephone switching equipment, call boxes and other similar
equipment in the Premises shall be subject to the approval of Landlord.
14. Landlord will furnish Tenant free of charge two (2) keys for each
locking door in the Premises. Any additional or replacement keys will be
furnished at a reasonable charge All keys to offices, rooms. and toilet rooms
shall be obtained from Landlord and Tenant shall not duplicate or obtain such
keys from any other source Upon termination of the Lease, Tenant shall deliver
to Landlord the keys to the offices, rooms and toilet rooms which were
previously furnished to Tenant, failing which Tenant shall pay Landlord the cost
of replacing same or of changing the lock or locks opened by any unreturned key
if Landlord deems it necessary to make such changes. Landlord shall have the
right periodically to change all locks and furnish Tenant with new keys
therefor. Tenant shall not alter any lock or install any new or additional locks
or any bolts on any door of the Premises without the prior written consent of
Landlord (except as to safes, vaults and other secured areas of Tenant approved
by Landlord).
15. No furniture, packages, supplies, equipment or merchandise will be
received in the Building or carried up or down in the elevators, except between
such hours and in such elevators as shall be designated by Landlord.
16. Landlord reserves the right to close and keep locked all entrances and
exit doors of the Building on Saturdays, Sundays, legal holidays and on other
days between non-business hours, and during such further hours as Landlord may
deem advisable for the adequate protection of the Building and the property of
its tenants (such hours are referred to as "After-Hours"). However, during such
After-Hours Tenant and/or authorized employees as well as guests, licensees or
invitees of Tenant who are accompanied by Tenant or an authorized employee of
Tenant, shall be allowed access to the Building upon proper identification.
Landlord shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of same.
17. The "normal business hours" for the Building are from 7:00 a.m. to
6:00 p.m. Monday through Friday, excluding nationally recognized standard
holidays. All other hours are deemed "After-Hours".
18. Tenant shall not canvass or solicit other tenants in the Building and
Tenant shall cooperate to prevent any such canvassing and/or solicitation.
Canvassing and peddling in the Building is prohibited. Tenant shall not obtain
for use in the Premises food, beverage, shoe-shine or other services except as
expressly permitted by Landlord.
EXHIBIT F - PAGE 2
<PAGE> 56
19. Landlord reserves the right to exclude or expel from the Building
any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, has no legitimate purpose to be in the Building,
or is violating the rules and regulations of the Building.
20. The requirements of Tenant will be attended to only upon application
to Landlord's designated property manager. Tenant acknowledges that employees of
Landlord shall have no obligation to perform work for Tenant or do anything
outside their regular duties for Tenant unless under special instructions from
Landlord, and that no employee will have any obligation to admit any person
(Tenant or otherwise) to any office of Landlord without specific instructions
from Landlord.
21. No vending machines of any description shall be installed,
maintained, or operated by Tenant upon the Premises or in the Building, without
the prior written consent of Landlord.
22. Tenant agrees that it shall comply with all fire and security
regulations that may be issued from time to time by Landlord, and Tenant shall
also provide Landlord with the name of a designated responsible employee to
represent Tenant in all matters pertaining to such fire or security regulations.
23. Tenant shall not install any radio or television antenna,
loudspeaker or other device on the roof or exterior walls of the Building.
Tenant shall not interfere with broadcasting or reception from or in the
Building or elsewhere.
24. Tenant shall store its trash and garbage within the Premises or in
other facilities designated by Landlord. Tenant shall not place in any trash
receptacle any material which cannot be disposed of in the ordinary practice of
trash disposal. All trash and garbage disposal shall be made pursuant to
directions issued from time to time by Landlord.
25. Landlord may waive any one or more of the rules and regulations as
to any tenant without being construed as having waived same as to any other
tenant.
26. Tenant shall be responsible for the observance of the rules and
regulations by Tenant's employees, agents, customers, invitees and guests.
27. Landlord reserves the right upon written notice to Tenant, to
rescind, alter or waive any rule or regulation at any time prescribed for the
Building, or to establish additional rules and regulations when, in Landlord's
sole judgment, it is necessary, desirable or proper for the best interest of the
Building and its tenants.
28. The rules and regulations shall be administered fairly by Landlord
and Landlord shall not enforce them in a discriminatory manner as between the
tenants of the Building.
EXHIBIT F - PAGE 3
<PAGE> 57
EXHIBIT G
Exhibit G has been intentionally omitted.
EXHIBIT G - PAGE 1
<PAGE> 58
EXHIBIT H
Exhibit H has been intentionally omitted.
EXHIBIT H - PAGE 1
<PAGE> 59
SUBORDINATION OF LEASE
================================================================================
THE CHASE MANHATTAN BANK
AND
ISOCOR
--------------------------
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
--------------------------
Dated:
Location: Santa Monica, California
================================================================================
1
<PAGE> 60
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
(Lease)
THIS AGREEMENT made the ___ day of _________, between THE CHASE MANHATTAN
BANK, a New York banking corporation having an office at 380 Madison Avenue, New
York, New York 1001 7- 2591 (the "MORTGAGEE"), and ISOCOR, a California
corporation, having an office at 3420 Ocean Park Boulevard, Suite 2010, Santa
Monica, California 90405 (the "TENANT");
WITNESSETH:
WHEREAS the Mortgagee is the present owner and holder of a certain
mortgage or mortgages (the "MORTGAGE") encumbering the premises located in the
County of Los Angeles, City of Santa Monica and State of California, known as
Suite No. 2010, 3420 Ocean Park Boulevard (the "Premises");
WHEREAS the Tenant is the holder of a leasehold estate in a portion of
the Premises under and pursuant to the provisions of a certain lease dated
________________ with Spieker Properties, L.P., as landlord (the "LEASE"); and
[INITIAL HERE]
WHEREAS the Tenant has agreed to subordinate the Lease to the Mortgage
and to the lien thereof and the Mortgagee has agreed to grant non-disturbance to
the Tenant under the Lease on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of Ten ($10) Dollars and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Mortgagee and the Tenant hereby covenant and agree as follows:
1 . The Tenant agrees that the Lease and all of the terms, covenants and
provisions thereof and all rights, remedies and options of the Tenant thereunder
are and shall at all times continue to be subject and subordinate in all
respects to the Mortgage and all of the terms, covenants and provisions thereof
and to the lien thereof and to any and all increases, renewals, modifications,
spreaders, consolidations, replacements and extensions thereof, and to any and
all sums, secured thereby, with the same force and effect as if the Mortgage had
been executed, delivered and recorded prior to the execution and delivery of the
Lease.
2. The Mortgagee agrees that if any action or proceeding is commenced by
the Mortgagee to foreclose the Mortgage or to sell the Premises, the Tenant
shall not be named as a party in any such action nor shall the Tenant be named a
party in connection with any sale of the Premises, provided that at the time of
the commencement of any such action or proceeding or at the time of any such
sale (i) the term of the Lease shall have commenced pursuant to the provisions
thereof, (ii) the Tenant shall be in possession of the premises demised under
the Lease, subject to any subleases previously approved by Mortgagee, (iii) the
Lease shall be in full force and effect, and (iv) the Tenant shall not be in
default under any of the terms, covenants or conditions of the Lease or of this
Agreement on the part of the Tenant to be observed or performed thereunder or
hereunder beyond any applicable cure periods set forth in the Lease, unless
applicable law requires the Tenant to be made a party thereto as a condition to
proceeding against the Landlord or protecting such rights and remedies. In the
latter case, the Mortgagee may join the Tenant as a defendant in such action
only for such purposes and not to terminate the Lease
3. The Tenant agrees that if the Mortgagee or any successors in interest
to the Mortgagee shall become the owner of the Premises by reason of the
foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of
foreclosure or otherwise, the Lease shall not be terminated or affected thereby
but shall continue in full force and effect as a direct lease (including without
limitation, the right, if any, to extend the lease term or to exercise any right
of first offer) between the Mortgagee and the Tenant upon all of the terms,
covenants and conditions set forth in the Lease and in that event the Tenant
agrees to attorn to the Mortgagee and the Mortgagee agrees to accept such
attornment, provided, however, that the provisions of the Mortgage shall govern
with respect to the disposition of any casualty insurance proceeds or
condemnation awards and the Mortgagee shall not be (i) obligated to complete any
construction work required to be done by the Landlord (as hereinafter defined)
pursuant to the provisions of the Lease or to reimburse the Tenant for any
construction work done by the Tenant, (ii) liable for any accrued obligation of
the Landlord, or for any act or omission of the Landlord, whether prior to or
after such foreclosure or sale, (iii) liable under any indemnity provision of
whatever nature contained in the Lease, including, but not limited to, any
environmental indemnification, (iv) required to make any repairs to the Premises
and/or to the premises demised under the Lease as a result of fire or other
casualty or by reason of condemnation, (v) required to make any capital
improvements to the Premises and/or to the premises demised under the Lease
which the Landlord may have agreed to make, but had not completed, or to perform
or provide any services not
2
<PAGE> 61
related to possession or quiet enjoyment of the premises demised under the Lease
which obligations of quiet enjoyment include Landlord's obligation to repair and
maintain the Premises and the Project as more fully set forth in the Lease
arising on or after the Mortgagee becomes the owner of the Project, (vi) subject
to any offsets, claims or counterclaims which shall have accrued to the Tenant
against the Landlord prior to the date on which the Mortgagee or its successor
in interest shall become the owner of the Premises, (vii) liable for any
security deposit or other monies not actually received by the Mortgagee.
4. The Tenant shall not, without the prior written consent of the
Mortgagee (i) enter into any agreement amending, modifying or terminating the
Lease, (ii) prepay any of the rents, additional rents or other sums due under
the Lease for more than one (1) month in advance of the due date thereof, (iii)
voluntarily surrender the premises demised under the Lease or terminate the
Lease without cause or shorten the term thereof, or (iv) assign the Lease or
sublet the premises demised under the Lease or any part thereof; and any such
amendment, modification, termination, prepayment, voluntary surrender,
assignment or subletting, without the prior written consent of the Mortgagee
shall not be binding on the Mortgagee.
5. The Tenant hereby represents and warrants to the Mortgagee that as of
the date hereof (i) the Tenant is the owner and holder of the tenant's interest
under the Lease % (ii) the Lease has not been modified or amended, (iii) the
Lease is in full force and effect and the term thereof commenced on
_______________ , pursuant to the provisions thereof, (iv) the premises' demised
under the Lease have been completed and the Tenant has taken possession of the
same on a rent paying basis, M neither the Tenant nor the Landlord is in default
under any of the terms, covenants or provisions of the Lease and the Tenant to
the best of its knowledge knows of no event which but for the passage of time or
the giving of notice or both would constitute an event of default by the Tenant
or the Landlord under the Lease, (vi) neither the Tenant nor the Landlord to the
best knowledge of Tenant has commenced any action or given or received any
notice for the purpose of terminating the Lease, (vii) all rents, additional
rents and other sums due and payable under the Lease have been paid in full and
no rents, additional rents or other sums payable under the Lease have been paid
for more than one (1) month in advance of the due dates thereof, and (viii)
there are no offsets or defenses to the payment of the rents, additional rents,
or other sums payable under the Lease.
[INITIAL HERE]
6. The Tenant shall notify the Mortgagee of any default by the Landlord
under the Lease or any other circumstance which would entitle the Tenant to
cancel or terminate the Lease or abate the rents, additional rents or other sums
payable thereunder, and agrees that, notwithstanding any provisions of the Lease
to the contrary, no notice of cancellation, termination or abatement thereof
shall be effective unless the Mortgagee shall have received notice of the
default or other circumstance giving rise to such cancellation, termination or
abatement and shall have failed within forty-five (45) days after receipt of
such notice to cure such default or remedy such circumstance, or if such default
cannot be cured within forty-five (45) days, shall have failed within forty-five
(45) days after receipt of such notice to commence and to thereafter diligently
pursue any action necessary to cure such default or remedy such circumstances as
the case may be.
7. Anything herein or in the Lease to the contrary notwithstanding, in
the event that the Mortgagee shall acquire title to the Building, or shall
otherwise become liable for any obligations of the Landlord under the Lease, the
Mortgagee shall have no obligation, nor incur any liability, beyond the
Mortgagee's then interest, if any, in the Building and the Tenant shall look
exclusively to such interest of the Mortgagee, if any, in the Building for the
payment and discharge of any obligations imposed upon the Mortgagee hereunder or
under the Lease and the Mortgages is hereby released or relieved of any other
liability hereunder and under the Lease. The Tenant agrees that with respect to
any money judgment which may be obtained or secured by the Tenant against the
Mortgagee, the Tenant shall look solely to the estate or interest owned by the
Mortgagee in the Building and the Tenant will not collect or attempt to collect
any such judgment out of any other assets of the Mortgagee.
8. Any notice, request, demand, statement, authorization, approval or
consent made hereunder shall be in writing and shall be sent by Federal Express,
or other reputable courier service, or by postage pre-paid registered or
certified mail, return receipt requested, and shall be deemed given when
received or refused (as indicated on the receipt) and addressed as follows:
If to the Mortgagee:
The Chase Manhattan Bank
Real Estate Finance Group
380 Madison Avenue
New York, New York 1001 7
Attention: Mr. James M. Reilly, Vice President
3
<PAGE> 62
With a copy to:
The Chase Manhattan Bank
Legal Department
270 Park Avenue - 40th Floor
New York, New York 10017
Attention: Michael R. Zients, Esq.
With a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard, Suite 1800
Los Angeles, California 90017
Attention: Joseph P. Heffernan, Esq.
If to the Tenant:
Isocor
3420 Ocean Park Boulevard, Suite 2010
Santa Monica, California 90405
Attention: Ms. Janine Bushman
- -------------------
It being understood and agreed that each party will use reasonable efforts to
send copies of any notices to the addresses marked "With a copy to" hereinabove
set forth; provided, however, that failure to deliver such copy or copies shall
have no consequence whatsoever to the effectiveness of any notice made to the
Tenant or the Mortgagee. Each party may designate a change of address by notice
given, as hereinabove provided, to the other party, at least fifteen (11 5) days
prior to the date such change of address is to become effective.
9. This Agreement shall be binding upon and inure to the benefit of the
Mortgagee and the Tenant and their respective successors and assigns.
10. The term 'Mortgagee' as used herein shall include the successors and
assigns of the Mortgagee and any person, party or entity which shall become the
owner of the Premises by reason of a foreclosure of the Mortgage or the
acceptance of a deed or assignment in lieu of foreclosure or otherwise The term
'Landlord' as used herein shall mean and include the present landlord under the
Lease and such landlord's predecessors and successors in interest under the
Lease. The term "Premises' as used herein shall mean the Premises, the
improvements now or hereafter located thereon and the estates therein encumbered
by the Mortgage.
11. This Agreement may not be modified in any manner or terminated
except by an instrument in writing executed by the parties hereto.
4
<PAGE> 63
1 2. This Agreement shall be governed by and construed under the laws of
the State in which the Premises are located.
IN WITNESS WHEREOF, the Mortgagee and the Tenant have duly executed this
Agreement as of the date first above written.
THE CHASE MANHATTAN BANK
By:
Vice President
(TENANT)
ISOCOR
a California corporation
By: /s/ JANINE BUSHMAN
-------------------------------
Janine Bushman
Vice President, Finance and
Administration/ Chief Financial
Officer
5
<PAGE> 64
THE CHASE MANHATTAN BANK ACKNOWLEDGEMENT
STATE OF NEW YORK )
)Ss:
COUNTY OF NEW YORK )
On _______________, before me ________________, a Notary Public, personally
appeared ___________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
------------------------------
Notary Public
TENANT ACKNOWLEDGEMENT
----------------------
STATE OF CALIFORNIA )
)Ss:
COUNTY OF LOS ANGELES )
On February 11, 1998 before me, DONNA WEBB a NOTARY Public, personally appeared
Janine Bushman, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) WHOSE name(s) is/are SUBSCRIBED TO
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
DONNA WEBB
[SEAL] COMM. # 1048278
NOTARY PUBLIC - CALIFORNIA
/s/ DONNA WEBB LOS ANGELES COUNTY
----------------------
Notary Public MY COMM. EXPIRES DEC 29.1998
6
<PAGE> 65
PARKING LICENSE AGREEMENT
SPIEKER PROPERTIES, L.P., a California limited partnership ("Licensor"),
hereby grants to ISOCOR, a California corporation ("Licensee"), the right and
license to use parking spaces in Santa Monica Business Park (the "Project"), as
described below and subject to the following conditions:
1. TYPE AND NUMBER OF PARKING SPACES. Licensee shall have the right to
use up to 60 unassigned automobile parking spaces. If the area of Licensee's
Premises in the Project is reduced, Licensee's allotment of parking spaces will
be adjusted proportionately. If the area of Licensee's Premises is increased,
Licensee may, at its option, increase the number of its allotted parking spaces
proportionately. Notwithstanding the preceding, Licensee shall have no right to
use any number of parking spaces in excess of the number of employees of
Licensee actually employed at the Premises.
2. MONTHLY FEE. Licensee shall pay for the right and license granted
hereby the prevailing rates charged for such spaces by Licensor from time to
time plus applicable taxes thereon ("market rate"). Such sums shall be payable
in advance on the first day of each calendar month. Licensor shall have no
obligation to accept any such payment from anyone other than Licensee (e.g.
Licensee's employees, subtenants, etc.). If Licensee fails to make any such
payment when due, Licensor, at its option and after five (5) days' notice to
Licensee, may forthwith terminate this license and all rights of Licensee
hereunder. Any late payment of the monthly fee will result in additional
administrative and processing costs being incurred by Licensor, the exact amount
of which would be extremely difficult to determine, and it is agreed that with
respect thereto a late fee of Ten Dollars ($10.00) per space is a reasonable
estimate thereof and will be payable by Licensee with regard to any monthly fee
not paid when due.
3. TERM. Licensee shall be entitled to the foregoing parking rights and
obligations for a period equivalent to the term of that certain "Lease" of
Premises in the Project entered into by Licensor and Licensee. Licensee's rights
to any and all parking spaces shall automatically be revoked and shall terminate
upon any material default hereunder, or any expiration or termination of said
Lease, as well as upon any assignment of such Lease or sublease of such
Premises, in violation of the terms of such Lease. Licensee must exercise its
rights under this Agreement by delivering all required security deposits and the
initial monthly fee for the parking spaces described above within thirty (30)
days after the "Commencement Date" of the aforementioned Lease (as defined
herein) unless otherwise agreed by Licensor. Failure of Licensee to so exercise
its rights will entitle Licensor without notice to transfer to others Licensee's
rights to park in any and all parking spaces as to which Licensee has not so
exercised its rights hereunder, and Licensee will be deemed to have waived its
rights hereunder with regard thereto.
4. LOCATION OF PARKING SPACES. Licensor shall have the right in its sole
discretion to designate the particular location of said parking space(s), which
designation is subject to change from time to time.
5. RIGHTS NON-TRANSFERRABLE. The foregoing parking rights are personal
to Licensee and Licensee shall not assign, convey, or otherwise transfer said
rights in any manner whatsoever without Licensor's prior written consent. Any
attempt by Licensee to do so shall be null and void and, at Licensor's election,
shall constitute a material default hereunder. If the Premises or any portion
thereof is assigned or sublet pursuant to the terms of the Lease, the number of
parking spaces allotted to Licensee under paragraph 1 hereof shall automatically
be adjusted accordingly and Licensor and Licensee shall immediately execute an
amendment to this Agreement setting forth (i) the number of spaces retained by
Licensee, (ii) the number of spaces allotted to Licensee's assignee or subtenant
(which number shall not exceed the amount stated in paragraph 1 above), (iii)
the then current "market rate" to be charged Licensee for the spaces allotted to
its assignee or subtenant, and (iv) the security deposit to be paid by Licensee
for its assignee's or subtenant's parking cards.
6. LICENSEE INDEMNIFICATION. Use of said parking spaces and of the
parking areas in the Project shall be at the sole risk of Licensee. Unless
caused by the negligence or wrongful acts of Licensor, its agents or employees,
Licensee hereby agrees to defend, indemnify and hold Licensor harmless against
any liability, loss, cost or expense (including reasonable attorneys' fees) for
any damage to or loss or theft of any vehicle or property within any vehicle or
any other property (including property of Licensee), or injury to or death of
any person (including Licensee and Licensee's family, agents, employees,
visitors or customers), arising directly or indirectly out of or in connection
with the use by Licensee or such other persons of the parking areas or any part
thereof.
7. INTERRUPTION OF USE. Licensor shall not be liable to Licensee for any
interruption of Licensee's use of the rights granted hereunder due to repairs,
improvements or alterations of the parking areas or the Project, or due to any
labor controversy, or resulting from any cause beyond the reasonable control of
Licensor. However, Licensee shall be entitled to an abatement of the monthly fee
with regard to any assigned parking space to the extent it is prevented from
using such space and no reasonably similar alternative space is made available
to it by Licensor.
PARKING LICENSE AGREEMENT
PAGE 1
<PAGE> 66
8. RULES AND REGULATIONS. Licensor's parking rules and regulations are
attached hereto. Licensor may adopt such other rules and regulations relating to
the use of the parking areas as in Licensor's opinion are necessary or desirable
for the proper, orderly and safe use of the parking areas. If Licensee fails to
comply with the rules and regulations and modifications thereto after receiving
notice thereof, Licensor may at its option forthwith terminate this license and
all rights of Licensee hereunder, and may also, whether or not such license is
so terminated, take such action as shall be required to remedy such failure,
and Licensee agrees to pay Licensor on demand the reasonable cost to Licensor
of such actions including attorneys' fees. Licensee shall at all times be
required to park in a lawful manner, and no vehicle shall at any time be parked
in more than one marked space at a time. Licensor shall be entitled to tow away
any vehicle which is improperly parked, at the vehicle owner's sole cost and
expense. In the event of such tow away, neither Licensor nor any Mortgagee of
Licensor shall have any liability therefor to Licensee or to such vehicle owner.
9.LICENSOR'S PROPERTY RIGHTS. Licensor shall have the right to decrease
the size of any or all of the parking areas in the Project, to alter or
rearrange parking spaces and improvements in the parking areas, to take all or
any portion of the parking areas for purposes of maintaining, repairing or
restoring same, or for purposes of construction and operating structures thereon
or adjacent thereto, to have ingress and egress in connection with the exercise
of any such rights, and to do and perform such other acts with respect to the
parking areas as Licensor shall in its discretion deem appropriate. Licensor may
at any time and from time to time in its discretion designate any portion of the
parking areas in the Project for use as assigned parking, visitor parking or
employee parking. If Licensor establishes an employee parking' area or other
assigned parking area for Licensee's employees to park in, Licensee shall
furnish Licensor, within five (5) days after written request to do so, with a
list of the vehicle license numbers of Licensee's employees parking in the
Project. Licensor may charge Licensee Ten Dollars ($10.00) per day for each day
or partial day for each vehicle parked by Licensee or any of its employees in a
parking space or area other than the space or parking area assigned or
designated for such vehicle. Licensor may tow away any such improperly parked
vehicles and may also attach violation notices or stickers to improperly parked
vehicles. In the event of such tow away, neither Licensor nor any Mortgagee of
Licensor shall have any liability therefor to Licensee or to such vehicle owner.
10. SECURITY DEPOSIT. If parking is in a controlled lot, a monthly
parking card or decal may be issued to Licensee for each parking space to be
used by Licensee hereunder. Licensee will pay a security deposit for each
parking card at the time of issuance of the card. Licensor shall have no
obligation to accept any such security deposit from anyone other than Licensee,
The security deposit shall be held by Licensor to secure Licensee's due
performance of its obligations with regard to parking hereunder and the return
to Licensor of such parking card(s) in good condition, normal wear and tear
excepted, upon termination of Licensee's rights hereunder. Licensee shall be
obligated to take reasonable steps to protect such cards from warping or
mutilation. Without limitation as to the generality of the foregoing, Licensor
may apply such security deposit to remedy any default by Licensee hereunder and
further, if such card(s) are lost or mutilated, Licensor may apply any or all of
said deposit toward Licensor's cost of such card(s). If at any time Licensor
applies any or all of such security deposit as provided herein, Licensee shall
be obligated to deposit with Licensor the amount so applied by Licensor within
ten (1 0) days after written request therefor is given. Upon termination of
Licensee's rights hereunder and the return to Licensor of the aforementioned
card(s) (or cards issued in substitution thereof) the security deposit or
balance thereof shall be returned to Licensee provided Licensee is not then in
default hereunder. Licensor need not hold said security deposit in a separate
account.
11. REPLACEMENT CARDS. If for any reason (other than a malfunction for
which Licensee is not responsible hereunder) any card issued to Licensee is
requested by Licensee to be replaced, Licensee shall pay Licensor the then
current non-refundable charge for said replacement card.
PARKING LICENSE AGREEMENT
PAGE 2
<PAGE> 67
12. MISCELLANEOUS. No waiver by Licensor of any breach of this agreement
by Licensee shall constitute a waiver of any other breach. Any amount due to
Licensor that is not paid when due shall bear interest at the maximum rate
allowable under law. In the event of any legal action taken or proceeding
brought to enforce the provisions hereof, the prevailing party shall be entitled
to recover its reasonable attorneys' fees and costs incurred in connection
therewith.
DATED this ___________ day of _____________________________________1998.
LICENSOR: SPIEKER PROPERTIES, L.R,
a California limited partnership
By: Spieker Properties, Inc.,
a Maryland corporation,
its general partner
By:
----------------------------------
Its:
------------------------------
Date:
------------------------------------
LICENSEE: ISOCOR,
a California corporation
BY: /s/ JANINE BUSHMAN
-------------------------------------
Janine Bushman
Vice President, Finance and
Administration/ Chief Financial
Officer
Date: 2/11/98
----------------------------------
PARKING LICENSE AGREEMENT
PAGE 3
<PAGE> 68
PARKING RULES AND REGULATIONS
1. All claimed damage or loss must be reported and itemized in writing
delivered to the parking facility office or property manager's office within ten
business days after any claimed damage or loss occurs. Any claim not so made is
waived. Licensor has the option to make repairs at its expense of any claimed
damage within ten business days after filing a claim. In all court actions the
burden of proof to establish a claim remains with Licensee. Court actions by
Licensee for any claim must be filed within ninety days from date of parking, in
a court of jurisdiction where the claimed loss occurred. Licensor is not
responsible for damage by water, fire, or defective brakes, or parts, or for the
acts or omissions of others, or for loss of articles left in vehicles. The total
liability of Licensor is limited to $250.00 for all damages or loss to any
vehicle. Licensor is not responsible for loss of use.
2. Licensee shall not park or permit the parking of any vehicle under
its control in any parking area designated by Licensor as areas for parking by
visitors. Licensee shall not leave vehicles in the parking area overnight nor
park any vehicles in the parking areas other than automobiles, motorcycles,
motor driven or non-motor driven bicycles or four-wheeled trucks.
3. Parking stickers or any other device or form of identification
supplied by Licensor as a condition of use of the parking facilities shall
remain the property of Licensor. Such parking identification device must be
displayed as requested and may not be mutilated in any manner. The serial number
of the parking identification device may not be obliterated. Devices are not
transferable and any device in the possession of an unauthorized holder will be
void.
4. No extended term storage of vehicles shall be permitted.
5. Vehicles must be parked entirely within the painted stall lines of a
single parking stall.
6. All directional signs and arrows must be observed.
7. The speed limit within all parking areas shall be 5 miles per hour.
8. Parking is prohibited:
(a) in areas not striped for parking;
(b) in driveways;
(c) where "no parking" signs are posted;
(d) in cross-hatched areas; and
(e) in such other areas as may be designated by Licensor or
its parking operator.
9. Every Parker is required to park and lock his own vehicle unless
Licensor furnishes valet service. Valet parking attendants may refuse to drive
any vehicle reasonably believed to be unsafe.
10. Loss or theft of parking identification devices from vehicles must
be reported to the parking operator immediately, and a lost or stolen report
must be filed at that time. Licensor has the right to exclude any vehicles from
the parking facilities that does not have an identification device.
1 1. Any parking identification devices reported lost or stolen found on
any unauthorized vehicle will be confiscated and the illegal holder will be
subject to prosecution.
1 2. Lost or stolen identification devices found by the Licensee should
be reported to the parking facility office or property manager immediately to
avoid confusion.
1 3. Washing, waxing, cleaning or servicing of any vehicle in any area
not specifically reserved for such purpose is prohibited.
14. Licensee shall acquaint all persons to whom Licensee assigns parking
space of these Rules and Regulations. Parking facility managers or attendants
are not authorized to make or allow any exceptions to these Rules and
Regulations.
1 5. Licensor reserves the right to refuse the sale of monthly stickers
or other parking identification devices to any person and/or his agents or
representatives who willfully refuses to comply with these Rules and
Regulations.
PARKING LICENSE AGREEMENT
PAGE 4
<PAGE> 1
Exhibit 10.17
[FORFAS LETTERHEAD]
3rd December 1997
Mr. Kevin McGrath
Isocor
Knockmaun House
42-47 Lower Mount Street
Dublin 2.
Dear Kevin,
KNOCKMAUN HOUSE LEASE EXTENSION
I am writing to you to confirm our consent to Isocor extending the lease for the
Ground, First and Second Floors and part of the Fourth Floor as defined in their
respective leases until 6th July 1999.
Yours sincerely,
/s/ LIAM SHERIDAN
- ----------------------------
Liam Sheridan
Facilities Department
<PAGE> 1
Exhibit 10.18
Agreement between Isocor (The Company) and Andrew De Mari (ADM)
1. ADM resigns voluntarily from CEO and President positions as of November 13,
1997.
2. ADM remains in the employment of the Company on a full time basis until
December 31, 1997 and on a part-time basis throughout the period January 1,
1998 and December 31, 1999. During such employment ADM will, in agreement
with the Company CEO:
2.1 lead the evolution of the Company's product direction towards new
growth areas such as Meta-directories through strategic alliances
(e.g. Zoomit) and coordination of Company internal inter-departmental
efforts
2.2 promote the Company and maintain relations with investors especially
in Europe and in Asia
2.3 Liaise with key customers and partners for business development
2.4 any other project agreed with the Company CEO
3. ADM remains on the Board of Directors and will be proposed for reelection
at the 1998 Shareholders Meeting.
4. ADM's compensation remains unchanged until December 31, 1997 at $190,000
(annualized) plus participation to the executive incentive plan for $17,500
at target for Q4 1997.
5. ADM's compensation throughout the period January 1, 1998 - December 31,
1999 is set at $100,000 per year and participation to the executive
incentive plan for $9,000 at target per quarter.
6. ADM's option vesting and benefits continue until December 31, 1999.
7. ADM's employment is normally terminated on December 31, 1999, with no
further obligation on the Company of employment or compensation.
8. ADM's employment may e terminated earlier than December 31, 1999 by either
party. In the case of constructive or involuntary termination by the
Company, other than for cause, the Company will pay ADM at the time of
termination the amount of compensation for salary and benefits that ADM
would have earned between the date of termination and December 31, 1999,
and option vesting, for the same number of options that ADM would have
normally vested during the same period above, will be accelerated.
The above is agreed on November 5, 1997, by:
/s/ ANDREW DE MARI /s/ JEAN MICHEL BARIBIER /s/ G. BRADFORD JONES
- ---------------------- ------------------------ ----------------------
Andrew De Mari Jean Michel Baribier Bradford Jones
2
<PAGE> 1
Exhibit 10.19
[ISOCOR LETTERHEAD]
December 9, 1997
Mr. Paul Gigg
1272 Corsica Drive
Pacific Palisades, CA 90272
Dear Mr. Gigg:
This letter shall confirm your appointment to the position of Chief Executive
Officer and President of ISOCOR serving at the pleasure of the Board of
Directors, effective November 14, 1997. Employment is at will. During your
initial year in this position, your compensation will be:
1. Weekly base salary of US$4,153.84, paid on a bi-weekly basis.
2. ISOCOR's standard benefits including medical insurance, 401K Plan, life
insurance, vacation and holidays.
3. ISOCOR's standard executive compensation plan for non-commissioned
executives, as approved by the Board of Directors, with an annual target
bonus of US$54,000 upon ISOCOR's achievement of 100% of its consolidated
targeted financial performance.
4. Reimbursement rental of a home of US$3,000 per month terminating upon the
earlier of your purchase of a home in the vicinity of the Company or March
31, 1999. This housing allowance is irrevocable once granted; except in
the event of your voluntary termination of employment or involuntary
termination of employment for cause.
5. Between November 14, 1998 and March 31, 1999, you will also be reimbursed
for the air fare of up to two Los Angeles/London round trips for yourself
and your immediate family members (or relatives) in accordance with
Company policies for company air travel, payable upon presentation of
invoices.
6. Upon your purchase of a home within the vicinity of the Company, you will
be eligible for a loan from ISOCOR of up to US$500,000. This loan will be
<PAGE> 2
secured against that home, bear the lowest legal interest rate at the time
of the loan, and will have a six year term with no payments for the first
36 months of the loan period. Payments of interest and principal will be
due monthly commencing upon the 37th month of the loan period and ending
with the 72nd month of the loan period, fully amortized. In the event that
your residence in the UK is sold by you, you commit to use the proceeds
from the sale of that house to pay down this loan. This loan is
irrevocable once granted; except in the event of your voluntary
termination of employment or involuntary termination of employment for
cause in which case the loan will become immediately due and payable in
full.
7. The Board of Directors has approved on November 14, 1997, a stock option
grant of 50,000 shares with a vesting period of 26 months.
8. Should your employment be involuntarily terminated other than for cause,
you will be entitled to a severance package consisting of six months of
your then current base salary at the date of the involuntary termination.
You agree to provide three months notice of termination in the event of
voluntary termination of employment. You further agree that for a period
of 12 months following the date of termination of employment, and without
the prior written consent of the Board, that you will not in connection
with the carrying on of any business similar to or in competition with the
business (defined as the provision of standards based solutions for
electronic document transfer and messaging) of ISOCOR either on your own
or on behalf of any person, firm, or company, directly or indirectly:
- seek to procure orders from or do business with any person, firm, or
company who has at any time during the 12 month period immediately
preceding the date of termination done business with ISOCOR, or
- for yourself or for any other person, firm, corporation,
partnership, association or other entity, solicit or attempt to
solicit any person employed by ISOCOR to terminate or otherwise
cease his or her employment with ISOCOR or interfere in any manner
with the contractual or employment relationship between ISOCOR and
any customer, vendor or employee of ISOCOR.
9. Except with respect to the 75,000 options you were granted pursuant your
compensation arrangement dated March 11, 1997 and the previously executed
standard ISOCOR confidentiality agreement, this letter supersedes your
prior compensation arrangement dated March 11, 1997.
<PAGE> 3
In addition, we confirm your election to the Board of Directors for the current
term. We look forward to a successful future at ISOCOR.
Sincerely,
/s/ BRAD JONES
- --------------------------------
Brad Jones
Director
Member of Compensation Committee
/s/ JEAN MICHEL BARBIER
- --------------------------------
Jean Michel Barbier
Director
Member of Compensation Committee
<PAGE> 1
Exhibit 10.20
CONSULTANCY AGREEMENT
This CONSULTING AGREEMENT (this "Agreement"), is made and entered into this
first day of September 1997 (the "Effective Date"), by and between ISOCOR, a
California Corporation, having a principal place of business at 3420 Ocean Park
Blvd., Suite 2010, Santa Monica, California USA 90405-3306 (hereinafter
"ISOCOR"), and Consultant, Cagan Co Inc., a C corporation registered under the
laws of California, with offices at 1170 Coast Village Road, Suite 212, Santa
Barbara, CA 93108 (hereinafter "Consultant").
ISOCOR is desirous of securing the services of a Consultant skilled and
experienced in high technology disciplines of strategy, sales, marketing,
services and distribution.
NOW, THEREFORE, the parties agree as follows:
1.00 DEFINITIONS
1.10 "CLIENT" shall mean any third party with whom ISOCOR contracts or
negotiates to supply products, consulting or software support services,
whether solely or in part.
1.20 "PROJECT COMMENCEMENT" shall mean the date by which the Consultant shall
begin consulting at an ISOCOR location, Client's location, some other
location or via some other medium.
1.30 "WORK ORDER" shall mean a writing signed by each party which includes at
a minimum the name of the client to be worked for, if any, the projected
start date of the project, an estimate of the total hours to be worked
for the project, and a brief outline of the tasks involved in completing
the project. The initial Work Order is attached hereto as Exhibit A.
2.00 TERM AND TERMINATION
2.10 TERM. This Agreement will become effective on the date first shown above
and will continue in effect for one year, and shall be automatically
renewed for a second year unless either party gives notice in writing at
least ten (10) days in advance of the renewal date.
2.20 TERMINATION. This Agreement can be terminated by either party in writing
with fourteen (14) days notice after the initial one year term. If this
Agreement is terminated, ISOCOR's sole obligation shall be to pay
Consultant the amount due for the Services completed as of the effective
date of termination. Termination of a Work Order at ISOCOR's discretion,
as set forth following in Section 4.31, will not serve to terminate this
Agreement unless the Agreement is also expressly terminated in the same
or separate writing as set forth above. Notwithstanding the foregoing,
the initial Work Order incorporated herein as Exhibit A shall not be
terminated by ISOCOR except in the event of cause or material breach of
this Agreement by Consultant.
2.30 SURVIVAL. In the event of any termination of this Agreement, Section 6
hereof shall survive and continue in effect.
3.00 INDEPENDENT CONTRACTOR STATUS
3.10 INTENTION OF PARTIES. It is the intention of the parties that Consultant
be an independent contractor and not an employee, agent, joint venturer,
or partner of ISOCOR. Nothing in this Agreement shall be interpreted or
construed as creating or establishing the relationship of employer and
employee between ISOCOR and either Consultant or any employee or agent
of Consultant. Consultant shall have no right or power to enter into any
contract or commitment on behalf of ISOCOR.
3.20 LIMITED EXCLUSIVITY. Consultant shall retain the right to perform work
for others during the terms of this Agreement, except as noted in
Section 3.21. ISOCOR shall retain the right to cause work of the same or
a different kind to be performed by its own personnel or other
contractors during the term of this Agreement.
3.21 During the term hereof, and for a period of two years following
termination of this agreement, Consultant shall not solicit ISOCOR's
Clients for consultancy or other services regarding any products with
similar functions, such as Internet- or X.400-based messaging services,
as those available from ISOCOR, except as specifically agreed to
beforehand in writing by ISOCOR.
<PAGE> 2
4.00 SERVICES TO BE PERFORMED BY CONSULTANT
4.10 WORK ORDERS. ISOCOR will advise Consultant of upcoming consulting
projects at least one week in advance of the date for Project
Commencement. The parties shall agree upon a detailed description of
services to be provided. ISOCOR will then forward to Consultant a Work
Order. Consultant is only authorized to provide services under this
agreement pursuant to signed Work Orders. ISOCOR shall have no liability
to Consultant for any services performed which were not authorized by a
written and signed Work Order.
4.20 RETURN OF DATA. Upon termination of this Agreement, Consultant shall
return to ISOCOR all materials supplied to it and all materials produced
and acquired by Consultant in the course of rendering services under
this Agreement.
4.40 METHOD OF PERFORMING SERVICES. Consultant will reasonably determine the
method, details, and means of performing the work to be carried out by
it for ISOCOR's clients. ISOCOR shall be entitled to exercise a broad
general power of supervision and control over the results of work
performed by Consultant to ensure satisfactory performance. This power
of supervision shall include the right to inspect, stop work, make
suggestions or recommendations as to the details of the work, and
request modifications to the scope of a project for its Clients.
4.41 ISOCOR's power of supervision shall also include the right to stop,
or pause any work on any Work Order being done by Consultant for
ISOCOR's Clients. Any such action by ISOCOR shall be in writing, and
ISOCOR and its Clients' liability for services rendered shall be limited
on any such stopped, paused or terminated Work Order to work performed
by Consultant prior to receipt of the request to stop, pause or
terminate.
5.00 COMPENSATION
5.10 COMPENSATION AND BILLING FOR SERVICES. Compensation to Consultant for
services Consultant has performed shall be as set out in the applicable
Work Order. Consultant's fee shall include and Consultant shall be
responsible for the payment of all taxes imposed by any governmental
agency of any kind which are attributable to the compensation it
receives. In no event shall ISOCOR be liable to Consultant for services
rendered on a Work Order in the face of non-payment or suit by Client
for poor work, incomplete services or other harm or damage caused by
Consultant and not the fault of ISOCOR.
5.20 WORK REPORTS. Consultant shall submit Work Reports to ISOCOR on a
calendar month basis for the services furnished and other expenses
incurred hereunder. Each Work Report will provide a breakdown and
distribution of services performed and expense items.
5.30 DATE FOR PAYMENT OF COMPENSATION. ISOCOR shall pay Consultant for its
services as set out in the applicable Work Order, or, if not specified,
within fifteen (15) days from the end of each calendar month for
services completed in that month.
5.4 EXPENSES. Except as otherwise agreed in this Agreement, Consultant shall
be responsible for all costs and expenses incident to the performance of
services for ISOCOR, including all costs incurred by Consultant to do
business. In the event, telephone, travel, communication or on-site room
and board expenses are incurred by Consultant, ISOCOR agrees to pay
these expenses in accordance with ISOCOR's corporate policy attached
hereto as Exhibit B.
6.00 INTELLECTUAL PROPERTY RIGHTS
6.10 CONFIDENTIAL INFORMATION. Consultant agrees that all Confidential
Information which it may acquire from ISOCOR or from ISOCOR's employees
or associates, shall be regarded as strictly confidential and held in
trust solely for the benefit of ISOCOR. Consultant shall not use or
directly or indirectly disclose such Confidential Information to any
other party without the written consent of ISOCOR during the term of and
for three years following the termination of this Agreement.
Confidential Information includes, for example, trade secrets, data,
know-how, developments, designs, techniques, marketing plans,
promotional ideas, strategies, forecasts, new products, licenses, costs,
customer and supplier lists, specifications, computer software programs,
manuals, and any information marked "Confidential" by ISOCOR. These
restrictions shall not be construed to apply to (1) information
generally available to the public; (2) information released by ISOCOR
generally without restriction; (3) information independently developed
2
<PAGE> 3
or acquired by Consultant without reliance in any way on other protected
information of ISOCOR; or (4) information approved for the use and
disclosure of Consultant. Neither party shall furnish to the other party
any Confidential Information which it does not have the right to furnish
and shall defend and indemnify the receiving party against any claim or
liability resulting from breach of such obligation.
6.20 OWNERSHIP OF WORK PRODUCT. All copyrights, patents, trade secrets, or
other intellectual property rights associated with any ideas, concepts,
techniques, inventions, processes, or works of authorship developed or
created by Consultant during the course of performing ISOCOR's work
(collectively, the "Work Product") shall belong exclusively to ISOCOR
and shall, to the extent possible, be considered a work made for hire
for ISOCOR within the meaning of Title 17 of the United States Code.
Consultant automatically assigns at the time of creation of the Work
Product, without any requirement of further consideration, any right,
title, or interest it may have in such Work Product, including any
copyrights or other intellectual property rights pertaining thereto.
Upon request of ISOCOR, Consultant shall take such further actions
including execution and delivery of instruments of conveyance, as may be
appropriate to give full and proper effect to such assignment.
6.30 RESIDUAL RIGHTS. Notwithstanding anything to the contrary herein,
Consultant shall be free to use and employ its general skills, know-how,
and expertise, and to use, disclose, and employ any generalized ideas,
concepts, know-how, methods, techniques, or skills gained or learned
during the course of any assignment, so long as it acquires and applies
such information without disclosure of any confidential or proprietary
information of ISOCOR and without any unauthorized use or disclosure of
Work Product.
7.00 CONSULTANT PERSONNEL
7.10 COMPENSATION OF CONSULTANT'S PERSONNEL. Consultant shall bear sole
responsibility for payment of compensation to and taxes for any of its
personnel or agents performing services hereunder. Consultant shall pay
and report, for itself and any such personnel, all applicable taxes due
on amounts paid to it hereunder. Consultant shall bear sole
responsibility for any liability, health or disability insurance,
retirement benefits, or other welfare or pension benefits (if any) to
which itself and any of its personnel may be entitled. Consultant agrees
to defend, indemnify, and hold harmless ISOCOR, ISOCOR's officers,
directors, employees, and agents, and the administrators of ISOCOR's
benefit plans from and against any claims, liabilities, or expenses
relating to such compensation, tax, insurance, or benefit matters;
provided that ISOCOR shall promptly notify Consultant of each such claim
when and as it comes to ISOCOR's attention, cooperate with Consultant in
the defense and resolution of such claim, and not settle or otherwise
dispose of such claim without Consultant's prior written consent, such
consent not to be unreasonably withheld.
7.20 WORKERS' COMPENSATION. Notwithstanding any other workers' compensation
or insurance policies maintained by ISOCOR, Consultant shall procure and
maintain workers' compensation coverage sufficient to meet the statutory
requirements of every state where Consultant's personnel assigned to
ISOCOR's work are located.
7.30 CONSULTANT'S AGREEMENTS WITH PERSONNEL. Consultant shall obtain and
maintain in effect written agreements with each of its personnel, if
any, who participate in any of the ISOCOR's work hereunder. Such
agreements shall contain terms sufficient for Consultant to comply with
all provisions of this Agreement.
7.40 STATE AND FEDERAL TAXES. As neither Consultant nor its personnel are
ISOCOR's employees, ISOCOR shall not take any action or provide
Consultant's personnel with any benefits or commitments inconsistent
with any of such undertakings by Consultant.
In particular:
1. ISOCOR will not withhold FICA (Social Security) from Consultant's
payments.
2. ISOCOR will not make state or federal unemployment insurance
contributions on behalf of Consultant or its personnel.
3. ISOCOR will not withhold state and federal income tax from payment
to Consultant.
4. ISOCOR will not make disability insurance contributions on behalf of
Consultant.
5. ISOCOR will not obtain workers' compensation insurance on behalf of
Consultant or its personnel.
8.00 GENERAL PROVISIONS
3
<PAGE> 4
8.10 NOTICES. Any notices to be given hereunder by either party to the other
may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested.
Mailed notices shall be addressed to the parties at the addresses
appearing in the introductory paragraph of this Agreement, but each
party may change such address by written notice in accordance with this
paragraph. Notices delivered personally will be deemed communicated as
of actual receipt. Mailed notices will be deemed communicated as of two
days after mailing.
8.30 ENTIRE AGREEMENT OF THE PARTIES. This Agreement supersedes any and all
agreements, either oral or written, between the parties hereto with
respect to the rendering of Services by Consultant for ISOCOR and
contains all the covenants and agreements between the parties with
respect to the rendering of such services in any manner whatsoever. Each
party to this agreement acknowledges that no representations,
inducements, promises, or agreements, orally or otherwise, have been
made by any party, or anyone acting on behalf of any party, that are not
embodied herein, and that no other agreement, statement, or promise not
contained in this agreement shall be valid or binding. Any modification
of this agreement will be effective only if it is in writing signed by
the party to be charged. Notwithstanding the foregoing, the parties
specifically acknowledge that the Confidentiality Agreement dated August
22, 1997 between the parties shall remain in full force and effect.
8.40 PARTIAL INVALIDITY. If any provision in this agreement is held by a
court of competent jurisdiction to be invalid, void, or unenforceable,
the remaining provisions will nevertheless continue in full force
without being impaired or invalidated in any way.
8.50 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective duly authorized representative. All copies of this
Amendment, signed by both parties, shall be deemed originals.
ISOCOR CONSULTANT
Signed: /s/ JANINE BUSHMAN Signed: /s/ DENNIS J. CAGAN
---------------------------- --------------------------------
Name: JANINE BUSHMAN Name: DENNIS J. CAGAN
---------------------------- --------------------------------
Title: CFO Title: PRESIDENT
---------------------------- --------------------------------
Date: 8/30/97 Date: 8-30-97
---------------------------- --------------------------------
4
<PAGE> 5
EXHIBIT A
WORK ORDER #1 - INITIAL WORK ORDER
<TABLE>
<S> <C>
CONTRACTOR
PERSONNEL: DENNIS CAGAN
DURATION OF
PROJECT September 1, 1997 - August 31, 1998
COMPENSATION: $6,000 per calendar month; plus contingent compensation of
up to $6,000 per calendar month, based upon the Executive
Bonus Program as approved by the Board of Directors of
ISOCOR, which Program for the period September 1, 1997
through December 31, 1997 is attached hereto as Exhibit B.
ISOCOR reserves the right to change the Executive Bonus
Program at the discretion of the Board of Directors.
EXPENSES Minimal telephone, travel and living directly incurred in
performance of this Work Order, and in accordance with
ISOCOR reimbursement policies
SCOPE OF WORK: 1.25 days per week shall be exclusively devoted to ISOCOR
strategy, sales, marketing, services and distribution.
</TABLE>
Work Order Approved by ISOCOR : /s/ JANINE BUSHMAN Date: 8-30-97
--------------------- ----------------
Work Order Accepted by Consultant: /s/ DENNIS CAGAN Date: 8-30-97
--------------------- ----------------
5
<PAGE> 6
Exhibit B - Executive Bonus Program
Period Covering September 1, 1997 - December 31, 1997
Participation in this Program for the second calendar half of 1997 is based upon
the weighted actual achievement of consolidated revenues and net income/(loss)
against planned levels of consolidated revenues and net income/(loss) of ISOCOR.
The Program provides for linear interpolation between the floor (at 85% weighted
performance) and 100% weighted performance, with the same rate beyond 100%
weighted performance. Calculations of contingent compensation will be made on a
calendar six month basis.
The weighted factors used in the Program are:
<TABLE>
<CAPTION>
Driver Weight
------ ------
<S> <C>
Revenue 60%
Net Income/(Loss) (post bonus) 40%
</TABLE>
Contingent Compensation Opportunity
At 100% weighted performance - $24,000
At 85% floor weighted performance - $1,200
(Below 85% weighted performance no contingent compensation is
payable)
At 112% weighted performance - $42,240
The goals for performance for the second calendar six months of 1997 are as
follows and exclude the impact of any acquisition activity ISOCOR may complete
in 1997:
<TABLE>
<CAPTION>
Second Half 1997
----------------
<S> <C>
Revenue $14,600,000
Net Loss $1,193,000
</TABLE>
6
<PAGE> 7
EXHIBIT A
WORK ORDER #2:
PURSUANT TO CONSULTANCY AGREEMENT SIGNED SEPTEMBER 1, 1997
(CANCELS AND SUPERSEDES WORK ORDER #1)
<TABLE>
<S> <C>
CONTRACTOR: DENNIS CAGAN
DURATION OF February 9, 1998 to August 31, 1998
PROJECT
COMPENSATION: $3,000 per calendar month; plus contingent compensation of
up to $3,000 per calendar month, based upon the Executive
Bonus Program as approved by the Board of Directors of
ISOCOR (ISOCOR reserves the right to change the Executive
Bonus Program at the discretion of the Board of
Directors).
EXPENSES minimal telephone, travel, and living expenses directly
incurred in performance of this Work Order in accordance
with ISOCOR's reimbursement policies (receipts must
accompany any invoice)
SCOPE OF WORK: 1 day every 2 weeks shall be exclusively devoted to ISOCOR
strategy, sales, marketing, professional services issues,
and distribution development; such work shall be performed
in ISOCOR's Santa Monica, California office unless
otherwise agreed
</TABLE>
THIS WORK ORDER #2 CANCELS AND SUPERSEDES WORK ORDER #1.
Work Order Approved by ISOCOR: [SIG] Date: 2/11/98
---------------------- ----------------
Work Order Accepted by Consultant: [SIG] Date: 2-11-98
---------------------- ----------------
1
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of ISOCOR on Form S-8 (File No. 333-05275) of our report dated February 18,
1998, on our audits of the financial statements of ISOCOR as of December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which
report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997, SEPTEMBER 30, 1997, JUNE
30, 1997 AND MARCH 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1997, NINE
MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1997, SIX MONTHS IN THE PERIOD ENDED
JUNE 30, 1997 AND THREE MONTHS IN THE PERIOD ENDED MARCH 30, 1997 AND ARE
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. SECTION
XIB.4.b REQUIRES RETROACTIVELY RESTATEMENT OF PREVIOUSLY FILED FINANCIAL DATA
SCHEDULE AS A RESULT OF SFAS No. 128, EARNINGS PER SHARE.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-30-1997
<CASH> 10,784 10,322 12,393 8,397
<SECURITIES> 9,677 10,693 10,802 15,505
<RECEIVABLES> 10,609 10,755 10,883 10,594
<ALLOWANCES> 1,509 1,972 2,035 2,112
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 31,554 31,660 34,244 34,500
<PP&E> 7,056 7,040 7,053 6,972
<DEPRECIATION> 4,651 4,382 4,138 3,941
<TOTAL-ASSETS> 34,223 34,605 37,459 37,857
<CURRENT-LIABILITIES> 8,406 7,528 9,576 7,756
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 39,359 39,258 39,096 39,082
<OTHER-SE> (13,675) (12,325) (11,369) (9,150)
<TOTAL-LIABILITY-AND-EQUITY> 34,223 34,605 37,459 37,857
<SALES> 22,018 15,376 9,189 3,834
<TOTAL-REVENUES> 22,018 15,376 9,189 3,834
<CGS> 2,863 1,743 935 430
<TOTAL-COSTS> 5,667 3,769 2,208 988
<OTHER-EXPENSES> 25,419 19,013 13,114 6,361
<LOSS-PROVISION> 382 251 218 107
<INTEREST-EXPENSE> (1,170) (893) (616) (308)
<INCOME-PRETAX> (7,859) (6,420) (5,408) (3,169)
<INCOME-TAX> 45 22 19 8
<INCOME-CONTINUING> (7,904) (6,442) (5,427) (3,177)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (7,904) (6,442) (5,427) (3,177)
<EPS-PRIMARY> 0.83 0.69 (0.58) 0.34
<EPS-DILUTED> 0.83 0.69 (0.58) 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996, SEPTEMBER 30, 1996, JUNE
30, 1996 AND MARCH 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1996, NINE
MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1996, SIX MONTHS IN THE PERIOD ENDED
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-30-1996
<CASH> 13,374 13,317 13,511 27,113
<SECURITIES> 11,739 12,475 12,518 0
<RECEIVABLES> 12,881 10,803 8,590 9,963
<ALLOWANCES> 1,647 1,169 1,093 993
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 37,965 37,512 35,831 37,922
<PP&E> 6,795 6,357 4,361 3,367
<DEPRECIATION> 3,805 3,409 1,987 780
<TOTAL-ASSETS> 41,298 40,766 38,534 40,858
<CURRENT-LIABILITIES> 7,907 7,577 5,968 7,495
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 39,047 39,034 38,940 39,063
<OTHER-SE> (5,843) (6,114) (6,674) (6,212)
<TOTAL-LIABILITY-AND-EQUITY> 41,298 40,766 38,534 40,858
<SALES> 26,394 19,388 12,976 5,329
<TOTAL-REVENUES> 26,394 19,388 12,976 5,329
<CGS> 2,663 2,066 1,549 447
<TOTAL-COSTS> 5,068 3,823 3,705 937
<OTHER-EXPENSES> 21,359 15,372 10,277 4,136
<LOSS-PROVISION> 223 102 102 32
<INTEREST-EXPENSE> (1,010) (687) (361) (68)
<INCOME-PRETAX> 668 649 291 306
<INCOME-TAX> 185 136 280 106
<INCOME-CONTINUING> 483 274 (15) 200
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 483 274 (15) 200
<EPS-PRIMARY> 0.06 0.04 (0.00) 0.03
<EPS-DILUTED> 0.05 0.03 (0.00) 0.02
</TABLE>
