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WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission File Number
0-24418
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SYSTEMSOFT CORPORATION
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(exact name of registrant as specified in its charter)
DELAWARE 04-3121799
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 VISION DRIVE
NATICK, MASSACHUSETTS 01760
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 508-651-0088
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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, $0.01 PAR VALUE PER SHARE THE NASDAQ STOCK MARKET - NATIONAL
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MARKET
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(Title of each class) (Name of each exchange of which
registered)
Indicate by check mark whether the restraint (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)
At April 15, 1997, the aggregate market value of voting stock held by non-
affiliates of the registrant was $ 208,270,086.
At April 15, 1997, 25,042,298 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) SPECIFICALLY IDENTIFIED PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR
THE FISCAL YEAR ENDED JANUARY 31, 1997 ARE INCORPORATED BY REFERENCE INTO PARTS
I, II AND IV AND ARE FILED AS AN EXHIBIT HERETO.
(2) SPECIFICALLY IDENTIFIED PORTIONS OF THE COMPANY'S DEFINITIVE PROXY
STATEMENT IN CONNECTION WITH THE COMPANY'S 1997 ANNUAL MEETING OF STOCKHOLDERS,
WHICH IS CURRENTLY EXPECTED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WITHIN 120 DAYS OF JANUARY 31, 1997, ARE INCORPORATED BY REFERENCE
INTO PART III.
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PART 1
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ITEM 1. BUSINESS
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CAUTIONARY STATEMENT
When used anywhere in this Form 10-K and in future filings by
SystemSoft Corporation ("SystemSoft," the "Company," or "the Registrant") with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "it is believed," "estimated," "projected," or
"outlook" or similar expressions (including confirmations by an authorized
executive officer of the Company of any such expressions made by a third party
with respect to the Company) are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company advises readers that the various risk factors
described under the caption "Risk Factors" section of this Item 1 could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to such future periods. The
Company specifically declines any obligation to publicly release the result of
any revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
GENERAL
The Company designs, develops, markets, and supports system-level and
problem-resolution/troubleshooting software to the market for personal computers
("PCs"), including desktop computers and mobile computers (comprised of laptops,
notebooks, subnotebooks, and PC peripheral devices). The Company is a Delaware
Corporation incorporated in 1990.
System-level software is the enabling layer in the PC architecture
between the PC's hardware and the operating system. The Company's major products
in this market segment include a family of Basic Input/Output System ("BIOS")
firmware and software and power-management software which are primarily marketed
to manufacturers of mobile computers.
SystemSoft also offers enabling software and problem-
resolution/troubleshooting software for PC Card peripherals that are primarily
used with mobile computers.
Recently the Company expanded its system software products to include
enabling software and firmware for the emerging Universal Serial Bus ("USB")
standard that permits fast, simple, and simultaneous connection of more than 100
peripherals to a single PC through standard plugs and connectors. USB software
and firmware is primarily marketed to manufacturers of computer peripherals that
attach to desktop computers - a new class of customers for the Company.
Separately, the Company has leveraged its expertise in system software
to pioneer a new market for automated problem-resolution software. The Company's
product, SystemWizard, is marketed to both desktop and mobile computer
manufacturers, as well as peripheral manufacturers.
MARKET BACKGROUND
System-level software is one of the four basic technologies in the
architecture of a PC: application software, operating system software, system-
level software and hardware.
Application software is designed to perform end-user tasks, such as
word processing and data analysis. Microsoft Word, Lotus 1-2-3 and Intuit
Quicken are examples of widely used application programs. Operating system
software allows PC hardware to control the sequencing and processing of
applications and respond to a PC user's commands, such as storing data,
displaying data and running an application program. Microsoft's DOS, Windows,
Windows 95 and Windows NT are the dominant operating systems in the IBM-
compatible PC market. System-level software is a necessary component in every
PC. It enables the PC's operating system to recognize, configure and communicate
with the hardware, including peripherals. PC hardware consists of
microprocessors, also known as central processing units ("CPUs"), CPU-support
chipsets, memory, input-output devices (such as monitors and keyboards) and
various other peripheral devices (such as printers, modems and CD-ROM drives).
Intel's x86 and Pentium chips are the leading CPUs in the PC market.
SYSTEM-LEVEL SOFTWARE
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Since their introduction in 1981, IBM and IBM-compatible PCs have
become widely adopted. In order to be IBM-compatible, PCs incorporated Intel
CPUs and Microsoft operating system software, which as a result became industry
standards. As the number of IBM compatible PC's increased in the 1980s, PC
manufacturers competed for market share by introducing higher performance,
easier to use and lower cost systems.
The advent of mobile computers has given end-users new flexibility in
how, where and when they work. Mobile computers, however, have historically had
limitations in functionality because size and weight considerations have
constrained memory capacity and restricted use of peripherals. Mobile computers
had been functionally restricted to whatever Original Equipment Manufacturers
("OEMs") could fit on their main circuit board or "motherboard." The number and
variety of peripherals, including faxes, modems, CD-ROM drives and printers,
have grown with the overall PC market. However, mobile computers have a limited
number of external adapters or "ports" to add on peripheral devices. Moreover,
even sophisticated users of mobile and desktop PCs have difficulty installing
and using these enhancements since the computer operating system must be
reconfigured to eliminate internal conflicts.
Another limitation for mobile computers is battery life. Each new
generation of CPUs typically consumes more power, and the use of peripherals
also demands incremental power, taxing battery capacity. Accordingly,
sophisticated power management has become critical to the design of all mobile
devices to permit longer use between battery charging.
Several technologies have emerged which address some of these
limitations by enhancing the functionality and flexibility of both desktop and
mobile computers. These technologies include Plug and Play, Hot Docking and
Power Management software.
. Plug and Play. Problems in configuring desktop PCs generally occur
because the computer must recognize and configure add-on devices that
require a variety of different system resources. Buses are the
communication pathway through which peripherals communicate with the
host computer. To deal with incompatibility issues, in 1993 Microsoft,
Intel and Compaq introduced the "Plug and Play" initiative to create a
standard for compatibility and configuration for computers and
peripherals using Intel and Intel-compatible CPUs and Microsoft
operating system software. Plug and Play technology is also
incorporated into mobile computers to allow them to configure add-on
devices such as a "docking station." Newer technologies, such as the
Advanced Configuration and Power-management Initiative (ACPI) and the
PC'97 standard also provide the Company with similar additional
opportunities.
. Hot Docking. Users of mobile computers are increasingly seeking to
use their mobile computers as complete replacements for their desktop
computer as well, enabling them to use a single machine for office or
traveling use. This has led to a growing requirement for users to
insert and remove their powered-up notebook from a "docking station"
that resides on the desktop. Through a single slide-in docking port, a
docking station provides instant connection to all of the conveniences
of desktop computing, including larger keyboard, full-size monitor,
network connection, and a mouse, among others.
. Power Management. The first mobile computers derived their power by
plugging into an AC power source. Today, mobile computers can derive
their power from a battery. This improves the versatility and ease of
use of mobile computers. The power requirements of these computers,
however, have increased with the use of more powerful CPUs and a
larger number of peripheral devices. All mobile devices using PC Card
sockets have significant power management requirements. Accordingly,
sophisticated power management has become critical to the design of
mobile computers and other computerized devices to permit longer use
between battery charging.
PC CARD SOFTWARE
The PC Card standard is an industry standard set by the Personal
Computer Memory Card International Association (PCMCIA) that enables PCs and
other devices to automatically recognize, install, and configure peripherals
(i.e., modems, flash memory and network cards) incorporated in credit card-sized
PC Cards. System-level software provides both a connectivity layer that
facilitates the addition, configuration, and use of peripheral devices, and a
hardware adaptation layer that comprises the communication link between a PC's
operating system software and hardware. Each new version of hardware or
operating system software generally requires new system-level software. PC
manufacturers are able to offer enhanced functionality, flexibility and ease of
use by using the Company's software in their products.
The purpose of PC Cards was to create a standard for sockets and
credit card-sized cards containing memory and peripheral devices that take up
less room and are easily inserted by a user into a mobile computer or electronic
device without the traditional complexities and frustrations of installation.
Through PC Card technology, expanded memory and increased
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flexibility and functionality are achieved, not by changing the computer's
motherboard or by installing separate peripheral circuit boards internally, but
rather by inserting credit card-sized PC Card cards into sockets built into the
mobile computer. PCMCIA has issued standards for buses, connectors, silicon
chips and software to make PC Cards easy to use in IBM and IBM-compatible
computers. PC Card sockets are currently being offered as standard equipment in
most mobile computers from manufacturers such as Apple, AST Research, Compaq,
Digital, Dell, Gateway 2000, NEC and Toshiba.
UNIVERSAL SERIAL BUS
The new Universal Serial Bus (USB) standard is designed to bring new
levels of usability for desktop computer users. Through identical connectors
consolidated into a single port, intrinsic power management, and hot-
swappability, USB brings "plug-and-play" ease to desktop peripherals that
connect to the outside of the PC- monitors, scanners, keyboards, mice, modems
and PBX interfaces, among others. This new standard supports up to 127 distinct
devices that roll-up through hub devices to consolidate into a single port on
the PC through standard, small connectors (flat, 4-pin) and thin cables for each
device - no more unwieldy, thick cables with large, difficult connectors. USB
lets users plug and unplug devices without powering down, and its low cost
profile is ideally suited for medium- and low-speed peripherals.
AUTOMATED PROBLEM-RESOLUTION
Computer and peripheral manufacturers continue to face significant
costs associated with providing telephone technical support to their customers.
Increasing complexity in all areas of the PC architecture - from applications
and operating systems to power-management and peripheral usage - and an
increasingly novice base of customers have combined to drive up both the volume
and length of technical support calls, as well as its associated costs. Industry
estimates for providing this assistance exceed $4 billion annually.
Automated problem-resolution technologies provide a series of
automated and computer-assisted techniques for resolving technical support
problems through expert diagnosis engines, knowledge bases and automated
instrumentation. The goal is to reduce the number of calls to support
manufacturers, or - at minimum- reduce the length of such calls.
RECENT ACQUISITIONS
In December 1996, the Company completed its acquisition (the "Radish
Merger") of Radish Communications Systems, Inc. ("Radish"). As a result of the
Radish Merger, the former stockholders of Radish received 2,037,802 shares of
SystemSoft Common Stock and $367,101 in cash. Also, pursuant to the terms of
the Radish Merger, Radish's obligations under Radish's existing stock option
plans, whether vested or unvested, were assumed by SystemSoft. The acquisition
of Radish is intended to qualify a tax-free reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended. SystemSoft will account for the
transaction as a purchase. The Radish Merger enhanced the Company's presence in
the call center and help desk environments. With the acquisition of Radish and
the integration of Radish's VoiceView(R), an industry standard for integrated
voice and data communications, into the Company's SystemWizard call-avoidance
software, the Company expects to expand its strategic focus to include not only
call-avoidance, but call-efficiency as well.
SYSTEMSOFT STRATEGY
SystemSoft's objective is to become the leading provider of
connectivity and other system-level software for microprocessor-based devices
and leverage this expertise in application areas such as automated problem-
resolution technologies and utilities. The Company's focus is on the PC market
where it has established itself as the leader in PC Card software. To date, the
Company has principally applied its expertise and derived its revenue from the
mobile computing market. The Company intends to capitalize on this expertise to
expand into the desktop computing market and new emerging markets for
computerized devices. These markets include a diverse range of compact, low-cost
devices such as personal digital assistants, cellular phones, pagers, hand held
terminals, digital cameras, global positioning systems and set-top boxes for
interactive television. The Company is pursuing the following strategies to
achieve its objectives.
. TECHNOLOGICAL LEADERSHIP. A critical component of the Company's
strategy is to increase revenues by being the first to market with new
technologies.
The Company has designed its system-level software as modular units of
core technology. By building its new technology on the basis of proven
modules from previously developed technology, the Company believes
that it can introduce new software more rapidly and efficiently. In
addition, the Company actively participates in industry-wide standard
setting organizations and alliances, including the PCMCIA, the Plug
and Play Association, the Peripheral Connect Interface ("PCI") Special
Interest Group, the Universal Serial Bus Committee and the Desktop
Management Task Force. An employee of the Company serves as the
Chairman of the PCMCIA,
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which develops the PC Card standards. The Company believes that this
strategy has allowed it to be the leading supplier in the PC Card
market, licensing software to the vast majority of the top mobile
computer manufacturers. In addition, the Company believes it was the
first software provider to ship production-ready Plug and Play
software complying with the Plug and Play Association's published
standard. The Company was also the first to design and ship an end-to-
end support-call solution.
. LEADERSHIP IN SUPPORT AND SERVICE SOLUTIONS - The Company intends to
exploit its technological leadership in system-level software in new
ways to address the growing industry problem of providing fast,
efficient technical support to users. The Company was the first to
announce a comprehensive product in this area and has secured
licensing agreements with several major computer and peripheral
manufacturers.
. STRATEGIC ALLIANCES AND KEY CUSTOMER RELATIONSHIPS. The Company views
its relationships with leading companies in the PC industry as
essential to its identification of and responsiveness to trends in the
PC market and to achieving its objective to be first to market and the
leader in system-level software. SystemSoft strives to develop and
maintain strategic relationships with leading hardware component
manufacturers, operating system software companies, OEMs and major
vendors of CPU support chipsets. These relationships include the
following:
Intel. In December 1993, the Company entered into a Development and
License Agreement with Intel pursuant to which Intel licenses certain
technologies to SystemSoft which SystemSoft develops into products and
then markets under its own name. In October 1995, the Company entered
into an agreement with Intel through which Intel supplies funding to
aid in the further development of call-avoidance software. Call-
avoidance software expands on the expert system-based technologies the
Company first developed with its CardWizard PC Card automatic problem-
resolution software to create a new software category that
automatically diagnoses and resolves system-wide incompatibilities.
See "Business -- Relationship with Intel."
Microsoft. The Company has licensed a basic version of its CardSoft
PC Card software to Microsoft for use in Windows 95. The Company has
continued to expand the features of its PC Card software above what is
currently included in Windows 95 to provide its customers with the
highest degree of PC Card compatibility as well as value added
features in its CardWizard products. The Company was also a co-
developer with Microsoft of the "Microsoft Flash File System," which
enables PC Card-compliant flash memory cards to act like a hard disk
drive. See "Business -- SystemSoft Software and Services."
. FURTHER EXPANSION INTO THE DESKTOP COMPUTING MARKET. The Company's
strategy is to use its expertise in technologies developed for the
mobile computing market and apply them to the desktop computing
market. These products are designed to enhance Plug and Play desktop
computer systems and make them easier to configure and upgrade as well
as provide greater end user satisfaction and lower support costs to
the computer manufacturer. With SystemWizard, SystemSoft now offers a
product to the broader desktop computer market. See "Business-
SystemSoft Software and Services."
. EXPANSION INTO THE PERIPHERALS MARKET. SystemSoft has recently begun
providing software and firmware to peripheral manufacturers, enabling
their devices to support the Universal Serial Bus standard. SystemSoft
has already licensed its USB technology to several peripheral
manufacturers.
. SERVICE EMPHASIS AND CUSTOMER SATISFACTION. The Company began as an
engineering service company and has devoted significant resources to,
and continues to place a high priority on, customer satisfaction and
responsiveness to customer needs. As of January 31, 1997, 151 of the
Company's 238 employees were engaged in the direct provision of
engineering and technical support services for customers. The Company
believes that its commitment to customer satisfaction and its timely
response to customer requirements are vital to its continued success.
SYSTEMSOFT SOFTWARE AND SERVICES
Software
SystemSoft offers a suite of system-level software that enables a
computer's operating system software to recognize, configure and communicate
with the hardware. Since system-level software must be tailored to the unique
specifications, feature sets and requirements of each new version of a PC,
customers frequently engage the Company to provide engineering services to
assist in customizing the Company's software.
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The principal software products currently offered by the Company include
the following:
. PC CARD SOFTWARE. Among the PC Card software currently offered by the
Company are: (i) CardSoft Socket Services Software, which communicates
with the hardware vendor's PC Card controller to recognize the status
of the card socket (empty or loaded); (ii) CardSoft Card Services
Software, which recognizes the nature of the peripheral loaded into a
card socket, manages and allocates system resources to PC Cards (such
as interrupts, memory conflicts and port requirements) and permits
"hot swapping" of cards (that is, the ability to remove and replace
cards without turning off and reconfiguring the computer); and (iii)
CardWizard, an artificial intelligence-based software tool that makes
PC Cards easier to use by automatically detecting and resolving
configuration conflicts. The Company believes that it is the leading
supplier of PC Card software, shipping to AST Research, Compaq, Dell,
Gateway 2000, Hewlett-Packard, IBM, NEC, and Toshiba, among others. In
addition, the Company recently announced licensing agreements for new
Windows-NT-compatible versions of its PC Card software.
. AUTOMATED PROBLEM-RESOLUTION SOFTWARE. In fiscal year 1997,
SystemSoft shipped SystemWizard, its comprehensive solution for
reducing support-call burdens on hardware and software manufacturers.
SystemWizard now encompasses four phases for managing support calls:
. Call Avoidance - SystemWizard Client solves problems on-the-
spot through a diagnosis engine and local Knowledge Base on
the user's PC. No call is needed to solve as many as 20
percent of common problems.
. Call Deflection - SystemWizard can connect to remote
SystemWizard Servers to obtain newer supersets of answers
and information. This is an automated process requiring no
support intervention. This typically targets an additional
10 percent of problems.
. Call Efficiency. If SystemWizard does not retrieve a
solution, it can connect the user to a support technician
and provide that technician with a "trouble ticket" of
system information that speeds the solution process.
SystemWizard Technician also enables the support
representative - on the same call on the same phone line -
to examine the user's PC online, check configurations, and
make changes. This step typically reduces the duration of
simple calls by 10-15 percent. For complex problems, it can
save much more time.
. Call Resolution - SystemWizard Builder enables support
technicians to create automated solutions for new problems
and publish them on SystemWizard Servers for future
automated resolution without intervention from the
technician.
. UNIVERSAL SERIAL BUS SOFTWARE - The Company believes that USB is
analogous to PC Cards and will play an extremely important role in
desktop computing. SystemSoft is offering (a) USB Interface Firmware,
a device-independent layer that isolates hardware details of the USB
controller implementation from application-specific layers and
implements all standard USB requests and data transfer protocols; (b)
USB Device-Specific Firmware for monitors and printers, and plans to
provide it for many other classes of USB devices; (c) USB Host Device
Drivers, that are based on the Windows Driver Model (WDM) that allows
the same driver to run under Windows 95 and Windows NT; (d) USB
Applications and Utilities -- control-panel-style applications -- that
control certain peripheral device functions previously implemented on
the hardware itself, for example, a USB monitor application would
control contrast, brightness, sizing, and positioning; and (e) USB-
Optimized BIOS, an optimized version of the Company's BIOS for use
with legacy USB peripherals such as the keyboard. In addition, the
Company has packaged solutions for monitor manufacturers and for
creating parallel port adapters that support USB.
. PLUG AND PLAY SOFTWARE. Plug and Play software permits PCs to
automatically recognize and configure add-on peripherals and
components without the necessity for the user to reconfigure the
computer system each time a device is removed or added. The Company
believes that it was the first software manufacturer to introduce and
license Plug and Play software complying with the Plug and Play
Association's published standard. SystemSoft's current Plug and Play
software supports Intel and Intel-compatible CPUs and Windows
operating systems. The Company's Plug and Play software includes
comprehensive diagnostic software that identifies and configures
system resources.
An industry consortium in the desktop personal computer industry,
in association with Intel, has developed the Peripheral Connect
Interface ("PCI") standard for buses (the communication pathways
through which peripherals communicate with the CPU). Compliance with
the PCI standard will enable peripheral devices to be connected to a
desktop computer and to be automatically configured and operable upon
rebooting the computer without any need to set jumpers or switches or
to load software. In addition, PCI is designed to significantly
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increase data transmission rates. The Company's PCI system software
for Intel and Intel-compatible CPUs is designed to provide optimal
flexibility and configurability for systems using PCI buses. PCI
system-level software is being adopted in the mobile computing market
and the Company has begun supplying its mobile system OEMs with PCI
software.
. POWER MANAGEMENT SOFTWARE. Power management software reduces power
consumption by monitoring a computer's operating system and hardware
for idle states, stopping or slowing a CPU's clock after a
predetermined period of inactivity, suspending or powering down system
components, and turning off all unnecessary system components and
operations while saving all system information to appropriate memory.
The Company offers system-level software designed to reduce power
consumption for desktop and mobile computers and other electronic
devices. Power management systems have been particularly important
for mobile systems to extend battery life and to reduce heat
generation by powerful CPUs. The Company's power management software
for mobile computers supports Intel and Intel-compatible CPUs and
provides support for DOS, Windows, OS/2, and Windows NT operating
systems.
. BIOS SOFTWARE. BIOS software permits PC hardware components to accept
commands from and deliver commands to the computer's operating system
software. The Company's BIOS software provides support for Intel and
Intel-compatible CPUs, enables PCs to be IBM-compatible and helps PC
OEMs achieve compatibility with Windows 95. The modularity of the
Company's BIOS software enables the Company to quickly respond to
changes in the hardware design provided by each PC manufacturer
because typically these changes, such as adding a new CPU, may only
require modifications to a particular module of the Company's BIOS
software.
The Company licenses the source code for its software for a fixed fee. The
Company also grants object code licenses entitling its OEM, PC Card, and
peripheral manufacturer customers to include the Company's software in their
products. For this license grant, the Company is generally paid a royalty based
on unit volumes and minimum licensing commitments. These manufacturers are
authorized to reproduce the software, provided that the Company's proprietary
rights are clearly noted and protected. Accordingly, the Company does not engage
in any significant manufacturing operations.
Licensees of SystemSoft's software may license subsets of the Company's
technologies as separate modules. This modularity accommodates specific customer
needs and generally permits favorable pricing for customers who license multiple
modules.
Services
OEMs frequently engage the Company to provide engineering services to
assist in customizing the Company's software to the unique specifications,
feature sets and requirements of new PC versions. These services are generally
quoted for projects based on estimated time to complete the project. The payment
of fees for such services depends on the achievement of negotiated milestones.
For PC Card manufacturers, the Company will certify a card's compliance with the
Company's software and published PCMCIA standards for a one-time fee.
The Company is committed to providing strong technical support to its
customers. The Company generally provides updates, corrections and enhancements
to licensed software at no additional charge for one year following the grant of
the license.
RELATIONSHIP WITH INTEL
As of April 15, 1997, Intel held 2,004,229 shares of the Company's Common
Stock.
In December 1993, the Company entered into a Development and License
Agreement with Intel (the "Intel Agreement") pursuant to which Intel licenses
certain technologies to the Company. The Company develops, markets and supports
the software developed from Intel's technology. Under the terms of the Intel
Agreement, Intel paid the Company $4,000,000 for the Company's engineering,
sales and marketing and support services. The final payment under the Intel
Agreement was received in September 1995.
In consideration of Intel's technology provided and licensed to the Company
under the Intel Agreement, the Company is obligated to pay Intel royalties based
on a percentage of revenues generated on all licensed works developed under the
Intel Agreement. Royalties are based upon a percentage of revenues generated on
PC Card software from February 1, 1994 through January 31, 1999 or beyond such
dates if the Company's PC Card software contains Intel's licensed technology.
The royalties paid to Intel are included in related party cost of revenues.
Intel has the right on sixty days notice
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to convert any exclusive license to a non-exclusive license, however such
conversion would reduce the royalty payments by fifty percent.
In October 1995 the Intel Agreement was amended to include engineering
services on additional products. The agreement provides the Company with
engineering service payments up to $3,600,000 which included an initial payment
of $600,000 and subsequent quarterly payments of $375,000 commencing on January
1, 1996, through October 1, 1997. Revenue is recognized as work is performed
and milestones are met. Payments to the Company can be made by offsetting
amounts from royalties due to Intel under the Intel Agreement, to the extent, if
any, that such earned royalties are less than the amounts payable to the
Company. Included in receivable from related party as of January 31, 1997 is
$1,466,000 due under the Intel Agreement. Royalties earned by Intel of $951,507
were used to offset amounts owed to the Company in fiscal year 1997.
Included in related party revenues is $1,875,000 for fiscal year 1997,
representing revenue recognized for services in accordance with the Intel
Agreement. Included in related party cost of revenues are costs associated with
this revenue of $856,147 for fiscal year 1997.
The Company also enters into separate contracts to provide software
licenses and engineering services to Intel. Revenues generated under such
contracts, which are included in related party cost of revenues were $650,000
with related costs of $130,000 for fiscal year 1997. In the Company's fiscal
year ended January 31, 1997, Intel represented approximately 6% of the Company's
total revenues.
SALES AND MARKETING
SystemSoft uses a direct sales force to provide current and prospective
customers, through a consultative sales approach, information about its products
and new technologies that are offered by providers of CPUs, CPU-support chipsets
and operating system software. The Company's goal is to become an engineering
partner, working with its customers' engineering teams to assist in their
adoption of the Company's software. The Company has instituted a strategic
account management program to assist key customers in their use of the Company's
software. These key strategic accounts represent a loyal customer base, help
provide strategic product direction and serve as a foundation for future
revenues.
The Company's sales and marketing organization, consisting of 62 persons as
of January 31, 1997, operates from the Company's headquarters in Natick,
Massachusetts and its field sales offices in Santa Clara and Oxnard, California,
Seattle, Washington, Yokohama, Japan and Taipei, Taiwan. The Company's sales
and marketing organization is complemented by two independent manufacturers'
representatives in Asia Pacific and Europe. Representatives generally are
compensated by commissions and are paid only when payments are received from
customers. The Company utilizes this supplemental sales channel to improve
worldwide sales coverage without increasing fixed payroll expense. For sales in
territories covered by both representatives and the Company's direct sales
force, the Company pays commissions to each. The Company may also provide end
users with upgrades and enhancements to the Company's PC Card software through
indirect distribution channels.
In support of its sales efforts, the Company conducts comprehensive
marketing programs aimed at current and prospective customers which include
industry trade shows, seminars, public relations efforts and participation in
industry committees and communications programs.
CUSTOMERS
The Company's customers include OEMs, including PC manufacturers and PC
Card manufacturers, hardware component manufacturers and operating system
software companies. As of January 31, 1997, SystemSoft had licensed its software
to more than 125 PC manufacturers or component vendors and its PC Card software
or services to more than 25 PC Card manufacturers, providing SystemSoft
compatibility for more than 500 PC Cards.
The Company strives to maintain and develop key customer relationships with
leaders in the PC market, such as Intel, Microsoft, IBM, and Packard Bell. For
example, the Company's first commercial product was a joint development project
with Intel to develop a low power device for the portable computing market. See
"Business -- Relationship with Intel." In July 1993, Microsoft licensed the
Company's base-level PC Card software and engaged the Company to assist in the
implementation of the Company's software for the Windows 95 operating system.
The Company is also a co-developer with Microsoft of the "Microsoft Flash File
System," which enables PC Card-compliant flash memory cards to act like a hard
disk drive. Microsoft has granted the Company a non-exclusive license to
enhance, develop and sublicense the Microsoft Flash File System. In April 1996,
IBM licensed the Company's complete line of PC Card software for incorporation
into its personal computers, under a royalty bearing, non-exclusive license.
See "Business -- SystemSoft Strategy."
8
<PAGE>
In fiscal year 1997, no customer accounted for more than 10% of total
revenue. Total revenue includes revenue from Intel.
In fiscal year 1997, 69% of the Company's revenues were derived from
customers in the United States, 27% from customers in the Asia Pacific Region
and 4% from customers in Europe. Sales to customers in Taiwan are generally
denominated in U.S. dollars. Sales to customers in Japan are denominated in
Japanese yen or U.S dollars.
PRODUCT DEVELOPMENT
The Company's engineering efforts are divided between new product
development and product implementations for particular customers. Because the
needs and priorities of its customers vary, it has been and remains a priority
within the Company's Product Architecture Group to develop modular software
which makes customization efforts faster and easier. Software modularity also
facilitates the continuous upgrade and improvements of the Company's software
required by the rapid evolution of standards and technologies in the PC market.
New product development efforts usually begin as research and development
projects headed by a member of the Company's Product Architecture Group. Through
active participation in several industry associations such as PCMCIA and the
Plug and Play Association, the members of this group acquire insights into
industry trends and requirements. The Company believes their participation in
these committees often allows the Company's views to be better expressed in the
industry standards adopted.
In addition to industry associations, the Product Architecture Group
maintains close working relationships with similar groups within semiconductor
companies and with product design teams of several of the Company's key
customers. One particularly important relationship, formalized under the Intel
Agreement, is the Company's technology sharing arrangement with the Intel
Architecture Laboratory. When cost-effective and advantageous as a means of
achieving its strategy of being the first to introduce new technologies, the
Company has from time to time purchased certain technologies.
Over half of the Company's employees are engineering or technical
personnel. Since inception, the Company has made substantial investments in
research and product development. In fiscal years 1997, 1996 and 1995, research
and development expenses were approximately $8,392,000, $5,112,000 and
$2,528,000, respectively net of capitalized software development expenses of
$2,116,000, $1,206,000 and $602,000, respectively, in those years.
COMPETITION
The markets for the Company's software are highly competitive. The Company
faces competition primarily from other system-level software companies and in-
house software development staff of current and prospective customers. Certain
of the companies with which the Company competes or may in the future compete
have substantially greater financial, marketing, sales and support resources and
may have more "brand-name" recognition than the Company. There can be no
assurance that the Company will be able either to develop software comparable or
superior to software offered by its competitors or to adapt to new technologies,
evolving industry standards and changes in customer requirements.
The Company believes that interdependencies may develop between system-
level software companies and their customers, leading to a "switching" cost
factor which competing system-level software companies must overcome in order to
replace an entrenched competitor. While SystemSoft believes this cost factor
may benefit it in its existing relationships with key participants in the PC
market, switching costs may make it more difficult for the Company to displace
or take market share from competitors, particularly in the desktop market, where
competitors may have strong relationships with certain PC manufacturers.
The Company believes that, in the future, operating systems software
vendors could choose to enter the Company's primary markets as direct
competitors or incorporate enough features into their products so as to decrease
revenues from OEMs.
The Company's software to date has been primarily based on Intel and Intel-
compatible CPUs and Microsoft operating system software. If the market for
Intel and Intel-compatible CPUs is materially diminished, demand for the
Company's current software could be reduced. In addition, most of the Company's
software has been installed on computers using Microsoft's MS/DOS or Windows
operating systems. If Microsoft's operating systems cease to be the dominant
operating system for the PC industry, the Company could experience increased
costs for engineering and/or diminished revenues.
9
<PAGE>
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success depends in significant part on the development,
maintenance and protection of its intellectual property. The Company regards its
software as proprietary and attempts to protect it with a combination of patent,
copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements and other methods of protection. The Company has
applied for several U.S. patents and has filed several international patent
applications to protect its proprietary technology. The Company may apply for
additional patents in the future. However, there is no assurance that any of
these applications will issue as enforceable patents, or that the scope of any
patent granted will be sufficient to prevent third-parties from producing
competitive products. Moreover, despite these precautions, it may be possible
for unauthorized third-parties to copy the Company's software or to reverse
engineer or obtain and use information that the Company regards as proprietary.
The Company licenses its object and source code under written license
agreements. Certain provisions of such licenses, including provisions protecting
against unauthorized use, copying, transfer and disclosure of the licensed
programs, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that the protections put in place by the Company will be
adequate.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement.
Moreover, although the Company is not currently involved in any litigation with
respect to intellectual property rights, there can be no assurance that third-
party claims alleging infringement will not be asserted against the Company in
the future. Such assertions could require the Company to discontinue the use of
certain software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially acceptable to the Company.
The Company's products are licensed to its personal computer manufacturing
customers on a "right to relicense" basis pursuant to the Company's Master
License Agreement or other appropriate contracts or documents. Certain
provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed software, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
From time to time the Company is notified of claims by a third party that a
Company product, or the products of others which contain a Company product,
infringe the intellectual property rights of the third party.
EMPLOYEES
As of January 31, 1997, the Company had 238 full-time employees, including
151 in engineering and technical positions, 62 in sales and marketing and 25 in
finance and administration. The Company's employees are not represented by any
collective bargaining organization and the Company has never experienced a work
stoppage. The Company believes that its relationship with its employees is good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Information with respect to this topic maybe found in Note 9 to the Notes
to Consolidated Financial Statements section of the Annual Report to
Stockholders for the Fiscal year ended January 31, 1997. Such information is
incorporated herein by reference.
RISK FACTORS
The Company operates in a rapidly changing environment that involves certain
risks and uncertainties, some of which are beyond the Company's control. These
risks include:
Variations in Operating Results. The revenue growth rates experienced by
the Company to date may not be indicative of future growth rates and there can
be no assurance that the Company will remain profitable in the future. Future
results of operations may fluctuate significantly based upon numerous factors
including the timing of new product introductions, product mix, levels of
international sales, activities of competitors and the ability of the Company to
penetrate new markets. The volume and timing of new contracts and delays in the
achievement of milestones could have a significant
10
<PAGE>
impact on operating results for a particular quarter. In addition, because many
of the Company's customers do not typically report royalties earned by the
Company until the last month of the calendar quarter, quarterly revenues are
difficult to predict.
Ability to Respond to Rapid Technological Change. The market for system-
level and call avoidance software is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The trend in the PC market in general is toward shorter product life cycles and
rapid product and technology obsolescence. The life cycle of the Company's
products is highly dependent on the life cycles of the products sold by its
customers. For the Company's core products, such as PC Card, Plug and Play,
Power Management and BIOS products, the life cycle may be as long as five years.
However, for specific adaptations of the Company's core products, the Company
generally expects a life cycle of one year or less. The Company's future success
will depend upon its ability to enhance its current software and to develop and
introduce new software which keeps pace with technological developments and
evolving industry standards as well as to respond to changes in customer
requirements. There can be no assurance that the Company will successfully
complete the development, or will not experience delays in the introduction, of
new software or enhancements to its existing software. Any delay or failure of
the Company's software to achieve market acceptance would adversely affect the
Company's business and financial condition. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's software or technologies non- competitive or obsolete.
Radish Acquisition. The successful integration of the Company and Radish
is important to the future financial performance of the combined enterprise. The
anticipated benefits of the Radish acquisition may not be achieved unless, among
other things, the operations of Radish are successfully combined with those of
the Company in a timely manner. The diversion of the attention of management,
and any difficulties encountered in the transition process, could have an
adverse impact on the revenues and operating results of the combined enterprise.
There can be no assurance that the Company will be able to successfully
integrate Radish and its services and products into the Company's operations.
Management of Growth. The Company is currently experiencing a period of
growth which has placed, and could continue to place, a strain on the Company's
financial and other resources. The Company's ability to manage its staff and
facilities growth effectively will require it to continue to improve its
operational, financial, and other internal systems, and to train, motivate and
manage its employees. If the Company's management is unable to manage growth
effectively and new employees are unable to achieve anticipated performance
levels, the Company's results of operations could be adversely affected.
Potential investors should consider the risks, expenses and difficulties
frequently encountered in connection with the operation and development of a new
and expanding business.
Attraction and Retention of Employees. The Company's success will depend
in large part upon its ability to attract, retain and motivate highly skilled
employees. Competition for qualified sales, technical and other qualified
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain additional highly qualified employees in
the future. Although the Company expects to continue to attract sufficient
numbers of highly qualified employees for the foreseeable future, there can be
no assurance that the Company will be able to do so.
Competition. The markets for the Company's software are highly
competitive. The Company faces competition primarily from other system-level
software companies and in-house software development staff of current and
prospective customers. Certain of the companies with which the Company competes
or may in the future compete have substantially greater financial, marketing,
sales and support resources and may have more "brand-name" recognition than the
Company. There can be no assurance that the Company will be able either to
develop software comparable or superior to software offered by its competitors
or to adapt to new technologies, evolving industry standards and changes in
customer requirements.
The Company believes that interdependencies may develop between system-
level software companies and their customers, leading to a "switching" cost
factor which competing system-level software companies must overcome in order to
replace an entrenched competitor. While SystemSoft believes this cost factor may
benefit it in its existing relationships with key participants in the PC market,
switching costs may make it more difficult for the Company to displace or take
market share from competitors, particularly in the desktop market, where
competitors may have strong relationships with certain PC manufacturers.
The Company believes that, in the future, operating systems software
vendors could choose to enter the Company's primary markets as direct
competitors or incorporate enough features into their products so as to decrease
revenues from OEMs.
The Company's software to date has been primarily based on Intel and Intel-
compatible CPUs and Microsoft operating system software. If the market for Intel
and Intel-compatible CPUs is materially diminished, demand for the Company's
current software could be reduced. In addition, most of the Company's software
has been installed on computers
11
<PAGE>
using Microsoft's MS/DOS or Windows operating systems. If Microsoft's operating
systems cease to be the dominant operating system for the PC industry, the
Company could experience increased costs for engineering and/or diminished
revenues.
Dependence on Strategic Business and Customer Relationships. The Company
believes that its success to date has been largely dependent on the adoption of
its software by key participants in the PC industry, including Intel, IBM,
Compaq, NEC, Packard Bell NEC, Digital, Toshiba, Microsoft and Apple. These
relationships have enabled the Company to learn about new technological
developments prior to their general release to the computer industry. The loss
of any of these strategic business and customer relationships could adversely
affect the Company's product development efforts, its business and financial
condition and its ability to realize its strategic objective to be first to
market.
Dependence on Key Customers; Concentration of Credit Risk. The loss of any
key customer and the inability of the Company to replace revenues provided by a
key customer could have a material adverse effect on the Company's business and
financial condition. The Company's customer base consists principally of large
OEMs in the PC market and as a result the Company maintains individually
significant receivable balances from major OEMs. If these OEMs fail to meet
their guaranteed minimum royalty payments and other payment obligations, the
Company's operating results could be adversely affected. As of January 31, 1997,
the three largest receivable balances collectively represented approximately
$4,573,000, or 33% of total accounts receivable.
International Revenues. International revenues are subject to a number of
risks, including the following: agreements may be difficult to enforce and
receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles; foreign countries could impose
additional withholding taxes or otherwise tax the Company's foreign income,
impose tariffs or adopt other restrictions on foreign trade; fluctuations in
exchange rates could affect product demand and net realizable value of foreign
receivables; U.S. export licenses may be difficult to obtain; and the protection
of intellectual property in foreign countries may be more difficult to enforce.
The Company opened its first international subsidiary in Taiwan on March 1,
1995. The Company now licenses software to its customers in Taiwan in U.S.
dollars. The Company opened its first office in Japan in July of 1996 and now
licenses software to its customers in Japan in the local currency and in U.S.
dollars and, as such, the results of some of its operations in Japan are subject
to currency value fluctuations.
Intellectual Property and Proprietary Rights. The Company's success
depends in significant part on the development, maintenance and protection of
its intellectual property. The Company regards its software as proprietary and
attempts to protect it with a combination of patent, copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements and other
methods of protection. The Company has applied for several U.S. patents and has
filed several international patent applications to protect its proprietary
technology. The Company may apply for additional patents in the future. However,
there is no assurance that any of these applications will issue as enforceable
patents, or that the scope of any patent granted will be sufficient to prevent
third-parties from producing competitive products. Moreover, despite these
precautions, it may be possible for unauthorized third-parties to copy the
Company's software or to reverse engineer or obtain and use information that the
Company regards as proprietary. The Company licenses its object and source code
under written license agreements. Certain provisions of such licenses, including
provisions protecting against unauthorized use, copying, transfer and disclosure
of the licensed programs, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the protections put in place by the
Company will be adequate.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement.
Moreover, although the Company is not currently involved in any litigation with
respect to intellectual property rights, there can be no assurance that third-
party claims alleging infringement will not be asserted against the Company in
the future. Such assertions could require the Company to discontinue the use of
certain software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop alternative technologies or to obtain such licenses or, if a license
were obtainable, that the terms would be commercially acceptable to the Company.
The Company's products are licensed to its personal computer manufacturing
customers on a "right to relicense" basis pursuant to the Company's Master
License Agreement or other appropriate contracts or documents. Certain
provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed software, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States.
12
<PAGE>
From time to time the Company is notified of claims by a third party that a
Company product, or the products of others which contain a Company product,
infringe the intellectual property rights of the third party.
Volatility of Stock Price. The trading price of the Company's Common Stock
has been and could continue to be subject to fluctuations in response to
quarterly variations in results of operations, announcements of technological
innovations or new products and services by the Company or its competitors,
changes in financial estimates by securities analysts, changes in management,
and other events or factors. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and often that has been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
ITEM 2. PROPERTIES
----------
The Company has entered into a fifteen year lease agreement for its new
corporate headquarters to be constructed in Natick, Massachusetts with an option
to build on adjacent land. The Company has leased approximately 125,000 square
feet and will occupy the facility in fiscal 1998. The Company's existing
corporate headquarters are located in Natick, Massachusetts. The Company leases
approximately 64,000 square feet in two facilities under leases expiring through
September 2002. The Company also leases additional space, approximately 32,000
square feet in the aggregate, for sales, support and development in Santa Clara
and Oxnard, California, Boulder, Colorado, Yokohama, Japan and Taipei, Taiwan
under leases expiring through 1999.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not now a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Information required by Item 10 of Form 10K with respect to executive officers
of the Company is set forth below. All of the executive officers are elected by
the Board of Directors on an annual basis and serve until their successors have
been duly elected and qualified, or until their earlier resignation or removal.
There are no family relationships among any of the executive officers or
directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert F. Angelo............................ 50 President, Chief Executive Officer, and Chairman of the Board of Directors
Jonathan L. Joseph.......................... 39 Senior Vice President, PC Software Division
William J. O'Connell........................ 39 Senior Vice President, SystemWizard Division
David Klein................................. 53 Senior Vice President, SystemWizard Division
David P. Sommers............................ 50 Senior Vice President, Finance, Treasurer and Chief Financial Officer
Thomas W. Higgins........................... 34 Vice President, Worldwide Sales
Paul J. Pedevillano......................... 40 Vice President, Business Development
Steven A. Berns............................. 50 Vice President, Secretary and General Counsel
</TABLE>
ROBERT F. ANGELO, a co-founder of the Company, has been President, Chief
Executive Officer and a director of the Company since its inception in 1990 and
Chairman of the Board of Directors since February 1996. From 1986 to 1989, he
held various executive positions at Phoenix Technologies Ltd., a developer of
system-level software, including Chief Operating Officer, Vice President of OEM
Operations, Vice President of Product Engineering and Vice President of
Marketing. Prior to 1986, he was Director of Marketing at Cullinet Software,
Inc. and Vice President of Marketing, Engineering and Sales at Acorn Products,
Inc.
13
<PAGE>
JONATHAN L. JOSEPH, a co-founder of the Company, has been Senior Vice
President, PC Software Division since June 1995, after having served as Senior
Vice President, Product Engineering and Marketing from May 1990 to June 1995.
From 1986 to 1990, he was employed by Phoenix Technologies Ltd. in the following
positions: from 1989 to 1990, he was General Manager of the Compatibility
Software Group and from 1988 to 1989, he was Director of Product Marketing for
the Phoenix ROM BIOS. Prior to 1986, he was a Product Manager at NEC Information
Systems and an Assistant to the President at Harvest Computer.
WILLIAM J. O'CONNELL, a co-founder of the Company, has been its Senior Vice
President, SystemWizard Division since June, 1996, after having served as Senior
Vice President, Strategic Accounts and Emerging Markets from March 1994 to June
1996, Senior Vice President, Sales and Marketing from August 1992 to March 1994
and Vice President, Sales from March 1990 to August 1992. He was the Director of
Sales for the Eastern Region at Phoenix Technologies Ltd. from September 1986 to
March 1990.
DAVID KLEIN has been Senior Vice President, SystemWizard Division since
joining the Company in December 1996. He was President and Chief Executive
Officer of Radish Communications from March 1992 until December 1996 after
having served as a consultant from October 1991 to March 1992. From August 1989
to October 1991, he was Division General Manager of Scientific Software-
Intercomp. From March 1976 to December 1988, he held various management
positions at NBI, Inc. Prior to 1976, Mr. Klein held various positions in sales,
marketing and management at Xerox Corporation for 13 years.
DAVID P. SOMMERS has been Senior Vice President , Finance, Treasurer and
Chief Financial Officer since joining the Company in February 1996. From 1993 to
1996, he was Chief Financial Officer of Advanced Media, Inc., a multimedia
software and services company. Prior to 1993, he held various management
positions in finance and marketing at IBM Corporation for twenty-four years.
THOMAS W. HIGGINS has been Vice President, Worldwide Sales since June 1995,
after having served as Director, Asian Pacific Sales from September 1994 until
May 1995. From 1987 to 1994, he held various sales management positions at
Intermetrics, Inc., including Manager of International Sales and Marketing,
Director of International Sales and Vice President, Product Marketing and
Distribution.
PAUL J. PEDEVILLANO has been Vice President, Business Development since
February 1996 after having served as Vice President, Finance, Secretary and
Chief Financial Officer from April 1993 to January 1996. From September 1990 to
April 1993, he was Chief Financial Officer of Star Semiconductor Corporation.
From September 1981 to April 1990, he served in various positions at Alloy
Computer Products including Chief Financial Officer, Chief Operating Officer and
Acting President.
STEVEN A. BERNS has been Vice President, Secretary and General Counsel
since joining the Company in February 1996. From 1994 to 1996, Mr. Berns was
Manager of Software Licensing and Intellectual Property at Digital Equipment
Corporation. From 1988 to 1993, he was Corporate Counsel for Phoenix
Technologies Ltd.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS
-------
Information with respect to stock price information may be found in the
table captioned "Selected Consolidated Quarterly Financial Data" of the Annual
Report to Stockholders for the fiscal year ended January 31, 1997. Information
with respect to the rest of this item may be found in the section captioned
"Stock Profile" of the Annual Report to Stockholders for the fiscal year ended
January 31, 1997. Such information is incorporated herein by reference.
On December 19, 1996 the Company completed a private placement of 2,037,802
shares (the "Shares") of its Common Stock, $.01 par value per share, to the
holders of the outstanding capital stock of Radish in exchange for all of the
outstanding shares of capital stock of Radish. Such private placement was made
to effect the acquisition of Radish by the Company. The offer and sale of the
Shares were exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act") pursuant to Section 4(2) and Rule 506 of
Regulation D under the Securities Act in reliance upon information available to
the Company as of December 19, 1996, including certain representations and
warranties of the purchasers of the Shares. The Shares were offered only to
"accredited investors" (as such terms are defined in Regulation D) or to
purchasers who, in the reasonable belief of the Company, either alone or with
his/her purchaser representative, had such knowledge and experience in financial
and business matters that he/she was capable of evaluating the merits and risks
of the investment. The last price of SystemSoft Common Stock on December 18,
1996 was $16.75 per share. In connection with
14
<PAGE>
the acquisition of Radish, on December 12, 1996, the Company issued to a
strategic partner of Radish a Common Stock Purchase Warrant to purchase 750,000
shares of Common Stock (the "Warrant"). The Warrant is immediately exercisable,
however, under the terms of the Warrant, the right to purchase 500,000 share of
Common Stock of the Company otherwise purchasable expires on December 12, 1998
and the right to purchase the remaining 250,000 shares of Common Stock of the
Company pursuant to the Warrant expires on December 12, 1999. The offer and sale
of the Warrant was exempt from registration under the Securities Act pursuant to
Section 4(2) under the Securities Act in reliance upon information available to
the Company as of December 12, 1996, including certain representations and
warranties of the recipient of the Warrant. The exercise price per share of
Common Stock under the Warrant is $23.00. On January 3, 1997, the Company filed
a registration statement on Form S-3 (File No. 333-19211) with the Securities
and Exchange Commission covering the resale of the Shares and the Common Stock
issueable pursuant to the Warrant and the registration statement became
effective on February 28, 1997.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Information with respect to this item may be found in the table captioned
"Selected Consolidated Five-Year Financial Data" of the Annual Report to
Stockholders for the fiscal year ended January 31, 1997. Such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Information with respect to this item may be found in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Annual Report to Stockholders for the fiscal year ended
January 31, 1997. Such information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Information with respect to this item may be found in the Report of
Independent Accountants, Consolidated Financial Statements, Notes to the
Consolidated Financial Statements and Selected Consolidated Quarterly Financial
Data sections of the Annual Report to Stockholders for the fiscal year ended
January 31, 1997 and in the consolidated financial statements and schedule set
forth in Item 14 of this 10-K. Such information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this item will be set forth under the Captions
"Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement which is currently
expected to be filed with the Securities and Exchange Commission within 120 days
of January 31, 1997 and is incorporated herein by reference thereto. Information
regarding the Company's executive officers is set forth in Item 4A of Part I
hereof, above, under the caption "Executive Officers of the Registrant" and is
incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The information required by this item will be set forth under the Captions
"Director's Compensation" and "Executive Compensation" in the Company's
definitive proxy statement which is currently expected to be filed with the
Securities and Exchange Commission within 120 days of January 31, 1997 and is
incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information required by this item will be set forth under the Caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement which is currently expected to be filed
with the Securities and Exchange Commission within 120 days of January 31, 1997
and is incorporated herein by reference thereto.
15
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required by this item will be set forth under the Captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the Company's definitive proxy statement which is currently
expected to be filed with the Securities and Exchange Commission within 120 days
of January 31, 1997 and is incorporated herein by reference thereto.
16
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) The following documents are filed as part of or are incorporated by
reference into this Annual Report on Form 10K:
1. The following audited consolidated financial statements of
SystemSoft and its subsidiaries, and the accountant's report relating thereto,
are incorporated by reference in Item 8 of this Report from the Company's 1997
Annual Report to Stockholders:
Report of Independent Accountants
Consolidated Balance Sheets as of January 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
January 31, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the
Years Ended January 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended
January 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements.
2. The following Consolidated Financial Statement Schedule filed with
this Annual Report on Form 10-K.
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are either not required, not
applicable or the information is shown in the Consolidated Financial Statements
or the Notes thereto.
3. The exhibits listed in the Exhibit Index filed with this Annual
Report on Form 10-K.
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated December 19, 1996 was filed on
January 3, 1997. The Current Report on Form 8-K was filed pursuant to Item 2 of
Form 8-K announcing the completion of the acquisition of Radish by means of a
merger of a wholly-owned subsidiary of SystemSoft, Black Acquisition Corporation
("BAC"), with and into Radish, pursuant to the Agreement and Plan of Merger and
Reorganization, dated as of December 12, 1996, by and among SystemSoft, BAC and
Radish. In addition, the Current Report on Form 8-K dated December 19, 1996
contained the Financial Statements, Pro Forma Financial Information and Exhibits
required pursuant to Item 7 of Form 8-K.
17
<PAGE>
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.
SYSTEMSOFT CORPORATION
By: /s/ Robert F. Angelo
-------------------------
Robert F. Angelo
Date: May 1, 1997 President, Chief Executive Officer
and
Chairman of the Board of Directors
We, the undersigned officers and directors of SystemSoft Corporation, hereby
severally constitute and appoint Robert F. Angelo and David P. Sommers, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them singly, to sign for us in our names in the capacities indicated below,
amendments to this Report on Form 10-K and to file 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 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, on behalf of the
registrant and in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Robert F. Angelo President, Chief Executive Officer, May 1, 1997
- ---------------------- and Chairman of the Board of Directors
Robert F. Angelo (principal executive officer)
/s/ David P. Sommers Senior Vice President-Finance, Treasurer May 1, 1997
- ---------------------- and Chief Financial Officer (principal
David P. Sommers financial and accounting officer)
/s/ Robert N. Goldman Director May 1, 1997
- -----------------------
Robert N. Goldman
/s/ William Frank King Director May 1, 1997
- ------------------------
William Frank King
/s/ David J. McNeff Director May 1, 1997
- ---------------------
David J. McNeff
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of SystemSoft Corporation
has been incorporated by reference in this Form 10-K from the 1997 Annual Report
to Stockholders of SystemSoft Corporation. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule in Item 14(a)2 of this Form 10-K.
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.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 28, 1997
19
<PAGE>
SCHEDULE II
SYSTEMSOFT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 1995, 1996, and 1997
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning Costs and from End of
Description of Year Expenses Reserves Year
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 31, 1995:
Reserve for doubtful accounts 386,258 331,932 146,546 571,644
YEAR ENDED JANUARY 31, 1996:
Reserve for doubtful accounts 571,644 255,744 336,350 491,038
YEAR ENDED JANUARY 31, 1997:
Reserve for doubtful accounts 491,037 1,312,592 885,714 917,915
</TABLE>
20
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
- --------------- -----------
=2.1 Agreement and Plan of Merger and Reorganization, dated as of
December 12, 1996, by and among SystemSoft, Black Acquisition
Corporation and Radish Communications Systems, Inc. ("Radish" and
now known as SystemSoft Colorado Corporation) (filed as exhibit to
Form 8-K dated December 19, 1996)
=2.2 Registration Rights Agreement dated as of December 12, 1996, by and
among SystemSoft and the stockholders listed on the signature block
thereto (filed as exhibit to Form 8-K dated December 19, 1996)
=2.3 Participation Agreement dated as of December 12, 1996, by and among
SystemSoft, Black Acquisition Corporation, Radish and certain
securityholders of Radish listed on the signature pages thereto
(filed as exhibit to Form 8-K dated December 19, 1996)
=2.4 Escrow Agreement dated as of December 12, 1996 among SystemSoft,
James Cowie and State Street Bank and Trust Company as escrow agent
only (filed as exhibit to Form 8-K dated December 19, 1996)
=3.1 Second Restated Certificate of Incorporation of the Registrant
(filed as exhibit to Form 10-Q for the quarterly period ended July
31, 1996)
=3.2 Certificate of Amendment of Second Restated Certificate of
Incorporation of the Registrant (filed as exhibit to Form 10-Q for
quarterly period ended July 31, 1996)
*3.3 Restated By-laws of the Registrant
*4.1 Specimen Stock Certificate
#*10.1 Intel-SystemSoft Development and License Agreement dated December
20, 1993 between the Registrant and Intel Corporation, as amended
#*10.2 Agreement dated March 31, 1993 between the Registrant and Compaq
Computer Corporation
*10.3 Form of Master License Agreement
~*10.4 1992 Stock Option Plan
~*10.5 Form of Incentive Stock Option
~*10.6 1992 Directors' Stock Option Plan
~*10.7 Form of Nonqualified Stock Option
~*10.8 1993 California Stock Option Plan
~*10.9 Form of Incentive Stock Option granted under the 1993 California
Stock Option Plan
~*10.10 1994 Omnibus Stock Plan, as amended
~*10.11 1994 Non-Employee Director Stock Option Plan
~*10.12 1994 Employee Stock Purchase Plan
~*10.13 Form of Employment Agreement between the Registrant and each of the
following executive officers: Robert F. Angelo, Jonathan L. Joseph
and William J. O'Connell, together with the Employment Agreement of
Paul J. Pedevillano
*10.14 Agreement dated June 10, 1994 between the Registrant and Intel
Corporation
#=10.15 Amendment No. 1 dated January 31, 1995 to Agreement dated March 31,
1993 between the Registrant and Compaq Computer Corporation (filed
as exhibit to Form 10-K for the fiscal year ended January 31, 1995)
=#10.16 Amendment No. 2 dated April 27, 1995 to Agreement dated March 31,
1993 between the Registrant and Compaq Computer Corporation (filed
as exhibit to Form 10-Q for the three month period ended April 30,
1995).
=10.17 Lease agreement dated July 19, 1995 between the Registrant and
Vision Drive, Inc. (filed as exhibit to Form 10-Q for the three
month period ended July 31, 1995).
21
<PAGE>
=10.18 Amendment dated September 11, 1995 to lease agreement dated July
19, 1995 between the Registrant and Vision Drive, Inc. (filed as
exhibit to Form 10-Q for the three month period ended October 31,
1995).
#=10.19 Amendment No.1 dated October 30, 1995 to the Development and
License Agreement dated December 20, 1993 between the Registrant
and Intel Corporation (filed as exhibit to Form 10-Q for the three
month period ended October 31, 1995).
=10.20 Sublease agreement dated December 19, 1995 between the Registrant
and Aspect Medical Systems, Inc. (filed as exhibit to Form 10-K for
the fiscal year ended January 31, 1996)
=~10.21 Employment Agreement between the Registrant and Thomas W. Higgins
executed on September 20, 1995 (filed as exhibit to Form 10-K for
the fiscal year ended January 31, 1996)
=~10.22 Radish 1992 Stock Option Plan (filed as exhibit to Registrant's
Registration Statement on Form S-8 (File No. 333-18657))
=~10.23 Amended and Restated Non-Qualified Stock Option Agreement dated
September 1, 1993 between Radish and Robert Baden (filed as exhibit
to Registrant's Registration Statement on Form S-8 (File No. 333-
18657))
=~10.24 Amendment to Amended and Restated Non-Qualified Stock Option
Agreement dated December 16, 1996 between Radish and Robert Baden
(filed as exhibit to Registrant's Registrant's Registration
Statement on Form S-8 (File No. 333-18657))
**10.25 Lease agreement dated December 20, 1996 between the Registrant and
DIV Natick, LLC
**10.26 Agreement dated December 20, 1996 between the Registrant and DIV
Natick, LLC
**11.1 Statement of Computation of Earnings (Loss) Per Share
**13.1 Portions of the 1997 Annual Report to Stockholders incorporated by
reference into Form 10-K.
**21.1 Subsidiaries of Registrant
**23.1 Consent of Independent Accountants
=24.1 Power of Attorney (included as part of signature page to this
Report)
27.1 Financial Data Schedule (EDGAR version only)
- ------------------------------------
* Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 33-80620) or an amendment thereto and
incorporated herein by reference.
# Confidential treatment requested as to certain portions.
~ Management contract or compensatory plan or arrangement.
= Filed with the report or Form indicated and incorporated herein by
reference.
** File herewith
22
<PAGE>
Exhibit 10.25
LEASE
BETWEEN
DIV NATICK, LLC
AND
SYSTEMSOFT CORPORATION
<PAGE>
TABLE OF CONTENTS
5<TABLE>
<C> <S> <C>
Article 1 - Demised Premises - Term of Lease.................................1
Article 2 - Rent.............................................................5
Article 3 - Utility Services................................................13
Article 4 - Insurance.......................................................13
Article 5 - Use of Demised Premises.........................................15
Article 6 - Compliance with Legal Requirements..............................16
Article 7 - Construction, Condition, Repairs and Maintenance
of Demised Premises.............................................17
Article 8 - Alterations and Additions.......................................23
Article 9 - Discharge of Liens..............................................23
Article 10 - Subordination..................................................24
Article 11 - Fire, Casualty and Eminent Domain..............................27
Article 12 - Indemnification................................................28
Article 13 - Mortgages, Assignments and Subleases by Lessee.................29
Article 14 - Default........................................................32
Article 15 - Surrender......................................................35
Article 16 - Quiet Enjoyment................................................36
Article 17 - Acceptance of Surrender........................................36
Article 18 - Notices - Service of Process...................................36
Article 19 - Separability of Provisions.....................................37
Article 20 - Miscellaneous..................................................37
Article 21 - Intentionally Deleted..........................................41
Article 22 - Intentionally Deleted..........................................41
Article 23 - Option.........................................................41
Article 24 - Right of First Offer...........................................42
Exhibit A - Description of Premises
Exhibit B - Design Development Plans and Specifications
Exhibit C - Additional Parking
Exhibit D - Title Matters
Exhibit E - Lessee's Preliminary Plans
</TABLE>
<PAGE>
LEASE
LEASE dated December 20, 1996 by and between DIV Natick, LLC, a
Massachusetts limited liability company (hereinafter called "Lessor"), and
SystemSoft Corporation, a Delaware corporation (hereinafter called "Lessee").
ARTICLE 1
Demised Premises - Term of Lease
Section 1.01. Upon and subject to the conditions and limitations
hereinafter set forth, Lessor does hereby lease and demise unto Lessee the
entire building to be constructed by Lessor in accordance with this Lease (the
"Demised Premises") on the land known as and numbered 568-598 Worcester Street,
Natick, Massachusetts more particularly described on Exhibit "A" (the
-----------
"Premises"), together with the right to use, in common with others, the
walkways, driveways, parking areas, and utility lines serving the Demised
Premises, terraces adjacent to the Demised Premises, and undeveloped portions of
the Premises for passive recreation activities such as walking and picnicking.
The Premises include land areas which may be developed by Lessor (or a successor
or assign of Lessor's development rights) for additional building and site
improvements (the "Development Land"), as shown on Exhibit "A". Pursuant to a
-----------
separate agreement of even date between Lessor and Lessee (the "Phase B
Agreement"), Lessee has certain rights to require that an additional building
and related site improvements ("Phase B") be developed on the Development Land
and leased to Lessee. The Development Land may also be developed and leased to
a third-party if permitted under the Phase B Agreement. The Premises may be
subdivided into separate lots, may be submitted to a condominium regime or may
be divided into separate leasehold lots by ground leases in order to permit
separate ownership and financing of all or any portion of the Development Land
so long as Lessee's rights and obligations under this Lease and the Phase B
Agreement are not affected in any material respect. In the event the Premises
as originally defined is subdivided or separated into separate leasehold lots,
the Premises shall be deemed to exclude all portions of the Development Land
which is so separated or subdivided. In the event the Premises are submitted to
a condominium regime, the Premises shall be deemed to be the condominium unit
consisting of the Demised Premises. Lessee agrees to enter into any instruments
reasonably requested by Lessor in connection with the foregoing so long as the
same are not inconsistent with the rights of Lessee under this Lease and the
Phase B Agreement and are otherwise reasonably acceptable to Lessee. Without
limiting the generality of the foregoing, such instruments may include an
acknowledgment that Lessee has no rights under this Lease with respect to the
Development Land except for the use of any common walkways, driveways, parking
areas and other specifically designated parts of the Premises serving the
Demised Premises, and/or a subordination of this Lease to documents creating a
condominium on the Premises. Lessee shall have a right to review and approve
any proposed condominium, subdivision, or ground lease documents, such approval
not to be unreasonably withheld, and shall agree to be bound by and comply with
the
<PAGE>
approved condominium, subdivision, or ground lease documents. After development
of the Development Land commences, except for the right to use walkways,
driveways, parking areas and utility lines serving the Demised Premises (which
may be relocated, removed, or altered as set forth in the Phase B Agreement),
Lessee shall have no rights or claims against Lessor under this Lease with
respect to the Development Land, its development, or any improvements thereto,
including any interruption in the use of walkways, driveways, parking areas, or
other portions of the Development Land serving the Demised Premises, Lessee
agreeing that its rights with respect to such matters are provided under the
Phase B Agreement and that Lessee shall look solely to the party who is the
"Developer" from time to time under the Phase B Agreement with respect to such
matters. If Lessor is the "Developer" under the Phase B Agreement, amounts due
from Tenant to Lessor under the Phase B Agreement shall be deemed to be
additional rent hereunder.
Section 1.02. The term of this Lease shall commence on the earlier of (a)
the date 120 days after the Initial Delivery Date (as defined below), provided
that such date shall be extended by the number of days of any Lessor Delay (also
as defined below) or (b) the date Lessee enters into possession of all or any
substantial portion of the Demised Premises for the conduct of its business
(which shall expressly exclude entry to perform Lessee's Work or otherwise
prepare the Demised Premises for occupancy). The date of commencement as so
determined is hereinafter referred to as the "Commencement Date." The term
shall expire fifteen (15) years after the Commencement Date, unless extended or
sooner terminated as hereinafter provided. If the Commencement Date is other
than the first day of the month, the balance of the month during which the
Commencement Date occurs (the "Commencement Month") shall be added to the first
year of the term. Lessor will provide Lessee with at least fourteen (14) days
prior notice of the Initial Delivery Date. (If the Initial Delivery Date does
not occur on the initially designated date, Lessor shall keep Lessee informed of
the anticipated Initial Delivery Date but shall not be required to give another
14-day notice.)
The Initial Delivery Date shall be the date on which at least one-half
floor of the Demised Premises is in "Delivery Condition," meaning that the roof
membrane is down (but not fully completed) and the exterior wall is installed or
tarped, with floor slabs and columns in place, and with reasonable access and
staging areas available, so that Lessee may commence construction of Lessee's
Work in such one-half floor area.
After the Initial Delivery Date occurs, Lessor shall use reasonable efforts
to put additional portions of the Demised Premises in Delivery Condition
according to the following schedule:
<TABLE>
<CAPTION>
Applicable Portion
------------------
of Demised Premises Scheduled Delivery Date
------------------- -----------------------
<S> <C>
Second One-Half Floor 12 days after the Initial Delivery Date
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Applicable Portion
------------------
of Demised Premises Scheduled Delivery Date
------------------- -----------------------
<S> <C>
Third One-Half Floor 12 days after the date Delivery Condition actually
occurs for the Second One-Half Floor
Fourth One-Half Floor 12 days after the date Delivery Condition actually
occurs for the Third One-Half Floor
Fifth One-Half Floor 12 days after the date Delivery Condition actually
occurs for the Fourth One-Half Floor
Sixth One-Half Floor 12 days after the date Delivery Condition actually
occurs for the Fifth One-Half Floor
</TABLE>
A "Lessor's Delay" shall mean (i) the number of days after any Scheduled
Delivery Date that Delivery Condition actually occurs for the Applicable Portion
of the Demised Premises and/or (ii) if Lessor's Work is not Substantially
Completed within 120 days after the Initial Delivery Date, the number of days
after the expiration of the 120-day period that Lessor's Work is Substantially
Completed; provided the deadlines set forth in this Section 1.02 for Delivery
Condition of portions of the Demised Premises and for Substantial Completion
shall be extended for delays caused by Lessee so long as Lessor promptly
notifies Lessee of the delay.
"Substantial Completion" and "Substantially Completed" mean that the
construction of Lessor's Work is completed, excepting only punch list type
items, the testing of the heating, ventilating, and air conditioning systems and
completion of site improvements which could not then be completed owing to their
seasonal nature, and mechanical adjustments, none of which exceptions will
interfere materially with the beneficial occupancy of the Demised Premises or
use of the Premises and all of which Lessor shall complete as soon as is
reasonably possible under the circumstances. Lessee shall obtain a Certificate
of Occupancy from the Natick Building Inspector as part of Lessee's Work, and a
Certificate of Occupancy shall not be required for Substantial Completion.
In the event of a dispute between Lessor and Lessee over whether Delivery
Completion has occurred for a portion of the Demised Premises, or whether
Substantial Completion has occurred, the certification of Lessor's architect
shall be conclusive.
Lessee shall have the right to enter portions of the Demised Premises prior
to the Commencement Date, as and when each portion is in Delivery Condition, to
construct Lessee's Work or otherwise prepare the Demised Premises for occupancy,
such possession and occupancy to be under all of the terms, covenants,
conditions and provisions of this Lease other than the obligation to pay rent
and additional rent, but including the obligation to pay utilities. Prior to
the Commencement Date, Lessee shall pay a share of utility bills equal to 1/6
multiplied by the number of half floors of the Demised Premises which were in
-3-
<PAGE>
Delivery Condition during the period covered by the utility bill (Lessee's share
to be appropriately adjusted for half floors which are in Delivery Condition for
a portion of such period only). Lessee and Lessor agree to execute an agreement
in recordable form identifying the actual Commencement Date and the termination
date of this Lease, but a failure to execute such an agreement shall not affect
the commencement or expiration of the term of this Lease.
Section 1.03. Lessee has entered into a Purchase and Sale Agreement dated
September 12, 1996 (the "P&S") with Argonaut Holdings, Inc. to acquire the
Premises, and Lessor and Lessee have entered into a letter agreement dated
August 30, 1996 (the "Pre-Development Agreement") and a letter agreement dated
September __, 1996 (the "Side Letter") concerning the acquisition and
development of the Premises. Lessee acknowledges that this Lease is being
executed and delivered in anticipation of Lessor acquiring the Premises and that
Lessor does not currently own the Premises, and has not obtained the
governmental approvals or financing necessary to construct the Demised Premises.
Lessee acknowledges that there is a possibility that Lessor will not acquire the
Premises or be able to obtain such approvals or financing. If Lessor has not
acquired the Premises and obtained the governmental approvals and financing
necessary to construct the Demised Premises by March 15, 1997, then either
party, by notice to the other, may terminate this Lease, in which event it shall
be deemed void, of no further force and effect and without recourse to the
parties hereto. If Delivery Condition has not occurred for all of the Demised
Premises by the date (the "Outside Delivery Date") fifteen (15) months after
Lessor's acquisition of the Premises, which date shall be extended for up to
three (3) months for delays in the development of the Premises for reasons
beyond Lessor's control, provided Lessor promptly notifies Lessee of the delay
and, unless the delay is caused by Lessee, uses all reasonable efforts to
mitigate the delay, then at Lessee's option exercised by notice to Lessor, this
Lease shall be deemed void, of no further force and effect and without recourse
to the parties hereto. Lessor's failure to acquire and develop the Premises, or
any delay in the same, for any good-faith reason, shall not give rise to any
liability of Lessor hereunder, shall not constitute a Lessor's default, and
except as provided in this Section 1.03 shall not affect the validity of this
Lease, the beginning or end of the Term as otherwise determined hereunder or
Lessee's obligations associated therewith. However, Lessor agrees (i) to use
commercially reasonable efforts at Lessor's expense, including overtime work, if
construction delays within Lessor's reasonable control are expected to prevent
Delivery Condition for all of the Demised Premises to be achieved by the Outside
Delivery Date, and (ii) to cooperate with Lessee, at Lessee's request and
expense, if Lessee desires to accelerate Lessor's construction schedule to
permit earlier occupancy of the Demised Premises. Also, Lessor's construction
lender shall be required to agree with Lessee that, if the construction loan
matures or is accelerated prior to the commencement date of the term, or if
Delivery Condition has not occurred for all of the Demised Premises on or before
the Outside Delivery Date, Lessee shall have the right to purchase the
construction loan for the full amount due thereunder. Lessee shall have the
right to review and approve Lessor's construction financing to confirm the same
is on reasonable commercial terms.
-4-
<PAGE>
Section 1.04. For the purposes of this Lease, Lessor may take title to the
Premises in the name of a nominee or assignee. In the event such nominee or
assignee acquires the Premises, then upon assuming and agreeing to perform the
obligations of Lessor hereunder in writing the assignee or nominee of Lessor
shall become the Lessor hereunder. Upon the Lessor or its nominee or assignee
acquiring the Premises, this Lease shall become self-operative and in full force
and effect without the necessity of any other action on the part of Lessor.
THIS LEASE IS MADE UPON THE COVENANTS, AGREEMENTS, TERMS, PROVISIONS,
CONDITIONS AND LIMITATIONS SET FORTH HEREIN, ALL OF WHICH LESSEE AND LESSOR EACH
COVENANT AND AGREE TO PERFORM AND COMPLY WITH, EXCEPTING ONLY AS TO THE
COVENANTS OF THE OTHER:
ARTICLE 2
Rent
Section 2.01. The Lessee shall pay the Lessor base rent in equal monthly
installments during the first through fifth years, inclusive, at the annual rate
of Fifteen and 18/100 ($15.18) Dollars per Rentable Square Foot, during the
sixth through tenth years, inclusive, at the annual rate of Seventeen and 08/100
($17.08) Dollars per Rentable Square Foot, and during the eleventh through
fifteenth years, inclusive, at the annual rate of Nineteen and 21/100 ($19.21)
Dollars per Rentable Square Foot. All monthly payments are due and payable in
advance on the Commencement Date and the first day of each calendar month
thereafter.
The parties agree that the Rentable Area for the Demised Premises shall
conclusively be deemed to be 125,000 square feet.
Section 2.02. (a) Commencing on the Commencement Date, Lessee shall pay
as additional rent to Lessor all real estate taxes and other municipal or public
assessments (excluding assessments for water and sewer which shall be paid by
Lessee pursuant to Section 3.01 hereof) levied against the Premises and all
operating expenses for the Premises, except as provided below with respect to
the development of an additional building on the Premises. Special assessments
shall be paid over the longest period permitted.
The additional rent computed under this Section 2.02 shall be prorated
should this Lease commence or terminate before: (i) the end of any fiscal tax
year for that portion related to taxes; or (ii) the end of any calendar year for
that portion related to operating expenses. The Lessee shall pay to Lessor such
additional rent within fifteen (15) days after written notice from Lessor to
Lessee that it is due. Upon request of Lessor, Lessee shall make monthly
payments of additional rent on the Commencement Date and the first of each month
thereafter equal to one-twelfth (1/12) of the annual amount of such additional
rent
-5-
<PAGE>
reasonably projected by Lessor to be due from Lessee (pro-rated for any partial
month at the beginning or end of the term). At the request of either party,
Lessee's monthly payments shall be reasonably revised from time to time so that
Lessee's aggregate monthly payments shall equal the additional rent then
projected to be due for the year in question. A final accounting and payment for
each real estate tax and operating period shall be made within thirty (30) days
after written notice from Lessor of the exact amount of such additional rent for
the fiscal tax year or calendar year in question. In the event real estate taxes
on the Premises, based upon which Lessee shall have paid additional rent, are
subsequently reduced or abated, Lessee shall be entitled to receive a rebate of
the amount abated, provided that the amount of the rebate allocable to Lessee
shall in no event exceed the amount of additional rent paid by Lessee for such
fiscal year on account of real estate taxes under this Section 2.02, and further
provided the rebate allocable to Lessee shall be reduced by the reasonable cost
of obtaining such reduction or abatement not otherwise paid by Lessee. Lessor
shall seek a reduction or abatement of real estate taxes for the Premises at
Lessee's reasonable request, provided that all reasonable costs incurred by
Lessor in seeking the reduction or abatement shall be reimbursed by Lessee
within thirty (30) days after request.
(b) Operating expenses for the purpose of this Section shall include:
(1) All reasonable expenses incurred by the Lessor or its agents
which shall be directly related to employment in connection with the
Premises of day and night supervisors, janitors, handymen, engineers,
mechanics, electricians, plumbers, porters, cleaners, accounting personnel,
and other personnel (including amounts incurred for wages, salaries and
other compensation for services, payroll, social security, unemployment and
similar taxes, workmen's compensation, insurance, disability benefits,
pensions, hospitalization, retirement plans and group insurance, uniforms
and working clothes and the cleaning thereof, and expenses imposed on the
Lessor or its agents pursuant to any collective bargaining agreement), for
services in connection with the operation, repair, maintenance, cleaning
and protection of the Premises in a manner customarily provided to first
class office buildings in suburban Boston (collectively the "Operation" of
the Premises), the Premises' heating, ventilating, air conditioning,
electrical, plumbing and elevator systems and the other improvements
constructed on the Premises, and, subject to clause (c)(1) below, personnel
engaged in supervision of any of the persons mentioned above;
(2) The reasonable market rate cost of services, materials and
supplies furnished or used in the Operation of the Premises;
(3) The reasonable market rate cost of replacements for tools and
equipment used in the Operation of the Premises;
(4) The amounts paid to managing agents and for reasonable legal
and other professional fees relating to the Operation of the Premises, but
excluding legal
-6-
<PAGE>
and other professional fees paid in connection with negotiation,
administration or enforcement of leases; provided, however, management fees
for the Premises shall not exceed three (3%) percent of the gross rental
income of the Premises (including base rent and all additional rent)
computed on an annual basis;
(5) Reasonable market rate insurance premiums in connection with
the Premises;
(6) The reasonable market rate costs of plowing and snow removal,
maintaining landscaping and storm water drainage systems (including
requirements of the Town of Natick Planning Board Decision 15-96), and
maintaining parking areas, driveways, and loading docks in good repair
reasonably free of snow and ice;
(7) Reasonable market rate amounts paid to independent contractors
for services, materials and supplies furnished for the Operation of the
Premises.
(8) All other reasonable market rate expenses incurred in
connection with the Operation of the Premises, including capital
expenditures (except as specifically excluded below), any expenses in the
nature of common area charges for facilities shared with adjoining property
to the extent allocable to the Premises, and any condominium common
expenses assessed against a condominium unit comprising the Demised
Premises.
(c) Operating expenses shall be computed on a cash basis and shall be
determined in accordance with generally accepted accounting principles
consistently applied. They may be incurred directly or by way of reimbursement
and shall include taxes applicable thereto. The Lessor shall use reasonable
efforts to obtain competitive prices for the goods and services provided in the
Operation of the Premises. Except in cases of emergency, Lessor shall solicit
at least three bids for any maintenance or repair costs to be included in
operating expenses which are anticipated to be in excess of Five Thousand
Dollars ($5,000.00), such amount to be reasonably adjusted from time to time for
inflation (using the Consumer Price Index - All Urban Consumers for the Boston
metropolitan area published by the U.S. Department of Labor or a comparable
index reasonably selected by Lessor), and shall consult with Lessee before
accepting a bid other than the lowest bid. The following shall be excluded from
operating expenses:
(1) Salaries and related benefits or any portion thereof for
officers and executives of the Lessor above the level of property manager.
(2) Depreciation of the Premises or any improvements thereon.
(3) Interest and amortization on indebtedness.
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(4) Expenses for which the Lessor, by the terms of this Lease or
otherwise, makes a separate charge.
(5) The cost of any electric current or other utilities paid for by
the Lessee.
(6) Leasing fees or commissions.
(7) Repairs or other work occasioned by the exercise of right of
eminent domain.
(8) Renovating or otherwise improving or decorating, painting or
redecorating space for tenants or other occupants or vacant tenant space,
other than maintenance and repairs required by this Lease and work in
common areas.
(9) Lessor's costs of utilities and other services sold separately
to tenants for which Lessor is entitled to be reimbursed by such tenants as
an additional charge over and above the base rent, operating expense, or
other rental amounts payable under the lease with such tenant.
(10) Expenses in connection with services or other benefits of a
type which Lessee is not entitled to receive under the Lease but which are
provided to another tenant or occupant.
(11) Expenses, including rental, created under any ground or
underlying leases.
(12) Any particular items and services for which a tenant otherwise
reimburses Lessor by direct payment over and above the base rent, operating
expenses and other rental amounts payable under the applicable lease.
(13) Any expense for which Lessor is compensated through proceeds of
insurance, condemnation or otherwise.
(14) Expenses for periods of time not included within the term of
this Lease.
(15) All costs incurred by Lessor to keep the foundations, floor
slabs, and structural columns and beams in good condition and repair, and
when necessary to replace the roof. The costs of ordinary maintenance and
repair of the roof shall be an operating expense.
(16) Cost of rebuilding after casualty or taking or in the removal,
abatement or remediation of hazardous substances or materials caused by
Lessor or persons other than Lessee.
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(17) All operating expenses shall be reduced by the amount (net of
collection costs) of any insurance reimbursement, discount or allowance
received by the landlord in connection with such costs.
(18) Costs incurred in the acquisition and development of the
Premises, including the initial construction of improvements by Lessor on
the Premises, the correction of any defective work in the initial
construction of such improvements pursuant to Section 7.01, or otherwise
during the first twelve (12) months following Substantial Completion and
any longer period during which Lessor is able, with reasonable efforts, to
enforce contractor's warranties to correct the defective work, and the
development of the Development Land for additional buildings and related
site improvements.
It is intended that base rent shall be a net return to Lessor throughout the
term of this Lease free of all costs, except those which this Lease expressly
makes Lessor responsible for bearing; and all provisions shall be construed in
terms of such intent. However, if operating expenses paid by Lessee during the
last 24 months prior to the scheduled expiration of the term (as it may be
extended) include capital expenses for the replacement of any building systems
or major items of equipment, and Lessee is not in material default of any of its
obligations under this Lease, then within ninety (90) days after the expiration
of the term Lessor shall reimburse Lessee for the unamortized portion of the
capital expense (amortization to be on a straight-line basis over the useful
life of the replacement). Lessor's obligation under the prior sentence shall
survive the expiration of the term.
Lessee shall have the right for a period of ninety (90) days following its
receipt of Lessor's statement of additional rent due on account of operating
expenses to examine Lessor's books and records concerning operating expenses.
If the additional rent due was less than the additional rent paid by Lessee,
Lessor shall either promptly refund to Lessee the difference or credit same
against rent next due from Lessee. If the additional rent due was less than
ninety-five percent (95%) of the additional rent paid by Lessee, Lessor shall
reimburse Lessee for the reasonable third-party costs of reviewing Lessor's
books and records.
Prior to the separation of the Development Land from the Premises,
operating expenses shall include all operating expenses incurred by Lessor in
connection with the Development Land. After such separation, operating expenses
under this Lease shall exclude any costs incurred by Lessor on account of the
operation of the Development Land, provided that operating expenses which are
incurred jointly for the benefit of the Demised Premises and the Development
Land shall be allocated between the Demised Premises and the Development Land in
accordance with the ratio of their respective Rentable Areas, unless the
Development Land is used for a purpose materially different than the Demised
Premises, such as retail uses, in which case the affected cost items shall be
allocated on a reasonable
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basis. Prior to the construction of an additional building on the Development
Land, the Rentable Area of the Development Land shall be deemed to be 80,000
square feet. If any portion of the Development Land is not a separate tax
parcel, then taxes shall be allocated between the Demised Premises and such
portion of the Development Land in accordance with the ratio of their respective
fair market values.
Section 2.03. All payments of rent and additional rent shall be made to
the Lessor at c/o The Davis Companies, One Appleton Street, Boston Massachusetts
02116, or as may be otherwise directed by the Lessor in writing.
Section 2.04. Lessor shall notify Lessee of the date it anticipates
acquiring the Premises, and at least fourteen (14) days prior to Lessor's
anticipated acquisition of the Premises, Lessee shall deliver to Lessor the sum
of One Million ($1,000,000.00) Dollars as security for the payment of all rent
and the performance and observance of the agreements and conditions in this
Lease contained on the part of Lessee to be performed and observed (the
"Security Deposit"), which sum shall be held by Lessor in a separate account and
not commingled with Lessor's other funds. In the event of any default or
defaults by Lessee, Lessor may apply the Security Deposit then held by Lessor,
or any part thereof, including any interest then accrued thereon, towards the
curing of any such default or defaults and/or towards compensating Lessor for
any loss or damage arising from any such default or defaults (including amounts
due and unpaid under the Phase B Agreement if deemed additional rent under
Section 1.01). If Lessor shall apply said sum or any part thereof, as
aforesaid, Lessee shall on demand pay to Lessor the amount so applied by Lessor,
to restore the Security Deposit to the original amount. Upon the yielding up of
the Demised Premises at the expiration or earlier termination of this Lease and
the cure of any defaults of Lessee under this Lease, the then unapplied and
unreturned amount of the Security Deposit shall be returned to Lessee, together
with interest thereon at prevailing money market account rates. In the event
Lessor's interest in the Premises shall be transferred or assigned and the
assigning Lessor shall credit or turn over to such assignee the sum of money
referred to above or the unpaid balance thereof, Lessee agrees to look only to
the assignee of such assignor with respect to the sum referred to above, its
application and return.
In lieu of cash, Lessee may provide the Security Deposit in the form of a
clean, irrevocable, freely transferable letter of credit in the required amount
in form and substance acceptable to Lessor and any mortgage lender, and from a
bank acceptable to Lessor and its mortgage lender, as security for Lessee's
obligations under this Lease. If there is a material adverse
change at any time in the financial conditional of the bank issuing the
letter of credit, Lessor may require Lessee to provide a substitute letter of
credit from another acceptable bank within thirty (30) days after request,
and if not so replaced Lessor may draw the latter of credit and hold the
proceeds as set forth above. Lessor approves Silicon Valley Bank to provide
the initial letter of credit for a term of no more than 18 months, and
specifically reserves the right to require a letter of credit from a different
bank with a higher credit rating upon expiration of the initial letter of
credit. If Lessee elects to provide a letter of credit, the
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letter of credit shall be renewed at least 30 days prior to its expiration from
time to time, and, if not so renewed, Lessor or its mortgage lender may draw the
letter of credit and hold the proceeds as set forth above. If Lessee shall fail
to perform any of its obligations under the Lease, Lessor or its mortgage lender
may, but shall not be obliged to, draw the entire amount of the letter of credit
and apply the amount necessary to cure the default. The balance shall be held by
Lessor in accordance with the first paragraph of this Section 2.04 as security
for the performance of Lessee's remaining obligations hereunder, and Lessee
shall be obligated upon demand to make a cash payment to restore the Security
Deposit from time to time to the required amount of the Security Deposit. No
interest shall accrue or be paid under this Section 2.04 so long as a letter of
credit is provided in lieu of cash.
Section 2.05. Upon the fulfillment of the conditions for reimbursement set
forth in this Section 2.05, Lessee shall be entitled to a cash allowance in the
amount of up to Twenty Dollars ($20.00) per Rentable Square Foot contained in
the Demised Premises from Lessor, which shall be used by Lessee to pay for the
costs of Lessee's Work (as defined in Section 7.02). As a condition to such
payment, Lessee agrees to deliver to Lessor prior to commencing Lessee's Work, a
statement, in reasonable detail, outlining Lessee's Work and plans therefor, an
approximate good faith cost estimate therefor, a copy of the fully executed
construction contract for Lessee's Work (including all exhibits) along with
Lessee's agreement to promptly perform and diligently pursue to completion from
and after the Initial Delivery Date, subject to Sections 5.01, 8.01 and Article
7, Lessee's Work. Lessor shall pay to Lessee sums incurred on account of
Lessee's Work, up to a maximum of Twenty Dollars ($20.00) per Rentable Square
Foot contained in the Demised Premises, upon completion of Lessee's Work (or in
installments as provided below in this Section 2.05). Payments pursuant to this
Section 2.05, shall not be required to be paid in any event until Lessor has
acquired the Premises and then only if the following conditions have been fully
satisfied: (a) at all times prior to submitting its request for payment and at
the time payment is to be made, Lessee shall have paid in full any rents due to
Lessor hereunder within applicable grace periods and this Lease is otherwise
current and not in default beyond applicable grace periods; (b) Lessee has
demonstrated to Lessor that the cost to complete Lessee's Work is no more than
the amount remaining to be disbursed by Lessor under this Section 2.05; (c)
Lessor shall have verified that all work for which payment is requisitioned is
"in place" and properly completed; (d) Lessee shall submit to Lessor paid
invoices evidencing the expenditures, along with lien waivers acceptable to
Lessor and its mortgagee from all parties performing Lessee's Work; (e) Lessee
shall have complied with any other reasonable requirements of Lessor's
construction lender for disbursement of funds, including confirmation that, to
Lessee's best knowledge, Lessor is not in default under the Lease and Lessor's
Work to date has been satisfactorily performed; and (f) for release of retainage
and any other final payment, an Unconditional Certificate of Occupancy for the
Demised Premises issued by the Town of Natick. Provided all of the foregoing
conditions have been satisfied in full, Lessor agrees that it will pay to Lessee
the sums due to Lessee within thirty (30) days after receipt of Lessee's
completed request. Payment shall be made by check payable to Lessee and/or to
Lessee's contractor; provided that if the payment is not made
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within thirty (30) days after the date when due, then Lessee may by notice to
Lessor and the construction lender elect to receive the payment as a credit
against rents next due from Lessee. Notwithstanding the foregoing, Lessee may
request progress payments for the performance of the work, subject to the
conditions set forth in (a)-(e) above, but shall request such payments no more
often than every thirty (30) days. Progress payments shall be subject to
reasonable retainage requirements of Lessor and Lessor's mortgage lender.
Section 2.06. Upon the fulfillment of the conditions for reimbursement set
forth in this Section 2.06, Lessee shall be entitled to a cash allowance in the
amount of up to One and 75/100 Dollars per Rentable Square Foot contained in the
Demised Premises from Lessor, which shall be used by Lessee to prepare plans and
specifications for Lessee's Work. Lessor shall pay to Lessee sums incurred to
prepare the plans and specifications for Lessee's Work, up to a maximum of One
and 75/100 Dollars per Rentable Square Foot contained in the Demised Premises
upon completion of the plans and specifications (or in installments as provided
in the last sentence of this Section 2.06), provided that Lessor shall not be
required to pay any such sums until after Lessor has acquired the Premises and
Lessee has delivered to Lessor a copy of the fully executed architect's contract
and any engineering contracts for Lessee's Work (including all exhibits) and
then only if the following conditions have been fully satisfied: (a) at all
times prior to submitting its request for payment and at the time payment is to
be made, Lessee shall have paid in full any rents due to Lessor hereunder within
applicable grace periods and this Lease is otherwise current and not in default
beyond applicable grace periods; (b) Lessee has demonstrated to Lessor that the
cost to complete the plans and specifications is no more than the amount
remaining to be disbursed by Lessor under this Section 2.06; (c) Lessor shall
have verified that all work for which payment is requisitioned has been properly
completed; (d) Lessee shall submit to Lessor paid invoices evidencing the
expenditures; and (e) Lessee shall have complied with any other reasonable
requirements of Lessor's construction lender for disbursement of funds,
including confirmation to Lessee's best knowledge, that Lessor is not in default
under the Lease and Lessor's Work to date has been satisfactorily performed.
Provided all of the foregoing conditions have been satisfied in full, Lessor
agrees that it will pay to Lessee the sums due to Lessee within thirty (30) days
after receipt of Lessee's completed request. Payment shall be made by check
payable to Lessee and/or Lessee's architect; provided that if the payment is not
made within thirty (30) days after the date when due, then Lessee may by notice
to Lessor and the construction lender elect to receive the payment as a credit
against rents next due from Lessee. Prior to or simultaneously with requesting
payment, Lessee shall direct Lessor in writing as to which of the methods of
payment Lessee desires. Notwithstanding the foregoing, Lessee may request
progress payments for the plans and specifications, subject to the conditions
set forth in (a)-(e) above provided no payments shall be due until after Lessor
has acquired the Premises.
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ARTICLE 3
Utility Services
Section 3.01. Lessee shall contract directly with the applicable utility
companies for all utilities serving the Demised Premises, and shall execute all
agreements and pay all utility deposits necessary to obtain the utility service
in Lessee's name and, in the case of electricity, to cause the electric utility
to install the facilities necessary to bring electric service to the Demised
Premises. Lessee agrees to pay for utilities consumed prior to the Commencement
Date as set forth in Section 1.02, and shall pay all charges for utilities
consumed on or after the Commencement Date as and when due.
Section 3.02. Lessor agrees to furnish heat, air conditioning and cleaning
to the Demised Premises as requested by Lessee from time to time (Lessee paying
the cost of all such services either directly (for utilities) or as operating
expenses). However, Lessor shall not be required to provide services which
exceed the capacity of the building systems serving the Demised Premises and
shall not be required to act (or prevented from acting) in any manner which
might create unsafe conditions, violate applicable legal requirements, or be
inconsistent with standards for the operation of comparable institutionally-
financed office buildings. In any event, subject to Section 7.06 below,
Lessor's obligation to provide such services shall be subject to interruption
due to accident, to the making of repairs, alterations or improvements (other
than those due to willful misconduct of Lessor), to labor difficulties, to
trouble in obtaining fuel, electricity, service or supplies from the sources
from which they are usually obtained for such building, governmental restraints,
or to any cause beyond the Lessor's reasonable control. In no event shall
Lessor be liable for any interruption or delay in any of the above services for
any of such causes except as provided in Section 7.06.
ARTICLE 4
Insurance
Section 4.01. The Lessee shall not permit any use of the Demised Premises
which will make voidable any insurance on the Premises, or on the contents of
said property, or which shall be contrary to any law or regulation from time to
time established by the Insurance Services Office, or any similar body
succeeding to its powers. The Lessee shall, on demand, reimburse the Lessor in
full for all extra insurance premiums caused by the Lessee's use of the Demised
Premises. Lessor is not aware of any projected increase in insurance premiums
on account of Lessee's intended use of the Demised Premises, which use is to be
reasonably the same as Lessee's current use of its Premises at Two Vision Drive,
Natick, Massachusetts.
Section 4.02. The Lessee shall maintain with respect to the Demised
Premises and the property of which the Demised Premises are a part, commercial
general public liability insurance, written on an occurrence basis, in the
amount of at least Five Million ($5,000,000.00) Dollars, single limit, with
property damage insurance in limits of at least
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Five Hundred Thousand ($500,000.00) Dollars, with companies having Best
Insurance Guide Rating of A-or better, qualified to do business in Massachusetts
and in good standing therein, insuring the Lessor and its mortgagees, as well as
the Lessee, against liability for injury to persons or damage to property.
Lessee's liability insurance policy shall be primary with respect to all claims
for which Lessee is to indemnify Lessor under Article 12. All furnishings,
fixtures, equipment, effects and property of Lessee and of all persons claiming
through Lessee which from time to time may be on the Demised Premises or in
transit thereto or therefrom shall be at the sole risk of Lessee and shall be
kept insured by Lessee through the term at Lessee's expense and in prudent
amounts, and if the whole or any part thereof shall be destroyed or damaged by
fire, water or otherwise, or by the leakage or bursting of water pipes, or other
pipes, by theft or from any other cause, no part of said loss or damage is to be
charged to or be borne by Lessor.
Section 4.03. The Lessor shall maintain at least Five Million
($5,000,000.00) Dollars of commercial general liability insurance (including so-
called umbrella coverage) covering the Premises and naming Lessee as an
additional insured. Lessor's liability insurance policy shall be primary with
respect to all claims for which Lessor is to indemnify Lessee under Article 12.
Lessor shall maintain physical damage and casualty insurance on the Premises
(excluding furnishings, fixtures, equipment and other personal property of
Lessee) in the amount of its full replacement value as reasonably determined by
Lessor, and shall also maintain boiler and rent loss insurance in amounts
required by Lessor's mortgage lender (or, if there is no mortgage lender,
consistent with standards for comparable institutionally financed buildings).
Section 4.04. During any construction by Lessee, if any, Lessee shall
maintain adequate builder's risk, liability and workmen's compensation insurance
to Lessor's reasonable satisfaction and which comply with the same insurance
requirements applicable to construction by Lessor under any mortgage to a
financial institution encumbering the Demised Premises. Lessor and its
mortgagee shall be named as additional insureds on the liability insurance of
Lessee's contractors.
Section 4.05. Any insurance carried by either party with respect to the
Demised Premises or property therein or occurrences thereon shall, if it can be
so written without additional premium or with an additional premium which the
other party agrees to pay, include a clause or endorsement denying to the
insurer rights of subrogation against the other party to the extent rights have
been waived by the insured hereunder prior to occurrence of injury or loss.
Each party, notwithstanding any provisions of this Lease to the contrary, hereby
waives any rights of recovery against the other for injury or loss due to
hazards covered by insurance carried (or required to be carried) by the party
suffering the injury or loss to the extent of the coverage provided (or to be
provided) thereunder.
Section 4.06. Within fifteen (15) days of request, each party shall
provide the other with certificates of all insurance maintained or required to
be maintained under this Lease.
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All such insurance certificates shall provide that such policy shall not be
canceled or reduced as to coverage or amount without at least thirty (30) days
prior written notice to each insured named therein.
ARTICLE 5
Use of Demised Premises
Section 5.01. The Lessee covenants and agrees to use the Demised Premises
only for the purposes of general business and professional offices, including
software engineering, research and development office uses, and for no other
purpose.
Section 5.02. Lessee will not make or permit any occupancy or use of any
part of the Demised Premises for any hazardous, offensive, dangerous, noxious or
unlawful occupation, trade, business or purpose or any occupancy or use thereof
which is contrary to any law, by-law, ordinance, rule, permit or license, and
will not cause, maintain or permit any nuisance in, at or on the Demised
Premises. The Lessee hereby agrees not to maintain or permit noises, operating
methods, or conditions of cleanliness of the Demised Premises or any
appurtenance thereto which are reasonably objectionable to Lessor. Lessor
acknowledges that Lessee's intended use, which use is to be reasonably the same
as Lessee's current use of its premises at Two Vision Drive, Natick,
Massachusetts, does not violate the foregoing limitations. No hazardous
substances or wastes shall be brought, kept, maintained or discharged on the
Premises except that customary office and cleaning supplies may be brought,
kept, maintained and discharged in amounts and a manner consistent with
reasonable commercial/office practices and in compliance with all laws. Except
as provided in Section 20.16, no sign, antenna or other structure or thing shall
be erected or placed on the Demised Premises or any part of the exterior of any
building or on the land comprising the Premises or erected so as to be visible
from the exterior of the building containing the Demised Premises without first
securing the written consent of the Lessor, which shall not be unreasonably
withheld or delayed.
Section 5.03. Lessor and Lessee shall each indemnify, defend with counsel
reasonably acceptable to the party entitled to indemnity and hold the other (and
in the case of Lessee, Lessor's managing agent and any mortgagee of the Demised
Premises) fully harmless from and against any and all liability, loss, suits,
claims, actions, causes of action, proceedings, demands, costs, penalties,
damages, fines and expenses, including, without limitation, attorneys fees,
consultants' fees, laboratory fees and clean up costs, and the costs and
expenses of investigating and defending any claims or proceedings, resulting
from, or attributable to (i) the presence of any Hazardous Substance on the
Premises or the Demised Premises arising from the action or negligence of the
party against whom indemnity is sought, its officers, employees, contractors,
agents and invitees, or arising out of the generation, storage, treatment,
handling, transportation, disposal or release by such party (or their respective
officers, employees, contractors, agents or invitees) of any Hazardous Substance
at or near the Premises or the Demised Premises, and (ii) any violation(s) by
the
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party against whom indemnity is sought (or their respective officers,
employees, contractors, agents or invitees) of any applicable law regarding
Hazardous Substances. This hold harmless and indemnity shall survive the
expiration or earlier termination of this Lease and shall not include
consequential damage, damage arising from the gross negligence or willful
misconduct of the party seeking indemnification, or damage to or loss of
personal property.
Section 5.04. Lessee will not permit any abandonment of the Demised
Premises or any part thereof except
(a) to the extent caused by condemnation,
(b) to the extent caused by damage to or alterations of the Demised
Premises pending restoration thereof, or
(c) as herein otherwise specifically provided or consented to in writing
by the Lessor.
The cessation of business operations by Lessee at the Demised Premises
shall not per se be considered abandonment if Lessee timely observes and
performs all of its other obligations under this Lease and properly and with
reasonable continuity monitors and maintains the security of and at the Demised
Premises so as to prevent any vandalism thereat or improper use thereof.
Section 5.05. Lessee will not cause or permit any waste, overloading,
stripping, damage, disfigurement or injury of or to the Premises or the Demised
Premises or any part thereof.
Section 5.06. Rules and regulations, provided the same are not
inconsistent with or in limitation of the provisions of this Lease affecting the
cleanliness, safety, occupation and use of the Demised Premises, which in the
judgment of the Lessor are reasonable, shall be observed by the Lessee and its
employees, and Lessee shall use reasonable efforts to cause its agents,
contractors, customers and business invitees to comply therewith.
ARTICLE 6
Compliance with Legal Requirements
Section 6.01. Throughout the term of this Lease, Lessee, at its sole cost
and expense, will promptly comply with all requirements of law related in any
way to the Demised Premises if such requirement becomes applicable after the
Substantial Completion of Lessor's Work and, regardless of the date the
requirement becomes applicable, any requirements of law related specifically to
Lessee's Work or to Lessee's specific use and occupation of the Demised Premises
or with respect to any modifications or renovation to the Demised Premises
proposed by Lessee and not to the Premises generally, and will procure
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and maintain all permits, licenses and other authorizations required with
respect to the Demised Premises, or any part thereof, for the lawful and proper
operation, use and maintenance of the Demised Premises or any part thereof.
Lessee shall in each and every event and instance, at its sole cost and expense,
be responsible for compliance with all codes and regulations with respect or
relating to the Demised Premises, including, without limitation, those
occasioned by work performed by or for Lessee. However, if Lessee incurs any
capital expenses during the last twenty-four (24) months prior to the scheduled
expiration of the term (as it may be extended) for alterations or improvements
to the equipment or building systems serving the Demised Premises in order to
comply with legal requirements applicable generally to office space and Lessee
is not in material default of any of its obligations under this Lease, then
within ninety (90) days after the expiration of the term Lessor shall reimburse
Lessee for the unamortized portion of the capital expense (amortization to be on
a straight-line basis over the useful life of the alteration or improvement).
Lessor's obligation under the prior sentence shall survive the expiration of the
term. Lessor shall be responsible for compliance of Lessor's Work with all
requirements of law applicable to Lessor's Work as of the date of Substantial
Completion.
ARTICLE 7
Construction, Condition, Repairs and Maintenance of Demised Premises
Section 7.01. The construction of the basic structural and mechanical
elements of the Demised Premises together with related site work and the like is
referred to as Lessor's Work. Lessor shall perform Lessor's Work in a good and
workmanlike manner, using materials of first quality, and shall comply with
applicable laws and all applicable ordinances, orders and regulations of
governmental authorities. Lessor's Work consists of the work shown on the
design development plans and specifications listed on Exhibit B (the "Design
Development Plans"), which have been reviewed and approved by Lessor and Lessee.
Lessor shall prepare final construction plans and specifications for Lessor's
Work ("Lessor's Plans"), which shall be subject to Lessee's review and approval.
Lessee shall have the opportunity to review and comment on Lessor's Plans as the
same are being prepared. Lessee shall not object to aspects of Lessor's Plans
which are shown on the Design Development Plans (or represent reasonable
detailing of items shown on the Design Development Plans), shall not
unreasonably withhold its approval with respect to any other aspects of Lessor's
Plans, and shall respond to Lessor's request for approval of Lessor's Plans
within four (4) business days of receipt of Lessor's request. Lessor's Work
shall be performed substantially in accordance with Lessor's Plans, provided
that Lessor may modify the design of Lessor's Work from time to time so long as
the modification does not affect the utility, quality, or appearance of Lessor's
Work in any material respect. If Lessor desires to make a design modification
materially affecting the utility, quality or appearance of Lessor's Work, Lessor
shall promptly so notify Lessee. Within four (4) business days after such
notice, Lessee shall notify Lessor whether Lessee approves such change. Lessee
shall not unreasonably withhold any such requested approval and Lessee agrees to
cooperate with Lessor in approving changes in Lessor's Plans necessary to
satisfy Lessor's schedule and
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financing requirements so long as Lessor's Work is consistent with standards for
a first-class suburban office building and the Design Development Plans.
In no event, however, shall Lessee be required to approve any of the
following changes in Lessor's Work:
(1) A change in the Rentable Area of the Demised Premises by more than
3,000 square feet.
(2) A change in the Rentable Area of any floor included within the Demised
Premises by more than 5%.
(3) Any change in the elevator systems or mechanical or electrical systems
in the Demised Premises with the result that the systems included
therein would be significantly inferior to those shown on the Design
Development Plans and inconsistent with systems customarily included
in a first-class, suburban office building.
(4) Any reduction in standard structural floor load capacities which would
result in a floor load capacity inconsistent with that customarily
included in a first-class, suburban office building.
(5) Any reduction in the quality of materials and fixtures used in the
lobby, passenger elevator cabs, or washrooms with the result that the
same would be significantly inferior to those shown on the Design
Development Plans and to those customarily included in a first-class,
suburban office building.
(6) Any major change in the overall exterior design or appearance of the
Demised Premises.
From time to time during the construction of the Demised Premises, Lessor
shall allow Lessee's authorized representatives to review plans and
specifications including change orders and generally to review the progress of
Lessor's Work. Such reviews shall be scheduled so as not to interfere with the
conduct of Lessor's Work.
Lessee may from time to time request changes in Lessor's Plans to
accommodate Lessee's interior space design. Lessor shall make such changes so
long as (i) Lessee pays for all additional costs resulting from the change as
such costs are incurred, (ii) in Lessor's reasonable judgment the change will
not delay Delivery Condition for any part of the Demised Premises or Substantial
Completion of Lessor's Work (provided that Lessor will make changes at Lessee's
request which may, in the aggregate, delay the outside date for commencement of
the term by up to a total of two (2) weeks but only so long as Lessee agrees to
make a payment on the term commencement date equal to the number of days of
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delay as reasonably estimated by Lessor multiplied by $6,300 [being Lessee's per
diem base rent plus a reasonable estimate of costs for real estate taxes,
utilities, insurance, and other costs of delay]), and (iii) the change is
consistent with design standards for Lessor's Work and general purpose office
space, does not affect the utility or value of the Demised Premises, and is
acceptable to Lessor's construction lender and permanent lender (or take-out
purchaser).
Within fourteen (14) days after the Substantial Completion of Lessor's
Work, Lessee shall give Lessor a "punchlist" of any items of Lessor's Work
needing correction or completion. Any matters not shown on the punchlist shall
be deemed approved by Lessee, subject to Lessor's obligations with respect to
latent defects as set forth below. Lessor shall as soon as is reasonably
possible under the circumstances correct or complete any items on such list
that, require correction or completion. Except for latent defects and items
specified in the punchlist, Lessee shall be deemed to have accepted all elements
of Lessor's Work on the date the punchlist is submitted. In the case of a
dispute concerning items specified in the punchlist, Lessor's architect shall
determine if the disputed items require completion or correction.
With respect to latent defects, Lessor shall remedy, repair or replace any
incomplete, defective or malfunctioning aspects of Lessor's Work which
materially affect Lessee's occupancy of the Demised Premises if Lessee notifies
Lessor of the same by the earlier of (i) the date thirty (30) days after the
date such defect could reasonably first have been discovered by Lessee or (ii)
the date one (1) year after Substantial Completion of Lessor's Work, such action
to occur as soon as practicable during normal working hours and so as to avoid
any unreasonable interruption of Lessee's use of the Demised Premises. If
Lessee notifies Lessor of any latent defects after the dates set forth above,
Lessor agrees to use commercially reasonable efforts, at Lessee's request and
expense, to enforce any existing rights of Lessor for remedy, repair or
replacement by a contractor, subcontractor, manufacturer, or architect.
The foregoing shall constitute Lessor's entire obligation with respect to
all incomplete, defective or malfunctioning aspects of Lessor's Work.
Section 7.02. Lessee shall perform all work, other than Lessor's Work,
required to make the Demised Premises completed for Lessee's use ("Lessee's
Work"). The preliminary plans and specifications for Lessee's Work are listed
on Exhibit "E" ("Lessee's Preliminary Plans"). Lessee agrees to construct and
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complete Lessee's Work in a good and workmanlike manner, using materials of
first quality, and shall comply with all applicable laws and all applicable
ordinances, orders and regulations of governmental authorities. Prior to
commencing Lessee's Work, Lessee shall prepare final construction plans and
specifications for Lessee's Work ("Lessee's Plans"), which shall be subject to
review and approval by Lessor and its construction lender. Lessor and its
construction lender shall have the opportunity to review and comment on Lessee's
Plans as the same are being prepared. Lessor
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and its construction lender shall not object to aspects of Lessee's Plans which
are shown on Lessee's Preliminary Plans (or represent reasonable detailing of
items shown on Lessee's Preliminary Plans), shall not unreasonably withhold
approval with respect to any other aspects of Lessee's Plans, and shall respond
to Lessee's request for approval of Lessee's Plans within four (4) business days
of receipt of Lessee's request. Lessee's Work shall be performed substantially
in accordance with Lessee's Plans, provided that Lessee may modify the design of
Lessee's Work from time to time so long as the modification does not affect the
utility, quality, or appearance of Lessee's Work in any material respect. If
Lessee desires to make a design modification materially affecting the utility,
quality or appearance of Lessee's Work, Lessee shall promptly notify Lessor.
Within four (4) business days after such notice, Lessor shall notify Lessee
whether Lessor and its construction lender approve such change. Lessor and its
construction lender shall not unreasonably withhold any such requested approval
and agree to cooperate with Lessee in approving changes in Lessee's Plans
necessary to satisfy Lessee's schedule and financing requirements so long as
Lessee's Work is consistent with standards for a first-class suburban office
building and Lessee's Preliminary Plans. The contractor performing Lessee's work
shall be subject to Lessor's approval, which shall not be unreasonably withheld.
Lessee shall cause its contractor to avoid any interference with, damage to, or
delay of Lessor's Work and to avoid any labor disharmony. Lessee shall reimburse
Lessor for any loss or expense arising out of any such interference, damage,
delay, or labor disharmony. Lessee shall not create or permit to be created or
to remain any lien, encumbrance, or charge upon the Premises or any part thereof
or upon Lessee's leasehold interest therein on account of Lessee's Work, and if
any such lien, encumbrance or charge is asserted shall discharge or bond off the
same as provided in Article 9.
(b) From time to time during the construction of Lessee's Work, Lessee
shall allow Lessor's authorized representatives to review plans and
specifications including change orders and generally to review the progress of
Lessee's Work. Such reviews shall be scheduled so as not to interfere with the
conduct of Lessee's Work.
(c) Lessee acknowledges and agrees that timely commencement and completion
of Lessee's Work consistent with the type, level, and quality of work described
on Lessee's Preliminary Plans, and occupancy of the Demised Premises by Lessee,
will be a condition of Lessor's financing. Lessee agrees (i) to complete
Lessee's Plans in compliance with the requirements of this Lease by April 1,
1997, (ii) to commence Lessee's Work within ten (10) days after the Initial
Delivery Date and to diligently prosecute Lessee's Work to completion
thereafter, (iii) to complete Lessee's Work (other than punchlist items not
necessary for use and occupancy of the Demised Premises) and to obtain a
Certificate of Occupancy for the entire Demised Premises on or before the later
of (w) the date one hundred sixty-five (165) days after the Initial Delivery
Date or (x) the date forty-five (45) days after Lessor's Work is Substantially
Completed and (iv) to occupy the Demised Premises for the conduct of business on
or before the later of (y) the date one hundred eighty (180) days after the
Initial Delivery Date or (z) the date sixty (60) days after Lessor's Work is
Substantially Completed.
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The deadline set forth in this Section 7.02(c) shall be extended for delays
beyond the control of Lessee, its architect and/or contractor, provided Lessee
promptly notifies Lessor of the delay and, unless the delay is caused by Lessor,
uses all reasonable efforts to mitigate the same. Lessor shall cooperate as
reasonably requested by Lessee in the design and construction of Lessee's Work
and Lessee's occupancy of the Demised Premises.
Section 7.03. Throughout the term of this Lease, but subject to the terms
of Article 11, Lessor shall maintain and repair the Premises, including, without
limitation, the Demised Premises and all other site improvements, in accordance
with standards for a first-class suburban office building, and except as
provided in Sections 2.02, 7.01 and 7.05, the cost thereof shall be an operating
expense. In the event of an unanticipated maintenance or repair cost which is
an operating expense (as set forth in the preceding sentence), Lessor shall
notify Lessee upon determining the maintenance or repair is needed and, as
necessary for Lessor to make payments to contractors or vendors, Lessee shall
pay such cost to Lessor within thirty (30) days after request in addition to the
estimated monthly payments for operating expenses under Section 2.02 and the
additional payment shall be credited against the total amount of operating
expenses due under Section 2.02 for the year in question.
Section 7.04. Lessor, or agents or prospective lenders or purchasers of
Lessor, at reasonable times, shall be permitted to enter upon the Demised
Premises to examine the condition thereof, to make repairs, alterations and
additions as Lessor is required or permitted to do under the terms of this
Lease, and at any reasonable time within eighteen (18) months before the
expiration of the term to show the Demised Premises to prospective lessees, and
for such purposes, Lessee hereby grants to Lessor and others accompanying Lessor
a right of access to the Demised Premises. In connection with such access,
Lessor shall not unreasonably interfere with the operation or work at the
Demised Premises and shall give Lessee reasonable prior notice (except in the
event of an emergency, in which event such notice shall be as prompt as possible
under the circumstances) of Lessor's intent to access the Demised Premises.
Section 7.05. Lessor shall maintain and repair the foundations, floor
slabs, and structural columns and beams, and when necessary replace the roof, at
its sole cost and expense, provided, however, Lessee shall promptly reimburse
Lessor for the cost to repair any damage caused by it or its licensees,
invitees, guests, agents or employees. The costs of ordinary maintenance and
repair of the roof shall be an operating expense.
Section 7.06. In the event Lessor shall not, within seven (7) days after
receipt of notice from Lessee of any failure by Lessor to maintain and repair
the Demised Premises as required by Sections 7.03 and 7.05 or provide the
services required to be provided by Lessor under Section 3.02, have commenced
such repairs and maintenance or efforts to provide such services, Lessee shall
have the right to take such reasonable steps as are necessary to correct any
such failure by Lessor to maintain and repair or to provide services as required
under Section 3.02 and may bill Lessor for any reasonable out-of-pocket costs so
incurred by
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Lessee which Lessee was not otherwise obligated to pay (either directly or as an
operating expense). Lessor shall reimburse Lessee for any such costs within
thirty (30) days after receipt by Lessor of invoices and reasonably appropriate
backup therefor. If such costs are not reimbursed within such thirty (30) day
period, and are not reimbursed within fifteen (15) days following an additional
notice to Lessor given after the thirty (30) day period expires, then Lessee
shall be entitled to deduct the unreimbursed costs from the next installments of
rent due under this Lease except to the extent Lessor disputes in good faith
such costs by notice to Lessee prior to the expiration of the fifteen (15) day
period. If Lessor so disputes such costs, then the matter shall be submitted to
arbitration as follows. Within fifteen (15) days of Lessor's notice of dispute,
Lessor and Lessee shall seek to agree to a single arbitrator and, if they are
unable to agree, shall each appoint one arbitrator. If either party fails to
appoint an arbitrator within the fifteen (15) day period, then the arbitrator
appointed by the other party shall be the sole arbitrator to decide the dispute.
If each party timely appoints an arbitrator, then a third arbitrator shall, upon
request by either party, be appointed by the then President of the Greater
Boston Real Estate Board or successor organization, and if such person fails to
designate the third arbitrator within fifteen (15) days after request, then
either party may request the American Arbitration Association, Boston office, to
designate the third arbitrator. The third arbitrator shall have at least ten
(10) years' experience in the management of 500,000 or more square feet of
first-class office space in the greater Boston area. The arbitrator (or a
majority of the arbitrators if three) shall determine by written decision if
Lessee is entitled to deduct the unreimbursed costs from the rent due under this
Lease. The arbitration shall be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (or any successor
organization), and the decision of the arbitrator(s) shall be final and binding
on the parties. The fee of a single or third arbitrator shall be paid equally by
the parties, and if there are three arbitrators, then each party shall pay the
arbitrator designated by it. Each party shall pay all other costs incurred by it
in connection with the arbitration. However, if it is determined that Lessee is
entitled to deduct any costs from rent under this Section 7.06 after an
arbitration, then the amount Lessee shall be entitled to deduct shall be equal
to such costs plus interest on such costs at the prime rate announced from time
to time by The First National Bank of Boston (or another major financial
institution selected by Lessee) from the date of Lessor's dispute notice until
the date of the arbitration decision. If Lessor shall be using reasonable
efforts to maintain and repair the Premises as required by Lessor under this
Lease or to provide services as required under this Lease, but shall be unable
to do so due to reasons beyond its control (financial reasons shall not be
deemed to be beyond Lessor's control), then so long as Lessor continues to use
reasonable efforts to provide such services or maintain and repair the Premises,
Lessee shall not be entitled to exercise this right of self-help.
Notwithstanding the foregoing, in the event a condition exists that prevents
access to the Demised Premises or threatens the fitness of the Demised Premises
for its Permitted Use or the safety and well-being of Lessee's guests, invitees
and/or employees (an "Unsafe Condition"), and such condition is not corrected
within twenty-four (24) hours after notice thereof from Lessee to Lessor, the
Lessee shall have the right to take such reasonable steps as are necessary to
restore access to the Demised Premises or eliminate the Unsafe Condition.
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ARTICLE 8
Alterations and Additions
Section 8.01. The Lessee shall not make any additional alterations or
additions beyond those approved by Lessor as Lessee's Work, structural or non-
structural, to the Demised Premises without first obtaining the written consent
of Lessor on each occasion which consent shall not be unreasonably withheld.
For non-structural alterations or additions valued at less than Twenty-Five
Thousand ($25,000.00) Dollars which do not affect any of the exterior, lobbies,
elevator, or building systems in the Demised Premises, Lessor's consent shall
not be required. (The foregoing $25,000.00 figure shall be adjusted from time
to time for inflation). Wherever consent is required, it shall include approval
of plans and contractors and the insurance required under Section 4.04. Lessee
shall notify Lessor of all alterations or additions and provide Lessor with
copies of any construction plans therefor whether or not Lessor's consent is
required. All such allowed alterations, including reasonable third-party costs
of review in seeking Lessor's approval, shall be made at Lessee's expense, in
compliance with all laws, and shall be in quality at least equal to that
required for the initial construction of Lessee's Work. Except as set forth
below, any alterations or additions made by the Lessee which are permanently
affixed to the Demised Premises or affixed in a manner so that they cannot be
removed without defacing or damaging the Demised Premises shall, if Lessor so
elects, become property of the Lessor at the termination of occupancy as
provided herein. If Lessor elects not to retain such additional alterations or
additions, they shall be removed by Lessee, at its expense, with minimal
disturbance to the Demised Premises; however, Lessee shall not be required to
remove any alterations or additions that are a part of Lessee's Work or
otherwise consistent with general office use. If Lessee so requests in writing,
Lessor shall advise Lessee in advance of Lessee making such alterations or
additions of which of those alterations or additions Lessee shall be required to
remove at the end of the term. Alterations or additions not affixed and which
may be removed with minimal disturbance or repairable damage may be removed by
Lessee provided such disturbance or damage is restored and repaired so that the
Demised Premises are left in at least as good a condition as they were in at the
commencement of the term, reasonable wear and tear excepted. All other
alterations and additions made by Lessee and not to be retained by Lessor shall
be removed by Lessee, at its expense, at the end of the term and the Demised
Premises shall be left in the same condition as at the commencement of the term
or after completion of Lessee's Work, reasonable wear, tear and damage by fire
or other casualty or taking or condemnation by public authority excepted.
ARTICLE 9
Discharge of Liens
Section 9.01. Lessee will not create or permit to be created or to remain,
and within five (5) days after notice from Lessor will discharge or bond off, at
its sole cost and expense and to the reasonable satisfaction of Lessor and any
mortgagee, any lien, encumbrance or
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charge (on account of any mechanic's, laborer's, materialmen's or vendor's lien,
or any mortgage, or otherwise) made or suffered by Lessee which is or might be
or become a lien, encumbrance or charge upon the Demised Premises or any part
thereof or upon Lessee's leasehold interest therein, or the rents, issues,
income or profits accruing to Lessor therefrom, and Lessee will not suffer any
other matter or thing within its control whereby the estate, rights and interest
of Lessor in the Demised Premises or any part thereof might be materially
impaired.
ARTICLE 10
Subordination
Section 10.01.
(a) The interest of the Lessee hereunder shall be subordinate to the
rights of any holder of a mortgage or holder of a ground lease of
property which includes the Demised Premises, originally given to an
institutional lender, and executed and recorded subsequent to the date
of this Lease, unless such holder shall otherwise so elect, and in any
event provided that such holder shall agree to recognize in writing
the right of the Lessee to use and occupy the Premises upon the
payment of rent and other charges payable by the Lessee under this
Lease, and the performance by the Lessee of the Lessee's obligations
hereunder (but without any assumption by such holder of the Lessor's
obligations under this Lease which relate to periods prior to the date
such holder acquired title to or took possession of the Demised
Premises); or
(b) If any holder of a mortgage or holder of a ground lease of property
which includes the Demised Premises, originally given to an
institutional lender, shall so elect, this Lease, and the rights of
the Lessee hereunder, shall be superior in right to the rights of such
holder, with the same force and effect as if this Lease had been
executed and delivered, and recorded, or a statutory notice hereof
recorded, prior to the execution, delivery and recording of any such
mortgage.
Any election as to Subsection (b) above shall become effective upon
either notice from such holder to the Lessee in the same fashion as
notices from the Lessor to the Lessee are to be given hereunder or by
the recording in the appropriate registry or recorder's office of an
instrument, in which such holder subordinates its rights under such
mortgage or ground lease to this Lease.
In the event any holder shall succeed to the interest of Lessor, the
Lessee shall, and does hereby agree to attorn to such holder and to
recognize such holder as its Lessor and Lessee shall promptly execute
and deliver any instrument that such holder may reasonably request to
evidence such attornment provided such document contains reasonably
satisfactory non-disturbance provisions to allow
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Lessee to remain in occupancy pursuant to this Lease as long as Lessee
remains current and not in default of its obligations hereunder. Upon
such attornment, the holder shall not be: (i) liable in any way to the
Lessee for any act or omission, neglect or default on the part of
Lessor under this Lease; (ii) responsible for any monies owing by or
on deposit with Lessor to the credit of Lessee unless received by the
holder; (iii) subject to any counterclaim or setoff which theretofore
accrued to Lessee against Lessor; (iv) bound by any modification of
this Lease subsequent to such mortgage or by any previous prepayment
of regularly scheduled monthly installments of fixed rent for more
than (1) month, which was not approved in writing by the holder; (v)
liable to the Lessee beyond the holder's interest in the Premises and
the rents, income, receipts, revenues, issues and profits issuing from
such Property; or (vi) liable for any portion of a security deposit
not actually received by the holder.
(c) The covenant and agreement contained in this Lease with respect to the
rights, powers and benefits of any such holder constitute a continuing
offer to any person, corporation or other entity, which by accepting
or requiring an assignment of this Lease or by entry of foreclosure
assumes the obligations herein set forth with respect to such holder;
every such holder is hereby constituted a party to this Lease and an
obligee hereunder to the same extent as though its name was written
hereon as such; and such holder shall at its written election be
entitled to enforce such provisions in its own name.
(d) No assignment of this Lease and no agreement to make or accept any
surrender, termination or cancellation of this Lease and no agreement
to modify so as to reduce the rent, change the term, or otherwise
materially change the rights of the Lessor under this Lease, or to
relieve the Lessee of any obligations or liability under this Lease,
shall be valid unless consented to in writing by the Lessor's
mortgagees or ground lessors of record, if any.
(e) The Lessee agrees on request of the Lessor to execute and deliver from
time to time any agreement, in recordable form, which may reasonably
be deemed necessary to implement the provisions of this Section 10.01.
(f) Lessor agrees that any subordination of this Lease to any mortgage
encumbering the Demised Premises shall be conditioned upon Lessor
delivering to Lessee a written, recordable Non-Disturbance Agreement
from the ground lessor or mortgagee seeking to have this Lease
subordinated to its interest which shall, inter alia, state that
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provided Lessee shall then and at all times thereafter be current and
not in default of its obligations under this Lease beyond applicable
grace periods, such ground lessor or mortgagee shall not disturb
Lessee in its possession of the Demised Premises pursuant to, and
shall recognize Lessee's rights under, the terms of this Lease.
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Section 10.02. Each party agrees to furnish to the other, within ten (10)
days after request therefor from time to time, a written statement setting forth
the following information:
(i) Whether and when Lessee accepted possession of the Demised Premises,
and the commencement and expiration dates of the term of this Lease,
(ii) The applicable rent then being paid, including all additional rent
based upon the additional rent most recently established;
(iii) That the Lease is current and the party providing the statement is
not aware of any default or specifying any default;
(iv) That the party providing the statement is not aware of any current
claims or offsets against the other party, or specifically listing
any such claims;
(v) The date through which rent has then been paid;
(vi) Such other information relevant to the Lease as the requesting party
may reasonably request; and
(vii) A statement that any prospective mortgage lender and/or purchaser
may rely on all such information.
Section 10.03. After receiving notice from any person, firm or other
entity that it holds a mortgage which includes the Demised Premises as part of
the mortgaged premises, or that it is the ground lessor under a lease with the
Lessor, as ground lessee, which includes the Demised Premises as a part of the
mortgaged premises, no notice from the Lessee to the Lessor shall be effective
against such holder unless and until a copy of the same is given to such holder
or ground lessor, and the curing of any of the Lessor's defaults by such holder
or ground lessor shall be treated as performance by the Lessor. Accordingly, no
act or failure to act on the part of the Lessor which would entitle the Lessee
under the terms of this Lease, or by law, to be relieved of the Lessee's
obligations hereunder, to exercise any right of self-help or to terminate this
Lease, shall result in a release or termination of such obligations or a
termination of this Lease unless (i) the Lessee shall have first given written
notice to such holder or ground lessor of the Lessor's act or failure to act
which could or would give basis for the Lessee's rights; and (ii) such holder or
ground lessor, after receipt of such notice, has failed or refused to correct or
cure the condition complained of within the applicable cure period afforded
Lessor under this Lease or such longer period as shall be reasonably agreed upon
by Lessee and such holder or ground lessor.
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Section 10.04. With reference to any assignment by the Lessor of the
Lessor's interest in this Lease, or the rents payable hereunder, conditional in
nature or otherwise, which assignment is made to the holder of a mortgage or a
ground lessor on property which includes the Demised Premises, the Lessee
agrees:
(a) That the execution thereof by the Lessor, and the acceptance thereof
by the holder of such mortgage or ground lessor, shall never be
treated as an assumption by such holder or ground lessor of any of the
obligations of the Lessor hereunder, unless such holder or ground
lessor shall, by notice sent to the Lessee, specifically make such
election; and
(b) That, except as aforesaid, such holder or ground lessor shall be
treated as having assumed the Lessor's obligations hereunder only upon
foreclosure of such holder's mortgage or the taking of possession of
the Premises, or, in the case of a ground lessor, the termination of
the ground lease.
ARTICLE 11
Fire, Casualty and Eminent Domain
Section 11.01. Should a substantial portion of the Premises be damaged by
fire or other casualty, or be taken by eminent domain, the Lessor, at its sole
option, may elect to terminate this Lease. When fire or other casualty or
taking renders a substantial portion of the Demised Premises unsuitable for its
intended use, a just and proportionate abatement of rent shall be made, and the
Lessee may elect to terminate this Lease if:
(a) The Lessor fails within sixty (60) days after such casualty or taking
to give written notice of its intention to restore the Demised
Premises and the portions of the Premises serving the Demised Premises
or provide alternate access, if access has been taken or destroyed and
to commence such restoration or provision of such alternate access; or
(b) If Lessor gives notice of its intention to restore or provide
alternate access, as applicable, and does not commence such work
within thirty (30) days after such notice; or
(c) If Lessor gives notice of its intention to restore or provide
alternate access as applicable, but within fifteen (15) days after a
subsequent request by Lessee, Lessor does not provide reasonable
evidence that the work will be completed within twelve (12) months
after restoration or repair is commenced (such as a schedule estimate
from Lessor's architect or contractor); or
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(d) If Lessor gives notice of its intention to restore or provide
alternate access, as applicable, and the Lessor fails to restore the
Demised Premises and the portions of the Premises serving the Demised
Premises to a habitable condition substantially suitable for their
intended use consistent with the immediately prior condition of the
Demised Premises and subject to any changes in laws or regulations
affecting construction, or fails to provide alternate access, as
applicable, within twelve (12) months of the date repair or
restoration is commenced, and fails to complete such repair or
restoration within thirty (30) days after a notice from Lessee given
after the expiration of such twelve (12) month period that Lessee
intends to terminate this Lease.
The Lessor agrees that if this Lease is not terminated in accordance with
this Section 11.01, that Lessor will diligently complete the restoration of the
balance of the Premises after restoration of the Demised Premises, subject to
Lessor's receipt of available insurance proceeds. The Lessor reserves, and the
Lessee grants to the Lessor, all rights which the Lessee may have for damages or
injury to the Demised Premises for any taking by eminent domain, except for
damages specifically awarded (i) on account of the Lessee's fixtures, property
or equipment, which may be removed at the end of the term, or (ii) for Lessee's
relocation expenses. For purposes of this Section, a taking or damage shall be
substantial if it shall affect more than twenty-five (25%) percent of the
Demised Premises, access is destroyed or taken, or more than sixty-three (63)
parking spaces are destroyed or taken (and not replaced).
ARTICLE 12
Indemnification
Section 12.01. Subject in any and all events to the limitations of Section
20.17, Lessee and Lessor shall each protect, indemnify and save harmless the
other party (and in the case of Lessee, Lessor's managing agent and any
mortgagee) from and against all liabilities, obligations, damages, penalties,
claims, causes of action, costs, charges and expenses, including all reasonable
attorneys' fees and expenses of employees, which may be imposed upon or incurred
by or asserted against the party entitled to indemnification by any third party,
by reason of any of the following during the term of this Lease occurring as a
result of action of the party against whom indemnification is sought or anyone
claiming or acting by, through or under it, or as a result of anyone dealing
with the party against whom indemnification is sought:
(a) any work or thing done in or on the Demised Premises or the Premises,
as applicable;
(b) any use, non-use, possession, occupation, condition, operation,
maintenance or management of the Demised Premises or the Premises, as
applicable, or any part thereof, including, without limiting the
generality of the foregoing, the use
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or escape of water or the bursting of pipes, or any nuisance made or
suffered on the Demised Premises;
(c) any act or omission with respect to the Demised Premises, or the use
or management thereof, or this Lease on the part of Lessee or the
Premises or the use or management thereof on the part of Lessor, as
applicable, or any of their agents, contractors, customers, servants,
employees, licensees, invitees, mortgagees, assignees, sub-tenants or
occupants;
(d) any accident, injury or damage to any person or property occurring in
or on the Premises or Demised Premises, as applicable; and
(e) any failure on the part of Lessee or Lessor to perform or comply with
any of the covenants, agreements, terms or conditions contained in
this Lease on its part to be performed or complied with, as
applicable.
In case any action or proceeding is brought against Lessor or Lessee by
reason of any such occurrence, Lessee or Lessor, upon written notice from the
other, will, at the sole cost and expense of the party required to provide
indemnification, resist and defend such action or proceeding or cause the same
to be resisted and defended, by counsel designated by Lessee or Lessor, as
applicable, and approved in writing by the other, which approval shall not be
unreasonably withheld. This hold harmless and indemnity shall survive the
expiration or earlier termination of this Lease and shall exclude damage arising
from the gross negligence or willful misconduct of the party seeking
indemnification.
ARTICLE 13
Mortgages, Assignments and Subleases by Lessee
Section 13.01. (a) Lessee's interest in this Lease may not be mortgaged,
encumbered, assigned or otherwise transferred, or made the subject of any
license or other privilege, by Lessee or by operation of law or otherwise, and
the Demised Premises may not be sublet, as a whole or in part, without in each
case the prior written consent of Lessor, which shall not be unreasonably
withheld or delayed, and the execution and delivery to Lessor by the assignee or
transferee of a good and sufficient instrument whereby such assignee or
transferee assumes all obligations of Lessee under this Lease. Lessor shall not
be required to consent to an assignment or a sublease of substantially all of
the Demised Premises if the assignee or subtenant is not at least as
creditworthy as the original Tenant on the date of execution of this Lease as
demonstrated by audited financial statements or equivalent evidence. Nothing
herein contained shall be construed as requiring Lessee to obtain any consent on
the part of Lessor as a condition to or any assignment resulting from any
merger, consolidation, sale of all or substantially all of the assets of Lessee,
or acquisition of any of the issued and outstanding capital stock of Lessee or
any assignment or sublease to an affiliate controlled by, controlling, or under
common control with Lessee; provided that in the case of a merger, consolidation
or asset sale the assignee shall after
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the transaction in question be at least as creditworthy as the original Lessee
on the date of execution of this Lease and Lessor has been provided with audited
financial statements or equivalent evidence of the same. (The determination of
creditworthiness shall take into account all of the considerations which an
institutional investor in real estate would consider in evaluating the credit of
a proposed tenant, including the amount of the Security Deposit under Section
2.04.) Any such assignment or sublease, however, shall be subject to the terms
and conditions set forth in Section 13.01(b) and 13.02 below, but not the
additional provisions of this Section 13.01(a). In connection with any request
by Lessee for such consent to assignment or sublet, Lessee shall provide Lessor
with all relevant information requested by Lessor concerning the proposed
assignee's or subtenant's financial responsibility, credit worthiness and
business experience to enable Lessor to make an informed decision. Lessee shall
reimburse Lessor promptly for all reasonable out-of-pocket expenses incurred by
Lessor including reasonable attorneys' fees in connection with the review of
Lessee's request for approval of any assignment or sublease. Upon receipt from
Lessee of such request and information, Lessor shall have the right, but not the
obligation, to be exercised in writing within ten (10) calendar days after its
receipt from Lessee of such request and information, (i) if the request is to
assign the Lease through the end of the then current term, to terminate this
Lease, or (ii) if the request is to sublet one-third or more of the Demised
Premises for a period of five (5) years or more, to release Lessee from its
obligations under this Lease with respect to the portion of the Demised Premises
subject to the proposed sublet for the term of the proposed sublease or if the
request is to sublet all of the Demised Premises through the end of the then
current term to terminate this Lease; in each case as of the date set forth in
Lessor's notice of exercise of such option, which date shall not be less than
thirty (30) days nor more than ninety (90) days following the giving of such
notice. If Lessor exercises such right, Lessee may withdraw the request for
consent within five (5) days after Lessor gives notice exercising such right,
and if Lessee so withdraws the request then this Lease shall continue in full
force and effect with respect to all of the Demised Premises then leased
hereunder. In the event of an assignment or a sublet of the Demised Premises
where Lessor exercised its option to terminate this Lease, Lessee shall
surrender possession of the Demised Premises, or the applicable part thereof, on
a date to be mutually agreed upon, but not later than the termination date, in
accordance with the provisions of this Lease relating to surrender of the
Demised Premises at the expiration of the term, and thereafter neither Lessor
nor Lessee shall have any further liability with respect thereto. In the event
of a sublet of the Demised Premises where Lessor does not terminate this Lease
but releases Lessee from its obligations under this Lease with respect to the
portion of the Demised Premises subject to the sublet, Lessee shall surrender
the portion of the Demised Premises subject to the sublease on the date set
forth in such notice in accordance with the provisions of this Lease relating to
surrender of the Demised Premises at the expiration of the term, and, at
Lessee's option, at the end of the term of the sublet the space subject to the
sublet shall be included in the Demised Premises and thereafter Lessee shall be
responsible for all obligations of Lessee hereunder with respect to such space
as a primary obligor, or Lessee shall be released of its obligations with
respect to such space and thereafter shall have no right to occupy that space.
Lessee's option under the prior sentence shall be exercised by notice to Lessor
at least one hundred eighty (180) days prior to the expiration of the sublet,
and failure to give such notice in a timely fashion shall be deemed an election
to include the sublet area in the Demised Premises and be responsible for
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the obligations therefor. If this Lease shall be canceled as to a portion of the
Demised Premises only, annual base rent and Lessee's liability for utilities,
operating expenses and real estate taxes shall be readjusted proportionately
according to the ratio that the number of square feet and the portion of the
space surrendered compares to the floor area of Lessee's Demised Premises during
the term of the proposed sublet, and tenants leasing the canceled portion of the
Demised Premises shall have the right, in common with Lessee, to use the lobby,
elevators, loading docks, common corridors and bathrooms, parking areas and
other common areas. Lessee shall not offer to make, or enter into negotiations
with respect to an assignment, sublease or transfer to any party which would be
of such type, character, or condition as to be inappropriate as a tenant for the
building. It shall not be unreasonable for Lessor to disapprove any proposed
assignment, sublet or transfer to any of the foregoing entities. Any purported
assignment, sublet or transfer under this Article 13 without Lessor's prior
written consent shall be void and of no effect. No acceptance of rent by Lessor
from or recognition in any way of the occupancy of the Demised Premises by a
sublessee or assignee shall be deemed a consent to such sublease or assignment.
(b) In the event Lessee assigns or sublets the Demised Premises or any part
thereof, Lessee shall, without deducting out-of-pocket costs and expenses
incurred by Lessee to third parties in connection therewith, pay Lessor 40% of
any rents or other compensation received by Lessee in excess of the rents and
other expenses due to Lessor.
(c) Lessee acknowledges and agrees that it will be a condition of
Lessor's financing that Lessee not sublet more than one floor of
the Demised Premises in the aggregate (any such sublet, a "Permitted Sublet")
nor assign its interest in this Lease except for an assignment in connection
with a merger, consolidation, or asset sale which satisfies the credit standards
set forth in Section 13.01(a) and which does not require Lessor's consent
thereunder (a "Permitted Assignment"). Except for Permitted Sublets or a
Permitted Assignment, Lessee shall not make any sublet, assignment or other
transfer of its interest in the Lease, and Lessor shall have no obligation to
approve any such sublet, assignment or transfer, so long as the Purchase
Contract of even date between Metropolitan Life Insurance Company and Lessor is
in force and effect.
Section 13.02. Except where Lessor shall have exercised its option to
terminate this Lease or release Lessee from a portion of the Demised Premises
under Section 13.01 above, no assignment or transfer of any interest in this
Lease, no sublease of the Demised Premises or any part thereof, and no execution
and delivery of any instrument of assumption pursuant to Section 13.01 hereof
shall in any way affect or reduce any of the obligations of Lessee under this
Lease, but this Lease and all of the obligations of Lessee under this Lease
shall continue in full force and effect as the obligations of a principal (and
not as the obligations of a guarantor or surety). From and after any such
assignment or transfer, the obligations of each such assignee and transferee and
of the original Lessee named as such in this Lease to fulfill all of the
obligations of Lessee under this Lease shall be joint and several. Each
violation of any of the covenants, agreements, terms or conditions of this
Lease, whether by act or omission, by any of Lessee's permitted encumbrances,
assignees, employees, transferees, licensees, grantees of a privilege, sub-
tenants or occupancy, shall constitute a violation thereof by Lessee.
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ARTICLE 14
Default
Section 14.01. In the event that:
(a) the Lessee shall default in the due and punctual payment of any
installment of rent, or any part hereof, when and as the same shall
become due and payable and such default shall continue for more than
ten (10) days after notice that such payment is due;
(b) the Lessee shall default in the payment of any additional rent or
amounts necessary to restore the security deposit, or any part
thereof, when and as the same shall become due and payable, and such
default shall continue for a period of ten (10) days after notice that
such payment is due; or
(c) the Lessee shall default in the observance or performance of Lessee's
covenants, agreements, or obligations under Section 7.02(c) and such
default shall not be cured within ten (10) days after notice; or
(d) the Lessee shall default in the observance or performance of any of
the Lessee's covenants, agreements or obligations hereunder, other
than those referred to in the foregoing clauses (a), (b) and (c), and
such default shall not be corrected within twenty-one (21) days after
written notice; provided, however, if Lessee immediately commenced to
cure the default and used all due diligence to effect the cure, but
such default was not capable of being cured by Lessee within the said
twenty-one (21) day period, the Lessee shall have such additional time
(up to 90 days) as is necessary to cure the default provided Lessee
diligently prosecutes the cure to completion; or
(e) the Lessee shall file a voluntary petition in bankruptcy or shall be
adjudicated a bankrupt or insolvent, shall file any petition or answer
seeking any reorganization, arrangement, composition, dissolution or
similar relief under any present or future federal, state or other
statute, law or regulation relating to bankruptcy, insolvency or other
relief for debtors, or shall seek, or consent, or acquiesce in the
appointment of any trustee, receiver or liquidator of Lessee or of all
or any substantial part of its properties, or of the Demised Premises,
or shall make any general assignment for the benefit of creditors; or
(f) any court enters an order, judgment or decree approving a petition
filed against Lessee seeking any reorganization, arrangement,
composition, dissolution or similar relief under any present or future
federal, state or other statute, law or regulation relating to
bankruptcy, insolvency or other relief for debtors, and
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such order, judgment or decree shall remain unvacated or unstayed for
an aggregate of sixty (60) days;
(g) the Demised Premises shall be abandoned except as allowed in Section
5.04 of this Lease; or
(h) if Lessor and the "Developer" under the Phase B Agreement are under
common control, any monetary default by Lessee under the Phase B
Agreement continuing beyond any applicable notice and cure period
provided therein, and only if Lessee fails to purchase the Phase B
site after such monetary default as provided in Section 5(a) of the
Phase B Agreement; or
(i) if Lessee enters into the Phase B Lease (as defined in the Phase B
Agreement), and the landlord under the Phase B Lease is under common
control with Lessor, any default by Lessee under the Phase B Lease
continuing beyond any applicable notice and cure period provided
therein.
then Lessor shall have the right thereafter to re-enter and take complete
possession of the Demised Premises, to declare this Lease terminated and to
remove the Lessee's effects without prejudice to any remedies which might be
otherwise used for arrears of rent or other default.
The Lessee shall indemnify the Lessor against all loss of rent and other
payments which the Lessor may incur by reason of such termination during the
residue of the term. Without limiting the generality of the foregoing, Lessor
may elect by written notice to Lessee following such termination to be
indemnified for loss of rent by a lump sum payment representing the present
value of the amount of rent and additional rent which would have been paid in
accordance with this Lease for the remainder of the term minus the present value
of the aggregate fair market rent and additional rent for the Demised Premises
during such time period, estimated as of the date of termination, and taking
into account reasonable projections of vacancy and time required to re-let the
Demised Premises. (For purposes of the lump sum calculation, additional rent
for the last 12 months prior to termination shall be deemed to increase for each
year thereafter by the average annual increase during the immediately preceding
5 years in the Consumer Price Index - All Urban Consumers for the Boston
Metropolitan area published by the U.S. Department of Labor or a comparable
index reasonably selected by Lessor. The Federal Reserve discount rate, or
equivalent, shall be used in calculating present values.) In the absence of
such election, Lessee shall indemnify Lessor for the loss of rent by a payment
at the end of each month which would have been included in the term equal to the
difference between the rent and additional rent which would have been paid in
accordance with this Lease and the rent actually derived from the Demised
Premises by Lessor for such month.
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In addition to the payment(s) due under the prior paragraph, Lessee shall
reimburse Lessor for all reasonable expenses arising out of the termination,
including without limitation, all costs incurred by Lessor in attempting to re-
let the Demised Premises or parts thereof such as advertising, brokerage
commissions, tenant fit-up costs, and legal expenses. The reimbursement from
Lessee shall be due and payable immediately from time to time upon notice from
Lessor of the expense so incurred.
Section 14.02. If the Lessee shall default in the observance or
performance of any condition or covenant on Lessee's part to be observed or
performed under or by virtue of any of the provisions of this Lease, and such
default continues beyond any applicable notice and cure period or Lessor
reasonably determines that an emergency exists, the Lessor, without being under
any obligation to do so and without thereby waiving such default, may remedy
such default for the account and at the expense of the Lessee. If the Lessor
makes any expenditures or incurs any obligations for the payment of money in
connection therewith, including but not limited to reasonable attorney's fees in
instituting, prosecuting or defending any action or proceeding, such sums paid
or obligation incurred and costs, shall be paid upon demand to the Lessor by the
Lessee as additional rent and if not paid within ten (10) days of demand with
interest at the rate of eighteen (18%) percent per annum calculated as of the
date such payments were due.
Section 14.03. No failure by Lessor to insist upon strict performance of
any covenant, agreement, term or condition of this Lease, or to exercise any
right or remedy consequent upon breach thereof, and no acceptance of full or
partial rent during the continuance of any breach, shall constitute a waiver of
any such breach or of any covenant, agreement, term or condition. No covenant,
agreement, term or condition of this Lease to be performed or complied with by
Lessee, and no breach thereof, shall be waived, altered or modified except by
written instrument executed by Lessor. No waiver of any breach shall affect or
alter this Lease, but each and every covenant, agreement, term and condition of
this Lease shall continue in full force and effect with respect to any other
then existing or subsequent breach thereof.
Section 14.04. In the event (i) any payment of rent (or additional rent)
is not paid within ten (10) business days of the due date, or (ii) a check
received by Lessor from Lessee shall be dishonored, then because actual damages
for a late payment or for a dishonored check are extremely difficult to fix or
ascertain, but recognizing that damage and injury result therefrom, Lessee
agrees to pay the greater of 5% of the amount due in (i) or $150.00 as
liquidated damages for each late payment and the greater of 2.5% of the amount
due in (ii) or $45.00 as liquidated damages for each time a check is dishonored.
(The grace period herein provided is strictly related to the liquidated damages
for a late payment and shall in no way modify or stay Lessee's obligation to pay
rent when it is due, nor shall the same preclude Lessor from pursuing its
remedies under this Section 14, or as otherwise allowed by law.) In the event
that two (2) or more Lessee's checks are dishonored, Lessor shall have the
right, in addition to all other rights under this lease, to demand all future
payments by certified check
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or wire transfer. Furthermore, if any payment of rent (annual or additional) or
any other payment payable hereunder by Lessee to Lessor shall not be paid when
due, the same shall bear interest, from the date when the same was due until the
date paid, at the rate of eighteen percent (18%) per annum. Such interest shall
constitute additional rent payable hereunder.
Section 14.05. Each right and remedy of Lessor provided for in this Lease
shall be cumulative and concurrent and shall be in addition to every other right
or remedy provided for in this Lease now or hereafter existing at law or in
equity or by statute or otherwise, and the exercise or beginning of the exercise
by Lessor of any one or more of the rights or remedies provided for in this
Lease now or hereafter existing at law or in equity or by statute or otherwise
shall not preclude the simultaneous exercise by Lessor of any or all other
rights or remedies provided for in this Lease or now or hereafter existing at
law or in equity or by statute or otherwise.
Section 14.06. Whenever, under any provision of this Lease, Lessee shall
be entitled to receive any payment from Lessor or to exercise any privilege or
right under this Lease, Lessor shall not be obligated to make any such payment
and Lessee shall not be entitled to exercise any such privilege or right so long
as Lessee shall be in default under any of the provisions of this Lease, and
until after such default shall have been cured, if cured prior to the expiration
or termination of this Lease pursuant to the provisions of Section 14.01 hereof.
Lessee shall not be entitled to offset against rent or any other charges payable
under this Lease any payments due from Lessor to Lessee.
ARTICLE 15
Surrender
Section 15.01. Lessee shall, upon any expiration or earlier termination of
this Lease, remove all of Lessee's goods and effects from the Demised Premises.
Lessee shall peaceably vacate and surrender to the Lessor the Demised Premises
and deliver all keys, locks thereto, and subject to Section 8.01 all alterations
and additions made to or upon the Demised Premises, in the same condition as
they were at the commencement of the term, or as they were put in during the
term hereof, reasonable wear and tear and damage by fire or other casualty or
taking or condemnation by public authority or as a result of Lessor's negligence
or willful misconduct only excepted. In the event of the Lessee's failure to
remove any of Lessee's property from the Demised Premises, Lessor is hereby
authorized, without liability to Lessee for loss or damage thereto, and at the
sole risk of Lessee, to remove and store any of the property at Lessee's
expense, or to retain same under Lessor's control or to sell at public or
private sale, after thirty (30) days notice to Lessee at its address last known
to Lessor, any or all of the property not so removed and to apply the net
proceeds of such sale to the payment of any sum due hereunder, or to destroy
such property.
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ARTICLE 16
Quiet Enjoyment
Section 16.01. Lessee, subject to any ground leases, deeds of trust and
mortgages to which this Lease is subordinate, upon paying the rent and other
charges herein provided for and performing and complying with all covenants,
agreements, terms and conditions of this Lease on its part to be performed or
complied with, shall not be prevented by the Lessor, or anyone claiming by,
through or under Lessor, from lawfully and quietly holding, occupying and
enjoying the Demised Premises during the term of this Lease, except as
specifically provided for by the terms hereof.
ARTICLE 17
Acceptance of Surrender
Section 17.01. No surrender to Lessor of this Lease or of the Demised
Premises or any part thereof or of any interest therein by Lessee shall be valid
or effective unless required by the provisions of this Lease or unless agreed to
and accepted in writing by Lessor. No act on the part of any representative or
agent of Lessor, and no act on the part of Lessor other than such a written
agreement and acceptance by Lessor, shall constitute or be deemed an acceptance
of any such surrender.
ARTICLE 18
Notices - Service of Process
Section 18.01. All notices, demands, requests and other instruments which
may or are required to be given by either party to the other under this Lease
shall be in writing. All notices, demands, requests and other instruments from
Lessor to Lessee shall be deemed to have been properly given if sent by United
States certified mail, return receipt requested, postage prepaid, or if sent by
prepaid Federal Express or other similar overnight delivery service which
provides a receipt, addressed to Lessee, Attention: Robert Angelo at the
Demised Premises and to the Lessee, Attention: David Sommers at the Demised
Premises (and, until Lessee occupies the Demised Premises, to Lessee, Attention:
Robert Angelo at Two Vision Drive, Natick, Massachusetts, and to Lessee,
Attention: David Sommers at Two Vision Drive, Natick, Massachusetts 01760), or
at such other address or addresses as the Lessee from time to time may have
designated by written notice to Lessor, with a copy to David B. Currie, Esq.,
Choate, Hall & Stewart, Exchange Place, Boston, Massachusetts 02109 and James B.
Thomson, Leggatt McCall Grubb & Ellis, One International Place, Boston,
Massachusetts 02110. All notices, demands, requests and other instruments from
Lessee to Lessor shall be deemed to have been properly given if sent by United
States certified mail, return receipt requested, postage prepaid or if sent by
prepaid Federal Express or other similar overnight delivery service which
provides a receipt, addressed to Lessor, Attention: Jonathan Davis at c/o The
Davis Companies, One Appleton Street, Boston, MA 02116, and to Lessor,
Attention: Paul Marcus at c/o The Davis
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Companies, One Appleton Street, Boston, MA 02116 or at such other address as
Lessor from time to time may have designated by written notice to Lessee, with a
copy to Richard D. Rudman, Esq., Hill & Barlow, One International Place, Boston,
Massachusetts 02110. Any notice shall be deemed to be effective upon receipt by,
or attempted delivery to, the intended recipient.
ARTICLE 19
Separability of Provisions
Section 19.01. If any term or provision of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
contrary to applicable law or unenforceable, the remainder of this Lease, and
the application of such term or provision to persons or circumstances other than
those as to which it is held invalid or contrary to applicable law or
unenforceable, as the case may be, shall not be affected thereby, and each term
and provision of this Lease shall be legally valid and enforced to the fullest
extent permitted by law.
ARTICLE 20
Miscellaneous
Section 20.01. This Lease may not be modified or amended except by written
agreement duly executed by the parties hereto.
Section 20.02. This Lease shall be governed by and construed and enforced
in accordance with the laws of the Commonwealth of Massachusetts.
Section 20.03. This Lease may be executed in several counterparts, each of
which shall be an original but all of which shall constitute but one and the
same instrument.
Section 20.04. The covenants and agreements herein contained shall,
subject to the provisions of this Lease, bind and inure to the benefit of
Lessor, its successors and assigns, and Lessee, and Lessee's successors and
assigns, and no extension, modification or change in the terms of this Lease
effected with any successor, assignee or transferee shall cancel or affect the
obligations of the original Lessee hereunder unless agreed to in writing by
Lessor. The term "Lessor" as used herein and throughout the Lease shall mean
only the owner or owners at the time in question of Lessor's interest in this
Lease. Upon any transfer of such interest, from and after the date of such
transfer, Lessor herein named (and in case of any subsequent transfers the then
transferor), shall be relieved of all liability for the performance of any
obligations on the part of the Lessor contained in this Lease except for
defaults by Lessor prior to such transfer or monies owned by Lessor to Lessee
and which were not assigned to and repayment or performance thereof assumed by
such transferee, provided that if any monies are in the hands of Lessor or the
then transferor at the time of such transfer,
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and in which Lessee has an interest, shall be delivered to the transferee, then
Lessee shall look only to such transferee for the return thereof.
Section 20.05. This instrument (including the exhibits) contains the
entire and only agreement between the parties regarding the lease of the Demised
Premises other than the Phase B Agreement, and no oral statements or
representations or prior written matter not contained in this instrument shall
have any force or effect.
Section 20.06. In the event this Lease or a copy thereof shall be recorded
by Lessee, then such recording shall constitute a default by Lessee under
Article 14 hereof entitling Lessor to immediately terminate this Lease. Lessor
and Lessee shall, contemporaneously with the execution of the Lease, execute a
document in recordable form containing only such information as is necessary to
constitute a Notice of Lease. All costs of preparation and recording such
notice shall be borne by Lessee.
Section 20.07. The submission of this Lease for review or comment shall
not constitute an agreement between Lessor and Lessee until both have signed and
delivered copies thereof.
Section 20.08. Whenever Lessee is required to obtain Lessor's approval
hereunder, Lessee agrees to reimburse Lessor all out-of-pocket expenses incurred
by Lessor, including reasonable attorney fees in order to review documentation
or otherwise determine whether to give its consent.
Section 20.09. Lessee shall furnish to Lessor on the execution of this
Lease and within forty-five (45) days after each calendar quarter and within one
hundred twenty (120) days after each calendar year of each year during the term
an accurate, up-to-date, audited if available, financial statement of Lessee
showing Lessee's financial condition for the immediately preceding calendar
quarter or calendar year. Lessee shall also provide the same financial
statements, at the same times, for any assignee of Lessee's interest in this
Lease or any sublessee subleasing more than 10,000 square feet.
Section 20.10. Lessor agrees that during the term of this Lease, Lessee
may, at no additional cost, use 268 parking spaces at the Premises on a non-
exclusive basis as may be reasonably necessary to accommodate officers,
employees, guests, invitees and clients, in connection with the operation of its
business. Lessee may also use, at no additional cost, all other available
parking at the Premises. At Lessee's request and expense Lessor shall construct
additional parking on the Premises for Lessee's use as shown on "Exhibit C"
---------
attached hereto. To the extent Lessor owns or exclusively controls the parking
directly in front of the Demised Premises, at Lessee's request such parking
spaces for motor vehicles shall be labeled as "Visitor Parking only."
Sections 20.11 and 20.12. Intentionally deleted.
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Section 20.13. Lessor and Lessee each represent and warrant that they have
not directly or indirectly dealt with any broker with respect to the leasing of
the Demised Premises other than Leggatt McCall/Grubb & Ellis ("Broker"). Each
party agrees to exonerate and save harmless and indemnify the other against any
loss, cost, claim or expense (including reasonable attorney's fees) resulting
from a breach of the forgoing representation and warranty. Broker is to be
paid, by Lessor, a fee for the initial space based on Boston standard rates
(i.e., 5, 4, 4, 3, 2, 1.5, . . 1.5) applied only to the base rent amount due
under this Lease, fifty (50%) percent at the later of lease signing or Landlord
taking title to the Premises and fifty (50%) percent when Tenant occupies
substantially all of the Demised Premises and begins payment of rent.
Section 20.14. Intentionally deleted.
Section 20.15. In the event Lessor shall be delayed or hindered in or
prevented from the performance of any act (excluding monetary obligations)
required under this Lease to be performed by Lessor by reason of strikes,
lockouts, labor troubles, inability to procure materials, failure of power,
restricted governmental law or regulations, riots, insurrection, war or other
reason of a like nature not the fault of the Lessor, then performance of such
act shall be excused for the period of the delay, and the period for the
performance of any such act shall be extended for a period equivalent to the
period of such delay. In the case of casualty or eminent domain, this Section
shall be limited to Lessor's inability to perform any such act for an additional
period of sixty (60) days beyond those allowed in Section 11.01. This Section
20.15 shall not operate to extend the dates set forth in Section 7.06 and
Section 1.03.
Section 20.16. Lessee shall have the right to install one sign identifying
Tenant on each of the north and west exterior walls of the Demised Premises, and
to install a tombstone ground sign identifying Tenant adjacent to the entrance
to the Premises on Route 9 and to install other signage as may be reasonably
acceptable to Lessor. Lessee shall obtain all required governmental approvals
at its expense, and the tombstone ground sign shall also be subject to obtaining
necessary rights from the adjacent property owner at Lessee's expense. Lessee
shall design and install such signs in locations and in accordance with plans
and with contractors approved in advance by Lessor, which approval shall not be
unreasonably withheld or delayed. Lessee shall maintain, keep in good condition
and repair, and pay for all taxes and costs in connection with the furnishing,
installation, use and maintenance of such signs, provided that Lessor shall
reimburse Lessee for up to $7,500 in signage costs as incurred. Lessee shall
remove the signs and restore the Demised Premises to its condition prior to the
installation thereof, at Lessee's sole cost and expense, upon termination of
this Lease. If this Lease is terminated with respect to 25% or more of the
Demised Premises under Section 13.01(a) and leased to another tenant, Lessor may
grant exterior signage rights to such other tenant. If any portion of the Lease
is terminated under Section 13.01(a) or otherwise, Lessor may grant reasonable
interior signage rights to any other tenant.
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Section 20.17. None of the provisions of this Lease shall cause Lessor to
be liable to Lessee, or anyone claiming through or on behalf of Lessee, for any
special, indirect or consequential damages, including, without limitation, lost
profits or revenues. In no event shall any individual partner, officer,
shareholder, trustee, beneficiary, director or similar party be liable for the
performance of or by Lessor or Lessee under this Lease or any amendment,
modification or agreement with respect to this Lease. Lessee agrees to look
solely to Lessor's interest in the Premises in connection with the enforcement
of Lessor's obligations in this Lease.
Section 20.18. In the event of an emergency, as reasonably determined by
Lessor or Lessee, as applicable, in order and to the extent necessary to protect
life or property, the party making that determination, where it is not practical
to notify the other party, may take action and incur out-of-pocket cost to third
parties for matters otherwise the obligation of the other party hereunder and,
to the extent the party taking action incurs expense in so acting, which
expense, but for such emergency would have been the expense of the other, then
the party on behalf of whom such action was taken and expense incurred will,
within fourteen (14) days after receipt of documentation of such expenses,
reimburse the party which incurred such expense.
Section 20.19. Intentionally deleted.
Section 20.20. Any reference to a material default of this Lease shall be
deemed to include, without limitation, any monetary default of this Lease in
excess of $5,000.00.
Section 20.21. The expression "the original term" means the period of
years referred to in Article 2. Prior to the exercise by Lessee of any election
to extend the original term, the expression "the term of this Lease" or any
equivalent expression shall mean the original term; after the exercise by Lessee
of the aforesaid election, the expression "the term of this Lease" or any
equivalent expression shall mean the original term as extended.
Section 20.22. Lessor shall pay all reasonable attorney's fees incurred by
Lessee in connection with any legal action concerning an alleged breach of this
Lease to the extent that Lessee is the prevailing party. Lessee shall pay all
reasonable attorney's fees incurred by Lessor in connection with any legal
action concerning an alleged breach of this Lease to the extent that Lessor is
the prevailing party.
Section 20.23. Lessor warrants that, as of the date the Premises is
acquired by Lessor (at which time Lessee's notice of lease shall be recorded),
the Premises shall be subject only to the matters set forth on Exhibit "D",
----------
Lessor's construction financing (which shall have been approved by Lessee
pursuant to Section 1.03 and shall be subject to a mutually acceptable
subordination and non-disturbance agreement), zoning approvals for the Demised
Premises and related site improvements, and such other matters as may be
approved by
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<PAGE>
Lessee (such approval not to be unreasonably withheld or delayed). Lessor
further warrants that, as of the date the Premises is acquired, the proposed use
of the Demised Premises for general office purposes, including computer software
engineering, shall be permitted under applicable zoning regulations and permits.
Section 20.24. At Lessee's request, Lessor shall purchase up to Ten
Thousand Dollars ($10,000.00) of artwork selected by Lessee to be installed in
or around the Demised Premises. The artwork shall be Lessee's property.
Section 20.25. The parties acknowledge and agree that prospective debt or
equity investors may require modifications to the Lease for the purpose of
implementing the investor protection provisions hereof or otherwise facilitating
the financability of this Lease. Lessee agrees not to unreasonably withhold or
delay its agreement to enter into requested modifications provided that, in the
reasonable opinion of Lessee, the same shall in no way affect the rent or
otherwise in any material respect adversely affect any of the essential rights
of the Lessee under this Lease.
ARTICLES 21 AND 22
Intentionally deleted.
ARTICLE 23
Option
Section 23.01. Provided the obligations of Lessee under this Lease shall
then be current and not in material default beyond any applicable notice and
cure period, Lessee shall have the right, at its election, to extend the
original term of this Lease for two (2) additional periods of five (5) years
each commencing upon the expiration of the original term, provided that Lessee
shall give Lessor written notice in the manner provided in Section 18.01 of the
exercise of its election to so extend at least twelve (12) months prior to the
expiration of the term (as the same may have been extended) of this Lease.
Except as expressly otherwise provided in this Lease, all the agreements and
conditions in this Lease contained shall apply to the additional period to which
the original term shall be extended as aforesaid. The construction and design
reimbursements provided in Sections 2.05 and 2.06 shall apply only to the work
for initial occupancy of the Demised Premises, and Lessor shall have no
obligation to pay for the design or construction of improvements to the Demised
Premises during any extension period. If Lessee shall give written notice as
provided in Section 18.01 of the exercise of the election in the manner and
within the time provided aforesaid, the term shall be extended upon the giving
of the notice without the requirement of any action on the part of Lessor.
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<PAGE>
Section 23.02. The base rent during the first 5 year additional period
shall be at an annual rate of Twenty-One and 61/100 ($21.61) Dollars per
Rentable Square Foot, and during the second 5 year additional period shall be at
an annual rate of Twenty-Four and 31/100 ($24.31) Dollars per Rentable Square
Foot.
ARTICLE 24
Right of First Offer
Section 24.01. Lessor agrees to notify Lessee if, after the Commencement
Date and during the term of this Lease, and provided Lessee is then occupying at
least 60,000 Rentable Square Feet in the Demised Premises and has remained and
is then current and not in material default of this Lease beyond any applicable
notice and cure period, Lessor intends to sell the Premises and in such notice,
Lessor shall offer the Premises to Lessee at the same price, terms and
conditions as the Premises would be offered to the public (the "Offer").
Within seven (7) days of Lessee's receipt of the Offer, Lessee shall notify
Lessor ("Lessee's Purchase Notice") of its desire to accept or reject the Offer.
If Lessee accepts the Offer, within fourteen (14) days after delivery of
Lessee's acceptance to Lessor, Lessee and Lessor shall execute a Purchase and
Sale Agreement, substantially on the Greater Boston Real Estate Board Form
("P&S") reflecting Lessor's agreement to sell and Lessee's agreement to purchase
the Premises on the same terms and conditions contained in the Offer and Lessee
shall pay a deposit of $250,000 to a mutually acceptable third-party escrow
agent.
In the event Lessee rejects the Offer, or fails or neglects to timely
deliver Lessee's Purchase Notice, then the rights granted to Lessee pursuant to
this Article 24 shall lapse and thereafter be void and of no further force and
effect and Lessor shall be entitled to sell the Premises to a third party for a
period of nine (9) months after the last date on which Lessee was required to
deliver Lessee's Purchase Notice, provided that the third-party sale is not on
terms materially more favorable to the purchaser than the Offer made to Lessee.
A reduction in the sale price of seven and one-half percent (7.5%) or more shall
be considered material. If the Premises is not sold within such nine (9) month
period and Lessor is continuing or desires to resume its sale efforts, or if
Lessor desires to sell the Premises on materially more favorable terms to the
purchaser, Lessor shall re-offer the Premises to Lessee pursuant to this Article
24. For purposes of this Article 24, a "sale" occurs upon execution of a
binding purchase and sale agreement, subject to buyer's contingencies, so long
as the property is subsequently conveyed pursuant to all of its material terms.
In the event Lessee shall give Lessee's Purchase Notice and then fail or
neglect to timely enter into the P&S in accordance with the terms of this
Section 24.01, or if Lessee fails to complete the transaction contemplated in
the P&S, Lessee's right to purchase the Premises under this Article 24 shall
lapse and be null, void and without recourse to Lessor, for the balance of the
term.
-42-
<PAGE>
For the purposes of this Article, "material default" shall include, but not
be limited to, failure to make any rent or other payment required by Lessee
hereunder, a default under Article 14.01(d), (e) or (f) or under Articles 4, 9
and 13.
Lessee's rights under this Article 24 shall not apply to a joint venture
transaction in which Lessor, or the principals of Lessor, will retain a direct
or indirect interest in the Premises. Lessee's rights under this Article shall
also not apply to any sale contract entered into prior to the Commencement Date,
a foreclosure, a deed-in lieu of foreclosure to a mortgage lender (or its
affiliate), or a sale of the Premises by a mortgage lender (or its affiliate)
who acquires the Premises by foreclosure or deed-in-lieu of foreclosure, but
shall apply thereafter to any subsequent sale of the Premises.
It is intended that this instrument will take effect as a sealed
instrument.
[Remainder of page intentionally left blank.]
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<PAGE>
IN WITNESS WHEREOF, the Lessor and Lessee have signed the same as of this
20 day of December, 1996.
DIV NATICK, LLC
By: [SIGNATURE APPEARS HERE]
------------------------------------
Manager
SYSTEMSOFT CORPORATION
By: /s/ David P. Sommers
------------------------------------
Name: David P. Sommers
Title: VP Finance & CFO
-44-
<PAGE>
EXHIBIT A
Legal Description
Premises
That certain parcel of land with improvements situated thereon in Natick,
Middlesex County, Massachusetts, bounded and described as follows:
NORTHERLY by Worcester Street by two (2) lines measuring, respectively, one
hundred eighty-nine and 95/100 (189.95) feet and six hundred forty
and 69/100 (640.69) feet;
EASTERLY by land now or formerly of George J. Dimatteo, by land now or
formerly of Brian B. and Tracey Kennedy and by Walnut Avenue, two
hundred sixty-seven and 72/100 (267.72) feet;
NORTHERLY by said Walnut Avenue, twenty-five (25) feet;
EASTERLY by land now or formerly of John F. and Mary F. Burns and Margaret
E. Morrissey, one hundred and ten and 21/100 (110.21) feet;
NORTHERLY by the same, ninety and 00/100 (90.00) feet;
EASTERLY by land now or formerly of Jeffrey A. and Karen G. Wise, by
Carlisle Terrace, by land now or formerly by Wilbur R. and F.
Beatrice Upson and by land now or formerly of Dennis, John and
Linda A. Doerr, by two (2) lines measuring, respectively, two
hundred seventy-three and 41/100 (273.41) feet and fifty-nine and
07/100 (59.07) feet;
SOUTHERLY by land now or formerly of Wendell P. III and Marie B. Carter and
by land now or formerly of Sonja E. Hicks, one hundred and fifteen
and 46/100 (115.46) feet;
EASTERLY by land now or formerly of said Hicks, two hundred one and 49/100
(201.49) feet;
SOUTHERLY by land now or formerly of said Hicks and by land now or formerly
of Mill Hunt Real Estate Corporation, three hundred four and
26/100 (304.26) feet;
EASTERLY by land now or formerly of said Mill Hunt Real Estate Corporation,
and by land now or formerly of Ellen G. Harwood, by three (3)
lines measuring respectively, twenty-eight and 86/100 (28.86)
feet, sixty-eight and 62/100 (68.62) feet and four hundred fifty-
three and 38/100 (453.38) feet;
A-1
<PAGE>
SOUTHERLY by land now or formerly of Edward J. and Karen A. Menard, two
hundred twenty and 55/100 (220.55) feet;
EASTERLY by the same, one hundred forty-nine and 43/100 (149.43) feet;
SOUTHWESTERLY by land now or formerly of Laura J. Klabin, thirteen and 83/100
(13.83) feet;
WESTERLY by land now or formerly of Helen G. Keniston and by land now or
formerly of Paul F. and Suzanne M. Sullivan, by two (2) lines
measuring, respectively, one hundred fifteen and 76/100 (115.76)
feet and one hundred ninety-five and 00/100 (195.00) feet;
SOUTHERLY by land now or formerly of said Sullivans, two hundred nine and
36/100 (209.36) feet;
EASTERLY by the same, sixty and 07/100 (60.07) feet;
SOUTHERLY by land now or formerly of Jay J. and Lynda M. Mahoney, one
hundred fourteen and 86/100 (114.86) feet;
WESTERLY by land now or formerly of Boston Young Women's Christian
Association, Inc. and by land now or formerly of Apple Hill
Associates, shown as Lot I on the hereinafter mentioned plan, by
two (2) lines measuring, respectively, three hundred thirty-
seven and 93/100 (337.93) feet and one hundred sixty-seven and
27/100 (167.27) feet;
NORTHERLY by land now or formerly of Apple Hill Associates, shown as Lot I
on the hereinafter mentioned plan, two hundred ninety-four and
54/100 (294.54) feet;
WESTERLY by the same, two hundred seventy and 57/100 (270.57) feet;
SOUTHWESTERLY by the same two hundred ninety-two and 68/100 (292.68) feet long
curve having a radius of two hundred twenty-five and 00/100
(225.00) feet;
WESTERLY by the same, one hundred twelve and 65/100 (112.65) feet; and
NORTHWESTERLY by the same one hundred twelve and 96/100 (112.96) feet along a
curve having a radius of one hundred twenty and 00/100 (120.00)
feet.
Being shown as Lot II (containing approximately 16,000 acres), Area "A"
(containing approximately 0.903 acres), and "Conservation Land" (containing
approximately 5.683 acres) on a plan prepared by C.T. Male Associates, Inc.
South Deerfield, Massachusetts, entitled "Plan of Land In Natick (Middlesex
County), Massachusetts, Prepared For Apple Hill Associates", dated May 6, 1985,
recorded with Middlesex South District Registry of Deeds in Book 16427, Page
459.
<PAGE>
SYSTEMSOFT
LEASE EXHIBIT B
DESIGN DEVELOPMENT PLANS & SPECIFICATIONS
DOCUMENT LIST
Dated 12/16/96
I) DESIGN DEVELOPMENT PLANS
- - All as revised on November 7, 1996
Civil/Site - prepared by Rizzo Associates, Inc.
Drawing Dated Description
C-2 09/09/96 Existing Conditions Plan
C-3 09/09/96 Site Layout and Materials Plan
C-4 09/09/96 Grading and Drainage Plan
C-5 09/09/96 Utility Plan
C-6 09/09/96 Erosion Control Plan
C-7 09/09/96 Construction Details
C-8 09/09/96 Construction Details
C-9 09/09/96 Construction Details
L-1 09/09/96 Landscsaping Site Plan
SE-1 09/26/96 Photometric Plan
Architectural - prepared by Spagnolo/Gisness & Associates, Inc.
Drawing Dated Description
A-1 10/03/96 First Floor Plan
A-2 10/03/96 Second Floor Plan
A-3 10/03/96 Third Floor Plan
A-4 10/03/96 Schematic Roof Plan
A-5 10/03/96 Exterior Elevations
A-6 10/03/96 North Elevations
A-7 10/03/96 East Elevations
A-8 10/03/96 Southeast, Southwest & Northwest Elevations
A-9 10/03/96 Wall Sections & Partial End Elevations
Structural - prepared by McNamara/Salvia, Inc.
Drawing Dated Description
S-1 10/03/96 General Notes
S-2 10/03/96 First Floor/Foundation Plan
S-3 10/03/96 Second Floor Framing Plan
<PAGE>
Exhibit B Document List
Structural - prepared by McNamara/Salvia, Inc. (continued)
<TABLE>
<CAPTION>
Drawing Dated Description
<S> <C> <C>
S-4 10/03/96 Third Floor Framing Plan
S-5 10/03/96 Roof Framing Plan
S-6 10/03/96 Column Schedule
S-7 10/03/96 Typical Concrete Details
S-8 10/03/96 Typical Steel & Masonry Details
S-9 10/03/96 Typical Joint Details
S-10 10/03/96 Sections & Details
Fire Protection - as prepared by Abbood/Holloran Associates, Inc.
<CAPTION>
Drawing Dated Description
<S> <C> <C>
FS01 10/01/96 Sprinkler System - First Floor
FS02 10/01/96 Sprinkler System - Second Floor
FS03 10/01/96 Sprinkler System - Third Floor
FA01 10/01/96 Fire Alarm System - First Floor
FA02 10/01/96 Fire Alarm System - Second Floor
FA03 10/01/96 Fire Alarm System - Third Floor
Plumbing - as prepared by Abbood/Holloran Associates, Inc.
<CAPTION>
Drawing Dated Description
<S> <C> <C>
P-1 10/03/96 Plumbing Legend & Diagrams
P-2 10/03/96 First Floor Plumbing Plan
P-3 10/03/96 Second Floor Plumbing Plan
P-4 10/03/96 Third Floor Plumbing Plan
P-5 10/03/96 Riser Diagrams
HVAC - as prepared by Abbood/Holloran Associates, Inc.
<CAPTION>
Drawing Dated Description
<S> <C> <C>
H-1 10/03/96 HVAC - Schedules, General Notes and Legend
H-2 10/03/96 HVAC - Details & Schematics
H-3 10/03/96 HVAC - First Floor Ductwork Plan
H-4 10/03/96 HVAC - Second Floor Ductwork Plan
H-5 10/03/96 HVAC - Third Floor Ductwork Plan
</TABLE>
<PAGE>
Exhibit B Document List
Electrical - as prepared by Abbood/Holloran Associates, Inc.
<TABLE>
<CAPTION>
Drawing Dated Description
<S> <C> <C>
E-1 10/03/96 Electrical Legend, Notes and Schedules
E-2 10/03/96 Electrical - Site Plan
E-3 10/03/96 Electrical - First Floor Lighting & Power
E-4 10/03/96 Electrical - Second Floor Lighting & Power
E-5 10/03/96 Electrical - Third Floor Lighting & Power
E-4 10/03/96 Electrical Risers & Schedules
</TABLE>
II) BASE BUILDING IMPROVEMENTS DESIGN DEVELOPMENT SPECIFICATIONS
dated 11/7/96
<PAGE>
LEASE EXHIBIT C ADDITIONAL PARKING
==================================
[DIAGRAM APPEARS HERE]
<PAGE>
EXHIBIT D
The matters listed in Lawyers Title Insurance Company Commitment no.
96-0243.
<PAGE>
SYSTEMSOFT
LEASE EXHIBIT E
LESSEES PRELIMINARY PLANS
DOCUMENT LIST
Dated 12/16/96
Architectural - prepared by Spagnolo/Gisness & Associates, Inc.
<TABLE>
<CAPTION>
Drawing Dated Description
<S> <C> <C>
OL-1 10/24/96 First Floor
OL-2 10/24/96 Second Floor
OL-3 10/24/96 Third Floor
</TABLE>
<PAGE>
Exhibit 10.26
AGREEMENT
AGREEMENT dated December 20, 1996 by and between DIV Natick, LLC,
a Massachusetts limited liability company ("Developer") and SystemSoft
Corporation, a Delaware Corporation ("SystemSoft").
Background
----------
SystemSoft has entered into a Purchase and Sale Agreement dated September
12, 1996 (the "P&S") with Argonaut Holdings, Inc., to acquire a certain parcel
of land known as and numbered 568-598 Worcester Street, Natick, Massachusetts
more particularly described on Exhibit "A" (the "Premises"). Developer and
-----------
SystemSoft intend that Developer shall acquire the Premises and construct on the
Premises a building and related parking areas and site improvements ("Phase A")
to be leased and occupied by SystemSoft. Accordingly, Developer and SystemSoft
have entered into certain agreements dated August 30, 1996 and September __,
1996 (the "Pre-Development Agreements") concerning the acquisition and
development of the Premises, and simultaneously with this Agreement Developer is
entering into a lease with SystemSoft (the "Phase A Lease") pursuant to which
Developer (or its nominee) will construct a building and related site
improvements on the Premises and lease the building to SystemSoft for a term of
fifteen (15) years.
Developer and SystemSoft have further agreed that SystemSoft shall have
certain rights to require that additional office improvements and related
parking areas and site improvements ("Phase B") be constructed and leased to
SystemSoft as set forth in this Agreement. Phase B is to be constructed within
the portion of the Premises referred to as the "Development Land" on Exhibit
-------
"A." At such time as SystemSoft's rights under this Agreement with respect to
- --
Phase B expire, terminate or are satisfied, Developer shall have the right to
develop the Development Land for other parties. The agreements among the
Developer and SystemSoft concerning Phase B are being set forth in this separate
agreement as it is intended that Phase A and the Development Land may be
separately owned and financed.
Agreement
---------
1. Commencing on the date the Premises are acquired by Developer or its
nominee and continuing until the Phase B Carry Termination Date (as defined
below), SystemSoft shall pay Developer, in order to defray the cost of acquiring
and carrying the Development Land, an annual amount equal to One Hundred Ninety
Thousand Dollars ($190,000.00) per annum, which shall be paid in equal monthly
installments in advance on
<PAGE>
the date the Premises are acquired and on the first day of each calendar month
thereafter (the first and last installment to be pro-rated for partial months).
In addition, (x) SystemSoft shall pay all real estate taxes allocable to the
Development Land during the period from acquisition of the Premises until the
commencement of the term of the Phase A Lease and (y) if, at any time after the
term of the Phase A Lease commences until the Phase B Carry Termination Date,
SystemSoft is not obligated to pay the costs of carrying the Development Land
under the Phase A Lease, then SystemSoft shall pay such costs to Developer as
set forth on Exhibit "B." The Phase B Carry Termination Date shall be (i) the
----------
date on which SystemSoft commences to pay rent under the Phase B Lease (as
defined below) if Phase B is developed for SystemSoft, (ii) if SystemSoft's
rights to lease Phase B under this Agreement are terminated and the Development
Land is developed for another tenant or occupant, six (6) months after the date
on which all permits and approvals for construction of such building have been
obtained by Developer or, if earlier, the date Developer commences construction
for the building or (iii) in any other event, the date on which the Phase A
Lease, as it may be extended by SystemSoft, is scheduled to expire. SystemSoft
shall have no obligation to make payments under this Section 1 on account of
time periods after the Phase B Carry Termination Date, but shall not be relieved
of its obligations to make payments for periods prior to the Phase B Carry
Termination Date which have not been paid as of that date. All payments shall be
made to Developer at c/o The Davis Companies, One Appleton Street, Boston,
Massachusetts, 02116, or as may be otherwise directed by Developer in writing.
2. Developer shall have the right, at any time, to separate the Phase A
Site and the Development Land by way of a subdivision, long-term ground lease or
condominium in order to permit separate ownership and financing of all or any
portion of the Development Land, provided that SystemSoft's rights and
obligations under the Phase A Lease and this Agreement shall not be affected in
any material respect. In the event the Premises as originally defined is
subdivided or separated into separate leasehold lots, the Premises under the
Phase A Lease shall be deemed to exclude all portions of the Development Land
which is so separated or subdivided. In the event the Premises are submitted to
a condominium regime, the Premises under the Phase A Lease shall be deemed to be
the condominium unit consisting of the "Demised Premises" (as defined under the
Phase A Lease). SystemSoft agrees to enter into any instruments reasonably
requested by Developer in connection with the foregoing so long as the same are
not inconsistent with the rights of SystemSoft under the Phase A Lease and this
Agreement and are otherwise reasonably acceptable to SystemSoft. Without
limiting the generality of the foregoing, such instruments may include an
acknowledgment that SystemSoft has no rights under the Phase A Lease with
respect to the Development Land except for the use of any common walkways,
driveways, parking areas and other specifically designated parts of the Premises
serving the Demised Premises, and/or a subordination of the Phase A Lease to
documents creating a condominium on the Premises. SystemSoft shall have a right
to review and approve any proposed condominium, subdivision, or ground lease
documents, such approval not to be unreasonably withheld, and
-2-
<PAGE>
shall agree to bebound by and comply with the approved condominium, subdivision,
or ground lease documents.
3. (a) SystemSoft shall have the right to have Phase B developed for
its use and occupancy as set forth herein after the Construction Mortgage,
Assignment of Leases and Rents, Security Agreement and Fixture Financing
Statement given by Developer to Mellon Bank, N.A. and recorded herewith
("Construction Mortgage") is discharged and the Development Land is conveyed
pursuant to the Purchase Contract of even date between Developer and
Metropolitan Life Insurance Company ("Met Life") (or such contract is
terminated) or, prior to suchevents, with the written approval of the holder of
the Construction Mortgage and Met Life in their sole discretion. Developer
shall have no obligation to proceed with development of Phase B under this
Agreement until such events occur or such approvals are given. SystemSoft shall
notify Developer if it desires Developer to develop Phase B for SystemSoft's use
and occupancy. Such notice is referred to as a "Phase B Notice to Proceed."
Phase B shall have a minimum rentable area of 80,000 square feet. Following the
Phase B Notice to Proceed, SystemSoft and Developer shall consult from time to
time on the design and cost of Phase B and Developer shall prepare a site plan,
design plans, and preliminary base building specifications for Phase B (the
"Phase B Design Package") and a budget of the reasonably estimated costs to
develop Phase B (the "Phase B Budget") for SystemSoft's review and approval,
which approval shall not be unreasonably withheld. Developer and SystemSoft
shall cooperate with each other in preparing the Phase B Design Package and
Phase B Budget in order to accommodate SystemSoft's reasonable design requests
and minimize the costs of developing Phase B consistent with appropriate
standards for first-class suburban office buildings reasonably comparable to
Phase A which satisfy requirements for institutional financing. Developer may
designate a development manager or agent to perform some or all of Developer's
responsibilities under this Agreement.
(b) After the Phase B Design Package and Phase B Budget have been
approved, SystemSoft and Developer shall enter into a lease (the "Phase B
Lease") for Phase B. The Phase B Lease shall be upon all of the same terms and
conditions as the Phase A Lease, except that:
(i) the base rent for Phase B shall be determined as set forth in
Section 3(c) below,
(ii) the term of the Phase B Lease shall be for a minimum term
equal to the longest of (x) ten (10) years, (y) such longer period,
up to a maximum of fifteen (15) years, as is necessary to satisfy
then current institutional underwriting standards for a lease which
is financable on commercially reasonable terms, or (z) such longer
period as is necessary for the Phase B Lease to expire on the same
day as the initial term or an extension term expires under the Phase
A Lease (SystemSoft agreeing that, if requested by Developer
-3-
<PAGE>
prior to execution of the Phase B Lease, SystemSoft will exercise
sufficient extension terms under the Phase A Lease so that the term
of the Phase A Lease shall be at least as long as the minimum term
for the Phase B Lease under (x) or (y) above and the Phase A Lease
and the Phase B Lease are scheduled to expire on the same date),
(iii) SystemSoft shall have the same number of five (5) year
extension options under the Phase B Lease as will remain under the
Phase A Lease after any extension of the expiration date of the
Phase A Lease under (ii) above, provided that the rent for the
extension terms under the Phase B Lease shall be determined as set
forth in Section 3(c) below,
(iv) the security deposit amount under the Phase B Lease shall be
equal to four and one-half months' rent and reasonably estimated
additional rent amounts,
(v) Developer shall have the right to terminate the Phase B Lease
(without liability to either party) until the date thirty (30) days
after all permits and approvals (other than a building permit) are
obtained for the construction of Phase B, provided that in the event
of such termination SystemSoft shall have the right to acquire the
Development Land on the same terms set forth in Section 5(b) of this
Agreement,
(vi) SystemSoft shall have the right to terminate the Phase B Lease
(without liability to either party) and acquire the Development Land
on the same terms set forth in Section 5(b) of this Agreement as its
sole and exclusive remedy if Developer does not diligently seek all
permits and approvals necessary for construction of Phase B or if
construction of Phase B has not commenced within 4 months after the
date all permits and approvals for the construction of Phase B are
obtained by Developer,
(vii) the Outside Delivery Date under the Phase B Lease shall be
fifteen (15) months after the Phase B Lease has been executed and
delivered and Developer obtains all permits and approvals for the
construction of Phase B and, if the construction is being financed,
closes construction financing for Phase B, such date to be extended
up to three (3) months for delays in the development of Phase B for
reasons beyond Developer's reasonable control, and
(viii)the Phase B Lease shall incorporate such other modifications
as are reasonably necessary to satisfy then current institutional
underwriting standards for a lease which is financable on
commercially reasonable terms.
-4-
<PAGE>
(c) The base rent for the Phase B Lease shall be determined as
follows based on the Phase B Budget approved by SystemSoft. The annual base rent
for the first five (5) years of the initial term under the Phase B Lease shall
be equal to the Phase B Rent Factor (defined below) multiplied by the total cost
to develop Phase B as shown on the approved Phase B Budget. The annual base rent
during each subsequent five (5) year period during the initial term shall be
equal to 112.5% of the base rent during the last year of the immediately
preceding 5-year period. The base rent during any five (5) year extension term
under the Phase B Lease shall be equal to 112.5% of the base rent under the
Phase B Lease during the last year immediately preceding the extension term in
question. The Phase B Budget shall include all reasonable out-of-pocket third-
party costs previously incurred or anticipated to be incurred by Developer in
connection with the leasing, development, design, permitting, financing, or
construction of Phase B, including the purchase price paid for the Development
Land (which is agreed to be $1,520,000.00), financing fees and construction
period interest and taxes, plus a contingency of five percent (5%) of the
----
foregoing costs and a fee to Developer of three percent (3%) of such costs. If
construction of Phase B is not financed, the Phase B Budget shall include
imputed amounts for financing fees and construction period interest at then
prevailing rates for a conventional first mortgage construction loan for a
comparable building and tenant, with a loan amount equal to the Phase B Budget.
Developer shall use reasonable efforts to obtain separate financing for Phase A
that allows for the development of Phase B without any change in the Phase A
financing, but if it is necessary to refinance Phase A in order to proceed with
Phase B, then the Phase B Budget shall include any prepayment premium or other
costs incurred to refinance Phase A and the annual amount of base rent under the
Phase A Lease shall be increased or decreased by the same amount as any increase
or decrease in the annual debt service costs under the new financing for Phase
A. The Phase B Rent Factor shall be equal to 12.5% adjusted as set forth below
for changes in interest rates. If the Benchmark Treasury Yield (defined below)
exceeds 6.78% then the Rent Factor shall be 12.5% plus the difference between
6.78% and the Benchmark Treasury Yield. If the Benchmark Treasury Yield is less
than 5.78%, then the Rent Factor shall be 12.5% minus the difference between
5.78% and the Benchmark Treasury Yield. The Benchmark Treasury Yield shall mean
the asked yield to call, at the close of business on the date Developer obtains
a commitment for permanent financing of Phase B (or, if no permanent financing
commitment has been obtained, the date a building permit is issued for Phase B),
on the United States Treasury Bond having a maturity closest to the date eleven
(11) years following the date on which the Benchmark Treasury Yield is
determined, as reported in the Wall Street Journal (by the designation "Ask
Yld.") on the next day. If not then reported in the Wall Street Journal, the
Benchmark Treasury Yield shall be determined using a comparable information
source reasonably selected by Developer and SystemSoft. An example of the
calculation of base rent for the Phase B Lease is attached as Exhibit "C."
----------
(d) SystemSoft shall have the right to withdraw any Phase B Notice
to Proceed by giving Developer a notice to that effect at any time before the
Phase B Lease is executed by SystemSoft (a "Phase B Withdrawal Notice"), in
which case Developer shall
-5-
<PAGE>
cease pre-development activities in connection with Phase B.Subject to Section
5(b) below, after a Phase B Notice to Proceed is given, Developer agrees to
pursue the design, permitting and financing for Phase B diligently and in good
faith unless and until a Phase B Withdrawal Notice is given.
(e) SystemSoft shall reimburse Developer for pre-development costs
incurred in connection with the design and permitting of Phase B and other pre-
development activities as set forth in this Section 3(e). Promptly after a
Phase B Notice to Proceed is given, Developer shall provide SystemSoft with a
preliminary budget for anticipated pre-development costs to be reimbursed under
this Section 3(e) ("Pre-Development Budget"). The Pre-Development Budget may be
revised from time to time by Developer. The Pre-Development Budget, and any
revisions thereto, shall be subject to SystemSoft's review and approval (such
approval not to be unreasonably withheld or delayed). Whether or not a Phase B
Notice to Proceed is withdrawn, SystemSoft shall reimburse Developer within
twenty (20) days after request from time to time for all out-of-pocket third
party costs incurred by Developer in accordance with the approved Pre-
Development Budget after the Phase B Notice to Proceed and prior to the
Reimbursement Cut-Off Date (defined below). Except as set forth in the next
sentence, the amounts paid by SystemSoft under this Section 3(e) shall be
included in the Phase B Budget and SystemSoft shall be reimbursed for such
amounts out of the proceeds of the construction loan for Phase B at the time
such loan is closed (or if the construction is not being financed, such amounts
shall be reimbursed by Developer when construction is commenced). However, if a
Phase B Notice to Proceed is withdrawn, all costs incurred in accordance with
the Pre-Development Budget prior to withdrawal of the Phase B Notice to Proceed
shall be borne by SystemSoft and shall not be included in the Phase B Budget or
reimbursed to SystemSoft. The Reimbursement Cut-Off Date shall be the earlier
of (i) the date SystemSoft withdraws the Phase B Notice to Proceed by giving a
Phase B Withdrawal Notice or (ii) the date on which the Phase B Lease has been
executed, all permits and approvals for the construction of Phase B have been
obtained by Developer and, if the construction is being financed, Developer has
closed construction financing for the construction of Phase B. In the event
SystemSoft gives a Phase B Withdrawal Notice, in addition to reimbursement for
pre-development costs in accordance with the Pre-Development Budget as set forth
in this Section 3(e), SystemSoft shall promptly pay Developer a fee for
Developer's pre-development efforts equal to twenty percent (20%) of the amount
of the out-of-pocket third party costs reimbursed or to be reimbursed by
SystemSoft in accordance with the Pre-Development Budget as set forth in this
Section 3(e).
4. SystemSoft agrees to cooperate with Developer in connection with the
development of the Development Land, whether for SystemSoft or another party,
and except as set forth below Developer shall have no liability to SystemSoft
with respect to any disruption, inconvenience, or interference caused by the
development of the Development Land. In particular, SystemSoft agrees that a
portion of the parking and related site improvements included in Phase A, but
not the building or access thereto, may be temporarily closed in connection with
the development of the Development Land and may be
-6-
<PAGE>
relocated or removed so long as equivalent parking is provided on the
Development Land upon completion of construction. Notwithstanding the foregoing,
Developer shall consult with SystemSoft and use reasonable efforts to minimize
disruption, inconvenience or interruption to SystemSoft during the development
of the Development Land, including by providing off-site parking areas and
shuttle bus service if necessary to replace on-site parking spaces needed by
SystemSoft which are temporarily closed. All costs of minimizing disruption,
inconvenience, or interruption shall be paid by Developer and included in the
Phase B Budget.
5. (a) SystemSoft's rights under Section 3 to require Developer to
develop Phase B and lease Phase B to SystemSoft for its own use and occupancy
("SystemSoft's Phase B Rights") shall be null and void without further action of
the parties upon notice by Developer in the event that: (i) the Phase B Lease
is not executed on or before the date which is ten (10) years after the
commencement of the initial term under the Phase A Lease, (ii) the Phase A Lease
is terminated, a material default by SystemSoft exists under the Phase A Lease
continuing after any applicable notice and cure period under the Phase A Lease,
or a material default by SystemSoft exists under this Agreement continuing for
more than ten (10) days after notice (or, in the case of a non-monetary default,
such longer period as is reasonably required with the exercise of due
diligence), (iii) SystemSoft assigns its interest in the Phase A Lease or its
rights under this Agreement and the assignment is not to an affiliate controlled
by, controlling, or under common control with SystemSoft, and is not the result
of a merger, consolidation, sale of all or substantially all of SystemSoft's
assets or acquisition of any of the issued and outstanding capital stock of
SystemSoft, (iv) SystemSoft subleases more than one third of the Demised
Premises under the Phase A Lease for a term of more than five years to a
subtenant who is not an affiliate controlled by, controlling, or under common
control with SystemSoft, or the Phase A Lease is terminated for more than one-
third of the Demised Premises and a time period of more than five (5) years on
account of a proposed sublease under the Phase A Lease, or (v) SystemSoft has
not satisfied the Phase B Default Financial Requirements (defined in Section 6
below) for a period of one (1) year or more. This Section 5(a) shall be self-
operative upon notice from Developer, but promptly after a request by Developer,
SystemSoft shall execute and deliver an instrument in recordable form confirming
the termination of SystemSoft's rights with respect to Phase B. Any termination
of SystemSoft's Phase B Rights under this Section 5(a) shall not affect
SystemSoft's obligations under this Agreement (including, without limitation,
its obligations under Sections 1, 2 and 4), except that after the date of such
notice SystemSoft shall have no further obligations under Section 3 except to
pay for any costs incurred by Developer prior to the date of such notice and
SystemSoft shall have no further obligation to provide financial information
under Section 6. In the event Developer terminates SystemSoft's Phase B Rights
under this Section 5(a) and the Phase A Lease has not been terminated and
SystemSoft is not in material default under the Phase A Lease or this Agreement
continuing beyond any applicable notice and cure period, then SystemSoft shall
have the right, exercised by notice to Developer given within sixty (60) days
after Developer's notice under this Section 5(a), to acquire, for a price
determined as set forth below, Developer's rights to develop the
-7-
<PAGE>
Development Land, including all of Developer's rights in the Development Land
and all agreements, plans, specifications, reports, studies, permits, approvals
and other materials concerning the development of the Development Land (the
"Development Land Rights"). SystemSoft's notice exercising this right shall be
accompanied by a deposit in the amount set forth below to be valid, and
Developer shall be entitled to retain the deposit as its sole remedy if
SystemSoft fails to purchase the Development Land as set forth herein. The
amount of the deposit shall be equal to $150,000 if SystemSoft's notice
exercising this right is given in the first year following the date of this
Agreement, and the required amount of the deposit shall increase by 5% on each
anniversary of the date of this Agreement for a notice given thereafter. In the
event SystemSoft exercises this right, Developer shall convey all of the
Development Land Rights to SystemSoft, for an amount equal to the greater of (x)
One Million Five Hundred Twenty Thousand Dollars ($1,520,000.00) plus all out of
----
pocket third-party costs then incurred by Developer in connection with the
acquisition or development of the Development Land which have not been
reimbursed by SystemSoft under Section 3(e), plus an amount equal to 20% of all
----
such costs whether or not reimbursed by SystemSoft or (y) the fair market value
of the Development Land Rights (such fair market value being referred to as the
"Determined Property Value"). The Development Land Rights shall be conveyed
without warranty or recourse except for a warranty of title by Developer as to
its own acts and a representation that Developer has delivered copies of all
documents and written information in Developer's possession concerning the
physical condition of the Development Land, the status of Developer's title, and
governmental
permits and approvals required or obtained for development of the Development
Land. Developer shall not be required to make any representations or warranties
regarding the accuracy or completeness of any such documents or information or
the matters set forth therein. In the event of a dispute concerning the
Determined Property Value, it shall be determined in accordance with the
appraisal procedure set forth in Exhibit "D," provided that SystemSoft shall
------------
have no right to require a determination of Determined Property Value unless it
has unconditionally and irrevocably exercised its purchase right by timely
notice to Developer. The Development Land Rights shall be conveyed at a closing
within thirty (30) days after SystemSoft's exercise notice (or, if later, within
fifteen (15) days after completion of the appraisal procedure). If the
Development Land has not then been separated from the Phase A Site by a
subdivision, ground lease or condominium, Developer and SystemSoft shall enter
into a ground lease of the Development Land with SystemSoft as tenant for a
prepaid rent equal to the purchase price for the Development Land Rights and
otherwise on terms and conditions reasonably acceptable to Developer and
SystemSoft. The ground lease shall require SystemSoft to use reasonable efforts
to separate the Development Land from the Phase A site by subdivision, and upon
such subdivision the Development Land shall be conveyed to SystemSoft subject to
appropriate cross-easements for access, parking, utilities, and the like. The
ground lease (and any such subdivision) shall, in all events, provide for
continued compliance of the Demised Premises under the Phase A Lease and related
site improvements with applicable legal requirements and the terms of the Phase
A Lease. SystemSoft shall pay all of Developer's reasonable expenses in
connection with any transfer of the Development Land Rights under this Section
5(a), and shall indemnify Developer for any loss, cost, expense, or liability
-8-
<PAGE>
(including reasonable attorneys' fees) arising with respect to acts, omissions,
or conditions concerning the Development Land first occurring after the transfer
except to the extent caused by Developer's negligence or willful misconduct.
Developer shall indemnify SystemSoft for any loss, cost, expense, or liability
(including reasonable attorneys' fees) arising with respect to acts, omissions,
or conditions concerning the Development Land first occurring prior to the
transfer except to the extent caused by SystemSoft's negligence or willful
misconduct.
(b) Developer shall have the right, in its discretion, to elect by
notice to SystemSoft not to proceed with development of Phase B after receiving
a Phase B Notice to Proceed or, if commenced, not to proceed further with
efforts to develop Phase B. If Developer shall so notify SystemSoft, Developer
shall have no further obligation to proceed with the development of Phase B. In
the event Developer notifies SystemSoft under this Section 5(b) that it is not
proceeding with development of Phase B, SystemSoft shall have the right,
exercised by notice to Developer given within ninety (90) days after Developer's
notice under this Section 5(b) to acquire the Development Land Rights for the
purchase price set forth below. If SystemSoft does not timely exercise such
right, SystemSoft's Phase B Rights shall be rendered null and void without
further action of the parties. SystemSoft's notice exercising this right shall
be accompanied by a deposit in the amount set forth below to be valid, and
Developer shall be entitled to retain the deposit as its sole remedy if
SystemSoft fails to purchase the Development Land as set forth herein. The
amount of the deposit shall be equal to $150,000 if SystemSoft's notice
exercising this right is given in the first year following the date of this
Agreement, and the required amount of the deposit shall increase by 5% on each
anniversary of the date of this Agreement for a notice given thereafter. In
the event SystemSoft exercises this right, Developer shall convey all of the
Development Land Rights to SystemSoft, at a closing within thirty (30) days
after SystemSoft's exercise notice, for an amount equal to One Million Five
Hundred Twenty Thousand Dollars ($1,520,000.00) plus all out-of-pocket costs
----
then incurred by Developer in accordance with the Pre-Development Budget which
have not been reimbursed by SystemSoft under Section 3(e), plus an amount equal
----
to 20% of all such costs whenever reimbursed by SystemSoft. The Development
Land Rights shall be conveyed without warranty or recourse except for a warranty
of title by Developer as to its own acts and a representation that Developer has
delivered copies of all documents and written information in Developer's
possession concerning the physical condition of the Development Land, the status
of Developer's title, and governmental permits and approvals required or
obtained for development of the Development Land. Developer shall not be
required to make any representations or warranties regarding the accuracy or
completeness of any such documents or information or the matters set forth
therein. If the Development Land has not then been separated from the Phase A
Site by a subdivision, ground lease or condominium, Developer and SystemSoft
shall enter into a ground lease of the Development Land with SystemSoft as
tenant for a prepaid rent equal to the purchase price for the Development Land
Rights and otherwise on terms and conditions reasonably acceptable to Developer
and SystemSoft. The ground lease shall require SystemSoft to use reasonable
efforts to separate the Development
-9-
<PAGE>
Land from the Phase A site by subdivision,and upon such subdivision the
Development Land shall be conveyed to SystemSoft subject to appropriate cross-
easements for access, parking, utilities, and the like. The ground lease shall,
in all events, provide for continued compliance of the Demised Premises under
the Phase A Lease and all related site improvements with applicable legal
requirements and the terms of the Phase A Lease. SystemSoft shall pay all of
Developer's reasonable expenses in connection with any transfer of the
Development Land Rights under this Section 5(b), and shall indemnify Developer
for any loss, cost, expense, or liability (including reasonable attorneys' fees)
arising with respect to acts, omissions, or conditions concerning the
Development Land first occurring after the transfer except to the extent caused
by Developer's negligence or willful misconduct. Developer shall indemnify
SystemSoft for any loss, cost, expense, or liability (including reasonable
attorneys' fees) arising with respect to acts, omissions, or conditions
concerning the Development Land first occurring prior to the transfer except to
the extent caused by SystemSoft's negligence or willful misconduct.
(c) SystemSoft shall, at any time, have the right by notice to
Developer to unconditionally and irrevocably waive and relinquish SystemSoft's
Phase B Rights (a "Phase B Waiver Notice"). A Phase B Waiver Notice shall not
affect SystemSoft's obligations under this Agreement (including, without
limitation, its obligations under Sections 1, 2 and 4), except that SystemSoft
shall have no further obligation under Section 3 except to pay for any costs
incurred by Developer prior to the date of the Phase B Waiver Notice and
SystemSoft shall have no further obligation to provide financial information
under Section 6. However, except as set forth below, upon a Phase B Waiver
Notice Developer shall commence and thereafter pursue diligent efforts to sell
or ground lease the Development Land or to develop the Development Land for
another tenant or occupant on commercially reasonable terms. SystemSoft shall
within twenty (20) days after request pay any out-of-pocket third-party costs
incurred in connection with efforts to market the Development Land for sale or
ground lease (subject to reimbursement out of any profit received by Developer
on the sale or ground lease), but all costs in connection with a proposed
development shall be paid by Developer. Developer shall have no obligation to
commence or pursue such efforts at any time that SystemSoft is in material
default under this Agreement or the Phase A Lease or if the Phase A Lease has
been terminated. Developer may also elect by notice to SystemSoft not to
commence such efforts or to cease such efforts at any time, provided that if
Developer makes such election, then in its notice Developer shall offer to
transfer the Development Land Rights to SystemSoft on the same terms and
conditions that would apply if SystemSoft's Phase B Rights were terminated by
Developer under Section 5(a). If Developer has not entered into a binding
agreement to sell, lease or develop the Development Land within one (1) year
after the Phase B Waiver Notice is given, and SystemSoft is not in material
default under this Agreement or the Phase A Lease and the Phase A Lease has not
been terminated, then SystemSoft shall have the right to market the Development
Land with a broker reasonably approved by Developer for sale or ground lease and
Developer shall cooperate with such efforts, but in no event shall Developer
have any obligation to sell or lease the Development Land on terms less
favorable than the terms
-10-
<PAGE>
which would apply if SystemSoft's Phase B Rights were terminated by Developer
under Section 5(a) (provided that SystemSoft shall have the right to make up any
payment shortfall).
6. SystemSoft acknowledges and agrees SystemSoft's financial condition
is essential to Developer's ability to obtain construction and permanent
financing for the development of Phase B. As set forth below, Developer and
SystemSoft have agreed on separate financial thresholds for Developer's
obligation to proceed with Phase B and for Developer's right to terminate
SystemSoft's Phase B Rights. SystemSoft shall promptly, from time to time upon
request by Developer, provide Developer full and complete information concerning
SystemSoft's financial condition certified by SystemSoft's chief financial
officer as well as all available financial statements reviewed or audited by
SystemSoft's outside public accountants. Developer shall have no obligation to
proceed with the pre-development activities for Phase B or enter into the Phase
B Lease at any time that SystemSoft's financial condition does not satisfy any
of the Phase B Development Financial Requirements, and as set forth in Section
5(a) above SystemSoft's rights with respect to the development and lease of
Phase B may be terminated if any of the Phase B Default Financial Requirements
remain unsatisfied for a period of more than one (1) year. The Phase B
Development and Default Financial Requirements are as follows:
<TABLE>
<CAPTION>
Phase B Phase B
Development Default
Financial Financial
Requirement Requirement
----------- -----------
<S> <C> <C> <C>
(a) Shareholders
Equity: $30 million $20 million
(b) Earnings (for
each of the 4
calendar
quarters then
most recently
ended): Positive, ----
excluding
one-time
charges
(c) Net Working
Capital (meaning
cash, cash
equivalents,
inventory valued
at cost, and
accounts
receivable of 90
days or less
minus accounts
payable): $15 million $10 million
</TABLE>
SystemSoft shall promptly notify Developer if at any time any of the Phase B
Development or Default Financial Requirements are not satisfied.
-11-
<PAGE>
7. All notices, requests, and other communications required or
permitted under this Agreement shall be made in writing and shall be sent,
unless otherwise provided herein, by registered or certified mail with postage
prepaid, or by hand delivery, or by a nationally recognized overnight courier,
as follows:
If to Developer:
Davis Investment Ventures, Inc.
One Appleton Street
Boston, Massachusetts 02116
Attn: Jonathan G. Davis and Paul R. Marcus
with a copy to:
Richard D. Rudman, Esq.
Hill & Barlow
One International Place
Boston, Massachusetts 02210
If to SystemSoft:
SystemSoft Corporation
Two Vision Drive
Natick, Massachusetts 01760
Attn: David Sommers
with a copy to
David B. Currie, Esq.
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, Massachusetts 02109
or to such other place or to the attention of such other individual as a party
may from time to time designate by written notice to all other parties given as
herein required. Each party shall, within ten (10) days after request from time
to time by the other, furnish a certificate (stating that it may be relied on by
a lender, purchaser, or assignee) confirming factual matters concerning this
Agreement or the performance by either party of its obligations hereunder.
-12-
<PAGE>
8. This Agreement contains the entire and only agreement between the
parties concerning the development and lease of Phase B, and no oral statements
or representations or prior written matter not contained in this Agreement shall
have any force or effect. This Agreement may not be modified or amended except
by written agreement duly executed by the parties hereto, and shall be governed
by and construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts.
9. The covenants and agreements herein contained shall, subject to the
provisions of this Agreement, bind and inure to the benefit of Developer, its
successors and assigns, and SystemSoft, and its successors and assigns. The
term "Developer" in this Agreement shall mean the owner or owners at the time in
question of Developer's interest in the Development Land. The term "SystemSoft"
shall mean the SystemSoft and its permitted assigns under the Phase A Lease.
Upon any transfer of such interest, from and after the date of such transfer,
Developer named herein (and in case of any subsequent transfers, the then
transferor) shall be relieved of all liability for the performance of any
obligations on the part of Developer contained in this Agreement except for a
default by Developer prior to such transfer. None of the provisions of this
Agreement shall cause either party to be liable to the other party, or anyone
claiming through or on behalf of the other party for any special, indirect or
consequential damages, including without limitation, lost profits or revenues.
In no event shall any individual partner, officer, shareholder, trustee,
beneficiary, director or similar party be liable for the performance of or by
Developer or SystemSoft under this Agreement or any amendment, modification or
agreement with respect to this Agreement. SystemSoft agrees to look solely to
Developer's interest in the Premises or, if separately owned, the Development
Land only in connection with the enforcement of Developer's obligations under
this Agreement.
10. Neither party shall record this Agreement, and if recorded this
Agreement may, at Developer's election, be declared null and void. The parties
shall, however, record an instrument executed by both of them to give notice of
the rights of SystemSoft hereunder with respect to the development and lease of
the Development Land.
11. Each party agrees to furnish to the other, within ten (10) days
after request therefor from time to time, a written statement setting forth the
following information:
(i) That the party providing the statement is not aware of any
default or specifying any default;
(ii) That the party providing the statement is not aware of any
current claims or offsets against the other party, or
specifically listing any such claims;
(iii) The date through which amounts due under this Agreement have
then been paid, and any amounts then due but not paid;
-13-
<PAGE>
(iv) Such other information relevant to the Agreement as the
requesting party may reasonably request; and
(v) A statement that any prospective mortgage lender and/or
purchaser rely on all such information.
12. Time shall be of the essence with respect to all dates and time
periods under this Agreement.
-14-
<PAGE>
Executed as a Massachusetts instrument under seal.
DIV NATICK, LLC
By:[SIGNATURE APPEARS HERE]
------------------------
Manager
SYSTEMSOFT CORPORATION
By:/s/ David P. Sommers
----------------------
Name: David P. Sommers
Title: VP Finance & CFO
-15-
<PAGE>
EXHIBIT A
Legal Description
That certain parcel of land with improvements situated thereon in Natick,
Middlesex County, Massachusetts, bounded and described as follows:
NORTHERLY by Worcester Street by two (2) lines measuring, respectively, one
hundred eighty-nine and 95/100 (189.95) feet and six hundred forty
and 69/100 (640.69) feet;
EASTERLY by land now or formerly of George J. Dimatteo, by land now or
formerly of Brian B. and Tracey Kennedy and by Walnut Avenue, two
hundred sixty-seven and 72/100 (267.72) feet;
NORTHERLY by said Walnut Avenue, twenty-five (25) feet;
EASTERLY by land now or formerly of John F. and Mary F. Burns and Margaret
E. Morrissey, one hundred and ten and 21/100 (110.21) feet;
NORTHERLY by the same, ninety and 00/100 (90.00) feet;
EASTERLY by land now or formerly of Jeffrey A. and Karen G. Wise, by
Carlisle Terrace, by land now or formerly by Wilbur R. and F.
Beatrice Upson and by land now or formerly of Dennis, John and
Linda A. Doerr, by two (2) lines measuring, respectively, two
hundred seventy-three and 41/100 (273.41) feet and fifty-nine and
07/100 (59.07) feet;
SOUTHERLY by land now or formerly of Wendell P. III and Marie B. Carter and
by land now or formerly of Sonja E. Hicks, one hundred and fifteen
and 46/100 (115.46) feet;
EASTERLY by land now or formerly of said Hicks, two hundred one and 49/100
(201.49) feet;
SOUTHERLY by land now or formerly of said Hicks and by land now or formerly
of Mill Hunt Real Estate Corporation, three hundred four and
26/100 (304.26) feet;
EASTERLY by land now or formerly of said Mill Hunt Estate Corporation, and
by land now or formerly of Ellen G. Harwood, by three (3) lines
measuring respectively, twenty-eight and 86/100 (28.86) feet,
sixty-eight and 62/100 (68.62) feet and four hundred fifty-three
and 38/100 (453.38) feet;
A-1
<PAGE>
SOUTHERLY by land now or formerly of Edward J. and Karen A. Menard, two
hundred twenty and 55/100 (220.55) feet;
EASTERLY by the same, one hundred forty-nine and 43/100 (149.43) feet;
SOUTHWESTERLY by land now or formerly of Laura J. Klabin, thirteen and 83/100
(13.83) feet;
WESTERLY by land now or formerly of Helen G. Keniston and by land now or
formerly of Paul F. and Suzanne M. Sullivan, by two (2) lines
measuring, respectively, one hundred fifteen and 76/100 (115.76)
feet and one hundred ninety-five and 00/100 (195.00) feet;
SOUTHERLY by land now or formerly of said Sullivans, two hundred nine and
36/100 (209.36) feet;
EASTERLY by the same, sixty and 07/100 (60.07) feet;
SOUTHERLY by land now or formerly of Jay J. and Lynda M. Mahoney, one
hundred fourteen and 86/100 (114.86) feet;
WESTERLY by land now or formerly of Boston Young Women's Christian
Association, Inc. and by land now or formerly of Apple Hill
Associates, shown as Lot I on the hereinafter mentioned plan, by
two (2) lines measuring, respectively, three hundred thirty-
seven and 93/100 (337.93) feet and one hundred sixty-seven and
27/100 (167.27) feet;
NORTHERLY by land now or formerly of Apple Hill Associates, shown as Lot I
on the hereinafter mentioned plan, two hundred ninety-four and
54/100 (294.54) feet;
WESTERLY by the same, two hundred seventy and 57/100 (270.57) feet;
SOUTHWESTERLY by the same two hundred ninety-two and 68/100 (292.68) feet
along a curve having a radius of two hundred twenty-five and
00/100 (225.00) feet;
WESTERLY by the same, one hundred twelve and 65/100 (112.65) feet; and
NORTHWESTERLY by the same one hundred twelve and 96/100 (112.96) feet along a
curve having a radius of one hundred twenty and 00/100 (120.00)
feet.
Being shown as Lot II (containing approximately 16,000 acres), Area "A"
(containing approximately 0.903 acres), and "Conservation Land" (containing
approximately 5.683 acres) on a plan prepared by C. T. Male Associates, Inc.,
South Deerfield, Massachusetts, entitled "Plan of Land In Natick (Middlesex
County), Massachusetts, Prepared For Apple Hill Associates", dated May 6, 1985,
recorded with Middlesex South District Registry of Deeds in Book 16427, Page
459.
<PAGE>
DEVELOPMENT LAND
EXHIBIT A TO PHASE B AGREEMENT
[MAP APPEARS HERE]
<PAGE>
EXHIBIT B
---------
OPERATING EXPENSES AND TAXES
(a) SystemSoft shall pay to Developer all real estate taxes and other
municipal or public assessments allocable to the Development Land from the
acquisition of the Premises until the Phase B Carry Termination Date and all
operating expenses for the Development Land, if not paid under the Phase A
Lease, from the commencement of the term of the Phase A Lease until the Phase B
Carry Termination Date. Special assessments shall be paid over the longest
period permitted.
Amounts due hereunder shall be prorated should SystemSoft's obligation
hereunder commence or terminate before: (i) the end of any fiscal tax year for
that portion related to taxes; or (ii) the end of any calendar year for that
portion related to operating expenses. SystemSoft shall pay to Developer the
amounts due hereunder within fifteen (15) days after written notice from
Developer to SystemSoft. Upon request of Developer, SystemSoft shall make
monthly payments on the first of each month equal to one-twelfth (1/12) of the
annual amount reasonably projected by Developer to be due from SystemSoft (pro-
rated for any partial month). At the request of either party, the monthly
payments shall be reasonably revised from time to time so that the remaining
monthly payments shall equal the additional rent then projected to be due for
the year in question. A final accounting and payment for each real estate tax
and operating period shall be made within thirty (30) days after written notice
from Developer of the exact amount due for the fiscal tax year or calendar year
in question. In the event real estate taxes on the Development Land are
subsequently reduced or abated, SystemSoft shall be entitled to receive a rebate
of the amount abated, provided that the amount of the rebate allocable to
SystemSoft shall in no event exceed the amount paid by SystemSoft for such
fiscal year on account of real estate taxes, and further provided the rebate
allocable to SystemSoft shall be reduced by the reasonable cost of obtaining
such reduction or abatement not otherwise paid by SystemSoft. If the
Development Land is a separate tax lot, Developer shall seek a reduction or
abatement of real estate taxes for the Development Land at SystemSoft's
reasonable request, provided that all reasonable costs incurred by Developer in
seeking the reduction or abatement shall be reimbursed by SystemSoft within
thirty (30) days after request.
(b) Operating expenses shall include:
(1) All reasonable expenses incurred by Developer or its agents which
shall be directly related to employment in connection with the Development
Land of personnel (including amounts incurred for wages, salaries and other
compensation for services, payroll, social security, unemployment and
similar taxes, workmen's compensation, insurance, disability benefits,
pensions, hospitalization, retirement plans and group insurance, uniforms
and working clothes and the cleaning thereof, and expenses imposed on the
Developer or its agents pursuant to any collective
-17-
<PAGE>
bargaining agreement), for services in connection with the ownership,
landscaping, drainage, fencing, maintenance, upkeep, and protection of the
Development Land in a manner customarily provided to undeveloped land in
first-class office parks in suburban Boston, including requirements imposed
by the Town of Natick Planning Board Decision 15-96 (collectively
"Carrying" the Development Land), and, subject to clause (c)(1) below,
personnel engaged in supervision of any of the persons mentioned above;
(2) The reasonable market rate cost of services, materials and
supplies furnished or used in Carrying the Development Land;
(3) The reasonable market rate cost of replacements for tools and
equipment used in Carrying the Development Land;
(4) Reasonable market rate insurance premiums in connection with the
Development Land;
(5) The reasonable market rate costs of plowing and snow removal,
landscaping, fencing, draining and maintaining the Development Land;
(6) Reasonable market rate amounts paid to independent contractors
for services, materials and supplies furnished for Carrying the Development
Land.
(7) All other reasonable market rate expenses incurred in connection
with Carrying the Development Land, including any expenses in the nature of
common area charges for facilities shared with adjoining property to the
extent allocable to the Development Land, and any condominium common
expenses assessed against the Development Land under a condominium created
at the Premises.
(c) Operating expenses shall be computed on a cash basis and shall be
determined in accordance with generally accepted accounting principles
consistently applied. They may be incurred directly or by way of reimbursement
and shall include taxes applicable thereto. Developer shall use reasonable
efforts to obtain competitive prices for the goods and services provided in
Carrying the Development Land. Developer shall solicit at least three bids for
any maintenance or repair costs to be included in operating expenses which are
anticipated to be in excess of Five Thousand Dollars ($5,000.00), such amount to
be reasonably adjusted from time to time for inflation, using the Consumer Price
Index - All Urban Consumers for the Boston metropolitan area published by the U.
S. Department of Labor or a comparable index reasonably selected by Developer
and shall consult with SystemSoft before accepting a bid other than the lowest
bid. The following shall be excluded from operating expenses:
(1) Salaries and related benefits or any portion thereof for officers
and executives of the Developer above the level of property manager.
-18-
<PAGE>
(2) Depreciation of the Development Land or any improvements thereon.
(3) Interest and amortization on indebtedness.
(4) Expenses which SystemSoft otherwise pays by the terms of Phase A
Lease or otherwise.
(5) Repairs or other work occasioned by the exercise of right of
eminent domain.
(6) Expenses, other than real estate taxes and third-party costs
incurred in Carrying of the Development Land, created under any ground or
underlying leases.
(7) Any expense for which Developer is compensated through proceeds
of insurance, condemnation or otherwise.
(8) Expenses for periods of time prior to commencement of the term of
the Phase A Lease or after the Phase B Carry Termination Date.
(9) Cost of removal, abatement or remediation of hazardous substances
or materials caused by Developer or persons other than SystemSoft.
(10) All operating expenses shall be reduced by the amount (net of
collection costs) of any insurance reimbursement, discount or allowance
received by Developer in connection with such costs.
(11) Costs incurred in the acquisition and development of the
Development Land, including leasing costs and costs to design or construct
improvements for use or occupancy by a tenant or other occupant.
It is intended that payments under this Exhibit "B" shall be a net return to
-----------
Developer throughout the term of Exhibit "B" free of all costs, except those
-----------
which this Exhibit "B" expressly makes Developer responsible for bearing; and
-----------
all provisions shall be construed in terms of such intent.
SystemSoft shall have the right for a period of ninety (90) days following
its receipt of Developer's statement of operating expenses to audit same. If it
is determined that the amount due was less than the amount paid by SystemSoft,
Developer shall either promptly refund to SystemSoft the difference or credit
same against the payments next due from SystemSoft. If it is determined that
the amount due was less than ninety-five percent (95%) the amount paid by
SystemSoft, Developer shall reimburse SystemSoft for the reasonable third-party
costs of any audit performed by SystemSoft.
-19-
<PAGE>
EXHIBIT C
---------
PHASE B BASE RENT CALCULATION EXAMPLE
Assume that the total cost to develop Phase B as shown on the approved
Phase B Budget is $12,000,000. Further assume that the Benchmark Treasury Yield
is 7.28%. The Phase B Rent Factor is therefore equal to 13.0% (12.5% plus the
0.5% by which 7.28% exceeds 6.78%). The base rent during the first five years
of the initial term of the Phase B Lease is therefore $1,560,000 per year
($12,000,000 multiplied by 13.0%).
-20-
<PAGE>
EXHIBIT D
---------
APPRAISAL PROCEDURE
At any time after SystemSoft has exercised a right to acquire the
Development Land Rights under Section 5(a) or 5(c) of the Agreement, either
Developer or SystemSoft may request that the other agree to the Determined
Property Value. If Developer and SystemSoft fail to agree on the Determined
Property Value within ten (10) days after any such request, the Determined
Property Value shall be determined by a single appraiser satisfactory to both
Developer and SystemSoft, if they are able to agree to such an appraiser within
such ten (10) day period. If no single appraiser is so selected, Developer and
SystemSoft shall each appoint an independent appraiser who is a member of the
Appraisal Institute and who has at least ten (10) years' experience appraising
commercial land development sites in the Greater Boston Area and who is not then
employed or anticipated to be employed, and who during the last three years has
not been employed, by the party selecting the appraiser, and in the case of the
third appraiser, either party. The two appraisers so appointed shall thereafter
appoint a third appraiser within seven (7) days of their appointment who meets
the same qualifications. If they fail to do so, Developer or SystemSoft may
request that the head of the Massachusetts Chapter of the American Institute of
Real Estate Appraisers (or any other recognized professional association of real
estate appraisers) designate a third appraiser with such qualifications. The
three appraisers so appointed shall within twenty (20) days thereafter render
their judgment as to the fair market value of the Development Land Rights. The
Determined Property Value shall be the numerical average of the two closest
appraisals or the one, if any, which is the numerical average of the other two.
In the event that Developer fails to select an appraiser within seven (7) days
of the request by SystemSoft that it do so, the Determined Property Value shall
be the fair market value of the Development Land Rights as determined by an
appraiser who meets the qualifications stated above and who is selected solely
by SystemSoft. In the event that SystemSoft fails to select an appraiser within
seven (7) days of a request made by Developer, the Determined Property Value
shall be the fair market value of the Development Land Rights as determined by
an appraiser who meets the qualifications stated above and who is selected
solely by Developer. SystemSoft shall pay the cost of the appraisers, provided
that the fees of Developer's appraiser are commercially reasonable.
-21-
<PAGE>
EXHIBIT 11.1
SYSTEMSOFT CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
------- -------
<S> <C> <C>
For the year ended January 31, 1995:
Common stock, less shares held in treasury, beginning of period 5,953,380 5,953,380
Issuance of cheap stock 685,338 685,338
Issuance of common stock 2,320,552 2,320,552
Conversion of preferred stock to common stock 4,289,270 4,289,270
Warrant exercised 258,256 258,256
Common stock equivalents 1,366,170 1,427,398
----------- ----------
Weighted average stock outstanding 14,872,966 14,934,194
=========== ==========
Net Income Per Share $ 0.11 $ 0.11
=========== ==========
For the year ended January 31, 1996:
Common stock, less shares held in treasury, beginning of period 19,796,998 19,796,998
Issuance of common stock 788,248 788,248
Purchase of treasury stock (31,488) (31,488)
Common stock equivalents 2,188,534 2,211,940
----------- ----------
Weighted average stock outstanding 22,742,292 22,765,698
=========== ==========
Net Income Per Share $ 0.16 $ 0.16
=========== ==========
For the year ended January 31, 1997:
Common stock, less shares held in treasury, beginning of period 20,946,792 20,946,792
Issuance of common stock 1,260,160 1,260,160
=========== ==========
Weighted average stock outstanding 22,206,952 22,206,952
=========== ==========
Net Loss Per Share ($1.70) ($1.70)
============ ==========
</TABLE>
<PAGE>
Exhibit 13.1
PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS
SYSTEMSOFT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by its directors, officers or
employees may contain "forward-looking" information which involves risks and
uncertainties. Actual results may differ materially.
Statements indicating that the Company "expects," "estimates," "believes," "is
planning," or "plans to," are forward-looking, as are other statements
concerning future financial results, product offerings or other events that have
not yet occurred. There are several important factors, including those
identified in the heading "Factors That May Affect Future Results" as well as
factors discussed elsewhere in this report and in the Company's other reports
filed with the Securities and Exchange Commission, including the Company's
Annual Report on Form 10-K for fiscal 1997, which could cause actual results or
events to differ materially from those anticipated by the forward-looking
statements. Although the Company has sought to identify the most significant
risks to its business, the Company cannot predict whether, or to what extent,
any of such risks may be realized nor can there be any assurance that the
Company has identified all possible issues which the Company might face.
BUSINESS OVERVIEW
The Company derives its revenues primarily from software license fees,
engineering services and related party revenues. Software license fees include
fees paid by OEMs for source code rights, typically a one-time fee, and royalty
fees paid by OEMs for reproduction and distribution of the Company's object
code. Engineering services are fees paid for customization of the Company's
software to the unique specifications, features sets and requirements of
customers. Related party revenues represent engineering, sales and marketing and
support services performed for Intel Corporation. Gross profits will vary in any
period depending on factors such as the timing of new product introductions,
significant new license agreements, revenue mix, domestic versus international
revenues and the nature of activities being performed for Intel Corporation.
CORPORATE INFORMATION
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues (except cost of revenues items, which are
set forth as a percentage of the corresponding revenue items):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Software license fees 72.4% 66.1% 67.0%
Engineering services 21.2 23.8 17.6
Related party 6.4 10.1 15.4
- ---------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0
- ---------------------------------------------------------------------------------------
Cost of revenues:
Software licenses fees 8.4 5.8 12.8
Engineering services 43.6 37.5 38.0
Related party 39.1 51.3 75.1
- ---------------------------------------------------------------------------------------
Total cost of revenues 17.8 17.9 26.8
- ---------------------------------------------------------------------------------------
Gross profit 82.2 82.1 73.2
Operating expenses:
Research and development 21.2 20.8 16.1
Sales and marketing 28.9 31.1 33.0
General and administrative 8.8 11.1 12.2
Acquired in-process R&D and other charges 117.1 - -
- ---------------------------------------------------------------------------------------
Total operating expenses 176.0 63.0 61.3
- ---------------------------------------------------------------------------------------
Income (Loss) from operations (93.8) 19.1 11.9
Interest income 1.0 2.3 1.9
Interest expense - - (0.1)
Foreign exchange loss (0.3) (0.4) -
- ---------------------------------------------------------------------------------------
Income (Loss) before provision for income taxes (93.1) 21.0 13.7
Provision for income taxes 1.8 6.4 0.8
- ---------------------------------------------------------------------------------------
Net income (Loss) (94.9)% 14.6% 12.9%
=======================================================================================
</TABLE>
ACQUIRED IN-PROCESS R&D AND OTHER CHARGES
On December 19, 1996, the Company acquired Radish, a developer of advanced
telecommunications software, by means of a merger of a wholly owned subsidiary
of the Company and Radish. The Company issued approximately 2,038,000 shares of
common stock and cash in exchange for all the outstanding shares of Radish. The
purchase price of $41,317,000 was comprised of common stock and options valued
at $37,862,000, cash paid of $367,000, liabilities assumed of $951,000 and
transaction costs of $2,137,000. The acquisition was accounted for under the
purchase method resulting in purchase price allocation of $5,198,000 to assets
acquired (primarily cash and equipment) and $36,119,000 to in-process
technology. In connection with this acquisition the Company performed an
assessment of the value of the acquired technology and made a determination that
the requirements for capitalization had not been met resulting in the charge.
The Company plans to incur significant efforts during fiscal 1998 to further
develop and integrate this acquired technology with the Company's technology to
work together as one seamless product. In addition, the Company reassessed its
existing purchased and capitalized technology based upon its revised technology
and product strategies resulting from the Radish acquisition. This evaluation
resulted in a write off of $2,398,000 of previously capitalized and purchased
software costs. In connection with the acquisition, the Company issued warrants
valued at $3,771,000 to a strategic partner of Radish. The results of Radish
are included in the consolidated financial statements from the date of
acquisition. Excluding the charges, income from operations would have been
$9,242,000 or 23% of revenue versus $4,708,000 or 19% of revenue for fiscal 1997
and 1996, respectively. Net income excluding the charges would have been
$6,441,000 or 16% of revenue versus $3,591,000 or 15% of revenue for fiscal 1997
and 1996, respectively.
<PAGE>
Comparison of Fiscal Years Ended January 31, 1997 and 1996
Revenues. Revenues were $39,668,000 and $24,589,000 for fiscal 1997 and 1996,
respectively, an increase of approximately 61%. Software license fees increased
to $28,724,000 from $16,255,000 or approximately 77%. This increase was
primarily due to software license fees on the Company's new call avoidance
products as well as an increase in the software license fees for BIOS, PC Card
and Universal Serial Bus ("USB") products. Certain contracts include fixed
royalty fees for various time periods in lieu of royalties on a per unit basis.
Revenues attributable to such fees, which are included in software license fees,
were $2,150,000 and $2,714,000 for fiscal 1997 and 1996, respectively. Although
such contracts provide for fixed payments to be made at specified time periods,
the timing or amount of such payments may be renegotiated as a matter of
business practice. The fixed royalties recognized as a result of renegotiated
contract terms were not material in fiscal 1997 and 1996. Engineering services
increased to $8,419,000 from $5,851,000 or approximately 44% due to engineering
services related to a contract to develop call-avoidance software products, as
well as growth in the mobile computing market engineering services. Related
party revenues, consisting of engineering, sales and marketing and support
services performed for Intel Corporation ("Intel") under a Development and
License Agreement, as amended, (the "Intel Agreement") and other engineering
services contracts, increased to $2,525,000 from $2,483,000 or approximately 2%.
Revenues generated under the Intel Agreement were $1,875,000 and $2,235,000 for
fiscal 1997 and 1996, respectively. The Company also enters into separate
contracts to provide software licenses and engineering services to Intel.
Revenues generated under such contracts, which are included in related party
revenues, were $650,000 and $248,000 for fiscal 1997 and 1996, respectively.
Cost of Revenues. Cost of revenues was $7,073,000 and $4,403,000 for fiscal
1997 and 1996, respectively. Cost of revenues consists primarily of amortization
of software development costs and purchased software, royalties and engineering
costs associated with engineering services revenues. Cost of revenues as a
percentage of revenues remained constant at 18% for the fiscal years ended
January 31, 1997 and 1996. Cost of software license fees as a percentage of
software license fees revenues increased to 8% from 6% primarily due to
increases in royalties resulting from an increase in revenue subject to
royalties and amortization of purchased software and software development costs.
Cost of engineering services increased as a percentage of engineering service
revenues to 44% from 38%, primarily due to variability in the timing of revenue
as contract milestones are met. Cost of related party revenues as a percentage
of related party revenues decreased to 39% from 51%, due to a decrease in
engineering and sales and marketing costs incurred in performing services under
the Intel Agreement as well as certain personnel costs being included in
Research and Development under the Intel Agreement, as amended.
Research and Development. Research and development expenses, consisting
primarily of payroll and related expenses, were $8,392,000 and $5,112,000, net
of capitalized development costs of $2,116,000 and $1,206,000, for fiscal 1997
and 1996, respectively, an increase of approximately 64%. The increase in
expenses resulted primarily from staff additions. Research and development
expenses as a percentage of revenues were 21% in both periods. Included in
Research and Development are costs associated with certain work performed under
the Intel Agreement.
Sales and Marketing. Sales and marketing expenses, consisting primarily of
payroll and related expenses, costs of marketing programs and events, sales
commissions to internal sales personnel and independent manufacturers'
representatives and travel costs, were $11,462,000 and $7,647,000 for fiscal
1997 and 1996, respectively, an increase of approximately 50%. The increase was
primarily due to staff additions, increased costs of marketing programs and
events and additional travel costs. Sales and marketing expenses as a
percentage of revenues decreased to 29% from 31% due to the substantial relative
increase in revenues.
General and Administrative. General and administrative expenses, consisting
primarily of payroll and related expenses, provision for doubtful accounts and
professional fees, were $3,499,000 and $2,719,000 for fiscal 1997 and 1996,
respectively, an increase of approximately 29%. The increase was primarily due
<PAGE>
to staff additions and an increase in the provision for doubtful accounts.
General and administrative expenses as a percentage of revenues decreased to 9%
from 11% due to the substantial relative increase in revenues.
Provision for Income Taxes. Provision for income taxes was $692,000 and
$1,585,000 for fiscal 1997 and 1996, respectively. The Company recorded a tax
provision in fiscal 1997 while incurring a net loss due to expenses incurred in
connection with the Radish acquisition that were recorded for financial
statement purposes but not for tax purposes. In fiscal 1997 and 1996, the
Company was able to reduce its federal tax liability through the utilization of
certain tax credits. The provision for income taxes in both periods includes
foreign tax withheld on customers' payments to the Company for revenues
originating in Taiwan and Japan. In connection with the acquisition of Radish,
the Company acquired $12,100,000 of net operating loss carryforwards which will
expire on various dates beginning in fiscal 2007. The Company has placed a full
valuation allowance against the acquired net operating loss carryforwards based
on management's judgment that it is more likely than not that the net operating
loss carryforwards will not be utilized based on the limitations on their use.
Comparison of Fiscal Years Ended January 31, 1996 and 1995
Revenues. Revenues were $24,589,000 and $15,691,000 for fiscal 1996 and 1995,
respectively, an increase of approximately 57%. Software license fees increased
to $16,255,000 from $10,513,000, or approximately 55%. This increase was
primarily attributable to the increase in both PC Card and mobile computer
software license fees. Certain contracts include fixed royalty fees for various
time periods in lieu of royalties on a per unit basis. Revenues attributable to
such fees, which are included in software license fees, were $2,714,000 and
$1,892,000 in fiscal 1996 and 1995, respectively. Although such contracts
provide for fixed payments to be made at specified time periods, the timing or
amount of such payments may be renegotiated as a matter of business practice.
The fixed royalties recognized as a result of renegotiated contract terms were
not material in fiscal 1996 and 1995. Engineering services increased to
$5,851,000 from $2,758,000, or approximately 112%, primarily due to engineering
services related to a significant new contract to develop call-avoidance
software products as well as growth in the mobile computing market and PC Card
engineering services. Related party revenues increased to $2,483,000 from
$2,419,000. Revenues generated under the Intel Agreement were $2,235,000 and
$2,280,000 for fiscal 1996 and 1995, respectively.
Cost of Revenues. Cost of revenues was $4,403,000 and $4,210,000 in fiscal 1996
and 1995, respectively. Cost of revenues as a percentage of revenues decreased
to 18% from 27% in fiscal 1996 and 1995, respectively, primarily as a result of
a decrease in the cost of providing services under the Intel Agreement, a
decrease in the software amortization costs, and substantial relative increase
in revenues. Cost of software license fees as a percentage of software license
fees revenues decreased to 6% from 13% due to a decrease in amortization of
software development costs and substantial relative increase in revenues. Cost
of engineering services as a percentage of engineering service revenues remained
constant at 38% in fiscal 1996 and 1995. Cost of related party expenses as a
percentage of related party revenues decreased to 51% from 75% due to a decrease
in engineering and sales and marketing costs incurred in performing services
under the Intel Agreement. Included in cost of related party expenses for
fiscal 1996 and 1995 were engineering and sales and marketing expenses relating
to the Intel Agreement of $1,223,000 and $1,789,000, respectively.
Research and Development. Research and development expenses were $5,112,000 and
$2,528,000, net of capitalized software development costs of $1,206,000 and
$602,000, in fiscal 1996 and 1995, respectively, an increase of approximately
102%. This increase was primarily attributable to an increase in payroll and
related expenses as a result of staff additions. Research and development
expenses as a percentage of revenues increased to 21% from 16% due to the staff
additions mentioned above. Included in research and development are costs
associated with certain work done under the Intel Agreement.
<PAGE>
Sales and Marketing. Sales and marketing expenses were $7,647,000 and
$5,184,000 in fiscal 1996 and 1995, respectively, an increase of approximately
48%. The increase was primarily due to staff additions, increased spending on
marketing programs and sales commissions resulting from the increased level of
revenue. Sales and marketing expenses as a percentage of revenues decreased to
31% from 33%, due primarily to the substantial relative increase in revenues.
General and Administrative. General and administrative expenses were $2,719,000
and $1,906,000 in fiscal 1996 and 1995, respectively, an increase of
approximately 43%. The increase was primarily due to increased professional
fees and travel expenses. General and administrative expenses as a percentage
of revenues decreased to 11% from 12% due to absolute expenses increasing at a
rate less than the rate of increase in revenues.
Provision for Income Taxes. Provision for income taxes was $1,585,000 and
$126,000 in fiscal 1996 and 1995, respectively. For fiscal 1996, the Company was
able to reduce its federal tax liability through the utilization of certain tax
credits. For fiscal 1995, the Company was able to reduce its federal tax
liability from a one-time income tax benefit primarily consisting of the
reversal of a valuation allowance of $1,315,000 related to deferred tax assets
and through the utilization of net operating loss carryforwards. The provision
for income taxes in both periods includes foreign tax withheld on customers'
payments to the Company for revenues originating in Taiwan and Japan.
LIQUIDITY AND CAPITAL RESOURCES
To date, SystemSoft has financed its operations primarily from cash provided by
operations and proceeds from stock issuances. As of January 31, 1997, the
Company had cash and cash equivalents and marketable securities of $10,909,000,
restricted cash of $1,000,000 related to a letter of credit issued to the lessor
of the Company's future offices, and working capital of $25,105,000. The
Company's operating activities used cash of $800,000 for fiscal 1997. Included
in operating activities are payments of $4,168,000 for costs incurred to
terminate certain foreign representative relationships and a minority interest
equity participation agreement. The Company's investing activities used cash of
$1,491,000 in fiscal 1997, net of cash acquired of $4,248,000 from the purchase
of Radish. The principal uses of cash for investing activities in fiscal 1997
were the purchase of property and equipment of $3,263,000, purchased software of
$3,219,000 and software development costs of $2,116,000. During fiscal 1997,
the Company's financing activities have provided cash of $5,693,000, due to the
exercise of stock options and purchases of stock under the Company's employee
stock purchase plan.
As of January 31, 1997, the Company's principal commitments consisted primarily
of office leases for its facilities. These leases, which are under non-
cancelable operating lease agreements, expire on various dates through fiscal
year 2012. The minimum annual rental commitment under these leases for fiscal
1998 are $2,306,000.
In connection with the February 28, 1997 termination of the Software Development
and License Agreement (the "Original Agreement") with Digital Equipment
Corporation ("DEC"), the Company will provide DEC certain license privileges and
guarantee payments of $6,750,000 in lieu of future royalties which would have
been paid over the life of the call avoidance software products. The
guaranteed payments shall include cash payments of $5,500,000 to be paid at
various dates during fiscal 1998 and $1,250,000 to be offset against amounts
owed to the Company. The Company is expensing these amounts commencing in
fiscal 1998 based on the royalty rates negotiated in the Original Agreement.
The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least the next twelve months. In the event
the Company requires additional financing the Company believes that it would be
able to obtain such financing; however, there can be no assurance that it would
be successful in doing so, or that it could do so on terms favorable to the
Company.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future results are subject to substantial risks and uncertainties.
Revenue growth rates experienced by the Company to date may not be indicative of
future growth rates and there can be no assurance that the Company will remain
profitable in the future. The market for the Company's system-level and call-
avoidance software is characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. The Company's future
success will depend upon its ability to enhance its current software and to
develop and introduce new software which keeps pace with technological
developments and evolving industry standards as well as to respond to changes in
customer requirements.
The Company believes that future results of operations, both annually and
quarterly, may fluctuate significantly based upon numerous factors including the
timing of new product introductions, product mix, activities of competitors and
the ability of the Company to penetrate new markets. The volume and timing of
new contracts could have a significant impact on operating results for a
particular quarter and may result in unanticipated quarterly earnings,
shortfalls or losses. In such an event, the price of the Company's Common Stock
would likely be materially adversely affected. In addition, broad stock market
fluctuations may adversely affect the market price of the Company's Common
Stock.
The successful integration of the Company and Radish is important to the future
financial performance of the combined enterprise. There can be no assurance
that the Company will be able to successfully integrate Radish and its services
and products into the Company's operations. The Company's ability to manage its
staff and facilities growth effectively will require it to continue to improve
its operational, financial, and other internal systems, and to train, motivate
and manage its employees. If the Company's management is unable to manage
growth effectively and new employees are unable to achieve performance levels,
the Company's results of operations could be adversely affected. Competition
for qualified sales, technical and other qualified personnel is intense, and
there can be no assurance that the Company will be able to attract, assimilate
or retain additional highly qualified employees in the future.
The Company may confront new competitors as it introduces new products and
expands into new markets. Certain current and potential competitors of the
Company are more established, benefit from greater market recognition and have
substantially greater financial, development and marketing resources than the
Company. Competitive pressures or other factors, including entry into new
markets, may result in unit royalty erosion that could have a material adverse
effect on the Company's results of operations. The Company believes that its
success to date has been largely dependent on the adoption of its software by
key participants in the PC industry the loss of which could adversely affect the
Company's product development efforts. The Company has historically relied on a
limited number of customers for a majority of its revenues. Accordingly, the
loss of any significant customer could have a material adverse effect on the
Company's business and financial condition.
The Company has international revenues that are subject to a number of risks
including the enforcement of agreements, difficulty in collecting receivables,
withholding taxes, changes in product demand due to fluctuations in exchange
rates and currency value fluctuations due to revenues generated in the local
currency in Japan. The Company regards its software as proprietary and attempts
to protect it with a combination of patent, copyright, trademark and trade
secret laws, employee and third-party nondisclosure agreements. There can be no
assurance that the protections put in place by the Company will be adequate.
<PAGE>
Selected Consolidated Five-Year Financial Data
<TABLE>
<CAPTION>
Years Ended January 31,
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands, except per share data (4) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $39,668 $24,589 $15,691 $ 9,154 $ 6,290
Gross profit 32,595 20,186 11,481 6,185 3,788
Acquired in process R&D and other charges 46,456 - - - -
Net income (loss) (1) (37,641) 3,591 2,026 230 (2,592)
Net income (loss) per common share (1), (2), (5) (1.70) 0.16 0.11 0.01 (0.23)
Weighted average number of common and common
equivalent shares (1), (2), (5) 22,207 2,742 19,166 15,382 11,286
Total assets $40,751 $26,952 $21,211 $ 7,394 $ 3,819
Notes payable - - - 60 184
Redeemable convertible preferred stock and warrant 3,771 - - 12,581 8,657
</TABLE>
Selected Consolidated Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 Quarter Ended April 30, July 31, October 31, January 31, Year Ended
In thousands, except per share data 1996 1996 1996 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,050 $ 9,291 $10,308 $12,019 $39,668
Gross profit 6,680 7,555 8,213 10,147 32,595
Income (loss) from operations 1,890 2,207 2,523 (43,834) (37,214)
Income (loss) before income taxes 1,966 2,290 2,619 (43,824) (36,949)
Provision (benefit) for income taxes 688 801 917 (1,714) 692
Net income (loss) (1) 1,278 1,489 1,702 (42,110) (37,641)
Net income (loss) per common share (1), (2) $ 0.06 $ 0.06 $ 0.07 $ (1.89) $ (1.70)
Common stock price per share (3)
High $ 14.25 $ 30.38 $ 36.50 $ 29.75 $ 36.50
Low $ 5.38 $ 12.00 $ 17.50 $ 10.25 $ 5.38
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 Quarter Ended April 30, July 31, October 31, January 31, Year Ended
In thousands, except per share data (4) 1995 1995 1995 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 5,181 $ 5,898 $ 6,189 $ 7,321 $24,589
Gross profit 4,250 4,647 5,086 6,203 20,186
Income from operations 882 1,187 1,146 1,493 4,708
Income before income taxes 1,035 1,333 1,270 1,538 5,176
Provision for income taxes 390 466 444 285 1,585
Net income 645 867 826 1,253 3,591
Net income per common share (2) $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ 0.16
Common stock price per share (3)
High $ 6.63 $ 9.06 $ 8.88 $ 8.25 $ 9.06
Low $ 3.63 $ 5.25 $ 5.75 $ 4.38 $ 3.63
</TABLE>
(1) For fiscal 1997, net loss and net loss per common share reflects a
charge for acquired in-process R&D and other charges in the amount of
$46,456 or $1.96 per common share.
(2) On June 19, 1996, the Board of Directors authorized and approved a 2
for 1 stock split in the form of a stock dividend. All share and per
share data have been restated for all periods presented to reflect this
stock split.
(3) The Company's common stock has been traded on the Nasdaq National
Market under the symbol "SYSF" since August 4, 1994, the effective date
of the Company's initial public offering. No cash dividends have been
paid to date. The Company does not intend to declare or pay cash
dividends in the near future. It is the Company's intention to retain
earnings to finance the expansion of its business. The prices have been
restated to reflect the 2 for 1 stock split. The price is based on the
high and low closing price as quoted on the Nasdaq National Market.
(4) Fiscal 1996 and 1995 adjusted to reflect the acquisition of Ventura
Micro, Inc. in June 1995.
(5) Net income (loss) per common share and weighted average number of
common and common equivalent shares for the years 1995, 1994, and 1993
have been presented on a pro forma basis which reflects the conversion
of all outstanding shares of redeemable convertible preferred stock on
the date of original issuance.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,807,691 $ 7,406,039
Restricted cash 1,000,000 -
Marketable securities 101,507 3,960,490
Accounts receivable, less allowance for doubtful accounts of
$917,915 in 1997 and $491,037 in 1996 12,352,489 7,561,096
Receivable from related party 1,466,015 692,722
Prepaid and other current assets 2,443,941 868,929
Deferred income taxes 2,528,079 1,512,756
- ---------------------------------------------------------------------------------------------------------
Total current assets 30,699,722 22,002,032
Property and equipment, net 4,935,625 2,830,529
Purchased software, net 3,747,032 556,058
Software development costs, net 1,368,359 1,563,303
- ---------------------------------------------------------------------------------------------------------
Total assets $40,750,738 $26,951,922
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,148,092 $ 680,493
Accrued expenses 2,599,457 402,066
Income taxes payable 348,500 524,258
Accrued commissions 48,238 497,354
Accrued compensation and benefits 450,218 582,845
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 5,594,505 2,687,016
Deferred income taxes 1,642,141 674,390
Commitments (Note 6)
Minority interest in subsidiary - 50,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; 1,000,000 shares authorized; none
issued and outstanding
Common Stock, $.01 par value; 90,000,000 and 30,000,000 Shares
authorized; 25,146,061 and 21,106,038 shares issued 251,460 211,060
Additional paid-in capital 68,670,675 24,867,556
Less treasury stock, at cost, 159,246 shares (427,187) (427,187)
Warrants 3,770,939 -
Accumulated deficit (38,751,795) (1,110,913)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 33,514,092 23,540,516
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $40,750,738 $26,951,922
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended January 31,
- --------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
(Note 1)
<S> <C> <C> <C>
REVENUES:
Software license fees $ 28,724,318 $16,254,859 $10,513,395
Engineering services 8,418,527 5,850,617 2,758,293
Related party 2,525,000 2,483,111 2,419,298
- --------------------------------------------------------------------------------------------------
Total revenues 39,667,845 24,588,587 15,690,986
- --------------------------------------------------------------------------------------------------
COSTS OF REVENUES:
Software license fees 2,418,960 935,113 1,343,950
Engineering services 3,668,138 2,194,643 1,048,243
Related party 986,147 1,272,982 1,817,343
- --------------------------------------------------------------------------------------------------
Total cost of revenues 7,073,245 4,402,738 4,209,536
- --------------------------------------------------------------------------------------------------
Gross profit 32,594,600 20,185,849 11,481,450
OPERATING EXPENSES:
Research and development 8,391,732 5,111,759 2,528,161
Sales and marketing 11,462,366 7,646,792 5,183,972
General and administrative 3,498,749 2,719,032 1,905,928
Acquired in-process R&D and other charges 46,455,622 - -
- --------------------------------------------------------------------------------------------------
Total operating expenses 69,808,469 15,477,583 9,618,061
- --------------------------------------------------------------------------------------------------
Income (loss) from operations (37,213,869) 4,708,266 1,863,389
Interest income 397,148 575,868 298,746
Interest expense (6,808) (1,081) (10,409)
Foreign exchange loss (125,100) (106,977) -
- --------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (36,948,629) 5,176,076 2,151,726
Provision for income taxes 692,253 1,584,787 126,074
- --------------------------------------------------------------------------------------------------
Net income (loss) (37,640,882) 3,591,289 2,025,652
- --------------------------------------------------------------------------------------------------
Accretion of preferred stock - - (412,640)
- --------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholder ($37,640,882) $3,591,289 $1,613,012
==================================================================================================
Net income (loss) per common share ($1.70) $0.16 $0.11
==================================================================================================
Weighted average number of common and
common stock equivalent shares outstanding 22,206,952 22,742,292 14,872,966
==================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Treasury Stock
Shares Amount Paid-In Capital Shares Amount Warrants
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994 6,066,280 $60,662 $ (28,519) (112,900) $(128,696)
Stock options exercised 193,566 1,936 203,829
Accretion of preferred stock (15,801)
Warrant exercised 516,512 5,166 494,834
Conversion of preferred stock to common stock 8,578,540 85,784 11,104,826
Issuance of common stock, net of issuance
cost of $1,154,724 4,555,000 45,550 10,449,139
Tax benefit from exercise of stock options 147,767
Net income
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1995 19,909,898 199,098 22,356,075 (112,900) (128,696)
Stock options exercised 1,061,274 10,612 1,077,732
Treasury stock (46,346) (298,491)
Issuance of common stock under employee
stock purchase plan 134,866 1,350 457,195
Tax benefit from exercise of stock options 976,554
Net income
- -----------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1996 21,106,038 211,060 24,867,556 (159,246) (427,187)
Stock options exercised 1,770,247 17,702 4,419,506
Issuance of common stock under employee
stock purchase plan 231,974 2,320 1,303,694
Tax benefit from exercise of stock options 238,584
Issuance of common stock to acquire
Radish Communications 2,037,802 20,378 37,841,335
Issuance of stock purchase warrants 3,770,939
Net loss
- -----------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 25,146,061 $ 251,460 $68,670,675 (159,246) $(427,187) $ 3,770,939
=============================================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------
Accumulated Total Stockholders
Deficit Equity (Deficit)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 31, 1994 $ (7,633,556) $ (7,730,109)
Stock options exercised 205,765
Accretion of preferred stock (396,839) (412,640)
Warrant exercised 500,000
Conversion of preferred stock to common stock 1,302,541 12,493,151
Issuance of common stock, net of issuance
costs of $1,154,724 10,494,689
Tax benefit from exercise of stock options 147,767
Net income 2,025,652 2,025,652
- ----------------------------------------------------------------------------------------
Balance, January 31, 1995 (4,702,202) 17,724,275
Stock options exercised 1,088,344
Treasury stock (298,491)
Issuance of common stock under employee
stock purchase plan 458,545
Tax benefit from exercise of stock options 976,554
Net income 3,591,289 3,591,289
- ----------------------------------------------------------------------------------------
Balance, January 31, 1996 (1,110,913) 23,540,516
Stock options exercised 4,437,208
Issuance of common stock under employee
stock purchase plan 1,306,014
Tax benefit from exercise of stock options 238,584
Issuance of common stock to acquire
Radish Communications 37,861,713
Issuance of stock purchase warrants 3,770,939
Net loss (37,640,882) (37,640,882)
- ----------------------------------------------------------------------------------------
Balance, January 31, 1997 $(38,751,795) $ 33,514,092
========================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended January 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Note 1)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(37,640,882) $ 3,591,289 $ 2,025,652
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
Depreciation and amortization 3,122,814 1,495,953 1,186,073
Deferred income taxes (47,572) 103,846 (942,212)
Provision for doubtful accounts 1,312,592 255,743 331,932
Tax benefit from exercise of stock options 238,584 976,554 147,767
Non-cash charge for acquired in-process R&D and other charges 42,288,123 - -
Changes in operating assets and liabilities:
Accounts receivable (8,731,281) (3,699,852) (2,678,450)
Receivable from related party (1,724,800) (1,071,500) 16,450
Prepaid and other current assets (1,270,052) (384,646) (183,484)
Accounts payable 1,266,103 63,574 262,433
Accrued expenses (704,344) 54,561 63,296
Income taxes payable (175,758) 133,115 384,143
Accrued commissions 141,511 (31,257) 394,963
Accrued compensation and benefits (211,107) (39,628) 58,968
Accrued royalties 1,335,928 214,571 115,444
Deferred revenue from related party - (260,000) (280,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1) (800,141) 1,402,323 902,975
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of Radish Communications 4,247,921 - -
Purchases of property and equipment (3,263,345) (2,321,965) (729,673)
Purchased software costs (3,218,761) (497,474) -
Software development costs (2,116,227) (1,206,208) (601,508)
Sale (purchase) of marketable securities 3,858,983 924,579 (4,885,069)
Increase in restricted cash (1,000,000) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,491,429) (3,101,068) (6,216,250)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and common stock warrants 4,437,208 1,088,344 205,765
Proceeds from employee stock purchase plan 1,306,014 458,544 -
Purchase of treasury stock - (298,491) -
Minority interest in subsidiary (50,000) 50,000 -
Payments on notes payable - - (419,168)
Proceeds from issuance of common stock, net of issuance costs of $1,154,724 - - 10,494,689
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,693,222 1,298,397 10,281,286
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,401,652 (400,348) 4,968,011
Cash and cash equivalents at beginning of year 7,406,039 7,806,387 2,838,376
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,807,691 $ 7,406,039 $ 7,806,387
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and taxes:
Interest $ 6,808 $ 1,081 $ 10,409
Income taxes 31,691 22,833 51,134
NON-CASH ACTIVITIES:
Receivable from related party exchanged for accrued royalties 951,507 452,278 -
Assets received for software license fees 1,933,958 289,999 183,041
Conversion of convertible preferred stock - - 12,493,151
Exercise of warrant - - 500,000
Receivable exchanged for cooperative marketing and other 1,835,290
Non-cash activities associated with Radish Communications acquisition
Issuance of common stock 37,861,713
Acquired in-process R&D 36,119,181
Capitalized software development 1,518,499
Purchased license fees 879,504
Stock purchase warrants 3,770,939
</TABLE>
(1) Net cash used in operating activities in fiscal 1997 includes $4,168,000 to
terminate certain foreign representative relationships and a minority
interest equity participation agreement
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
SystemSoft Corporation (the "Company") designs, develops, markets, licenses and
supports call avoidance, PC Card and advanced system-level software products for
manufacturers of mobile and desktop personal computers and peripherals. The
Company delivers enabling technologies which increase PC functionality and
simplify usage while allowing manufacturers to differentiate their products
through highly expandable system design. The principal markets for the Company's
products are U.S. and Asia Pacific based manufacturers of personal computers and
related devices.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany transactions and accounts have
been eliminated in consolidation. The 1995 financial statements have been
adjusted to include the results of operations and cash flows of Ventura Micro,
Inc. ("VMI") acquired in June 1995 in an acquisition which was accounted for
under the pooling of interest method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents include highly liquid investments purchased with an original
maturity of three months or less. Marketable securities consist primarily of
U.S. Treasury obligations classified as "held to maturity" and are stated at
amortized cost which approximates fair market value. Restricted cash represents
security on a letter of credit issued to the lessor of the Company's future
office space.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are amortized over the lesser of
the lease term or the life of the asset. Upon retirement or other disposition
of property and equipment, the cost and related depreciation are removed from
the accounts and the resulting gain or loss is reflected in net income.
PURCHASED SOFTWARE
Purchased software costs consist of purchased technologies, costs of translating
the Company's products into various languages and costs to build knowledge bases
for the call avoidance software products. Capitalized costs are amortized
commencing upon the general release of the product on a straight-line basis over
the estimated economic lives of the related products (generally one to three
years). The Company reviews purchased software development costs each period
and, if necessary, reduces the carrying value of each product to its net
realizable value. Accumulated amortization was $328,327 and $674,308 at January
31, 1997 and 1996, respectively. Related amortization expense was $679,533,
$233,550 and $134,413 for fiscal 1997, 1996 and 1995, respectively.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain internally generated software development costs
after technological feasibility has been established. Capitalized costs are
amortized commencing upon the general release of the product on a straight-line
basis over the products estimated economic lives (generally one to three years).
The Company reviews capitalized software development costs each period and, if
necessary,
<PAGE>
reduces the carrying value of each product to its net realizable value.
Accumulated amortization was $1,973,745 and $1,885,914 at January 31, 1997 and
1996, respectively. Related amortization expense was $792,672, $439,698 and
$681,159 for fiscal 1997, 1996 and 1995, respectively.
MINORITY INTEREST IN SUBSIDIARY
Minority interest represents the joint venture partners proportionate share of
the equity of SystemSoft K.K. (SSKK), a Japanese stock corporation established
in November 1995. In June 1996, the Company established a wholly owned Japanese
subsidiary, Pacific SystemSoft K.K., which began operations in July 1996. In
December 1996, the Company repurchased stock of SystemSoft K.K. from its
minority shareholders and subsequently dissolved the corporation.
REVENUE RECOGNITION
Revenue from software license fees is recognized when the software has been
delivered, providing that no significant vendor obligations remain outstanding,
customer acceptance is reasonably assured and collectibility is deemed probable.
Revenue recognized from software licenses with minimum guaranteed payments is
limited to amounts due within the next fiscal quarter. Additional software
license fees are recognized as per unit royalties exceed the minimum guaranteed
payments. Insignificant vendor obligations, if any, remaining after contract
execution and shipment are accounted for by accruing the costs related to the
remaining obligations.
Revenue from engineering services consists of fees charged for customization of
software and is recognized as related services are performed and contractual
milestones are met.
Revenue from related party consists of engineering, sales and marketing and
support services performed for Intel Corporation ("Intel") under a Development
and License Agreement (the "Intel Agreement") and other engineering services
contracts (see Note 5). Revenue from Intel is recognized as work is performed
and milestones are met.
NONMONETARY TRANSACTIONS
The Company occasionally enters into nonmonetary transactions in which the
Company's software licenses are exchanged for products or services. These
transactions are recorded at the estimated fair market value of the product or
service received.
INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between financial and taxable income. Such differences arise
primarily from operating loss carryforwards, U.S. and foreign tax credits,
accruals, capitalized software costs, and provisions for doubtful accounts.
FOREIGN CURRENCY TRANSLATION
The Company considers the United States dollar as its functional currency for
the foreign operations of its international subsidiaries. Monetary assets and
liabilities are translated into U.S. dollars at the exchange rate on the balance
sheet date. Nonmonetary assets and liabilities are remeasured into U.S. dollars
at historical exchange rates. Income and expense items are translated at average
rates of exchange prevailing during each period. Translation adjustments are
recognized currently as a component of foreign currency gain or loss.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based upon the weighted average
number of common and common equivalent shares outstanding during each period
using the treasury stock method. Common equivalent shares are included in the
calculations where the effect of their inclusion would be dilutive. In fiscal
1997, common equivalents were excluded from the calculation since the effect
would be antidilutive due to the net loss for the year. Common and common
equivalent shares issued during the twelve-month period preceding the date of
the initial filing of the Company's Registration Statement have been included in
the calculation, using the treasury stock method and the assumed public offering
price, as if they were
<PAGE>
outstanding for all periods presented. In the computation of net income per
common share for fiscal 1995, accretion of the redeemable convertible preferred
stock is included as a reduction of net income available to common stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
Number 128, "Earnings per Share" ("FAS128"). This standard is effective for
financial statements for both interim and annual periods ending after December
15, 1997. FAS 128 simplifies the standards for computing earnings per share and
makes them comparable to international EPS standards. The Company will adopt
FAS128 for fiscal 1998 and, upon adoption, will restate all prior EPS presented.
COOPERATIVE MARKETING
In fiscal 1997 the Company entered into arrangements with customers to
cooperatively advertise its call avoidance software in order to enhance market
awareness of the products with end-users. Marketing expenses related to these
programs are deducted directly from the customer accounts receivable balances
and charged to sales and marketing expense in the period.
RECLASSIFICATION
Certain prior year amounts in the financial statements have been reclassified to
conform to the 1997 presentation.
2. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
January 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------------
Computer equipment $ 6,039,427 $ 3,236,400
Furniture and fixtures 1,605,552 794,790
Office equipment 358,813 150,430
Leasehold improvements 931,487 362,990
- -------------------------------------------------------------------------------
8,935,279 4,544,610
Less accumulated deprecation (3,999,654) (1,714,081)
- -------------------------------------------------------------------------------
Property and equipment, net $ 4,935,625 $ 2,830,529
- -------------------------------------------------------------------------------
</TABLE>
Depreciation expense of property and equipment was $1,650,609, $829,438 and
$383,249 for fiscal 1997, 1996 and 1995, respectively.
3. STOCKHOLDERS EQUITY:
PREFERRED STOCK
In June 1994, the stockholders of the Company approved the creation of a new
class of undesignated preferred stock and authorized 1,000,000 shares of $.01
par value, in one or more series, with voting rights and preferences to be
determined by the Board of Directors. There were no shares issued or outstanding
as of January 31, 1997.
STOCK SPLIT
On June 19, 1996, the Company's Board of Directors declared a two-for-one stock
split, payable in the form of a 100% stock dividend which was distributed on
July 17, 1996 to holders of record on July 3, 1996. The par value of the
additional 10,783,848 shares of common stock issued in connection with the stock
split was transferred to common stock from additional paid-in capital. All
references to number of shares (except shares authorized), per share data and
stock option plan data have been restated for all periods presented to reflect
the stock split.
<PAGE>
COMMON STOCK
On July 30, 1996, a majority of the stockholders of the Company voted to
increase the number of authorized shares of common stock to 90,000,000 shares.
STOCK-BASED COMPENSATION PLANS
The Company has three stock-based compensation plans, which are described below.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation" ("FAS123") which is effective for periods beginning after December
15, 1995. FAS 123 requires that companies either recognize compensation expense
for grants of stock, stock options, and other equity instruments based on fair
value, or provide pro forma disclosure of net income (loss) and earnings (loss)
per share in the notes to the financial statements. The Company adopted the
disclosure provisions of FAS 123 in 1997 and has applied APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with FAS 123, the Company's net income (loss) and earnings (loss) per
share for fiscal 1997 and 1996 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Net Loss Loss Per Share Net Income Earnings Per Share
<S> <C> <C> <C> <C>
As reported $(37,640,882) $(1.70) $3,591,289 $ .16
Pro forma (40,941,446) (1.84) 2,947,302 .13
</TABLE>
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for both fiscal 1997 and 1996: an expected life of 4.5 years,
expected volatility of 62.5%, a risk-free interest rate of 6% and no expected
dividends.
The effects of applying FAS 123 for the purposes of providing pro forma
disclosure may not be indicative of the effects on reported net income (loss)
for future years, as the pro forma disclosures include the effects of only those
awards granted after February 1, 1995.
In January 1992, the Company adopted the 1992 Stock Option Plan (the "Employee
Plan") and the 1992 Directors' Stock Option Plan (the "Directors' Plan"). The
Employee Plan provided for the granting of incentive stock options to employees
and nonqualified stock options to employees, consultants and advisors of the
Company. The Directors' Plan provided for the granting of nonqualified stock
options to Directors. In February 1993, the Company adopted the 1993 California
Stock Option Plan (the "California Plan"), which provided for the issuance of
incentive stock options for employees located in California. The Employee Plan,
the Directors Plan and the California Plan all expired in June 1994, except as
to options then outstanding.
In June 1994, the Company adopted the 1994 Omnibus Stock Plan (the "1994 Plan")
and the 1994 Non-Employee Director Stock Option Plan (the "1994 Directors'
Plan"). The 1994 Plan provided for the granting of up to 700,000 incentive stock
options to employees and nonqualified stock options or restricted stock to
employees, consultants, directors and officers of the Company. The 1994
Directors' Plan provided for the granting of up to 200,000 nonqualified stock
options to directors. On March 23, 1995, the Company's Board of Directors
approved an amendment to the 1994 Plan, reserving an additional 800,000 shares
plus such additional number of shares as become available due to the forfeiture
of options previously granted pursuant to the Employee Plan and the California
Plan. On February 28, 1996, the Company's Board of Directors approved an
amendment to the 1994 Plan, reserving an additional 2,500,000 shares. These
amendments were approved by a majority vote of the Company's stockholders.
<PAGE>
As a result of the acquisition of Radish Communications Systems, Inc. ("Radish")
(see Note 11), the Company acquired the 1992 Stock Option Plan and related
option agreement ("Radish Plan"). The options granted under the Radish Plan
converted to options to purchase 188,708 shares of the Company's common stock.
The Radish Plan for incentive stock options vest over a four year period and
expire eight years after the date of grant and non-qualified stock options are
generally fully vested when granted.
The exercise price of incentive stock options must be at least equal to the fair
market value of the stock on the date of the grant. The exercise price of
nonqualified stock options is determined by the Board of Directors. To date, all
nonqualified stock options have been granted at a price equal to the fair market
value of the stock on the date of the grant. Accordingly, the granting of
incentive and nonqualified options has not resulted in a compensation charge.
The stock options generally vest over a four-year period and expire ten years
from date of grant.
The following table summarizes the status of the Company's stock option plans at
January 31, 1997, 1996 and 1995, and changes during the years then ended:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year 4,167,550 $ 3.39 3,639,028 $ 1.50 2,166,820 $ 1.04
Granted 2,067,700 9.80 2,094,652 5.30 2,061,670 2.02
Aquired option pool 188,708 1.19 - -
Exercised (1,762,573) 2.51 (1,061,274) 1.03 (193,556) 1.06
Canceled (272,559) 5.49 (504,856) 2.43 (395,896) 1.86
---------- ----------- ----------
Outstanding at the end of the year 4,388,826 $ 6.54 4,167,550 3.39 3,639,028 $ 1.50
========== =========== ==========
Options exercisable at year end 928,366 $ 4.03 994,359 $ 1.56 987,375 $ 0.80
Weight-average grant-date fair value
of options granted during the year $ 5.57 $ 2.96
</TABLE>
The following table summarizes information about stock options outstanding at
January 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------
Range of Remaining Weighted- Weighted-
Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ .09 - 1.88 918,167 6.72 $ 1.71 498,667 $ 1.63
1.90 - 5.22 902,672 8.33 4.17 248,459 4.19
5.44 - 7.63 825,414 8.65 6.46 110,982 6.64
7.75 - 7.75 1,092,748 9.20 7.75 6,476 7.75
9.88 - 23.63 649,825 9.70 14.69 63,782 17.24
- ----------------------------------------------------------------------------------------------
.09 - 23.63 4,388,826 8.47 6.54 928,366 4.03
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In June 1994, the Company adopted the 1994 Employee Stock Purchase Plan and has
reserved 700,000 shares of Common Stock for issuance under the plan, including
500,000 shares approved by the stockholders in fiscal 1996. Subject to certain
limitations, SystemSoft employees may purchase shares of common stock at a price
per share that is the lesser of 85% of the fair value as of the beginning or end
of the annual offering period. Shares issued under the Employee Stock Purchase
Plan were 231,974 and 134,866 in fiscal 1997 and 1996, respectively.
WARRANTS
<PAGE>
In December 1996, the Company issued a common stock purchase warrant which
entitles the holder to purchase 750,000 shares of common stock at an exercise
price of $23.00. The right to purchase 500,000 shares expire in December, 1998
and the right to purchase the remaining 250,000 shares expire in December, 1999.
4. INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 202,798 $1,084,000 $ 190,000
State 35,788 76,660 90,000
Foreign taxes 501,241 320,281 640,519
- -------------------------------------------------------------------------------------------------
739,827 1,480,941 920,519
- -------------------------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal (116,208) 93,385 (701,445)
State 68,634 10,461 (93,000)
- -------------------------------------------------------------------------------------------------
(47,574) 103,846 (794,445)
- -------------------------------------------------------------------------------------------------
Total $ 692,253 $1,584,787 $ 126,074
- -------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the U.S federal statutory rate to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
Years Ended January 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate (35)% 35% 35%
Acquired in-process R&D 34 - -
Stock purchase warrant 4 - -
State income taxes, net - 3 -
Benefit for foreign tax credits (7) -
Reversal of valuation allowance - - (61)
Foreign taxes for which no benefit was recorded - - 30
Other (1) - 2
- -------------------------------------------------------------------------------------------------
Total 2% 31% 6%
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The components of the deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
January 31,
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Purchased software $(1,171,903) $ (123,182)
Software capitalization (465,241) (530,766)
Depreciation (4,997) (4,997)
- ------------------------------------------------------------------------------------------
Gross deferred tax liabilities (1,642,141) (658,945)
Deferred tax assets:
Foreign tax credits 950,409 705,524
Allowance for doubtful accounts 216,892 166,953
Net operating loss carryforwards 589,150 589,150
Acquired net operating loss carryforwards 4,235,000 -
R&D credits 261,000 -
Acquisition costs 510,628 -
Deferred lease - 35,684
- ------------------------------------------------------------------------------------------
Gross deferred tax assets 6,763,079 1,497,311
- ------------------------------------------------------------------------------------------
Valuation allowance (4,235,000) -
- ------------------------------------------------------------------------------------------
Net deferred tax assets $ 885,938 $ 838,366
- ------------------------------------------------------------------------------------------
</TABLE>
In connection with the acquisition of Radish, the Company acquired $12,100,000
of net operating loss carryforwards which will expire on various date beginning
in fiscal 2007. The Company has placed a full valuation allowance against the
acquired net operating loss carryforwards based on management's judgment that it
is more likely than not that the net operating loss carryforwards will not be
utilized based on the limitations on their use.
Based on the Company's projections of future earnings, management believes that
it is more likely than not that sufficient taxable income will be generated in
the foreseeable future to realize the deferred tax asset. Accordingly, during
fiscal 1995, $1,314,534 of the valuation allowance offsetting the deferred tax
asset was reversed.
The sale of incentive stock options prior to the expiration of the required
holding period and the exercise of non qualified stock options result in state
and federal income tax benefits to the Company equal to the difference between
the market price at the date of exercise and the option price. During fiscal
1997 and 1996, $238,584 and $976,554, respectively, was credited to additional
paid-in capital to recognize this benefit. The Company had an additional
$27,700,000 of tax deductions related to the sale of incentive stock options
prior to the expiration of the required holding period and the exercise of non-
qualified stock options at January 31, 1997. The recognition of the tax benefit
related to these tax deductions will result in an increase to additional paid-in
capital in the year realized.
As of January 31, 1997, the Company had net operating loss carryforwards of
$1,730,000 available to offset future taxable income. The net operating loss
carryforwards will expire on various dates beginning in fiscal 2007. In
addition, the Company has approximately $12,100,000 of Radish net operating
losses, incurred prior to the December 19, 1996 acquisition, which are subject
to certain change of control limitations under the Internal Revenue Code. These
Radish net operating losses will expire on various dates beginning in fiscal
2007.
5. RELATED PARTY:
Intel held approximately eight and nine percent of the outstanding shares of the
Company's common stock as of January 31, 1997 and 1996, respectively.
In December 1993, the Company entered into a Development and License Agreement
with Intel (the "Intel Agreement") pursuant to which Intel licenses certain
technologies to the Company. The Company
<PAGE>
develops, markets and supports the software developed from Intel's technology.
Under the terms of the Intel Agreement, Intel paid the Company $4,000,000 for
the Company's engineering, sales and marketing and support services. The final
payment under the Intel Agreement was received in September 1995.
In consideration of Intel's technology provided and licensed to the Company
under the Intel Agreement, the Company is obligated to pay Intel royalties based
on a percentage of revenues generated on all licensed works developed under the
Intel Agreement. Royalties are based upon a percentage of revenues generated on
PC Card software from February 1, 1994 through January 31, 1999 or beyond such
dates if the Company's PC Card software contains Intel's licensed technology.
The royalties paid to Intel are included in related party cost of revenues.
Intel has the right on sixty days notice to convert any exclusive license to a
non-exclusive license, however such conversion would reduce the royalty payments
by fifty percent.
In October 1995 the Intel Agreement was amended to include engineering services
on additional products. The agreement provides the Company with engineering
service payments up to $3,600,000 which included an initial payment of $600,000
and subsequent quarterly payments of $375,000 commencing on January 1, 1996,
through October 1, 1997. Revenue is recognized as work is performed and
milestones are met. Payments to the Company can be made by offsetting amounts
from royalties due to Intel under the Intel Agreement, to the extent, if any,
that such earned royalties are less than the amounts payable to the Company.
Included in receivable from related party as of January 31, 1997 is $1,466,000
due under the Intel Agreement. Royalties earned by Intel of $951,507 and
$452,278 were used to offset amounts owed to the Company in fiscal 1997 and
1996, respectively.
Included in related party revenues is $1,875,000, $2,235,000, and $2,280,000 for
fiscal 1997, 1996 and 1995, respectively, representing revenue recognized for
services in accordance with the Intel Agreement. Included in related party cost
of revenues are costs associated with this revenue, of $856,147, $1,223,360,
and $1,788,577 for fiscal 1997, 1996, and 1995, respectively.
The Company also enters into separate contracts to provide software licenses and
engineering services to Intel. Revenues generated under such contracts, which
are included in related party cost of revenues, were $650,000, $248,111, and
$139,298, respectively, with related costs of $130,000, $49,622, and $28,766 for
fiscal 1997, 1996, and 1995, respectively.
6. COMMITMENTS:
The Company leases facilities under noncancelable operating leases expiring at
various dates through 2012. In December 1996, the Company signed a fifteen year
lease for the construction of its corporate headquarters with an additional
option to build on adjacent land. Under the terms of the agreement, $1,000,000
security deposit in the form of a letter of credit was issued to the lessor and
secured by restricted cash in the same amount. The Company will occupy the
facility in fiscal 1998.
Minimum annual rental commitments (net of subleases) under these noncancelable
leases as of January 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year:
<S> <C>
1998 $ 2,306,478
1999 3,286,565
2000 3,098,708
2001 3,125,129
2002 3,080,218
Thereafter 26,600,342
-----------
Total $41,497,440
</TABLE>
Rent expense under all operating leases was $1,223,406, $740,878, and $369,267
for fiscal 1997, 1996 and 1995, respectively.
<PAGE>
In connection with the February 28, 1997 termination of the Software Development
and License Agreement (the "Original Agreement") with Digital Equipment
Corporation ("DEC"), the Company will provide DEC certain license privileges and
guarantee payments of $6,750,000 in lieu of future royalties which would have
been paid over the life of the call avoidance software products. The
guaranteed payments shall include cash payments of $5,500,000 to be paid at
various dates during fiscal 1998 and $1,250,000 to be offset against amounts
owed to the Company. The Company is expensing these amounts commencing in
fiscal 1998 based on the royalty rates negotiated in the Original Agreement.
The Company is subject to lawsuits and other legal matters arising out of the
general conduct of its business. In the opinion of Management, such matters
would not have a material adverse effect on the financial position and results
of operations of the Company.
7. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents, marketable securities and
accounts receivable.
The Company maintains excess cash in money market investments and U.S.
Government securities with major financial institutions. These investments
typically mature within 90 days. Marketable securities consist of U.S.
Government debt securities generally maturing within one year. Historically,
the Company has not recorded any losses related to these investments.
The Company extends credit on open accounts to its customers and does not
require collateral. The Company performs ongoing credit evaluations of all
customers and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
As of January 31, 1997 and 1996, the three largest receivable balances including
receivable from related party collectively represented approximately $4,573,000
or 31% and $2,714,000 or 31%, respectively, of total accounts receivable. As of
January 31, 1997 and 1996, receivables from foreign customers were $6,537,000
and $2,625,000, respectively, or 44% and 30%, respectively, of total accounts
receivable.
8. EMPLOYEE BENEFITS:
The Company maintains a defined contribution plan covering all U.S employees
which was established under Section 401(a) of the Internal Revenue Code.
Eligible employees may voluntarily contribute a percentage of their annual
pretax compensation. The Company is not required and has not contributed to the
Plan since inception.
9. GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
The Company operates in one industry segment: the development, marketing and
support of call avoidance and system-level software. In fiscal 1997 no customer
accounted for more than 10% of total revenue. In fiscal 1996 two customers
accounted for approximately 13% and 10% of total revenues. In fiscal 1995 two
customers accounted for approximately 15% and 10% of total revenues. The
customers included in these percentages vary from year to year, and include
revenue from a related party.
Export sales were $12,387,000, $6,990,000, and $3,965,000 for fiscal years 1997,
1996, and 1995, respectively.
Summarized information related to international operations is as follows
<TABLE>
<CAPTION>
Years ended January 31,
- ------------------------------------------------------------------------------------------------
Sales to unaffiliated customers: 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
United States $ 27,281,169 $ 17,598,395
Asia Pacific 10,895,813 6,707,222
Other 1,490,863 282,970
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
Total sales to unaffiliated customers $ 39,667,845 $ 24,588,587
- ------------------------------------------------------------------------------------------------
Operating Income(Loss):
United States $ (38,222,621) $ 4,494,432
Asia Pacific 1,008,752 213,834
- ------------------------------------------------------------------------------------------------
Total operating income(Loss) (37,213,869) 4,708,266
- ------------------------------------------------------------------------------------------------
Identifiable Assets:
United States $ 36,442,260 $ 25,272,420
Asia Pacific 4,308,478 1,679,502
- ------------------------------------------------------------------------------------------------
Total identifiable assets $ 40,750,738 $ 26,951,922
- ------------------------------------------------------------------------------------------------
</TABLE>
10. ACQUIRED IN-PROCESS R&D AND OTHER CHARGES
In fiscal 1997, the Company recorded a charge for acquired in-process R&D and
other charges of approximately $46,456,000 which includes $42,288,000 of costs
associated with the acquisition of Radish and $4,168,000 of costs incurred to
terminate certain foreign representative relationships and a minority interest
participation agreement. See Note 11.
11. ACQUISITIONS
On December 19, 1996, the Company acquired Radish, a developer of advanced
telecommunications software, by means of a merger of a wholly owned subsidiary
of the Company and Radish. The Company issued approximately 2,038,000 shares of
common stock and cash in exchange for all the outstanding shares of Radish. The
purchase price of $41,317,000 was comprised of common stock and options valued
at $37,862,000, cash paid of $367,000, liabilities assumed of $951,000 and
transaction costs of $2,137,000. The acquisition was accounted for under the
purchase method resulting in purchase price allocation of $5,198,000 to assets
acquired (primarily cash and equipment) and $36,119,000 to in-process
technology. In connection with this acquisition the Company performed an
assessment of the value of the acquired technology and made a determination that
the requirements for capitalization had not been met resulting in the charge.
The Company plans to incur significant efforts during fiscal 1998 to further
develop and integrate this acquired technology with the Company's technology to
work together as one seamless product. In addition, the Company reassessed its
existing purchased and capitalized technology based upon its revised technology
and product strategies resulting from the Radish acquisition. This evaluation
resulted in a write off of $2,398,000 of previously capitalized and purchased
software costs. In connection with the acquisition, the Company issued warrants
valued at $3,771,000 to a strategic partner of Radish. The results of Radish
are included in the consolidated financial statements from the date of
acquisition.
In June 1995, the Company issued approximately 188,000 shares of its common
stock in exchange for all of the issued and outstanding stock of VMI, a system
software and consulting company specializing in PC Card technology. The merger
has been accounted for under the pooling of interest method and, accordingly,
the Company's consolidated financial statements for 1995 have been restated to
include the accounts and operations of VMI. In connection with the merger,
$61,210 of merger costs and expenses were incurred and have been charged to
general and administrative expenses.
<PAGE>
Separate revenues and net income amounts of SystemSoft and VMI are as follows:
<TABLE>
<CAPTION>
Years ended January 31,
In thousands 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
SystemSoft $ 24,513 $15,221
VMI 76 470
- ---------------------------------------------------------------------------------------------
Combined $ 24,589 $15,691
Net Income (Loss):
SystemSoft $ 3,667 $ 2,045
VMI (76) (19)
- ---------------------------------------------------------------------------------------------
Combined $ 3,591 $ 2,026
</TABLE>
Separate revenues and net income (loss) amounts of SystemSoft and Radish are as
follows:
<TABLE>
<CAPTION>
Years ended January 31,
In thousands 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
SystemSoft $ 39,668 $24,589
Radish 3,990 2,070
- ---------------------------------------------------------------------------------------------
Combined $ 43,658 $26,659
Net Income (Loss):
SystemSoft $(37,641) $ 3,591
Radish (2,766) (3,614)
- ---------------------------------------------------------------------------------------------
Combined $(40,407) $ (23)
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of SystemSoft Corporation
We have audited the consolidated balance sheets of SystemSoft Corporation and
its Subsidiaries as of January 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended January 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SystemSoft Corporation and its Subsidiaries as of January 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended January 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 28, 1997
<PAGE>
Corporate Information
<TABLE>
<S> <C>
Executive Officers Market for Common Stock
SystemSoft common stock is traded on NASDAQ NMS
Robert F. Angelo under the symbol SYSF.
President, Chief Executive Officer,
Chairman of the Board of Directors
SEC Form 10-k
Jonathon L. Joseph A copy of the Company's annual report Form 10-K, as filed
Senior Vice President, PC Software Division with the Securities and Exchange Commission, is available
without charge upon written request to:
William J. O'Connell
Senior Vice President, System Wizard Division Investor Relations
SystemSoft Corporation
David Klein 2 Vision Drive
Senior Vice President, System Wizard Division Natick, MA 01760
508/651-0088
David Sommers
Senior Vice President, Finance, Treasurer, Annual Meeting
and Chief Financial Officer The Annual Meeting of Stockholders will be held on
June 25, 1997. A Notice of the meeting, together with
Steven A. Berns a form of proxy and a proxy statement, will be mailed to
Vice President, Secretary, and General Counsel all stockholders on or about May 16, 1997, at which time
proxies will be solicited by the Board of Directors.
Thomas W. Higgins
Vice President, Worldwide Sales Trademarks
SystemSoft is a registered trademark and SystemWizard,
Paul J. Podevillano VoiceView, CardWorks, CardWizard, and MobilePRO
Vice President, Business Development are trademarks of SystemSoft Corporation, Microsoft
and Windows are registered trademarks of Microsoft
Corporation. All other trademarks, registered trademarks,
or tradenames are property of their respective holders.
Stock Profile
Directors As of April 15, 1997, there were approximately 364
stockholders of record of the Company's common stock
Robert N. Goldman with 25,042,298 shares outstanding. No cash dividends
President, Chief Executive Officer, have been paid on the common stock since the Company's
Chairman - Object Design, Inc. inception. The Company does not intend on paying cash
dividends in the forseeable future.
W. Frank King, Ph.D.
President - PSW Technologies, Inc. Independent Accountants
Coopers & Lybrand L.L.P.
David J. McNeff Boston, Massachusetts
President - The Bullfinch Group
Legal Counsel
Testa, Hurwitz & Thibeault, LLP
Boston, Massachusetts
Transfer Agent
Boston EquiServe Limited Partnership
Canton, massachusetts
Graphic Design
Caryl Hull Design Group
Boston, Massachusetts
Writing
Wordscape Communications, Inc.
Millis, Massachusetts
Photography
Len Rubenstein Photography
North Scituate, Massachusetts
</TABLE>
<PAGE>
EXHIBIT 21.1
SYSTEMSOFT CORPORATION SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION OWNERSHIP
- ------------------ ----------------------------- ---------
<S> <C> <C>
SystemSoft Japan Corporation Delaware 100% owned by SystemSoft Corporation
SystemSoft Taiwan Corporation Massachusetts 100% owned by SystemSoft Corporation
SystemSoft Colorado Corporation Delaware 100% owned by SystemSoft Corporation
Yellow Rose Corporation Delaware 100% owned by SystemSoft Corporation
SystemSoft K.K. Japan 80.02% owned by SystemSoft Japan
Corporation
Pacific SystemSoft K.K. Japan 100% owned by SystemSoft Corporation
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
SystemSoft Corporation on Form S-8 (File Nos. 33-85968, 33-80843, 333-13019 and
333-18657) and on Form S-3 (File Nos. 33-96116 and 333-19211) of our report
dated February 28, 1997, on our audits of the consolidated financial statements
and financial statement schedule of SystemSoft Corporation as of January 31,
1997 and 1996, and for each of the three years in the period ended January 31,
1997, which report is incorporated by reference into this Annual Report on Form
10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K FOR
YEAR ENDED 1/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1996
<PERIOD-START> FEB-01-1996 FEB-01-1995
<PERIOD-END> JAN-31-1997 JAN-31-1996
<CASH> 10,807,691 7,406,039
<SECURITIES> 101,507 3,960,490
<RECEIVABLES> 13,818,504 8,253,818
<ALLOWANCES> 917,915 491,037
<INVENTORY> 0 0
<CURRENT-ASSETS> 30,699,722 22,002,032
<PP&E> 8,935,279 4,544,610
<DEPRECIATION> 3,999,654 1,714,081
<TOTAL-ASSETS> 40,750,738 26,951,922
<CURRENT-LIABILITIES> 5,594,505 2,687,016
<BONDS> 0 0
0 0
0 0
<COMMON> 251,460 211,060<F1>
<OTHER-SE> 33,262,632 23,329,456<F1>
<TOTAL-LIABILITY-AND-EQUITY> 40,750,738 26,951,922
<SALES> 28,724,318 16,254,859
<TOTAL-REVENUES> 39,667,845 24,588,587
<CGS> 2,418,960 935,113
<TOTAL-COSTS> 7,073,245 4,402,738
<OTHER-EXPENSES> 69,808,469 15,477,583
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,808 1,081
<INCOME-PRETAX> (36,948,629) 5,176,076
<INCOME-TAX> 692,253 1,584,787
<INCOME-CONTINUING> (37,640,882) 3,591,289
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (37,640,882) 3,591,289
<EPS-PRIMARY> ($1.70) $.16<F1>
<EPS-DILUTED> ($1.70) $.16<F1>
<FN>
<F1>The Company issued a 2:1 stock split in the form of a stock dividend on July
17, 1996. All amounts have been retroactively adjusted for the earliest period
presented.
</FN>
</TABLE>
