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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number:
January 31, 2000 000-21287
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PEERLESS SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-3732595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2381 Rosecrans Avenue, El Segundo, CA 90245
(Address of principal executive offices, including zip code)
(310) 536-0908
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Acts: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the Registrant, based upon the last sale price of the Common Stock
reported on the Nasdaq National Market on April 24, 2000 was approximately
$40,021,455.
The number of shares of Common Stock outstanding as of April 24, 2000 was
14,891,704.
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Peerless Systems Corporation Proxy Statement relating
to the annual meeting of stockholders to be held on June 20, 2000 (the "Proxy
Statement") are incorporated by reference into Part III of this Annual Report
on Form 10-K.
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Act of 1934 which are subject to the "safe harbor" created by those sections.
The forward-looking statements include, but are not limited to, statements
related to industry trends and future growth in the markets for digital document
products, embedded imaging systems and enterprise networks; the Company's
strategies for reducing its customers' costs and time-to-market; the Company's
product development efforts; the Company's efforts to secure and protect the
rights to its proprietary technology; the effect of GAAP accounting
pronouncements on the Company's recognition of revenues; market risk; the
Company's future research and development expenditures; the availability of
future rental space; the payment of dividends; and the sufficiency of the
Company's capital resources. Discussions containing such forward-looking
statements may be found in "Business", "Properties", "Market for Registrant's
Common Equity and Related Stockholder Matters" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations". These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in such forward-looking
statements. The Company disclaims any obligation to update these forward-looking
statements as a result of subsequent events. The risks and uncertainties on
pages 21 through 25, among other things, should be considered in evaluating the
Company's prospects and future financial performance.
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PEERLESS SYSTEMS CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business................................................................................ 4
Item 2. Properties.............................................................................. 13
Item 3. Legal Proceedings....................................................................... 13
Item 4. Submission Of Matters To A Vote Of Security Holders..................................... 13
PART II
Item 5. Market For The Registrant's Common Equity Related
Stockholder Matters..................................................................... 14
Item 6. Selected Financial Data................................................................. 15
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations..................................................... 16
Item 8. Consolidated Financial Statements And Supplementary Data................................ 25
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.... 25
PART III
Item 10. Directors And Executive Officers....................................................... 26
Item 11. Executive Compensation................................................................. 27
Item 12. Security Ownership Of Certain Beneficial Owners And Management......................... 27
Item 13. Certain Relationships And Related Transactions......................................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On
Form 8-K................................................................................. 28
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TRADEMARKS
Memory Reduction Technology(R) (MRT), PEERLESS SYSTEMS(R), Peerless Powered(R),
WINEXPRESS(R), PeerlessPrint(R) and QuickPrint(R) are registered trademarks of
Peerless Systems Corporation. CPL(TM), PicturePrint(TM), Acceleprint(TM) and
Synthesys(TM) are trademarks of Peerless Systems Corporation and are subjects of
applications pending for registration with the United States Patent and
Trademark Office. Imageworks(TM) and Webworks(TM) are trademarks of Peerless
Systems Corporation. Peerless Systems (in English and Japanese Katakana),
Peerless (in logo) and P (in logo) are registered service marks with the
Japanese Patent Office. Peerless(TM) (in logo) and P(TM) (in logo), Peerless
Systems(TM), PEERLESSPRINT and PEERLESSPAGE(TM) (all in English and Japanese
Katakana), are trademarks of Peerless Systems Corporation and are subjects of
applications pending for registration with the Japanese Patent Office. This Form
10-K also refers to various products and companies by their trademark names. In
most, if not in all cases, their respective companies claim these designations
as trademarks or registered trademarks.
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PART I
Item 1 -- Business.
Peerless Systems Corporation ("Peerless" or the "Company"), incorporated
in California in 1982 and reincorporated in Delaware in September 1996, is a
leading provider of software-based embedded imaging and networking systems to
original equipment manufacturers ("OEMs") of digital document products.
Digital document products include monochrome and color printers, copiers, fax
machines and scanners, as well as multifunction products ("MFPs") that perform
a combination of these imaging functions. In order to process digital text and
graphics, digital document products rely on a core set of imaging software and
supporting electronics, collectively known as an embedded imaging system.
Embedded networking systems supply the core software technologies to digital
document products that enable them to communicate over local and wide area
networks and the Internet. The Peerless Systems family of products and
engineering services provide advanced embedded imaging and networking
technologies that enable the Company's OEM customers and third party developers
for OEM's to develop standalone and networked digital printers, copiers and MFPs
quickly and cost effectively. The Company markets its solutions directly to OEM
customers such as Canon, Hewlett Packard, IBM, Konica Minolta, Ricoh and Seiko
Epson.
In June 1999, the Company acquired Auco, Inc. ("Auco") a supplier of embedded
networking systems. As a result of the acquisition, Auco became a wholly owned
subsidiary of the Company and was subsequently renamed Peerless Systems
Networking ("PSN"). PSN's low-cost integrated networking capability enables
office peripheral OEMs to provide networking as a standard feature in their
products. This acquisition gives Peerless the opportunity to improve its
customers' time to market and product performance, including the addition of
critical new capabilities such as Internet connectivity. The acquisition also
brought several key new customers to the Company.
In December 1999, the Company acquired HDE, Inc ("HDE"). HDE is a developer
of embedded imaging and Internet printing products. As a result of the
acquisition, HDE became a wholly owned subsidiary of the Company and was
subsequently renamed Peerless Systems Imaging Products ("PSIP"). The
acquisition expanded Peerless' presence in the embedded imaging and Internet
printing solutions markets and added important new customers to the Company's
portfolio. In conjunction with HDE's strategic relationship with Adobe,
Peerless is among the leading embedded Adobe PostScript suppliers to the imaging
market. Further, the Company believes that the combination of its established
network software solutions and PSIP's expertise in Windows 2000 and internet
technologies will put it in the forefront of networking and directory
integration for networked devices.
Industry Background
Embedded Imaging Systems
Today's office environment is increasingly dependent on a variety of
electronic imaging products such as printers, copiers, fax machines and
scanners, collectively known as digital document products. These imaging
products also are becoming common in the home environment. Historically, most
electronic imaging products in the office environment have been stand-alone,
monochrome (black-and-white) machines, dedicated to a single print, copy, fax or
scan function. However, with the proliferation of personal computers and color,
desktop publishing software and network computing, documents increasingly are
being created, stored and transmitted digitally, thereby creating the need for
digital document reproduction.
Digital documents are becoming increasingly complex and may include digital
text, line art or photographic images. In order to process and render these
documents, digital document products rely upon a core set of imaging software
and supporting electronics collectively known as an embedded imaging system. To
date, a majority of embedded imaging systems have been developed and produced
internally by digital document product manufacturers such as Hewlett-Packard
("HP"), Xerox and Canon. The Company estimates the digital document market,
based in part upon data and projections provided by International Data
Corporation ("IDC"), was approximately $41 billion in 1999.
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Developments in the Digital Document Products Market
Rapid changes in technology and end-user requirements have created increased
challenges for digital document product manufacturers, particularly in the area
of embedded imaging systems. These changes include increased technical
complexity, the increased role of networking, the emergence of MFPs and the
demand for color imaging driven by the internet. As a result, OEMs are relying
on outside embedded imaging systems suppliers to provide their embedded imaging
system solutions.
Increased Technical Complexity. Initially, the software written for embedded
imaging systems supported only monochrome, single-function, low-resolution
capabilities. This software was relatively simple and resided on a low-end 8-bit
microprocessor platform. However, as technology and end-user requirements have
evolved, the embedded imaging task has become significantly more complex. Today,
digital imaging engines operate at resolutions of 1,200 dots per inch and
greater, require the support of a variety of document handling options, operate
at increased speeds and are offering high-quality color output. In addition,
computers and application software create increasingly sophisticated documents
that incorporate complex graphical content. The data files for these digital
documents can be very large and, if left in raw form, can overwhelm the memory
and processing power of the digital document product. In response, embedded
imaging systems have evolved from 8-bit to 32-bit platforms that often must
employ special techniques to manage large data files and minimize memory costs.
Most embedded imaging systems use compression techniques to reduce the size of
data files, which can result in reduced image quality. The increased complexity
of digital document products, the rapid pace of technological change and the
increased memory requirements have created increased challenges for digital
document product manufacturers, particularly in the core areas of image
processing and operating system architecture.
Reliance on Outsourcing. In addition to the engineering challenges generated
by changing technology, digital document product manufacturers are continually
subject to a variety of market pressures. Competition in the marketplace,
coupled with end-user demand for greater performance at reduced cost has created
a growing need to reduce time-to-market and engineering costs. This increased
competition is forcing digital document product manufacturers to outsource some
or all imaging software and supporting electronics design to embedded imaging
systems suppliers in order to include new imaging technologies and minimize
development time and cost. The increased role of networking, the emergence of
MFPs, the demand for color imaging and the increased technical complexity
associated with products meeting these market changes has enhanced the need for
OEMs to look for cost and value based outsourcing solutions. Digital output
OEMs are reducing their outsourcing of traditional monochrome printer technology
while growing the outsourcing of new emerging technologies. Also, OEM internal
resources are focusing on the core competencies in new product systems
development while leaving the quest for product differentiation to a technology
outsourcing function. Additionally, there has been no established comprehensive
embedded imaging system standard for the digital document product industry since
it is a platform from which competitive differentiation is leveraged. However,
as product market sectors converge and the complexity of imaging technology
intensifies, Peerless believes digital document product manufacturers will
realize significant cost and time-to-market advantages by utilizing a single
open embedded imaging system standard across multiple digital document product
market sectors. See "Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of these
forward-looking statements.
Demand for Color Imaging. Although many office computers have color displays,
and the graphical content available to office users via the Internet and
advanced office applications make heavy use of color, most digital document
products found in today's office environment still generate monochrome output.
In the 1990s, color inkjet printers were introduced into the small office/home
office (SOHO) market and color laser printers were introduced into the office
marketplace. In the SOHO market, most color inkjet printers are typically
limited by output speeds of one or fewer pages per minute. In the office market,
color laser printers have been limited by technology and unit costs that remain
significantly higher than monochrome laser printers. In addition, the printing
speeds for color continue to be significantly slower than monochrome laser
printers. Furthermore, digital document product manufacturers are developing
tandem engines, which are comprised of multiple imaging stations dedicated to
individual colors used in the printing process. Although these products hold the
promise of raising desktop office color printing speeds to monochrome levels of
performance, cost effective embedded imaging systems that can produce high
quality output from these tandem engines are limited in the market. As a result,
market pressures for
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advanced embedding imaging systems that enable high quality and improved
price/performance for both SOHO and office color products remain high. In
addition, the Internet, digital cameras and scanners are creating an intensified
need for photoquality color printing capabilities. Although digital document
engine manufacturers have developed color hardware technology that is now
capable of supporting high speed photoquality color printing, the output
produced by today's digital document products, in many cases, continues to be
limited by existing printing technology. A challenge also exists for embedded
imaging systems as they support the transition from monochrome to color output
because the simultaneous implementation of four planes of color coupled with up
to 8 bits per pixel at increased resolution significantly while increasing the
size of the digital document data stream. As a result, there is a need for
embedded imaging systems that can support the accelerated performance
requirements of high-density color output.
Emergence of Multifunction Products. The advent of MFPs has eroded the
boundaries between the previously distinct printer, copier, fax and scanner
market sectors. MFPs, ranging from small home products to large office devices,
offer several of these functions for significantly less cost than would
otherwise be incurred by purchasing these products separately. In the copier
market, the transition from analog to digital technologies is accelerating
demand for mid-range and high-speed MFP devices. Each of the dominant vendors
in the printer, copier and fax markets have now introduced MFPs, which have
required each of them to broaden their imaging expertise. At the same time, the
need for concurrent processing of multiple digital document product functions
has created the need for real-time, multitasking operating system support.
Increased Role of Networking. Within the office environment, digital document
products increasingly are deployed in a networked configuration. According to
projections by IDC, 79% of laser printers sold in the United States in 1996 were
estimated to have been connected to enterprise networks, and this percentage is
expected to increase to 83% by 2003. Because multiple local area network
protocols and network operating systems are deployed in the corporate network
environment, networked digital document products must support a broad array of
networking technologies to maximize accessibility by various user groups. The
network environment is also changing rapidly and becoming increasingly complex,
with a growing requirement for remote network management that extends across
local area networks, wide area networks, the enterprise IT environment and the
Internet. In addition, because the majority of office digital document products
are networked, the image processing intelligence may be partitioned and located
anywhere within the network: at the site of document or image origination, at a
server, or, as is typically the case today, inside the digital document product
itself. In some instances, such as when printing to a remote location, it can be
advantageous to perform image pre-processing and compression at the document
origination site prior to transmission over usage-sensitive or congested
facilities. In other instances, such as when printing from a graphics
workstation, it can be advantageous to perform most of the image processing at
the printer in order to offload a host computer that is under a heavy workload.
In order to accommodate the emerging needs of the networked office environment,
an optimal embedded imaging system must employ a modular architecture capable of
serving and managing distributed corporate resources.
Peerless Products And Solutions
Peerless is a leading provider of software-based embedded imaging and
networking systems for the digital document product market. The Company's
technology and engineering services provide advanced embedded imaging solutions
that enable the Company's OEM customers to develop digital printers, copiers and
MFPs quickly and cost effectively. The Company delivers its products to its OEM
customers in multiple ways: 1) licensing of the Company's standard Software
Development Kit ("SDK") imaging and networking technology for the OEM's internal
product development; 2) turnkey product development whereby the Company provides
the technology and the additional engineering services necessary to integrate
the appropriate technology into a complete embedded imaging system solution
optimized to the OEM's specific requirements or 3) a co-development relationship
that combines the licensing of Peerless technology with joint Peerless and OEM
engineering resources.
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Products and Services
The Company has designed its embedded imaging technology with a modular
architecture that addresses a broad spectrum of digital document product
solutions tailored to an individual OEM's requirements.
Peerless also offers its OEM customers the flexibility to selectively optimize
solutions for monochrome, color, network connectivity, printer control language,
and various multifunction features for this digital document produced.
ImageWorks. ImageWorks is a complete object-based imaging system including a
high-performance real-time operating system kernel, printing engine driver,
object-based image processing model, graphics library, font management, hard
disk management, print job management and user control panel interface. The
scaleable nature of the Company's technology enables it to serve both the low
cost and high performance sectors of the market. The multitasking operating
system enables the Company to manage concurrent processing of digital document
product tasks for the MFP marketplace. For added performance and flexibility,
the Company's imaging system may be implemented to operate in a distributed
fashion, allowing for portions of the imaging processing task to take place in
the originating host computer, in the digital document product or elsewhere in
the network. Color extensions to ImageWorks support the unique requirements of
color printers.
Page Description Languages. The Company provides OEMs with support for the
most widely used and standard page description languages ("PDLs"), Adobe's(R)
PostScript Software and Hewlett-Packard's Printer Control Language ("PCL").
The Company offers PeerlessPrint technology, which emulates Hewlett-Packard's
PCL. The complete range of printing language products includes PeerlessPrint5E,
5C and 6. PeerlessPrint5E provides compatibility with HP's PCL 5e language
utilized in their LaserJet 5P, 5Si, LJ4000 and LJ5000 laser printer products, as
well as enhancements to support higher resolutions and added paper handling
options. PeerlessPrint5C is designed to provide compatibility with HP's PCL 5C
utilized in its Color LaserJet 4500 and high-end inkjet products. PeerlessPrint6
provides monochrome and color compatibility with HP's latest PCL 6 language. As
a third-party co-developer, the Company provides an optimized, high performance
integration of Adobe(R) PostScript 3 into the PeerlessPage imaging system and
certification services for customers desiring to license Adobe(R) PostScript
from Peerless.
PC Software. The Company provides a complete set of PeerlessPrint drivers that
optimize the printing process in the Windows 3.1, 95, 98 and the NT 4.0
environments. Windows NT 5.0 is currently under development and planned for
future release.
ASICs. The Company designs application specific integrated circuit ("ASIC")
solutions for the office and SOHO sectors of the digital document product
marketplace. These ASICs provide a single chip implementation of key components
of its imaging software. Peerless has licensed these designs to semiconductor
manufacturers, such as IBM Microelectronics, NEC and Motorola who, in turn, have
the right to manufacture and sell these ASICs directly to digital document
product manufacturers. The Company's QuickPrint line of imaging ASIC co-
processors and integrated processors incorporate basic components of the
Company's imaging system into a silicon solution to reduce controller costs and
enhance overall performance. For the high performance sector of the office
market, the Company offers specialized co-processors that accelerate the
Peerless imaging software and incorporate controller functionality and imaging
features to provide both cost savings and performance enhancements. The Company
currently markets the QP 1700, QP 1800, QP 1900 and QP +401 ASICs. The QP +401
is a "system on a chip" solution which integrates the processor and co-processor
on a single chip. Additionally, the Company introduced the QP 1900 family of
ASICs to address tandem color engines for high-speed color printing as well as
very high-speed monochrome printing.
The 1900 introduced a new business model where Peerless designs and contracts
for the manufacture and distribution of an ASIC semiconductor system. This
model permits Peerless to offer an integrated solution to its OEM customers. In
addition, the Company is currently selling the 1900 family of ASICs directly to
its OEM customer base. Peerless Systems has entered into a distribution
agreement with an effective date of December 14,
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1999 with Maruban Corporation for services provided in our Japan region. A
contract has been negotiated with Arrow Electronic Corporation for similar
distribution services in the United States.
Networking Technology. Peerless supports a broad array of networking
protocols, allowing its OEM customers to address the majority of end-user
networking requirements. To accommodate the need for remote network management
of digital document products over Local Area Network ("LAN") and across wide
area networks, including intranets, the Company supplies management information
base ("MIB") tables that may be utilized by open industry-standard network
management The PSN embedded network solution eliminates the need for a network
interface card and provides low cost, high speed embedded networking solutions
for cost sensitive market segments.
Engineering Services. For those OEMs that wish to outsource the development of
some or all of the embedded imaging system for a digital document product, the
Company offers engineering services. This can include controller design and
custom engineering for vendor-specific features that complement the Company's
standard imaging technology. These services can be flexible to the OEMs needs
for hourly time and material support and fixed priced quotations. Peerless
supplies an excellent quality process including project management, the
management of multiple suppliers, design and testing to enable the delivery of a
quality proven product to meet the customers needs.
Solutions
The Company's technology can be leveraged to provide a wide range of scaleable
solutions:
Multifunction Solution. The Company's MFP imaging solutions target high-speed
copier-based MFP products lower-cost color inkjet, fax or laser-based workgroup
MFP products. The higher-end solutions combine the Company's networkable imaging
products with MFP-specific extensions to facilitate printing, copying, faxing
and scanning in the same digital document product. The Company's solutions
provide multifunction capability, but the Company does not provide stand-alone
fax or copier solutions.
Color Solution. The Company's color imaging solutions target OEM requirements
for a broad range of color imaging devices. The Company's proprietary object-
based imaging system reduces Central Processing Unit ("CPU") and resource
requirements for printing color pages while simultaneously accelerating the
document imaging process and increasing print quality.
Monochrome Solution. The Company's monochrome solution targets are well
recognized in the industry and span copiers and printers in the office
environment from a few pages per minute to units approaching one hundred pages
per minute.
Technology
The Company develops unique technologies for the embedded imaging systems
marketplace that provide meaningful improvements in performance, cost and time
to market for Peerless' OEMs. The Company's proprietary embedded, object-based
imaging system reduces the size of digital document product imaging files with
virtually no loss of visual quality. This proprietary technology enables the
Company's OEM customers to reduce memory cost and increase print quality and
speed while eliminating or reducing the need for incremental compression
technology. When optimized, this component of the embedded imaging system can
provide significant cost savings and performance differentiation to digital
document product manufacturers. The Company incorporates complimentary
technologies, or makes its technologies compatible with third-party
technologies, in order to provide its customers with a more comprehensive
imaging solution.
Object-Based Image Processing. Most other embedded imaging systems utilize
similar methods of processing document imaging information. They convert a file
that represents a document page into a bitmap and then process all page elements
as a collection of pixels. Because bitmaps generate large files, the image
processing task can become time-consuming, requiring subsequent document pages
to be stored in memory while previous pages are being processed. To accommodate
memory limitations, file compression technologies are often utilized. These
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compression technologies frequently result in a loss of clarity and detail in
the printed document and require significant processing power.
Peerless has developed a proprietary approach to the embedded imaging task.
Rather than recognizing a page image as a collection of pixels, the Peerless
object-based image processing technology recognizes basic imaging elements in
the document, differentiating between text, line art and photographs much as the
human eye does. Peerless' software then creates a display list of image objects
as an intermediate representation of the document to be printed. This display
list is a more concise means of representing the imaging information of the
document, enabling complex imaging data to be processed more quickly and with
less memory, typically without resorting to compression techniques that degrade
the image. For high performance applications, the display list can be processed
in real time with assistance from a Peerless-designed graphics co-processor
embedded in the digital document product. Because Peerless technology can enable
the page image to be processed in real time, concurrent with the transmission of
the document print file, memory requirements can be reduced and performance can
be enhanced. Furthermore, the image quality or resolution can be modified to
accommodate limitations in the digital document product's memory, or
progressively enhanced by installation of additional digital document product
memory. The Company's object-based image processing technology provides more
significant benefits as the image processing workload increases, which occurs
with increased resolution or a transition from monochrome to color. The Company
holds six patents in the United States protecting the intellectual property
within certain aspects of its object-based imaging approach.
Systems Architecture. The Company has developed standardized interfaces for
the Company's family of products that enable the Company's imaging solution to
be ported to a variety of platforms, languages and applications. For example,
the standardized PeerlessPage interface provides the ability to support multiple
printing languages. The PeerlessPage object-based imaging system is both
platform- and device-independent and is able to accommodate a variety of print
engines and controller architectures. The Company has also developed an
applications interface that enables the support of features such as spooling,
stored macros, stored forms, electronic collation and stapling.
Technology Partners. The Company has established relationships that permit it
to offer to its customers complementary technologies through technology
partners. Adobe has been a development partner with Peerless since 1992 and the
relationship has grown stronger with each joint application of Peerless and
Adobe technologies. On July 23, 1999, Adobe and Peerless entered into a
PostScript Software Development License and Sublicense Agreement which expanded
the technology application and integration of the respective technologies.
Peerless has licensed (for internal development purposes) the right to use
Adobe's PostScript Software to enable the company's products to be used with
Adobe's PostScript Software. The Company's relationship with Adobe permits the
Company to offer a convenient and optimized Adobe PostScript - enabled solution,
as well as directly license PostScript to its OEM customers. With the assumption
of the HDE Adobe direct licensing contract on December 6, 1999 the HDE (now
PSIP) Adobe relationship has significantly expanded the availability of Adobe
embedded PostScript software business to Peerless. In addition, the Company
incorporates font rasterizers into its imaging solution to enable its OEMs to
license font technology from providers such as Agfa and Bitstream. The Company
has also established semiconductor agreements with leading developers and
manufacturers of RISC microprocessors in order to offer integrated processor and
co-processor solutions. The integrated processors combine the Company's basic
imaging sending functionality with an industry-standard microprocessor.
As a result of the acquisition of Auco in June of 1999, the Company has also
established a strategic partnership with Novell. The partnership covers
networking and device management software licenses for imaging and storage
devices across the Novell NDS server environment, which includes Novell Embedded
NEST Server Software and eDirectory. The agreement enables Peerless to directly
license embedded directory and network services technology for both market
segments. This enables the company to bring greater functionality to all network
devices beginning with digital output systems and other network devices such but
not limited to storage systems.
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Customers and Markets
Customers
Peerless markets its imaging networking technology to OEMs manufacturing
digital document products for the high to medium performance sector of the
office market. In addition, the Company markets its imaging technology to
technology partners, which incorporate certain components of the Company's
technology into integrated product offerings that are ultimately marketed to
digital document OEMs. With the exception of technology partners, such as Adobe
and Novell, the Company has derived substantially all of its revenues in recent
years from direct sales to digital document product OEMs.
The Company's customers that individually comprised more than 10% of the
Company's total revenues for fiscal 2000 were Canon, Ricoh and Seiko Epson.
Revenues from the Company's top four customers accounted for 47%, 52%, and 49%
of the Company's total revenues for fiscal years 2000, 1999 and 1998,
respectively. Although the Company has expanded and diversified its customer
base through focused sales efforts and the acquisitions of Auco and HDE, the
Company anticipates that its future revenues may be similarly concentrated with
a limited number of customers. The Company's largest customers vary to some
extent from year to year as product cycles end, contractual relationships expire
and new products and customers emerge. Many of the engineering services and
licensing arrangements with the Company's customers are provided on a project-
by-project basis, are terminable with limited or no notice, and in certain
instances, and, in a limited number of cases, are not governed by long-term
agreements.
Markets
Enterprise Office Market. The office sector of the digital document product
market is characterized by digital document products ranging in price from
approximately $1,000 to in excess of $40,000 each. These products typically
offer high performance differentiated by customized features. In many cases,
digital document product manufacturers demand turnkey, customized embedded
imaging solutions that include imaging software, controller design and network
interface card design. As a result of these unique requirements, Peerless
typically addresses the high performance sector of the digital document product
market via direct OEM relationships with individual digital document product
manufacturers. The Company's major customers in the office market in the fiscal
year ended January 31, 2000 included Ricoh, Canon, Kyocera, Sharp and Minolta.
The Company produces a chipset that integrates components of the Company's
imaging software and semiconductor firmware. Peerless has licensed its
technology to Conexant, which has the rights to manufacture and sell a chipset
directly to digital document product manufacturers. Conexant is presently the
Company's primary customer in the SOHO market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for discussion on the
Company's dependence on sole source providers.
International Markets. Revenues from customers outside the United States
accounted for 72%, 64%, and 52% of the Company's total revenues for fiscal years
2000, 1999 and 1998, respectively. Further, the Company expects that sales to
customers located outside the United States may increase in absolute dollars in
the future. Peerless' international customers are comprised primarily of
companies headquartered in Japan. These Japanese customers sell products
containing Peerless' technology primarily in the North America and European
marketplaces. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for further discussion on Asian markets.
All of the Company's contracts with international customers are, and the
Company expects that in the future will be, denominated in U.S dollars. As a
result, the Company is currently not subject to foreign currency transaction and
translation gains and losses.
10
<PAGE>
Seasonality
The Company believes that its business may be subject to seasonal trends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion on seasonality.
Sales and Marketing
The Company markets its products to the leading OEMs that sell digital
document products into the worldwide market. The Company directs most of its
sales efforts through its headquarters in California and its subsidiary in
Japan. Sales to European digital document product manufacturers are conducted
out of the Company's California headquarters.
The Company markets directly to OEMs and through focused trade relations and
branding programs. Direct OEM marketing consists of focused public relations
activities and the development of sales collateral, mailers, trade show
attendance and sales support. The Company focuses its time on media read by OEM
customers. The Company directs its branding programs toward building the
Company's brand awareness. These programs consist of public relations and
Peerless product branding on its silicon and software products.
Product Development and Engineering Services
The Company's product development activities are located at all three of the
sites, namely in El Segundo, California, Redwood City, California and Kent,
Washington. These activities primarily consist predominantly of new product
development, enhancement of existing products, product testing and technical
documentation development. The Company's engineering personnel are divided into
two primary development areas: research and development, which focuses on
development and enhancement of the Company's core technologies; and engineering
services, which focuses on customized customer design activities.
The Company's engineering services personnel work closely with OEMs that
desire a turnkey solution, developing customized interfaces and applications
specific to individual OEMs. The Company typically receives a fee for such
engineering services. As part of its corporate strategy, the Company leverages
its engineering services capability to penetrate emerging market sectors where
applications and interfaces have not fully evolved.
Intellectual Property and Proprietary Rights
The Company's success is heavily dependent upon its proprietary technology. To
protect its proprietary rights, the Company relies on a combination of patent,
copyright, trade secret and trademark laws as well as nondisclosure and other
contractual restrictions. The Company holds six patents issued in the United
States, one of which is also issued in France, Germany and Great Britain. The
issued patents relate to techniques developed by the Company for generating
output for continuous synchronous raster output devices, such as laser printers.
The Company has four applications pending in Japan, three applications pending
in the European Patent Office and three applications pending in the United
States. There can be no assurance that patents held by the Company will not be
challenged or invalidated, that patents will issue from any of the Company's
pending applications or that any claims allowed from existing or pending patents
will be of sufficient scope or strength (or issue in the countries where
products incorporating the Company's technology may be sold) to provide
meaningful protection or any commercial advantage to the Company. In any event,
effective protection of intellectual property rights may be unavailable or
limited in certain countries. The status of United States patent protection in
the software industry is not well defined and will evolve as the United States
Patent and Trademark Office grants additional patents. Patents have been granted
to fundamental technologies in software after the development of an industry
around such technologies and patents may be issued to third parties that relate
to fundamental technologies related to the Company's technology.
As part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, OEMs and strategic
partners and limits access to and distribution of its software and other
proprietary information. Despite these efforts, the Company may be unable to
effectively protect its proprietary
11
<PAGE>
rights and, in any event, enforcement of the Company's proprietary rights may be
expensive. The Company's source code also is protected as a trade secret.
However, the Company from time to time licenses its source code to OEMs, which
subjects the Company to the risk of unauthorized use or misappropriation despite
the contractual terms restricting disclosure. In addition, it may be possible
for unauthorized third parties to copy the Company's products or to reverse
engineer or obtain and use the Company's proprietary information.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology increasingly may become the subjects of infringement claims. There
can be no assurance that third parties will not assert infringement claims
against the Company in the future. Any such claims, regardless of merit, could
be time consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, or at all, which could have a material adverse affect on the
Company's operating results. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation to determine the validity of any claims, whether or not such
litigation is determined in favor of the Company, could result in significant
expense to the Company and divert the efforts of the Company's technical and
management personnel from productive tasks. In addition, the Company may lack
sufficient resources to initiate a meritorious claim. In the event of an adverse
ruling in any litigation regarding intellectual property, the Company may be
required to pay substantial damages, discontinue the use and sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses to infringing or substituted technology. The failure of the
Company to develop, or license on acceptable terms, a substitute technology if
required could have a material adverse effect on the Company's operating
results.
Competition
The market for embedded imaging systems for digital document products is
highly competitive and characterized by continuous pressure to enhance
performance, add functionality, reduce costs and accelerate the release of new
products. The Company competes on the basis of technology expertise, product
functionality, development time and price. The Company's technology and services
primarily compete with solutions developed internally by OEMs. Virtually all of
the Company's OEMs have significant investments in their existing solutions and
have the substantial resources necessary to enhance existing products and to
develop future products. These OEMs have or may develop competing embedded
imaging systems technologies and may implement these systems into their
products, thereby replacing the Company's current or proposed technologies,
eliminating a need for the Company's services and products and limiting future
opportunities for the Company. The Company therefore is required to persuade
these OEMs to outsource the development of their embedded imaging systems and to
provide products and solutions to these OEMs that cost-effectively compete
favorably with their internally developed products. The Company also competes
with software and engineering services provided in the digital document product
marketplace by other systems suppliers to OEMs. In this regard, the Company
competes with, among others, Destiny, Electronics for Imaging, Oak Technologies
and Splash.
As the industry continues to develop, the Company expects that competition and
pricing pressures will increase from OEMs, existing competitors and other
companies may enter the Company's existing or future markets with similar or
substitute solutions that may be less costly or provide better performance or
functionality. The Company anticipates increasing competition for its color and
multifunction products, particularly as new competitors develop and enter
products in this emerging market. Some of the Company's existing competitors,
many of its potential competitors and virtually all of the Company's OEMs have
substantially greater financial, technical, marketing and sales resources than
the Company. In the event that price competition increases, competitive
pressures could cause the Company to reduce the amount of royalties received on
new licenses and to reduce the cost of its engineering services in order to
maintain existing business and generate additional product licensing revenues,
which could reduce profit margins and result in losses and a decrease in market
share. No assurance can be given as to the ability of the Company to compete
favorably with the internal development capabilities of its current and
prospective OEM customers or with other third-party embedded imaging system
suppliers, and the inability to do so would have a material adverse effect on
the Company's operating results.
12
<PAGE>
Employees
As of January 31, 2000 the Company had a total of approximately 235 employees
and independent contractors. None of the Company's employees is represented by a
labor union, and the Company has never experienced any work stoppage. The
Company considers its relations with its employees to be good.
Item 2 -- Properties.
The Company leases its principal facilities in El Segundo, California. The
operating lease, as amended, expires in March 2007. The Company also leases
office space in Redwood City, California and Mountain View, California for PSN,
in Covington and Kent, Washington for PSIP and in Japan. The Company believes
that suitable additional facilities or alternative space will be available in
the future on commercially reasonable terms as needed.
Item 3 -- Legal Proceedings.
The Company has filed a lawsuit in January 2000 against Conexant Systems Inc.,
Newport Beach, CA in the Orange County Superior Court regarding the failure and
refusal of Conexant to pay to the Company a portion of a Source License Fee and
guaranteed royalty payments pursuant to an agreement between the parties. The
Company is confident that it will prevail in this matter.
The Company was sued by a major shareholder, the State of Wisconsin Investment
Board ("SWIB") in the Court of Chancery of the State of Delaware in New Castle
County in December 1999. The Company's former Chief Executive Officer, Edward A.
Gavaldon, has also been named as a defendant. The complaint alleges that
Peerless wrongfully influenced the passage of Proposal 2 (Increase in the Number
of Shares in the Stock Option Plan) at the 1999 Annual Meeting of Shareholders
and provided misleading information to SWIB. Mr. Gavaldon is alleged to have
benefited wrongfully from these actions.
SWIB seeks to nullify the shareholder approved Amendment and is asking for
unspecified damages. The Company has filed an Answer and Counter-claim and
believes that it will prevail in this matter.
On March 23, 2000, a lawsuit was filed in the Alameda County Superior Court
against the Company and its wholly owned subsidiary, Peerless Systems
Networking, Inc. (PSN) by Howard Sidorsky, a current employee and Vice President
of Marketing of PSN. Mr. Sidorsky alleges that he is entitled to a commission of
not less than $630,000 for his participation in the 1999 sale to Peerless of
AUCO, Inc., the predecessor of PSN. The Company has not yet responded to the
complaint. The Company believes that it will prevail in this matter.
Item 4 -- Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 2000.
13
<PAGE>
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the Nasdaq National Market under
the symbol "PRLS". The table below sets forth, during the periods indicated, the
high and low sales price for the Company's common stock as reported on the
Nasdaq National Market.
Year Ended
----------------------------------------------------------
January 31, 2000 January 31, 1999
------------------------- -------------------------
Quarter High Low High Low
--------- ---------- ---------- ---------- ----------
First $ 11.000 $ 6.000 $ 21.250 $ 11.000
Second $ 13.625 $ 6.750 $ 24.375 $ 15.500
Third $ 15.000 $ 7.500 $ 21.375 $ 2.813
Fourth $ 12.875 $ 4.875 $ 10.875 $ 6.750
As of April 5, 2000, there were approximately 150 holders of record of the
Company's common stock.
Dividend Policy
Prior to its merger with Peerless in December 1999, PSIP, a now wholly-
owned subsidiary of the Company, declared and paid a cash dividend on its common
stock in the amount of $15,000 during the year ended January 31, 1998. The
Company has not declared or paid any other cash dividends on its common stock
during any period for which financial information is provided in this Annual
Report on Form 10-K. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends on its common stock in the foreseeable future.
14
<PAGE>
ITEM 6 - Selected Financial Data
The statement of operations data for the years ended January 31, 2000, 1999
and 1998 and the balance sheet data at January 31, 2000 and 1999, are derived
from, and should be read in conjunction with, the audited consolidated financial
statements and notes thereto included elsewhere in this Form 10-K. The statement
of operations data for the years ended January 31, 1997 and December 31, 1995
and the balance sheet data at January 31, 1998 and 1997 and December 31, 1995
are derived from unaudited consolidated financial statements not included in
this Form 10-K. The data set forth below (in thousands, except per share data)
are qualified in their entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended
Years Ended January 31, (1) December 31,
---------------------------------------
2000 1999 1998 1997 1995
(Unaudited) (Unaudited)
--------- -------- -------- -------- ----------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 42,076 $ 41,077 $ 30,958 $ 18,874 $ 12,831
Income (loss) from operations 4,133 4,647 3,283 632 (1,140)
Net income (loss) 3,441 2,462 1,527 2,714 (1,398)
Basic earnings per share 0.25 0.19 0.12 0.38 (0.32)
Diluted earnings per share 0.22 0.16 0.11 0.22 (0.32)
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 31, (1) December 31,
---------------------------------------
2000 1999 1998 1997 1995
(Unaudited) (Unaudited) (Unaudited)
--------- -------- -------- -------- ----------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total assets $ 52,565 $ 49,887 $ 42,829 $ 37,842 $ 5,251
Long Term Obligations 3,165 3,703 1,367 2,617 5,238
Redeemable preferred stock - - - - 5,931
</TABLE>
______________
(1) The Company changed its fiscal year end to January 31, beginning February 1,
1996.
Selected Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
------------------------------------------ -----------------------------------------
Year Ended January 31, 2000 Year Ended January 31, 1999
------------------------------------------ -----------------------------------------
Quarter Fourth Third Second First Fourth Third Second First
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 8,224 $ 11,712 $ 11,400 $ 10,740 $ 10,649 $ 8,808 $ 10,344 $ 11,276
Gross Margin 4,322 8,491 7,914 7,376 7,304 5,190 6,926 7,175
Gross Margin % 52.55% 72.50% 69.42% 68.68% 68.59% 58.92% 66.96% 63.63%
Income from operations $ (1,485) $ 3,245 $ 604 $ 1,769 $ 2,152 $ (704) $ 1,173 $ 2,026
Net Income (772) 2,294 707 1,212 1,415 (902) 518 1,431
Net Income - Basic (0.05) 0.16 0.05 0.09 0.11 (0.07) 0.04 0.12
Net Income - Diluted (0.05) 0.15 0.05 0.08 0.09 (0.07) 0.03 0.09
</TABLE>
15
<PAGE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. The statements contained in this report that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including without limitation, statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on current
expectations, estimates, forecasts and projections about the industry in which
Peerless operates, management's beliefs and assumptions made by management.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Highlights
The Peerless solution is based on a combination of software and imaging
ASICs, which together form a cost-effective embedded imaging system that
addresses virtually all sectors of the printing market, from low-end SOHO
inkjets to high end laser digital color copiers and printers. The low-cost,
high-performance printers and MFPs that the Company's imaging solutions drive
are increasingly replacing expensive standalone copiers and printers in
corporate offices. Peerless' target markets are continuing to expand, driven by
the transition from analog to digital in the copier sector, by improving price-
performance, and by the broadening role of color in office printing.
In June 1999, the Company acquired Auco, Inc. ("Auco") a supplier of
embedded networking systems. The transaction was accounted for as a pooling-of-
interests. As a result of the acquisition, Auco became a wholly owned subsidiary
of the Company and was subsequently renamed Peerless Systems Networking ("PSN").
PSN's low-cost integrated networking capability enables office peripheral OEMs
to provide networking as a standard feature in their products. This acquisition
brought several key new customers to the Company and gives Peerless the
opportunity to improve its customers' time to market and product performance,
including the addition of critical new capabilities such as Internet
connectivity. In addition, PSN is leading the Company's strategic efforts in the
Network Storage area.
In December 1999, the Company acquired HDE, Inc ("HDE"). HDE is a developer
of embedded imaging and Internet printing solutions. The transaction was
accounted for as a pooling-of-interests. As a result of the acquisition, HDE
became a wholly owned subsidiary of the Company and was subsequently renamed
Peerless Systems Imaging Products ("PSIP"). The acquisition expanded Peerless'
presence in the embedded imaging and Internet printing solutions markets and
added important new customers to the Company's portfolio. As a result of HDE's
strategic relationship with Adobe, Peerless is now the leading embedded Adobe
PostScript supplier to the imaging market. Further, the Company believes that
the combination of its established network software solutions and PSIP's
expertise in Windows 2000 and internet technologies will put it in the forefront
of networking and directory integration for networked devices.
On July 23, 1999, the Company entered into a distribution license agreement
with Adobe, Inc. for Adobe PostScript 3, PostScript fonts, both roman and double
byte, and certain other Adobe host software applications. This licensing
agreement will allow the Company to directly license Adobe technologies to its
OEMs, resulting in incremental revenues from licensing, recognized both when the
SDKs are delivered and subsequently in the form of recurring licensing revenues
as products utilizing these products are launched. In addition, this new
distribution agreement calls for the Company to remit licensing fees to Adobe
for the first time, which is expected to increase the Company's cost of goods
sold.
In December 1999, PSIP likewise entered into a distribution agreement with
Adobe. While similar in nature to PSCs, PSIP additionally has access to Adobe
Postscript source code. This enables PSIP to meet the special needs Peerless
OEMs seek for product differentiation.
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<PAGE>
Traditionally, Peerless provided ASIC (Application Specific Integrated
Circuit) designs to chip foundries that manufactured and distributed the
Company's ASICs to the Company's OEMs. In return, the Company received license
revenue from its chip foundries. As part of the total solution being offered to
its OEMs, the Company is now developing a direct distribution channel for its
ASICs chips. Under this "fabless" model, Peerless will distribute ASIC chips
from the foundry through a third party. The Company will be responsible for
marketing and sale administration, including the billings and collections to and
from its OEMs and distributors, but it is expected that the third party will be
responsible for the coordination of production with the foundry, maintenance of
necessary inventories and providing just-in-time delivery to OEMs and
distributors. The change from licensing ASIC technology to the distribution of
the actual chips will result in higher revenues but lower margin percentages due
to the cost of chips and the costs of distribution and inventory maintenance by
the third party. Peerless is currently finalizing an agreement with a domestic
third party distributor and in December 1999 entered into an international
distribution agreement with Maruban. In the interim, the Company placed its
first ASIC order to the foundry in the third quarter of fiscal 2000. The Company
made its first direct distribution in the first quarter of fiscal year 2001.
Peerless continues to increase its focus and success in selling its source
code development kits ("SDK"), which allow the OEMs to access Peerless'
technology and perform their own customization. The development kit sales
increase the OEMs commitment to Peerless' embedded imaging technology from a
single point product solution to a broad product platform solution for multiple
printing products.
The Company continued to invest in research and development which, along
with the recent acquisitions, resulted in an increase in both the breadth and
the depth of its technical product offerings. Among other technologies, the
Company is working on a 100 page per minute (PPM) SDK. Currently, the Company's
highest speed software addresses a 75 PPM machine.
General
Historically, a limited number of customers have provided a substantial
portion of the Company's revenues. Therefore, new contracts or modifications and
additions to existing contracts with these customers may materially impact the
Company's financial position and results of operations from quarter to quarter.
The Company's product licensing revenues are comprised of both recurring
licensing revenues and one-time licensing fees for source code or SDKs.
Recurring licensing revenues are derived from per unit fees paid quarterly by
the Company's OEMs upon manufacturing and subsequent commercial shipment of
products incorporating the Company's technology. Recurring licensing revenues
are derived, to a lesser extent, from arrangements in which the Company enables
third-party technology, such as solutions from Adobe, to be used with its
products. The Company often requires minimum royalty commitments from certain
OEMs. These commitments are generally guaranteed quarterly minimum royalty
payments or block license sales, where the OEM purchases a fixed number of
licenses. Payments associated with royalty commitments are generally paid in one
lump sum or over four or more quarters. The Company's development licensing fees
are paid by OEMs for access to the Company's SDKs, which in turn generate
recurring licensing revenues if the software is incorporated into OEM products
that are subsequently developed and commercially shipped.
The Company also has engineering services revenues that are derived
primarily from adapting the Company's software and supporting electronics to
specific OEM requirements. The Company provides its engineering services to OEMs
seeking a turnkey embedded imaging solution for their digital document products.
The Company's maintenance revenues are derived from software maintenance
agreements. Maintenance revenues currently constitute a small portion of total
revenue.
Over the past several quarters, the Company has experienced a shift in its
business and financial model. The Company generates revenue from its OEMs
through the sale of embedded imaging solutions in either turnkey or software
development kit form. Historically, OEM demand for turnkey solutions has
exceeded demand for SDK solutions. In the last fiscal year, the Company
experienced a shift away from turnkey solutions to the sale of SDKs,
particularly for its monochrome solutions, which incorporate more mature
technology. Additionally, the Company
17
<PAGE>
has expanded its solution offering by incorporating related embedded imaging and
networking technologies licensed from third parties, which in future quarters
could result in incremental SDK, services and royalty revenue streams.
The shift to SDK sales has resulted in an increase in the products
shipping, as OEMs who utilize Peerless SDKs develop and introduce multiple
products. However, the shift to SDKs will subject the Company to risks
associated with customer delays in funding the purchase of SDKs and starting
their product development utilizing the Company's SDK solution. The Company
expects to continue to provide turnkey solutions in color and MFP where the
technology is certain to evolve and where the turnkey development challenge is
more difficult for OEMs to assume.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statements of operations to
total revenues.
<TABLE>
<CAPTION>
Percentage of Total Revenues
-----------------------------------
Years Ended January 31,
-----------------------------------
2000 1999 1998
-------- -------- ----------
Statement of Operations Data:
<S> <C> <C> <C>
Revenues:
Product licensing 62% 52% 51%
Engineering services and maintenance 38 48 49
-------- -------- ----------
Total revenues 100 100 100
-------- -------- ----------
Cost of revenues:
Product licensing 2 - -
Engineering services and maintenance 31 35 34
-------- -------- ----------
Total cost of revenues 33 35 34
-------- -------- ----------
Gross margin 67 65 66
-------- -------- ----------
Operating expenses:
Research and development 23 21 20
Sales and marketing 15 16 20
General and administrative 14 16 15
Other non-recurring costs 5 - -
-------- -------- ----------
Total operating expenses 57 53 55
-------- -------- ----------
Income from operations 10 12 11
Interest income, net 3 3 4
-------- -------- ----------
Income before income taxes 13 15 15
Provision for income taxes 5 9 10
-------- -------- ----------
Net income 8% 6% 5%
======== ======== ==========
</TABLE>
Comparison of Fiscal 2000 and 1999
Fiscal 2000 revenues increased 2% over the previous year. Product licensing
revenues increased 22% in the current year, however, this growth was largely
offset by a 19% decline in engineering services and maintenance revenues from
the previous fiscal year. Product licensing revenues increased due to an
increase in the number of products shipped into the marketplace incorporating
Peerless' imaging and networking technology, an increase in
18
<PAGE>
the market penetration of existing products, and an increase in sales of SDKs.
Additionally, during fiscal 2000, the Company successfully negotiated a contract
modification and extension with a major OEM resulting in the combination of a
new sale and recognition of revenue previously deferred of a total of $1.0
million in product licensing fees. Current year product licensing also benefited
from the sales of block licenses to OEMs and an increase in guaranteed minimum
royalty commitments. Engineering services revenues declined in the current
fiscal year due to a shift in OEM demand from turnkey projects to internally
developed solutions based on Peerless standardized software solutions. Revenues
in the current period further benefited from a one-time cancellation fee of $1.3
million arising from an OEM project that was cancelled due to external technical
challenges.
The Company's gross margin as a percentage of total revenues increased to
67% in fiscal 2000 from 65% in fiscal 1999. The increase was due to a higher
percentage of licensing fees in the revenue mix. Licensing fees have relatively
low costs associated with the revenues being recognized. The engineering
services margins deteriorated from 27% in fiscal 1999 to 19% in fiscal 2000. The
decline was attributable to additional costs associated with the completion of
product deliveries for customers on fixed-fee arrangements.
Peerless continues to invest heavily in the future by funding the research
and development of new technology solutions. Research and development expenses
increased 10% in the current year due to increased spending on technical
solutions partially offset by research efforts expended in the prior year on
test tool efforts at PSN ("Auco") that were subsequently terminated. Although
research and development spending increased in the current year, the rate of
growth declined significantly from the 42% growth rate in the prior year. The
decline in the growth rate indicates Peerless is able to leverage off the
existing base of developers and realize economies of scale.
Although the sales and marketing expenses decreased 2% between fiscal years
2000 and 1999, the Company is still focused on the penetration of new OEM
customers, attendance at industry trade shows and other opportunities to promote
the Company's embedded imaging and network solutions. As a result of this
effort, and the recent acquisitions of Auco and HDE, the Company added several
new strategic OEMs to its customer list during fiscal 2000.
General and administrative expense for fiscal 2000 decreased 14% from
fiscal 1999. The expense decline in the current year was attributable to
$275,000 in expenses associated with a fiscal year 1999 acquisition for which an
agreement was not achieved. Excluding the one time-item, general and
administrative expenses would have been 13% of total revenues for fiscal 2000
and 16% of total revenues for fiscal 1999.
Other non-recurring costs of $2.3 million for fiscal 2000 represented
transaction costs, consisting primarily of fees for investment bankers,
attorneys, accountants, consultants, financial printing and other related
charges associated with the June 1999 acquisition of Auco and the December 1999
acquisition of HDE.
Interest income earned in fiscal years 2000 and 1999 was attributable to
interest and investment income earned on cash and cash equivalents and
investment balances resulting primarily from the $26.3 million in proceeds
received upon the closing of the Company's initial public offering in September
1996.
The Company's effective tax rate for fiscal 2000 is 36% compared to 59% in
the prior year. The high effective rate for fiscal year 1999 was attributed to
taxes associated with the business combinations.
Comparison of Fiscal 1999 and 1998
Fiscal 1999 revenues increased 33% over the previous year. The revenue
growth was driven by a 35% increase in product licensing revenues and a 31%
increase in engineering services and maintenance revenues over the prior fiscal
year. Product licensing revenues increased due to an increase in the number of
products shipped into the marketplace incorporating Peerless' imaging technology
and an increase in the market penetration of existing products. Most of the
increase in recurring license fees can be attributed to an increase in
penetration in the color and multi-function markets. Adding to the product
licensing revenues were strong sales of SDKs. The growth in
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<PAGE>
engineering services and maintenance revenues was the direct result of an
increase in the dollar value of engineering services design wins in fiscal 1999
over fiscal 1998.
The Company's gross margin as a percentage of total revenues decreased to
65% in fiscal 1999 from 66% in fiscal 1998. Although fiscal year 1999 revenue
mix included a higher percentage of licensing fees, which have relatively low
costs associated with the revenues being recognized, the margin on engineering
services and maintenance declined in 1999. The deterioration in the engineering
services margins from 31% in fiscal 1998 to 27% in fiscal 1999 was attributable
to a mid-year refocusing of the engineering services department. This change
yielded a record number of product deliveries, but resulted in lower margins as
additional resources were allocated to projects in process in an effort to
reduce the time-to-market.
Research and development expenses increased 42% between fiscal 1999 and
1998. The expense increases resulted primarily from a growth in the development
staff headcount and the use of outside development partners. The increased
funding was used for, among other things, development programs associated with
the Company's color technology, multi-function technology, application specific
integrated circuit ("ASIC") designs and digital photography technology.
Sales and marketing expenses increased 6% between fiscal years 1999 and
1998. The increase reflected a growth in the sales and marketing headcount and
an expanded emphasis on penetrating new OEM customers. As a result of this
additional effort, the Company added several new OEMs to its customer list
during fiscal 1999.
General and administrative expense for fiscal 1999 increased 39% over
fiscal 1998. The expense growth related primarily to an increase in personnel
and expenses necessary to support the growth in the Company's operations, which
included the formation of a corporate development department in support of the
Company's strategy to acquire complementary technology.
Interest income earned in fiscal years 1999 and 1998 was attributable to
interest and investment income earned on cash and cash equivalents and
investment balances.
The Company's effective tax rate for fiscal 1999 was 59% compared to 66% in
the prior year. The high effective rates for these two fiscal years is due to
taxes associated with the business combinations.
Liquidity and Capital Resources
Compared to January 31, 1999, total assets at January 31, 2000 grew 5% to
$52.6 million and stockholders' equity grew 14% to $43.8 million. The Company's
cash and short-term investment portfolio was $25.9 million at January 31, 2000
and the current ratio was 7:1. The Company's operations generated cash of $3.0
million during fiscal 2000 and used $488,000 during fiscal 1999.
The Company's investing activities during the years ended January 31, 2000
and 1999 generated cash of $3.1 million and $5,000, respectively. Purchases,
sales and maturities of investment securities generated net cash of $5.7 million
in fiscal 2000 and $1.8 million in fiscal 1999. It is the Company's policy to
invest the majority of its unused cash in low risk government and commercial
debt securities. The Company has not historically purchased, nor does it expect
to purchase in the future, derivative instruments or enter into hedging
transactions. During the second quarter of the current fiscal year, the Company
completed the expansion of its El Segundo operating facility to 56,000 square
feet from 30,000 square feet in order to accommodate the growth in operations.
As part of the expansion, the Company made leasehold improvements in the amount
of $818,000 and $1.4 million during 2000 and 1999, respectively. During 2000 and
1999, the Company invested $1.7 million and $.5 million, respectively, in
engineering development tools, computer and network system upgrades.
Net cash provided by financing activities during fiscal years 2000 and 1999
primarily related to the issuance of common stock under the Company's employee
stock purchase plan and the exercise of common stock options. The Company also
generated $820,000 from the issuance of PSN preferred stock during fiscal 1999.
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Risks and Uncertainties
The following risks and uncertainties, among other things, should be
considered in evaluating the Company's outlook:
Future Growth Rate and Operating Results: The 2% revenue growth rate in
fiscal 2000 did not approach the 33% level attained in fiscal 1999. Further,
the Company does not expect revenue growth in the first half of fiscal 2001.
The Company was unprofitable in the fourth quarter of fiscal 2000 and does
not expect to return to a profitable level in fiscal 2001. There can be no
assurance that the Company will be profitable in the future. The factors noted
below may have a material adverse effect on the Company's future revenue growth
and/or results of operations:
Concentration of Revenues: During fiscal 2000, Canon, Ricoh and Seiko Epson
each generated greater than 10% of the Company's revenues. In the prior fiscal
year, five customers each generated more than 10% of the Company's revenues.
Although recent acquisitions and sales efforts have expanded the Company's
customer base, historically, a limited number of customers have provided a
substantial portion of Peerless' revenues. There presently are only a limited
number of customers in the digital document product market to which the Company
markets its technology and services. Therefore, the ability of the Company to
replace a lost customer or offset a significant decrease in the revenues from a
customer may be significantly limited. A change in business from a customer
providing a significant portion of the Company's revenues could have a material
adverse effect on the Company's operating results. In particular, the Company's
recurring license fees exert a disproportionate influence on profitability and
are often dependent upon end-user demand for OEM products that embed the
Company's technology.
Shifting OEM Demand for Software Development Kits vs. Turnkey Solutions:
Over the past several quarters, the Company has experienced a shift in OEM
demand from the historically prevailing requirement for a turnkey solution
towards software development kits, or SDKs. Turnkey solutions require the
Company to provide engineering services in order to deliver customized imaging
solutions to an OEM customer, whereas OEMs that opt for an SDK solution choose
to license the Company's embedded imaging technology and perform development
internally using the OEM's in-house engineers. Turnkey design wins result in
engineering services contracts that generate revenue for three to six quarters
prior to product launch. SDK design wins result in development license revenues
that are typically recognized in one quarter and are generally lower in
magnitude than revenue associated with turnkey design wins prior to product
launch but generate higher profitability than engineering services revenues
associated with turnkey design wins. Recurring licensing revenues are generally
the same for both turnkey and SDK products.
Because the Company has experienced a shift in demand away from turnkey
solutions towards SDKs, engineering services resources were re-deployed to the
research and development department in recent quarters. Should this trend
reverse and turnkey design wins accelerate, the Company may need to transfer
resources back to engineering services. Accordingly, its results of operations
could be negatively affected in the interim.
Risks in Providing Engineering Services: In the past, the Company has
experienced significant fluctuations in quarterly engineering services results
that have been caused by many factors including: product development delays (see
"Technological Changes" below), third party delays, increases in the estimated
hours to complete particular engineering services projects, delays in the
availability or stability of third-party technology and cancellation or
redirection of engineering services projects by the Company's OEMs. There can be
no assurance that similar factors will not impact future engineering services
results. Further, in the past, the Company has benefited from the inclusion of
cancellation fees in its engineering services agreements. There can be no
assurance that the Company will continue to be able to negotiate these fees into
future engineering services arrangements.
Shifting of the Recurring License Fee Model: Over the past several
quarters, the Company's recurring licensing fee model has shifted from per unit
royalties paid upon OEM shipment of product to a revenue structure that
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<PAGE>
includes more revenues associated with guaranteed quarterly minimum royalties
and sales of block licenses. Although the new royalty model benefits the
Company's cash flows and minimizes the Company's risk associated with unexpected
decreases in demand for customer products, the Company's revenues could
fluctuate significantly from quarter to quarter as the number and value of new
royalty commitments changes.
Recurring Product Licensing Reporting: The recurring product licensing
revenues reported by the Company are dependent, in part, on the timing and
accuracy of product sales reports received from the Company's OEM customers.
These reports are provided only on a calendar quarter basis and, in any event,
are subject to delay and potential revision by the OEM. Therefore, the Company
is required to estimate all of the recurring product licensing revenues for the
last month of each fiscal quarter and to further estimate all of its quarterly
revenues from an OEM when the report from such OEM is not received in a timely
manner. In the event the Company is unable to estimate such revenues accurately
prior to public announcement of the Company's quarterly results, the Company may
be required to adjust revenues for subsequent periods.
Technological Changes: Rapidly changing technology, evolving industry
standards and needs, and frequent new product introductions characterize the
market for the Company's products and services. The Company's success will
depend on, among other things: market acceptance of the Company's technology and
the digital document products of the Company's OEM customers; the ability of the
Company and its OEM customers to meet industry changes and market demands in a
timely manner; achievement of new design wins by the Company followed by the
OEMs' development of associated new digital document products; and the regular
and continued introduction of new and enhanced technology and services by the
Company and its OEMs on a timely and cost-effective basis. There can be no
assurance that the products and technology of competitors of the Company or its
OEMs will not render the Company's technology or its OEMs' products
noncompetitive or obsolete. Any failure by the Company or its OEMs to anticipate
or respond adequately to the rapidly changing technology and evolving industry
standards and needs, or any significant delay in development or introduction of
new and enhanced products and services, could result in a loss of
competitiveness or revenues, which could have a material adverse effect on the
Company's operating results.
Technology Licensing: The Company's larger customers at times have required
that the Company offer new technology directly to them prior to offering it to
other customers and have attempted to restrict the Company from licensing the
technology utilized by these customers to customers developing potentially
competing products. Although the Company has not granted exclusive rights with
respect to its core technologies, the Company has granted exclusive rights in
unusual circumstances with respect to derivative software developed by the
Company in support of a specific customer's proprietary products or
technologies. No assurance can be given, however, that the Company will not, in
the future, grant broader exclusive rights to its technology in order to enter
into a licensing agreement with a customer, or that an unwillingness to grant
such exclusive rights will prevent the Company from entering into such a
licensing agreement.
Receivables: Although the Company's net trade accounts receivable balances
remained consistent between January 31, 2000 and 1999, the Company's days sales
outstanding increased significantly. Increases in future trade accounts
receivable balance could be caused by increased recurring licensing revenues,
the shift towards the SDK model and the timing of Japanese collections. Much of
the Company's revenue growth in recent years has been fostered by strong
recurring licensing fees, which are not contractually possible to collect prior
to the end of a quarter. The shift towards the SDK model has generated lump-sum
license fees that are billed at the time of delivery. Finally, the Company noted
a trend of slow collections from one of its major Japanese customers. An
increase in accounts receivable has a negative impact on operating cash and
poses inherent collection risks. Although the Company feels that its accounts
receivable reserves are adequate at January 31, 2000, there can be no assurance
regarding this assertion.
Seasonality: The Company believes that its business may be subject to
seasonal trends. In the digital document product industry, it is not unusual for
vendors to experience an increase in demand in the second calendar quarter
followed by a decrease in the third quarter, as well as an increase in demand in
the fourth calendar quarter followed by a significant decrease in the following
quarter. Although the Company has attempted to manage this risk with the
incorporation of guaranteed minimum royalty commitments, the Company's
predominant shifts in the current year to SDK based revenue negatively impacted
fourth quarter revenues and traditional seasonality. Additionally, the
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Company's product licensing revenues may be negatively impacted by seasonality
of unit shipments experienced by its OEMs.
ASIC Chips: The Company is in the process of developing a "fabless"
distribution model for the sale of ASIC chips. The Company has no direct
distribution experience and will place reliance on third parties to maintain
inventories to address OEM needs, manage manufacturing logistics, and distribute
the product in a timely manner. Additionally, there can be no assurance that the
OEMs will elect to purchase from Peerless as their distributor.
Dependence on Sole Source Providers: Currently, the Company is dependent
on four independent parties, Motorola, IBM Microelectronics, NEC and Intel, each
of which provides unique application specific integrated circuits ("ASICs")
incorporating the Company's imaging technology to certain of the Company's OEMs.
Additionally, the Company has a set of relationships with Adobe that address
many critical aspects of the Company's OEM customers' needs. The Company has
licensed (for internal development purposes) from Adobe the right to use Adobe's
PostScript Software to enable the Company's products to be used with Adobe's
PostScript Software, has licensed to Adobe several of the Company's technologies
and has developed technologies for Adobe for which the Company receives
royalties and engineering services fees. These sole source providers are subject
to materials shortages, excess demand, reduction in capacity and/or other
factors that may disrupt the flow of goods to the Company's customers and
thereby adversely affect the Company's customer relationships. Any such
disruption could limit or delay production or shipment of the products
incorporating the Company's technology, which could have a material adverse
effect on the Company's operating results.
The Company, through its subsidiary PSN, has entered into contracts with
entities and persons located in Hong Kong, which city is located in a political
district of the People's Republic of China. Through these long term
relationships, the Company operates at favorable cost, schedule and quality of
output advantages. There can be no assurances that the political and business
climates in Hong Kong will remain stable. However, should there be disruption in
the aforesaid relationships, it is not expected to have a materially adverse
affect on the Company, its financial condition or results of financial
operations.
Costs and Expenses: A substantial portion of the Company's costs and
expenses is related to costs of engineering services and maintenance, product
development, other personnel costs, marketing programs and facilities. The level
of spending for such costs and expenses cannot be adjusted quickly and is based,
in significant part, on the Company's expectations of future revenues and
anticipated OEM commitments. As in the current fiscal year, if such commitments
do not materialize or are terminated or if revenues are below expectations, the
Company's quarterly and annual operating results will be adversely affected.
Dependence on Key Personnel: The Company is largely dependent upon the
skills and efforts of its senior management and other officers and key
employees. The Company believes that its future success will depend in large
part upon its ability to attract and retain highly skilled managerial,
engineering, sales, marketing and operations personnel, many of whom are in
great demand. Competition for such personnel recently has increased
significantly. The Company only maintains key person life insurance policies for
one executive, Mr. Au. The loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
operating results.
International Activities: Peerless is substantially dependent on its
international business activities and the Company expects that sales to
customers located outside the United States may increase in absolute dollars in
the future. The international market for products incorporating the Company's
technology is highly competitive, and the Company expects to face substantial
competition in this market from established and emerging companies and
technologies developed internally by its OEMs. Risks inherent in the Company's
international business activities also include currency fluctuations, changes in
the economic condition of foreign countries, the imposition of government
controls, tailoring of products to local requirements, trade restrictions,
changes in tariffs and taxes, and the burdens of complying with a wide variety
of foreign laws and regulations, any of which could have a material adverse
effect on the Company's operating results. Although all of the Company's
contracts are, and the Company expects that its future contracts will be,
denominated in U.S. dollars, there can be no assurance that its contracts with
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<PAGE>
international OEMs in the future will be denominated in U.S. dollars. In the
event that one or more contracts are denominated in foreign currencies, the
Company will be subject to additional risks associated with currency
fluctuations, which could have a material adverse effect on the Company's
operating results.
During the past few years, the Asian economy has been financially
depressed. As a result, some members of the imaging industry have reported
negative financial impacts attributable to a decrease in demand from Asian
customers. Peerless' Asian customers are comprised primarily of companies
headquartered in Japan. These Japanese customers sell products containing
Peerless' technology primarily in the North American and European marketplaces.
There can be no assurance that revenues from Asian customers will not decline in
future quarters.
Volatility of Stock Price: The Company's common stock has experienced
significant price volatility and such volatility may occur in the future.
Factors that could affect the trading price of the common stock include
variations in quarterly results of operations, announcements of new products by
the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, overall market conditions
and other factors. In addition, the stock market historically has experienced
extreme price and volume fluctuations, which have particularly affected the
market price of securities of many high technology companies and which at times
have been unrelated or disproportionate to the operating performance of such
companies.
Market Risk: The Company is exposed to various market risks including
changes in interest rates. Market risk is the potential loss arising from
adverse changes in market rates and prices, such as interest rates. The Company
has not been at risk from adverse changes in foreign currency exchange rates as
all transactions have been denominated in U.S. dollars. The Company has not
entered into derivatives or other financial instruments for trading purposes.
Peerless' exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company invests its
excess cash in fixed rate debt instruments of the U.S. Government and high-
quality corporate issuers as well as floating rate money market funds. The
Company, by policy, limits the amount of credit exposure to any one issuer.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, Peerless' future investment income may fall short
of expectations due to changes in interest rates, or Peerless may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Year 2000: The Company, its subsidiaries, and to its knowledge the
Company's third party suppliers did not experience any problems associated with
its defined exposure areas of its Licensed Products, their Key Transaction
Processing Applications, the Company's Equipment and Facilities and with Key
Suppliers during the transition to the Year 2000. During 1999, the Company spent
approximately $356,000 out of a budget of $400,000 for addressing and preparing
for potential Year 2000 related problems. However, as a result of the work
performed previously and experience in Year 2000 to date, the Company does not
foresee any problems in this area. The Company has determined to maintain a
discrete observation of these potential exposure areas through Year 2000 in the
ordinary course of business. There can be no assurances that such problems,
should they occur, will not have a materially adverse effect on the Company, its
financial condition, or results of operations.
Future Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives will be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The adoption of SFAS No. 133 will not have a material impact on the
Company's results of operations, financial position or cash flows.
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<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company is currently evaluating the impact of SAB 101 on its
financial statements and related disclosures but does not expect such impact, if
any, will be material. The accounting and disclosures prescribed by SAB 101 will
be effective no later than the second fiscal quarter of the first fiscal year
beginning after December 15, 1999, as amended by.
ITEM 8 - Financial Statements and Supplementary Data.
See Index to Financial Statements on page F-1.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 20, 1999, the registrant dismissed PricewaterhouseCoopers
LLP ("PwC"), the independent accounting firm which the registrant previously
engaged as the principal accounting firm to audit the registrant's financial
statements. PwC's report on the registrant's consolidated financial statements
for either of the past two years did not contain an adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles. On September 16, 1999, the Audit
Committee of the registrant's Board of Directors approved the decision to
dismiss PwC. During the registrant's two most recent fiscal years and the period
from the end of its most recent fiscal year through the date of dismissal, there
were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PwC, would have caused it
to make reference to the subject matter of the disagreements in connection with
its report.
On September 21, 1999, the registrant engaged Ernst & Young LLP as the
principal accountant to audit the registrant's consolidated financial
statements. The Audit Committee of the registrant's Board of Directors approved
this engagement on September 16, 1999. During the registrant's two most recent
fiscal years and the period from the end of its most recent fiscal year to
September 20, 1999, the registrant did not consult Ernst & Young LLP regarding
either (i) the application of accounting principles to a specified transaction,
either complete or proposed or (ii) the type of audit opinion that might be
rendered on the registrant's consolidated financial statements.
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PART III
ITEM 10-- Directors and Executive Officers.
The information required by this item, insofar as it relates to the
Company's directors, will be contained under the captions "Election of
Directors" and "Section 16 Beneficial Ownership Reporting Compliance" in the
Proxy Statement and is incorporated herein by reference. On April 13, 2000
Edward A. Gavaldon resigned as President, Chief Executive Officer and Chairman
of the Board. The information covering his resignation will be contained in the
Proxy Statement. The information relating to the Company's executive officers as
of April 13, 2000 is contained in the following table:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert G. Barrett 55 Chairman of the Board and Director
Howard J. Nellor 61 Interim President and Chief Executive Officer
Carolyn M. Maduza 43 Senior Vice President, Finance and Administration, Chief Financial
Officer
Margaret Turner 36 Vice President, Engineering
Ron Davis 52 Vice President, Sales
Adam W. Au 43 Vice President, General Manager, Peerless Systems Networking
</TABLE>
Robert G. Barrett has been a longstanding member of Peerless' Board of
Directors. He is the founder and a Managing Partner of Battery Ventures, a
venture capital firm, and in that capacity is primarily involved in software
and Internet investments. Prior to forming Battery Ventures, Mr. Barrett was
involved in financing high technology companies as a commercial banker at First
Chicago and an investment banker at Hayden Stone. Mr. Barrett holds a BA degree
in History from Harvard College and an MBA from Harvard Business School.
Howard J. Nellor has been a consultant to Peerless for four years and has
assisted in the development and delivery process for the Company's products. Mr.
Nellor's consulting work for Peerless has focused on strategic planning,
business process re-engineering, and software product development. His work
experience includes over 20 years with TRW, including internal management
consulting assignments to define the vision and improve the performance of
operating units. For the past 13 years, he has consulted for a variety of
high-technology firms and health care organizations, primarily to assist in the
management of crisis and turnaround situations. Mr. Nellor's experience also
includes the reversal of declining sales trends and the stabilization of
corporate performance in companies undergoing management changes. At a recent
client engagement in the communications industry, Mr. Nellor reversed a decline
in sales and rebuilt the company's management team after several key executives
left the firm. He holds a Bachelors degree in Engineering and a Master's degree
in Business Administration.
Carolyn M. Maduza has served the Company as Senior Vice President of
Finance and Administration and Chief Financial Officer since April 1999. Prior
to joining Peerless, Ms. Maduza served for 15 months as the Senior Vice
President, Chief Financial Officer and Treasurer of Smart Technologies, Inc., an
enterprise software and Internet services company located in Austin, Texas.
Prior to that, she served for 21 months as the Senior Vice President, Chief
Financial Officer, Treasurer and Corporate Secretary for Arrowsmith Technologies
Inc., an enterprise software company focused on GPS-based fleet management
software systems. Ms. Maduza has also served as Managing Director for MASI,
Ltd., a member firm of M&A International, which provides global investment
banking advisory services which includes mergers and acquisitions and corporate
finance. Ms. Maduza has over nineteen years of financial and general management
experience in the technology and financials services industries. Ms. Maduza
received a Masters of International Management from the American Graduate School
of International Management and a B.A. in Business Administration from the
University of Wisconsin at Milwaukee. Ms. Maduza is a CPA in the state of
Illinois.
Margaret Turner joined Peerless as a Project Manager in 1995 and was
promoted to Sr. Project Manager in January 1997. She was promoted once again to
Director, Engineering Services in December 1997 and then to her most current
position of VP, Engineering in February 2000. Margaret has over 15 years
experience in the software technology industry with an emphasis in project
management, future technologies and business group management. Margaret was
employed by Easams, Ltd. from 1987 - 1995 and Software Sciences, ltd. from
1984-1987. Margaret earned her BS from the University of Nottingham, England.
Ron Davis began with Peerless in 1996 as the Director of Strategic
Planning. Ron received a promotion to Vice President of Sales & Marketing in
March 1999 and then focused attention as VP of Sales effective December 1999.
Prior to Peerless, Ron spent approximately 12 years at Xerox in a number of
functions including program business manager, market and product planning, major
account marketing and market research. Ron also worked for 3M from 1971 to 1984
in several marketing roles. Ron earned his BS in Marketing from the University
on MN and an MBA from the College at St. Thomas, MN.
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<PAGE>
sales and sales management positions. Mr. Boelig received a B.A in Business
Administration from the University of New Hampshire. Mr. Boelig resigned his
position effective September 17, 1999.
Adam W. Au has served as the Vice President and General Manager of Peerless
Systems Networking since June 1999. Mr. Au founded Auco, Inc. in May 1994 and
served as the Chairman, President and Chief Executive Officer until the Company
merged with Peerless in June 1999. Prior to founding Auco, Mr. Au spent nine
years at Novell, Inc. His most recent position at Novell was Group Director of
the Corporate Technology Office where he was responsible for overseeing the
company-wide development process and resolving corporate engineering problems.
At Novell, Mr. Au also worked as Group Director of Enterprise Systems where he
was responsible for developing Novell's SNA and remote access products. Mr. Au
has over eighteen years of experience in the technology industry. Mr. Au
received a M.S. in Computer Engineering from the University of Wisconsin at
Madison.
ITEM 11 -- Executive Compensation.
The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by reference.
ITEM 12 -- Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13 -- Certain Relationships and Related Transactions.
The information required by this item will be contained in the Proxy
Statement under the caption "Certain Transactions" and is incorporated herein by
reference.
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PART IV
ITEM 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as a part of this Form 10-K:
(1) Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Report of PricewaterhouseCoopers LLP, Independent Accountants
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
The following financial statement schedule of Peerless Systems
Corporation is filed as part of this Report and should be read in conjunction
with the Financial Statements of Peerless Systems Corporation.
Schedule Page
- -------- ----
II Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Financial Statements or Notes thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended January 31, 2000.
(c) Exhibits. The following exhibits are filed as part of, or incorporated by
reference into, this Form 10-K.
Exhibit
Number
- -------
3.1(1) Certificate of Incorporation of the Company.
3.2(4) Amended and Restated Bylaws of the Company.
4.1 Instruments defining the rights of security holders. Reference is
made to Exhibits 3.1 and 3.2.
4.2(4) Rights Agreement, dated October 7, 1998, between the Company and
Norwest Bank Minnesota, N.A., as Rights Agent.
10.1(1) Form of Indemnity Agreement.
10.2(1)(2) 1992 Stock Option Plan (the "Option Plan"), as amended.
10.3(1)(2) 1996 Equity Incentive Plan.
10.4(1)(2) Form of Incentive Stock Option.
10.5(1)(2) Form of Nonstatutory Stock Option.
10.6(1)(2) 1996 Employee Stock Purchase Plan.
10.7(1) Third Party Development and License Agreement (the "Adobe Third
Party License"), dated September 18, 1992, between the
Registrant and Adobe Systems Incorporated ("Adobe").
10.8(1)(3) Reference Post Appendix #2 to the Adobe Third Party License, dated
February 11, 1993.
10.9(1) Amendment No. 1 to the Adobe Third Party License, dated November
29, 1993.
10.10(1)(3) PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Re gistrant and Adobe.
10.11(1)(3) Amendment No. 1 to the PCL License, dated October 31, 1993.
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<PAGE>
10.12(1)(3) Letter Modification to the PCL License, dated August 5, 1994.
10.13(1)(3) Addendum No. 1 to the PCL License, dated March 31, 1995.
10.14(1)(3) Letter Modification to the PCL License, dated August 30, 1995.
10.15(1) Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated
February 6, 1992.
10.16(1) First Amendment to Office Lease, dated December 1, 1995, between
the Company and Continental Development Corporation.
10.18(1)(2) Employment Agreement with Lauren Shaw.
10.19(1)(2) Employment Agreement with Edward Gavaldon.
10.20 (5) Second Amendment to Office Lease, dated April 8, 1997, between the
Company and Continental Development Corporation.
10.21(5) Third Amendment to Office Lease dated, December 16, 1997, between
the Company and Continental Development Corporation.
10.22(6) Fourth Amendment to Office Lease, dated April 22, 1998, between the
Company and Continental Development Corporation.
10.23 (7) Agreement and Plan of reorganization and Merger by and among
Peerless Systems Corporation, Auco Merger Sub, and Auco,
Inc. dated as of April 6, 1999.
10.24 (7) Employment Agreement with Adam Au.
10.25 Employment Agreement with Gordon Hanson.
10.26 Maruban Supplier/Distribution Agreement, dated December 14, 1999.
10.27 Lease PSN McKelvy Family Trust (386 Main Street) Standard
Industrial/Commercial Single-Tenant Lease-Net, dated March
14, 1997
10.28 Lease PSN Terra Bella Inc. and Archie J. Snider dba Terra Snider
Joint Venture (1130 Terra Bella) Standard
Industrial/Commercial Single-Tenant Lease-Net, dated March
16, 2000.
10.29 Lease PSIP Kent Centennial Limited Partnership, dated January 31,
1996.
10.30 Lease PSIP Intrarock 1 LLC dated March 15, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Independent Accountants
24.1 Power of Attorney. Reference is made to page 30.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule - Fiscal Year 1999 and 1998
27.3 Restated Financial Data Schedule - Quarters - Fiscal Year 2000
27.4 Restated Financial Data Schedule - Quarters - Fiscal Year 1999
- -------------
(1) Previously filed in the Company's Registration Statement on Form S-1 (File
No. 333-09357), as amended and incorporated herein by reference.
(2) Management contract or compensatory plan or arrangement.
(3) Subject to Confidential Treatment Order.
(4) Previously filed in the Company's Current Report on Form 8-K, filed October
8, 1998, and incorporated herein by reference.
(5) Previously filed in the Company's 1998 Annual Report filed on form 10-K,
filed April 24, 1998, and incorporated herein by reference.
(6) Previously filed in the Company's 1999 Annual Report filed on form 10-K,
filed April 26, 1999, and incorporated herein by reference.
(7) Previously filed in the Company's Registration Statement on Form S-4 (File
No. 333-77049) as amended and incorporated herein by reference.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, as amended, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
April, 2000.
PEERLESS SYSTEMS CORPORATION
By: /s/ CAROLYN M. MADUZA
----------------------------
Carolyn M. Maduza
Senior Vice President of Finance and
Administration, Chief Financial Officer,
Secretary and Treasurer
(duly authorized representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ ROBERT G. BARRETT Chairman of the Board, April 25, 2000
- ------------------------ Director
Robert G. Barrett
/s/ HOWARD J. NELLOR Interim President and Chief April 25, 2000
- ----------------------- Executive Officer
Howard J. Nellor (Principal Executive Officer)
/s/ ROBERT V. ADAMS Director April 25, 2000
- ----------------------
Robert V. Adams
/s/ ADAM AU Director April 25, 2000
- ------------------------
Adam Au
/s/ ROBERT L. NORTH Director April 25, 2000
- ------------------------
Robert L. North
30
<PAGE>
PEERLESS SYSTEMS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors F-2
Report of PricewaterhouseCoopers LLP, Independent Accountants F-3
Consolidated Statements of Income F-4
Consolidated Balance Sheets F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of Peerless Systems Corporation
We have audited the accompanying consolidated balance sheet of Peerless Systems
Corporation as of January 31, 2000 and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. Our audit
also included the financial statement schedule listed in the Index at Item 14
(a) for the year ended January 31, 2000. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Peerless Systems
Corporation at January 31, 2000 and the consolidated results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted the United States. Also, in our opinion, the
related financial statement schedule for the year ended January 31, 2000, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
March 2, 2000
F-2
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Peerless Systems Corporation
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of income, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of Peerless Systems Corporation
and its subsidiaries at January 31, 1999, and the results of their operations
and their cash flows for each of the two years in the period ended January 31,
1999, in conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule for each
of the two years in the period ended January 31, 1999 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. The
consolidated financial statements and financial statement schedule give
retroactive effect to the mergers of Auco, Inc. in June 1999 and HDE, Inc. in
December 1999 with Peerless Systems Corporation in transactions accounted for as
poolings of interests, as described in Note 2 to the consolidated financial
statements. We did not audit the financial statements of HDE, Inc. which
statements reflect total assets of $1,288,000 at January 31, 1999, and total
revenues of $4,429,000 and $3,834,000 for the years ended January 31, 1999 and
1998, respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for HDE, Inc., is based solely on the report
of the other auditors. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Peerless Systems Corporation
for any period subsequent to January 31, 1999.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, CA
March 5, 1999, except as to the pooling of interests with Auco Inc., which is as
of June 10, 1999, and except as to the pooling of interests with HDE, Inc.,
which is as of December 20, 1999.
F-3
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended January 31,
-----------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Revenues:
Product licensing $26,042 $21,305 $15,836
Engineering services and maintenance 16,034 19,772 15,122
------- ------- -------
Total revenues 42,076 41,077 30,958
------- ------- -------
Cost of revenues:
Product licensing 932 139 141
Engineering services and maintenance 13,041 14,343 10,404
------- ------- -------
Total cost of revenues 13,973 14,482 10,545
------- ------- -------
Gross margin 28,103 26,595 20,413
------- ------- -------
Operating expenses:
Research and development 9,600 8,765 6,152
Sales and marketing 6,366 6,514 6,169
General and administrative 5,752 6,669 4,809
Other non-recurring costs 2,252 - -
------- ------- -------
Total operating expenses 23,970 21,948 17,130
------- ------- -------
Income from operations 4,133 4,647 3,283
Interest income, net 1,209 1,371 1,243
------- ------- -------
Income before income taxes 5,342 6,018 4,526
Provision for income taxes 1,901 3,556 2,999
------- ------- -------
Net income $ 3,441 $ 2,462 $ 1,527
======= ======= =======
Basic earnings per share $ 0.25 $ 0.19 $ 0.12
======= ======= =======
Diluted earnings per share $ 0.22 $ 0.16 $ 0.11
======= ======= =======
Weighted average common shares outstanding - basic 13,890 12,682 12,316
======= ======= =======
Weighted average common shares outstanding - diluted 15,483 15,181 14,498
======= ======= =======
</TABLE>
See accompanying notes
F-4
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
January 31,
------------------------
2000 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $13,620 $ 6,132
Short term investments 12,329 16,158
Trade accounts receivable, less allowance for doubtful accounts of $175
in 2000 and 1999 10,168 10,543
Unbilled receivables 2,343 2,994
Income taxes receivable 21 -
Deferred tax asset 682 2,766
Prepaid expenses and other current assets 682 639
------- -------
Total current assets 39,845 39,232
Long term receivable 1,500 -
Investments 2,922 4,605
Property and equipment, net 6,565 5,450
Deferred tax asset 1,050 -
Other assets 683 600
------- -------
Total assets $52,565 $49,887
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 615 $ 927
Income taxes payable - 784
Deferred revenue, current portion 671 2,231
Note payable to stockholder - 350
Other current liabilities 4,320 3,463
------- -------
Total current liabilities 5,606 7,755
Deferred tax liability - 394
Deferred revenue - 800
Deferred rent 366 431
Other tax liabilities 2,799 2,078
------- -------
Total liabilities 8,771 11,458
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 30,000 shares authorized, 14,724 and 12,838
shares issued and outstanding in 2000 and 1999, respectively 15 13
Additional paid-in capital 47,953 39,360
Convertible preferred stock Series A, no par value, zero and 3,250 shares
authorized, zero and 3,228 shares issued and outstanding in 2000 and 1999,
respectively - 3,217
Convertible preferred stock Series B, no par value, zero and 3,000 shares
authorized, zero and 1,413 shares issued and outstanding in 2000 and 1999,
respectively - 3,520
Deferred compensation (123) (188)
Accumulated deficit (4,051) (7,493)
------- -------
Total stockholders' equity 43,794 38,429
------- -------
Total liabilities and stockholders' equity $52,565 $49,887
======= =======
</TABLE>
See accompanying notes
F-5
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible Convertible
Preferred Stock Preferred Stock Additional Total
Common Stock Series A Series B Paid-In Deferred Accumu- Stockholders'
-------------- -------------- ---------------- lated
Shares Amount Shares Amount Shares Amount Capital Comp (Deficit) Equity
------ ------ ------ ------ ------ ------ ------- ---- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 31, 1997
as previously reported 10,484 $ 10 - $ - - $ - $ 37,225 $ (346) $ (8,825) $ 28,064
Adjustment for poolings
of interests 1,707 2 2,500 2,490 - - 53 - (2,642) (97)
------ ----- ------ ------ ------- ----- --------- ------ --------- --------
Balances, January 31, 1997 12,191 12 2,500 2,490 - - 37,278 (346) (11,467) 27,967
Issuance of common stock 26 1 - - - - 406 - - 407
Exercise of stock options 191 - - - - - 331 - - 331
Issuance of preferred
stock Series B - - - - 400 1,000 - - - 1,000
Conversion of notes payable
to preferred stock Series
A and B - - 728 727 685 1,700 - - - 2,427
Amortization of deferred
compensation - - - - - - - 63 - 63
Cancellation of stock
options granted - - - - - - (8) 8 - -
Payment of dividends by PSIP - - - - - - - - (15) (15)
Net income - - - - - - - - 1,527 1,527
------ ----- ------ ------ ------- ----- --------- ------ --------- --------
Balances, January 31, 1998 12,408 13 3,228 3,217 1,085 2,700 38,007 (275) (9,955) 33,707
Issuance of common stock 72 - - - - - 481 - - 481
Exercise of stock options 358 - - - - - 872 - - 872
Issuance of preferred
stock Series B - - - - 328 820 - - - 820
Amortization of deferred
compensation - - - - - - - 87 - 87
Net income - - - - - - - - 2,462 2,462
------ ----- ------ ------ ------- ----- --------- ------ --------- --------
Balances, January 31, 1999 12,838 13 3,228 3,217 1,413 3,520 39,360 (188) (7,493) 38,429
Issuance of common stock 151 - - - - - 846 - - 846
Exercise of stock options 530 1 - - - - 961 - - 962
Conversion of preferred
stock Series A and B to
common stock 1,200 1 (3,228) (3,217) (1,413) (3,520) 6,736 - - -
Conversion of notes payable
to common stock 5 - - - - - 50 - - 50
Acquisition adjustment - - - - - - - - 1 1
Amortization of deferred
compensation - - - - - - - 65 - 65
Net income - - - - - - - - 3,441 3,441
------ ----- ------ ------- ------- ------ --------- ------ --------- --------
Balances, January 31, 2000 14,724 $ 15 - $ - - $ - $ 47,953 $ (123) $ (4051) $ 43,794
====== ===== ====== ======= ======= ====== ========= ====== ========= ========
</TABLE>
See accompanying notes
F-6
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
------------------------------------
2000 1999 1998
------ ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,441 $ 2,462 $ 1,527
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Depreciation and amortization 1,540 1,289 969
Amortization of investment discounts and premiums (146) (125) (247)
Amortization of deferred compensation 65 87 63
Compensation expense on common stock issued to employees 48 78 -
Allowance for bad debt 97 75 -
Deferred taxes 640 (522) 1,048
Other 2 - 21
Interest expense associated with convertible notes payable - - 363
Changes in operating assets and liabilities:
Trade accounts receivable 278 (4,060) (2,825)
Unbilled receivables 651 (1,608) (1,023)
Income taxes receivable (21) - -
Prepaid expenses and other assets (192) (23) (717)
Long term receivable (1,500) - -
Accounts payable (312) (513) 855
Income taxes payable (784) 334 372
Deferred revenue (2,360) 257 (2,147)
Other liabilities 1,513 1,781 1,603
------- ------- -------
Net cash provided (used) by operating activities 2,960 (488) (138)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,742) (483) (1,667)
Purchases of leasehold improvements (818) (1,357) (1,795)
Purchases of held-to-maturity securities - - (24,244)
Purchases of available-for-sale securities (22,892) (18,155) (2,992)
Maturities of held-to-maturity securities 5,500 12,000 7,000
Proceeds from sales of available-for-sale securities 23,050 8,000 -
Purchase of software license (30) - -
------- ------- -------
Net cash provided (used) by investing activities 3,068 5 (23,698)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 798 403 407
Proceeds from exercise of common stock options 962 872 331
Issuance of notes payable - 200 750
Repayment of outstanding notes payable (300) (200) -
Issuance of preferred stock Series B - 820 1,000
Payment of dividends - - (15)
------- ------- -------
Net cash provided by financing activities 1,460 2,095 2,473
------- ------- -------
Net increase (decrease) in cash and cash equivalents 7,488 1,612 (21,363)
Cash and cash equivalents, beginning of period 6,132 4,520 25,883
------- ------- -------
Cash and cash equivalents, end of period $13,620 $ 6,132 $ 4,520
======= ======= =======
</TABLE>
See accompanying notes
F-7
<PAGE>
PEERLESS SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
---------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $1,554 $2,332 $ 189
====== ====== =======
Interest $ 15 $ 34 $ 1
====== ====== =======
Supplemental schedule of noncash investing and financing activities:
Conversion of preferred stock Series A to common stock $3,217 $ - $ -
====== ====== =======
Conversion of preferred stock Series B to common stock $3,520 $ - $ -
====== ====== =======
Conversion of notes payable to common stock $ 50 $ - $ -
====== ====== =======
Common stock issued to employees $ 48 $ 78 $ -
====== ====== =======
Tenant improvements paid by the Company's landlord $ - $ 41 $ 213
====== ====== =======
Cancellation of stock options granted with exercise prices
below market on the date of grant $ - $ - $ 8
====== ====== =======
Conversion of notes payable to shares of preferred
stock Series A and B, less issuance costs of $10 $ - $ - $ 2,427
====== ====== =======
</TABLE>
See accompanying notes
F-8
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. Organization and Summary of Significant Accounting Policies:
Organization: Peerless Systems Corporation ("Peerless" or the "Company")
was incorporated in the state of California in April 1982 and reincorporated in
the state of Delaware in September 1996. Peerless develops and licenses
software-based embedded imaging and networking systems and supporting electronic
technologies and provides custom engineering services to Original Equipment
Manufacturers ("OEMs") of digital document products located primarily in the
United States and Japan. Digital document products include printers, copiers,
fax machines, scanners and color products, as well as multifunction products
that perform a combination of these imaging functions. In order to process
digital text graphics, digital document products rely on a core set of imaging
software and supporting electronics, collectively known as the embedded imaging
system. Embedded networking systems supply the core software technologies to
digital document products that enable them to communicate over local area
networks and the Internet.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Business Combinations: All business combinations have been accounted for
under the pooling-of interests method of accounting under Accounting Principles
Board Opinion No. 16. In such cases, the assets, liabilities and stockholders'
equity of the acquired entities were combined with the Company's respective
accounts at recorded values. Prior period financial statements have been
restated to give effect to the mergers.
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 periods. Actual results could differ from those estimates.
Investments: The Company's investments at January 31, 2000 and 1999
consisted of held-to-maturity and available-for-sale U.S. government debt, state
and local government debt, corporate debt, and other debt securities. Held-to-
maturity securities are carried at amortized cost. Amortization of the purchase
discounts and premiums is included in interest income. Available-for-sale
securities are carried at fair value. Unrealized gains and losses, if material,
are reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary are included in
results of operations. Realized gains and losses are calculated using the
specific identification method and were not material to the Company's results of
operations in any period presented.
Property and Equipment: Property and equipment are stated at cost, less
accumulated depreciation. Depreciation on property and equipment is calculated
using the straight-line method as follows:
Computers and equipment 3 to 5 years
Furniture 10 years
Leasehold improvements shorter of useful life or lease term
Maintenance and repairs are expensed as incurred, while renewals and
betterments are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation, and any resulting gain or loss is included in results of
operations.
Long-Lived Assets: The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets may be
impaired. To date, no such impairment has been recorded.
F-9
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
Capitalization of Software Development Costs: The Company follows the
working model approach to determine technological feasibility of its products.
Costs that are incurred subsequent to establishing technological feasibility are
immaterial and, therefore, the Company expenses all costs associated with the
development of its products as such costs are incurred.
Revenue Recognition: The Company recognizes revenues in accordance with
Statement of Position 97-2 "Software Revenue Recognition" as amended by
Statement of Position 98-4.
Development license revenues from the licensing of source code or software
development kits for the Company's standard products are recognized upon
delivery of the software if no significant modification or customization of the
software is required and collection of the resulting receivable is probable. If
modification or customization is essential to the functionality of the software,
development license revenues are recognized over the course of the modification
work.
The Company also enters into engineering services contracts with certain of
its OEMs to provide a turnkey solution, adapting the Company's software and
supporting electronics to specific OEM requirements. Revenues on such contracts
are recognized over the course of the development work on a percentage-of-
completion basis. Progress-to-completion under percentage-of-completion is
determined based on direct costs, consisting primarily of labor and materials,
expended on the arrangement. The Company provides for any anticipated losses on
such contracts in the period in which such losses are first determinable.
Maintenance revenues are recognized ratably over the term of the maintenance
contract.
Recurring licensing revenues are derived from per unit fees paid by the
Company's customers upon manufacturing and subsequent commercial shipment of
products incorporating Peerless technology. These recurring licensing revenues
are recognized on a per unit basis as products are shipped commercially. In
certain cases, the Company requires customers to pay minimum royalty
commitments. These minimum payments are typically made in one lump sum or extend
over a period of four or more quarters. The Company generally recognizes
revenues associated with recurring licensing fee commitments on delivery of
software, when collection of the resulting receivable is probable and when the
fee is fixed and determinable. In cases where the royalty commitments are not
fixed and determinable, revenue is recognized as payments become due. Further,
when earned royalties exceed minimum royalty commitments, revenues are
recognized on a per unit basis as products are shipped commercially.
For fees on multiple element arrangements, values are allocated among the
elements based on vendor specific evidence of fair value ("VSOE"). If VSOE does
not exist, all revenue for the arrangement are deferred until the earlier of the
point at which such VSOE does exist or all elements of the arrangement have been
delivered. If an arrangement includes both software and service elements, a
determination is made as to whether the service element can be accounted for
separately as services are performed.
Deferred revenue consists of prepayments of recurring licensing royalties,
and payments billed to customers in advance of revenue recognized on engineering
services contracts. Unbilled receivables arise when the revenue recognized on a
contract exceeds billings due to timing differences related to billing
milestones as specified in the contract.
Research and Development Costs: Research and development costs are expensed
as incurred.
Advertising Costs: Advertising costs are expensed as incurred in accordance
with Statement of Position 93-7 "Reporting on Advertising Costs". Advertising
expenses are recorded in sales and marketing expense and were immaterial to the
results of operations for all periods presented.
F-10
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
Income Taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting For Income Taxes." Under this method, deferred income taxes are
recognized for the tax consequences in future years resulting from differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred income
tax assets to the amount expected to be realized. Income tax provision is the
tax payable for the period and the change during the period in net deferred
income tax assets and liabilities.
Earnings Per Share: Basic earnings per share ("basic EPS") is computed by
dividing net income available to common stockholders (the numerator) by the
weighted average number of common shares outstanding (the denominator) during
the period. The computation of diluted earnings per share ("diluted EPS") is
similar to the computation of basic EPS except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. Potential
common shares include outstanding options under the company's employee stock
option plan (which are included under the treasury stock method) and any
outstanding convertible securities. In addition, in computing the dilutive
effect of convertible securities, the numerator is adjusted to add back the
after-tax amount of interest recognized in the period associated with any
convertible debt. A reconciliation of basic EPS to diluted EPS is presented in
Note 10 to the Company's financial statements.
Common Stock Options: During 1997, the Company implemented the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." This
statement sets forth alternative standards of recognition of the cost of
stock-based compensation and requires that the Company's financial statements
include certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. As permitted by this
statement, the Company continues to apply Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in recording compensation related to its plans. The supplemental
disclosure requirements and further information related to the Company's stock
option plans are presented in Note 12 to the Company's financial statements.
Segment Reporting: The Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" for the year ended January
31, 1999. SFAS No. 131 requires that companies report financial and descriptive
information about operating segments and establishes disclosures about products
and services, geographic areas, and major customers. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. The Company
believes that it operates in only one reportable business segment, the
development and sale of embedded imaging software and related services. The
Company's adoption of SFAS No. 131 did not affect the results or disclosure of
segment information as the Company's management financial information provides
for only one segment.
Cash and Cash Equivalents: Cash and cash equivalents represent cash and
highly liquid investments with an original maturity of three months or less.
Reclassifications: Certain previously reported financial information has
been reclassified to conform to the fiscal 2000 presentation.
F-11
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
Future Developments: In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives will be recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133
is effective for fiscal years beginning after June 15, 2000, as amended by SFAS
No. 137. The adoption of SFAS No. 133 will not have a material impact on the
Company's results of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company is currently evaluating the impact of SAB 101 on its
financial statements and related disclosures. While the Company does not expect
the impact on the financial statements and results of operations to be material,
it is not known at this time what the ultimate impact will be. The accounting
and disclosures prescribed by SAB 101 will be effective no later than the second
fiscal quarter of the first fiscal year beginning after December 15, 1999.
2. Business Developments:
In June 1999, the Company completed its acquisition of Auco, Inc. ("Auco").
Auco, based in Redwood City, California, develops embedded networking technology
and was privately held prior to the acquisition. As a result of the acquisition,
Auco was renamed Peerless Systems Networking ("PSN") and became a wholly owned
subsidiary of the Company. The Company exchanged 2,500 shares of its common
stock for all outstanding shares of Auco capital stock on a fully diluted basis,
and its convertible note payable. Each share of Auco was exchanged for .2585
shares of Peerless common stock.
In December 1999, the Company completed its acquisition of HDE, Inc.
("HDE"). HDE, based in Seattle, Washington, develops embedded imaging and
Internet printing solutions and was privately held prior to the acquisition. As
a result of the acquisition, HDE was renamed Peerless Systems Imaging Products
("PSIP") and became a wholly owned subsidiary of the Company. The Company
exchanged 890 shares of its common stock for all of the outstanding shares of
HDE common stock.
Both the Auco and HDE acquisitions qualified as tax-free exchanges and were
accounted for as poolings-of-interests under Accounting Principles Board Opinion
No. 16. Accordingly, the Company's financial statements have been restated to
include the results of Auco and HDE for all periods presented.
Prior to the June 1999 merger with Auco, Auco's fiscal year ended on
December 31. In recording the business combination, Auco's prior period
financial statements were not restated to conform to the Company's fiscal year.
Accordingly, the consolidated balance sheet at January 31, 1999 combines the
Peerless balance sheet at January 31, 1999 and the Auco balance sheet at
December 31, 1998. The consolidated statements of income for the 1999 and 1998
fiscal years consist of Peerless' results of operations for the twelve month
periods ended January 31, 1999 and 1998, respectively, and Auco's results of
operations for the twelve month periods ended December 31, 1998 and 1997,
respectively. Beginning in the second quarter of fiscal 2000, Auco's fiscal year
end was changed to conform to Peerless' fiscal year end of January 31.
Accordingly, Auco's results of operations for the month of April 1999 were
excluded from the Company's consolidated operating results. Revenues and net
income of Auco for April 1999 were $463 and $1, respectively, with net income
reflected as an adjustment to retained earnings effective May 1, 1999.
There were no transactions between Peerless and Auco prior to the
combination. Prior to the acquisition, HDE provided engineering services to the
Company. Transactions between the Company and HDE have been eliminated
F-12
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
in consolidation. Certain reclassifications were made to the Auco and HDE
financial statements to conform to Peerless' presentations.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine Month Three Month
Period Ended Period Ended Years Ended
October 31, April 30, January 31,
------------------
1999 1999 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Peerless $31,065 $ 8,194 $32,583 $25,363
Auco (A) 1,666 4,142 1,878
HDE 2,787 880 4,429 3,834
Eliminations - - (77) (117)
------- ------- ------- -------
Combined $33,852 $10,740 $41,077 $30,958
======= ======= ======= =======
Net income (loss):
Peerless $ 4,178 $ 1,091 $ 4,641 $ 4,944
Auco (A) 122 (863) (2,541)
HDE 35 (1) (1,316) (876)
------- ------- ------- -------
Combined $ 4,213 $ 1,212 $ 2,462 $ 1,527
======= ======= ======= =======
</TABLE>
(A) Included in Peerless consolidated amounts after merger in June 1999.
F-13
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
3. Investments:
Investments at January 31 consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Held-to-maturity securities:
Maturities within one year:
U.S. government debt securities $ - $ 5,503
-------- --------
Total held-to-maturity securities - 5,503
-------- --------
Available-for-sale securities:
Maturities within one year:
U.S. government debt securities 1,500 979
State and local U.S. government debt securities 830 -
Corporate debt securities 9,999 4,976
Other debt securities - 2,000
-------- --------
12,329 7,955
-------- --------
Maturities after one year through five years:
U.S. government debt securities - 1,503
State and local U.S. government debt securities 500 -
Corporate debt securities - 3,102
-------- --------
500 4,605
-------- --------
Maturities after ten years:
U.S. government debt securities - 2,700
State and local U.S. government debt securities 2,422 -
-------- --------
2,422 2,700
-------- --------
Total available-for-sale securities 15,251 15,260
-------- --------
Total investments $ 15,251 $ 20,763
======== ========
</TABLE>
In February 1999, $2,700 of U.S. government securities with maturities in
excess of ten years was sold and the proceeds were invested in short-term,
available-for-sale securities. Accordingly, the securities have been classified
as current in the 1999 balance sheet.
The fair value of held-to-maturity securities at January 31, 2000 and 1999
approximated their carrying value (amortized cost). Unrealized gains or losses
on available-for-sale securities were immaterial for all periods presented.
F-14
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
4. Property and Equipment:
Property and equipment at January 31 consisted of the following:
2000 1999
-------- --------
Computers and other equipment $ 7,129 $ 5,507
Furniture 473 390
Leasehold improvements 3,044 2,223
-------- --------
10,646 8,120
Less, accumulated depreciation (4,081) (2,670)
-------- --------
$ 6,565 $ 5,450
======== ========
Depreciation for the years ended January 31, 2000, 1999 and 1998 was
$1,444, $1,149 and $828, respectively.
5. Liabilities:
Other current liabilities consisted of the following at January 31,
2000 1999
------- -------
Accrued wages $ 1,675 $ 1,736
Accrued compensated absences 895 784
Accrued warranty costs 289 100
Accrued license fees 645 -
Other current liabilities 816 843
------- -------
$ 4,320 $ 3,463
======= =======
6. Notes Payable:
From June 1994 through December 1994, PSN issued 10% Convertible Promissory
Notes ("Convertible Notes") with an aggregate principal amount of $763 to a
shareholder. The Convertible Notes were convertible, at the option of the
holder, to shares of PSN stock at a specified conversion price of $1.00 of
principal amount per share of PSN stock. In November 1997, the principal amount
plus all accrued interest was converted into 598 shares of Convertible Preferred
Stock Series A and into 165 shares of Convertible Preferred Stock Series B. (See
Note 11 for discussion of Convertible Preferred Stock).
From December 1996 through February 1997, PSN issued 10% Convertible Notes
with an aggregate principal amount of $1,300 to shareholders. The Convertible
Notes had a maturity date of December 31, 1999 and were convertible, at the
option of the holder, to shares of PSN stock at a specified conversion price of
$2.00 of principal amount per share of PSN stock. In November 1997, the
principal amount plus all accrued interest was converted into 130 shares of
Convertible Preferred Stock Series A and into 520 shares of Convertible
Preferred Stock Series B. (See Note 11 for discussion of Convertible Preferred
Stock).
F-15
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
In December 1997, PSN issued a 10% convertible note with an aggregate
principal amount of $50 to a shareholder. The Convertible Note had a maturity
date of December 31, 1998 and was convertible, at the option of the holder, to
shares of PSN stock at a specified conversion price of $2.50 of principal amount
per share of PSN stock. In June 1999, upon closing of the merger between
Peerless and PSN, the Convertible Note was converted into 5 shares of Peerless
common stock.
In December 1997, PSN issued 10% Promissory Notes ("Notes") with an
aggregate principal amount of $300 to shareholders. In June 1998, PSN issued
Notes with an aggregate principal amount of $200 to a shareholder. As of January
31, 2000 and 1999, $0 and $300, respectively, in principal amount of the Notes
was outstanding.
7. Commitments:
Operating Leases The Company leases its offices and certain operating
equipment under operating leases that expire through 2007. The principal
operating leases covering the Company's office space contain certain
predetermined rent increases calculated at the inception of the lease based on
the lessor's estimate of expected increases in the fair market value of the
leased space. The leases do not specifically provide for renewal options.
Future minimum rental payments under long-term operating leases are as
follows:
For the Years
Ending January 31,
------------------
2001 $ 1,289
2002 1,326
2003 1,350
2004 1,395
2005 1,226
Thereafter 4,196
--------
$ 10,782
========
Total rental expense was $1,403, $1,313 and $1,078 for the years ended
January 31, 2000, 1999 and 1998, respectively.
F-16
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
8. Risks and Uncertainties:
Concentration of Credit Risk: The Company had cash and certificates of
deposit on deposit at banks at certain times throughout the year that was in
excess of federally insured limits.
The Company's credit risk in accounts receivable, which are generally not
collateralized, is concentrated with customers which are OEMs of laser printers
and printer peripheral technologies. The financial loss, should a customer be
unable to meet its obligation to the Company, would be equal to the recorded
accounts receivable. At January 31, 2000 and 1999, two and three customers
collectively represented 32% and 39% of total trade accounts receivable,
respectively. For the years ended January 31 the following customers, not
necessarily the same from year to year, represented greater than ten percent of
total revenues:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Customer A $ 7,888 19% $ 6,664 16% $ 5,444 18%
Customer B 4,496 11% 5,803 14% 3,544 11%
Customer C 4,413 10% 4,805 12% 3,216 10%
Customer D 4,044 10% 3,134 10%
Customer E 3,986 10% 3,084 10%
------- ------- -------
$16,797 40% $25,302 62% $18,422 59%
======= ======= =======
</TABLE>
Significant Estimates of Revenues: The Company's recurring product
licensing revenues are dependent, in part, on the timing and accuracy of product
sales reports received from the Company's OEM customers. These reports are
provided only on a calendar quarter basis and, in any event, are subject to
delay and potential revision by the OEM. Therefore, the Company is required to
estimate all of the recurring product licensing revenues for the last month of
each fiscal quarter and to further estimate all of its quarterly revenues from
an OEM when the report from such OEM is not received in a timely manner. In the
event the Company is unable to estimate such revenues accurately prior to
reporting financial results, the Company may be required to adjust revenues for
subsequent periods.
Legal Proceedings: The Company is subject to litigation in the ordinary
course of business. The Company believes that this litigation will not have a
material adverse effect on the financial position, results of operations and
cash flows of the Company.
The Company filed a lawsuit in January 2000 against Conexant Systems Inc.,
Newport Beach, CA in the Orange County Superior Court regarding the failure and
refusal of Conexant to pay to the Company a portion of a Source License Fee and
guaranteed royalty payments pursuant to an agreement between the parties.
Conexant has filed a cross-complaint alleging misrepresentation of facts
regarding the Company's Intellectual Property. Discovery has been initiated. The
Company is confident that it will prevail in this matter. The Company has not
accrued any liability associated with this lawsuit, as management believes that
the reserve for doubtful accounts at January 23, 2000 is adequate. The
receivable has been reclassified as a long-term receivable in that management
does not expect that the lawsuit will be concluded, and the balance outstanding
to Peerless will be collected, within the next fiscal year.
F-17
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
The Company was sued by a major shareholder, the State of Wisconsin
Investment Board ("SWIB") in the Court of Chancery of the State of Delaware In
New Castle County in December 1999. The Company's former Chief Executive
Officer, Edward A. Gavaldon, has also been named as a defendant. The complaint
alleges that Peerless wrongfully influenced the passage of a proposal to
increase the number of shares in the stock option plan at the 1999 Annual
Meeting of Shareholders and provided misleading information to SWIB. Mr.
Gavaldon is alleged to have benefited wrongfully from these actions. SWIB seeks
to nullify the shareholder approved Amendment and is asking for unspecified
damages. The Company has filed an Answer and believes that it will prevail in
this matter. Discovery has been undertaken, but no hearing date has been set by
the Court on the matter.
9. Income Taxes:
The income tax provision for the years ended January 31, consists of:
2000 1999 1998
------ ------ ------
Current:
Federal $ 232 $2,995 $1,397
State 92 381 462
Foreign 937 702 92
------ ------ ------
1,261 4,078 1,951
------ ------ ------
Deferred:
Federal 365 (585) 830
State 275 63 218
------ ------ ------
640 (522) 1,048
------ ------ ------
$1,901 $3,556 $2,999
====== ====== ======
F-18
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
The foreign tax provision is comprised of foreign withholding taxes on
license fees and royalty payments.
Temporary differences at January 31 which give rise to deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,886 $ 2,033
Accrued liabilties 483 467
Allowance for doubtful accounts 69 75
Deferred revenue 263 2,172
Deferred expenses 133 136
Tax credit carryforwards 443 951
Other 1 2
-------- --------
Total deferred tax assets 3,278 5,836
-------- --------
Deferred tax liabilities:
Property and equipment (409) (355)
State taxes - (39)
-------- --------
Total deferred tax liabilities (409) (394)
-------- --------
Subtotal 2,869 5,442
Valuation allowance (1,137) (3,070)
-------- --------
Net deferred income tax asset $ 1,732 $ 2,372
======== ========
</TABLE>
The Company periodically evaluates the sufficiency of its deferred tax
asset valuation allowance, which is adjusted as deemed appropriate based on
operating results. The reduction in the valuation allowance in the current year
is primarily due to changes in federal income tax laws which will allow the
company to utilize purchased net operating loss carry forwards acquired through
business combinations.
F-19
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
The provision for income taxes for the years ended January 31, differs from the
amount that would result from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Foreign provision 17.5 11.7 2.0
Nondeductible acquisition expenses 13.8 - -
Other nondeductible expenses 9.0 20.1 15.9
State tax 4.7 4.7 13.4
Foreign tax and research and experimentation credits (20.6) (15.4) (1.5)
Change in valuation allowance (31.2) 3.7 (0.7)
Other 8.4 0.3 3.2
------ ------ ------
Provision for income taxes 35.6% 59.1% 66.3%
====== ====== ======
</TABLE>
As of January 31, 2000, the Company has net operating loss carryforwards of
approximately $4,815 for federal purposes, which begin to expire in fiscal year
2001.
10. Earnings Per Share:
Earnings per share for the years ended January 31, is calculated as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- --------------------------- -------------------------
Net Per-Share Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Earnings available to the common
stockholders $3,441 13,890 $ 0.25 $2,462 12,682 $ 0.19 $1,527 12,316 $ 0.12
====== ====== ======
Effect of Dilutive Securities
Options - 1,115 - 1,350 - 1,481
Convertible preferred stock Series A - 332 - 834 - 662
Convertible preferred stock Series B - 146 - 315 - 39
------ ------ ------ ------ ------ ------
Diluted EPS
Earnings available to common
stockholders with assumed conversions $3,441 15,483 $ 0.22 $2,462 15,181 $ 0.16 $1,527 14,498 $ 0.11
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Options to purchase 970 shares of common stock at $10.13 to $23.13 per
share, 629 shares of common stock at $13.50 to $22.38 per share and 157 shares
of common stock at $14.63 to $18.50 per share were outstanding during the years
ended January 31, 2000, 1999 and 1998, respectively, but were not included in
the computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares. In addition, the convertible
note payable was excluded because the impact on earning per share was
antidilutive.
F-20
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
11. Convertible Preferred Stock:
Prior to June 1999, PSN had authorized 10,000 shares of preferred stock, of
which 3,250 were designated as Series A, 3,000 were designated as Series B and
3,750 were undesignated.
During the year ended January 31, 1999, PSN issued 328 shares of
Convertible Preferred Stock Series B at a price of $2.50 per share in exchange
for $820 of cash. During 1998, PSN issued 400 shares of Convertible Preferred
Stock Series B at a price of $2.50 per share in exchange for $1,000 of cash.
In June 1999, upon closing of the merger between Peerless and PSN, all
outstanding shares of Convertible Preferred Stock Series A and Convertible
Preferred Stock Series B were converted into 835 and 365 shares of common stock,
respectively.
12. Stock Option and Purchase Plans:
Nonstatutory Stock Option Program: During 1992, the Board of Directors
authorized a nonstatutory stock option program for the purpose of granting
options to purchase a total of 222 shares of the Company's common stock to
employees. The Board of Directors reduced the number of shares authorized to 133
during 1994. Options vested annually, pro rata over a five-year period,
retroactive to the date of hire for each recipient. No options were outstanding
and no additional options were authorized under this plan in 2000.
The following represents option activity for the years ended January 31
under the nonstatutory option plan:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ---------------------------
Weighted Weighted
Average Average
Per Share Per Share
Number of Exercise Number of Exercise
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 2 $ 0.20 22 $ 0.50
Options exercised (2) $ 0.20 (20) $ 0.53
Options forfeited - -
------- -------
Options outstanding at year-end - 2 $ 0.20
======= =======
Options exercisable at year-end - 2 $ 0.20
======= =======
Options available for future grant -
=======
</TABLE>
F-21
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
1992 Stock Option Plan: During 1992, the Board of Directors authorized the
1992 Stock Option Plan for the purpose of granting options to purchase the
Company's common stock to employees, directors and consultants. The Board of
Directors determines the form, term, option price and conditions under which
each option becomes exercisable. Options to purchase a total of 1,055 shares of
common stock have been authorized by the Board under this plan.
The following represents option activity for the years ended January 31
under the 1992 Stock Option Plan:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Per Share Per Share Per Share
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 444 $ 1.39 683 $ 1.33 810 $ 1.36
Options granted - - -
Options exercised (277) $ 1.42 (202) $ 1.42 (120) $ 1.07
Options forfeited (3) $ 1.61 (37) $ 1.41 (7) $ 1.02
------------- --------- ---------
Options outstanding at year-end 164 $ 1.44 444 $ 1.43 683 $ 1.41
============= ========= =========
Options exercisable at year-end 158 $ 1.40 393 $ 1.39 340 $ 1.33
============= ========= =========
Options available for future grant -
=============
Weighted average remaining contractual
life in years 4.9
=============
Range of per share exercise prices for
options outstanding at year-end $0.53 - $1.65
=============
</TABLE>
Incentive Plan: In May 1996, the Board adopted the Company's 1996 Stock
Option Plan. The Company's 1996 Equity Incentive Plan (the "Incentive Plan") was
adopted by the Board of Directors in July 1996 as an amendment and restatement
of the Company's 1996 Plan. At that time, the Board had authorized and reserved
an aggregate of 1,267 shares of common stock for issuance under the Incentive
Plan. In June 1998, 1,200 additional shares of common stock were authorized and
reserved for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees and nonstatutory stock options, restricted stock purchase awards and
stock bonuses to employees, directors and consultants. The terms of stock
options granted under the Incentive Plan generally may not exceed 10 years. The
exercise price of options granted under the Incentive Plan is determined by the
Board of Directors, provided that the exercise price for an incentive stock
option cannot be less than 100% of the fair market value of the common stock on
the date of the option grant and the exercise price for a nonstatutory stock
option cannot be less than 85% of the fair market value of the common stock on
the date of the option grant. Options granted under the Incentive Plan vest at
the rate specified in each optionee's option agreement.
During 1994, the PSN Board of Directors authorized the 1994 Stock Option
Plan. The terms and conditions of this plan were generally the same as those of
the Peerless Incentive Plan except options issued under the PSN plan were
exercisable immediately subject to repurchase rights held by PSN. In June 1999,
upon completion of the merger between Peerless and PSN, the PSN options were
converted to options under the Company's Incentive Plan.
F-22
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
The following represents consolidated option activity under the Incentive
Plan for the years ended January 31:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------ ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Per Share Per Share Per Share
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year 1,884 $ 7.67 1,256 $ 5.67 1,025 $ 3.27
Option grants 1,180 $ 10.09 1,098 $ 8.95 417 $ 9.11
Options exercised (253) $ 2.33 (129) $ 4.20 (51) $ 3.17
Options forfeited (474) $ 9.34 (341) $ 4.96 (135) $ 2.73
------------- --------- ---------
Options outstanding at year-end 2,337 $ 8.96 1,884 $ 7.67 1,256 $ 5.67
============= ========= =========
Options exercisable at year-end 640 $ 6.87 621 $ 2.87 571 $ 1.36
============= ========= =========
Options available for future grant 765
=============
</TABLE>
For various price ranges, weighted average characteristics of outstanding
stock options under the Incentive Plan at January 31, 2000 were as follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Remaining Per Share Shares Per Share
Under Life Exercise Under Exercise
Range of Exercise Prices Option (Years) Price Option Price
- ------------------------ ---------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.00 to $2.31 299 5.6 $ 0.72 227 $ 0.66
$2.32 to $4.63 112 6.1 $ 3.30 67 $ 3.30
$4.64 to $6.94 410 6.9 $ 5.28 84 $ 5.10
$6.95 to $9.25 503 9.2 $ 8.24 31 $ 8.52
$9.26 to $11.56 128 7.8 $ 10.49 38 $10.99
$11.57 to $13.88 415 8.4 $ 13.07 24 $13.26
$13.89 to $16.19 348 7.6 $ 14.18 119 $14.22
$16.20 to $18.50 86 5.3 $ 17.44 40 $17.36
$18.51 to $20.81 10 7.6 $ 19.44 3 $19.34
$20.82 to $23.13 26 8.1 $ 22.20 7 $22.28
---------- ----------
Total 2,337 640
========== ==========
</TABLE>
Stock Bonuses: During both the years ended January 31, 2000 and 1999, the
Company granted 5 shares of common stock as stock bonuses to certain employees.
The Company recorded $48 and $78 of compensation expense related to these stock
bonuses during the years ended January 31, 2000 and 1999, respectively.
Deferred Compensation: During the year ended January 31, 1997, the Company
recorded deferred compensation costs of $452 for the difference between the
exercise price and the deemed fair value of the
F-23
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
Company's common stock at the date of grant for options issued under the
Incentive Plan. Of the total deferred expense, the Company recognized $65, $87
and $63 as compensation expense during the years ended January 31, 2000, 1999
and 1998, respectively. The remaining deferred compensation expense will be
amortized over the remaining vesting periods of the options.
Employee Stock Purchase Plan: In July 1996, the Company's Board of
Directors approved the Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 300 shares of the Company's common stock. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than 27
months. Plan offering periods have been six months since the inception of the
plan. Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board of Directors and meet
eligibility standards established by the Board of Directors. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by the
Board of Directors, to the purchase of shares of common stock. The price of
common stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the common stock on the commencement date or the
purchase date of each offering period. Employees may end their participation in
the offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company and its affiliates.
The Purchase Plan will terminate at the Board of Directors' discretion.
During the year ended January 31, 2000, 1999 and 1998, employees purchased
146, 87 and 26 shares of common stock at weighted average per share prices of
$5.48, $6.04 and $10.88, respectively.
F-24
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
SFAS 123: The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for its stock option plans
and employee stock purchase plan, and therefore does not recognize compensation
expense for grants of stock options or shares sold under the Purchase Plan.
Under SFAS No. 123, compensation cost would be recognized for the fair value of
the employee option rights and shares sold under the employee stock purchase
plan. In determining the fair value, the Company used the Black-Scholes model,
assumed no dividend per year, used expected lives ranging from 2 to 10 years,
expected volatility of 99.5%, 100.0% and 72.6% for the years ended January 31,
2000, 1999 and 1998, respectively, and risk free interest rate of 5.7% for the
year ended January 31, 2000, rates ranging from 4.0% to 5.75% for the year ended
January 31, 1999 and rates ranging from 5.75% to 7.25% for the year ended
January 31, 1998. The weighted average per share fair value of options granted
during the year with exercise prices equal to market price on the date of grant
was $8.83, $8.81 and $10.40 per share for the years ended January 31, 2000, 1999
and 1998, respectively. There were no options granted with exercise prices below
market price on the date of grant during any of the years presented. Had
compensation cost for the Company's grants under stock-based compensation plans
and shares sold under the Purchase Plan been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced to
the pro-forma amounts indicated below for the years ended January 31:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Net income as reported $ 3,441 $ 2,462 $ 1,527
======== ======== =======
Proforma net income (loss) $ (1,881) $ (2,215) $ 149
======== ======== =======
Earnings per share as reported:
Basic $ 0.25 $ 0.19 $ 0.12
======== ======== =======
Diluted $ 0.22 $ 0.16 $ 0.11
======== ======== =======
Proforma earnings (loss) per share:
Basic $ (0.14) $ (0.17) $ 0.01
======== ======== =======
Diluted $ (0.14) $ (0.17) $ 0.01
======== ======== =======
</TABLE>
13. Shareholder Rights Plan:
In October 1998, the Board of Directors of the Company adopted a
stockholder rights plan, as set forth in the Rights Agreement, dated as of
October 7, 1998 by and between the Company and Norwest Bank Minnesota, N.A., as
rights agent. Pursuant to the Rights Agreement, one Right was issued for each
share of the Company's 11,037 outstanding shares of common stock as of October
15, 1998. Each of the Rights entitles the registered holder to purchase, from
the Company, one one-thousandth of a share of Series A Junior Participating
Preferred Stock at a price of $35.50 per one one-thousandth of a share. The
Rights generally will not become exercisable unless and
F-25
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
until, among other things, any person or group not approved by the Board of
Directors acquires beneficial ownership of 15% or more of the Company's
outstanding common stock or commences a tender offer or exchange offer which
would result in a person or group beneficially owning 15% or more of the
Company's outstanding common stock. Upon the occurrence of certain events, each
holder of a Right, other than such person or group, would thereafter have the
right to purchase, for the then exercise price of the Right, shares of common
stock of the Company or a corporation or other entity acquiring the Company,
having a value equal to two times the exercise price of the Right. The Rights
are redeemable by the Company under certain circumstances at $0.01 per Right and
will expire, unless earlier redeemed or extended, on October 15, 2008.
14. Employee Savings Plans:
The Company and PSN maintain employee savings plans that qualify under
Section 401(k) of the Internal Revenue Code (the "Code") for all of the Peerless
and PSN full-time employees. The plans allow employees to make specified
percentage pretax contributions up to the maximum dollar limitation prescribed
by the Code. The Company has the option to contribute to both plans up to a
maximum of $2,000 per employee per year. Company contributions to the Peerless
plan during the years ended January 31, 2000, 1999 and 1998 were $245, $253 and
$192, respectively. The Company contributed $53 to the PSN plan in 2000. No
contributions were made to the PSN plan in 1999 and 1998. Subsequent to January
31, 2000, the PSN plan was terminated and merged into the Peerless plan.
PSIP maintains a profit sharing plan for all eligible employees. Company
contributions to the profit-sharing plan were $35, $35, and $49 for the years
ended January 31, 2000, 1999 and 1998, respectively. Subsequent to January 31,
2000, the PSIP plan was terminated.
15. International Operations:
The Company's long-lived assets are located principally in the United
States. The Company's revenues for the years ended January 31, which are
transacted in U.S. dollars, are derived based on sales to customers in the
following geographic regions:
2000 1999 1998
-------- -------- --------
United States $ 11,864 $ 14,633 $ 14,805
Japan 28,537 25,852 16,136
Other 1,675 592 17
-------- -------- --------
$ 42,076 $ 41,077 $ 30,958
======== ======== ========
F-26
<PAGE>
PEERLESS SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands, except per share amounts)
16. Subsequent Events (Unaudited)
On March 23, 2000, a lawsuit was filed in the Alameda County Superior Court
against the Company and its wholly owned subsidiary, Peerless Systems
Networking, Inc. (PSN) by Howard Sidorsky, a current employee and Vice President
of Marketing of PSN. Mr Sidorsky alleges that he is entitled to a commission of
not less than $630,000 for his participation in the 1999 sale to Peerless of
AUCO, Inc., the predecessor of PSN. The Company has not yet responded to the
complaint. The Company believes that it will prevail in this matter.
On March 16, 2000 PSN entered into an agreement to lease approximately 12,000
square feet of office space in Mountain View, California. The term of the lease
agreement is seven years. The Company has guaranteed the lease commitment of PSN
and has secured the first twelve months of the agreement with a $742,000 standby
letter of credit, which has been secured by a certificate of deposit of a like
amount. Over the next four years the value of the standby letter of credit shall
be reduced to $594,000, $445,000, $297,000 and $148,000, respectively.
On March 17, 2000, PSIP entered into an agreement to lease approximately 10,000
square feet of office space in Kent, Washington. The term of the lease agreement
is five years and is guaranteed by the Company.
The annual minimum rental payments under these operating leases are as follows:
For the Years
Ending January 31,
------------------
2001 $ 562
2002 967
2003 1,005
2004 1,044
2005 1,085
Thereafter 2,455
-------
$ 7,118
=======
F-27
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Charged
Balance at to Costs Balance at
Beginning and Deductions End
Description of Period Expenses (a) of period
----------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended January 31, 1998
Reserves deducted from assets to which they apply:
Allowances for uncollectible accounts receivable $ 100 30 $ (30) $ 100
Year Ended January 31, 1999
Reserves deducted from assets to which they apply:
Allowances for uncollectible accounts receivable $ 100 $ 420 $ (345) $ 175
Year Ended January 31, 2000
Reserves deducted from assets to which they apply:
Allowances for uncollectible accounts receivable $ 175 $ (248) $ 248 $ 175
</TABLE>
- ------
(a) Accounts written off, net of recoveries
S-1
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- ------
3.1(1) Certificate of Incorporation of the Company.
3.2(4) Amended and Restated Bylaws of the Company.
4.1 Instruments defining the rights of security holders. Reference is
made to Exhibits 3.1 and 3.2.
4.2(4) Rights Agreement, dated October 7, 1998, between the Company and
Norwest Bank Minnesota, N.A., as Rights Agent.
10.1(1) Form of Indemnity Agreement.
10.2(1)(2) 1992 Stock Option Plan (the "Option Plan"), as amended.
10.3(1)(2) 1996 Equity Incentive Plan.
10.4(1)(2) Form of Incentive Stock Option.
10.5(1)(2) Form of Nonstatutory Stock Option.
10.6(1)(2) 1996 Employee Stock Purchase Plan.
10.7(1) Third Party Development and License Agreement (the "Adobe Third
Party License"), dated September 18, 1992, between the
Registrant and Adobe Systems Incorporated ("Adobe").
10.8(1)(3) Reference Post Appendix #2 to the Adobe Third Party License,
dated February 11, 1993.
10.9(1) Amendment No. 1 to the Adobe Third Party License, dated November
29, 1993.
10.10(1)(3) PCL Development and License Agreement (the "PCL License"), dated
June 14, 1993, between the Registrant and Adobe.
10.11(1)(3) Amendment No. 1 to the PCL License, dated October 31, 1993.
10.12(1)(3) Letter Modification to the PCL License, dated August 5, 1994.
10.13(1)(3) Addendum No. 1 to the PCL License, dated March 31, 1995.
10.14(1)(3) Letter Modification to the PCL License, dated August 30, 1995.
10.15(1) Lease Agreement between the Company and Continental Development
Corporation, dated February 6, 1992, and Addendum, dated
February 6, 1992.
10.16(1) First Amendment to Office Lease, dated December 1, 1995, between
the Company and Continental Development Corporation.
10.18(1)(2) Employment Agreement with Lauren Shaw.
10.19(1)(2) Employment Agreement with Edward Gavaldon.
10.20(5) Second Amendment to Office Lease, dated April 8, 1997, between
the Company and Continental Development Corporation.
10.21(5) Third Amendment to Office Lease dated, December 16, 1997, between
the Company and Continental Development Corporation.
10.22(6) Fourth Amendment to Office Lease, dated April 22, 1998, between
the Company and Continental Development Corporation.
10.23 (7) Agreement and Plan of reorganization and Merger by and among
Peerless Systems Corporation, Auco Merger Sub, and Auco,
Inc., dated as of April 6, 1999.
10.24 (7) Employment Agreement with Adam Au.
10.25 Employment Agreement with Gordon Hanson.
10.26 Maruban Supplier/Distribution Agreement, dated December 14, 1999.
10.27 Lease PSN McKelvy Family Trust (386 Main Street)
Standard Industrial/Commmercial Single-Tenant Lease-Net, dated
March 14, 1997.
10.28 Lease PSN Terra Bella Inc. and Archie J. Snider dba Terra Snider
Joint Venture (1130 Terra Bella) Standard
Industrial/Commercial Single-Tenant Lease-Net, dated March
16, 2000.
10.29 Lease PSIP Kent Centennial Limited Partnership, dated January 31,
1996.
10.30 Lease PSIP Intrarock 1 LLC dated March 15, 2000.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to page 30.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule - Fiscal Year 1999 and 1998
27.3 Restated Financial Data Schedule - Quarters - Fiscal Year 2000
27.4 Restated Financial Data Schedule - Quarters - Fiscal Year 1999
- -------------
(1) Previously filed in the Company's Registration Statement on Form S-1 (File
No. 333-09357), as amended and incorporated herein by reference.
<PAGE>
(2) Management contract or compensatory plan or arrangement.
(3) Subject to Confidential Treatment Order.
(4) Previously filed in the Company's Current Report on Form 8-K, filed
October 8, 1998, and incorporated herein by reference.
(5) Previously filed in the Company's 1998 Annual Report filed on Form 10-K,
filed April 24, 1998, and incorporated herein by reference.
(6) Previously filed in the Company's 1999 Annual Report filed on form 10-K,
filed April 26, 1999, and incorporated herein by reference.
(7) Previously filed in the Company's Registration Statement on Form S-4 (File
No. 333-77049) as amended and incorporated herein by reference.
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, dated as of December 20, 1999 (this "Agreement") by and
between HDE, Inc. (the "Company"), a Washington corporation, and Gordon L.
Hanson (the "Executive").
R E C I T A L S
- - - - - - - -
A. The Executive is currently employed as the President of the Company and
has made and is expected to continue to make major contributions to the short-
and long-term profitability, growth and financial strength of the Company;
B. The Company is currently contemplating a merger (the "Merger") with a
wholly owned subsidiary of Peerless Systems Corporation ("Peerless");
C. The Company desires to assure itself of both present and future
continuity of management in light of the Merger and subsequent to the Merger;
and
D. The Company desires to provide additional inducement for the Executive
to continue to remain in the ongoing employ of the Company.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. At-Will Employment. Subject to the terms and conditions of this
------------------
Agreement, the Company agrees to continue to employ Executive on an at-will
basis and Executive agrees to remain in the employ of the Company on an at-will
basis. With respect to periods following the Merger, references to the "Company"
shall include the surviving corporate parent in the Merger.
2. Position. During his employment with the Company, Executive
--------
agrees to serve the Company, and the Company shall employ Executive, as Vice
President and General Manager, Imaging Products Division, or in such other
comparable or superior executive capacity or capacities as may be specified from
time to time by the Chief Executive Officer of the Company.
3. Operation Dates of Agreement; and Duties.
----------------------------------------
(1) Operative Dates of Agreement. This Agreement shall be binding
----------------------------
upon the parties hereto immediately upon its execution, but, anything in this
Agreement to the contrary notwithstanding, the operative provisions of this
Agreement shall not be effective unless
<PAGE>
and until the Merger is consummated. Upon the closing of the Merger, without
further action, this Agreement shall become immediately in effect. After the
operative date, this Agreement shall continue in effect during Executive's
employment with the Company until the first (1st) anniversary of the closing
date of the Merger, at which time this Agreement shall automatically terminate
without further action.
(2) Duties. During his employment under this Agreement, and
------
except for illness, vacation periods and leaves of absence, all in accordance
with the policies and procedures of Peerless in effect from time to time,
Executive shall devote his best efforts and substantially all his business time,
attention, skill and efforts to the business and affairs of the Company and its
affiliated companies, as such business and affairs exist immediately following
consummation of the Merger and as they may be hereafter changed or added to,
under and pursuant to the general direction of the Board of Directors of the
Company; provided, however, that, with the approval of the Chief Executive
-------- -------
Officer of the Company (which shall not be unreasonably withheld), Executive may
serve, or continue to serve, on the boards of directors of, or hold any other
offices or positions in, companies or organizations which, in such officer's
judgment, will not present any conflict of interest with the Company or any of
its subsidiaries or affiliates or divisions, or materially affect the
performance of Executive's duties pursuant to this Agreement. The Company shall
retain full direction and control of the means and methods by which Executive
performs the services for which he is employed hereunder. The services which are
to be performed by Executive hereunder are to be substantially rendered in the
State of Washington.
4. Compensation and Reimbursement of Expenses;
------------------------------------------
Other Benefits;
--------------
(1) Compensation. During his employment under this Agreement,
------------
Executive shall be paid a salary at the rate of $150,000.00 per year, or such
higher salary as may be from time to time approved by the Board of Directors (or
any duly authorized committee thereof) of the Company ("Base Salary"), plus such
additional incentive compensation, if any, as may be voted to him yearly by the
Board of Directors (or any duly authorized committee thereof).
(2) Reimbursement of Expenses. The Company shall pay or
-------------------------
reimburse Executive, in accordance with its normal policies and practices, for
all reasonable travel and other expenses incurred by Executive in performing his
obligations under this Agreement.
(3) Other Benefits. During the period of employment under this
--------------
Agreement, Executive shall be entitled to receive all other benefits of
employment generally available to other members of the Company's management and
those benefits for which
<PAGE>
executives are or shall become eligible, when and as he becomes eligible
therefor, including, without limitation, three weeks of paid vacation.
(4) Stock Options. Executive shall be granted an option with
-------------
respect to 65,000 shares of Peerless common stock (the "Base Amount") which is
to vest over a four year period in equal annual amounts of 16,250 shares, with
the first vesting date occurring on the date that is one year from the closing
date of the Merger, and the remaining vesting dates occurring on each subsequent
anniversary of such closing date. The grant will be effective upon the closing
of the Merger, and the exercise price shall be equal to the closing price of the
common stock of Peerless on the Nasdaq National Market on the business day
immediately following consummation of the Merger. As long as the Executive
remains an executive of the Corporation, Executive shall also be eligible to
participate in the long term stock option incentive stock option program under
the Peerless' Executive Compensation Plan, as made available and in accordance
with the policies and procedures of said Plan.
(5) Bonus. Provided that the total cash and cash equivalents
-----
reflected in the Final Closing Balance Sheet is greater than the Minimum Cash
Balance (as such items are defined in the Merger Agreement), Executive shall be
entitled to receive a one-time cash bonus in an amount equal to such excess.
Executive shall also be eligible to receive an annual bonus, up to a maximum of
fifty thousand dollars ($50,000), based upon earnings per share goals for the
entire company, as may be determined by the Board of Directors of the Company.
5. Termination.
-----------
(1) For Cause. Notwithstanding anything herein to the contrary,
---------
and specifically reiterating the at-will nature of Executive's employment, which
can be terminated by either Executive or Company for any reason or no reason
without advance notice, the Company may, without liability, also terminate
Executive's employment hereunder for Cause (as defined herein) at any time upon
written notice from the Board of Directors (or any duly authorized committee
thereof). As used herein, Cause shall mean the occurrence of any of the
following events: (i) Executive's conviction of or guilty plea to the commission
of an act or acts constituting a felony under the laws of the United States or
any state thereof; (ii) action by Executive toward the Company involving
personal dishonesty, theft or fraud in connection with Executive's duties as an
officer of the Company; or (iii) Executive's willful failure to abide by or
follow lawful directions of the Board of Directors that is not cured after
notice to the Executive. If the Company terminates Executive's employment for
Cause, Executive's right to compensation under this Agreement will terminate as
of the date of such termination and all of the Company's obligations hereunder
shall immediately cease and terminate, except that Executive shall be entitled
to receive all compensation to which he is due under federal and state law or
pursuant to Company policy up through and including the date of termination.
<PAGE>
(2) Death. If Executive's employment hereunder is terminated by
-----
reason of Executive's death, Executive's (or Executive's estate's) right to
compensation under this Agreement will terminate as of the date of such
termination and all of the Company's obligations hereunder shall immediately
cease and terminate, except that Executive's estate will be entitled to received
all compensation to which Executive is due under federal and state law or
pursuant to Company policy up through and including the date of termination.
(3) Disability. If the Company terminates Executive's employment
----------
by reason of Executive's Disability (as defined herein), Executive's right to
benefits under this Agreement will terminate as of the date of such termination
and all of the Company's obligations hereunder shall immediately cease and
terminate, except that Executive shall be entitled to receive all compensation
to which Executive is due under federal and state law or pursuant to Company
policy up through and including the date of termination. As used herein,
Executive's Disability shall mean that, due to physical or mental illness,
Executive shall have been absent from his duties hereunder on a full-time basis
for one hundred eighty (180) consecutive days, and within thirty (30) days after
written notice of termination is given (which may occur before or after the end
of such 180-day period) Executive shall not have returned to the performance of
his duties hereunder on a full-time basis.
(4) Termination by the Company other than for Cause, Death, or
----------------------------------------------------------
Disability, or Termination by Executive for Good Reason. If the Company
- -------------------------------------------------------
terminates Executive's employment for any reason other than for cause, death or
disability, pursuant to Sections 5(a)-(c) above, or Executive terminates his
employment for Good Reason (as defined herein) then, notwithstanding anything
herein to the contrary and in complete satisfaction and discharge of all of its
obligations to Executive hereunder, Executive shall be entitled to receive all
compensation to which Executive is due under the terms of this Agreement as if
the Executive had remained in the employment of the Company during the term of
this Agreement as set forth in Section 3(a) hereof. For purposes of this
Agreement, Executive shall have "Good Reason" to terminate his employment with
the Company following the occurrence of any of the following events, without
Executive's written consent thereto, provided, that Executive shall have given
--------
Company written notice specifying the conduct alleged to have constituted such
Good Reason and Company has failed to cure such conduct, if curable, within
fifteen (15) days following receipt of such notice:
(A) Any failure to elect or reelect or otherwise to maintain
Executive in the office or the position, or a substantially equivalent
office or position, of or with the Company, as described in Paragraph 2;
(B) A significant adverse change in the nature or scope of
the authorities, powers, functions, responsibilities or duties described in
Paragraph 3(b);
<PAGE>
(C) A reduction in Executive's Base Salary described in
Paragraph 4(a);
(D) The Company requires the Executive to have his principal
location of work changed to any location that is outside a one hundred
(100) mile radius of the greater Seattle, Washington area; or
(E) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company or any
successor.
(5) Termination by Executive other than for Good Reason. If
---------------------------------------------------
Executive terminates his employment hereunder for any reason other than for Good
Reason, Executive shall be entitled to receive all compensation to which
Executive is due under federal and state law or pursuant to Company policy up
through and including the date of termination.
6. Obligations of Executive During and After Employment.
----------------------------------------------------
(1) Executive agrees that during his employment under this
Agreement, he will engage in no other business activities, directly or
indirectly, which are or may be competitive with or which might place him in a
competing position to that of the Company, or any affiliated company, without
the prior written consent of the Chief Executive Officer of the Company.
(2) Executive acknowledges and agrees that (i) during the course
of his employment Executive will have produced and/or have access to
confidential information, records, notebooks, data, formulae, specifications,
trade secrets, customer lists and secret inventions and processes of Company and
its affiliated companies, and (ii) the unauthorized use or sale of any of such
confidential or proprietary information at any time would constitute unfair
competition with Company. Executive promises and agrees not to engage in any
unfair competition with Company either during or after the term of this
Agreement. Therefore, during and subsequent to his employment by Company, or by
an affiliated company, Executive agrees to hold in confidence and not, directly
or indirectly, disclose, use, copy or make lists of any such information, except
to the extent expressly authorized by Company in writing. All records, files,
drawings, documents, equipment, and the like, or copies thereof, relating to
Company's business, or the business of an affiliated company, which Executive
shall prepare, or use, or come into contact with, shall be and remain the sole
property of Company, or of an affiliated company, and shall not be removed
(except to allow Executive to perform his responsibilities hereunder while
traveling for business purposes or otherwise working away from his office) from
the Company's or the affiliated company's premises without its prior written
consent, and shall be promptly returned to Company upon termination of
employment with Company and its affiliated companies. This paragraph 6(b) shall
survive the termination or expiration of this Agreement.
<PAGE>
7. General Provisions.
------------------
(1) Executive's rights and obligations under this Agreement shall
not be transferable by assignment or otherwise, nor shall Executive's rights be
subject to encumbrance or subject to the claims of Company's creditors. Nothing
in this Agreement shall prevent the consolidation of Company with, or its merger
into, any other corporation, or the sale by Company of all or substantially all
of its properties or assets; and this Agreement shall inure to the benefit of,
be binding upon and be enforceable by, any successor surviving or resulting
corporation, or other entity to which such assets shall be transferred. This
Agreement shall not be terminated by the voluntary or involuntary dissolution of
the Company.
(2) This Agreement and the rights of Executive with respect to
the benefits of employment referred to in Paragraph 4 constitute the entire
agreement between the parties hereto in respect of the employment of Executive
by Company. This Agreement supersedes and replaces all other prior oral and
written agreements, understandings, commitments, and practices between the
parties.
(3) Any dispute, controversy or claim arising under or in
connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the Rules of the American
Arbitration Association then in effect. Judgment upon the award rendered by the
arbitrator may be entered in any court of competent jurisdiction. Any
arbitration held pursuant to this paragraph in connection with any termination
of Executive's employment shall take place in Northern California at the
earliest possible date. If any proceeding is necessary to enforce or interpret
the terms of this Agreement, or to recover damages for breach thereof, the
prevailing party shall be entitled to reasonable attorneys fees and necessary
costs and disbursements.
(4) The provisions of this Agreement shall be regarded as
divisible, and if any of said provisions or any part thereof are declared
invalid or unenforceable by a court of competent jurisdiction, the validity and
enforceability of the remainder of such provisions or parts thereof and the
applicability thereof shall not be affected thereby.
(5) This Agreement may not be amended or modified except by a
written instrument executed by Company and Executive.
(6) This Agreement and the rights and obligations hereunder shall
be governed by and construed in accordance with the laws of the State of
California.
(7) If, but for one or more provisions of this Agreement, the
Merger would qualify for "pooling of interests" accounting treatment, then (A)
this Agreement shall, to the extent practicable, be interpreted and/or reduced
in scope or effect to the extent necessary to permit such accounting treatment,
and (B) to the extent that the application of clause (A) of this
<PAGE>
Section 8(g) does not preserve the availability of such accounting treatment,
then, to the extent that any provision of this Agreement would disqualify the
Merger as a "pooling" transaction (including, if applicable, the entire
Agreement), such provision shall be null and void as of the effective date
hereof. All determinations under this Section 8(g) shall be made by the
accounting firm whose opinion with respect to "pooling of interests" treatment
is required as a condition to the consummation of the Merger.
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date first above written.
HDE, Inc.
By /s/ Edward A. Gavaldon
-----------------------
Name: Edward A. Gavaldon
Title: President
EXECUTIVE
By /s/ Gordon L. Hanson
--------------------
Name: Gordon L. Hanson
<PAGE>
EXHIBIT 10.26
MARUBUN/PEERLESS Supplier/Distribution Agreement
SUPPLIER/DISTRIBUTION AGREEMENT
THIS AGREEMENT, is concluded and made effective on this December 14, 1999 by and
between MARUBUN Corporation, a corporation organized and existing under the laws
of Japan, having principal place of business at Marubun Daiya Bldg., 8-1,
Nihonbashi Odenmacho, Chuo-ku, Toyko 103-8577, Japan (hereinafter referred to as
"MARUBUN") and PEERLESS Systems (Registered Trademark) Corporation, a Delaware
corporation having its principal place of business at 2381 Rosecrans Avenue, El
Segundo, CA 90245 USA (hereinafter referred to as "PEERLESS"), either or both of
which is referred to as a "party" or the "parties".
RECITALS:
WHEREAS, MARUBUN is desirous of stable supplies of a certain product hereinafter
specified in Attachment A (hereinafter referred to as the "PRODUCTS") from
PEERLESS;
WHEREAS, MARUBUN will supply PRODUCTS and special value-added services to any
Japan-based customers that require said PRODUCTS and services;
WHEREAS, MARUBUN will be the exclusive distributor of the PRODUCT in Japan,
WHEREAS, MARUBUN is desirous of supplying PRODUCTS to MARUBUN throughout the
period hereinafter specified;
NOW, THEREFORE, the parties hereby agree as follows:
APPLICATION. This Agreement shall be applied to all the transactions with regard
to PRODUCTS between MARUBUN and PEERLESS. In case any INDIVIDUAL RELEASE as
stipulated in Paragraph 3.1 herein conflicts with this Agreement, this Agreement
shall prevail over the conflicting parts of such INDIVIDUAL RELEASE.
December 6, 1999 Page 1 Initials: MARUBUN__, PEERLESS R
<PAGE>
MARUBUN/PEERLESS Supplier/Distribution Agreement
1. PRODUCTS. PRODUCTS subject to this Agreement are listed in Attachment A.
The description of PRODUCTS is as specified in an INDIVIDUAL RELEASE or
otherwise agreed by both parties.
2. Forecasting
2.1. Demand Forecast
2.1.1. MARUBUN shall provide PEERLESS a PRODUCT demand forecast,
which shall cover a minimum of twelve (12) months detailed
by PRODUCT and month.
2.1.2. Forecasts shall constitute actual production estimates of
MARUBUN's anticipated requirements for PRODUCTS. This
forecast shall not contractually obligate PEERLESS to
supply, nor contractually obligate MARUBUN to purchase the
quantities of PRODUCTS set forth in such forecasts.
2.2. Forecast Updates
2.2.1. By the first of every month, during the term of this
Agreement, MARUBUN will provide PEERLESS an updated PRODUCTS
demand forecast covering a rolling twelve (12) month period
(not to extend beyond the term of the Agreement), which will
be reviewed for approval by PEERLESS within ten (10) days of
receipt by PEERLESS.
2.3. Forecast Acceptance
2.3.1. PEERLESS shall have the right to ask for clarification of
data or format.
3. Order
3.1. Individual Releases
3.1.1. The actual transaction for PRODUCTS between the parties
hereof shall be carried out by exchanging MARUBUN order-
release forms and PEERLESS' order acknowledgment forms both
in written form duly signed by respective managers with
execution authority (hereinafter referred to as "INDIVIDUAL
RELEASE"). Without limited the foregoing, to the extent the
provisions of a purchase order conflict with the terms and
provisions of this Agreement, the terms and provisions of
this Agreement shall control. Each INDIVIDUAL RELEASE shall
specify:
3.1.1.1. MARUBUN's purchase order number
3.1.1.2. MARUBUN's tax status -exempt or non-exempt
3.1.1.3. Ship to location-complete address
3.1.1.4. Bill to location -complete address
3.1.1.5. Order from location-complete address
3.1.1.6. Shipping instructions, including preferred carrier
and carrier account number
3.1.1.7. The agreement number of this agreement
3.1.1.8. Name of MARUBUN designated contact for procurement
3.1.1.9. Product part numbers and quantities being ordered
(in increments of the Minimum Order Quantity)
3.1.1.10. Product's negotiated unit price per Attachment A
3.1.1.11. Requested receipt dates (in increments of the
Minimum Shipment/Pack Quantity)
3.2. Quantity Discounts
3.2.1. MARUBUN agrees that if MARUBUN decreased the total quantity
of an order that has a unit price based on an agreed to
quantity MARUBUN will pay an applicable higher unit price
for previous shipments and for new shipments.
3.3. Lead Times
3.3.1. PEERLESS shall publish manufacturing lead times on the fifth
working day of each month.
3.3.2. MARUBUN shall issue individual orders in accordance with the
published lead times.
3.4. Minimum Order Amount
3.4.1. PEERLESS shall publish minimum Amount orders on the fifth
working day of each month.
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3.4.2. MARUBUN shall issue individual orders in accordance with the
published minimum order quantities. Failure to comply shall
result in an increase in the unit cost at a pre-negotiated
rate.
3.5. Minimum Shipment/Pack Quantity
3.5.1. PEERLESS shall publish minimum shipment quantities on the
fifth working day of each month.
3.5.2. MARUBUN shall issue individual orders in accordance with the
published minimum shipment quantities. Failure to comply
shall result in an increase in the unit cost at a pre-
negotiated rate.
3.6. Acceptance Criteria
3.6.1. PEERLESS shall acknowledge MARUBUN's order in writing within
10 calendar days.
3.6.2. PEERLESS shall reject any order that it cannot reasonably
deliver according to the terms of the release.
3.6.3. Acceptance by PEERLESS shall be deemed to have occurred if
PEERLESS fails to accept or reject the order within 10
calendar days after receiving such order.
3.7. Order Release Rescheduling
3.7.1. MARUBUN may reschedule the delivery date of any undelivered
PRODUCTS scheduled for delivery provided: (i) the notice is
received by PEERLESS more than thirty (30) days prior to
shipment date, (ii) the rescheduled delivery date is within
sixty (60) days after the shipment date.
3.7.2. Once a shipment date is rescheduled, the new shipment date
is firm and cannot be rescheduled by MARUBUN.
3.7.3. Only one (1) reschedule for an order line item (scheduled
ship date) is permitted of PRODUCT schedule for shipment.
MARUBUN shall be liable for any additional costs or expenses
incurred by PEERLESS in the delivery date by MARUBUN.
3.8. Order Release Cancellation
3.8.1. MARUBUN can cancel any order release for convenience prior
to production start. If cancellation is after production
start, MARUBUN agrees to pay PEERLESS 100% of the release.
3.8.2. If PRODUCT is rescheduled by MARUBUN and subsequently
cancelled, cancellation charges for such rescheduled product
shall be computed based upon the originally scheduled
delivery date.
3.8.3. If MARUBUN directs PEERLESS to stop work or hold shipments,
such action shall be deemed equivalent to a cancellation,
unless otherwise mutually agreed in writing.
4. Payment
4.1. Price
4.1.1. PEERLESS shall guarantee that the unit price of PRODUCTS in
this Agreement is not higher than that charged to any third
party under the same or the similar conditions to this
Agreement.
4.1.2. Unit price shall be as agree upon by PEERLESS and MARUBUN
as set forth in Attachment A.
4.2. Invoices
4.2.1. PEERLESS shall invoice MARUBUN at the time of shipment for
all PRODUCTS shipped.
4.3. Terms
4.3.1. Prices and payment shall be in U.S. dollars in the U.S.
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4.3.2. PRODUCTS shall be shipped F.O.B. Place of Manufacture as
designed by PEERLESS unless otherwise agreed upon in
writing. The said trade terms shall be construed according
to the California Commercial Code.
4.3.3. MARUBUN shall pay the full amount of the price of the
PRODUCT shipped in a given month by the 15th of the
following month in which the invoice was submitted.
4.3.4. In the event MARUBUN fails to pay the amount in full within
such period, MARUBUN shall in addition pay PEERLESS interest
on the remaining unpaid balance, commencing to accrue 31
calendar days after the date of the invoice, at the lesser
1.5 percent simple interest per month or the highest rate of
interest permitted by law with respect to such balance.
4.4. Taxes, Tariffs & Duties
4.4.1. Unless otherwise agreed between PEERLESS and MARUBUN prior
to the completion of manufacture of each pertinent order,
MARUBUN shall have sole responsibility for collecting,
reporting, and/or paying all income, sales, excise,
property, value-added tax, and other taxes imposed by any
governmental authority, as they pertain to MARUBUN's duties,
obligations, and performance hereunder. Without limiting the
generality of the foregoing, MARUBUN shall be responsible
for reporting and paying all customs, import, and remittance
duties or assessments arising from the import of the Product
into any and all countries, except for taxes based on
PEERLESS' net income.
5. Customer Pricing. It is agreed between the parties that all pricing for
Product, as defined in Attachment A herein, to third parties, as offered by
MARUBUN, shall be reviewed and approved by PEERLESS prior to the initial
release of each pricing plan. Once approved by PEERLESS, and attached
hereto as Attachment B, MARUBUN may offer this pricing plan without further
prior approval from PEERLESS.
6. Delivery
6.1. Delivery Date
6.1.1. MARUBUN shall designate the delivery date of PRODUCTS to
MARUBUN in each individual release.
6.1.2. PEERLESS shall obtain MARUBUN's consent if PEERLESS intends
to deliver PRODUCTS before or after the delivery date.
6.1.3. In case such revised delivery schedule cannot satisfy
MARUBUN, then MARUBUN may indicate PEERLESS a schedule
acceptable to MARUBUN, require air shipment or other rapid
transport method, or terminate this Agreement and INDIVIDUAL
RELEASE partly or entirely at its discretion.
6.1.4. MARUBUN and PEERLESS shall negotiate in good faith as to
indemnity for the loss, if any, due to such delay or change.
6.2. Delay of delivery
6.2.1. PEERLESS shall not be liable nor in default of the Agreement
if PEERLESS' supply of the PRODUCTS becomes constrained or
if, for any reason beyond PEERLESS' reasonable control,
including inventory shortages, work slowdowns or stoppages,
PEERLESS is unable to fill the order or make delivery. In
such event, PEERLESS may, as PEERLESS deems reasonable,
reduce quantities or delay shipments to MARUBUN.
6.3. Shipment & Packing
6.3.1. Unless otherwise agreed, PEERLESS shall, at its expense,
package and label PRODUCTS in accordance with PEERLESS'
customary procedures.
6.3.2. Unless MARUBUN designates a preferred carrier shipment shall
be by a carrier selected by PEERLESS.
6.3.3. PEERLESS shall devote reasonable efforts to ship the
PRODUCTS within the quoted lead-time plus 5 working days
after receipt and acceptance of the order.
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6.3.4. PEERLESS shall make all the arrangements at its expense
until the delivery so that PRODUCTS can be transported
safely to the aforementioned destination.
6.3.5. Title and all risks of loss or damage of PRODUCTS shall
transfer from PEERLESS to MARUBUN upon delivery thereof.
6.3.6. In case of necessity, MARUBUN may have PEERLESS transport
PRODUCTS to any destination other than the place that is
stipulated in INDIVIDUAL RELEASE, upon MARUBUN's prior
written notice.
6.4. Inspection
6.4.1. PEERLESS shall perform inspection of PRODUCTS at their own
expense and responsibility under the Inspection Standard
agreed by both parties before the shipment of PRODUCTS.
PEERLESS shall deliver only the units of PRODUCTS that have
passed this shipping inspection.
6.4.2. MARUBUN shall carry out an acceptance inspection under the
Inspection Standard agreed by both parties within reasonable
period after the receipt of PRODUCTS by MARUBUN at MARUBUN's
own expense and responsibility.
6.4.3. MARUBUN shall notice PEERLESS in writing within 5-day period
and inform PEERLESS of the nature of such nonconformity in
reasonable detail.
6.4.4. PEERLESS may take whatever actions deemed necessary or
appropriate to remedy or cure such nonconformity in the
PRODUCTS in any reasonable manner, during the 60-day period
following PEERLESS' receipt of such notice.
6.4.5. If 60 days elapse after PEERLESS has received the notice of
nonconformity and PEERLESS has not remedied or cured such
nonconformity in the PRODUCTS, MARUBUN may return to
PEERLESS any PRODUCTS in such shipment that demonstrate
material nonconformity.
6.5. Quality Assurance
6.5.1. In case MARUBUN acknowledges it necessary, MARUBUN may
inspect the production and quality control procedure
PRODUCTS, observe the shipping-inspection of PEERLESS at
PEERLESS's facility(s) or the ordinary ship place(s) with
prior written notice and guide PEERLESS with regard to such
production and quality con procedures and/or such shipping
inspection.
6.5.2. The inspection in the production and quality control
procedures of PRODUCTS, observation and guidance shall be
performed by MARUBUN's qualified representatives. All of the
expenses for such inspection, observation and guidance
(which include voyage expenses and hotel expenses for
MARUBUN's qualified representatives) shall be borne by
PEERLESS when aforementioned inspection, observation and
guidance are based upon PEERLESS' request
6.6. Export Regulations
6.6.1. MARUBUN shall comply with all export laws and restrictions
and regulations of the Department of Commerce, or other U.S.
or foreign agency or authority, and shall not export, or
allow re-export of the PRODUCTS or any Confidential
Information or any direct product thereof in violation of
any such restrictions, laws or regulations, or to
Afghanistan, People's Republic of China or any Group Q, S,
W, Y or Z country specified in the then current Supplement
No. 1 to Section 770 of the U.S. Export Administration
Regulations (or any successor supplement or regulations).
6.6.2. MARUBUN shall obtain and bear all expenses relating to any
necessary licenses and/or exemptions with respect to the
export from the U.S., of all material or items deliverable
by PEERLESS to any location, and shall demonstrate to
PEERLESS compliance with all applicable laws, and
regulations prior to delivery thereof by PEERLESS
6.6.3. MARUBUN agrees to defend, indemnify, and hold harmless
PEERLESS from and against any claim, loss liability,
expense, or damage (including fines and legal fees) incurred
by
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PEERLESS with respect to any of MARUBUN's export or re-
export activities contrary to foregoing instructions.
7. Warranty
7.1. Conforming Material
7.1.1. PEERLESS shall warrant that PRODUCTS conform to MARUBUN's
specifications and free from any defects in quality,
material and workmanship for six (6) months from the date
when PRODUCTS have passed MARUBUN's acceptance inspection
(hereinafter referred to as "WARRANTY TERM") .
7.1.2. In case any defect is found in PRODUCTS within WARRANTY
TERM MARUBUN shall notify PEERLESS thereof and may adopt
either of the following measures as determined by the lowest
cost to PEERLESS, and then, PEERLESS shall accept MARUBUN's
decision and settle the matter at its cost immediately.
7.1.2.1. to repair the defective unit on MARUBUN's site and
demand the payment of the cost thereof from
PEERLESS, or
7.1.2.2. to return such defective unit to PEERLESS and
demand replacement from PEERLESS
7.2. Nonconforming Material
7.2.1. Product damaged in transit shall be returned to PEERLESS
within 30 days after receipt, accompanied by such
documentation as may reasonably be required to assert any
claims that may lie against the carrier causing such damage.
7.2.2. In case MARUBUN finds any non-qualified units of PRODUCTS
that does not conform to the specification specified by
MARUBUN and/or conditions under this Agreement and /or
INDIVIDUAL RELEASE through acceptance-inspection, MARUBUN
shall notify PEERLESS thereof in writing and MARUBUN may
adopt either of the follow measures at MARUBUN's discretion:
7.2.2.1. to repair PRODUCTS by MARUBUN or PEERLESS at the
expense of PEERLESS
7.2.2.2. to refuse the receipt of such non-qualified unit
and demand replacement therefor without delay
expenses occasioned thereby such as sending back
of such non-qualified unit and transport of
substitute shipment be borne by PEERLESS
7.2.2.3. to reduce the price of non-qualified unit of
PRODUCTS from the amount price of PRODUCTS at
subsequent INDIVIDUAL RELEASE or to demand the
payment of such price
7.2.2.4. to terminate this Agreement and/or INDIVIDUAL
RELEASE partly or in its entirety
7.2.3. In case the quantity of PRODUCTS delivered by PEERLESS has
not conformed to agreed quantity in INDIVIDUAL RELEASE,
MARUBUN shall notify PEERLESS thereof and may demand
PEERLESS, to take back, supply the balance agreed quantity
within the period designated by MARUBUN, or adjust at
subsequent INDIVIDUAL RELEASES at PEERLESS' expense unless
otherwise agreed upon
7.2.4. In case MARUBUN has incurred any damage because of such non-
qualified units of PRODUCTS and/or shortage, MARUBUN and
PEERLESS shall negotiate in good faith as to indemnity for
the loss.
7.3. Latent Defects
7.3.1. Notwithstanding after WARRANTY TERM, in case any serious
latent defect(s) or the same or very similar defects occur
frequently or continuously on the same spot or area of
PRODUCTS and MARUBUN recognizes such defects fall in the
category of so called "EPIDEMIC FAILURE" rationally.
7.4. Patent Defects
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7.4.1. A patent defect is defined as a defect that is discernable
upon inspection of the product in the exercise of ordinary
care and prudence.
7.4.2. MARUBUN is deemed to have accepted nonconforming material if
after 45 days fails to (1) perform an incoming inspection of
the material, (2) notify the seller of the nonconformance
and (3) make an effective rejection of the material.
7.5. Exclusion of Warranties
7.5.1. EXCEPT AS SPECIFICALLY PROVIDED HEREIN, PEERLESS DISCLAIMS
ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING THE IMPLIED
WARRANTIES OR MERCHANTABILITY, TITLE AND FITNESS FOR A
PARTICULAR PURPOSE AND AGAINST INFRINGEMENT. Without
limiting the foregoing, PEERLESS does not warrant that any
of the PRODUCTS that it provides will be error free or
operate without interruption. PEERLESS does not make, and
hereby expressly disclaims, any representation or warranty
to any End User or other third party. MARUBUN shall not have
the right to make or pass though, and shall take all
measures necessary to insure that neither it nor any of its
agents or employees attempt to make or pass through, any
such representation or warranty on behalf of PEERLESS.
8. Product Liability Indemnification
8.1. Damages
8.1.1. PEERLESS agrees, at its expense, to protect, indemnify and
hold MARUBUN or its customers harmless from and against all
liability resulting from any and all claims by third parties
for loss, damage or injury (including death) allegedly
caused by any PRODUCTS supplied by PEERLESS under this
Agreement, by reason of any defect in design, material,
workmanship or warning, to the extent not caused by misuse,
abuse or other fault directly attributable to MARUBUN or its
customers and provided that PEERLESS is notified by MARUBUN
of all such claims within a reasonable period of time
following MARUBUN's initial notification of such claims, and
provided that PEERLESS is given full control over any
negotiation, arbitration, or litigation concerning such
claims. The provisions of his Section 8 shall survive the
term and any termination of this Agreement.
8.1.2. Except as for payments pursuant to PAYMENT above, in no
event or circumstances shall each party's total liability
under this Agreement to the other party for damages however
denominated, attorneys fees and costs from a judgment
arising out of any and all actions and proceedings brought
by either party against the other party for any cause of
action sounding in tort, contract or otherwise, exceed the
lesser of the amounts actually paid by MARUBUN to PEERLESS
during the twelve months prior to the event sued upon or
five hundred thousand dollars ($500,000.00).
8.1.3. IN NO EVENT SHALL PEERLESS BE LIABLE FOR ANY SPECIAL,
INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES, INCLUDING,
WITHOUT LIMITATION DAMAGES FOR LOSS OF USE, LOST PROFITS OR
LOSS OF DATA OR INFORMATION OF ANY KIND, ARISING OUT OF OR
IN CONNECTION WITH THIS AGREEMENT, WHETHER OR NOT PEERLESS
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE.
9. Intellectual Property
9.1. Rights
9.1.1. Execution of this Agreement does not signify that MARUBUN is
given any right with regard to Intellectual Property and/or
technical information concerning PRODUCTS as patents,
registered designs, trade mark, trade dress, copy right or
know-how which are possessed or will be possessed by
PEERLESS. It is further agreed that all such Intellectual
Property and/or technical information concerning PRODUCTS as
patents, registered designs, trade mark, trade dress, copy
right or know-how is the sole property of PEERLESS and
MARUBUN shall claim no such rights in any form or structure
now or in the future.
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9.1.2. MARUBUN shall have the right at no additional charge to use
and/or reproduce PEERLESS's applicable Non-Confidential
literature such as operating and maintenance manuals,
technical publication, prints, drawing, training manuals and
other similar supporting documentation and sales literature.
9.1.3. MARUBUN agrees not to decompile, disassemble or otherwise
attempt to reverse engineer any PRODUCTS provided in
firmware form.
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9.2. Indemnification
9.2.1. PEERLESS shall indemnify MARUBUN and hold it harmless from
any liabilities to any third parties, in the United States
and the several countries set out in Attachment A attached
hereto, as finally awarded by a court of competent
jurisdiction, arising out of, and any costs and expenses of
defending or settling, any claim that any Current Release,
Update Release or any part thereof infringes any copyright,
patent or trade secret existing or issued as of the date of
this Agreement. MARUBUN shall notify PEERLESS in writing of
any such claim promptly after MARUBUN first learns thereof,
shall tender sole control of the defense and settlement of
such claim to PEERLESS, and shall provide PEERLESS with such
reasonable assistance and cooperation as PEERLESS may
reasonably request from time to time in connection with such
defense. In the event of any such claim, PEERLESS, at its
sole discretion may replace at its expense any allegedly
infringing PEERLESS Material with non-infringing software or
other material of equivalent functionality, and MARUBUN
shall thereupon cease all use or distribution of such
PEERLESS material and return all copies thereof to PEERLESS.
None of PEERLESS' obligations under this Section 9 shall
apply in connection with any claim of infringement if
MARUBUN has modified any PEERLESS Material or combined any
such material with or into any other programs, data, device,
component or applications or breached this Agreement and
such infringement would not have occurred without such
modifications, combination or breach. Under no circumstances
will PEERLESS have an obligation to indemnify MARUBUN from
any claims relating to any technology provided by third
parties for which MARUBUN enters into a separate agreement
with such third party for such technology; MARUBUN'S sole
indemnity rights, if any, relating to such third
party technology will be governed under its separate
agreement with the third party. PEERLESS will not be
required to defend and indemnify MARUBUN with respect to
losses and expense finally adjudged to have been caused by
MARUBUN's negligence, gross negligence or willful
misconduct.
10. Termination
10.1. Terminate
10.1.1. Either party may terminate this Agreement at no charge upon
sixty (60) days written notice if:
10.1.1.1. A party breaches any provision of the Agreement and
upon written notification of said breach and failed
to cure the breach within 30 days
10.1.1.2. Any terms of the Agreement violates any law or
regulation of either parties nation or governmental
agency
10.1.1.3. Upon assignment of rights under this Agreement to
any third party without the express and written
consent of the non-assigning party
10.1.2. All outstanding orders shall be deemed canceled upon the
termination of the Agreement. The terms in Paragraph 4.3
herein, remain applicable as set forth in this Agreement.
All monies owed shall become immediately due and payable.
10.1.3. The following Sections of this Agreement shall survive and
remain in effect upon the termination of this Agreement.
11. Confidentiality
11.1. Disclosure
11.1.1. Both PEERLESS and MARUBUN shall not disclose to any third
party any documentation, drawings, technical information
and/or managerial information of disclosing party whether
it's written or not which receiving party has come to know
through this Agreement and/or INDIVIDUAL RELEASE
(hereinafter referred to as "CONFIDENTIAL INFORMATION").
However, MARUBUN may disclose CONFIDENTIAL INFORMATION to a
third party for the purpose of distribution, sale and
service of PRODUCTS as necessary.
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11.1.2. Receiving party shall limit the disclosure of CONFIDENTIAL
INFORMATION to a minimum number of employees who need to
know to fulfill their functions. Receiving party shall
alert such employees not to violate aforementioned secrecy
observance and shall take all responsibility whatever may
happen when said receiving party discloses CONFIDENTIAL
INFORMATION to them.
11.1.3. When this Agreement is terminated, or when requested by
disclosing party, receiving party shall cease to use and
return all the documents concerning CONFIDENTIAL
INFORMATION as soon as possible to said disclosing party.
11.1.4. CONFIDENTIAL INFORMATION shall be kept secret strictly not
only during Validity Term of this Agreement but also even
after the expiration or the termination thereof regardless
of other Articles herein.
11.1.5. Disclosure by laws, regulations or governmental orders
shall not be deemed to constitute a violation hereof.
11.1.6. The obligation herein shall not apply to any information
which:
11.1.6.1. is already in the public domain or becomes
available to the public through no breach of the
Agreement by receiving party.
11.1.6.2. Was the possession of receiving party prior to
receipt from disclosing party.
11.1.6.3. Is received by receiving party independently from a
third party free to disclose such information to
said receiving party.
11.1.6.4. Is subsequently independently developed by
receiving party.
11.1.7. Receiving party shall have the written burden of proving
the existence or availability of any of the exceptions set
out in this Article.
12. Arbitration
12.1. Binding Arbitration
12.1.1. Unless otherwise provided in this Agreement, any
controversy or claim, whether based on tort, contract or
legal theory (including, but not limited to, a claim of
fraud or misrepresentation) arising out of or related to
this Agreement shall be resolved by arbitration pursuant to
this Paragraph and the then current rules and supervision
of the American Arbitration Association as modified herein,
The duty to arbitrate shall extend to any officer,
employee, agent or subsidiary making or defending a claim
that would otherwise be arbitrable.
12.1.2. The arbitration shall be held in Los Angeles, CA before a
single arbitrator who is knowledgeable in the embedded
software industry. The arbitrator must be selected within
14 days after the claim for arbitration is filed. The
arbitrator must hold a preliminary hearing within 14 days
after he or she is selected. Discovery must be conducted
and concluded not later than 90 days after the preliminary
hearing concludes. The arbitration hearing must commence no
later than 30 days after discovery concludes and must
conclude not later than 21 days thereafter. The arbitration
hearing shall run from 8:00 A.M. to 12:00 P.M. and 1:30
P.M. to 4:30 P.M. each day with one morning beak and one
afternoon break not to exceed 15 minutes each and, except
for Sundays and holidays, shall run day-to-day until
concluded. The arbitrator shall render his or her decision
within 10 days after the conclusion of the arbitration
proceeding.
12.1.3. The parties must use reasonable best efforts to meet the
foregoing time schedule, and the arbitrator shall have the
right to impose appropriate sanctions against any party who
fails to comply with the agreed upon time schedule. The
arbitrator shall not have the poser to unilaterally modify
the foregoing time schedule. The parties may stipulate in
writing to modify the agreed upon time schedule subject to
the arbitrator's approval.
12.1.4. The arbitrator's decision and award shall be a final and
binding judgment and may be entered in any court having
jurisdiction. The arbitrator shall not have the power to
award
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punitive or exemplary damages. Issues of arbitrability
shall be determined in accordance with the federal
substantive and procedural laws relating to arbitration:
all other aspects shall be interpreted in accordance with
the laws of the State of California. California Rules of
Evidence shall apply. The arbitrator shall be required to
conform to California case and statutory law. Either party
appeal the arbitrator's decision on any legal
ground(s).
12.1.5. The prevailing party shall be entitled to an award of its
attorneys fees associated with the arbitration and any
other costs and expenses of the arbitration shall be borne
as provided by the rules of the American Arbitration
Association.
12.1.6. If court proceedings to stay litigation or compel
arbitration are necessary, the party who unsuccessfully
opposes such proceedings must pay all associated costs,
expenses and attorneys fees reasonably incurred by the
other party. If any portion of this Section 12 is held to
be unenforceable, it shall be severed and shall not affect
either the duty to arbitrate or any other part of the
Paragraph.
12.1.7. The following disputes shall not be subject to arbitration:
(a) any dispute involving infringement of and title to
PEERLESS' intellectual property; b) any dispute involving
immediate termination of this Agreement; c) any dispute
involving enforcement of the confidentiality provisions set
forth in this Agreement; d) any dispute in which any party
seeks an award of compensatory damages exceeding
$500,000.00; e) any judicial proceeding in equity seeking
temporary retraining orders, preliminary injunctions or
other interlocutory relief; and f) any dispute involving
the provisions in Section 8 herein.
12.1.8. Equitable Relief. It is understood and agreed that one
party's remedies at law for a breach by the other party of
its obligations under may be inadequate. Notwithstanding
any other provisions of this Agreement, the parties shall,
in the event of any such breach, be entitled to equitable
relief by a court of law (including without limitation
injunctive relief and specific performance) without a
requirement to post a bond, in addition to all other
remedies provided under this Agreement or available to the
parties at law or otherwise.
13. Miscellaneous
13.1. Sub-Contracts
13.1.1. The work may be performed, in whole or in part, by third
parties selected by PEERLESS.
13.1.2. In the event of an accident, a strike or the like that may
cause any hindrance to supply PRODUCTS to MARUBUN happens
relating such subcontract, PEERLESS shall inform thereof to
MARUBUN immediately and comply with MARUBUN's instructions.
13.2. Governing Law
13.2.1. This Agreement shall be construed and enforced in accordance
with the laws of the United States of America and the State
of California without giving effect to its conflicts of laws
principles. Any action or proceeding brought by MARUBUN or
PEERLESS against the other arising out of or related to this
Agreement shall be brought in a state or federal court of
competent jurisdiction located in the County of Los Angeles,
State of California, and MARUBUN hereby submits knowingly to
the in personam jurisdiction of such courts for purposes of
any such action or proceeding. The parties agree that the
International Regimes, including but not limited to the
United Nations Convention On Contracts For the International
Sale of Goods, and Supernational Regimes, including but not
limited to NAFTA, shall not apply to this Agreement or the
Addenda thereto.
13.3. Transfer
13.3.1. Neither party shall transfer or give as a security the
rights or obligations stemming from this Agreement or
position herein partly or entirely to any third party(s)
without obtaining the other party's consent in writing in
advance.
13.4 Force Majeure
13.4.1. Neither party hereto shall be liable to the other party for
failure to perform its obligations hereunder due to the
occurrence of any event beyond the reasonable control of
such party and affecting its performance such as including,
without limitation, governmental
December 6, 1999 Page 11 Initials: MARUBUN__, PEERLESS R
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MARUBUN/PEERLESS Supplier/Distribution Agreement
regulations or orders, outbreak of a state of emergency,
acts of God, war, hostilities, civil commotion, riots,
epidemics, fire, strikes, lockout or any other similar cause
or causes (hereinafter referred to as "FORCE MAJEURE").
13.4.2. The party so affected shall make its best efforts to avoid
or remove such causes of non-fulfillment and shall continue
fulfillment hereunder without delay whenever such causes are
removed.
13.5. Trademarks
13.5.1. Nothing in this Agreement grants either party any rights to
use the other party's trademarks or trade names, directly or
indirectly, in connection with any product, prototype,
service, promotion, publication or publicity without prior
written approval of the other party of trademark owner.
13.6. Offsets
13.6.1. In case either PEERLESS or MARUBUN has credit and debt at
the same time to the other party. Such credit may be offset
against the debt with written notice if possible pursuant to
the law.
13.7. Validity Term
13.7.1. Validity Term of this Agreement shall be on (1) year from
and including the date of which the Agreement becomes
effective.
13.7.2. Unless either party proposes a non-extension of this
Agreement to the other party with a prior written notice at
lease three (3) months before the expiration date, this
Agreement shall be extended for another one (1) year
automatically. Any further extension of this Agreement shall
be made upon the said procedure.
13.7.3. The provision of Warranty as stipulated in Section 7 herein,
the provision of Indemnity as stipulated in Paragraph 9.2
herein, a the provision of Validity Term as stipulated in
this Article shall survive the expiration or termination of
this Agreement and the provision of Intellectual Property as
stipulated in Paragraph 9.1 herein, shall survive the
expiration the termination of this Agreement for its own
period and the provision of Secrecy as stipulated in Article
shall survive expiration or termination of this Agreement
for 5 years from the aforementioned expiration termination.
13.7.4. Even when this Agreement expires, any INDIVIDUAL RELEASE, of
which fulfillment date is beyond expiration date shall
survive this Agreement until the date of its final
fulfillment unless otherwise agreed by the parties in
writing.
13.8. Specified Change
13.8.1. MARUBUN may request engineering-change in PRODUCTS and/or
specification-change thereof which need(s) modification on
design of PRODUCTS. PEERLESS shall make its best effort to
meet said request. Both parties shall in good faith
negotiate the cost, delivery date, etc., whichever may occur
therefrom.
13.8.2. PEERLESS shall obtain prior written approval from MARUBUN
before making any change in design, material manufacture
process of PRODUCTS or any other matters that may affect the
specification, quality level and/or reliability of PRODUCTS.
13.9. Offer of Data
13.9.1. PEERLESS, in case requested MARUBUN, shall furnish MARUBUN
with specification. Drawings and other technical data or
PRODUCTS in order to facilitate the use and application of
PRODUCTS by MARUBUN at the expense of PEERLESS, PEERLESS
agrees to advise MARUBUN of any updated information relative
to PRODUCTS with timely notifications in writing. Any such
date furnished by PEERLESS shall be subject to a
Confidential Disclosure Agreement and a site license
negotiated between the parties.
13.10. Notices
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MARUBUN/PEERLESS Supplier/Distribution Agreement
13.10.1. Any notice required or permitted to be given under this
Agreement shall be given in writing (including facsimile and
telephone) and shall be addressed to the nominated address
shown below.
13.11. Modification
13.11.1. A writing duly signed by the authorized representatives of
both parties can only change this Agreement.
13.12. Language
13.12.1. All the communications, documents and/or any records for
mutual understanding with regard to the Agreement and
INDIVIDUAL RELEASE shall be provided in English.
13.13. Duties
13.13.1. Either party shall not assume any role other than stipulated
herein and consequently is not vested with rights and/or
duties stemming from what is not stipulated herein.
13.14. Entirety
13.14.1. This Agreement and the Addenda hereto as well as the Mutual
Confidential Disclosure Agreement between the PEERLESS and
MARUBUN, dated December 14, 1999, as amended, constitute
the exclusive statement of the Agreement between PEERLESS
and MARUBUN concerning the subject matter hereof. All other
prior agreements, arrangements or understandings, oral or
written, relating to the subject matter hereto are merged
into and are superseded by the terms of this Agreement.
Without limiting the foregoing, the pre-printed portions of
a purchase order or any other document submitted by MARUBUN
in connection with an order shall not add to or vary the
terms of this Agreement.
MARUBUN CORPORATION PEERLESS SYSTEMS CORPORATION
By: /s/ Takanori Oshima By: /s/ Cary A. Kimmel
------------------------- -------------------------
(Authorized Signature) (Authorized Signature)
Name: Takanori Oshima Name: Cary A. Kimmel
Title: Senior Vice President Title: Director of Business Development
Components & Materials Group
Date: December 14, 1999 Date: December 14, 1999
December 6, 1999 Page 13 Initials: MARUBUN__, PEERLESS R
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ATTACHMENT A
Detailed Pricing Terms
December 6, 1999 Page 14 Initials: MARUBUN_, PEERLESS R
<PAGE>
ATTACHMENT B
Detailed Pricing Terms
December 6, 1999 Page 15 Initials: MARUBUN _, PEERLESS R
<PAGE>
EXHIBIT 10.27
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only, March
14, 1997, is made by and between McKelvy Family Trust ("Lessor") and Auco, Inc.
a California corporation ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2 Premises: That certain real property, including all improvements therein
or to be provided by Lessor under the terms of this Lease, and commonly known by
the street address of 386 Main Street, Redwood City located in the County of San
Mateo, State of California and generally described as (described briefly the
nature of the property) approximately 6,362 square feet in a two story office
building ("Premises"). (See Paragraph 2 for further provisions.)
1.3 Term: Seven (7) years and 0 months ("Original Term") commencing June 1,
1997 ("Commencement Date") and ending May 31, 2004("Expiration Date"). (See
Paragraph 3 for further provisions.)
1.4 Early Possession: May 1, 1997 - May 31, 1997 ("Early Possession Date").
(See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 Base Rent: $9,861.10 per month ("Base Rent"), payable on the 1st day of
each month commencing June 1, 1997. See addendum paragraph 49 for base rent
adjustments. (See Paragraph 4 for further provisions.)
[X] If this box is checked, there are provisions in this Lease for the Base Rent
to be adjusted.
1.6 Base Rent Paid Upon Execution: $9,861.10 as Base Rent for period June 1,
1997 - June 30, 1997.
1.7 Security Deposit: $70,618.20 (see addendum "Security Deposit"). (See
Paragraph 5 for further provisions.)
1.8 Permitted Use: Office administration, paragraph 51. research and
development of embedded software. (See Paragraph 6 for further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following Real Estate Brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes): Cornish & Carey Commercial
represents
[X] Lessor exclusively ("Lessor's Broker"); [_] both Lessor and Lessee,
and Interbay
[X] Lessee exclusively ("Lessee's Broker"); [_] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by Adam Au see addendum paragraph 57 ("Guarantor"). (See Paragraph 37
for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 57 and Exhibits A & B all of which constitute a part of
this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of
debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been
advised by the Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner of occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease, however,
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
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3.3 Delay In Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee as agreed herein by the Early Possession Date, if one
is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the Parties shall be discharged
from all obligations hereunder; provided, however, that if such written notice
by Lessee is not received by Lessor within said ten (10) day period , Lessee's
right to cancel this Lease shall terminate and be of no further force or effect.
Except as may be otherwise provided, and regardless of when the term actually
commences, if possession is not tendered to Lessee when required by this Lease
and Lessee does not terminate this Lease, as aforesaid, the period free of the
obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed
shall run from the date of delivery of possession and continue for a period
equal to what Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts changes or omissions of Lessee.
4. RENT.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor all its address stated herein or to such other persons
or at such other addresses as Lessor may from time to time designate in writing
to Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful
performance of Lessee's obligations under this Lease. If Lessee fails to pay
Base Rent or other rent or charges due hereunder, or otherwise Defaults under
this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all
or any portion of said Security Deposit for the payment of any amount due Lessor
or to reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security Deposit,
Lessee shall within ten (10) days after written request therefor deposit moneys
with Lessor sufficient to restore said Security Deposit to the full amount
required by this Lease. Any time the Base Rent increases during the term of this
Lease, Lessee shall, upon written request from Lessor, deposit additional moneys
with Lessor sufficient to maintain the same ratio between the Security Deposit
and the Base Rent as those amounts are specified in the Basic Provisions. Lessor
shall not be required to keep same ratio between the Security Deposit and the
Base Rent as those amounts are specified in the Basic Provisions. Lessor shall
not be required to keep all or any part of the Security Deposit separate from
its general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee (or,
at Lessor's option, to the last assignee, if any, of Lessee's interest herein),
that portion of the Security Deposit not used or applied by Lessor. Unless
otherwise expressly agreed in writing by Lessor, no part of the Security Deposit
shall be considered to be held in trust, to bear interest or other increment for
its use, or to be prepayment for any moneys to be paid by Lessee under this
Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes set
forth in Paragraph 1.8, or any other use which is comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessee assignees or subtenants, and by prospective assignees
and subtenants of the Lessee, its assignees and subtenants, for a modification
of said permitted purpose for which the premises may be used or occupied, so
long as the same will not impair the structural integrity of the improvements on
the Premises, the mechanical or electrical systems therein, is not significantly
more burdensome to the Premises and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days give a written notification
of same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5. hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, split, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lender and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from it's obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to [deleted and initialed] the first sentence of Paragraph
2.2,
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7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense at all times,
keep the Premises and every part thereof in good order, condition and repair,
structural and non-structural (whether or not such portion of the Premises
requiring repairs, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, without limiting the generality of the foregoing,
all equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls (interior and exterior),
foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights,
landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks
and parkways located in, on, about, or adjacent to the Premises. Lessee shall
not cause or permit any Hazardous Substance to be spilled or released in, on,
under or about the Premises (including through the plumbing or sanitary sewer
system) and shall promptly, at Lessee's expense; take all investigatory and/or
remedial action reasonably recommended, whether or not formally ordered or
required, for the cleanup of any contamination of, and for the maintenance,
security and/or monitoring of the Premises, the elements surrounding same, or
neighboring properties, that was caused or materially contributed to by Lessee,
or pertaining to or involving Hazardous Substance, and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. If Lessee occupies the Premises for seven (7) years or more. Lessor may
require Lessee to repaint the exterior of the buildings on the Premises as
reasonably required, but not more frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2. Lessor's Obligations. It is intended by the Parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises, the improvements located thereon, or the equipment therein, whether
structural or non structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties
that the terms of this Lease govern the respective obligations of the Parties as
to maintenance and repair of the Premises. Lessee and Lessor expressly waive the
benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease by reason of any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations" is
used in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and /or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
Interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with all Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation that
costs $10,000 or more upon Lessee's providing Lessor with a lien and completion
bond in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation and/or upon Lessee's posting an additional
Security Deposit with Lessor under Paragraph 36 hereof.
(c) Indemnification. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; And Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the Improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary Wear and Tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is the
Insuring Party, Lessee shall pay for all insurance required under this Paragraph
8 except to the extent of the cost attributable to liability insurance carried
by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods
commencing prior to or extending beyond the Lease term shall be prorated to
correspond to the Lease term. Payment shall be made by Lessee to Lessor within
ten (10) days following receipt of an invoice for any amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee and Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain
the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any Intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "Insured contract" for the
performance of Lessee's indemnity obligations under this Lease. The limits of
said insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. In the event Lessor is the Insuring Party, Lessor
shall also maintain liability Insurance described in Paragraph 8.2(a), above, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
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8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
8.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender) including coverage for any additional costs resulting from
debris removal and reasonable amounts of coverage for the enforcement of any
ordinance or law regulating the reconstruction or replacement of any undamaged
sections of the Premises required to be demolished or removed by reason of the
enforcement of any building, zoning, safety or land use laws as the result of a
covered cause of loss. Said policy or policies shall also contain an agreed
valuation provision in lieu of any coinsurance clause, waiver of subrogation,
and inflation guard protection causing an increase in the annual property
insurance coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for the city
nearest to where the Premises are located. If such insurance coverage has a
deductible clause, the deductible amount shall not exceed $1,000 per occurrence,
and Lessee shall be liable for such deductible amount in the event of an Insured
Loss, as defined in Paragraph 9.1(c).
(b) Rental Value. The Insuring Party shall, in addition, obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Adjacent Premises. If the Premises are part of a larger building, or
if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Tenant's Improvements. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall Insure Lessee Owned Alterations
and Utility Installations.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duty licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least R+, V, or such other rating as may be required by a Lender having a lien
on the Premises, as set forth in the most current issue of "Best's Insurance
Guide," Lessee shall not do or permit to be done anything which shall invalidate
the insurance policies referred to in this Paragraph 8. If Lessee is the
Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of
policies of such insurance or certificates evidencing the existence and amounts
of such insurance with the insureds and loss payable clauses as required by this
Lease. No such policy shall be cancellable or subject to modification except
after thirty (30) days prior written notice to Lessor Lessee shall at least
thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor ("Waiving Party") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee, its agents, contractors, employees or invitees, and
out of any Default or Breach by Lessee in the performance in a timely manner of
any obligation on Lessee's part to be performed under this Lease. The foregoing
shall include, but not be limited to, the defense or pursuit of any claim or any
action or proceeding involved therein, and whether or not (in the case of claims
made against Lessor) litigated and/or reduced to judgment, and whether well
founded or not. In case any action or proceeding be brought against Lessor by
reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense. Lessor need not have
first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than 50%
or the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an
insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available. Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonable possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period. Lessor may
nevertheless elect by written notice to Lessee within then (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days of following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for
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any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available for
the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonable possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End Of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 Abatement Of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial Damage-
Insured), whether or not Lessor or Lessee repairs or restores the Premises, the
Base Rent, Real Property Taxes, insurance premiums, and other charges, if any,
payable by Lessee hereunder for the period during which such damage, its repair
or the restoration continues (not to exceed the period for which rental value
insurance is required under Paragraph 8l.3(b)) shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, as aforesaid, all other obligations of Lessee hereunder shall
be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000 whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent of $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 Termination - Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, an equitable adjustment shall be made concerning advance
Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitable prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.
(b) Advance Payment. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable in which the applicable tax installment would become
delinquent (end without interest thereon), would provide a fund large enough to
fully discharge before delinquency the estimated installment of taxes to be
paid. When the actual amount of the applicable tax bill is known, the amount of
such equal monthly advance payment shall be adjusted as required to provide the
fund needed to pay the applicable taxes before delinquency. If the amounts paid
to Lessor by Lessee under the provisions of this Paragraph are insufficient to
discharge the obligations of Lessee to pay such Real Property Taxes as the same
become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional
sums as are necessary to pay such obligations. All moneys paid to Lessor under
this Paragraph may be intermingled with other moneys of Lessor and shall not
bear interest. In the event of a Breach by Lessee in the performance of the
obligations of Lessee under this Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 Definition of "Real Property Taxes". As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
10.3 Joint Assessment. If the Premises are not separately assessed, Lessee's
liability shall be an equitable proportion of the Real Property Taxes for all
the land and improvements included within the tax parcel assessed, such
proportion to be determined by Lessor from the respective valuations
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assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor of all charges jointly metered with other premises.
12. Assignment And Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not: (i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) after the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or any
one else responsible for the performance of the Lessee's obligations under this
Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including, but not limited to, the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The following
terms and conditions shall apply to any subletting by Lessee of all or any part
of the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
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is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragrapah 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, compiled with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
lessee of any general arrangement or assignment for the benefit of creditors,
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including, but not limited to, the obtaining of reasonably required
bonds, insurance policies, or governmental licenses, permits or approvals. The
costs and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of the Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event Of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fail and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach By Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days after such notice are reasonably
required for its performance, then Lessor shall not be in breach of this Lease
if performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes
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title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effects as to the portion
of the Premises remaining, except that the Base Rent shall be reduced in the
same proportion as the tentable floor area of the Premises taken bears to the
total rentable floor area of the building located on the Premises. No reduction
of Base Rent shall occur if the only portion of the Premises taken is land on
which there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures in the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received over and above the legal and other
expenses incurred by Lessor in the condemnation matter repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. Broker's Fee
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said
Brokers jointly, or in such separate shares as they may mutually designate in
writing, a fee as set forth in a separate written agreement between Lessor and
said Brokers for brokerage services rendered.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including, but not limited to, Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The Term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the thirty-
first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by the United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
Initials AA
---------------
/s/ D. McK
---------------
PAGE 8
<PAGE>
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect: Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, " Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Leasee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provision of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not; (i) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one (1) month's rent.
30.3 Non-disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance ( a "non-disturbance agreement") from
the Lender that Lessee's possession and this Lease, including any options to
extend the term hereof, will not be disturbed so long as Lessee is not in Breach
hereof and attorns to the record owner of the Premises.
30.4 Self-executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter declined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "Prevailing Party" shall
include, without limitation, a Party or Broker who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. Leasor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements and additions to the Premises or the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior consent. Notwithstanding anything to the contrary in
this Lease, Lessor shall not be obligated to exercise any standard of
reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all right to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including, but not
limited to, architects', attorneys', engineer's or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including, but not
limited to, consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2 (e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgement that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference tot he particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the
form of the guaranty to be executed by each such Guarantor shall be in the form
most recently published by the American industrial Real Estate Association and
each said Guarantor shall have the same obligations as Lessee under this Lease,
including but not limited to the obligation to provide the Tenancy Statement
and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor, (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all other covenants, conditions and provisions
on Lessee's part to be observed and performed under this Lease, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or to renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right to first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 Options Personal To Original Leasee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention or thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
Initials /s/ AA
Initials /s/ D. McK
PAGE 9
<PAGE>
39.3 Multiple Options. In the event that Lessee has any Multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect Of Default On Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary; (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, whether or not the Defaults
are cured during the twelve (12) month period immediately preceding the exercise
of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provision of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Leasee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee) or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured or iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor make take from time to time for
the management, safety, care and cleanliness of the grounds, the parking and
unloading vehicles and preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time, to
grant, without the consent or jointer of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part
of said Party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said Party to pay
such sum or any part thereof, said Party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under to the provision
of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within (30) days after request by Lessor, deliver to
Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and submission
of same of Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, If more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW
THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE
THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE
COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND
LESSEE WITH RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE
CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE
POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES.
NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR
THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT,
OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Atherton, Calif. Executed at Redwood City
------------------- ---------------------
On March 21, 1997 on March 19, 1997
By LESSOR: McKelvy Family Trust by LESSEE: Auco, Inc., a California
corporation
____________________________________ ___________________________________
____________________________________ ___________________________________
By /s/ Doryce K. McKelvy By /s/ ____________________________
---------------------------------
Name Printed: DORYCE K. MCKELVY Name Printed: _____________________
----------------------
Title:______________________________ Title:_____________________________
By _________________________________ By /s/ Adam Au
--------------------------------
Name Printed:_______________________ Name Printed: Adam Au
---------------------
Title:______________________________ Title: President
---------------------------
Address: 48 Lloyden Drive Address: 386 Main Street
--------------------------- -------------------------
Atherton, CA 94027 Redwood City, CA 94063
- ------------------------------------ -----------------------------------
Tel No.:(415)322-6525 Fax No.(__)__ Tel. No.(415)610-8210 Fax No.[illegible]
NET
NOTICE: These forms are often modified to meet changing requirements of
law and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071. (213) 687-8777, Fax No. (213) 687-8616.
(C) Copyright 1990 - By American Industrial Real Estate
Association. All rights reserved. No part of these works may be
reproduced in any form without permission in writing.
PAGE 10
<PAGE>
[LETTERHEAD of C&C]
Oncor International
================================================================================
Lease Addendum
================================================================================
ADDENDUM TO THE LEASE DATED MARCH 13, 1997, BY AND BETWEEN MCKELVY FAMILY
TRUST, LESSOR, AND AUCO INC., A CORPORATION, LESSEE, FOR THOSE PREMISES
LOCATED AT 386 MAIN STREET, REDWOOD CITY, CALIFORNIA.
49. Rental Schedule:
Months Rent/sq. ft./month
01-12 (June 1, 1997 - May 31, 1998) $1.55 NNN = $9,861.10
13-24 (June 1, 1998 - May 31, 1999) $1.60 NNN = $10,179.20
25-36 (June 1, 1999 - May 31, 2000) $1.65 NNN = $10,497.30
37-48 (June 1, 2000 - May 31, 2001) $1.70 NNN = $10,815.40
49-60 (June 1, 2001 - May 31, 2002) $1.75 NNN = $11,133.50
61-72 (June 1, 2002 - May 31, 2003) $1.80 NNN = $11,451.60
73-84 (June 1, 2003 - May 31, 2004) $1.85 NNN = $11,769.70
The projection of 1997 NNN expenses is approximately $0.23/square foot per
month.
50. First Month's Rent and Security Deposit:
Lessee shall tender to Lessor upon signature of Lease, the first month's
rent equal to $9,861.10 as rent for the month of June, 1997 and a security
deposit equal to $70,618.20. Total amount due = $80,479.30
Provided Lessee is in compliance with all the terms and conditions of
the Lease Agreement, Lessor agrees to reduce Lessee's security deposit
according to the following time schedule:
<TABLE>
<S> <C> <C>
Credit Months 13 & 14 (June 1, 1998 - July 30, 1998 $ 20,358.40) Remaining Bal.=$50,259.80
Credit Months 25 & 26 (June 1, 1999 - July 30, 1999 $20,994.60) Remaining Bal.=$29,265.20
Credit Months 37 (June 1, 2000 - June 30, 2000 $ 10,815.40) Remaining Bal.=$18,449.80
Credit Month 49 (June 1, 2001 - June 30, 2001 $6,680.10*) Remaining Bal.=$11,769.70
</TABLE>
* Balance of base rent due for month 49 is $4,453.40
Lessor agrees to hold Lessee's security deposit in a separate interest
bearing account, with interest payable to the Lessee.
51. Lease Improvements by Lessor:
Lessor, at Lessor's sole cost and expense, shall repaint and recarpet
premises with paint, carpet, color and type to be standard commercial grade
and mutually agreed upon.
52. Condition of Premises:
Lessor shall deliver the building of components, including roof,
electrical, elevator, plumbing, light fixtures, HVAC and ceiling grid in
good working order. Lessor does not warrant or represent that the building
and all building systems comply with all government building codes. To the
best of Lessor's knowledge, there is no asbestos or any hazardous materials
within the building or on the property.
53. Lease Renewal Option:
Lessee shall have one (1) three (3) year option to renew the Lease at the
then fair market rent, but in no event less than the rent paid in the last
month of the initial Lease Term.
54. Signage:
Lessee shall be allowed signage subject to city and Lessor approval, which
shall not be unreasonably withheld.
<PAGE>
[LETTERHEAD OF C&C]
================================================================================
Lease Addendum
================================================================================
55. Parking:
21 parking spaces available for Lessee's exclusive use.
56. Subletting:
Lessee shall have the right to assign all or a portion of the Leased
Premises with Lessor's written consent, not to be unreasonably withheld.
Any excess rent shall go to the Lessor.
57. Personal Guarantee:
The lease shall be personally guaranteed by Adam Au. When Auco Inc.'s net
worth equals or exceeds $2,000,000 at any time during the term of this Lease,
and Lessee has not been in default of the Lease at any time, Lessor shall
reasonably consider removing Mr. Adam Au from any further financial liability as
Guarantor.
AGREED AND ACCEPTED:
Lessor: The McKelvy Family Trust
By: /s/ Doryce K. McKelvy Date: 3-21-97
------------------------------------------ ---------------
Lessee: Auco, Inc., a California corporation
By: /s/ Adam Au Date: 3-21-97
------------------------------------------ ---------------
By: /s/ Adam Au Date: 3-19-97
------------------------------------------ ---------------
Guarantor, Adam Au
<PAGE>
[LETTERHEAD OF C&C]
================================================================================
Guarantee of Lease
================================================================================
ACKNOWLEDGED:
Lessor: THE MCKELVY FAMILY TRUST
By: /s/ Doryce K. McKelvy Date: 3-21-97
------------------------------- ------------------
Lessee: AUCO, INC. A CALIFORNIA CORPORATION
By: /s/ Adam Au Date: 3-19-97
-------------------------------- ------------------
NOTICE TO LESSOR AND LESSEE; CORNISH & CAREY COMMERCIAL IS NOT AUTHORIZED TO
GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS GUARANTEE OR ANY DISCUSSIONS
BETWEEN CORNISH & CAREY AND LESSOR AND/OR LESSEE SHALL BE DEEMED TO BE A
REPRESENTATION OR RECOMMENDATION BY CORNISH & CAREY COMMERCIAL, OR ITS AGENTS OR
EMPLOYEES AS TO THE LEGAL EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY
TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH THEIR
INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE TRANSACTION
CONTEMPLATED BY THIS GUARANTEE.
Page 2 of 2
<PAGE>
[LETTERHEAD OF C&C]
Oncor International
================================================================================
Guarantee of Lease
================================================================================
This Guarantee of Lease is made as of this 20th day of March, 1997 by the
undersigned ("Guarantor") concerning that certain lease, dated March 14, 1997,
by and between the McKelvy Family Trust ("Lessor") and Auco, Inc., a California
corporation ("Lessee") and relating to the property commonly known as 386 Main
Street, Redwood City, CA (the "Lease").
1. Guarantor hereby unconditionally guarantees the full performance of each and
all of the terms, covenants and conditions of the Lease to be kept and
performed by Lessee, including the payment of all rentals and other charges
under the Lease.
2. This Guarantee will continue in favor of Lessor notwithstanding any
extension, modification or alteration of the Lease entered into by and
between the parties thereto, or their successors or assigns, and
notwithstanding any assignment of the Lease, with or without the consent of
the undersigned. No extension, modification, alteration or assignment of the
Lease shall release or discharge the Guarantor.
3. This Guarantee will continue unchanged by any bankruptcy, reorganization or
insolvency of Lessee or any successor or assignee thereof or by any
disaffirmance or abandonment by a trustee of Lessee.
4. Lessor may, without notice, assign this Guarantee in whole or in part and no
assignment or transfer of the Lease or this Guarantee will operate to
extinguish or diminish the liability of the undersigned hereunder.
5. The liability of the Guarantor under this Guarantee shall be primary. In any
right of action which accrues to Lessor under the Lease, Lessor may, at its
option, proceed directly against the Guarantor without having commenced any
action or having obtained any judgment against the Lessee.
6. The Guarantor shall, in addition to any other sums to which Lessor may be
entitled to hereunder, pay to Lessor reasonable attorneys' fees and all costs
and other expenses incurred in any collection or attempted collection or in
any negotiations relating to the obligations hereby guaranteed or enforcing
the Guarantee against the Guarantor.
7. The Guarantor hereby waives (i) notice of any demand by the Lessor, (ii)
notice of default in the payment of rent or any other amounts contained or
reserved in the Lease (iii) notice of acceptance of this Guarantee by any
person and (iv) any other notice to which the Guarantor may be entitled in
connection herewith.
8. In the event any provision of this Guarantee is deemed to be invalid,
unenforceable or void, the remaining provisions of this Guarantee shall be
unaffected and shall remain in full force and effect. The terms and
provisions of this Guarantee are binding upon an inure to the benefit of the
respective successors and assigns of the parties named in this Guarantee.
IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be executed as
to the date first above written.
Guarantor: /s/ Adam Au
---------------------------- Address: 938 Hamilton Avenue
Adam Au Palo Alto, CA
EXHIBIT A
Page 1 of 2
<PAGE>
EXHIBIT B
[FLOOR PLAN: MAIN FLOOR AND SECOND FLOOR APPEARS HERE]
<PAGE>
EXHIBIT 10.28
March 22, 2000
Terra Bella, Inc., and Archie J Snider d.b.a.
Terra Snider Joint Venture
C/o Mr. Tom Snider
BT Commercial
1995 N. 1st Street, Suite 200
San Jose, CA 95221
With respect to the Lease agreement dated March 16, 2000 by and between Peerless
Systems Networking, a wholly owned subsidiary of Peerless Systems Corporation
("Lessee") and Terra Bella, Inc., and Archie J. Snider d.b.a Terra Snider Joint
Venture ("Lessor"), Lessee and Lessor hereby agree to the following
modifications to the Lease agreement:
1. Paragraph 5. Security Deposit. The following shall not be applicable:
"If the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional moneys with Lessor so
that the total amount of the Security Deposit shall at all times bear the
same proportion to the increased Base Rent as the initial Security Deposit
bore to the initial Base Rent".
2. Paragraph 8.7 Indemnity. The following shall not be applicable:
In the first sentence, delete "gross" preceding the word "negligence" and
"willful" proceeding the word "misconduct".
3. Paragraph 12. Assignment and Subletting.
In subparagraph 12.1 (a) the following shall be added at the end of the
sentence, "which consent shall not be unreasonably withheld".
4. Paragraph 34. Signs. The following shall be added:
"Notwithstanding the foregoing, Lessee, at their sole cost and expense,
shall have the right to install signage on the monument sign post
perpendicular to Terra Bella, subject to municipal approvals as required,
and subject to Lessor's approval, which shall not be unreasonably
withheld".
<PAGE>
Terra Bella, Inc.
March 22, 2000
Page 2
5. Paragraph 51. Letter of Credit (Additional Security Deposit), second
paragraph (iv) shall be amended to read: "(iv) be payable on sight draft
accompanied by a letter from an attorney licensed to practice in the State
of California stating that upon a review of the "Standard
Industrial/Commercial Single Tenant Lease-Net" between Terra Bella, Inc.
and Archie J. Snider d.b.a. Terra Snider Joint Venture (Lessor) and
Peerless Systems Networking, Inc., a wholly owned subsidiary of Peerless
Systems Corporation (Lessee) that the Lessor is entitled to payment in the
amount stated therein because an Event of Default under the Lease has
occurred to the damage of the Lessor in the amount sought herein."
6. Paragraph 54. Contaminate Acknowledgement. The following shall be added:
"Lessor hereby warrants and represents that to the best of Lessor's
knowledge at the date of execution of this Lease, there exist no known
contaminates and that no current or pending legal actions against Lessor
with respect to said contaminates".
The foregoing accurately sets forth the agreement between lessee and
Lessor, as of the date written below.
READ AND APPROVED
LESSEE:
Peerless Systems Networking, a wholly owned subsidiary of Peerless Systems
Corporation
By: /s/ Adam Au
-----------------------------
Its: VP & General Manager
-----------------------------
Date: 3/22/2000
-----------------------------
READ AND APPROVED
LESSOR:
Terra Bella, Inc., and Archie J. Snider d.b.a Terra Snider Joint Venture
By: _____________________________
Its: _____________________________
Date: _____________________________
<PAGE>
[LOGO OF AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION]
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only March
16, 2000, is made by and between Terra Bella In. and Archie J. Snider d.b.a.
Terra Snider Joint Venture ("Lessor") and Peerless Systems Networking, a wholly
owned subsidiary of Peerless Systems Corporation "(Lessee"). (collectively the
"Parties," or individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of the Lease, and commonly
known as 1130 Terra Bella, Mountain View, located in the County of Santa Clara,
State of California, and generally described as (describe briefly the nature of
the property and, if applicable, the "Project", if the property is located
within a Project) an approximately 12,263 square foot Office/R&D Building
("Premises"). (See also Paragraph 2).
1.3 Term: 7 years and 0 months ("Original Term") commencing July 1, 2000
("Commencement Date") and ending June 30, 2007 ("Expiration Date"). (See also
Paragraph 3)
1.4 Early Possession: N/A ("Early Possession Date"). (see also Paragraphs
3.2 and 3.3)
1.5 Base Rent: $67,447.00 per month ("Base Rent"), payable on the First
(1st) day of each month commencing July 1, 2000 (See also Paragraph 4) [x] If
this is checked, there are provisions in the Lease for The Base Rent to be
adjusted.
1.6 Base Rent Paid Upon Execution $67,447.00 as Base Rent for the period
July 1- July 31, 2000.
1.7 Security Deposit $134,894 in cash and $741,917.00 LOC ("Security
Deposit"). (See also Paragraph 5).
1.8 Agreed Use: general office and related legal uses (See also Paragraph
6).
1.9 Insuring Party. Lessor is the "Insuring Party" unless otherwise stated
herein. (See also Paragraph 8).
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction (check
applicable boxes):
[x] BT Commercial represents Lessor exclusively ("Lessor's Broker"):
[x] Cress Partners represents Lessee exclusively ("Lessee's Broker"): or
[_] __________________________represents both Lessor and Lessee ("Dual
Agency").
(b) Payment to Brokers: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their separate
written agreement.
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by Peerless Systems Corporation, a Delaware Corporation
("Guarantor"). (See also Paragraph 37).
1.12 Addends and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 56 and Exhibits A, all of which constitute a
part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leased to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in the Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee broom clean and
free of debris on the Commencement Date or the Early Possession Date, whichever
first occurs ("Start Date"), and, so long as the required service contracts
described in Paragraph 7.1 (b) below are obtained by Lessee within thirty (30)
days following the Start Date, warrants that the existing electrical, plumbing,
fire sprinkler, lighting, heating, ventilating and air conditioning systems
("HVAC"), loading doors. If any, and all other such elements in the Premises,
other than those constructed by Lessee, shall be in good operating condition on
said date and that the structural elements of the roof, bearing walls and
foundation of any buildings on the Premises (the "Building") shall be free of
material defects. If a non-compliance with said warranty exists as of the Start
Date, Lessor shall, as Lessor's sole obligation with respect to such matter,
except as otherwise provided in this Lease, promptly after receipt of written
notice from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If after the State Date,
Lessee does not give Lessor written notice of any non-compliance with this
warranty within (i) one year as to the surface of the roof and the structural
portions of the roof, foundations and bearing walls, (ii) six (6) months as to
the HVAC systems, (iii) thirty (30) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance. Except for Seismic, ADA and Title 24 Codes and
regulations, Lessor warrants that the improvements of the Premises comply with
all applicable laws, covenants or restrictions of record, building codes,
regulations and ordinances ("Applicable Requirements") in effect on the Start
Date. Said warranty does not apply to the use to which Lessee will put the
Premises or to any Alterations of Utility installations (as defined in Paragraph
7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for
determining whether or not the zoning is appropriate for Lessee's intended use,
and acknowledges that past uses of the Premises may no longer be allowed. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense. If Lessee does not give Lessor written notice of a non-
compliance with this warranty within six (6) months following the Start Date,
correction of that non-compliance shall be the obligation of Lessee at Lessee's
sole cost and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in Paragraph
6.2 (a) below so as to require during the term of this Lease the construction of
an addition to or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of the
building ("Capital Expenditure"). Lessor and Lessee shall allocate the cost of
such work as follows:
Initials /s/ AA
----------
Page 1
<PAGE>
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures
are required as a result of the specific and unique use of the Premises by
Lessee as compared with uses by tenants in general, Lessee shall be fully
responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last two (2) years of this Lease and the cost
thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this
Lease unless Lessor notifies Lessee, in writing, within ten (10) days after
receipt of Lessee's termination notice that Lessor has elected to pay the
difference between the actual cost thereof and the amount equal to six (6)
months' Base Rent. If Lessee elects termination, Lessee shall immediately cease
the use of the Premises which requires such Capital Expenditure and deliver to
Lessor written notice specifying a termination date at least ninety (90) days
thereafter. Such termination date shall, however, in no event be earlier than
the last day that Lessee could legally utilize the Premises without commencing
such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by Lessee (such as, governmentally mandated seismic
modifications), then Lessor and Lessee shall allocate the obligation to pay for
such costs pursuant to the provisions of Paragraph 7.1(c); provided, however,
that if such Capital Expenditure is required during the last two years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor,
in writing, within ten (10) days after receipt of Lessor's termination notice
that Lessee will pay for such Capital Expenditure. If Lessor does not elect to
terminate, and fails to tender its share of any such Capital Expenditure, Lessee
may advance such funds and deduct same, with interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is not sufficient to fully reimburse Lessee on an offset basis,
Lessee shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in intensity
of use, or modification to the Premises then, and in that event, Lessee shall be
fully responsible for the cost thereof, and Lessee shall not have any right to
terminate this Lease.
2.4 Acknowledgements. Lessee acknowledges that: (a) it has been advised by
Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements), and their suitability for Lessee's intended use, (b) Lessee has
made such investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to its occupancy of the
Premises, and (c) neither Lessor, Lessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Lease. In addition, Lessor acknowledges that: (a)
Broker has made no representations, promises or warranties concerning Lessee's
ability to honor the Lease or suitability to occupy the Premises, and (b) it is
Lessor's sole responsibility to investigate the financial capability and/or
suitability of all proposed tenants.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3 Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Real Property Taxes and
insurance premiums and to maintain the Premises) shall, however, be in effect
during such period. Any such early possession shall not affect the Expiration
Date.
3.3. Delay on Possession. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease. Lessee shall not, however,
be obligated to pay Rent or perform its other obligations until it receives
possession of the Premises. If possession is not delivered within (60) see orig.
2.0 day period, cancel this Lease, in which event the Parties shall be
discharged from all obligations hereunder. If such written notice is not
received by Lessor within said ten (10) day period, Lessee's right to cancel
shall terminate. Except as otherwise provided, if possession is not tendered to
Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid,
any period of rent abatement that Lessee would otherwise have enjoyed shall run
from the date of delivery of possession and continue for a period equal to what
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to what Lessee would otherwise have
enjoyed under the terms hereof, but minus any days of delay caused by the acts
or omissions of Lessee. If possession of the Premises is not delivered within
four (4) months after the Commencement Date, this Lease shall terminate unless
other agreements are reached between Lessor and Lessee, in writing.
3.4 Lease Compliance. Lessor shall not be required to tender possession of
the Premises to Lessee until Lessee complies with its obligation to provide
evidence of insurance (Paragraph 8.6). Pending delivery of such evidence, Lessee
shall be required to perform all of its obligations under this Lease from and
after the Start Date, including the payment of Rent, notwithstanding Lessor's
election to withhold possession pending receipt of such evidence of insurance.
Further, if Lessee is required to perform any other conditions prior to or
concurrent with the Start Date, the Start Date shall occur but Lessor may elect
to withhold possession until such conditions are satisfied.
4. Rent.
4.1 Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
Rent for any period during the term hereof which is for less than one (1) full
calendar month shall be prorated based upon the actual number of days of said
month. Payment of Rent shall be made to Lessor at its address stated herein or
to such other persons or place as Lessor may from time to time designate in
writing. Acceptance of a payment which is less than the amount then due shall
not be a waiver of Lessor's rights to the balance of such Rent, regardless of
Lessor's endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefor deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. If the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor so that the total amount of the Security
Deposit shall at all times bear the same proportion to the Increased Base Rent
as the Initial Security Deposit bore to the Initial Base Rent. Should the Agreed
Use be amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said changes in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or termination
of the Lease, if Lessor elects to apply the Security Deposit only to unpaid
Rent, and otherwise within thirty (30) days after the Premises have been vacated
pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the
Security Deposit not used or applied by Lessor. No part of the Security Deposit
shall be considered to be held in trust, to bear interest or to be prepayment
for any monies to be paid by Lessee under this Lease.
Initials /s/ AA
----------
PAGE 2
<PAGE>
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use,
or any other legal use which is reasonably comparable thereto, and for no other
purpose. Lessee shall not use or permit the use of the Premises in a manner that
is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to neighboring properties. Lessor shall not
unreasonably withhold or delay its consent to any written request for a
modification of the Agreed Use, so long as the same will not impair the
structural integrity of the improvements on the Premises or the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises. If Lessor elects to withhold consent, Lessor shall within five (5)
business days after such request give written notification of same, which notice
shall include an explanation of Lessor's objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products, or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expenses) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such use
is in compliance with all Applicable Requirements, is not a Reportable Use, and
does not expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may condition its consent to any Reportable Use upon receiving such
additional assurances as Lessor reasonably deems necessary to protect itself,
the public, the Premises and/or the environment against damages, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and/or increasing the Security
Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor, and provide Lessor
with a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
Lessee, or any third party.
(d) Lessee Indemnification. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless from
and against any and all loss of rents and/or damages, liabilities, judgments,
claims, expenses, penalties, and attorneys' and consultants' fees arising out of
or involving any Hazardous Substance brought onto the Premises by or for Lessee,
or any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties). Lessee's obligations shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation, removal, remediation, restoration and/or abatement, and shall
survive the expiration or termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee shall
release Lessee from its obligations under this Lease with respect to Hazardous
Substances, unless specifically so agreed by Lessor in writing at the time of
such agreement.
(g) Lessor Termination Option. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue in
full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and
Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lessee shall continue in full
force and effect, or (ii) if the estimated cost to remediate such condition
exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater, give written notice to Lessee, within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of
Lessor's desire to terminate this Lease as of the date sixty (60) days following
the date of such notice. In the event Lessor elects to give a termination
notice, Lessee may, within ten (10) days thereafter, give written notice to
Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with said funds or satisfactory assurance thereof
within thirty (30) days following such commitment. In such event, this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time provided, this Lease shall terminate as of the
date specified in Lessor's notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise
provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to the Premises, without regard to whether said
requirements are now in effect or become effective after the Start Date. Lessee
shall, within ten (10) days after receipt of Lessor's written request, provide
Lessor with copies of all permits and other documents, and other information
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving the failure
of Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in
Paragraph 30 below) and consultants shall have the right to enter into Premises
at any time, in the case of emergency, and otherwise at reasonable times, for
the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall be
paid by Lessor, unless a violation of Applicable Requirements, or a
contamination is found to exist or be imminent, or the inspection is requested
or ordered by a governmental authority. In such case, Lessee shall upon request
reimburse Lessor for the cost of such inspections, so long as such inspection is
reasonably related to the violation or contamination.
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7. Maintenance, Repairs, Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9. (Damage or Destruction, and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premise as requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises), including, but
not limited to, all equipment or facilities, such as plumbing, heating,
ventilating, air-conditioning, electrical, lighting facilities, boilers,
pressure vessels, fire protection system, fixtures, walls (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices, specifically including the procurement and
maintenance of the service contracts required by Paragraph 7.1(b) below.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all Improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall, during the term of this
Lease, keep the exterior appearance of the Building in a first-class condition
consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers, (viii) basic utility
feed to the perimeter of the Building, and (ix) any other equipment, if
reasonably required by Lessor.
(c) Replacement. Subject to Leasee's Indemnification of Lessor as set
forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if the Basic Elements described in Paragraph 7.1(b) cannot be
repaired other than at a cost which is in excess of 50% of the cost of replacing
such Basic Elements, then such Basic Elements shall be replaced by Lessor, and
the cost thereof shall be prorated between the Parties and Lessee shall only be
obligated to pay, each month during the remainder of the term of this Lease, on
the date on which Base Rent is due, an amount equal to the product of
multiplying the cost of such replacement by a fraction, the numerator of which
is one, and the denominator of which is the number of months of the useful life
of such replacement as such useful life is specified pursuant to Federal Income
tax regulations or guidelines for depreciation thereof (including Interest on
the unamortized balance as is then commercially reasonable in the judgment of
Lessor's accountants), with Lessee reserving the right to prepay its obligations
at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation).
It is intended by the Parties hereto that Lessor have no obligation, in any
manner whatsoever, to repair and maintain the Premises, or the equipment
therein, all of which obligations are intended to be that of the Lessee. It is
the intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereafter in effect to
the extent it is inconsistent with the terms of this Lease.
7.3 Utility Installation; Trade Fixtures; Alterations.
(a) Installations; Consent Required. The term "Utility Installations"
refers to all floor and window coverings, air lines, power panels, electrical
distribution, security and fire protection systems, communication systems,
lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.
The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements, other than Utility Installation
or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations
and/or Utility Installations" are defined as Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations
to the Premises without Lessor's prior written consent. Lessee may, however,
make non-structural Utility Installations to the Interior of the Premises
(excluding the roof) without such consent but upon notice to Lessor, as long as
they are not visible from the outside, do not involve puncturing, relocating or
removing the roof or any existing walls, and the cumulative cost thereof during
this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in
any one year.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee's: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) Indemnification. Lessee shall pay, when due, all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Leasee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, than Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to one and one-half times the amount of such contested lien, claim
or demand, indemnifying Lessor against liability for the same. If Lessor elects
to participate in any such action, Lessee shall pay Lessor's attorneys' fees and
costs.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require removal or elect
ownership as hereinafter provided, all Alterations and Utility Installations
made by Lessee shall be the property of Lessee, but considered a part of the
Premises. Lessor may, at any time, elect in writing to be the owner of all or
any specified part of the Lessee Owned Alterations and Utility Installations.
Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or termination of
this Lease, become the property of Lessor and be surrendered by Lessee with the
Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor not
earlier than ninety (90) and not later than thirty (30) days prior to the end of
the term of this Lease, Lessor may require that any or all Lessee Owned
Alterations or Utility Installations be removed by the expiration or termination
of this Lease. Lessor may require the removal at any time of all or any part of
any Lessee Owned Alterations or Utility Installations made without the required
consent.
(c) Surrender Restoration. Lessee shall surrender the Premises by the
Expiration Date or any earlier termination date, with all of the improvements,
parts and surfaces thereof broom clean and free of debris, and in good operating
order, condition and state of repair, ordinary wear and tear excepted. "Ordinary
wear and tear" shall not include any damage or deterioration that would have
been prevented by good maintenance practice. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Leasee
Owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee, and the
removal, replacement, or remediation of any soil, material or groundwater
contaminated by Leasee. Trade Fixtures shall remain the property of Lessee and
shall be removed by Lessee. The failure by Lessee to time by vacate the Premises
pursuant to this Paragraph 7.4(c) without the express written consent of Lessor
shall constitute a holdover under the provisions of Paragraph 26 below.
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8. Insurance; Indemnity.
8.1 Payment for Insurance. Lessee shall pay for all insurance required
under Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor under Paragraph 8.2 (b) in excess of $2,000,000 per
occurrence. Premiums for policy periods commencing prior to or extending beyond
the Lease term shall be prorated to correspond to the Lease term. Payment shall
be made by Lessee to Lessor within ten (10) days following receipt of an
Invoice.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "Additional Insured-Managers or Lessors of Premises
Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance by Lessor, whose insurance shall be considered excess
insurance only.
(b) Carried by Lessor. Lessor shall maintain liability insurance as
described in Paragraph 8.2(a) in addition to, and not in lieu of , the
insurances required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force a policy or policies in the name of Lessor, with loss payable to
Lessor, any ground lessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurance value thereof. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's
personal property shall be insured by Lessee under Paragraph 8.4 rather than by
Lessor. If the coverage is available and commercially appropriate, such policy
or policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver or subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located. If
such insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) Rental Value. The Insuring Party shall obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one (1) year. Said insurance
shall provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide for
one full year's loss of Rent from the date of any such loss. Said insurance
shall contain an agreed valuation provision in lieu of any coinsurances clause,
and the amount of coverage shall be adjusted annually to reflect to the
projected Rent otherwise payable by Lessee, for the next twelve (12) month
period. Lessee shall be liable for any deductible amount in the event of such
loss.
(c) Adjacent Premises. If the Premises are part of a larger building,
or of a group of buildings owned by Lessor which are adjacent to the Premises,
the Lessee shall pay for any increase in the Premiums of the property insurance
of such building or buildings if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property, Trade Fixtures and Lessee Owned Alternations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all parts commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such parts.
(c) No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B(plus), V, as set forth in the most current issue of
"Best's Insurance Guide", or such other rating as may be required by a Lender.
Lessee shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand. Such policies shall be for a term of at least
one year, or the length of the remaining term of this Lease, whichever is less.
If either Party shall fail to procure and maintain the insurance required to be
carried by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damage against the other, for loss of or damage to its
property arising out of or incident to the profits required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductible applicable hereto.
The Parties agree to have their respective property damage insurance carriers
waive any right to subrogation that such companies may have against Lessor or
Lessee, as the case may be, so long as the insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct,
Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor
and its agents, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, liens, judgments,
penalties, attorneys, and consumers' fees, expenses and/or liabilities arising
out of, involving, or in connection with, the use and/or occupancy of the
Premises by Lessee. If any action or proceeding is brought against Lessor by
reason of any of the foregoing matters, Lessee shall upon notice defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, HVAC or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon either portions of the Building of which the Premises are a
part, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under
no circumstances be liable for injury to Lessee's business or for any loss of
income or profit therefrom.
9. Damage or Restriction
9.1 Definitions
(a) "Premises Partial Damage" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alternations and Utility
Installations, which can reasonably be repaired in six (6) months or less from
the date of the damage or destruction.
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Lessor shall notify Lessee in writing within thirty (30) days from the date of
the damage or destruction as to whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations and
Trade Fixtures, which cannot reasonably be repaired in six (6) months or less
from the date of the damage or destruction Lessor shall notify Lessee in writing
within thirty (30) days from the date of the damage or destruction as to whether
or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be covered by the
insurance described in paragraph 8.3 (a), irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an
Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lessee shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 of less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds (except as to
the deductible which is Lessee's responsibility) as and when required to
complete said repairs. In the event, however, such shortage was due to the fact
that, by reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within then (10) days
following receipt of written notice of such shortage and request thereof. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, the party responsible for making the repairs shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to: (1) make
such restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full forces and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee shall
not be entitled to reimbursement of any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be
some insurance coverage, but the net proceeds for any such insurance shall be
made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an insured loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage. Such termination shall be effective sixty (60) days following the date
of such notice. In the event Lessor elects to terminate this Lease, Lessee shall
have the right within (10) days after receipt of the termination notice to give
written notice to Lessor of Lessee's commitment to pay for the repair of such
damage without reimbursement from Lessor. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within thirty (30) days after making
such commitment. In such event this Lease shall continue in full force and
effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not make the
required commitment, this Lease shall terminate as of the date specified in the
termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate sixty (60) days
following such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of this Lease there is damage for which the cost to repair exceeds one (1)
month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to amend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurances thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date upon which
such option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurances during such period, than this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies
(a) Abatement. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value Insurance. All other
obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall
have no liability for any such damage, destruction, remediation, repair or
restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial and meaningful way, such repair
or restoration within ninety (90) days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives such notice
and such repair or restoration is not commenced within thirty (30) days
thereafter, the Lease shall terminate as of the date specified in said notice.
If the repair or restoration is not commenced within thirty (30) days, this
Lease shall continue in full force and effect. "Commence" shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 Termination-Advance Payments. Upon termination of this Lease pursuant
to Paragraph 6.2(g) of Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes
10.1 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of assessment; real estate, general,
special, ordinary or extraordinary, or rental levy or tax (other than
inheritance, personal income or estate taxes); improvement bond; and/or license
fee imposed upon or levied against any legal or equitable interest of Lessor in
the Premises. Lessor's right to other income herefrom, and/or Lessor's business
of leasing, by any authority having the direct or indirect power to tax and
where the funds are generated
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with reference to the Building address and where the proceeds so generated are
to be applied by the city, county or other local taxing authority of a
jurisdiction within which the Premises are located. The term "Real Property
Taxes" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring during the term of this
Lease, including, but not limited to, a change in the ownership of the Premises.
10.2
(a) Payment of Taxes. Lessee shall pay the Real Property Taxes
applicable to the Premises during the term of this Lease. Subject to Paragraph
10.2(b), all such payments shall be made at least ten (10) days prior to any
delinquency date. Lessee shall promptly furnish Lessor with satisfactory
evidence that such taxes have been paid. If any such taxes shall cover any
period of time prior to or after the expiration or termination of this Lease,
Lessee's share of such taxes shall be prorated to cover only that portion of the
tax bill applicable to the period that this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment. If Lessee shall fail to pay any required
Real Property Taxes, Lessor shall have the right to pay the same, and Lessee
shall reimburse Lessor therefor upon demand.
(b) Advance Payment. In the event Lessee incurs a late charge on any
Rent payment, Lessor may, at Lessor's option, estimate the current Real Property
Taxes, and require that such taxes be paid in advance to Lessor by Lessee,
either: (i) in a lump sum amount equal to the installment due, at least twenty
(20) days prior to the applicable delinquency date, or (ii) monthly in advance
with the payment of the Base Rent. If Lessor elects to require payment monthly
in advance, the monthly payment shall be an amount equal to the amount of the
estimated installment of taxes divided by the number of months remaining before
the month in which said installment becomes delinquent. When the actual amount
of the applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes. If the amount collected by Lessor is insufficient to pay such
Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All moneys paid to
lessor under this Paragraph may be intermingled with other moneys of Lessor and
shall not bear interest. In the event of a Breach by Lessee in the performance
of its obligations under the Lease, then any balance of funds paid to Lessor
under the provisions of this Paragraph may at the option of Lessor, be treated
as an additional Security Deposit.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to delinquency, all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause such property to be assessed and
billed separately from the real property of Lessor. If any of Lessee's said
personal property shall be assessed with Lessor's real property, Lessee shall
pay Lessor the taxes attributable to Lessee's property within ten (10) days
after receipt of a written statement.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any terms thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. Assignment and Subletting
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or encumber (collectively, "assign or assignment") or sublet
all or any part Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis, of twenty-five percent
(25%) or more of the voting control of Lessee shall constitute a change in
control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment
or hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which lessor may
withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c) or a noncurable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unapproved assignment or subletting as a noncurable Breach, Lessor
may either: (i) increase terminate this Lease, or (ii) upon thirty (30) days
written notice increase the monthly Base Rent to one hundred ten percent (110%)
of the Base Rent then in effect. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to one hundred ten percent
(110%) of the price previously in effect and (ii) and fixed and non-fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessor's remedy for any breach of Paragraph 12.1 by Lessor shall
be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) after the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may
proceed directly against Lessee, any Guarantors or anyone else responsible for
the performance of Lessee's obligations under this Lease, including any assignee
or sublessee, without first exhausting Lessor's remedies against any other
person or entity responsible therefore to Lessor, or any security held by
Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to, the intended use and/or
required modification of the Premises. If any, together with a fee of $1,000 or
ten percent (10%) of the current monthly Base Rent applicable to the portion of
the Premises which is the subject of the proposed assignment or sublease,
whichever is greater, as consideration for Lessor's considering and processing
said request. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed to have
assigned and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all sublease under this
Lease whether or not expressly incorporated therein:
(a) Lessor hereby assigns and transfer to Lessor all of Lessee's
interest in all Rent payable on any sublease, and Lessor may collect such Rent
and apply same toward Lessee's obligations under this Lease; provided, however,
that until a Breach shall occur in the performance of Lessee's obligations,
Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or
any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such subleases. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice
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from Lessor stating that a Breach exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor all Rent due and to become due
under the sublease. Sublessee shall rely upon any such notice from Lessor and
shall pay all Rents to Lessor without any obligation or right to inquire as to
whether such Breach exists, notwithstanding any claim from Lessee to the
contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option,
require sublessee to attorn to Lessor, in which event Lessor shall undertake the
obligations of the sublessor under such sublease from the time of the exercise
of said option to the expiration of such sublease: provided, however, Lessor
shall not be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any prior Defaults or Breaches of such
sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee fro any
such Defaults cured by the sublessee.
13. Default, Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to
comply with or perform any of the terms, covenants, conditions or rules under
this Lease. A "Breach" is defined as the occurrence of one or more of the
following Defaults, and the failure of Lessee to cure such Default within any
applicable grace period:
(a) The abandonment of the Premises: or the vacating of the Premises
without providing a commercially reasonable level of security, or where the
coverage of the property insurance described in Paragraph 8.3 is jeopardized as
a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance of
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (1) reasonable written evidence
of compliance with Applicable Requirements, (ii) the service contracts, (iii)
the rescission of an unauthorized assignment or subletting, (iv) a Tenancy
Statement, (v) a requested subordination, (vi) evidence concerning any guaranty
and/or Guarantor, (vii) any document requested under Paragraph 42 (easements),
or (viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if this nature of Lessee's Default is such that more
than thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of
any general arrangement or assignment for the benefit of creditors; (ii)
becoming a "debtor" as defined in 11 U.S.C. section 101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises as of Lessee's Interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery that any financial statement of Lessee or of any
Guarantor given to Lessor was materiality false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to hone the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory basis, and
Lessee failure, within sixty (60) days following written notice of any such
event, to provide written alternative assurance or security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the combined
financial resources of Lessee and the Guarantor's that existed at the time of
execution of this Lease.
13.2 Remedies. If Lessee fails to perform any of its affirmative duties or
obligations, within ten (10) days after written notice (or in case of an
emergency, without notice), Lessor may, at its option, perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licensee, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee upon receipt of invoice therefor. If any check given
to Leasor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made by Lessee to
be by cashier's check. In the event of a Breach, Lessor may, with or without
further notice or demand, and without limited Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach:
(a) Terminate. Lessee's right to possession of the Premises by any
lawful means, in which case the Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lessee. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Breach of this Lease shall not waive Lessor's right
to recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable
therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessor's right to possession and recover
the Rent as it becomes due, in which event Lessee may sublet or assign, subject
only to reasonable limitations. Acts of maintenance, efforts to relet, and/or
this appointment of a receiver to protect the Lessor's interests, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the
laws or judicial decision of the state wherein the Premises are located. The
expiration or termination of this Lease and/or the termination of Lessee's right
to possession shall not relieve Lessee from liability.
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under any Indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3. Inducement Recapture. Any agreement for free or abated rent or other
charges, or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into this Lease,
all of which concessions are hereinafter referred to as "Inducement Provisions,"
shall be deemed conditioned upon Lessee's full and faithful performance of all
of the terms, covenants and conditions of this Lease. Upon Breach of this Lease
by Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by Lessor
under such an Inducement Provisions shall be immediately due and payable by
Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee.
The acceptance by Lessor or rent or the cure of the Breach which initiated the
operation of this paragraph shall not be deemed a waiver by Lessor of the
provisions of this paragraph unless specifically so stated in writing by Lessor
at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
of Rent will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within five (5) days after such amount shall be
due, then, without any requirement for notice to Lessee, Lessee shall pay to
Lessor a one-time late charge equal to ten percent (10%) of each such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of such late
payment. Acceptance of such late charge by Lessor shall in no event constitutes
a waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent the exercise of any of the other rights and remedies granted hereunder.
In the event that a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of Base Rent, then notwithstanding any
provisions of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than late
charges, not received by Lessor, when due as to schedule payments (such as Base
Rent) or within thirty (30) days following the date on which it was due for non-
scheduled payment, shall bear interest from the date when due, as to scheduled
payments, or the thirty-first (31st) day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be equal to the prime rate
reported in the Wall street Journal as published closest prior to the date when
due plus four percent (4%), but shall not exceed the maximum rate allowed by
law. Interest is payable in addition to the potential late charge provided for
in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of this
Lease unless Lessor falls within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and any Lender whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are reasonably
required for its performance, than Lessor shall not be in breach if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event that
neither Lessor nor Lender cures said breach within thirty (30) days after
receipt of said notice, or if having commenced said cure they do not diligently
pursue it to completion, then Lessee may elect to cure said breach at Lessee's
expense and offset from Rent an amount equal to the greater of one month's Base
Rent or the Security Deposit, and to pay an excess of such expense under
protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall
document the cost of said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs. If more than ten percent (10%) of any building portion of the
premises, or more than twenty-five percent (25%) of the land area portion of the
premises not occupied by any building, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
Premises remaining, except that the Base Rent shall be reduced in proportion to
the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expense, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. Brokers' Fee.
15.2 Assumption of Obligations. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assured Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15,22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lessee when due, then such amounts
shall accrue interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered in to and by and/or
between Lessor and Lessor's Broker.
15.3 Representations and Indemnities of Broker Relationships. Lessee and
Lessor each represent and warrant to the other that it has had no dealings with
any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the Indemnifying Party. Including any costs expenses,
attorneys' fees reasonably incurred with respect thereto.
16. Estoppel Certificate.
(a) Each Party (as "Responding Party") shall within ten (10) days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the than most current "Estoppel Certificate" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no insured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrances may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
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(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee and all Guarantors shall deliver to any potential
lender or purchaser designated by Lessor such financial statements as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purpose herein set forth.
17. Definition of Lessor. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's Interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's Interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provisions hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the provisions of Paragraph 17 above,
the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the Individual partners of Lessor or its or their
Individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the Individual partners of Lessor, or its or their Individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. Time of Essence. Time of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to his Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by courier) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 Days of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantee next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the Postal Service or courier. Notices transmitted by
facsimile transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt, provided a copy is also delivered via delivery or mail.
If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed
received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessees may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, than the Base Rent shall be increased to
one hundred fifty percent (150%) of the Base Rent applicable during the month
immediately preceding the expiration or termination. Nothing contained herein
shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with as other remedies at
law or in equity.
28. Covenants and Conditions; Construction of Agreement. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the parties, but rather
according to be their meaning as a whole, as if both parties had perceived it.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination, Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lessor's Lender") shall have no liability or obligations to
perform any of the obligations of Lessor under this Lease. Any Lender may elect
to have this Lease and/or any Option granted hereby superior to the lien of its
Security Device by giving written notice thereof to Lessee, whereupon this Lease
and such Options shall be deemed prior to such Security Device, notwithstanding
the relative duties of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new
Initials /s/ AA
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<PAGE>
owner shall not: (i) be liable for any act or omission of any prior lessor or
with respect to events occurring prior to acquisition of ownership; (ii) be
subject to any offsets or defenses which Lessee might have against any prior
lessor, or (iii) be bound by prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease.
Lessor shall use its commercially reasonable efforts to obtain an Non-
Disturbance Agreement from the holder of any pre-existing Security Device which
is secured by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement with said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether or
not such action or proceeding is pursued to decisions or judgment. The term,
"Prevailing Party" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be, whether
by compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fees award shall not be computed
in accordance with any court fee schedule, but shall be such as to fully
reimburse all attorney's fees reasonably incurred. In addition, Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. Lessor's Access Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchaser, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises as Lessor may deem necessary.
All such activities shall be without abatement of rent or liability to Lessee.
Lessor may at any time place on the Premises any ordinary "For Sale" signs and
Lessor may during the last six (6) months of the term hereof place on the
Premises any ordinary "For Lease" signs. Lessee may at any time, place on or
about the Premises any ordinary "For Sublease" sign.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard or reasonableness in determining
whether to permit an auction.
34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.
35. Termination, Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to constitute any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election of have such event
constitute the termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgement that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons of such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within ten (10) business days following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty in
the form most recently published by the American Industrial Real Estate
Association, and each such Guarantor shall have the same obligations as Lessee
under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any Guarantor
fails or refuses, upon request to provide: (a) evidence of the execution of the
guaranty, including the authority of the party signing on Guarantor's behalf to
obligate Guarantor, and in the case of a corporate Guarantor, a certified copy
of a resolution of its board of directors authorizing the making of such
guaranty, (b) current financial statements, (c) a Tenancy Statement, or (d)
written confirmation that the guaranty is still in effect.
38. Quiet Possession. Subject to payment by Lessee of the Rent and
performances of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. Options
39.1 Definition. "Option" shall mean: (a) the right to extend the term of
or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor, (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.
39.3 Multiple Options. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options have been validly exercised.
39.4 Event of Default on Options.
(a) Lessee shall have no right to exercise an Option: (i) during the
period commencing with the giving of any notice of Default and continuing until
said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Default are cured, during the twelve (12) months period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or effect,
notwithstanding Lessee's due and timely exercise of the Option, if, after such
exercise and prior to the commencement of the extended term, (i) lessee fails to
pay Rent for a period of thirty (30) days after such Rent becomes due without
any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee
three (3) or more notices of separate Default during any twelve (12) month
period, whether or not the Default are cured, or (iii) if Lessee commits a
Breach of this Lease.
40. Multiple Buildings. If the Premises are a part of a group of buildings
controlled by Lessor, Lessee agrees that it will observe an reasonable rules and
regulations which Lessor may make from time to time for the management , safety,
and care of said properties, including
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<PAGE>
the care and cleanliness of the grounds and including the parking, loading and
unloading of vehicles, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the costs of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time,
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay.
44. Authority. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other party
satisfactory evidence of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining or normal financing or
refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is named herein as
either Lessor or Lessee, such multiple Parties shall have joint and several
responsibility to comply with the terms of this Lease.
49. Mediation and Arbitration of Disputes. An addendum requiring the Mediation
and/or Arbitration of all disputes between the Parties and/or Brokers arising
out of this Lease [ ] is [X] is not attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
- --------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- --------------------------------------------------------------------------------
The parties herein have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at:_________________________ Executed at: San Jose
on: _________________________________ On: March 22, 2000
By LESSOR: By LESSEE:
Terra Bella Inc. & Archie J. Snider Peerless System Networking a wholly
- ------------------------------------- -----------------------------------
D.b.a. Terra Snider Joint Venture owned subsidiary of Peerless System
- ------------------------------------- -----------------------------------
Corporation
-----------------------------------
By:__________________________________ By: /s/ Adam Au
--------------------------------
Name Printed:________________________ Name Printed: Adam Au
----------------------
Title:_______________________________ Title: VP & General Manager
-----------------------------
By:__________________________________ By:________________________________
Name Printed:________________________ Name Printed:______________________
Title:_______________________________ Title:_____________________________
Address:_____________________________ Address:___________________________
_____________________________________ ___________________________________
Telephone: ( )_____________________ Telephone: (650) 569-4405
-------------------------
Facsimile: ( )_____________________ Facsimile: (650) 568-9308
-------------------------
Federal ID No.: ( )________________ Federal ID No.: ( )______________
NOTE: These terms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017, (213) 687-8777.
Fax No. (213) 687-8616
PAGE 12
/C/ Copyright 1997 - By American Industrial Real Estate Association. All rights
reserved. No part of these works may be reproduced in any form without
permission in writing.
<PAGE>
ADDENDUM TO THE LEASE AGREEMENT DATED MARCH 16, 2000 BY AND BETWEEN PEERLESS
SYSTEMS NETWORKING A WHOLLY OWNED SUBSIDIARY OF PEERLESS SYSTEMS CORPORATION, AS
LESSEE/TENANT, AND TERRA BELLA INC. AND ARCHIE J. SNIDER, D.B.A. TERRA SNIDER
JOINT VENTURE, AS LESSOR/LANDLORD, FOR THE PROPERTY COMMONLY KNOWN AS 1130 TERRA
BELLA IN MOUNTAIN VIEW, CALIFORNIA.
50. Rent Schedule:
-------------
Lessee shall pay rent to Lessor based upon the following schedule:
MONTHS MONTHLY BASE RENT NNN
------ ---------------------
1-12 $67,447.00
13-24 $70,145.00
25-36 $72,951.00
37-48 $75,869.00
49-60 $78,903.00
61-72 $82,060.00
73-84 $85,342.00
51. Letter of Credit (Additional Security Deposit):
----------------------------------------------
Subject to all the terms and conditions of paragraph 5 of the Lease
Agreement and in addition to the Cash Security Deposit amount of
$134,894.00, Lessee shall deliver to Lessor, upon execution of this lease
agreement, an Additional Security Deposit in the form of an irrevocable
Letter of Credit as hereinafter described (the "Letter of Credit").
The Letter of Credit shall (i) be an irrevocable standby letter of credit
(ii) be issued by a reputable bank reasonably approved by Landlord, (iii)
name Landlord as beneficiary, (iv) be payable on sight draft accompanied
only by Landlord's statement that it is entitled to payment there on
because an Event of Default under the Lease has occurred, (v) be in a form
acceptable to Lessor, (vi) be for an initial term of at least twelve (12)
months and shall be renewed for four (4) twelve (12) months periods
immediately thereafter (for a total term of five (5) years), and (vii)
assume payment in the amount of $741,917.00. The following provisions
shall govern the parties' rights and obligations with respect to the
Letter of Credit.
51.1 Landlord shall be entitled to recourse against the Letter of
Credit to recover any loss or damage it may suffer as a result of any
breach or default by Tenant under this Lease. Partial draws shall be
permitted under the Letter of Credit.
51.2 Tenant shall keep the Letter of Credit in effect during the
entire initial Term; Tenant's failure to do same or Tenant's failure to
furnish written evidence to Landlord of the renewal of the Letter of
Credit shall be an Event of Default hereunder. Provided Tenant is not in
default at the end of the twelfth (12th), twenty-fourth (24th), thirty-
sixth (36th) and forty-eighth (48th) months, respectively, of the Term,
and not more than one (1) Event of Default under the Lease had occurred
during the preceding twelve (12) month period. Tenant may reduce the
amount of the Letter of Credit at the end of each such months as follows:
MONTHS LETTER OF CREDIT AMOUNT
------ -----------------------
1-12 $741,917.00
13-24 $593,533.60
25-36 $445,150.20
37-48 $296,766.80
49-60 $148,383.40
51.3 Tenant shall pay, as Additional Rent under this Lease, any and
all costs or fees charged in connection with the Letter of Credit that
arise due to: (i) Landlord's sale or transfer of all or a portion of the
Building; (ii) the addition, deletion or modification of any beneficiaries
under the Letter of Credit.
51.4 Tenant shall have no injunctive relief against either Landlord
or the issuer of the irrevocable standby Letter of Credit for Landlord's
or Issuer's failure to draw upon or pay from such Letter of Credit to the
manner provided for in the Lease or in the Letter of Credit.
52. Assignment and Subletting (Additional Terms and Conditions):
-----------------------------------------------------------
52.1 Notwithstanding anything to the contrary contained in the Lease
Agreement, and in addition in Landlord's right to approve of any subtenant
or assignee, Landlord shall have the option, in its sole discretion, in
the event of any proposed subletting or assignment to terminate this
Lease, or in the case of a proposed subletting of less than the entire
Premises, to recapture the portion of the Premises to be sublet, as of the
date the subletting or assignment to be effective. The option shall be
exercised, if at all, by Landlord giving Tenant written notice given by
Landlord to Tenant within fifteen (15) days following Landlord's receipt
of Tenant's written notice as required above. If this Lease shall be
terminated with respect to the entire Premises pursuant to this Section,
the Term of this Lease shall end on the date stated to Tenant's notice as
the effective date of the sublease assignment as if that date had been
originally fixed in this Lease for the expiration of the Term. If landlord
recaptures under this Section only a portion of the Premises, the rent to
be paid from time to time during the unexpired Term shall abate
proportionately based in the proportion by which the approximate square
footage of the remaining portion of the Premises shall be less than that
of the Premises as of the date immediately prior to such recapture.
52.2 Notwithstanding anything to the contrary contained in the Lease
Agreement, in the event that Tenant sells, sublets, assigns or transfers
this Lease, Tenant shall pay to Landlord as additional rent an amount
equal to fifty percent (50%) of any Increased Rent (is defined below) when
and as such Increased Rent is received by Tenant. As used in this Section,
"Increased Rent" shall mean the excess of (i) all rents and other
consideration which Tenant is entitled to receive by reason of any sale,
sublease, assignment or other transfer of this Lease, ever (ii) the rent
otherwise payable by Tenant under this Lease at such time. For purposes of
the foregoing, any consideration received by Tenant in form other than
cash shall be valued as its fair market value as determined by the
Landlord in good faith.
53. Relief
------
Lessor, at Lessor's sole cost and expense, shall install a new roof
membrane prior to the Lease Commencement Date.
54. Contaminate Acknowledgement:
---------------------------
Lessee Acknowledges that certain contaminates may be present, due to an
offsite source, in the ground water below the Premises.
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<PAGE>
55. Compliance with Covenants, Restrictions and Building Code:
---------------------------------------------------------
Lessee, at Lessee's sole cost and expense, shall be responsible for
compliance with the Disabled Access Regulation under Title 24 of the
California Code of Regulations and to American With Disabilities Act and
any Seismic requirements if such compliance is required by any
governmental organization holding jurisdiction as a result or any
Alterations or Utility Installations made to the Premises by Lessee or due
to the date Lessee will put to the Premises.
56. Effect of Addendum:
------------------
In the event of any inconsistency between this Addendum and the Lease
Agreement, the terms of this Addendum shall prevail. As used herein, the
term "Lease Agreement" shall mean the pre-printed Lease Form (American
Industrial Real Estate Association 1997 Standard Industrial/Commercial
Single-Tenant Lease-Net) attached hereto.
READ AND APPROVED:
- -----------------
Lessor: Terra Bella Inc. & Archie J. Snider
d.b.a. Terra Snider Joint Venture
By: __________________________
By: __________________________
By: __________________________
Date: ________________________
Lessee: Peerless System Networking a wholly owned Subsidiary of Peerless
System Corporation
By: /s/ Adam Au
--------------------------
Its: VP & General Manager
--------------------------
Date: 3/22/2000
-------------------------
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2
<PAGE>
GUARANTY OF LEASE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
WHEREAS, Terra Bella Inc. And Archie J. Snider, d.b.a. Terra Snider Joint
----------------------------------------------------------------
Venture, hereinafter referred to as "Lessor", and Peerless Systems Networking a
- ------- -----------------------------
wholly owned Subsidiary of Peerless Systems Corporation, hereinafter referred to
- -------------------------------------------------------
as "Lessee", are about to execute a document entitled "Lease" dated March 16,
--------
2000 concerning the premises commonly known as 1130 Terra Bella, Mountain View,
- ---- -------------------------------
California wherein Lessor will lease the premises to Lessee, and
- ----------
WHEREAS, Peerless Systems Corporation "a Delaware Corporation",
----------------------------------------------------
hereinafter referred to as "Guarantors", have a financial interest in Lessee,
and
WHEREAS, Lessor would not execute the Lease if Guarantors did not execute
and deliver to Lessor this Guaranty of Lease.
NOW THEREFORE, for and in consideration of the execution of the foregoing,
Lease by Lessor and as a material inducement to Lessor to execute said Lease,
Guarantors hereby jointly, severally, unconditionally and irrevocably guarantee
the prompt payment by Lessee of all rentals and all other sums payable by Lessee
under said Lease and the faithful and prompt performance by Lessee of each and
every one of the terms, conditions and covenants of said Lease to be kept and
performed by Lessee.
It is specifically agreed and understood that the terms of the foregoing
Lease may be altered, affected, modified or changed by agreement between Lessor
and Lessee, by a course of conduct, and said Lease may be assigned by Lessor or
any assignee of Lessor without consent of notice to Guarantors and that this
Guaranty shall thereupon and thereafter guarantee the performance of said Lease
as to changed, modified, altered or assigned.
This Guaranty shall not be released modified or affected by failure to
delay on the part of Lessor to enforce any of the rights or remedies of the
Lessor under said Lease, whether pursuant to the terms thereof or at law or in
equity.
No notice of default need be given to Guarantors, it being specifically
agreed and understood that the guarantee of the undersigned is a continuing
guarantee under which Lessor may proceed forthwith and immediately against
Lessee or against Guarantors following any breach or default by Lessee or the
enforcement of any rights which Lessor may have as against Lessee pursuant to or
under the terms of the written Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantors hereunder
following any breach or default by Lessee without first proceeding against
Lessee and without previous notice to or demand upon either Lessee or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protect, (c) all right to assert or please
any statue of limitation as to or relating to this Guaranty and the Lease, (d)
any right to require the Lessor to proceed against the Lessee or any other
Guarantor or any other person or entity liable to Lessor, (e) any right to
require Lessor to apply any default any security deposit or other security it
may hold under the Lease, (f) any right to require Lessor to proceed under any
other remedy Lessor may have before proceeding against Guarantors, (g) any right
of subrogation.
Guarantors do hereby subrogate all existing or future indebtedness of
Lessee to Guarantors to the obligations owed to Lessor under the Lease and this
Guaranty.
Any married woman who signs this Guaranty expressly agrees that recourse
may be had against her separate property for all of her obligations hereunder.
The obligations of Lessee under the Lease to execute and deliver estoppel
statements and financial statements, as therein provided, shall be deemed to
also require the Guarantors hereunder to do and provide the same relative to
Guarantors.
The term "Lessor" whenever hereinabove used refers to and means the Lessor
in the foregoing Lease specifically named and also any assignee of said Lessor,
whether by outright assignment or by assignment for security, and also any
successor to the interest of said Lessor or of any assignee in such Lessee or
any part thereof, whether by assignment or otherwise. So long as the Lessor's
interest in or to the leased premises or the rents, issues and profits
therefrom, or in, to or under said Lease, are subject to any mortgage or deed of
trust or assignment for security, no acquisition by Guarantors of the Lessor's
interest in the leased premises or under said Lease shall effect the continuing
obligation of Guarantors under this Guaranty which shall nevertheless continue
in full force and effect for the benefit of the mortgagee, beneficiary, trustee
or assignee under such mortgage, deed or trust or assignment, of any purchase at
sale by judicial foreclosure or under private power of sale, and the successors
and assigns of any such mortgagee, beneficiary, trustee, assignee or purchaser.
The term "Lessee" whenever hereinabove used refers to and means the Lessee
in the foregoing Lease specifically named and also any assignee or sublease of
said Lease and also any successor to the interests of said Lease, assignee or
sublessee or said Lease or any part thereof, whether by assignment, sublease or
otherwise.
In the event any action be brought by said Lessor against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
If this Form has been filled in it has been prepared for submission to your
attorney for his approval. No representation or recommendation is made by the
real estate broker or its agents or employees as to the legal sufficiency, legal
effect, or tax consequences of this Form or the transaction relating therein.
Executed at:________________________ Peerless System Corporation "a
------------------------------
Delaware Corporation"
on:_________________________________ --------------------
By: /s/ Adam Au
Address_____________________________ ---------------------------------
Its: VP & General Manager
____________________________________ -------------------------------
"GUARANTORS"
NOTE: For these forms write or call the American Industrial Real Estate
Association, 350 S. Figuroine Street, Suite 275, Los Angeles, CA 90071.
213-687-8777.
Initials /s/ AA
--------
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<PAGE>
EXHIBIT A
[LOGO OF COMMERCIAL REAL ESTATE]
REAL PROPERTY DISCLOSURE AND ACKNOWLEDGMENT
(LEASE)
Date: March 16, 2000
--------------------------------------------------------------
Broker: BT Commercial
--------------------------------------------------------------
Lessor: Terra Bella Inc. and Archie Snider of d.b.a. Terra Snider
Joint Venture
--------------------------------------------------------------
Lease: Peerless Systems Networking, a wholly owned subsidiary of
Peerless Systems Corporation
--------------------------------------------------------------
Property Address: 1130 Terra Bella, Mountain View
--------------------------------------------------------------
Also Known As: A + / - 12,263 square foot Office / R&D Building
--------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTIFICATION RE: NATIONAL FLOOD INSURANCE PROGRAM
- -------------------------------------------------
This property [_] is / [x] is not located in a Special Flood Hazard Area on
United States Department of Housing and Urban Development (HUD) "Special Flood
Zone Area Maps." Federal law requires that as a condition of obtaining federally
related financing on most properties located in "flood zones, banks, savings and
loan associations, and some insurance lenders require flood insurance to be
carried where the property, real or personal, is secured for a loan. This
requirement is mandated by the National Flood Insurance Act of 1968 and the
Flood Disaster Protection Act of 1973. The purpose of the program is to provide
flood insurance to property owners at a reasonable cost. Cities or countries
participating in the National Flood Insurance Program may have adopted building
or zoning restrictions, or other measures, as a part of their participation in
the program. You should contact the city or county in which the property is
located to determine any such restrictions. The extent of coverage available in
your area and the cost of this coverage may vary, and for further information,
you should consult your tender or insurance carrier.
Flood Zone Designation: Zone:_________ Source:_____________________________
NOTIFICATION: ALQUIST - PRIOLO SPECIAL EARTHQUAKE FAULT ZONING ACT
- ------------------------------------------------------------------
The Property described above [_] is / [x] is not / [_] may not be situated in an
Earthquake Fault Zone as designated under the Alquist-Priolo Earthquake Fault
Zoning Act, Sections 2621-2630, inclusive, of the California Public Resources
Code; and, as such, the construction or development of the Property of any
structure for human occupancy may be subject to the findings of a geologic
report prepared by a geologist registered in the State of California, unless
such report is waived by the city or county under the terms of the Act. No
representations on the subject are made by Lessor or by Broker of its agents or
employees, and the Lessee should make his/her/its own inquiry or investigation.
HAZARDOUS WASTES OR SUBSTANCES AND UNDERGROUND STORAGE TANK
- -----------------------------------------------------------
Comprehensive federal and state laws and regulations have been enacted in the
past several years in an effort to control the use, storage, handling, clean-up,
removal and disposal of hazardous wastes or substances. Some of these laws and
regulations (such as, for example, the Comprehensive Environmental Response
Compensation Liability Act (CERCLA) provide for broad liability on the part of
owners, tenants, or other users on property for clean-up costs and damages,
regardless of fault. Another such statute is California Health and Safety Code
Section 25359.7(a), which provides in part that a Lessor of nonresidential real
property who knows, or has reasonable cause to believe, that any release of a
hazardous substance that has come to be located on or beneath that real property
shall, prior to the lease, give written notice of that condition to the Lessee;
and that failure of the Lessor to provide written notice as required shall
subject the Lessor to liability for damages. Other laws and regulations set
standards for the handling of asbestos, and establish requirements for the use,
modification, abandonment, and closure of underground storage tanks.
Page 1 of 3
<PAGE>
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, Broker recommends that Lessors and Lessees consult legal
counsel to determine their respective rights and liabilities with respect to the
issues described in the Notice, as well as all other aspects of the proposed
transaction. If hazardous wastes or substances have been, or are going to be
used, stored, handled or disposed on the Property, of if the Property has had or
may have underground storage tanks, it is essential that legal and technical
advise be obtained to determine, among other things, the nature of permits and
approvals which have been obtained or may be required; the estimated costs and
expenses associated with the use, storage, handling, clean-up, disposal or
removal of hazardous wastes or substances; and the nature and extent of
contractual provisions necessary or desirable in this transaction. Broker
recommends expert assistance and site investigation to determine past uses of
the property, which may provide valuable information as to the likelihood of
hazardous wastes or substances, or underground storage tanks, being on the
Property.
Lessor agrees to disclose to Broker and to Lessee any and all information which
he/she/it has regarding present and future zoning and environmental matters
affecting the Property and regarding the condition of the Property, including,
but not limited to, structural, mechanical and soil conditions, the presence and
location of asbestos, PCB transformers, other toxic, hazardous or contaminated
substances, and underground storage tanks, in, on or about the Property. Broker
hereby requests that such information be provided immediately so that it may be
timely communicated to the Lessee.
Broker has conducted no investigation regarding the subject matter hereof,
except as may be contained in a separate written document signed by Broker.
Broker makes no representations concerning the existence or nonexistence of
hazardous wastes or substances, or underground storage tanks in, on, or about
the Property. Lessee should contact a professional such as a civil engineer,
industrial hygienist or other persons with experience in these matters, to
advise on these matters.
The term "hazardous wastes or substances" is used herein in its very broadest
sense and includes, but is not limited to, petroleum based products, paint and
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium
compounds, asbestos, PCBs and other chemical products. Hazardous wastes or
substances and underground storage tanks may be present on all types of real
property. This Notice is intended to apply to any transaction involving any type
of real property, whether improved or unimproved.
BROKER DISCLOSURE
- -----------------
The parties hereby expressly acknowledge that Broker has made no independent
determination or investigation regarding the following: present or future use or
zoning of the property; environmental matters affecting the Property; the
condition of the Property, including, but not limited to, structural, mechanical
and soils conditions, as well as issues surrounding hazardous wastes or
substances as set out above; violations of the Occupational Safety and Health
Act or any other federal, state, county or municipal laws, ordinances, or
statutes; measurements of land and/or buildings. Lessee agrees to make its own
investigation and determination regarding such items.
A real estate broker is qualified to advise on real estate. If you desire legal
advice, please consult your attorney.
AMERICANS WITH DISABILITIES ACT (ADA)
- -------------------------------------
Owners of tenants of real property may be subject to the Americans with
Disabilities Act (ADA), a federal law codified at 42 USC Section 12201 et. seq.
Among other requirements of the ADA that could apply to your property, Title III
of the Act requires owners and tenants of "public accommodations" to remove
barriers to access by disabled persons and provide auxiliary aids and services
for hearing, vision or speech impaired persons. The regulations under Title III
of the ADA are codified at 28 CFR Part 36.
Broker recommends that you and your attorney review the ADA and the regulations,
and, if appropriate, your proposed lease agreement, to determine if this law
would apply to you and the nature of the requirements. These are legal issues.
You are responsible for conducting your own independent investigation of these
issues.
Page 2 of 3
<PAGE>
EARTHQUAKE SAFETY
- -----------------
Owners of their agents who are involved in the transfer of a precast concrete or
reinforced or unreinforced masonry building with wood frame floors or roof which
was built before January 1, 1975 must deliver to the transferee a copy of a
state entitled "The Commercial Property Owner's Guide to Earthquake Safety"
published by the California Seismic Safety Commissions. The undersigned Lessee
of the real property herein described acknowledges that Broker has delivered to
the undersigned a copy thereof in accordance with California Government Code
Section 8875.6 and Sections 8893 et seq.
Y2K DISCLOSURE
- --------------
Many buildings are depended on computers, computer software applications or
microchips (collectively, "Computer") that operate building systems like
elevators, lighting, power, HVAC and security systems. Many of these Computers
are date sensitive. Unless the Computers are Year 2000 Compliant (hereinafter
defined), the Computers may experience operating problems or fall to operate
when the date changes to a number the Computer does not properly recognize. In
addition, many vendors providing services in or for the benefit of a building
owner may rely on computers or software systems that are not year 2000
Compliant. The failure of the vendor's systems may cause service interruptions
when the date changes. Any Computer or vendor failures may have a significant
impact upon the value of a building or any leasehold interest in a building.
Year 2000 Compliant means, that a computer will properly read and process
information involving dates in both the twentieth and twenty-first century, and
that date information will be read or sorted in accurate sequence and that
calculations involving dates will be performed properly, including leap year
calculations.
The real estate brokers involved in this transaction are neither authorized nor
qualified to advise you as to whether the Building, its systems, or its vendors
are Year 2000 Compliant. Nor are the brokers involved in this transaction
qualified to advise you concerning whether the Seller or Owner has an adequate
plan to bring it or the Property into Year 2000 Compliance, or to assure that
the vendors providing goods or services to the property have adequately
addressed the Year 2000 issue. It is the responsibility of the parties to a
transaction to retain expert advisors to assist them in evaluating the potential
Year 2000 Compliance Issues relating to any particular transaction. The brokers
involved in this transaction are not qualified to advise you concerning a
potential expert's qualifications.
- --------------------------------------------------------------------------------
RECEIPT OF A COPY OF THESE DISCLOSURES IS HEREBY ACKNOWLEDGED
LESSOR: Terra Bella Inc. and Archie J. LESSEE: Peerless System Networking
Snider d.b.a. Terra Snider
Joint Venture
By:_____________________________________ By: /s/ Adam Au
-------------------------------
Its:____________________________________ Its: VP & General Manager
------------------------------
Dated:__________________________________ Dated: 3/22/2000
---------------------------
Notice to Lessor and Lessee: BT Commercial is not authorized to give legal or
tax advice. No representation or recommendation is made by BT Commercial or it s
agents or employees as to the legal sufficiency, legal effect or tax
consequences of this document or any transaction relating thereto since these
are matters which should be discussed with your attorney.
Page 3 of 3
<PAGE>
EXHIBIT 10.29
LEASE
1. PARTIES. This Lease is entered into as of this 31st day of
-------
January, 1996, by and between KENT CENTENNIAL LIMITED PARTNERSHIP, a Washington
limited partnership ("Landlord"), and HDE, INC., a Washington corporation (as
"Tenant").
2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby
--------
leases form Landlord upon the terms and conditions herein set forth that certain
space (the "Premises") containing approximately 4,422 square feet of floor area,
all as shown on Exhibit A attached hereto and incorporated herein by this
---------
reference. The Premises constitute a portion of a building (the "Building")
located at 400 West Gowe, Kent, Washington, and situated upon the real property
legally described on Exhibit B attached hereto and incorporated herein by this
---------
reference (the "Land").
3. COMMON AREAS. The following areas adjacent to or located in or on
------------
the Premises, Building, or Land shall constitute common areas available for
Tenant's non-exclusive use including without limitation: walkways, hallways,
stairways, driveways, lavatories, janitorial rooms, mechanical rooms, electrical
rooms, landscaped areas and grounds, parking areas, Parking Garage and all other
areas used in common by the tenants of the Building, Landlord, and invitees and
employees of Tenant. All Common Areas shall be subject to Landlord's sole
management and control and shall be operated and maintained in such manner as
Landlord, in its sole discretion, shall determine. Landlord may, from time to
time in Landlord's sole discretion, alter, modify or change the dimensions and
location of the Common Areas, or designate portions of the Common Areas for the
exclusive use of tenants of the Building. Tenant and others entitled or allowed
to use the Common Areas shall be subject to and shall comply with rules and
regulations applicable to the Common Areas as may be established by Landlord
from time to time.
4. LEASE TERM AND COMMENCEMENT DATE. This Lease shall be for a term
--------------------------------
of twelve (12) months and shall, subject to the provisions of this paragraph,
commence on February 1, 1996 (the "Commencement Date"), and shall end on that
date which is one (1) day prior to twelve (12) months thereafter, or January 31,
1997 (the "Termination Date").
4.1 Tenant Improvements. Landlord shall furnish and install
-------------------
within the Premises, the Tenant Improvements in accordance with final plans and
specifications shown on Exhibit A and in accordance with the Work Letter
---------
attached hereto. Landlord shall, in accordance with the provisions of the Work
Letter attached hereto and incorporated herein by this reference, complete the
Tenant Improvements to the Premises pursuant to the Work Letter. The Tenant
Improvements shall be deemed completed three (3) business days after the date
Landlord's contractor certifies to Tenant in writing that the Tenant
Improvements are substantially completed pursuant to the Work Letter, subject to
the completion of minor "punch list" items not necessary for Tenant's use or
occupancy of the Premises. Landlord shall, after substantial completion, cause
the punch list items to be promptly and diligently completed.
5. RENT; ADDITIONAL RENT.
---------------------
5.1 Monthly Rent. Tenant agrees to pay Landlord as Rent, without
------------
notice or demand, the sums for the time periods shown on the Rent Schedule
attached hereto as Exhibit C (the "Monthly Rent"), in advance, on or before the
---------
first day of the month in which the
-1-
<PAGE>
Commencement Date occurs, and a like sum on or before the first day of each and
every successive calendar month thereafter during the term hereof. Monthly Rent
for any period during the term hereof which is for less than one month shall be
a prorated portion of the Monthly Rent herein, based upon a thirty (30) day
month. The Monthly Rent payable hereunder shall be subject to adjustment as
hereinafter provided in subparagraph 5.2, and Tenant agrees to pay as additional
rental, the amount of the rental adjustments and other charges required by this
Lease. All Rent shall be paid to Landlord at the address to which notices to
Landlord are to be given, in accordance with paragraph 27.17 herein, without
deduction or offset in lawful money of the United States of America, or to such
other persons or at such other place as Landlord may from time to time designate
in writing.
5.2 Monthly Rent Adjustment; Additional Rent. It is agreed that
----------------------------------------
the Monthly Rent called for in subparagraph 5.1 above includes Tenant's Share of
"Operating Expenses." The amount of annual Operating Expenses which Landlord has
included within the Monthly Rent at the commencement of the Lease term is $4.95
per square foot per year ("Operating Expenses Base"). As used herein, "Operating
Expenses" shall mean:
5.2.1 Operating Expenses. Operating Expenses include any
------------------
and all costs and expenses directly related to and incurred by
Landlord in connection with the repair, operation, and maintenance of
the Building, including interior and exterior maintenance, all costs
to maintain, repair and replace Common Areas, including covered and
uncovered parking areas (including the Parking Garage), elevators,
sidewalks, driveways, exterior walls (including periodic painting
thereof), roof membrane and surface, and all other areas used in
common by tenants of the Building and, in addition, the structural
parts including glass and doors, (but excluding foundation, structural
portions of the roof, concrete walls and the concrete floors and
subflooring (but not he finish thereon)); all reasonable costs to
supervise, manage, and administer the maintenance of the Building and
the Land, including the Common Areas, and such fees (not to exceed
four percent (4%) of the Monthly Rent) as may be paid to a third party
in connection with such supervision and management or a fee to
Landlord or Landlord's designee to supervise and administer the
maintenance of the Building and the Land, including the Common Areas,
including wages, salaries, and benefits of personnel engaged in the
management, operation, maintenance or repair of the Building and the
Land; the costs of the annual determination of the operating expenses,
the amortization of capital investments made to reduce operating costs
limited, however, to the amount of the resulting reduction in
Operating Expenses, and the amortization of extraordinary repairs made
to extend the life of the Building in accordance with generally
accepted operational and maintenance procedures as such repairs are
amortized over their useful life in accordance with reasonable and
sound operational and accounting practices; the amortization of
capital investments made to the Building and Common Areas required by
governmental law or action; and all costs of services furnished by
Landlord, including janitorial, security, gardening, landscaping, and
related costs and expenses, licenses, permits, and inspection fees,
the cost of supplies, materials, equipment, and tools used in
connection with the maintenance, operation, or repair of the Building
and Land, and all other costs and expenses directly related to the
operation, maintenance, and repair of the Building, Land and Common
Areas, (excluding, however, such costs which are the responsibility of
third parties or other tenants of the Building). Operating Expenses
shall also include: Real estate taxes and insurance defined as
follows:
Real estate taxes. All real estate taxes, including, without
-----------------
limitation, any installments payable for any improvement
assessments, personal property taxes, and any and all other
governmental charges, general or special, ordinary or
extraordinary, of any kind and nature whatsoever, including
without limitation, surcharges levied upon or assessed upon
parking spaces or areas (including the
-2-
<PAGE>
Parking Garage), and payments to public transit or carpooling
facilities required by any governmental agency; and
Insurance. Any and all insurance premiums including fire,
---------
extended coverage, public liability, boiler, elevator, D.I.C.,
property damage, and other insurance premiums as such amounts
relate to the Premises, the Building, and the Land on which the
Premises are located.
5.2.2 Tenant's Share of Operating Expenses. Tenant's
------------------------------------
Share of Operating Expenses shall equal its prorated share of the
total Operating Expenses calculated by dividing the actual square foot
area of the Premises by the actual total leasable area in the Building
containing the Premises. As of the date of this Lease, it is estimated
that Tenant's Share will be 6.2%. Operating Expenses covering a period
not within the term of this Lease shall be prorated.
5.2.3 Adjustment. For purposes of Tenant's paying its
----------
share of Operating Expenses, Tenant and Landlord agree that the
Monthly Rent called for in subparagraph 5.1 above is subject to
adjustment at the beginning of each calendar year for the term hereof.
The Monthly Rent shall be adjusted to include Tenant's Share of
Operating Expenses in excess of the Operating Expenses Base of $4.95
per square foot per year. If Tenant's Share of the Operating Expenses
paid or incurred by Landlord for any calendar year exceeds the
Operating Expenses Base included in Tenant's Monthly Rent, then Tenant
shall pay such excess as additional rent.
On March 1 after the beginning of each calendar year of the
term hereof, Landlord shall give to Tenant a statement of any
additional rent payable by Tenant hereunder for the previous year,
which shall be due and payable within thirty (30) days of Tenant's
receipt of said statement. In addition, Tenant shall pay Tenant's
Share of Landlord's estimate of the amount by which the Operating
Expenses shall exceed the Operating Expenses Base. This estimated
amount shall be divided into twelve (12) equal monthly installments.
Tenant shall pay to Landlord, concurrently with the regular Monthly
Rent payment next due following the receipt of such statement, an
amount equal to one (1) monthly installment multiplied by the number
of months from January in the calendar year in which said statement is
submitted to the month of such payment, both months inclusive.
Subsequent installments shall be payable concurrently with the regular
Monthly Rent payments for the balance of that calendar year and shall
continue until the next calendar year's statement is rendered.
If, in any calendar year the actual amount of Tenant's Share
of actual Operating Expenses which is in excess of the Operating
Expenses Base is less than the payments made by Tenant during that
year, then upon receipt of Landlord's statement, Landlord shall pay
the excess to Tenant at the time Landlord furnishes said statement, or
credit the excess toward Tenant's payments of Tenant's Share of
Operating Expenses in the next succeeding calendar year, at Tenant's
sole election. However, in no event shall Tenant be credited for any
amount which will cause Tenant's rent to be reduced below the Monthly
Rent established in paragraph 5.1 above.
Even though the term is expired and Tenant has vacated the
Premises, when the final determination is made of Tenant's Share of
Operating Expenses for the year in which this Lease terminates, Tenant
shall immediately pay an increase due over the estimated Operating
Expenses paid and, conversely, any overpayment made in the event said
Operating Expenses decrease shall be immediately rebated by Landlord
to Tenant.
-3-
<PAGE>
5.3 Occupancy Adjustment Period. In the event the average occupancy
---------------------------
level of the Building for any year of the Lease term was or is not ninety five
percent (95%) or more of full occupancy, the sum of all costs and expenses
comprising of the Operating Expenses of such year shall be adjusted
proportionately by Landlord to reflect those costs which would have occurred had
the Building been ninety five percent (95%) occupied during such year.
5.4 Change in Method of Taxation. If, at any time during the term of
----------------------------
this Lease, the present method of taxation is changed to that in lieu of or in
addition to the whole or part of any taxes, assessments, or charges levied,
assessed, or imposed upon real estate and the improvements thereon, there is
levied, assessed, or imposed on Landlord a capital levy, or other tax directly
on the rents received or a franchise tax assessment, levy, or charge measured by
or based, in whole or in part, upon such rents for the present or any future
building or buildings on the Land or any other tax or assessment, levied or
assessed in lieu of or in addition to present taxes, assessments or charges,
then all such other or additional taxes, assessments, levies, or charges will be
deemed to be included within the term "real estate taxes" for the purposes
hereof.
6. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of Five
----------------
Thousand Five Hundred Ninety Three Dollars ($5,593.00) as of the date of
execution of this Lease, as a security deposit. Said sum shall be held by
Landlord as security for the faithful performance by Tenant of all the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term hereof. If Tenants defaults with respect to any provision of
this Lease, including, but not limited to, the provisions relating to payment of
rent, Landlord may (but shall not be required to) use, apply, or retain all or
any part of this security deposit for payment of any rent or any other sum in
default or for the payment of any amount which Landlord may spend or become
obligated to spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said deposit is so used or applied, Tenant shall,
within five (5) days after written demand thereof, deposit cash with Landlord in
an amount sufficient to restore the security deposit to its original amount and
Tenant's failure to do so shall be a default under this Lease. Landlord shall
not be required to keep the security deposit separate from its general funds.
Landlord shall receive any and all interest accruing on such deposit. If Tenant
shall fully and faithfully perform every provision of this Lease to be performed
by it, the security deposit or any balance thereof shall be returned to Tenant
or, at Landlord's option, to the last assignee of Tenant's interest hereunder
(within 10 days following expiration of the Lease term). In the event of
termination of Landlord's interest in this Lease, Landlord shall transfer said
deposit to Landlord's successor in interest. The use by Landlord of all or a
portion of the security deposit shall not constitute a limitation on Tenant's
liability.
7. USE OF PREMISES. Tenant's use and occupancy of the Premises shall be
---------------
for general office purposes. Tenant shall not use or permit the Premises to be
used for any other purpose without the prior written consent of Landlord.
7.1 Uses Prohibited. No retail sales shall be made on the Premises.
---------------
Tenant shall not do or permit anything to be done in or about the Premises nor
bring of keep anything therein which will in any way increase the existing rate
of or affect any fire or other insurance upon the Building or any of its
contents or cause a cancellation of any insurance policy covering the Building
or any part thereof or any of its contents. Tenant shall not do or permit
anything to be done in or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Building or
injure or annoy them or use or allow the Premises to be used for any improper,
immoral, unlawful, or objectionable purpose, nor shall Tenant cause, maintain,
or permit any nuisance in, on, or about the Premises. Tenant shall not commit or
allow to be committed any waste in or upon the Premises.
-4-
<PAGE>
7.2 Compliance With Law. Tenant shall not use or permit the use of
-------------------
the Premises in any way in conflict with any law or governmental rule. Tenant
shall, at its sole cost, promptly comply with all such laws and governmental
rules, including, without limitation, the Americans With Disabilities Act and
with the requirements of any board of fire underwriters or similar bodies now or
hereafter constituted relating to the condition, use or occupancy of the
Premises. The judgment of any court of competent jurisdiction or the admission
of Tenant in any action against Tenant that Tenant has violated any law or
governmental rule, whether or not Landlord is a party, shall be conclusive of
that fact as between Landlord and Tenant.
7.3 Use of Parking Garage; Parking Charges. The Parking Garage and
--------------------------------------
parking areas shall be used for vehicle parking only and not for storage.
Garbage and refuse awaiting collection which may be placed in parking areas or
the parking Garage shall be stored in dumpster type containers which shall be
placed in areas away from public view. Use of the parking areas and Parking
Garage shall be subject to parking charges as determined by Landlord in its sole
discretion, from time to time, during the term of this Lease. Tenant shall have
available to it a parking ratio of 3.5 parking stalls per 1,000 rentable square
feet in the restricted area of the Parking Garage, provided, however, such
stalls are on a first come, first served basis only.
8. ALTERATIONS AND ADDITIONS. Tenant shall not make or allow to be made
-------------------------
be made any alterations, improvements, or changes to or of the Premises or any
part thereof, including tenant improvements, without the prior written consent
of Landlord, and all improvements, alterations, or changes so made shall become
a part of the leased Premises and shall belong to Landlord upon expiration or
sooner termination of this Lease, unless Landlord requests that Tenant remove
the same upon termination or relocation under this Lease. In connection with
Landlord's determination regarding Landlord's consent, Landlord may request and
Tenant shall provide Landlord with current financial information regarding
Tenant's creditworthiness in order that Landlord may determine, in the exercise
of its reasonable judgment, Tenant's financial capability to pay for such
alterations, improvements, or changes to or of the Premises. In the event
Landlord consents to the making of any alterations, additions, or improvements
to the Premises by Tenant, the same shall be made by Tenant at Tenant's sole
cost and expense.
9. MAINTENANCE AND REPAIRS. Responsibility for maintenance and repairs
-----------------------
shall be allocated between Landlord and Tenant as follows:
9.1 Tenant's Obligations. By taking possession of the Premises,
--------------------
Tenant shall be deemed to have accepted the Premises as being clean and in good
order, condition, and repair. Tenant shall, at Tenant's sole cost and expense,
keep the Premises and every part thereof in good condition and repair (except as
hereinafter provided with respect to Landlord's obligations), including without
limitation the maintenance, replacement, and repair of any doors, windows, and
window casements. Tenant shall further, at Tenant's sole cost and expense,
repair any damage to plumbing, pipes, electrical wiring, and conduits located
within the Premises that occurs as a result of Tenant's neglect in its use of
these improvements to the Premises. Tenant shall, upon the expiration or sooner
termination of this Lease, surrender the Premises to Landlord in good condition,
broom clean, ordinary wear and tear excepted. Damage caused by Tenant's use of
the Premises shall be repaired at the sole cost and expense of Tenant.
9.2 Landlord's Obligations. Upon receipt of written notice of the
----------------------
need for the same, subject to the provisions of paragraph 5 hereinabove,
Landlord shall arrange for the repair and maintenance of the structural portions
of the Building, including the concrete walls and the concrete floors and
subflooring (but not the finish thereon), structural portions of the roof and
foundation. In the event the Building of which the Premises are a part is
occupied by third parties, in addition to Tenant, and in the event such
maintenance and repairs are necessitated in whole or in part by the acts,
neglect, fault, or omission of any duty by Tenant, its agents,
-5-
<PAGE>
servants, employees, invitees, Tenant shall pay to Landlord the entire cost of
such maintenance and repairs, rather than a prorated portion thereof as provided
in paragraph 5. There shall be no abatement of rent and no liability of Landlord
by reason of any injury to or interference with Tenant's business arising from
the making of any repairs, alterations, or improvements in or to any portion of
the Building or the Premises or in or to fixtures, appurtenances, and equipment.
Tenant waives the right to make repairs at Landlord's expense under any law,
statute, or ordinance now or hereafter in effect.
10. LIENS. Tenant shall keep the Premises and the Land on which the
-----
Premises are situated free from any liens arising out of any work performed,
materials furnished, or obligations incurred by Tenant. Landlord may require, at
Landlord's sole option, that Tenant shall provide Landlord, at Tenant's sole
cost and expense, a lien and completion bond in an amount equal to one and one-
half (1 -1/2) times the estimated cost of any improvements, additions, or
alterations in the Premises which Tenant desires to make with Landlord's prior
consent, to insure Landlord against any liability from mechanics' and
materialmen's liens, and to insure completion of the work. On final
determination of any lien and/or claim for lien, Tenant shall immediately pay
any judgment rendered, together with all proper costs and charges, and shall
have the lien released or judgment satisfied at no cost to Landlord.
11. HOLD HARMLESS. Tenant shall indemnify and hold harmless Landlord from
-------------
and against any and all claims arising from Tenant's use of the Premises or from
the conduct of its business or from any activity, work, or other things done,
permitted or suffered by Tenant in or about the Premises and shall further
indemnify and hold harmless Landlord from and against any and all claims arising
from any breach or default in the performance of any obligation on Tenant's part
to be performed under the terms of this Lease or arising from any act or
negligence of Tenant or any officer, agent, employee, guest, or invitee of
Tenant, and from all costs, attorneys' fees, liabilities incurred in or about
the defense of any such claim or any action or proceeding brought thereon. In
any action or proceeding brought against Landlord by reason of such claim,
Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by
counsel reasonably satisfactory to Landlord. Landlord shall not be liable to
Tenant for damage to Tenant or Tenant's property or injury to persons in, upon,
or about the Premises from any cause, except that Landlord shall be liable to
Tenant for damage to Tenant or Tenant's property resulting from the intentional
acts of Landlord, its agents or employees. Landlord or its agent shall not be
liable for any loss or damage to persons or property resulting from fire,
explosion, falling plaster, steam, gas, electricity, water, or rain which may
leak from any part of the Building or from the pipes, appliances, or plumbing
works therein or from the roof, street, or subsurface, or from any other place
resulting from dampness, or from any other cause whatsoever, unless caused by or
due to the negligence of Landlord, its agents, or employees. Landlord or its
agent shall not be liable for interference with the light or air, or for any
latent defect in the Premises. Tenant shall give prompt notice to Landlord in
case of casualty or accidents in the Premises.
12. SUBROGATION. So long as their respective insurers so permit, Landlord
-----------
and Tenant hereby mutually waive their respective rights of recovery against
each other for any loss insured by fire, extended coverage, and other property
insurance policies existing for the benefit of the respective parties. Each
party shall apply to their insurers to obtain said waivers. Each party shall
obtain any special endorsements if required by their insurer, to evidence
compliance with the aforementioned waiver.
13. LIABILITY INSURANCE. Tenant shall, at Tenant's expense, obtain and
-------------------
keep in force during the term of this Lease a policy of comprehensive public
liability insurance insuring Landlord and Tenant against any liability arising
out of the ownership, use, occupancy, or maintenance of the Premises. Such
insurance shall be in amount not less than $1,000,000 Combined Single Limit with
respect to injuries to or death of persons, and/or destruction of or damage to
property. The limit of any such insurance shall not, however, limit the
liability of
-6-
<PAGE>
Tenant hereunder. Tenant may provide this insurance under a blanket policy
provided said insurance shall have a landlord's protective liability endorsement
attached thereto. If Tenant shall fail to procure and maintain said insurance,
Landlord may, but shall not be required to, procure and maintain the same at the
expense of Tenant. Insurance required hereunder shall be in companies rated A-XI
or better in "Best's Insurance Guide." Tenant shall deliver to Landlord, prior
to right of entry, certificates evidencing the existence and amounts of such
insurance with loss payable clauses satisfactory to Landlord. No policy shall be
cancelable or subject to reduction of coverage by the Tenant without prior
written consent of Landlord. All such policies shall be written as primary
policies not contributing with and not only in excess of coverage which Landlord
may carry. Landlord shall, as an Operating Expense, cause to be obtained and
kept in force during the term of this Lease a policy of hazard and casualty
insurance, with replacement coverage in an amount acceptable to Landlord's
lender.
14. SERVICES AND UTILITIES. Provided that Tenant is not in default
----------------------
hereunder, Landlord agrees to furnish to the Premises during the hours of 6:45
A.M. to 7:00 P.M. on generally recognized business days, and during non-business
hours and non-business days, on an access and override basis, and subject to the
reasonable rules and regulations of the Building of which the Premises are a
part, the following services: (a) electricity for normal lighting and routine
office machines, (b) heat and air conditioning required in Landlord's judgment
for the comfortable use and occupation of the Premises, and maintenance of a
reasonable temperature in the Premises; (c) janitorial services unless Tenant
advises Landlord of Tenant's desire to provide its own janitorial services; and
(d) water in quantities reasonably used by Tenant. Landlord shall also maintain
and keep lighted the common stairs, common entries and toilet rooms in the
Building of which the Premises are a part. Landlord shall not be liable for, and
Tenant shall not be entitled to, any reduction of rent by reason of Landlord's
failure to furnish any of the foregoing when such failure is caused by accident,
breakage, repairs, strikes, lockouts or other labor disturbances or labor
disputes of any character, or by any other cause, similar or dissimilar, beyond
the reasonable control of Landlord. Landlord shall not be liable under any
circumstances for a loss of or injury to property, however, occurring, through
or in connection with or incidental to failure to furnish any of the foregoing,
except to the extent such loss or injury is directly caused by Landlord.
Wherever h eat generating machines or equipment are used by Tenant in the
Premises which affect the temperature otherwise maintained by the air
conditioning system, Landlord reserves the right to install supplementary air
conditioning units in the Premises and the cost thereof, including the cost of
installation, and the cost of operation and maintenance thereof shall be paid by
Tenant to Landlord upon demand by Landlord.
Tenant will not, without written consent of Landlord, use any apparatus or
device in the Premises, including machines which require electricity in excess
of that normally used by office machines such as photocopiers and mini
computers, which will in any way increase the amount or electricity usually
furnished or supplied for the use of the Premises as office space; nor connect
with electric current except through existing electrical outlets in the Premises
as agreed to in Tenant Improvements, any apparatus or device, for the purpose of
using electric current. If Tenant shall require water or electric current in
excess of that usually furnished or supplied for the use of the Premises as
general office space, Tenant shall first procure the written consent of
Landlord, which consent shall not be unreasonably withheld, to the use thereof
and Landlord may cause a water meter or electrical current meter to be installed
in the Premises, so as to measure the excess amount of water and electric
current consumed for any such use. The cost of any such meters and of
installation, maintenance and repair thereof shall be paid for by Landlord and
if excessive usage is disclosed by said meters, Tenant agrees to pay to Landlord
promptly upon demand, therefor by Landlord, for all such water and electric
current consumed as shown by said meters, at the rate charged for such services
by the local public utility furnishing the same, plus any additional expense
incurred in keeping account of the water and electric current so consumed. If a
separate meter is not installed, such excess cost for such water and electric
current will be established by an estimate made by a utility company or
electrical engineer.
-7-
<PAGE>
15. PERSONAL PROPERTY TAXES. Tenant shall pay or cause to be paid before
-----------------------
delinquency any and all taxes levied or assessed and which become payable during
the term hereof upon all tenants' equipment, furniture, fixtures, and any other
personal property located in the Premises. In the event any or all of the
Tenants' equipment, furniture, fixtures, and any other personal property shall
be assessed and taxed with the real property, Tenant shall pay to Landlord its
share of such taxes within ten (10) days after delivery to Tenant by Landlord of
a statement in writing setting forth the amount of such taxes applicable to
Tenant's property.
16. ENTRY BY LANDLORD. At any and all reasonable times during regular
-----------------
business hours, upon one (1) day's prior written notice to Tenant, Landlord
reserves and shall have the right to enter the Premises to inspect the same a
reasonable number of times, to submit the Premises to prospective purchasers or
tenants, to repair the Premises and any portion of the Building that Landlord
may deem necessary or desirable, without abatement of rent, and may for that
purpose erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, always providing that the
entrance to the Premises shall not be blocked thereby and further providing that
the business of Tenant shall not be interfered with unreasonably. Tenant hereby
waives any claim for damages or for any injury or inconvenience to or
interference with Tenant's business or any loss of occupancy or quiet enjoyment
of the Premises, and any other loss occasioned thereby. Landlord shall have the
right to use any and all means which Landlord may deem proper to open any doors
or otherwise obtain access to the Premises in an emergency, without liability to
Tenant except for any failure to exercise due care for Tenant's property, and
any entry to the Premises obtained by Landlord by any of said means or otherwise
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises or an eviction of Tenant from
the Premises or any portion thereof.
17. ASSIGNMENT AND SUBLETTING. It is understood and agreed that Landlord
-------------------------
may fully assign its interest in this Lease as Landlord. Tenant shall not either
voluntarily or by operation of law assign, transfer, mortgage, pledge,
hypothecate, or encumber this Lease or any interest therein and shall not sublet
the Premises or any part thereof or any right or privilege appurtenant thereto
or allow any person (the employees, agents, servants and invitees of Tenant
excepted) to occupy or use the Premises or any portion thereof without the prior
written consent of Landlord. Landlord reserves the right to recapture the
Premises, or applicable portions thereof, in lieu of giving its consent by
notice given to Tenant within fifteen (15) days after receipt of Tenant's
request for assignment or subletting and delivery of all reasonable information
or any such assignee or subtenant as requested by Landlord. Such recapture shall
terminate this Lease as to the applicable space effective on the prospective
date of the assignment or subletting, which shall be the last day of a calendar
month and not earlier than sixty (60) days after receipt of Tenant's request for
assignment or subletting and delivery of all reasonable information on any such
assignee or subtenant as requested by Landlord. If Landlord elects not to
recapture and thereafter gives its consent, Landlord and Tenant agree that
Landlord may charge Tenant a reasonable sum to reimburse Landlord for legal and
administrative costs incurred in connection with such consent; and that from the
date of such assignment or sublease of this Lease, Landlord shall receive any
rental, fees, and other proceeds payable by such subtenant or assignee in excess
of the rent to be paid to Landlord under the terms of this Lease. Any such
assignment or subletting without compliance with the terms of this paragraph
shall be void and shall, at the option of Landlord, constitute a default under
the terms of this Lease. If Tenant is a corporation, any transfer of this Lease
from Tenant by merger, consolidation, or liquidation or any change in the
ownership or power to vote in the majority of the outstanding voting stock of
Tenant shall constitute an assignment for purposes of this paragraph. If Tenant
is a partnership, any change in the individuals or entities of which the
partnership is composed shall constitute an assignment for purposes of this
paragraph. A consent to one assignment, subletting, occupation, or use by any
other person shall not be deemed to be a consent to any subsequent assignment,
subletting, occupation, or use by another person. Consent to any such assignment
or subletting shall in no
-8-
<PAGE>
way relieve Tenant of any liability under this Lease. Landlord may assign the
rental herein provided to any person, partnership, corporation, or bank, and
Tenant agrees when notified in writing by the assignee of such assignment to
make the rental payments to assignee under the terms of said assignment.
18. HOLDING OVER. If Tenant remains in possession of the Premises or any
------------
part thereof after the expiration of the term of this Lease with the express
written consent of Landlord, such occupancy shall be a tenancy from month to
month at a rental in the amount of 125% of the last monthly minimum rent, plus
all other charges payable hereunder, and upon all the terms hereof applicable to
a month-to-month tenancy.
19. TENANT'S DEFAULT. The occurrence of any one or more of the following
----------------
events shall constitute a default and breach of this Lease by Tenant.
19.1 Abandonment. Tenant vacates or abandons the Premises while the
-----------
rent remains unpaid;
19.2 Failure to Pay Rent. Tenant fails to make any payment of rent or
-------------------
any other payment required to be made by Tenant hereunder, as and when due,
where such failure shall continue for a period of three (3) business days after
written notice thereof by Landlord to Tenant;
19.3 Failure to Observe Other Covenants. Tenant fails to observe or
----------------------------------
perform any of the covenants, conditions, or provisions of this Lease to be
observed or performed by Tenant, other than described in subparagraph 19.1 and
19.2 above, where such failure shall continue for a period of thirty (30) days
after written notice thereof by Landlord to Tenant; provided, however, that if
the nature of Tenant's default is such that more than thirty (30) days are
reasonably required for such cure, then Tenant shall not be deemed to be in
default if Tenant commences such cure within said thirty (30) days and
thereafter, diligently prosecutes such cure to completion;
19.4 Insolvency. Tenant makes any general assignment or general
----------
arrangement for the benefit of creditors or the filing by or against Tenant of a
petition to have Tenant adjusted a bankrupt, or a petition to reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days) or
the appointment of a trustee or a receiver to take possession of substantially
all of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within thirty (30) days or the
attachment, execution, or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interests in this Lease
where such seizure is not discharged within thirty (30) days:
19.5 Misrepresentation. Tenant makes or has made or furnishes or has
-----------------
furnished any warranty, representation or statement to Landlord in connection
with this Lease, or any other agreement to which Tenant and Landlord are
parties, which is or was false or misleading in any material respect when made
or furnished; or
19.6 Failure To Take Possession. Tenant fails to take possession of
--------------------------
the Premises when Landlord delivers the same by notifying Tenant that the
Premises are ready for occupancy.
20. REMEDIES ON DEFAULT. In the event of any default or breach by
-------------------
Tenant, Landlord may, at any time thereafter with or without notice or written
demand in the exercise of a right or remedy which Landlord may have by reason of
such default or breach, terminate this Lease by written notice to Tenant, revoke
the Tenant's right to any free rent (whereupon any such free rent shall become
due and payable to Tenant), reenter and take possession of the Premises
-9-
<PAGE>
without termination of this Lease, declare all Rent to become due during the
initial term of this Lease to be fully and immediately due and payable, or
pursue any remedy allowed by law. Tenant agrees to pay Landlord the cost of
recovering possession of the Premises, the expenses of reletting, and any other
costs or damages arising out of Tenant's default, including, without limitation,
the costs of removing persons and property from the Premises, the costs of
repairing or altering the Premises for reletting, brokers' commissions, and
legal expenses and fee. Notwithstanding any termination, reentry, or reletting,
the liability of Tenant for the rent and additional rent for the balance of the
term of this Lease shall not be extinguished and Tenant shall pay and Landlord
may recover from Tenant at the time of termination, reentry, or reletting, the
excess, if any, of the amount of the rent reserved in this Lease for the balance
of the term hereof over the then reasonable rental value of the Premises for the
same period. Reasonable rental value shall mean the amount of rental which
Landlord does or could reasonably be expected to obtain as rent for the
remaining balance of the Lease term. In the event that Landlord relets the
Premises or any part thereof without first terminating Tenant's right to
possession pursuant to this Lease, Landlord reserves the right, at any time
thereafter, to elect to terminate Tenant's right to possession to that portion
of the Premises for the default that originally resulted in the reletting.
20.1 Remedies Cumulative. The remedies hereinafter described shall be
-------------------
cumulative and Landlord shall be entitled to pursue any other remedy now or
hereafter available to Landlord under the law or judicial decisions of the State
of Washington.
20.2 Removal of Personal Property. In the event of a retaking of
----------------------------
possession of the Premises by Landlord, Tenant shall remove all personal
property located thereon and upon failure to do so upon demand of Landlord,
Landlord may remove and store the same in any place selected by Landlord,
including but not limited to a public warehouse, at the expense and risk of
Tenant. If Tenant shall fail to pay the cost of storing any such property after
it has been stored for a period of thirty (30) days or more, Landlord may sell
any or all of such property at a public or private sale and shall apply the
proceeds of such sale first to the cost of such sale, secondly to the payment of
the charges for storage, if any, and thirdly to the payment of any other sums of
money which may be due from Tenant to Landlord under the terms of this Lease,
and the balance, if any, to Tenant. Tenant hereby waives all claims for damages
that may be caused by Landlord's lawfully reentering and taking possession of
the Premises or lawfully removing and storing the property of Tenant as herein
provided and will save Landlord harmless from loss or damages occasioned by
Landlord thereby, whether such lawful reentry shall be considered or construed
to be a forcible entry.
21. DAMAGE AND RECONSTRUCTION. Should the Premises be damaged during the
-------------------------
term of this Lease, Tenant shall immediately notify Landlord and the rights and
responsibilities of Landlord and Tenant shall be as follows:
21.1 Insured Damage. In the event the Premises are damaged by fire or
--------------
other perils covered by extended coverage insurance, Landlord agrees to
forthwith commence repair of the same to the extent of insurance proceeds
available and this Lease shall remain in full force and effect, except that
Tenant shall be entitled to a proportionate reduction of the minimum monthly
rent from the date of such damage and while such repairs are being made until
such repairs are substantially completed, such proportionate reduction to be
based upon the extent to which the damage and making of such repairs shall
unreasonably interfere with the business carried on by Tenant in the Premises.
If the damage is due to the fault or neglect of Tenant or its employees, there
shall be no abatement of rent.
21.2 Other Damage. In the event the Premises are damaged as a result
------------
of any cause other than the perils covered by fire and extended coverage
insurance, then Landlord shall forthwith commence repair of the same, provided
the extent of the destruction is less than ten
-10-
<PAGE>
percent (10%) of the then full replacement cost of the Premises. In the event
the destruction of the Premises is to an extent of ten percent (10%) or more of
the full replacement cost, then Landlord shall have the option (a) to repair or
restore such damage, this Lease continuing in full force and effect, but the
minimum monthly rent to be proportionately reduced as hereinabove provided as
for the date of such damage and while such repairs are being made until such
repairs are substantially completed, or (b) to give notice to Tenant at any time
within (60) days after such damage, terminating this Lease as of the date
specified by Landlord.
21.3 Damage During Last Twelve Months. Notwithstanding anything to
--------------------------------
the contrary continued in this paragraph, Landlord shall not have any obligation
whatsoever to repair, reconstruct, or restore the Premises when the damage
resulting from any casualty covered under this paragraph occurs during the last
twelve (12) months of the term of this Lease. In such event, Landlord may, at
Landlord's option: (a) terminate this Lease in the manner provided in
subparagraph 21.2 above; or (b) reduce the minimum monthly rent by a proportion
equal to the extent, if any, the damage interferes with the business carried on
by Tenant in the Premises in the manner provided in subparagraph 21.2 above.
21.4 Damage To Tenant's Property. Landlord shall not be required to
---------------------------
repair any injury or damage by fire or other cause or to make any repairs or
replacements of any leasehold improvements, fixtures, or other personal property
of Tenant.
22. EMINENT DOMAIN.
--------------
22.1 Taking. If twenty-five percent (25%) or more of the Premises
------
shall be taken or appropriated by any public or quasi-public authority under the
power of eminent domain, either party hereto shall have the right at its option
within sixty (60) days after said taking to terminate this Lease upon thirty
(30) days' written notice.
22.2 Partial Taking. If less than twenty-five percent (25%) of the
--------------
Premises are taken (or 25% or more of the Premises are taken and neither party
elects to terminate as herein provided) the minimum rent thereafter to be paid
shall be equitably reduced. If any part of the Building of which the Premises
are a part may be so taken or appropriated, Landlord shall within sixty (60)
days of said taking have the right at its option to terminate this Lease upon
written notice to Tenant.
22.3 Award. In the event of any taking or appropriation whatsoever,
-----
Landlord shall be entitled to any and all awards or settlements which may be
given and Tenant shall have no claim against the condemning authority or
Landlord for the value of any unexpired term of this Lease and Tenant hereby
assigns to Landlord any and all claims to any award or settlement. Nothing
contained herein shall be deemed to give Landlord any interest in or to require
Tenant to assign to Landlord any award made to Tenant for the taking of personal
property or fixtures belonging to Tenant or for the interruption of or damage to
Tenant's business or for Tenant's moving expenses.
23. SIGNS.
-----
23.1 Tenant Signs. No signage shall be installed on the Premises by
------------
Tenant. All signage within the Building and Premises shall be installed by
Landlord, at Landlord's expense, as a part of the completion of the Tenant
Improvements. Any such signage shall comply with and be subject to the Sign
Guidelines attached hereto as Exhibit D and incorporated herein by this
---------
reference. Any such signs shall be the property of Landlord.
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<PAGE>
23.2 For Lease or Sale Signs. At any time within one hundred eighty
-----------------------
(180) days prior to the expiration of this Lease, Landlord may place upon the
Premises "for lease" signs. Landlord may place "for sale" signs on the Premises
at any time during the Lease term.
24. SUBORDINATION AND MODIFICATION BY LENDER. Tenant agrees that this
----------------------------------------
Lease shall be subordinate to any mortgage or deed of trust that may hereafter
be placed upon the Premises or the Building and to any and all advances to be
made thereunder to the interest thereon, and all renewals, replacements, and
extensions thereof; provided, the mortgagee or trustee named in such mortgage or
deed of trust shall agree in writing to recognize the Lease of Tenant in the
event of foreclosure, if Tenant is not in default. In the event any mortgagee or
trustee elects to have the Lease a prior lien to its mortgage or deed of trust,
then in such event, upon such mortgagee or trustee notifying Tenant to that
effect, this Lease shall be deemed prior in lien to the said mortgage or deed of
trust whether or not this Lease is dated prior to or subsequent to the date of
said mortgage or trust deed. Within fifteen (15) business days of presentation,
Tenant agrees to execute any documents which such mortgagee or trustee may
require to effectuate the provisions of this paragraph. Tenant further agrees
that, if in connection with obtaining financing for the Land, Building, or
Premises, a lender shall request modification of this Lease as a condition to
such financing, Tenant shall not withhold, delay or defer its consent thereto,
provided that such modifications do not increase the financial obligations of
Tenant hereunder or materially adversely affect the leasehold interest hereby
created.
25. TENANT'S STATEMENT. Tenant shall at any time and from time to time
------------------
upon not less than ten (10) business days' prior written notice from Landlord
execute, acknowledge, and deliver to Landlord a statement in writing (a)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified is in full force and effect) and the date to which the rental and
other charges are paid in advance, if any, and (b) acknowledging that there are,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder,
or specifying such defaults if any are claimed, and (c) setting forth the date
of commencement of rents and expiration of the term hereof. Any such statement
may be relied upon by any prospective purchaser or encumbrancer of the Land,
Building, or Premises.
26. HAZARDOUS SUBSTANCES. Tenant shall not generate, release, spill,
--------------------
store, deposit, transport, or dispose of (collectively "Release") any hazardous
substances, sewage, petroleum products, hydrocarbons, radioactive substances,
medicinal, bacteriological, medical wastes, or disease-producing substances,
hazardous materials, toxic substances or any pollutants or substances defined as
hazardous or toxic in accordance with applicable federal, state, and local laws
and regulations ("Hazardous Substances") in, on or about the Premises, Building,
Common Areas or Land. In the event, and only in the event, Landlord approves
such Release of Hazardous Substances on the Premises, Building, Common Areas or
Land, Tenant agrees that such Release shall occur safely and in compliance with
all applicable federal, state, and local laws and regulations. Tenant shall
indemnify, hold harmless and defend Landlord from any and all claims,
liabilities, losses, damages, cleanup costs, response costs, and expenses
(including reasonable attorneys' fees) arising out of or in any way related to
the Release by Tenant, or any of its agents, representatives, or employees, or
the presence of such Hazardous Substances in, on or about the Premises,
Building, Common Areas or Land caused by Tenant or any of its agents,
representatives or its employees, and occurring at any time after the
Commencement Date. Landlord shall indemnify, hold harmless and defend Tenant
from any and all claims liabilities, losses, damages, cleanup costs, response
costs, and expenses (including reasonable attorneys' fees) arising out of or in
any way related to the presence of Hazardous Substances in, on or about the
Premises caused by Landlord or any of its agents, representatives or employees.
The provisions of this paragraph shall survive termination or expiration of this
Lease.
-12-
<PAGE>
27. GENERAL PROVISIONS. Landlord and Tenant agree to the following general
------------------
provisions:
27.1 Waiver. The waiver by Landlord of any term, covenant, or
------
condition herein contained shall not be deemed to be the waiver of such term,
covenant, or condition upon any subsequent breach of the same or of any other
term, covenant, or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding
default by Tenant of any term, covenant, or condition of this Lease other than
the failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding default at the time of the acceptance of
such rent.
27.2 Joint Obligation. If there be more than one Tenant, the
----------------
obligations hereunder imposed shall be joint and several.
27.3 Time. Time is of the essence of this Lease and each and all of
----
its provisions in which performance is a factor.
27.4 Paragraph Headings. The paragraph headings of this Lease are not
------------------
a part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
27.5 Successors and Assigns. The covenants and conditions herein
----------------------
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators, and assigns of the parties hereto.
27.6 Recordation. Neither Landlord nor Tenant shall record this Lease,
-----------
but a short form memorandum hereof may be recorded at the request of Landlord.
27.7 Quiet Possession. Upon Tenant paying the rent reserved hereunder
----------------
and performing all of the covenants, conditions, and provisions on Tenant's part
to be observed and performed hereunder, Tenant shall have quiet possession of
the Premises for the entire term hereof, subject to all the provisions of this
Lease. The Premises are leased subject to any and all existing encumbrances
conditions, rights, covenants, easements, restrictions, rights-of-way, and any
matters of record, applicable zoning and building laws, and such matters as may
be disclosed by inspection or survey.
27.8 Overdue Rent. Unpaid installments of the minimum monthly rent,
------------
Additional Rent, or other sums due hereunder shall, if not timely paid, be
subject to a late charge of Fifty and No/100 Dollars ($50.00) to cover the
excess costs of administration and shall bear interest from the date due at the
publicly announced prime rate for commercial borrowers of Seattle First National
Bank, Head Office, plus five percent (5%) until all rent and interest has been
paid in full.
27.9 Prior Agreements. This Lease contains all of the agreements of
----------------
the parties hereto with respect to any matter covered or mentioned in this Lease
and no prior agreements or understandings pertaining to any such matters shall
be effective for any purpose. No provision of this Lease may be amended or added
to except by agreement in writing signed by the parties hereto or their
respective successors in interest. This Lease shall not be effective or binding
upon any party until fully executed by both parties hereto.
27.10 Inability to Perform. This Lease and the obligations of Tenant
--------------------
hereunder shall not be affected or impaired because Landlord is unable to
fulfill any of its obligations hereunder or is delayed in doing so, if such
inability or delay is caused by reason of strike, labor troubles, acts of god,
or any other cause beyond the reasonable control of Landlord.
-13-
<PAGE>
27.11 Partial Invalidity. Any provisions of this Lease which shall
------------------
provide to be invalid, void, or illegal shall in no way affect, impair, or
invalidate any other provision hereof and such other provision shall remain in
full force and effect.
27.12 Cumulative Remedies. No remedy or election hereunder shall be
-------------------
deemed exclusive but shall whenever possible be cumulative with all other
remedies at law or in equity.
27.13 Choice of Law. This Lease shall be governed by the laws of the
-------------
State of Washington. The parties agree that venue for any action hereunder shall
properly lie in King County, Washington.
27.14 Attorneys' Fees. In the event of any action or proceeding
---------------
brought by either party against the other under this Lease, the prevailing party
shall be entitled to recover for the fees of its attorneys in such action or
proceeding including costs of appeal, if any, in such amount as the court may
adjudge reasonable as attorneys' fees. In addition, should it become necessary
for Landlord to employee legal counsel to enforce any of the provisions herein
contained, Tenant agrees to pay all attorneys' fees and court costs reasonably
incurred. For the purposes of this provision, the terms "action" or "proceeding"
shall include arbitration, administrative, bankruptcy, and judicial proceedings
included appeals therefrom.
27.15 Real Estate Commission. Tenant and Landlord each warrant to the
----------------------
other that, other than Cushman & Wakefield, no real estate broker or agent has
been employed by Tenant or Landlord or is entitled to receive any commission or
fee with respect to this transaction other than Cushman & Wakefield, to whom
Landlord has consented by written agreement and to whom Landlord has agreed to
pay a commission. Tenant and Landlord shall each indemnify and save the other
harmless from the claims of any real estate brokers or agents with whom Tenant
or Landlord as the case may be, may have dealt with respect to this transaction,
other than as so consented to by Landlord.
27.16 Execution. This Lease may be executed in several counterparts,
---------
each of which shall be deemed an original instrument.
27.17 Notices. All notices to be given hereunder shall be in writing
-------
and shall be personally delivered and receipt acknowledged, sent by United
States certified mail, return receipt requested, sent by facsimile, with
original delivered within three (3) business days, or sent by overnight delivery
through public or private service, delivery charge prepaid, and addressed to the
party at the respective mailing address as herein set forth.
To Landlord at:
Centennial Venture Limited Partnership
c/o Sound Ventures Management Company
400 West Gowe Street, Suite 412
Kent, WA 98032
Attn: Stephanie Klappenbach
To Tenant at:
HDE, INC.
400 West Gowe, Suite 324
Kent, WA 98032
Attn: David Glidewell
Gordon Hanson
-14-
<PAGE>
It is understood that each party may change the address to which notices
may be sent by giving a written notice of such change to the other party hereto
in the manner herein provided.
27.18 Corporate Authority. If Tenant is a corporation, each individual
-------------------
executing this Lease on behalf of said corporation represents and warrants that
he or she is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the board of
directors of said corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with it terms. Tenant further represents and warrants that it is fully
registered and qualified to do business in the State of Washington.
27.19 Limited Partnerships. It is understood and agreed that any
--------------------
claims by Tenant on Landlord shall be limited to the assets of the limited
partnership, and furthermore, Tenant expressly waives any and all rights to
proceed against the individual partners or the officers, directors, or
shareholders of any corporate partner, except to the extent of their interest in
said limited partnership.
27.20 Financial Statements. Upon the written request of the Landlord,
--------------------
which request shall be made by the Landlord no more than once per year at such
time as such financial statements shall consist of year-to-date reports for
Landlord is required to provide such financial information to Landlord's lender,
Tenant shall deliver to Landlord financial statements of Tenant, including a
balance sheet, income statement and statement of retained earnings. Such
financial statements shall consist of year-to-date reports for the current
fiscal year and annual reports for the last three fiscal years of Tenant. Each
such financial statement shall be dated as of the end of such reporting period,
shall be in reasonable detail and shall be duly certified by an independent
certified public accountant as being correct, complete, fairly representative of
the financial condition of Tenant as of such date and prepared in accordance
with generally accepted accounting principles consistently applied.
27.21 Condition of Premises. Tenant shall be deemed to have accepted
---------------------
and taken possession of the Premises in "as-is" condition. Landlord has made no
representation or warranty to Tenant, express or implied, respecting the
condition of the Premises, Building, or Property.
28. OPTION TO EXTEND.
----------------
28.1 Option Exercise. Tenant is given the option to extend the term on
---------------
all provisions contained in the Lease, for one (1) one-year period (the 1-year
extension of the initial term shall be referred to as the "Option Period").
Tenant may extend the Lease term, following expiration of the initial 14 month
term, by giving notice of exercise of the option ("Option Notice") to Landlord
at least ninety (90) days before the expiration of the initial 14 month Lease
term, provided that if Tenant is in default on the date of giving Option Notice,
the Option Notice shall be ineffective unless Tenant timely cures such default
in accordance with the terms of this Lease, such Option Period shall not
commence and this Lease shall expire at the end of the then current term. Tenant
shall have no other right to extend the term beyond the Option Period, unless
the parties otherwise agree in writing.
28.2 Option Period Rent. Monthly Rent for each month of the Option
------------------
Period shall be $6,264.50/month.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and
year first above written.
Tenant Landlord
- ------ --------
HDE, INC. KENT CENTENNIAL LIMITED
PARTNERSHIP
By: CENTENNIAL VENTURE
LIMITED PARTNERSHIP,
By /s/ David Glidewell Its General Partner
-----------------------
David Glidewell
Its VP/SEC
------------------- By: /s/ Douglas W. Klappenbach
--------------------------
Douglas W. Klappenbach
By /s/ Gordon Hanson Its General Partner
-----------------------
Gordon Hanson
Its President
-------------------
TENANT'S PERFORMANCE OF ITS OBLIGATIONS UNDER THIS LEASE IS UNCONDITIONALLY AND
IRREVOCABLY GUARANTEED BY THE UNDERSIGNED CORPORATION.
HDE, INC.
By /s/ David W. Glidewell
-----------------------
David Glidewell
Its VP/SEC
-------------------
By /s/ Gordon Hanson
-----------------------
Gordon Hanson
Its President
----------------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this day personally appeared before me David Glidewell and Gordon
Hanson, to me known to be the VP/Sec and President of HDE, INC., the corporation
------ ---------
that executed the within and foregoing instrument, and acknowledged the
instrument to be the free and voluntary act and deed of said corporation for the
uses and purposes therein mentioned, and on oath stated the he was duly
authorized to execute said instrument on behalf of the corporation.
-16-
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 14th day of
February 1996.
/s/ Shannon Nugent
-----------------------------
NOTARY PUBLIC in and for the
State of Washington, residing at
Federal Way; My commission
expires: 6/15/99
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this day personally appeared before me DOUGLAS W. KLAPPENBACH to me
known to be the General Partner of Centennial Venture Limited Partnership,
General Partner of KENT CENTENNIAL LIMITED PARTNERSHIP, the partnership that
executed the within and foregoing instrument, and acknowledged the instrument to
be the free and voluntary act and deed of said partnership for the uses and
purposes therein mentioned, and on oath stated that he was duly authorized to
execute said instrument on behalf of the partnership.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 19th
day of FEBRUARY, 1996.
/s/ [ILLEGIBLE]
-----------------------------
NOTARY PUBLIC in and for the
State of Washington, residing at
Seattle; My Commission expires:
8-4-96
-17-
<PAGE>
EXHIBIT A
[FLOOR PLAN - THIRD FLOOR APPEARS HERE]
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION
-----------------
Lot A City of Kent Lot Line Adjustment No. LL-89-36 Recorded January 24, 1990
under King County Recording No. 9001240759.
<PAGE>
EXHIBIT C
RENT SCHEDULE
-------------
Month 1 (February, 1996) $3,132.25/month
Months 2-12 $6,264.50/month
<PAGE>
EXHIBIT D
SIGN GUIDELINES
---------------
1. Landlord shall provide a lobby directory sign system, including building
lobby and elevator lobby signage.
2. Tenant shall be entitled to a single suite identification sign. Landlord
shall provide a building standard sign with Tenant's name and suite number.
<PAGE>
FIRST AMENDMENT TO LEASE
AND
EXTENSION AND EXPANSION AGREEMENT
THIS FIRST AMENDMENT TO LEASE AND EXTENSION AND EXPANSION AGREEMENT is made this
19 day of July, 1996, by and between THE CITY OF KENT, a Washington municipal
corporation ("Landlord"), and HDE, INC., a Washington corporation ("Tenant").
WITNESSETH:
WHEREAS, Tenant and Landlord's predecessor in interest, KENT CENTENNIAL LIMITED
PARTNERSHIP ("Kent Centennial"), have entered into that certain Lease dated as
of the 31st day of January, 1996 (the "Lease"); and
WHEREAS, on July 1, 1996, Landlord purchased the Land described in the Lease and
assumed Kent Centennial's obligations as Landlord under the Lease; and
WHEREAS, Landlord and Tenant desire to amend the Lease to grant Tenant an
additional option to extend the term thereof, to expand the Premises, and to
state the applicable Monthly Rent of the Lease and other agreements between
Landlord and Tenant;
NOW, THEREFORE, in consideration of the mutual promises of the parties hereto
and other good and valuable consideration, the receipt of which is hereby
acknowledged, Landlord and Tenant agree as follows:
AGREEMENTS:
1. The following additional provision shall be added to Section 2 of the
Lease:
2.1 Expansion Area. The Premises shall be expanded to include an
--------------
additional 1,406 square feet all as mote particularly shown on the Exhibit
-------
E attached hereto and constituting a part hereof (the "Expansion Area"),
-
which brings to total square footage of the Premises to 5,848 square feet.
2. The following additional provision shall be added to Section 4 of the
Lease:
4.2 Expansion Area Tenant Improvements. Tenant accepts the existing
----------------------------------
Tenant Improvements in that portion of the Premises constituting 4,442
square feet (i.e., without the Expansion Area) in "as-is, where-is"
condition without modification or further improvement or alteration. With
respect to the Expansion Area, Tenant shall cause, at Tenant's expense, SVI
Construction Company, a Washington corporation ("SVI") to construct and
complete the tenant improvements shown on Exhibit E (the "Expansion Area
---------
Tenant Improvements"). The costs of the Expansion Area Tenant Improvements
shall be paid by Tenant directly to SVI. It is anticipated that the
Expansion Area Tenant Improvements will be completed on or before August
30,1996. Monthly Rent for the premises that include the Expansion Area
shall be in the amount set forth in Section 5.1 and shall commence as set
forth in Section 5.1.
3. There shall be added an additional sentence at the end of Section 5.1 of
the Lease:
-1-
<PAGE>
Notwithstanding the foregoing or the Rent Schedule shown on EXHIBIT C, but
---------
subject to the foregoing conditions, Monthly Rent for the Premises which
includes the Expansion Area shall be in the amount of $8,284.67 per month,
and shall commence upon Tenant's occupancy of the Premises of which the
Expansion Area is a part, but in no event later than September 1, 1996.
4. There shall be added an additional Section 5.5 to the Lease:
5.5 The Monthly Rent commencing after Tenant's occupancy of the
Premises of which the Expansion Area is a part includes the amount of $4.95
per square foot per year as the "Operating Expense Base for 1996". The
Monthly Rent shall be adjusted to include Tenant's Share of Operating
Expenses in excess of the Operating Expenses Base for 1996. If Tenant's
Share of the Operating Expenses paid or incurred by Landlord for any
calendar year exceeds the Operating Expenses Base for 1996 included in the
Monthly Rent, then Tenant shall pay such excess of additional rent in
accordance with the last three paragraphs of Section 5.2.3 of the Lease.
5. The Tenant's Share of 6.2% identified in Section 5.2.2 shall be amended to
be 8.2% upon the Expansion Area Monthly Rent Commencement Date.
6. Section 28. Of the Lease is deleted in its entirety and replaced with the
following:
28. Options to Extend.
28.1 Option Exercise. Tenant is given the option to extend the term on
---------------
all provisions contained in the Lease, two (2) one-year periods (the "First
Option Period" and "Second Option Period"). Tenant may extend the Lease
term, following expiration of the initial 12 month term or First Option
Period, as the case may be, by giving notice of exercise of the option
("Option Notices") to Landlord at least ninety (90) days before the
expiration of the initial Lease term or First Option Period, as the case
may be, provided that if Tenant is in default on the date of giving either
Option Notice, the Option shall be ineffective unless Tenant timely cures
such default in accordance with the terms of this Lease, such Option Period
shall not commence, and this Lease shall expire at the end of the then
current term. Tenant shall have no other right to extend the term of this
Lease beyond the First and Second Option Periods, unless the parties
otherwise agree in writing.
28.2 Options Periods Rent. Monthly Rent for each month of the First
--------------------
and Second Option Periods shall be $8,284.67.
7. For purposes hereof, all capitalized terms, unless otherwise defined
herein, shall have the same meaning as set forth in the Lease.
8. Tenant hereby certifies to Landlord that the Lease is in full force and
effect; that there exist no uncured defaults on the part of Landlord under the
Lease.
-2-
<PAGE>
9. Except as modified by this First Amendment to Lease and Extension and
Expansion Agreement, all terms and conditions of the Lease shall remain in full
force and effect.
IN WITNESS WHEROF, the parties hereto have executed the First Amendment to Lease
and Extension and Expansion Agreement as of the date first above written.
Tenant Landlord
- ------ --------
HDE, Inc THE CITY OF KENT
By: /s/ Gordon L. Hanson By: /s/ Charles Lindsey
--------------------------- --------------------------
Its: President Its: Facilities Manager
---------------------- ---------------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this day personally appeared before me Charles Lindsey, to me known to be the
Landlord/representative of Centennial Center, the person that executed the
within and foregoing instrument, and acknowledged the instrument to be the free
and voluntary act and deed of said ______ for the uses and purposes therein
mentioned, and on oath stated that was duly authorized to execute said
instrument on behalf of the City of Kent.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 18th day of
July, 1996.
/s/ Rosalie Givens
-----------------------------------
NOTARY PUBLIC in and for the
State of Washington residing
at Kent, Washington; My
commission expires 8-19-97
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this day personally appeared before me Gordon L. Hanson, to me known to be
the President of HDE, the Incorp that executed the within and foregoing
instrument, and acknowledged the instrument to be the free and voluntary act and
deed of said __________ for the uses and purposes therein mentioned, and on oath
stated that he was duly authorized to execute said instrument on behalf of the
Incorporation.
-3-
<PAGE>
IN WITNESS WHEROF, I have hereunto set my hand and seal this 19th day of
July, 1996.
/s/ Rosalie Givens
-----------------------------------
NOTARY PUBLIC in and for the
State of Washington residing
at Kent, Washington; My
commission expires: 8-19-97
-4-
<PAGE>
EXHIBIT E
[FLOOR PLAN APPEARS HERE]
<PAGE>
[LOGO]
[LETTERHEAD OF SOUND VENTURES INC.]
September 16, 1998
Mr. Gordon Hanson
HDE, Inc.
400 West Grove, Suite 300
Kent, WA 98032
RE: Centennial Center, Suite 300
Extension of Lease Term
Gentlemen:
As requested, on behalf of Centennial Center and the City of Kent, we are
pleased to present the following lease extension proposal:
1. Tenant: HDE, Inc.
Landlord: The City of Kent
2. Lease Extension Term This lease extension shall be for a term
of 12 month and shall commence of
February 1, 1999 (the "Commencement
Date") and shall end on January 31, 2000
(the "Termination Date").
3. Square Footage: Suite 3005,848 sf, Rentable (appx)
4. Lease Extension Rental Rate: Rental Rate for the extension term shall
be:
Feb 1, 1999 - Jan 31, 2000 $9,228.00/mo
Gross lease encompassing all operating
expenses with pass through
reconciliation on an annual basis.
Please note that the above rate includes
an increase in the CAM amount, effective
January 1999 to $5.10/sf. This is the
first increase in CAM since 1995.
Tenant hereby certifies to Landlord that the Lease is in full force and effect;
that there exist no uncured defaults on the part of the Landlord under the
Lease; and that Tenant accepts the condition of the Premises in their current,
existing and "as-is" condition.
<PAGE>
LETTER TO D. GLIDEWELL/HDE, INC.
RE: LEASE EXTENSION, SUITE 300
SEPTEMBER 16, 1998 - PAGE 2
[LOGO]
Except as modified by the proposed terms, all terms and conditions of the Lease
shall remain in full force and effect.
The signed copy shall be a non-binding agreement and shall act as a Letter of
Intent and authorization for Landlord to prepare for the appropriate lease
document for your review and signature. If the general terms and conditions
detailed above meet with you approval, please sign below and return a copy of
this letter prior to noon, September 30, 1998, at which time the offer shall
expire.
If you have any questions, please feel free to contact me at (206) 223-9500,
ext. 105
Sincerely,
/s/ Lauran Kinnunen
- ---------------------
Lauran Kinnunen
Director of Marketing
Approved & Accepted HDE, INCORPORATED
By /s/ Gordon Hanson
-----------------------------------
Its President
----------------------------------
Date 9/23/98
---------------------------------
Enclosures: Exhibit A, original sf. 2-1-96
Exhibit E, additional sf. 7-19-96
cc: Charlie Lindsey, City of Kent
Stephanie Klappenbach, SVI
<PAGE>
[FLOOR PLAN - THIRD FLOOR APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
[LETTERHEAD OF KENT CENTENNIAL LTD. PARTNERSHIP] 1996 RENT SCHEDULE
INVOICES
Contact for Rental Payment:
Mr. David Glidewell Occupancy Date:
Mr. Gordon Harson
HDE, Inc. February 1, 1996
400 West Gowe St., Suite #324
Kent, WA 98032
January Rent/C.A.M. 0.00
February Rent 2,220.21
C.A.M 912.04
----------
Amount Due 3,132.25
Pre-pd Rent 12/6/95 (5,593.00)
----------
Balance Remaining (2,460.75)
March Rent 4,440.43
C.A.M 1,824.08
----------
Amount Due 6,264.50
Pre-pd Rent (2,460.75)
----------
Amount Due 3,803.75
April Rent/C.A.M. 6,264.50
May Rent/C.A.M. 6,264.50
June Rent/C.A.M. 6,264.50
July Rent/C.A.M. 6,264.50
August Rent/C.A.M. 6,264.50
September Rent/C.A.M. 6,264.50
October Rent/C.A.M. 6,264.50
November Rent/C.A.M. 6,264.50
December Rent/C.A.M. 6,264.50
Page 1
<PAGE>
EXHIBIT 10.30
OFFICE LEASE
BETWEEN
INTRAROCK 1 LLC
AS LANDLORD,
AND
PEERLESS SYSTEMS IMAGING PRODUCTS, INC.
AS TENANT
<PAGE>
<TABLE>
<CAPTION>
INDEX
-----
Page
----
<S>
<C>
SECTION 1. Lease Data; Exhibits..................................... 1
SECTION 2. Premises.................................................. 4
(a) Premises..................................................... 4
(b) Condition.................................................... 4
(c) Common Areas................................................. 4
(d) Alterations.................................................. 4
(e) Determination of Area........................................ 4
SECTION 3. Term...................................................... 5
(a) Commencement................................................. 5
(b) Early Entry.................................................. 5
(c) Extension Options............................................ 5
SECTION 4. Base Rent and Additional Rent............................. 7
SECTION 5. Tenant's Share of Operating Costs and Real Property Taxes. 8
(a) Amount....................................................... 8
(b) Definition................................................... 9
SECTION 6. Late Charge; Interest.................................... 11
SECTION 7. Deposit.................................................. 11
SECTION 8. Tenant's Operations...................................... 11
(a) Use of Premises............................................. 11
(b) Unlawful Use................................................ 11
(c) Liens and Encumbrances...................................... 12
(d) Hazardous Substances........................................ 12
(e) Signs....................................................... 13
(f) Parking..................................................... 13
(g) Rules and Regulations....................................... 13
SECTION 9. Utilities and Services; Deliveries....................... 14
(a) Tenant's Responsibility..................................... 14
(b) Services.................................................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
(c) Interruption................................................... 15
(d) Repairs by Landlord; Maintenance and Repair Charges............ 15
(e) Telecommunications Services.................................... 15
SECTION 10. Licenses and Taxes.......................................... 16
SECTION 11. Alterations by Tenant....................................... 16
SECTION 12. Care of Premises............................................ 17
SECTION 13. Surrender of Premises....................................... 17
SECTION 14. Waiver; Indemnity........................................... 18
(a) Tenant Indemnity............................................... 18
(b) Landlord's Indemnity........................................... 18
(c) General Indemnity Provisions................................... 18
(d) Release of Claims.............................................. 19
SECTION 15. Insurance................................................... 19
(a) Tenant's Insurance............................................. 19
(b) General Insurance Requirements................................. 19
(c) Landlord's Insurance........................................... 20
(d) Waiver of Subrogation.......................................... 20
SECTION 16. Assignment or Subletting.................................... 20
(a) Consent Required............................................... 20
(b) Recapture Right................................................ 21
(c) Additional Consideration....................................... 21
(d) Entity Ownership............................................... 22
(e) Assignment by Landlord......................................... 22
SECTION 17. Destruction................................................. 22
(a) Partial Destruction............................................ 22
(b) Total Destruction.............................................. 23
(c) Limitation..................................................... 23
SECTION 18. Eminent Domain.............................................. 23
(a) Taking......................................................... 23
(b) Award........................................................... 24
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
SECTION 19. Default by Tenant.......................................... 24
(a) Definition.................................................... 24
(b) Remedies...................................................... 25
(c) Reentry....................................................... 25
(d) Termination................................................... 25
(e) Adequate Security............................................. 26
(f) Landlord's Remedies Cumulative; Waiver........................ 26
SECTION 20. Default by Landlord; Lender Protection..................... 26
(a) Default by Landlord........................................... 26
(b) Notice to Lender.............................................. 26
SECTION 21. Attorneys' Fees............................................ 27
SECTION 22. Access by Landlord......................................... 27
SECTION 23. Holding Over............................................... 27
SECTION 24. Subordination; Estoppel Certificates....................... 28
(a) Subordination................................................. 28
(b) Estoppel Certificates......................................... 28
SECTION 25. Relocation.................................................. 29
SECTION 26. Liability of Landlord...................................... 29
SECTION 27. Miscellaneous.............................................. 29
(a) Quiet Enjoyment............................................... 29
(b) Notices....................................................... 30
(c) Successors or Assigns......................................... 30
(d) Tenant Authority and Liability................................ 30
(e) Brokers' Commission........................................... 30
(f) Partial Invalidity............................................ 30
(g) Recording..................................................... 30
(h) Force Majeure................................................. 31
(i) Name of Building.............................................. 31
(j) Headings...................................................... 31
(k) Execution by Landlord and Tenant; Approval of Lender.......... 31
(l) Transportation Management Programs; Recycling................. 31
(m) Financial Statements.......................................... 31
(n) Tax on Rent................................................... 32
(o) Light, Air and View........................................... 32
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
(p) Entire Agreement; Applicable Law.............................. 32
(q) Business Days................................................. 32
SECTION 28. Additional Lease Provisions................................ 32
(a) Rooftop Equipment............................................. 32
(b) Back-up Power................................................. 34
(c) Security...................................................... 35
(d) Landlord's Representations and Warranties..................... 35
(e) Right to Terminate............................................ 36
(f) Risers; Conduit............................................... 36
(g) Right of First Opportunity.................................... 36
</TABLE>
-iv-
<PAGE>
OFFICE LEASE
THIS LEASE is made as of March 15, 2000, between INTRAROCK 1 LLC, a
Delaware limited liability company ("Landlord"), and PEERLESS SYSTEMS IMAGING
PRODUCTS, INC., a Washington corporation ("Tenant"). Landlord and Tenant
covenant and agree as follows:
SECTION 1. Lease Data; Exhibits. The following terms shall have the
--------------------
following meanings, except as otherwise specifically modified in this Lease:
(a) Building And Complex: The Building is the building with a total
--------------------
rentable area of approximately 72,730 square feet currently known as the
Creekside One Building, located at 20415 - 72nd Avenue South in Kent, King
County, Washington, and designated on the Site Plan attached in Exhibit C (the
---------
"Site Plan"). The Building is situated on the real property legally described in
Exhibit A attached (the "Land"). The Complex refers to the office park complex
- -------
of which the Building is part, with a total rentable area of approximately
735,000 square feet, known as CenterPoint Corporate Park. The Complex includes
all improvements thereon and all future improvements to the Complex.
(b) Premises: An agreed area of approximately 10,000 rentable square
--------
feet located on the fourth (4th) floor of the Building as outlined on the floor
plan attached as Exhibit B (the "Floor Plan").
---------
(c) Lease Term: A period of sixty (60) full calendar months, commencing
----------
on the Commencement Date and expiring on the Expiration Date; provided, if the
Commencement Date is a day other than the first day of a calendar month, unless
otherwise agreed in writing, the Lease Term shall also include all days,
beginning with the Commencement Date, in the calendar month in which the
Commencement Date occurs.
(d) Commencement Date: June 1, 2000, or such earlier or later date as
-----------------
is provided in Section 3.
(e) Expiration Date: 11:59 p.m. on the last day of the sixtieth (60th)
---------------
full calendar month of the Lease Term.
(f) Base Rent: Tenant shall pay the following dollar amounts per month
---------
as Base Rent on or before the first day of each month:
Monthly
Month of Lease Term Base Rent
------------------- ---------
Commencement Date - 12 $11,250.00
13 - 24 $11,666.67
-1-
<PAGE>
25 - 35 $12,083.33
37 - 48 $12,500.00
49 - 60 $12,916.67
(g) Additional Rent: Whether or not so designated, all other sums due
---------------
from Tenant under this Lease shall constitute Additional Rent, payable when
specified in this Lease.
(h) Operating Costs And Real Property Taxes: Tenant will pay its share
---------------------------------------
("Tenant's Share") of Operating Costs and Property Taxes pursuant to Section 5
of this Lease. Tenant's Share of Operating Costs and Property Taxes is estimated
to be 13.75%. Tenant's Share shall be calculated and may be adjusted during the
Lease Term as provided in Section 5 below. The terms Operating Costs and
Property Taxes, are defined in Section 5 below.
(i) Deposit: $17,916.67.
-------
(j) Prepaid Rent: $16,250, to be paid on execution of this Lease and to
------------
be applied to the first month of the Lease Term.
(k) Guarantor: Peerless Systems Corporation, a Delaware corporation,
---------
shall guarantee Tenant's obligations under this Lease pursuant to a Guaranty of
Lease in the form of Exhibit F attached.
---------
(l) Permitted Use: General business offices.
-------------
(m) Building Standard Hours: Monday through Friday - 6 a.m. to 6 p.m.,
-----------------------
excluding legal holidays. Landlord understands Tenant is a high-tech company and
its business hours may extend beyond the Building Standard Hours. Tenant
acknowledges that it must pay for after-hours services in accordance with the
terms of Section 9 below.
(n) Notice Addresses:
----------------
To Landlord: IntraRock 1 LLC
20415-72nd Avenue South, Suite 150
Kent, WA 98032
Attn: Jack Rader
Facsimile: (253) 395-9288
With a copy to:
Alston, Courtnage, Proctor & Bassetti LLP
1000 Second Avenue, Suite 3900
Seattle, WA 98104-1045
Attn: Andrew B. Bassetti
Facsimile: (206) 623-1752
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<PAGE>
To Tenant: Prior to the Commencement Date:
Peerless Systems Imaging Products, Inc.
_________________________________
_________________________________
Facsimile: (425)______________
After the Commencement Date:
To the Premises
With a copy to:
Peerless Systems Corporation
2381 Rosecrans Avenue
El Segundo, CA 90245
Attn: Counsel
Facsimile: (310) 297-3142
(o) Brokers:
-------
Listing Broker - Pacific Real Estate Partners, Inc.
Cooperating Broker - Kidder Matthews & Segner (Richard Davidson)
(p) Name and Address for Payments to Landlord:
-----------------------------------------
IntraRock 1 LLC
20415 - 72nd Avenue South, Suite 150
Kent, WA 98032
(q) TIME IS OF THE ESSENCE OF THIS LEASE.
(r) Exhibits: The following exhibits are made a part of this Lease:
--------
Exhibit A - Legal Description of Land
---------
Exhibit B - Floor Plan
---------
Exhibit C - Site Plan
---------
Exhibit D - Workletter
---------
Exhibit E - Estoppel Certificate
---------
Exhibit F - Guaranty of Lease
---------
Exhibit G - Confirmation of Lease Terms
---------
Exhibit H - Rules and Regulations
---------
-3-
<PAGE>
SECTION 2. Premises.
--------
(a) Premises. Landlord hereby leases to Tenant, and Tenant hereby
--------
leases from Landlord, those certain premises (the "Premises") located in the
Building(s) and on the floor(s) and in the location(s) referenced in Section 1.
(b) Condition. The Premises are leased by Landlord and accepted by
---------
Tenant in an "AS IS" condition, subject to the requirement that Landlord
complete any improvements, alterations or modifications to be made by Landlord
pursuant to Exhibit D attached (the "Workletter"). Prior to taking occupancy of
---------
the Premises or moving any of its furniture, fixtures or equipment, Tenant shall
inspect the Premises and Landlord and Tenant shall prepare and agree upon a
"punchlist" of any items or repairs which are the responsibility of Landlord.
The existence of repairs or defects of a nature commonly found on a "punchlist,"
as such term is used in the construction industry, shall not postpone the
Commencement Date or result in a delay or abatement of Tenant's obligation to
pay rent or give rise to a damage claim against Landlord.
(c) Common Areas. During the Lease Term, Tenant and its licensees,
------------
invitees, customers and employees shall have the non-exclusive right to use all
entrances, lobbies, elevators, stairs, corridors, restrooms, roadways,
sidewalks, landscaped areas, and other public areas of the Building and the
Complex (the "Common Areas") in common with Landlord, other tenants of the
Building and of the Complex and their respective licensees, invitees, customers
and employees. Landlord shall at all times have exclusive control and management
of the Common Areas and no diminution thereof shall be deemed a constructive or
actual eviction or entitle Tenant to compensation or a reduction or abatement of
rent.
(d) Alterations. Landlord may in its discretion increase, decrease
-----------
or change the number, locations and dimensions of any hallways, lobby areas,
Common Areas and other improvements in the Building and the Complex which are
not within the Premises. Landlord will provide Tenant with reasonable advance
notice of any such alterations affecting the Premises. Landlord reserves the
right from time to time (i) to install, use, maintain, repair, relocate and
replace pipes, ducts, conduits, wires and appurtenant meters and equipment for
service to the Premises or to other parts of the Building in areas above the
suspended ceiling surfaces, below the floor surfaces, within the walls and in
the central core areas of the Building within the Premises and elsewhere in the
Building; (ii) the use of the exterior walls and the roof of the Building; (iii)
to alter or expand the Building, any other or buildings or other improvements at
the Complex; (iv) all air rights over the Premises and (v) to alter, relocate or
substitute any of the Common Areas, including any improvements constituting part
of the Common Areas.
(e) Determination of Area. The rentable area of the Premises shall
---------------------
be determined by Landlord's space measurement consultant upon completion of any
and all improvements to be made to the Premises pursuant to the Workletter.
These calculations shall be made in accordance with a method of measuring
rentable office space specified in the American
-4-
<PAGE>
National Standard Institute Publication ANSI Z65.1-1996 (the modified BOMA
standard), and including those portions of the Building dedicated as office
building uses, as such standard may be updated from time to time. Upon the
completion of such measurements, Landlord will provide Tenant with written
notice of the rentable area of the Premises. If the rentable area of the
Premises is different than the rentable area specified in Section 1(b) above,
Tenant shall be notified of the difference and the reasons therefore, and the
amount of the monthly Base Rent payable by Tenant and Tenant's Share shall be
adjusted accordingly.
SECTION 3. Term
----
(a) Commencement. The Commencement Date listed in Section 1 of this
------------
Lease represents an estimate of the actual Commencement Date. The actual
Commencement Date shall be the first to occur of the following events: (i) three
(3) days after Landlord notifies Tenant the Premises are available for Tenant's
occupancy in the condition required pursuant to Section 2(b) above, or (ii) the
date on which Tenant takes possession of the Premises for purposes other than
completing tenant improvements. If the Commencement Date is later than the
estimated Commencement Date specified in Section 1 above, this Lease shall not
be void or voidable, and Landlord shall have no liability to Tenant. Following
the Commencement Date, Landlord may confirm the Commencement Date and the area
of the Premises by Tenant's execution of the Confirmation of Lease Terms
attached as Exhibit G. The Lease Term shall begin on the Commencement Date and
end on the Expiration Date, unless extended or sooner terminated in accordance
with the terms of this Lease.
(b) Early Entry. If Tenant is permitted entry to the Premises prior
-----------
to Commencement Date for the purpose of installing tenant improvements or
fixtures or any other purpose permitted by Landlord, such early entry will be at
Tenant's sole risk and subject to all the terms and provisions of this Lease as
though the Commencement Date had occurred, except for the payment of Base Rent
and Additional Rent, which will commence on the Commencement Date. Tenant, its
agents and employees will not interfere with or delay Landlord's completion of
construction of any improvements to be made by Landlord. All rights of Tenant
under this Section 3(b) will be subject to the requirements of all applicable
building codes and zoning requirements, and must not interfere with Landlord
obtaining a certificate of occupancy for the Premises. Landlord has the right to
impose such additional conditions on Tenant's early entry as Landlord deems
appropriate in its reasonable discretion, and will further have the right to
require that Tenant execute an early entry agreement containing such conditions
prior to Tenant's early entry.
(c) Extension Options. So long as Tenant is not then in default
-----------------
under this Lease, on the terms and conditions stated in this Section 3(c),
Tenant shall have the option to extend the term of this Lease for an additional
sixty (60) month period (the "Additional Term"). To exercise its option to
extend this Lease for the Additional Term, Tenant must deliver to Landlord a
written notice (an "Option Notice") exercising its renewal option at least nine
(9)
-5-
<PAGE>
months (but not more than twelve (12) months) prior to the date the initial
Lease Term will expire, together with a then current financial statement of
Tenant. If such financial statement shows a material adverse change in Tenant's
financial condition since the date of this Lease, at Landlord's option, Tenant's
exercise of its extension option shall be null and void. If Landlord determines
Tenant's extension option is null and void because of a pending default, or an
adverse change in Tenant's financial condition, Landlord will so notify Tenant
within thirty (30) days after receiving Tenant's written notice exercising the
extension option. The extension option granted to Tenant pursuant to this
Section 3(c) is personal to Tenant and may not be exercised by or for the
benefit of any assignee or sublessee of Tenant. All of the terms and conditions
of this Lease shall apply during the Additional Term except (i) the base annual
rent shall be the "fair market rent" (defined below) for the Premises as agreed
to by Landlord and Tenant or determined by arbitration as set forth below; (ii)
unless otherwise agreed by Landlord in writing, there shall be no further
renewal options after the commencement of the Additional Term; and (iii)
Landlord shall have no tenant improvement obligations with respect to the
Premises except as otherwise agreed in writing by Landlord. When the rental rate
for the Additional Term is determined, whether by agreement of the parties or
pursuant to arbitration as provided below, Landlord and Tenant shall enter into
a lease extension agreement setting forth the new base rent for the Premises and
such other terms as may be applicable. If at the time Tenant delivers the Option
Notice to Landlord, or at any time between such date and the commencement date
of the Additional Term, Tenant defaults under this Lease and fails to cure its
default within the applicable cure period, if any, Landlord may declare the
Option Notice null and void by written notice to Tenant. The term "fair market
rent" means the rate per rentable square foot that a willing, non-equity tenant
would pay in an arms-length transaction for comparable space in the Building and
in comparable suburban office buildings in East and South King County,
Washington, for leases having a sixty (60) month term, taking into account the
then condition of the improvements in the Premises. Landlord and Tenant agree
the base annual rent for the Additional Term shall be determined as follows:
(i) Landlord shall advise Tenant in writing ("Landlord's
Notice") of Landlord's determination of fair market rent not later than thirty
(30) days after receiving the Option Notice. Within thirty (30) days after
receiving Landlord's Notice, Tenant shall notify Landlord in writing ("Tenant's
Notice") whether or not Tenant accepts Landlord's determination of the fair
market rent. If Tenant disagrees with Landlord's determination of fair market
rent, Tenant's Notice shall set forth Tenant's determination of fair market
rent. If Tenant fails to give Tenant's Notice to Landlord within such thirty
(30) day period, then the Option Notice shall be deemed null and void, unless
otherwise agreed in writing by Landlord and Tenant. If Tenant does not accept
Landlord's determination of fair market rent, and Tenant has given Tenant's
Notice, the parties (or their designated representatives) shall promptly meet
and attempt to agree on the fair market rent. If the parties have not agreed on
the fair market rent within ninety (90) days after Landlord receives the Option
Notice, and Tenant's renewal option is still in effect in accordance with the
terms of this paragraph, then unless otherwise agreed in writing by the parties,
the parties shall submit the matter to arbitration in accordance with the terms
of the following paragraphs. The last day of such ninety
-6-
<PAGE>
(90) day period (as the same may be extended by the written agreement of the
parties) is referred to in this Lease as the "Arbitration Commencement Date".
(ii) The arbitration will be conducted by three MAI real
estate appraisers who have been active over the five (5) year period ending on
the Arbitration Commencement Date in the appraisal of similar suburban office
properties in East and South King County, Washington. One appraiser will be
selected by Tenant, one appraiser will be selected by Landlord, and the third
appraiser will be selected by the two appraisers so chosen. If the two
appraisers chosen by the parties cannot agree on a third appraiser within ten
(10) days after the date the second appraiser has been appointed, the third
appraiser will be appointed by the Seattle office of the American Arbitration
Association upon the application of either party. Each party shall select its
appraiser within ten (10) days after the Arbitration Commencement Date. If
either party fails to select its appraiser within such ten (10) day period, and
the other party timely selects its appraiser, then the appraiser selected by the
other party shall be the sole arbitrator for determining fair market rent.
(iii) Within thirty (30) days after the selection of the third
appraiser (or if only one appraiser is to render the decision as provided in
subparagraph (ii) above, within thirty (30) days after the last day of the
above-referenced ten (10) day period), the appraiser(s) shall determine fair
market. If more than one appraiser has been appointed, the decision of a
majority of the appraisers shall control. If a majority of the appraisers do not
agree within the stipulated time period, then each appraiser shall in writing
render his or her separate determination as to fair market rent within five (5)
days after the expiration of the thirty (30) day period. In such case, the three
determinations shall be averaged to determine the fair market rent; however, if
the lowest fair market rent or the highest fair market rent is ten percent (10%)
lower or higher, as applicable, than the middle fair market rent, then the low
fair market rent and/or the high fair market rent, as applicable, shall be
disregarded and the remaining fair market rent(s) will be averaged in order to
establish the fair market rent.
(iv) Both parties may submit any information to the
arbitrators for their consideration, with copies to the other party. The
arbitrators shall have the right to consult experts and competent authorities
for factual information or evidence pertaining to the determination of fair
market rent. The arbitrators shall render their decision and award in writing
with counterpart copies to each party. The arbitrators shall have no power to
modify the provisions of this Lease. The determination of the arbitrators will
be final and binding upon Landlord and Tenant. The cost of the arbitration will
be paid by Landlord if the fair market rent determined by arbitration is ninety
percent (90%) or less than the fair market rent specified in Landlord's Notice;
by Tenant if the fair market rent determined by arbitration is one hundred ten
percent (110%) or more than the fair market rent specified in Tenant's Notice;
and otherwise shall be shared equally by Landlord and Tenant.
SECTION 4. Base Rent and Additional Rent. Tenant shall pay to Landlord at
-----------------------------
the address and to the account specified by Landlord in Section 1 above or such
other address or account as
-7-
<PAGE>
Landlord may hereafter designate in writing, without notice or demand, or any
setoff or deduction whatsoever except as provided in this Lease, in lawful money
of the United States: (a) Base Rent in the amount(s) specified in Section 1
above in advance on the first day of each month, and (b) Additional Rent as and
when specified elsewhere in this Lease, but if not specified, then within ten
(10) days of demand. Base Rent and Additional Rent shall be prorated on a daily
basis (based on a 30-day month and the actual number of days elapsed) for any
partial month within the Lease Term and for any partial initial month in the
Lease Term shall be paid on the first day of the Lease Term.
SECTION 5. Tenant's Share Of Operating Costs And Real Property Taxes.
---------------------------------------------------------
(a) Amount. In addition to Base Rent, Tenant shall pay to Landlord as
------
Additional Rent, Tenant's Share of (i) all "Operating Costs" (defined below) and
(ii) "Property Taxes" (defined below) incurred by Landlord in any "Lease Year"
(defined below). As used herein, "Tenant's Share" is determined by multiplying
the cost to be shared by a fraction, the numerator of which is the rentable area
of the Premises from time to time and the denominator of which is the rentable
area of the Building(s) in which the Premises are located from time to time;
provided that Tenant's share may also include expenses related to the Complex,
and not solely the Building, Tenant's fractional share of such expenses,
determined by a fraction, the numerator of which is the rentable area of the
Premises from time to time and the denominator of which is the rentable area of
the Complex from time to time. After the end of each Lease Year, Landlord will
notify Tenant in writing of Landlord's estimate of Tenant's Share of the
estimated Operating Costs and Property Taxes for the current Lease Year. Tenant
shall pay the estimated amount set forth in Landlord's notice, in advance, in
equal monthly installments, without deduction or offset whatsoever, on or before
the first (1st) day of each calendar month, with the payment of Base Rent
required pursuant to Section 4 above. Until Landlord provides Tenant with the
notice provided for above in this paragraph, Tenant shall continue to pay
Tenant's Share under this Section 5 in the monthly amounts specified in the last
such notice given to Tenant by Landlord, if any. Within one hundred twenty (120)
days following the end of each Lease Year, Landlord will compute Tenant's Share
due under this Section 5 for such Lease Year, based on actual costs, and, if
Tenant's Share for such Lease Year is greater than that already paid by Tenant
for such Lease Year, Tenant shall pay Landlord the deficiency within twenty (20)
days of its receipt of written notice or an invoice for the amount of the
deficiency. If the total amount paid by Tenant under this Section 5 for a Lease
Year exceeds Tenant's Share, then Landlord shall credit such excess to the
payment of Base Rent and Additional Rent thereafter coming due; however, upon
the expiration or sooner termination of the Lease Term, if Tenant is not then in
default under this Lease, Landlord shall refund the excess to Tenant within
thirty (30) days after such determination is made. If during a Lease Year
Landlord obtains information regarding Operating Costs or Property Taxes which
alters its prior estimates, Landlord may adjust the amount due from Tenant under
this Section 5 during the balance of that Lease Year to reflect such new
information by written notice to Tenant, and Tenant shall pay any deficiency
executed thereby within twenty (20) days after written notice from Landlord.
-8-
<PAGE>
(b) Definitions. For purposes of this Lease:
-----------
(i) "Operating Costs" means all expenses paid or incurred by
Landlord or charged to Landlord for maintaining, managing, operating, repairing
and administering the Building and the Complex (including the Common Areas), and
the personal property used in conjunction therewith, together with a sum equal
to five percent (5%) of the cost thereof (excluding Property Taxes and any third
party property management fee) as an administrative fee including without
limitation, the costs of refuse collection, water, sewer, electricity, heat, air
conditioning, fuel, light, fire protection, and other utilities and services;
supplies; janitorial and cleaning services; window washing; snow, garbage and
refuse removal; security services and systems; landscape maintenance; parking
lot and parking garage maintenance, including sweeping, patching, resurfacing,
repair, striping, lighting, cleaning and security; elevator operation, repair
and maintenance compensation (including employment taxes and fringe benefits) of
all persons who perform duties in connection with the operation, management,
maintenance, repair and administration of the Building and the Complex;
insurance premiums for all insurance carried by Landlord with respect to the
Building and the Complex; costs imposed by, or incurred to comply with, laws or
regulations promulgated by any governmental authority in connection with the use
or occupancy of the Premises, the Building or the Complex; depreciation of the
cost of acquiring or the rental value of personal property used in maintenance,
and in upkeep of Common Areas; licenses, permits and inspection fees; subsidies
and other payments required by public bodies (including those for traffic
control, transportation management and fire protection); market rate property
management fees; rent for any on-site property management office; easement and
license fees; legal and accounting expenses; and all other expenses or charges
whether or not hereinabove described which, in accordance with generally
accepted accounting and management practices, would be considered an expense of
maintaining, managing, operating, repairing and administering the Building and
the Complex, excluding: (a) costs of any special services rendered to individual
tenants (including Tenant) for which a special charge is made, or costs (such as
utility costs) which are separately metered and charged to tenants of the
Complex; (b) ground lease rental payments and debt service on mortgages or deeds
of trust encumbering the Building or the Complex; (c) leasing commissions and
attorneys' and other fees and costs incurred in leasing space in the Complex or
in connection with disputes with tenants of the Complex; (d) depreciation or
amortization expenses; (e) Property Taxes; and (f) costs required to be
capitalized in accordance with generally accepted accounting practices, except
Operating Costs shall include amortization of capital improvements (1) designed
with a reasonable probability of improving the operating efficiency of the
Building, (2) required to comply with governmental laws or regulations, or (3)
made for the general benefit or convenience of tenants of the Building.
(ii) "Property Taxes" means all taxes of every kind and nature
on the Building, the Complex and/or the Land and on personal property used by
Landlord in conjunction therewith; surcharges and all local improvement and
other assessments levied with respect to the Building, the Complex and the Land
and all other property of Landlord used in connection with the operation of the
Building and the Complex; and any taxes levied or assessed in lieu of, in whole
or in part, such real or personal property taxes; and any taxes in addition to
such real and personal property taxes, including, but not limited to, taxes or
license fees imposed upon or measured by the leasing of the Complex or the rents
or other income collected therefrom, other than any federal or state net income
or inheritance tax; and all costs and expenses incurred by Landlord in efforts
to reduce or minimize such taxes.
-9-
<PAGE>
"Notwithstanding any of the foregoing, (a) Tenant's Share of Operating Costs
(other than insurance premiums and utility charges) payable by Tenant in any
Lease Year after the initial Lease Year shall not exceed 105% of Tenant's Share
of Operating Costs(other than insurance premiums charges and utilities) payable
by Tenant in the preceding Lease Year, and (b) the property management fees used
to calculate Tenant's Share of Operating Costs shall not be in excess of the
management fees then being charged by independent property managers of
comparable properties in the Seattle metropolitan area.
(iii) "Lease Year" means a twelve (12) month period beginning
January 1st and ending December 31st; however, if the Commencement Date is a
date other than the first day of a calendar year, the first Lease Year shall
commence on the Commencement Date and end on December 31 of such calendar year,
and the last Lease Year shall commence on January 1 of the last calendar year
during the Lease Term and end on the Expiration Date.
(c) Tenant Audit Rights. At any time within six (6) months after a
-------------------
statement for Operating Costs or Property Taxes for any particular calendar year
is provided to Tenant, upon twenty (20) days prior written notice and during
normal business hours at Landlord's office or at such other place as Landlord
shall reasonably designate, Tenant shall be entitled to inspect and examine the
books and records of Landlord related to the determination of any sums payable
by Tenant pursuant to this Section 5 which are the subject of the applicable
statement.
If, after inspection and examination of such books and records, Tenant
disputes the amounts paid by Tenant pursuant to this Section 5, Tenant by
written notice to Landlord, may request an independent audit of such books and
records. The independent audit of Landlord's books and records shall be
conducted by a certified public accountant designated by Tenant and reasonably
acceptable to Landlord. The audit shall be limited to the determination of the
amount of any or all items payable by Tenant pursuant to this Section 5 for the
subject calendar year. If the audit discloses any amounts billed to and paid by
Tenant which are incorrect, the appropriate party shall pay to the other party
the deficiency or overpayment, as applicable, within thirty (30) days after the
results of the audit have been disclosed to both parties, unless Landlord
disputes the results of the audit within sixty (60) days of receipt of the
results of the audit, in which case, Landlord and Tenant shall agree upon a
national accounting firm to review and verify the Operating Costs and/or
Property Taxes, and provide the results to Landlord and Tenant (the
"Reconciliation Audit"). The determination as set forth in the Reconciliation
Audit shall be binding upon Landlord and Tenant. If the Reconciliation Audit is
performed, Landlord and Tenant shall each pay one-half of the cost of the
Reconciliation Audit. The exercise by Tenant of its audit rights hereunder shall
not relieve Tenant of its obligations to pay prior to the request for and
inspection and examination of Landlord's books and records or permit Tenant the
right to audit any other sums. Additionally, Tenant agrees and acknowledges that
various tenants' lease provisions in the Building related to Operating Costs
and/or Property Taxes may vary, and that the audit right is set forth herein in
the review of books and records shall be confidential. With the exception of
Tenant's auditors, Tenant shall not disclose or discuss the audit or the results
of the audit to any third parties, including but not limited to any other
tenants in the Building or the Complex. All costs and expenses of the audit
shall be paid by Tenant unless the audit shows that
-10-
<PAGE>
Landlord overstated Tenant's Share of the subject calendar year by more than
five percent (5%) of the actual amount payable by Tenant, in which case Landlord
shall pay all costs and expenses of the audit. Notwithstanding any of the
foregoing, Tenant shall not be entitled to inspect or audit the books and
records of Landlord more frequently than once each calendar year.
SECTION 6. Late Charge; Interest. If Tenant fails to pay any Base Rent or
---------------------
Additional Rent within five (5) business days of the due date, a late charge
equal to the greater of $50.00, or five percent (5%) of the unpaid amount, shall
be assessed and be immediately due and payable by Tenant. In addition, any Base
Rent or Additional Rent more than five (5) business days past due shall bear
interest from the date due until paid in full (together with late charges and
interest) at an interest rate equal to the lesser of one and one-half percent
(1.5%) per month, or the maximum rate of interest permitted by applicable law.
SECTION 7. Deposit. Upon mutual execution of this Lease, Tenant shall
-------
deposit with Landlord the sum specified as the Deposit in Section 1 of this
Lease, if any. This sum shall belong to Landlord and shall constitute partial
consideration for the execution of this Lease, subject only to repayment when
required in this Section. Landlord may commingle the Deposit with its other
funds. Landlord shall pay Tenant the remaining balance of the Deposit, without
any liability for interest, within thirty (30) days after the expiration or
prior termination of the Lease Term, or any extension thereof, if and only if
Tenant has fully performed all of its obligations under this Lease. Landlord may
withdraw from the Deposit the amount of any unpaid rent or other charges not
paid to Landlord when due, and Tenant shall immediately redeposit an amount
equal to that so withdrawn within ten (10) days of demand. Any such application
by Landlord shall not be considered as liquidated damages for the default.
SECTION 8. Tenant's Operations.
-------------------
(a) Use of Premises. Tenant shall use the Premises only for the
---------------
Permitted Use specified in Section 1. Tenant shall not permit any act that will
increase the then existing rate of insurance on the Building or the Complex,
without Landlord's prior written consent. Tenant shall pay on demand the amount
of the increase in insurance rates caused by any such acts or omissions by
Tenant, or its agents or employees. Tenant shall not commit or allow to be
committed any waste on the Premises, or any public or private nuisance or other
act which disturbs the quiet enjoyment of any other tenant of the Building or
the Complex. Tenant shall not, without the prior written consent of Landlord,
use any apparatus, machinery or devise in or about the Premises which will cause
any substantial noise, vibration or fumes. If any of Tenant's office machines or
equipment disturb the quiet enjoyment of any other tenant of the Building or the
Complex, Tenant shall provide adequate insulation or take such other action as
Landlord directs to eliminate the disturbance.
(b) Unlawful Use. Tenant shall not use or permit the Premises or the
------------
Common Areas or any part thereof to be used for any purpose in violation of any
municipal, county, state or
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federal law, ordinance or regulation of which the Complex is a part and Tenant
shall comply with and shall cause its employees, invitees and contractors to
comply with such nondiscriminatory rules and regulations as Landlord may from
time to time promulgate. Tenant shall promptly comply, at its sole cost and
expense, with all laws, ordinances and regulations now in force or hereafter
adopted relating to or affecting the condition, use or occupancy of the
Premises, including without limitation the Americans With Disabilities Act of
1990, as now or hereafter amended (the "ADA").
(c) Liens and Encumbrances. Tenant shall keep the Premises, the
----------------------
Building, the Complex and the Land free and clear of, and shall indemnify,
defend and hold Landlord harmless from, any and all liens and encumbrances
arising or growing out of Tenant's acts or omissions, or breach of this Lease or
its use, improvement or occupancy of the Premises. If any lien is so filed
against the Premises, the Land, the Complex or the Building, Tenant shall cause
the same to be fully discharged and released of record within ten (10) days of
demand or within such period provide Landlord with cash or other security
acceptable to Landlord in an amount equal to one and one-half (1 1/2 ) times the
amount of the claimed lien as security for its prompt removal. Landlord shall
have the right to disburse such security to cause the removal of the lien if a
judgment is entered against Tenant in the lien proceeding, if such lien causes
difficulties for Landlord in connection with its financing of the Building or
the Complex, or if Tenant is otherwise in default under this Lease.
(d) Hazardous Substances. Tenant shall not, without Landlord's prior
--------------------
written consent, keep any substances designated as, or containing components now
or hereafter designated as, hazardous, dangerous, toxic or harmful and/or
subject to regulation under any federal, state or local law, regulation or
ordinance ("Hazardous Substances") on or about the Premises or anywhere in the
Complex. Notwithstanding the preceding sentence, Tenant may keep, use, store and
dispose of, in, on and from the Premises, materials and supplies otherwise
constituting Hazardous Substances which are normally used in general business
offices, provided such materials and supplies are used, handled, stored and
disposed of in accordance with all applicable governmental rules, regulations,
laws and requirements, and in accordance with all applicable manufacturers' or
suppliers' recommendations. With respect to any Hazardous Substances stored with
Landlord's consent or permitted hereunder, Tenant shall: promptly, timely and
completely comply with all governmental requirements for reporting and record
keeping; submit to Landlord true and correct copies of all reports, manifests
and identification numbers at the same time as they are required to be and/or
are submitted to the appropriate governmental authorities; within five (5) days
of Landlord's request, provide evidence satisfactory to Landlord of Tenant's
compliance with all applicable governmental rules, regulations and requirements;
and comply with all governmental rules, regulations and requirements regarding
the proper and lawful use, sale, transportation, generation, treatment and
disposal of Hazardous Substances. Any and all costs incurred by Landlord and
associated with Landlord's inspections of the Premises and Landlord's monitoring
of Tenant's compliance with this Section 8(d), including Landlord's attorneys'
fees and costs, shall be Additional Rent and shall be due and payable to
Landlord within ten (10) days of Landlord's demand. Tenant shall be fully and
completely liable to Landlord for any and all cleanup costs and
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expenses and any and all other charges, expenses, fees, fines, penalties (both
civil and criminal) and costs imposed with respect to Tenant's use, disposal,
transportation, generation and/or sale of Hazardous Substances, in or about the
Premises or Building. Tenant shall indemnify, defend and hold Landlord, and
lenders to Landlord (each a "Lender"), harmless from any and all of the costs,
fees, penalties, charges and expenses assessed against or imposed upon Landlord
and Lender (as well as Landlord's and Lender's attorneys' fees and costs) as a
result of Tenant's use, disposal, transportation, generation and/or sale of
Hazardous Substances. This indemnification covenant shall survive expiration or
earlier termination of this Lease.
(e) Signs. Tenant shall not erect or place, or permit to be erected or
-----
placed, or maintain any signs of any nature or kind whatsoever on the exterior
walls or windows of the Premises or elsewhere in the Building or at the Complex,
with the exception of a sign identifying Tenant placed on or near the front door
of the Premises, the size, style and location of which must first be approved in
writing by Landlord, which approval will not be unreasonably withheld, a
Building standard sign identifying Tenant in the elevator lobby of the floor in
the Building on which the Premises are located, and a Building standard name
slip identifying Tenant in the main interior Building directory. In addition,
subject to applicable governmental laws, ordinances, rules and regulations,
Tenant shall have the right to place a prominent sign on the exterior of the
Building, the size, design and location of which must be reasonably acceptable
to Landlord. Tenant shall be solely responsible for the costs of acquiring,
installing and maintaining its exterior Building sign. Upon the expiration or
earlier termination of the Lease Term, at its sole cost and expense, Tenant
shall remove its exterior signage from the Building and Tenant will restore the
exterior of the Building to its condition prior to the installation of Tenant's
sign, reasonable wear and tear excepted. Any exterior signage must comply with
the signage policy for the Building and the Complex.
(f) Parking. Tenant shall have the right to use in common with other
-------
tenants of the Complex and their invitees, licensees, employees and agents the
surface parking facilities located in the Common Areas of the Complex. Four (4)
parking stalls per 1,000 useable square feet of the Premises shall be allocated
to Tenant. All parking spaces are made available on an unreserved basis. Tenant
shall comply with such reasonable rules and regulations that Landlord may adopt
from time to time regarding the use of parking areas. Delivery and service
vehicles shall only be permitted to park in areas specially designated for their
use.
(g) Rules and Regulations. Tenant shall comply with the rules and
---------------------
regulations promulgated by Landlord, which are attached hereto as Exhibit H, and
---------
such reasonable amendments and additions as from time to time may be adopted by
Landlord after thirty (30) days' prior notice to Tenant, to govern the use,
occupancy and operation of the Complex (the existing rules and regulations, as
so amended or supplemented from time to time, being the "Rules and
Regulations"). Landlord shall not be responsible to Tenant for the noncompliance
by any other occupant with any of the Rules and Regulations, and any failure by
Landlord to enforce any Rules and Regulations against either Tenant or any other
occupant shall not constitute a waiver thereof;
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however, Landlord agrees to take reasonable steps to ensure that all tenants of
the Building comply with the Rules and Regulations.
SECTION 9. Utilities And Services; Deliveries.
----------------------------------
(a) Tenant's Responsibility. In accordance with Section 5 of this
-----------------------
Lease, as Additional Rent, Tenant shall pay its share of all charges for heat,
water, light, gas, electricity, sewer, garbage, fire protection and any other
utilities and/or services used or consumed on or supplied to the Complex and to
the Building, including the Premises, and not separately metered or charged to
Tenant or any other tenant of the Building or the Complex. Tenant shall be
solely responsible for and shall promptly pay when due all charges for telephone
and all other charges for other utilities and/or services which are separately
metered or charged to the Premises.
(b) Services. Landlord shall cause the Common Areas such as
--------
walkways, landscaped areas, lobbies, elevators, stairs, corridors and restrooms,
to be maintained in reasonably good order and condition, except for damage
occasioned by any act or omission of Tenant or Tenant's officers, contractors,
agents, invitees, licensees or employees, the repair of which latter damage
shall be paid for by Tenant. Twenty-four (24) hours per day, seven (7) days per
week, Tenant shall have access to the Premises (subject to such Building and
Complex security systems and procedures as may be in place from time to time),
and Tenant shall have available to it water and electrical service for lighting
and operation of 110-volt office equipment. During the Building Standard Hours
specified in Section 1 above, Landlord shall furnish the Premises with heat and
air conditioning services. If requested by Tenant, Landlord shall furnish such
services at times other than Building Standard Hours, and Tenant shall pay for
the cost of such after-hours services at rates established by Landlord from time
to time. At its option, Landlord may elect to cause the lighting and convenience
electrical service to the Premises to be separately metered pursuant to a
monitoring/metering system. If Landlord so elects to separately meter such
electrical service Tenant's consumption of such electricity will be separately
billed to Tenant by Landlord and paid for by Tenant, and in calculating Tenant's
Share of Operating Costs, the cost of lighting and convenience electrical
service provided to other leased premises in the Building shall be excluded from
Operating Costs; however Tenant will pay Tenant's Share of the electricity used
or consumed in connection with the Common Areas as reasonably and in good faith
estimated by Landlord. Tenant may have separate supplementary air conditioning
units for the Premises installed in connection with the initial improvements to
the Premises pursuant to the Workletter, subject to the approval of the location
and method of installation thereof in accordance with the Workletter. The cost
of operating such separate supplementary air conditioning units (including
electricity, maintenance and repairs) shall be separately billed and charged to
Tenant by Landlord. The electricity used and consumed in operating such separate
supplementary air conditioning units shall be separately metered with the
remainder of the Premises.
(i) Janitorial. Landlord will provide janitorial services customary
----------
for buildings comparable to the Building in quality and location. If Tenant
requires excessive or
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<PAGE>
specialized janitorial services, Tenant shall promptly pay Landlord the
additional costs and expenses incurred by Landlord in providing such services.
(ii) Additional Service. The Building standard mechanical system
------------------
is designed to accommodate heating loads generated by lights and 110-volt office
equipment normally found in general business offices. Before installing lights
and equipment in the Premises which in the aggregate exceed the heating and
cooling loads of the Building's mechanical system, Tenant shall obtain the
written permission of Landlord. Landlord may refuse to grant such permission
unless Tenant agrees to pay the cost of installing supplementary air
conditioning units or electrical systems as necessitated by such equipment or
lights. In addition, Tenant shall pay to Landlord in advance, on the first day
of each month during the Lease Term, the amount estimated by Landlord as the
cost of furnishing electricity for the operation of such equipment or lights and
the amount estimated by Landlord as the costs of operation and maintenance of
supplementary air conditioning units or electrical systems as necessitated by
Tenant's use of such equipment or lights. Landlord shall be entitled to install
and operate at Tenant's cost a monitoring/metering system in the Premises to
measure the added demands on electricity, heating, ventilation, and air
conditioning systems resulting from such equipment and lights and from Tenant's
after-hours heating, ventilation and air conditioning service requirements.
Tenant shall comply with Landlord's instructions, rules and regulations for the
use of drapes, blinds and thermostats in the Building(s).
(c) Interruption. Landlord shall not be liable for any loss, injury
------------
or damage to person or property caused by or resulting from any variation,
interruption, or failure of such services due to any cause whatsoever, or from
failure to make any repairs or perform any maintenance. No temporary
interruption or failure of such services incident to the making of repairs,
alterations or improvements, or due to accident, strike or conditions or other
events beyond Landlord's reasonable control shall be deemed an eviction of
Tenant or to relieve Tenant from any of Tenant's obligations hereunder or to
give Tenant a right of action against Landlord for damages.
(d) Repairs By Landlord; Maintenance And Repair Charges. Tenant shall
---------------------------------------------------
take good care of the Premises and shall reimburse Landlord for all damage done
to the Building, the Complex or the Premises occasioned by any act or omission
of Tenant or Tenant's officers, employees, contractors, agents, invitees,
licensees or employees, including, but not limited to, cracking or breaking of
glass. If Tenant fails to take good care of the Premises, Landlord, at its
option, may do so, and in such event upon receiving written statements from
Landlord, Tenant shall promptly pay the entire cost thereof as additional rent.
Landlord shall have the right to enter the Premises for such purposes. Landlord
shall have the right to enter the Premises for such purposes; provided Landlord
gives Tenant at least forty eight (48) hours advance notice of Landlord's intent
to do so, except no advance notice shall be necessary in the event of an
emergency.
(e) Telecommunications Services. All telephone and telecommunications
---------------------------
services desired by Tenant shall be ordered and utilized by Tenant at its sole
cost and expense.
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<PAGE>
Tenant understands and acknowledges the telecommunications switching facilities
in the Complex may be owned and operated by a third party and such third party
may have the right to charge other telecommunications providers for access to
such facilities subject to applicable laws, rules and regulations. Tenant shall
separately contract with such third party or another telecommunications provider
(a "Provider") to provide telephone and telecommunications services to the
Premises. If Tenant desires to utilize the services of a Provider whose
equipment is not then servicing the Building, such Provider must obtain the
written consent of Landlord (which consent will not be unreasonably withheld)
before it will be permitted to install its lines or other equipment within the
Building. Landlord's consent to the installation of lines or equipment within
the Building by any Provider shall be evidenced by a written agreement between
Landlord and the Provider, which contains terms and conditions acceptable to
Landlord in its reasonable discretion. Landlord's refusal for any reason
whatsoever to consent to any prospective Provider shall not be deemed a default
or breach by Landlord of its obligations under this Lease. Landlord makes no
warranty or representation to Tenant as to the suitability, capability or
financial strength of any Provider whose equipment is presently serving the
Building, and Landlord's consent to a Provider whose equipment is not presently
serving the Building shall not be deemed to constitute such a representation or
warranty. To the extent the service by a Provider is interrupted, curtailed or
discontinued for any reason whatsoever, Landlord shall have no obligation or
liability in connection therewith unless the interruption is caused by the
negligence or intentional misconduct of Landlord, and it shall be the sole
obligation of Tenant at its expense to obtain substitute service. The provisions
of this paragraph are solely for the benefit of Tenant and Landlord, are not for
the benefit of any third party, specifically including without limitation, no
telephone or telecommunications provider shall be deemed a third party
beneficiary hereof.
SECTION 10. Licenses and Taxes. Tenant shall be liable for, and shall pay
------------------
throughout the term of this Lease, all license and excise fees and occupation
taxes covering the business conducted on the Premises and all personal property
taxes levied with respect to all personal property located at the Premises. If
any governmental authority levies a tax or license fee on rents payable under
this Lease or rents accruing from use of the Premises or a tax or license fee in
any form against Landlord or Tenant because of or measured by or based upon
income derived from the leasing or rental thereof (other than a net income tax
on Landlord's income), or a transaction privilege tax, such tax or license fee
shall be paid by Tenant, either directly if required by law, or by reimbursing
Landlord for the amount thereof upon demand.
SECTION 11. Alterations by Tenant. Tenant shall not make any alterations,
---------------------
additions or improvements in or to the Premises without first obtaining
Landlord's prior written approval, which approval shall not be unreasonably
withheld, and if required by Landlord, submitting to Landlord professionally-
prepared plans and specifications. Tenant covenants it will cause all such
alterations, additions and improvements to be performed at Tenant's sole cost
and expense by a contractor reasonably acceptable to Landlord and in a manner
which: (a) is consistent with any Landlord-approved plans and specifications and
any reasonable conditions imposed by Landlord; (b) is in conformity with first
class commercial standards; (c) includes acceptable insurance
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coverage for Landlord's benefit; (d) does not affect the structural integrity of
the Building or the systems serving the Building or the Complex; (e) does not
disrupt the business or operations of other tenants; and (f) does not invalidate
or otherwise affect the construction and systems warranties then in effect with
respect to the Building or the Complex. Tenant shall secure all governmental
permits and approvals and comply with all other applicable governmental
requirements and restrictions, and reimburse Landlord for all expenses incurred
in connection therewith. Except as provided in Section 14 with regard to
concurrent negligence, Tenant shall indemnify, defend and hold Landlord harmless
from and against all losses, liabilities, damages, liens, costs, penalties and
expenses (including attorneys' fees, but without waiver of the duty to hold
harmless) arising from or out of the performance of such alterations, additions
and improvements, including, but not limited to, all which arise from or out of
Tenant's breach of its obligations under terms of this Section 11. All
alterations, additions and improvements (expressly including all light fixtures,
heating, ventilation and air conditioning units and floor, window and wall
coverings), except Tenant's moveable trade fixtures and appliances and equipment
not affixed to the Premises, shall immediately become the property of Landlord
without any obligation on its part to pay therefor. These improvements remain
Landlord's and Tenant shall not remove all or any portion thereof on the
termination of this Lease except as specifically directed by Landlord in
writing.
SECTION 12. Care of Premises. Tenant shall take good care of the Premises
----------------
(including all doors, entrances and lighting and plumbing fixtures located
within the Premises) and shall reimburse Landlord for all damage done to the
Complex, Building or Premises occasioned by any act or omission of Tenant or
Tenant's officers, contractors, agents, invitees, licensees or employees,
including, but not limited to, cracking or breaking of glass. If Tenant fails to
take good care of the Premises, Landlord may, at its option, do so, and in such
event, upon receipt of written statements from Landlord, Tenant shall promptly
pay the entire cost thereof as Additional Rent. Landlord shall have the right to
enter the Premises for such purposes; provided, except in an emergency, Landlord
must give Tenant at least forty eight (48) hours advance notice of its intent to
do so. Except as provided in Section 17, there shall be no abatement or
reduction of rent arising by reason of Landlord's making of repairs, alterations
or improvements.
SECTION 13. Surrender of Premises. At the expiration or sooner termination
---------------------
of the Lease Term, Tenant shall return the Premises to Landlord in the same or
better condition than on the Commencement Date (or, if altered, then the
Premises shall be returned in such altered condition unless otherwise directed
by Landlord pursuant to Section 11), except for reasonable wear and tear, damage
by condemnation and damage by casualty not caused by Tenant or its employees,
agents, contractors or invitees. Prior to such return, Tenant shall (i) remove
its furniture and equipment, (ii) if so directed by Landlord, remove any and all
telephone, computer and other communications system cabling and equipment
installed by or for Tenant, (iii) restore the Premises to the condition of the
Premises prior to the installation of said items, and (iv) repair any damage
resulting from removal of said items. In no event shall Tenant remove floor
coverings; heating, ventilating and air conditioning equipment; lighting
equipment or fixtures; or floor, window or wall coverings unless otherwise
specifically directed by Landlord in writing. Tenant's obligations under this
Section 13
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<PAGE>
shall survive the expiration or termination of this Lease. Tenant shall
indemnify Landlord for all damages and losses suffered as a result of Tenant's
failure to so redeliver the Premises on a timely basis.
SECTION 14. Waiver; Indemnity.
-----------------
(a) Tenant Indemnity. Landlord shall not be liable for any injury
----------------
to person, or for any loss or damage to any property (including property of
Tenant) occurring in or about the Premises from any cause whatsoever, other than
the negligence or intentional misconduct of Landlord or its employees or agents.
Except as otherwise provided in this Section 14, Tenant shall indemnify, defend
and hold Landlord, its partners, officers, agents, employees and contractors and
Lenders, harmless from all claims, suits, losses, damages, fines, penalties,
liabilities and expenses (including Landlord's attorneys' fees and other costs
incurred in connection with claims, regardless of whether such claims involve
litigation) resulting from any actual or alleged injury (including death) of any
person or from any actual or alleged loss of or damage to any property arising
out of or in connection with (i) Tenant's occupation, use or improvement of the
Premises or that of its employees, agents or contractors, (ii) Tenant's breach
of its obligations hereunder, or (iii) any negligent or willful act or omission
of Tenant or any subtenant, licensee, assignee or concessionaire of Tenant, or
of any officer, agent, employee, guest or invitee of Tenant, or of any such
entity in or about the Premises, the Building or the Complex.
(b) Landlord's Indemnity. Except as otherwise provided in this
--------------------
Section 14, Landlord shall indemnify, defend and save Tenant, its partners,
officers, agents, employees and contractors, harmless from all claims, suits,
losses, damages, fines, penalties, liabilities and expenses (regardless of
whether such claims involve litigation), resulting from any actual or alleged
injury (including death) of any person or from any actual or alleged loss of or
damage to any property arising out of or in connection with (i) Landlord's
breach of its obligations hereunder, or (ii) any negligent or willful act or
omission of Landlord or any officer, agent, employee, guest or invitee of
Landlord, or of any such entity, in or about the Premises, the Building or the
Complex.
(c) General Indemnity Provisions. The indemnities in Sections 14(a)
----------------------------
and 14(b) above are intended to specifically cover actions brought by the
indemnifying party's own employees, and with respect to acts or omissions during
the term of this Lease shall survive termination or expiration of this Lease.
Such indemnities are specifically and expressly intended to constitute waivers
by the indemnifying party of its immunity, if any, under Washington's Industrial
Insurance Act, RCW Title 51, to the extent necessary to provide the other party
with a full and complete indemnity from claims made by the indemnifying party
and its employees, to the extent of their negligence. Tenant shall promptly
notify Landlord of casualties or accidents occurring in or about the Premises.
If losses, liabilities, damages, liens, costs and expenses covered by either
party's indemnity are caused by the sole negligence of the other party or by the
concurrent negligence of both Landlord and Tenant, their employees, agents,
invitees and licensees, then the indemnifying party shall indemnify the other
only to the extent of the indemnifying party's own
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negligence or that of its officers, agents, employees, guests or invitees.
LANDLORD AND TENANT ACKNOWLEDGE THAT THE INDEMNIFICATION PROVISIONS OF SECTION
12 AND THIS SECTION 14 WERE SPECIFICALLY NEGOTIATED AND AGREED UPON BY THEM.
(d) Release of Claims. Except as provided in Section 14(b) above,
-----------------
Tenant hereby fully and completely waives and releases all claims against
Landlord for any losses or other damages sustained by Tenant or any person
claiming through Tenant resulting from any accident or occurrence in or upon the
Premises, including but not limited to: any defect in or failure of Building or
Complex equipment; any failure to make repairs; any defect, failure, surge in,
or interruption of Building or Complex facilities or services; any defect in or
failure of Common Areas; broken glass; water leakage; the collapse of any
component or any Building or other improvement at the Complex; or any act,
omission or negligence of co-tenants, licensees or any other persons or
occupants of the Complex.
SECTION 15. Insurance.
---------
(a) Tenant's Insurance. Tenant shall, at its own expense, maintain
------------------
comprehensive or commercial general liability insurance with broad form and stop
gap endorsements with combined single limits of Two Million Dollars
($2,000,000), for property damage and loss and for personal injuries (including
death), to insure and indemnify both Landlord and Tenant against claims,
demands, losses, damages, liabilities and expenses arising out of or in
connection with the use, operation, occupancy or condition of the Premises and
Tenant's operations in and about the Premises. Landlord shall have the right to
periodically review the appropriateness of such limits in view of inflation
and/or changing industry conditions and to require a reasonable increase in such
limits no more frequently than annually, upon ninety (90) days prior written
notice. Landlord, any Lender designated by Landlord, and any agents of Landlord
designated by Landlord (such as the Building property manager), shall be named
as additional insureds and shall be furnished with a certificate of insurance on
request. All such insurance shall bear an endorsement that the same shall not be
canceled or materially altered without at least thirty (30) days prior written
notice to such additional insureds. During the Lease Term, Tenant shall also
maintain at its own expense insurance covering its furniture, fixtures,
equipment and inventory and all improvements which it makes to the Premises in
an amount equal to the full replacement cost thereof, against fire and such
other perils as are covered by an all risk policy including plate glass coverage
and coverage for sprinkler leakage.
(b) General Insurance Requirements. All insurance required of
------------------------------
Tenant under this Lease shall (a) be issued by insurance companies authorized to
do business in the State of Washington and otherwise acceptable to Landlord; (b)
be issued as a primary policy, or under a blanket policy, not contributing with
and not in excess of coverage which Landlord may carry; (c) in the case of the
liability policy, contain a contractual liability coverage endorsement covering
Tenant's indemnification duties under this Lease to the fullest extent
insurable; and (d) have
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deductibles reasonably acceptable to Landlord. Tenant shall deliver to Landlord
prior to the Commencement Date, and thereafter not less than thirty (30) days
before the expiration dates of any expiring policies of insurance, and from time
to time thereafter within ten (10) days after written request from Landlord,
certificates of insurance evidencing the insurance coverages required of Tenant
pursuant to this Paragraph 15. In no event shall the limits of any such policies
be considered as limiting the liability of Tenant under this Lease. If Tenant
does not deliver to Landlord certificates of insurance as required above,
Landlord may charge Tenant a $50.00 noncompliance fee. If Tenant fails to
maintain any insurance required of it under this Section 15, Landlord may do so,
and Tenant shall reimburse Landlord for the full expense thereof upon demand.
(c) Landlord's Insurance. Throughout the Lease Term, Landlord shall
--------------------
maintain such property and liability insurance coverages as are customarily
maintained by owners of buildings similar in age, location and construction to
the Complex, and such additional insurance as any Lender may reasonably require,
and the cost of all such insurance shall be considered an Operating Cost.
(d) Waiver of Subrogation. Neither Landlord nor Tenant shall be
---------------------
liable to the other party or to any insurance company (by way of subrogation or
otherwise) insuring the other party for any loss or damage to any building,
structure or tangible personal property of the other occurring in or about the
Premises, the Building or the Complex, even though such loss or damage might
have been occasioned by the negligence of such party, its agents or employees,
if such loss or damage is covered by insurance under terms of this Lease. Each
party shall use its best efforts to cause each insurance policy obtained by it
to contain the waiver of subrogation clause. Notwithstanding the foregoing, no
such release shall be effective unless a party's insurance policy or policies
expressly permit such a release or contain a waiver of the carrier's right to be
subrogated.
SECTION 16. Assignment or Subletting.
------------------------
(a) Consent Required. Tenant shall not sublet or encumber the whole
----------------
or any part of the Premises, nor shall this Lease or any interest thereunder be
assignable (for security purposes or otherwise) or transferable, voluntarily or
involuntarily, by operation of law or by any process or proceeding of any court
or otherwise without the prior written consent of Landlord, which consent shall
not be unreasonably withheld. In determining whether to consent to a proposed
assignment, subletting or other transfer, Landlord may consider any commercially
reasonable basis for approving or disapproving the proposed subletting,
assignment or other transfer, including without limitation any of the following:
(i) the experience or business reputation of the proposed assignee or sublessee,
(ii) whether the clientele, personnel or foot traffic which will be generated by
the business of the proposed assignee or sublessee is consistent in Landlord's
opinion with the businesses of other tenants of the Building and of the Complex,
(iii) notwithstanding that Tenant or others may remain liable under this Lease,
whether the proposed
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assignee or sublessee has a net worth and financial strength and credit record
satisfactory to Landlord, and (iv) whether the use of the Premises by the
proposed assignee or sublessee will be substantially the same as the use of the
Premises by Tenant, or whether such use is consistent with the businesses of
other tenants then occupying the Complex, and whether such use will violate or
create any potential violation of any laws or a breach or violation of any other
lease or agreement by which Landlord is bound. Any assignment or sublease
without Landlord's prior written consent, at Landlord's option, shall be void.
No assignment or sublease shall release Tenant from primary liability hereunder.
Each assignment and sublease shall be by an instrument in writing in form
satisfactory to Landlord. The granting of consent to a given transfer shall not
constitute a waiver of the consent requirement as to future transfers. Tenant
shall also pay all legal fees and other costs incurred by Landlord in connection
with Landlord's consideration of Tenant's request for approval of assignments or
subleases, including assignments for security purposes. Tenant shall deliver to
Landlord with its request for Landlord's approval of a proposed assignment or
subletting a fee of $500.00 which shall be credited against the fees and costs
payable by Tenant pursuant to the preceding sentence.
Any transferee other than a subtenant approved by Landlord shall
assume all obligations of Tenant and shall be jointly and severally liable with
Tenant for the payment of rent, additional rent and other charges and
performance of all of Tenant's obligations under this Lease. Tenant shall
provide Landlord with full and complete duplicate originals of all instruments
of assignment, sublease or assumption. It shall not be unreasonable for Landlord
to withhold consent to a proposed assignment or sublease because it wishes to
exercise its right to recapture all or part of the Premises under Section 16(b)
hereof, or because (a) the proposed transferee is any governmental agency,
federal, state, local or foreign government or incorporation, (b) the transfer
would cause the Landlord to violate another lease or agreement to which Landlord
is a party or would give another tenant in the Complex the right to cancel its
lease, or (c) the proposed transferee occupies space in the Building or the
Complex, is negotiating with Landlord to lease space in the Building or the
Complex, or has negotiated with Landlord to lease space in the Building or the
Complex during the six months immediately proceeding the notification from
Tenant.
(b) Recapture Right. In lieu of giving its consent to a proposed
---------------
assignment or subletting, Landlord may terminate the Lease as to the portion of
the Premises affected by the action for which Landlord's consent is requested
and recover possession thereof from Tenant within twenty (20) days following
written notice thereof to Tenant. All costs incurred by Landlord in separating
the remainder of the Premises from the area so retaken shall be paid by Tenant
as Additional Rent.
(c) Additional Consideration. If Tenant assigns its interest in
------------------------
this Lease or sublets the Premises, Tenant shall pay to Landlord any and all
consideration received by Tenant for such assignment or sublease, whether such
additional consideration is in the form of rent in excess of the Base Rent
and/or Additional Rent payable by Tenant under this Lease, cash payments or
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otherwise; however, such additional consideration shall be reduced by any
reasonable costs and expenses (including brokerage fees and tenant improvement
costs) incurred by Tenant in connection with the sublease or assignment.
(d) Entity Ownership. The cumulative transfer (i.e. in one or more
----------------
sales or transfers, by operation of law or otherwise) of an aggregate of fifty
percent (50%) or more of the voting stock issued and outstanding on the date of
this Lease is executed by Landlord, including by creation or issuance of new
stock of a corporation which is (i) owned by Tenant, (ii) the corporate assignee
of Tenant, or (iii) any corporation which is a general partner in a general or
limited partnership or member of a limited liability company which is the tenant
or an assignee of the tenant of this Lease; or the cumulative transfer of an
aggregate of fifty percent (50%) or more of the ownership interest in a general
or limited partnership, limited liability company or other entity which is the
tenant or an assignee of the tenant, by which an aggregate of fifty percent
(50%) or more of such ownership interest is vested in a person or persons who
are not general partners, members or other owners (except as the result of
transfer by gift or inheritance), shall be deemed a Transfer of this Lease and
shall be subject to the provisions of Section 16. For the purpose of Section 16,
any entity which has undergone any of the changes described in this Section
shall be deemed to be a transferee. The term "voting stock" means the stock
regularly entitled to vote for election of directors of the corporation; and any
stock, however denominated, which is convertible into such voting stock, shall
be treated for purposes of the foregoing as if it were in fact converted. The
two immediately preceding sentences, however, shall not be applicable to any
Tenant corporation the outstanding voting stock of which is listed on a national
securities exchange and actively traded "over the counter."
(e) Assignment by Landlord. If Landlord sells or otherwise transfers
----------------------
the Building(s), such purchaser or transferee shall be deemed to have assumed
Landlord's obligations hereunder, and Landlord shall thereupon be relieved of
all liabilities hereunder arising thereafter, but this Lease shall otherwise
remain in full force and effect and Tenant shall attorn to Landlord's successor.
SECTION 17. Destruction
-----------
(a) Partial Destruction. If the Premises are rendered partially
-------------------
untenantable by fire or other insured casualty, and if the damage is repairable
within sixty (60) days from the date of the occurrence (with the repair work and
preparations therefore to be done during regular working hours on regular work
days), landlord shall repair the Premises with due diligence, to the extent of
the insurance proceeds available (which shall be subject to the prior rights of
any Lender), and the monthly minimum rental shall be abated in the proportion
that the untenantable portion of the Premises bears to the whole thereof for the
period from the date of the casualty to the completion of the repairs, unless
the casualty results from Tenant's negligence or its breach of the terms hereof.
If thirty percent (30%) or more of the rentable area of the Building is
destroyed or damaged, regardless of whether the Premises are damaged, Landlord
may terminate this Lease as of the date
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of such damage or destruction by giving notice to Tenant within thirty (30) days
thereafter of the election so to do.
(b) Total Destruction. If the Premises are completely destroyed by
-----------------
fire or other casualty, or if they are damaged by uninsured casualty, or by
insured casualty to such an extent that the damage cannot be repaired within
sixty (60) days of the occurrence, Landlord shall have the option to restore the
Premises or to terminate this Lease on thirty (30) days written notice,
effective as of any date not more than sixty (60) days after the occurrence. If
this Section becomes applicable, Landlord shall advise Tenant within thirty (30)
days after such casualty whether Landlord elects to restore the Premises or to
terminate this Lease. If Landlord elects to restore the Premises, it shall
commence and prosecute the restoration work with diligence. For the period from
the date of the casualty until completion of the repairs (or the date of
termination of this Lease, if Landlord elects not to restore the Premises), the
monthly minimum rent shall be abated in the same proportion that the
untenantable portion of the Premises bears to the whole thereof, unless the
casualty results from Tenant's negligence or its breach of its obligations under
this Lease. If the Premises are totally damaged or destroyed, and the repairs to
the Premises cannot or have not been completed within nine (9) months after the
damage or destruction (subject to delays such as force majeure delays which are
beyond Landlord's control), Tenant shall have the right to terminate this Lease
by written notice given to Landlord within thirty (30) days after the end of the
foregoing nine (9) month period, provided Landlord does not complete the repairs
prior to the date Tenant delivers its termination notice to Landlord.
(c) Limitation. Except as otherwise provided in this Lease,
----------
Landlord shall not be liable to Tenant for destruction or damage to any of
Tenant's property including fixtures, equipment or other improvements, or for
damages or compensation for inconvenience, loss of business or disruption
arising from repairs or restoration of any portion of the Complex, the Building
or the Premises.
SECTION 18. Eminent Domain.
--------------
(a) Taking. If all of the Premises are taken by Eminent Domain,
------
this Lease shall terminate as of the date Tenant is required to vacate the
Premises and all Base Rent and Additional Rent shall be paid to that date. The
term "EMINENT DOMAIN" shall include the taking or damaging of property by,
through or under any governmental or statutory authority, and any purchase or
acquisition in lieu thereof, whether the damaging or taking is by government or
any other person. If a taking of any part of the Premises by Eminent Domain
renders the remainder thereof unusable for the business of Tenant, in the
reasonable judgment of Landlord or Tenant, this Lease, at the option of either
party, may be terminated by written notice given to the other party not more
than thirty (30) days after Landlord gives Tenant written notice of the taking,
and such termination shall be effective as of the date when Tenant is required
to vacate the portion of the Premises so taken. If this Lease is so terminated,
all Base Rent and Additional Rent shall be paid to the date of termination.
Whenever any portion of the Premises is taken by Eminent Domain and
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this Lease is not terminated, Landlord shall at its expense proceed with all
reasonable dispatch to restore, to the extent of available proceeds (which shall
be subject to the prior rights of any Lender) and to the extent it is reasonably
prudent to do so, the remainder of the Premises to the condition they were in
immediately prior to such taking, and Tenant shall at its expense proceed with
all reasonable dispatch to restore its personal property and all improvements
made by it to the Premises to the same condition they were in immediately prior
to such taking. The Base Rent and Additional Rent payable hereunder shall be
reduced from the date Tenant is required to partially vacate the Premises in the
same proportion that the rentable area taken bears to the total rentable area of
the Premises prior to taking.
(b) Award. Landlord reserves all right to the entire damage award
-----
or payment for any taking by Eminent Domain (subject to the prior right of any
Lender), and except as provided below, Tenant waives all claim whatsoever
against Landlord for damages for termination of its leasehold interest in the
Premises or for interference with its business. Tenant hereby grants and assigns
to Landlord any right Tenant may now have or hereafter acquire to such damages
and agrees to execute and deliver such further instruments of assignment as
Landlord may from time to time request. Tenant shall, however, have the right to
claim from the condemning authority all compensation that may be recoverable by
Tenant on account of any loss incurred by Tenant in moving Tenant's merchandise,
furniture, trade fixtures and equipment, provided, however, that Tenant may
claim such damages only if they are awarded separately in the eminent domain
proceeding and not out of or as part of Landlord's damages.
SECTION 19. Default by Tenant.
-----------------
(a) Definition. Tenant shall be deemed in default under this Lease
----------
if (i) Tenant vacates or abandons the Premises, (ii) fails to pay Base Rent or
Additional Rent, or make any other payment required of Tenant under this Lease
on the date such rent or payment is due, (iii) Tenant violates or breaches or
fails to keep or perform any covenant, term or condition of this Lease other
than those requiring the payment of rent or otherwise requiring Tenant to make
payments pursuant to this Lease, or (iv) Tenant or any guarantor files or is the
subject of a petition in bankruptcy, or if a trustee or receiver is appointed
for Tenant's or any guarantor's assets, or if Tenant or a guarantor makes an
assignment for the benefit of creditors, or if Tenant or a guarantor is
adjudicated insolvent. With respect to a default under (ii) above, Tenant shall
have five (5) days after written notice of the default to remedy or cure its
default. With respect to a default under (iii) above, Tenant shall have twenty
(20) days after written notice from Landlord to remedy or cure the default;
however, if the default cannot reasonably be cured within such twenty (20) day
period, and Tenant commences the cure within the twenty (20) day period, and
Tenant thereafter diligently prosecutes the cure to completion in good faith,
such twenty (20) day period shall be extended for such period of time as is
reasonably necessary for Tenant to cure the default, but in no event more than
an additional sixty (60) days. The foregoing notice and cure provisions shall be
inclusive of and not in addition to the notices and cure periods provided for in
RCW 59.12, as now or hereafter amended, or any legislation in lieu or
substitution thereof.
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<PAGE>
(b) Remedies. If Tenant defaults and fails to cure the default
--------
within the applicable cure period, if any, Landlord shall have the following
rights and remedies, at its option, which shall be cumulative and not exclusive,
and which shall be in addition to and not in lieu of any other rights or
remedies available to Landlord at law or in equity, or elsewhere in this Lease:
(i) to declare the Lease Term ended and reenter the Premises and take possession
thereof and remove all persons therefrom, and Tenant shall have no further claim
thereon or hereunder; (ii) to cure such default on Tenant's behalf and at
Tenant's cost and expense and charge Tenant as Additional Rent for all costs and
expenses incurred by Landlord in effecting the cure; (iii) without declaring
this Lease terminated, to reenter the Premises and occupy the whole or any part
thereof for and on account of Tenant and collect any unpaid rentals and other
charges, which have become payable, or which may thereafter become payable; (iv)
even though it may have reentered the Premises, to thereafter elect to terminate
this Lease and all of the rights of Tenant in or to the Premises.
(c) Reentry. If Landlord reenters the Premises under option (iii)
-------
of Section 19(b), Landlord shall not be deemed to have terminated this Lease or
the liability of Tenant to pay any Rent thereafter accruing as it becomes due,
or to have terminated Tenant's liability for damages under any of the provisions
hereof, by any such reentry or by any action, in unlawful detainer or otherwise,
to obtain possession of the Premises, unless Landlord shall have notified Tenant
in writing that it has so elected to terminate this Lease, and Tenant shall be
liable for and reimburse Landlord upon demand for all costs and expenses of
every kind and nature incurred in retaking possession of the Premises and all
other losses suffered by Landlord as a consequence of Tenant's default. In the
event of any entry or taking possession of the Premises, Landlord shall have the
right, but not the obligation, to remove therefrom all or any part of the
personal property located therein and may place the same in storage at a public
warehouse at the expense and risk of Tenant.
(d) Termination. If Landlord elects to terminate this Lease
-----------
pursuant to the provisions of options (i) or (iv) of Section 19(b), Landlord may
recover from Tenant as damages, the following: (i) the worth at the time of
award of any unpaid Rent which had been earned at the time of such termination;
plus (ii) the worth at the time of award of the amount by which the unpaid Rent
which would have been earned after termination until the time of award exceeds
the amount of the Rent loss Tenant proves could have been reasonably avoided;
plus (iii) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the term after the time of award exceeds the amount of the
Rent loss that Tenant proves could be reasonably avoided; plus (iv) any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, including but not
limited to, any costs or expenses incurred by Landlord in retaking possession of
the Premises, including reasonable attorneys' fees therefor; maintaining or
preserving the Premises after such default; preparing the Premises for reletting
to a new tenant, including repairs or alterations to the Premises for such
reletting; leasing commissions; and any other costs necessary or appropriate to
relet the Premises; and (v) such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by the laws of the
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<PAGE>
State of Washington. As used in items (i) and (ii) of this Section 19(d), the
"worth at the time of award" shall be computed by allowing interest at the
interest rate specified in Section 6 of this Lease. As used in item (iii) above,
the "worth at the time of award" shall be computed by using the then applicable
discount rate quoted by the Federal Reserve Bank of San Francisco or its
successor. For purposes of this Section 22 only, the term "RENT" shall be deemed
to be the Base Rent and all Additional Rent and other sums required to be paid
by Tenant pursuant to the terms of this Lease.
(e) Adequate Security. If a petition is filed by or against Tenant
-----------------
or Guarantor under any provision of the Bankruptcy Code or successor act, Tenant
agrees that it shall be obligated to post a cash bond with Landlord equal to six
(6) months Base Rent and Additional Rent, to provide Landlord with adequate
security for Tenant's performance of its obligations under this Lease.
(f) Landlord's Remedies Cumulative; Waiver. Landlord's rights and
--------------------------------------
remedies hereunder are not exclusive, but cumulative, and Landlord's exercise of
any right or remedy due to a default or breach by Tenant shall not be deemed a
waiver of, or alter, affect or prejudice any other right or remedy which
Landlord may have under this Lease or by law or in equity. Neither the
acceptance of rent nor any other acts or omissions of Landlord at any time or
times after the happening of any event authorizing the cancellation or
forfeiture of this Lease shall operate as a waiver of any past or future
violation, breach or failure to keep or perform any covenant, agreement, term or
condition hereof or to deprive Landlord of its right to cancel or forfeit this
Lease, upon the written notice provided for herein, at any time that cause for
cancellation or forfeiture may exist, or be construed so as at any future time
to estop Landlord from promptly exercising any other option, right or remedy
that it may have under any term or provision of this Lease.
SECTION 20. Default by Landlord; Lender Protection.
--------------------------------------
(a) Default by Landlord. Landlord shall be in default if Landlord
-------------------
fails to perform its obligations under this Lease within twenty (20) days after
its receipt of written notice of nonperformance from Tenant; provided that if
the default cannot reasonably be cured within the twenty (20) day period, and
Landlord commences the cure within said 20-day period and thereafter diligently
prosecutes the cure to completion in good faith, such 20-day period shall be
extended for such additional period of time as is reasonably necessary for
Landlord to cure the default.
(b) Notice to Lender. Notwithstanding anything to the contrary in
----------------
this Lease, Landlord shall not be in default under any provision of this Lease
unless written notice specifying such default is given to Landlord and to any
Lender who has been identified to Tenant in writing as a party to whom notice
must be sent. Any Lender of Landlord entitled to notice pursuant to the
preceding sentence shall have the right to cure any default on behalf of
Landlord within the later of (a) thirty (30) days after receipt of such notice,
or (b) thirty (30) days after the expiration of any cure period provided to
Landlord pursuant to this Lease; provided, if such default cannot
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reasonably be cured within such thirty (30) day period, the Lender shall be
entitled to such additional time as may be reasonably necessary to cure the
default, if within the thirty (30) day period the Lender commences and
thereafter diligently pursues the actions necessary for the Lender to cure such
default by Landlord (including, if possession of the Premises is necessary to
cure the default, commencing such judicial or nonjudicial proceedings as may be
necessary for the Lender or a receiver to take possession of the Premises). So
long as a Lender is diligently taking the actions reasonably necessary for it to
cure Landlord's default, Tenant shall not exercise its remedies for Landlord's
default under this Lease.
SECTION 21. Attorneys' Fees. If either party retains the services of an
---------------
attorney in connection with enforcing the terms of this Lease, or if suit is
brought for the recovery of the Base Rent or Additional Rent due under this
Lease or for the breach of any covenant or condition of this Lease or for the
restitution of the Premises to Landlord and/or eviction of Tenant during the
term of this Lease or after the expiration thereof, the substantially prevailing
party therein will be entitled to recover from the other party the substantially
prevailing party's reasonable attorneys' fees, witness fees and other court
costs incurred in connection therewith.
SECTION 22. Access by Landlord. Landlord and its agents shall have the
------------------
right to enter the Premises at any time upon reasonable prior notice to Tenant
to examine the same, and to show them to prospective purchasers, lenders or
tenants, and to make such repairs, alterations, improvements, additions or
improvements to the Premises, the Building or the Complex as Landlord may deem
necessary or desirable; provided, in an emergency or perceived emergency or to
provide normal services (such as janitorial and security services) to the
Premises, and no advance notice shall be required. Landlord understands the
Premises will contain proprietary and confidential information regarding Tenant
and its customers. If Tenant is not personally present to permit entry and an
entry is necessary in an emergency, Landlord may enter the same by master key or
may forcibly enter the same, without rendering Landlord liable therefor. Nothing
contained herein shall be construed to impose upon Landlord any duty of repair
or other obligation not specifically stated in this Lease. Tenant shall change
the locks to the Premises only through Landlord and upon paying Landlord for all
costs related thereto, and providing Landlord with evidence that the new lock is
keyed to landlord master lock system for the Complex.
SECTION 23. Holding Over. Unless otherwise agreed in writing by Landlord,
------------
any holding over by Tenant after the expiration of the term hereof consented to
in advance in writing by Landlord shall be construed as a tenancy from month-to-
month on the terms and conditions set forth herein, except the Base Rent shall
be the Base Rent agreed to by Landlord and Tenant. Any such hold-over tenancy
may be terminated by either party upon thirty (30) days written notice to the
other party. If Tenant fails to surrender the Premises upon the termination of
this Lease, without the prior written consent of Landlord, Tenant shall
indemnify, defend and hold harmless Landlord from all losses, damages,
liabilities and expenses resulting from such failure, including, without
limiting, the generality of the foregoing, any claims made by any succeeding
tenant arising out of such failure. Any holding over by Tenant after the
expiration of the Lease Term without Landlord's
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consent shall be deemed a tenancy at will, terminable at any time by Landlord,
at a rental rate equal to (a) two (2) times the Base Rent payable by Tenant
during the last month rent is payable by Tenant pursuant to this Lease, plus (b)
the Additional Rent then payable by Tenant pursuant to this Lease.
SECTION 24. Subordination; Estoppel Certificates.
------------------------------------
(a) Subordination. This Lease shall be automatically subordinate to
-------------
all of Landlord's mortgages, deeds of trust, or ground leases which heretofore
and hereafter affect the Premises, the Building or the Complex, to any and all
advances made or to be made thereunder, to the interest on the obligations
secured thereby, and to all renewals, modifications, consolidations,
replacements or extensions thereof. This subordination includes, without
limitation, subordination of the Landlord's and Tenant's rights in casualty and
condemnation proceeds under Sections 17 and 18 above to the prior rights of any
Lender. This subordination shall be self operative, and no further instrument of
subordination shall be necessary to effect such subordination; nevertheless,
within fifteen (15) days after receiving a written request from Landlord, Tenant
shall execute such additional instrument of subordination as may be required by
Landlord (or its lenders or ground lessors) if such instrument of subordination
provides so long as Tenant is not in default hereunder beyond any applicable
cure period in this Lease, Tenant shall have continued enjoyment of the Premises
free from any disturbance or interruption by reason of any foreclosure of any
such deed of trust, mortgage or the exercise of any remedies by the lessor under
any such ground lease. In the event of sale or foreclosure of any such mortgage
or deed of trust, or exercise of the power of sale thereunder, or in the event
of a transfer in lieu of foreclosure, or in the event a ground lessor acquires
the Landlord's interests in the Building or the Complex, Tenant shall attorn to
the purchaser (or transferee) of the Building or the complex at such foreclosure
or sale and recognize such purchaser (or transferee) as Landlord under this
Lease if so requested by such purchaser (or transferee). Such attornment shall
be self operative and no further instruments need be executed to effect such
attornment. If any lender elects to have this Lease superior to its mortgage or
deed of trust and gives notice of its election to Tenant, then this Lease shall
thereupon become superior to the lien of such mortgage or deed of trust, whether
this Lease is dated or recorded before or after the mortgage or deed of trust.
(b) Estoppel Certificates. As a material inducement to Landlord to
---------------------
enter into this Lease, Tenant covenants that it shall, within fifteen (15) days
of the receipt thereof, acknowledge and deliver to Landlord an estoppel
certificate in the form attached to this Lease as Exhibit E, or such other form
---------
requested by Landlord from time to time, certifying, to the extent true, that
(i) Tenant shall be in occupancy, (ii) this Lease is unmodified and in full
force and effect, or if there have been modifications, that the same is in full
force and effect as modified and stating the modifications, (iii) Base Rent and
Additional Rent have been paid only through a certain specified date, (iv)
Tenant has no offsets, defenses or claims against Landlord, and (v) such other
matters as Landlord may reasonably request. Tenant's failure to deliver an
estoppel certificate within the fifteen (15) day period shall be deemed its
confirmation of the accuracy of the
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information supplied by Landlord to the prospective lender or purchaser. Tenant
acknowledges and agrees that Landlord and others will be relying and are
entitled to rely on the statements contained in such estoppel certificates.
SECTION 25. Relocation. Landlord reserves the right upon sixty (60) days
----------
written notice to Tenant, to substitute other space within the Building or the
Complex (the "Substitute Premises") for the Premises, provided that the
Substitute Premises at least (a) contain approximately the same or a greater
number of square feet as the Premises; (b) contain comparable tenant
improvements; and (c) are made available to Tenant at a rental rate equal to the
lesser of (i) the fair market rent for the Substitute Premises for the time
period in question (namely, from the delivery date of the Substitute Premises
through the Expiration Date), and (ii) Base Rent rate called for under this
Lease as of the time of the substitution, either on a per square foot basis or
in total. If the substitution occurs prior to the date Tenant initially occupies
the Premises, then Landlord shall reimburse Tenant for the necessary and
reasonable costs incurred by Tenant in planning for the space in the initial
Premises which expenses have been previously approved by Landlord and which have
no benefit to Tenant in the Substitute Premises. If Tenant is occupying the
Premises at the time Landlord gives notice of any such relocation, Landlord
shall (1) pay the reasonable cost of moving Tenant, its property and equipment
to the Substitute Premises, (2) without cost or expense to Tenant, improve the
Substitute Premises with improvements substantially similar to those located in
the Premises, and (3) cause such relocation to occur in a manner which does not
interfere with the conduct of Tenant's business in the Premises. All of the
other terms, covenants and conditions of the Lease shall remain unchanged and in
full force and effect, except that Section 1 and Exhibit B shall be revised to
---------
identify the Substitute Premises, to state the square foot area of the
Substitute Premises and to make the change, if any, in Base Rent. If Tenant
elects to move to new space in the Complex or the Building other than at the
request of Landlord, the terms of this section shall be inapplicable.
SECTION 26. Liability of Landlord. Tenant shall look solely to rents,
---------------------
issues and profits from the Complex (or the portions thereof then owned by
Landlord) for the satisfaction of any judgment or decree against Landlord,
whether for breach of the terms hereof or arising from a right created by
statute or under common law. Tenant agrees that no other property or assets of
the Landlord or any partner in Landlord shall be subject to levy, execution or
other enforcement procedures for satisfaction of any such judgment or decree;
and no partner, shareholder or other holder of an ownership interest in Landlord
shall be sued or named as a party in any suit or action (except as may be
necessary to secure jurisdiction over the partnership).
SECTION 27. Miscellaneous.
-------------
(a) Quiet Enjoyment. If Tenant fully complies with and promptly
---------------
performs all of the terms, covenants and conditions of this Lease on its part to
be performed, it shall have quiet enjoyment of the Premises throughout the Lease
term, subject, however, to matters of record on the day hereof and to those
matters to which this Lease may be subsequently subordinated.
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(b) Notices. Any notices required in accordance with any of the
-------
provisions herein shall be in writing and (i) delivered personally, (ii) mailed
by registered or certified mail to the parties at the addresses set forth in
Section 1 above, or to such other address as a party shall from time to time
designate in writing by notice given pursuant to this Section 27(b), or (iii)
sent by facsimile with electronic confirmation of receipt. If Tenant is a
partnership, any notice required or permitted hereunder may be given by or to
any one partner thereof with the same force and effect as if given by or to all
thereof. If mailed, a notice shall be deemed received three (3) days after the
postmark affixed on the envelope by the United States Post Office. If sent by
facsimile, a notice shall be claimed received upon electronic confirmation of
receipt.
(c) Successors or Assigns. All of the terms, conditions, covenants
---------------------
and agreements of this Lease shall be binding upon and subject to Section 16
above, benefit Landlord, Tenant and their respective heirs, administrators,
executors, successors and assigns, and upon any person or persons coming into
ownership or possession of any interest in the Premises by operation of law or
otherwise.
(d) Tenant Authority and Liability. Tenant warrants that this Lease
------------------------------
has been duly authorized, executed and delivered by Tenant, and Tenant has the
requisite power and authority to enter into this Lease and perform its
obligations hereunder. Tenant covenants to provide Landlord with evidence of its
authority and the authorization of this Lease upon request. All persons and
entities named as Tenant herein shall be jointly and severally liable for
Tenant's liabilities, covenants and agreements under this Lease.
(e) Brokers' Commission. Tenant represents that it has not dealt
-------------------
with any broker, agent or finder in connection with this Lease other than the
brokers listed in Section 1 of this Lease, if any, and Tenant agrees to
indemnify and hold Landlord harmless from all damages, judgments, liabilities,
claims and expenses (including attorneys' fees) arising out of or in connection
with any claim or demand of any other broker, agent or finder with whom Tenant
has dealt for any commission or fee alleged to be due in connection with its
participation in the procurement of Tenant or the negotiation of this Lease.
(f) Partial Invalidity. If any court determines that any provision
------------------
of this Lease or the application thereof to any person or circumstance is, to
any extent, invalid or unenforceable, the remainder of this Lease, or
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby and
each other term, covenant or condition of this Lease shall be valid and be
enforced to the fullest extent permitted by law.
(g) Recording. Tenant shall not record this Lease nor a memorandum
---------
of this Lease without the prior written consent of Landlord.
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<PAGE>
(h) Force Majeure. Neither party shall be deemed in default under
-------------
this Lease for failing to perform its duties or obligations under this Lease if
such failure is due to causes beyond its reasonable control, including but not
limited to acts of God, acts of civil or military authorities, fires, floods,
windstorms, earthquakes, strikes or labor disturbances, civil commotion, delays
in transportation, governmental delays or war; provided, nothing in this Section
27(h) shall limit or otherwise modify or waive Tenant's obligation to pay Base
Rent and Additional Rent as and when due pursuant to the terms of this Lease.
(i) Name of Complex and Building. Landlord may change the name of
----------------------------
the Complex and the building at any time. Any such change shall not require
amendment of this Lease or affect in any way Tenant's obligations under this
Lease, and except for the name change, all terms and conditions of this Lease
shall remain in full force and effect.
(j) Headings. The section headings used in this Lease are used for
--------
purposes of convenience and do not alter or limit in any manner the content of
the sections. Whenever appropriate from the context, the use of any gender shall
include any other or all genders, and the singular shall include the plural, and
the plural shall include the singular.
(k) Execution by Landlord and Tenant; Approval of Lender. Landlord
----------------------------------------------------
shall not be deemed to have made an offer to Tenant by furnishing Tenant with a
copy of this Lease with particulars inserted. No contractual or other rights
shall exist or be created between Landlord and Tenant until all parties have
executed this Lease and, if specified in writing by Landlord, until it has been
approved in writing by a Lender and fully executed copies have been delivered to
Landlord and Tenant. Tenant agrees to make such changes herein as may be
reasonably requested by a Lender, so long as such changes do not increase Base
Rent and Additional Rent due from Tenant or otherwise materially alter Tenant's
rights or obligations hereunder.
(l) Transportation Management Programs; Recycling. Tenant shall
---------------------------------------------
cooperate with Landlord in meeting the objectives and complying with the terms
and conditions of any transportation management plan now or hereafter instituted
by any governmental authority and applicable to the Building or the Complex.
Landlord will provide Tenant with notice of any such transportation plan now or
hereafter in effect. In addition, Tenant will cooperate with and participate in
any and all recycling programs now or hereafter in place with respect to the
Building or the Complex, whether or not governmentally mandated, if all tenants
of the Building or the Complex are requested to participate.
(m) Financial Statements. Within ten (10) days after Landlord's
--------------------
request therefor, Tenant shall deliver to Landlord such current financial
statements regarding Tenant as Landlord may reasonably request. Tenant shall
certify the accuracy of such statements. Landlord may make the financial
statements available to potential lenders or purchasers, but shall otherwise
preserve their confidentiality except in connection with legal proceedings
between the parties or as otherwise directed by court rule or order. Before
providing such financial
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statements to third parties, Landlord will obtain a confidentiality agreement
(with terms reasonably acceptable to Tenant) from such persons or entities.
(n) Tax on Rent. The Base Rent and Additional Rent charged herein is
-----------
exclusive of any sales, business and occupation, gross receipts or other tax
based on rents, or tax on Tenant's property or tax upon or measured by the
number of employees of Tenant, or any similar tax or charge. If any such tax or
charge be hereinafter enacted, and imposed upon Landlord, Tenant shall pay
Landlord the amount thereof concurrently with each monthly rent payment. If it
shall not be lawful for Tenant so to reimburse Landlord, the monthly rent
payable to Landlord under this Lease shall be revised to net Landlord the same
net rental after imposition of any such tax or charge upon Landlord as would
have been payable to Landlord prior to the imposition of such tax or charge.
Tenant shall not be liable to reimburse Landlord for any federal income tax or
other income tax of a general nature applicable to Landlord's income.
(o) Light, Air and View. Landlord does not guarantee the continued
-------------------
present status of light or air over any property adjoining or in the vicinity of
the Building or the Complex. Any diminution or shutting off of light, air or
view by any structure which may be erected near or adjacent to the Building or
the Complex shall in no way affect this Lease or impose any liability on
Landlord.
(p) Entire Agreement; Applicable Law. This Lease and the attached
--------------------------------
exhibits set forth the entire agreement of Landlord and Tenant concerning the
Premises and the Building, and there are no other agreements or understanding,
oral or written, between Landlord and Tenant concerning the Premises or the
Building. Any subsequent modification or amendment of this Lease shall be
binding upon Landlord and Tenant only if reduced to writing and signed by them.
This Lease shall be governed by, and construed in accordance with the laws of
the State of Washington. Venue for any action under this Lease shall be in King
County, Washington.
(q) Business Days. The term "business days" as used in this Lease
-------------
means a weekday (i.e., Monday through Friday) other than a holiday observed by
Landlord or Tenant.
SECTION 28. Additional Lease Provisions.
---------------------------
(a) Rooftop Equipment.
-----------------
(i) Subject to the terms of this Section 28(a), Tenant, at its
sole costs and expense, shall have a non-exclusive license to install on the
roof of the Building, a satellite dish or antenna and related communication
equipment using signal strength similar to such equipment commonly located on
the rooftops of comparable office buildings in the East and South King County
areas (the "equipment"). Prior to installation, in addition to the location of
the Equipment, Landlord must approve, which approval will not be unreasonably
withheld: (1) the Equipment; (2) drawings submitted by Tenant showing the
Equipment to be installed,
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method of installation, connectors to electrical services, conduit to the
Premises in the Building, and such other information concerning the
installation, use and maintenance of the Equipment which Landlord may request;
and (3) the contractor selected by Tenant to install the Equipment, and the
terms of the contract between Tenant and its contractor. If required by
Landlord, Tenant shall use Landlord's roofing contractor during the installation
of the Equipment. The installation work shall be done in a manner which does not
invalidate any roof warranty then in effect, and Tenant will repair any damage
to the roof or roof structure caused by such installation. The Equipment may be
used only for Tenant's own communications needs and on a non-fee basis;
provided, however, Tenant may propose the installation of additional Equipment
for commercial purposes, for interfacing with satellite services and for the
placement of other transmission and reception facilities, subject to Landlord
and Tenant agreeing in writing on the extent of such additional Equipment, and a
monthly fee for the use of the roof of the Building for such purposes. Tenant
shall obtain (through Landlord or with Landlord's approval) all permits and
approvals required by any governmental entities to install, operate or maintain
the Equipment. At its sole cost and expense, Tenant shall maintain the Equipment
and comply with all the laws, rules, regulations, ordinances and standards of
all governmental authorities having jurisdiction over the Equipment or the
Building. Tenant shall be responsible for all roof repair and additional
maintenance costs, if any, attributable to the Equipment and Tenant's use of the
Building roof pursuant to this Section 28(a). Tenant shall pay for all utilities
used or consumed in connection with the Equipment; pay all personal property
taxes, if any, separately assessed with respect to the Equipment; and if and to
the extent the Equipment is assessed for tax purposes as part of the Building or
Landlord's personal property, reimburse Landlord within thirty (30) days of
Landlord's written demand for all additional taxes, if any, attributable to the
Equipment as reasonably determined by Landlord.
(ii) Installation, maintenance and use of the Equipment shall not
in any way interfere with the systems of the Building or the Complex or the
quiet enjoyment by any other tenant or occupant of the Building or the Complex,
including without limitation the use of computers, television, radio, telephone
and other communications equipment and any other communications apparatus now or
hereafter located on the roof of the Building or elsewhere in the Complex. If
Landlord receives complaints regarding interference with reception from another
tenant, and Landlord reasonably believes the source of the interference is the
Equipment, Tenant shall take all steps necessary to stop the interference.
Within thirty (30) days following expiration or earlier termination of this
Lease, Tenant shall remove the Equipment, repair any damage caused by such
removal and restore the roof and any other affected areas of the Building to a
condition at least as good as its condition immediately prior to the
installation of the Equipment, ordinary wear and tear excepted. If Tenant fails
to so remove the Equipment and restore the Building, Landlord may do so on
Tenant's behalf, and Tenant shall within ten (10) days after demand pay to
Landlord the actual costs incurred by Landlord in so doing. Landlord agrees to
permit Tenant reasonable access to the roof and other Common Areas of the
Building to facilitate the installation, use and maintenance of the Equipment
and the removal of the Equipment. Any Equipment so installed shall be installed
and used at Tenant's sole risk, and in
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no event shall Landlord be liable under any circumstances for any damage to the
Equipment or loss of use related to the Equipment, except to the extent the
damage is the result of the negligence or intentional misconduct of Landlord.
Nothing in this Section 28(a) is intended to create any exclusive right in favor
of Tenant to use the roof of the Building or any other portion of the Complex
for telecommunications equipment or otherwise. At the request of Landlord,
Tenant will cooperate with Landlord in relocating the Equipment to another
location on the roof of the Building or elsewhere in the Complex so long as
Landlord pays the reasonable cost of such relocation.
(b) Back-up Power.
-------------
(i) Subject to the terms of this Section 28(b), Tenant, at its
sole costs and expense, shall have a non-exclusive right to install an emergency
power generator (the "Generator") and an associated uninterrupted power supply
switching facility (the "UPS") at a mutually acceptable location in the Complex
adjacent to the Building. Prior to installation, in addition to the location,
Landlord must approve: (1) the Generator and UPS, (2) drawings submitted by
Tenant showing the Generator and UPS to be installed, method of installation,
connectors to electrical services, conduit to the Premises, and such other
information concerning the installation, use and maintenance of the Generator
and UPS which Landlord may request, and (3) the contractor selected by Tenant to
install the Generator and UPS, and the terms of the contract between Tenant and
its contractor. The Generator and UPS shall be painted in a color approved by
Landlord to match the adjacent improvements and shall be surrounded by an
acoustic shield. Tenant shall obtain (through Landlord or with Landlord's
approval) all permits and approvals required by any governmental entities to
install, operate or maintain the Generator and UPS. At its sole cost and
expense, Tenant shall maintain the Generator and UPS and comply with all the
laws, rules, regulations, ordinances and standards of all governmental
authorities having jurisdiction over the Building. Tenant shall be responsible
for all additional maintenance costs, if any, attributable to the use, operation
or maintenance of the Generator and UPS. Tenant shall pay for all utilities used
or consumed in connection with the Generator and UPS; pay all personal property
taxes, if any, separately assessed with respect to the Generator and UPS; and if
and to the extent the Generator and UPS is assessed for tax purposes as part of
the Building or Landlord's personal property, reimburse Landlord within thirty
(30) days of Landlord's written demand for all additional taxes, if any,
attributable to the Generator and UPS. The Generator and UPS shall be used only
for periodic testing and in the event Tenant's primary electrical service is
interrupted. All testing shall take place at times acceptable to Landlord to
minimize interference with other tenants. The Generator and UPS shall be used
for backup power for Tenant only, and may not be used as a primary power source
for Tenant or by any other person or entity.
(ii) Installation, maintenance and use of the Generator and UPS
shall not in any way interfere with the systems of the Building or the Complex
or the quiet enjoyment by any other tenant or occupant of the Building or the
Complex. Tenant shall within thirty (30) days following expiration or earlier
termination of the Lease, remove the Generator and UPS,
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<PAGE>
repair any damage caused by such removal and restore the affected areas of the
Building or the Complex to a condition at least as good as its condition
immediately prior to the installation of the Generator and UPS, ordinary wear
and tear excepted. If Tenant fails to so remove the Generator and UPS and
restore the Building or the Complex, Landlord may do so on Tenant's behalf, and
Tenant shall within ten (10) days after demand pay to Landlord the actual costs
incurred by Landlord in so doing. Landlord agrees to permit Tenant reasonable
access to the Common Areas of the Building or the Complex to facilitate the
installation, use and maintenance of the Generator and UPS and the removal of
the Generator and UPS. Any Generator and UPS so installed shall be installed and
used at Tenant's sole risk, and in no event shall Landlord be liable under any
circumstances for any damage to the Generator and UPS or loss of use related to
the Generator and UPS.
(c) Security. Landlord shall provide key-card access to the elevators
--------
and entrances to the Building. Key access will be provided to the Premises;
however, Tenant may install its own security surveillance systems restricting
access to the Premises so long as Landlord is given reasonable access to the
Premises in order to perform its obligations under this Lease or in the event of
an emergency.
(d) Landlord's Representation and Warranties. Landlord represents and
----------------------------------------
warrants to Tenant that to the best of Landlord's knowledge:
(i) The Building is "Year 2000 Compliant" (i.e., the Building
systems are able to perform date-sensitive functions after December 31, 1999).
(ii) No Hazardous Substances are or have been in the past
generated, treated, stored or discharged on or at the Premises or Building
except in accordance with applicable laws.
(iii) The Building and the Common Areas thereof have been
constructed in accordance with all applicable building codes and government
requirements in place at the time of construction.
(iv) The Building meets or exceeds all current ADA standard
requirements in place at the time of construction thereof.
For purposes of the warranties and representations of Landlord set forth in
this Section 28(d), Landlord's knowledge shall be limited to matters within the
actual present knowledge of Jack Rader, the general manager of Landlord, with
respect to the Complex, without any independent investigation or obligation to
make inquiry of any other person. If any of the foregoing representations or
warranties are incorrect, any costs or expenses incurred by Landlord in
correcting the inaccuracies shall be borne by Landlord.
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<PAGE>
(e) Right to Terminate. If by December 31, 2000, there have not been
------------------
opened in the Complex an exercise facility with locker rooms and exercise
equipment, and a facility serving food, which are available for use by Tenant's
employees, then so long as Tenant is not then in default under this Lease,
Tenant may elect to terminate this Lease by giving Landlord written notice of
Tenant's election to so terminate this Lease, which notice must be given before
such facilities are opened and in any event no later than February 28, 2001. If
Tenant so elects to terminate this Lease, (i) the termination shall be effective
as of the last day of the sixth (6/th/) full calendar month following the date
the termination notice is given to Landlord, and (ii) Tenant shall pay to
Landlord a termination fee equal to the unamortized balance of "Landlord's
Costs" (defined below), calculated as of the termination date. Within fifteen
(15) days after receiving Tenant's written termination notice Landlord will
provide Tenant with written notice of the amount of the termination fee and
Tenant shall pay the termination fee to Landlord within thirty (30) days after
receiving Landlord's written notice of the amount of the termination fee. For
purposes of determining the termination fee payable by Tenant pursuant to this
Section 28(e) and Section 28(g) below, Landlord's Costs will be amortized over
the initial Lease Term at an interest rate of eleven percent (11%) per annum.
For purposes of this Lease, the term "Landlord's Costs" means the sum of (1) the
real estate fees and commissions paid by Landlord in connection with this Lease,
and (2) the costs and expenses incurred by Landlord in making improvements to
the Premises pursuant to the Workletter, or otherwise.
(f) Risers; Conduit. Subject to Landlord's review and approval of
---------------
plans and specifications, including methods of installation and connection to
Building systems, and such other information as Landlord may request, Tenant at
its expense may (i) connect to any fiber optic lines under West Valley Highway
to the west of the Building, and (ii) install cable and conduits from the
adjacent street, the ground floor of the Building and the roof of the Building
to the Premises. Tenant, at its expense, shall be solely responsible for
obtaining any third party approvals (including governmental permits or licenses)
necessary in order for Tenant to do anything otherwise permitted pursuant to
this Section 28(f).
(g) Right of First Opportunity. From and after Tenant notifies
--------------------------
Landlord in writing that Tenant needs additional space in the Building (an
"Expansion Notice"), Tenant shall have a right of first offer (the "RFO") to
lease any space in the Building which is adjacent and contiguous to the Premises
that becomes available for lease during the initial Lease Term (the "RFO
Space"). Tenant's rights to RFO Space shall be subject to the expansion and
extension rights of other tenant's of the Building, and space will not be
considered available if the tenant occupying the space agrees with Landlord to
extend the term of its lease of the space. From and after the date Tenant gives
the Expansion Notice to Landlord, and prior to leasing any RFO Space to a third
party, Landlord will first advise Tenant in writing (the "RFO Notice") of the
amount of any RFO Space which is available, and the terms and conditions on
which Landlord is prepared to lease the subject RFO Space to Tenant. If the RFO
Notice is given during the last thirty six (36) months of the initial Lease
Term, Landlord may require that the term of this Lease be extended (on mutually
acceptable terms and conditions) for up to five (5) years from the date Tenant
occupies the
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<PAGE>
RFO Space. Tenant shall have ten (10) business days after receiving an RFO
Notice to notify Landlord in writing that Tenant desires to lease all of the
subject RFO Space on the terms and conditions set forth in the RFO Notice. If
Tenant fails to timely notify Landlord of its interest in leasing all of the
subject RFO Space, Landlord shall be free to lease such space to any other
person or entity. If during the first twenty four (24) months of the Lease Term
Tenant has given an Expansion Notice to Landlord advising Landlord that Tenant
desires to lease 5,000 or more rentable square feet of space in the Building,
and Landlord is unable during such twenty four (24) month period to provide
Tenant with at least an additional 5,000 rentable square feet of additional
space in the Building on terms and conditions mutually acceptable to Landlord
and Tenant, then so long as Tenant is not in default under this Lease, Tenant
shall have a one-time right to terminate this Lease by giving a written
termination notice to Landlord, which notice must be given within two (2) months
following the end of such twenty four (24) month period. If Tenant so elects to
terminate this Lease, (i) the termination shall be effective as of the last day
of the sixth (6th) full calendar month following the date the termination notice
is given to Landlord, and (ii) Tenant shall pay to Landlord a termination fee
equal to the unamortized balance of Landlord's Costs, calculated as of the
termination date. Within fifteen (15) days after receiving Tenant's written
termination notice Landlord will provide Tenant with written notice of the
amount of the termination fee and Tenant shall pay the termination fee to
Landlord within thirty (30) days after receiving written notice of the amount of
the termination fee.
DATED as of the day and year first indicated above.
LANDLORD:
INTRAROCK 1 LLC, a
Delaware limited liability company
By: Space Center East LLC, its manager
By: Intracorp Real Estate, L.L.C.,
member
By: Intracorp Investments, L.L.C.,
its manager
By: /s/ Jack Rader
------------------------------
Its GENERAL MANAGER
---------------------------
[Signatures continued on next page]
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<PAGE>
TENANT:
PEERLESS SYSTEMS IMAGING PRODUCTS,
INC., a Washington corporation
By /s/ Gordon Hanson
--------------------------------
Its VP & GM
------------------------------
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<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 31/st/ day of March, 2000, before me, a Notary Public in and for
the State of Washington, duly commissioned and sworn, personally appeared Jack
Rader, to me known to be the General Manager of Intracorp Investments, L.L.C.,
manager of Intracorp Real Estate, L.L.C., member of Space Center East LLC, as
manager of INTRAROCK 1 LLC, the corporation named in and which executed the
foregoing instrument; and he/she acknowledged to me that he/she signed the same
as the free and voluntary act and deed of said corporation for the uses and
purposes therein mentioned.
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
WITNESS my hand and official seal the day and year in this certificate
above written.
/s/ Daniel A. Mathews
--------------------------------------
Signature
Daniel A. Mathews
--------------------------------------
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at Bellevue, WA. My
commission expires May 15, 2000.
NOTARY SEAL OF DANIEL A. MATHEWS.
COMMISSION EXPIRES
NOTARY PUBLIC 5-15-00
STATE OF WASHINGTON
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<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 17/th/ day of March, 2000, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn
personally appeared Gordon Hanson, known to me to be the VP and GM of PEERLESS
SYSTEMS IMAGING PRODUCTS, INC., the corporation that executed the foregoing
instrument, and acknowledged the said instrument to be the free and voluntary
act and deed of said corporation, for the purposes therein mentioned, and on
oath stated that he/she was authorized to execute said instrument.
I certify that I know or have satisfactory evidence that the person
appearing before me and making this acknowledgment is the person whose true
signature appears on this document.
WITNESS my hand and official seal hereto affixed the day and year in
the certificate above written.
/s/ Barbara J. Gelling
----------------------------------
Signature
Barbara J. Gelling
----------------------------------
Print Name
NOTARY PUBLIC in and for the State of
Washington, residing at Seattle. My
commission expires 11/29/03.
NOTARY SEAL OF BARBARA J. GELLING
COMMISSION EXPIRES
NOTARY PUBLIC 11-29-03
STATE OF WASHINGTON
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<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Parcel 1 of Greenriver Corporate Park One Short Plat No. SPC-84-4 (SPC-84-6),
according to the Short Plat recorded under King County Recording No. 8410250437;
situated in the City of Kent, County of King, State of Washington.
<PAGE>
EXHIBIT B
FLOOR PLAN
See Attached
<PAGE>
BUILDING 230
FOURTH FLOOR
<PAGE>
EXHIBIT C
SITE PLAN
See Attached
<PAGE>
[MAP APPEARS HERE]
<PAGE>
EXHIBIT D
WORK LETTER
This Exhibit D is attached to and made a part of the Office Lease dated as
of March 15, 2000, between INTRAROCK 1 LLC, a Delaware limited liability company
("Landlord") and PEERLESS SYSTEMS IMAGING PRODUCTS, INC. ("Tenant"). Defined
terms used in this Exhibit D will have the same meanings given them in the
Lease.
1. Base Building Improvements. At its sole cost and expense, Landlord
--------------------------
will install new ceiling tile and fluorescent light fixtures throughout the
Premises, and new digital HVAC controls.
2. Tenant Improvements. Landlord agrees to make additional improvements
-------------------
to the Premises in accordance with this Exhibit D (the "Tenant Improvements").
Design and construction of the Tenant Improvements will be provided at Tenant's
expense; however, Landlord shall pay the cost of the Tenant Improvements up to
an amount equal to Eighteen and 00/100 Dollars ($18.00) per rentable square foot
of the Premises (the "Tenant Allowance"). Landlord will make up to an additional
Ten and 00/100 Dollars ($10.00) per rentable square foot of the Premises
available to Tenant to pay for the costs of construction of the Tenant
Improvements (the "Additional Allowance") to the extent such costs exceed the
amount of the Tenant Allowance. If Tenant elects to use any of the Additional
Allowance, the amount so used by Tenant will amortized over the initial term of
this Lease at an interest rate equal to ten percent (10%) per annum, and the
monthly Base Rent will be increased by the amount of the monthly payments
necessary to fully amortize the Additional Allowance (or portion thereof used by
Tenant) over the initial Lease Term. If Tenant elects to terminate this Lease in
accordance with the terms of Sections 27(e) or 27(g) of the Lease, the
unamortized balance of the Additional Allowance will be due and payable in full.
Furthermore, Landlord agrees to make available to Tenant a space planning
allowance in the amount of $.15 per useable square foot of the Premises to pay
for costs associated with Tenant's design of the Tenant Improvements. The Tenant
Allowance will be applied only to the costs of construction of the Tenant
Improvements, and a coordination and administration fee to Landlord. The
coordination and administration fee to Landlord shall be in an amount equal to
three percent (3%) of the cost of constructing the Tenant Improvements. All work
will be performed by designers and contractors selected and engaged by Landlord.
3. Approval of Plans; Construction of Tenant Improvements.
------------------------------------------------------
(a) Preparation of Plans. Landlord and Tenant shall cooperate with
--------------------
each other in the preparation of all plans and specifications for the Tenant
Improvements. All such plans and specifications must have the approval of both
Landlord and Tenant, which approval will not be unreasonably withheld or delayed
by either party. Complete plans and specifications and a
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<PAGE>
cost estimate for the Tenant Improvements will be approved by Landlord and
Tenant no later than thirty (30) days after the full execution of this Lease in
accordance with the procedure set forth in paragraph 3(b) below.
(b) Approval of Plans. Within five (5) days after the full execution
-----------------
of the Lease, Tenant, at its expense, will provide Landlord's architect with
instructions sufficient to enable Landlord's architect to prepare complete plans
and specifications for the Tenant Improvements. Such plans and specifications
and a cost estimate for the Tenant Improvements will e prepared by Landlord's
architect and submitted to Landlord and Tenant for preliminary approval.
Landlord and Tenant shall use diligent efforts to approve or disapprove such
plans and specifications and cost estimate within ten (10) days after receipt
thereof. When the plans, specifications and cost estimate are so approved by
Landlord and Tenant, Landlord shall obtain from its general contractor a
quotation of the cost of the Tenant Improvements and, if Landlord approves such
quotation, it shall submit the same to Tenant for approval as the price to be
paid by Tenant to Landlord for the Tenant Improvements. Upon written approval of
such price by Tenant, Landlord and Tenant will be deemed to have given final
approval to the plans and specifications on the basis of which the quotation was
made, and Landlord will be authorized to proceed with the improvement of the
Premises in accordance with such plans and specifications. If Tenant disapproves
such price or fails to approve or disapprove such price within five (5) days
after Landlord provides such price to Tenant, Landlord will not be obligated to
commence work on the Premises until such time as Landlord and Tenant approve a
price for the Tenant Improvements, and Tenant will be responsible for any costs
due to any resulting delay in completion of the Premises.
(c) Payments. Prior to commencement of the Tenant Improvements and if
--------
the price for such Tenant Improvements is greater than the Tenant Allowance,
Tenant shall deposit with Landlord any additional cost above the Tenant
Allowance (the "Additional Cost Deposit"), unless Tenant elects to use all or
any portion of the Additional Allowance, in which case Tenant shall deposit with
Landlord any additional cost above the sum of the Tenant Allowance and the
amount of the Additional Allowance which Tenant has elected to use. Landlord's
contractor will complete the Tenant Improvements in accordance with the approved
final plans and specifications. Payments for the Tenant Improvements will be
made as follows: (i) first, by application of the Additional Cost Deposit; (ii)
second , by application of the entire Tenant Allowance provided by Landlord
against the monthly progress payments due; (iii) third, by application of any
portion of the Additional Allowance which Tenant has elected to use, and (iv)
fourth, Tenant shall pay, within ten (10) days after receipt of monthly progress
statements from Landlord, the full amount of such progress billings.
(d) Modifications. If Tenant requests any change after the plans and
-------------
specifications are approved, Tenant shall request such change in writing to
Landlord and such request will be accompanied by all plans and specifications
necessary to show and explain changes from the approved final plans and
specifications. After receiving this information,
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<PAGE>
Landlord will give Tenant, within five (5) business days, a written price for
the cost of engineering design services and an estimate of construction costs to
incorporate the change in Tenant's final plans and specifications. If Tenant
approves of such price in writing within five (5) business days, Landlord will
have such changes made to engineering drawings in final plans and
specifications. Within five (5) business days after completion of such changes
in the final plans and specifications, Landlord will provide Tenant a written
breakdown of the final costs which will be chargeable or credited to Tenant for
such change and any impact such change will have on the schedule of
construction. If Tenant wishes to proceed with such change, Tenant shall, within
five (5) business days, so notify Landlord in writing. In the absence of such
notice, Landlord shall proceed in accordance with the previously approved final
plans and specifications before such change was requested. Tenant will be
responsible for any resulting delay in completion of the Premises due to
modification of final plans and specifications. Tenant will also be responsible
for any demolition work required as a result of the change.
4. Other Work by Tenant. All work not within the scope of the normal
--------------------
construction trades employed on the Building, such as installation of draperies
(other than building standard window coverings), furniture, telephone equipment
and wiring and office equipment will be furnished and installed by Tenant at
Tenant's expense. Tenant shall adopt a schedule in conformance with the schedule
of Landlord's contractors and conduct its work in such a manner as to maintain
harmonious labor relations and as not to interfere unreasonably with or delay
the work of Landlord's contractors. Any movers or other laborers used by Tenant
must be approved by Landlord and will be subject to the administrative
supervision of Landlord's general contractor. Landlord will give access and
entry to the Premises to Tenant to enable Tenant to adapt the Premises for
Tenant's use provided, however, that such entry is prior to the commencement of
the term of this Lease. Such entry shall be subject to Section 3(b) of the
Lease.
5. Representatives. Landlord and Tenant shall each appoint a
---------------
representative to act in all matters associated with this workletter. All
inquiries, requests, instructions, authorizations and other communications with
respect to the matters covered by this workletter will be made to Landlord's
representative or Tenant's representative, as applicable. Tenant will not make
any inquiries of or requests to and will not give any instructions or
authorizations to any employee or agent of Landlord including, without
limitation, Landlord's architect, engineers and contractors or any of their
agents or employees with regard to matters associated with this workletter.
Either party may change its representative under this workletter at any time by
providing three (3) days prior written notice to the other party.
-3-
<PAGE>
EXHIBIT E
ESTOPPEL CERTIFICATE
THIS ESTOPPEL CERTIFICATE (this "Certificate") is made this _____ day
of _______________, ________, by ____________________________, a
_________________ ("Tenant"), to and for the benefit of INTRAROCK 1 LLC
("Landlord") and ______________________________, a ________________________
("Purchaser") [("Lender")].
Recitals
--------
A. Tenant is the tenant under that certain Office Lease, dated as
of _______________, as amended by _______________________________ (as so
amended, the "Lease"), covering certain premises located at
_______________________________, as more particularly defined and described in
the Lease (the "Leased Premises"); and
B. Purchaser [Lender] intends to purchase [make a loan secured by]
certain property, including the Leased Premises (the "Property") from the
Landlord; and
C. Purchaser [Lender] has requested that Tenant provide certain
certifications with respect to the Lease which Purchaser [Lender] will rely on
in connection with its acquisition of [loan secured by] the Property;
Certification
-------------
NOW, THEREFORE, Tenant hereby certifies to Purchaser [Lender] as
follows:
(a) That Tenant is the tenant under the Lease;
(b) That attached hereto as Exhibit A is a true, correct and
---------
complete copy of the Lease, that the Lease has not been modified, changed,
altered, or amended in any respect except as expressly set forth in Exhibit A,
---------
constitutes the entire agreement between Tenant and the Landlord with respect to
the Leased Premises and has been duly executed and delivered on behalf of Tenant
pursuant to proper authority therefor;
(c) That any work and all other improvements to the Leased Premises
required to be furnished or constructed by the Landlord pursuant to the terms of
the Lease have been completed to Tenant's satisfaction, that Tenant has accepted
the Leased Premises, and that the term of the Lease commenced on
_________________. The term of the lease expires on _____________________, and
Tenant has the following options to extend the term of the lease (if none,
insert "none"): __________________;
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<PAGE>
(d) That the fixed minimum net rent for the Leased Premises is
currently $_____________ per month and the additional rent is currently
$__________________ per month, and has been paid to and including
____________________, 1999 and that there has been no prepayment of rent or
other amounts due under the Lease other than that provided for in the Lease for
the calendar month of this Certificate;
(e) That there are $_________ in security deposits held under the
Lease;
(f) That Tenant has no options to purchase or lease the Property and
no rights of first offer or rights of first refusal with respect thereto, except
as otherwise set forth in the Lease;
(g) That any of Tenant's rights of fist offer or rights of first
refusal applicable to the sale of the Property to Purchaser and any prohibition
on Landlord's right to transfer the Property have been waived;
(h) That, except as noted below, the Lease is in full force and
effect, that there exists no default nor state of facts which with notice or the
passage of time would constitute a default of Tenant thereunder or, to the
knowledge of Tenant, on the part of the Landlord thereunder, and Tenant has made
no claim against Landlord alleging Landlord's default under the Lease; Tenant
has no claims, counterclaims, defenses, or set-offs against Landlord arising
from the Lease or otherwise, nor is Tenant entitled to any rental concession,
rebate, allowance or free rent for any period after this certification;
(i) That there are no actions, whether voluntary or otherwise,
pending or, to the knowledge of Tenant, threatened, against Tenant under the
bankruptcy laws of the United States or any state thereof;
(j) No labor or materials have been supplied to the Leased Premises
at the request of, or on behalf of, Tenant for which full payment has not been
made; and
(k) The assignment of the Lease to Purchaser [Lender] does not
violate any of the terms of the Lease.
Tenant acknowledges and agrees that the Purchaser [Lender] shall be entitled to
rely on Tenant's certifications and agreements set forth herein.
[Tenant]
--------
By: /s/ Gordon Hanson
------------------------------
Its: VP & GM
-----------------------------
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<PAGE>
EXHIBIT F
GUARANTY OF LEASE
THIS GUARANTY OF LEASE (this "Guaranty") is made this 15th day of March,
2000.
1. Guaranty. As a material inducement to INTRAROCK 1 LLC, a Delaware
--------
limited liability company ("LANDLORD"), to enter into a certain Office Lease
(the "LEASE"), dated March 15, 2000, between Landlord and PEERLESS SYSTEMS
IMAGING PRODUCTS, INC., a Washington corporation ("Tenant"), as tenant of the
premises known as Creekside One Building, located at 20415 - 72nd Avenue South
in Kent, King County, Washington, PEERLESS SYSTEMS CORPORATION, a Delaware
corporation, 2381 Rosecrans Avenue, El Segundo, CA 90245 USA (the "Guarantor")
unconditionally and irrevocably guarantees the full, complete and prompt
performance of each and every obligation on the part of Tenant to be performed
under the Lease by Tenant irrespective of the validity, binding effect, legality
or enforceability of the Lease or whether the Lease has been duly executed by
Tenant, or any other circumstance which might now or hereafter constitute a
legal or equitable discharge or defense of Guarantor. Guarantor acknowledges
that it will receive a direct financial benefit by virtue of the execution and
delivery of the Lease.
2. Independent Liability. Guarantor agrees that its liability hereunder
---------------------
is independent of the liability of Tenant, and its successors and assigns, as
tenant under the Lease, and that a separate action or actions may be brought and
prosecuted against Guarantor whether or not Tenant, or its successors and
assigns, is joined in any such action or actions and whether or not Landlord has
first pursued any or all other remedies to which it may also be entitled,
against Tenant or otherwise.
3. Landlord's Authority. Guarantor authorizes Landlord, without notice or
--------------------
demand, from time to time without affecting Guarantor's obligations hereunder,
to: (i) compromise, extend or otherwise change or modify any and all of the
provisions of the Lease, including, but not by way of limitation, increasing or
reducing the rent thereunder or releasing Tenant as to all or any portion of the
obligations hereby guaranteed; (ii) from time to time, and without inquiry as to
financial condition, release any other guarantor from its obligations, or accept
additional or substituted security for the performance of any obligations hereby
guaranteed; or (iii) release or subordinate any security for the performance of
any obligation hereby guaranteed.
4. Actions Not Affecting Guarantor's Obligations. Guarantor's obligations
---------------------------------------------
under this Guaranty shall be a continuing liability and shall in no way be
affected or diminished by reason of (i) any extension of time or other
indulgence that may at any time, and from time to time, be granted by Landlord
to Tenant; (ii) the release or discharge of Tenant in any creditors'
receivership, bankruptcy or other proceeding; (iii) the impairment, limitation
or modification of
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<PAGE>
the liability or the obligations of Tenant or its trustee or receiver, or such
impairment, limitation or modification of Landlord's remedies by virtue of the
Bankruptcy Code or other statute or from a decision of any court including the
disaffirmance or rejection of the Lease in any such proceeding; (iv) the
assignment or other transfer of the Lease or its interest therein by Tenant; or
(v) the existence of any counterclaim, offset or other claim alleged by Tenant
in connections with Landlord's enforcement of its rights under this Guaranty.
5. Guarantor's Waivers. As further inducement to Landlord to enter into
-------------------
the Lease and in consideration for it, Guarantor expressly waives (i) any right
to require Landlord to proceed against Tenant or any other guarantor, proceed
against any security held from Tenant or any other guarantor or proceed against
or exhaust any other remedy in Landlord's power, and (ii) any right to notice of
nonperformance on the part of Tenant except as expressly provided for in the
Lease.
6. Subordination. Any indebtedness of Tenant now or hereafter held by
-------------
Guarantor is subordinated to the indebtedness of Tenant to Landlord without
reduction or affecting in any manner the liability of Guarantor under the other
provisions of this Guaranty.
7. Termination of Guarantor's Obligations. This Guaranty will continue in
--------------------------------------
effect until one day following the final payment and performance by Tenant under
the Lease.
8. Joint and Several Obligation. This Guaranty will be the joint and
----------------------------
several obligation of each of the undersigned, if there be more than one, and
will bind the individual and community property of each of them. Guarantor's
liability hereunder is coextensive with that of tenant and will be joint and
several.
9. Successors and Assigns. Guarantor's obligations hereunder will inure
----------------------
to the benefit of Landlord's successors and assigns, including by merger or
consolidation. Any reference in this Guaranty to Tenant includes the Tenant's
heirs and personal representatives.
10. Fees and Costs. If either party retains the services of an attorney in
--------------
connection with enforcing the terms of this Guaranty, or if suit is brought for
the recovery of the Base Rent or Additional Rent due under this Guaranty or for
the breach of any covenant or condition of this Guaranty during the term of this
Guaranty or after the expiration thereof, the substantially prevailing party
therein will be entitled to recover from the other party the substantially
prevailing party's reasonable attorneys' fees, witness fees and other court
costs incurred in connection therewith.
11. Choice of Law/Venue. The validity and interpretation of this Guaranty
-------------------
will be determined in accordance with the laws of the State of Washington. Venue
for any action hereunder shall be in King County, Washington.
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<PAGE>
12. Jurisdiction. Guarantor acknowledges and agrees that all disputes
------------
relating in any way to this Guaranty, including all actions to enforce this
Guaranty, will be dealt with and adjudicated in the state courts of Washington
or the federal court sitting in Washington; and Guarantor expressly and
irrevocably submits to the jurisdiction of such courts in any suit, action or
proceeding relating to this Guaranty.
13. Bankruptcy. Should Landlord be obligated by any bankruptcy or other
----------
law to repay Tenant or Guarantor or to any trustee or other representative any
amounts previously paid, then this Guaranty will be reinstated in the amount of
such repayment.
14. Notice. Any notice of demand hereunder must be in writing and will be
------
deemed given (i) when delivered personally, or (ii) two (2) days after being
sent by United States certified or registered mail, return receipt requested,
postage prepaid to the address of Guarantor at PEERLESS SYSTEMS CORPORATION, a
Delaware corporation, 2381 Rosecrans Avenue, El Segundo, CA 90245 USA, or (iii)
upon receipt if sent by private courier service guaranteeing next day delivery,
addressed to Guarantor at the aforementioned address. Guarantor may change the
address for purposes of this paragraph by delivering to Landlord written notice
of such chance in accordance with the terms of this paragraph.
GUARANTOR:
PEERLESS SYSTEMS CORPORATION
/s/ CAROLYN M. MADUZA
----------------------------------
Carolyn M. Maduza, Senior Vice President
of Finance and Chief Financial Officer
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<PAGE>
GUARANTY OF LEASE
THIS GUARANTY OF LEASE (this "Guaranty") is made this 15th day of March,
2000.
1. Guaranty. As a material inducement to INTRAROCK 1 LLC, a Delaware
--------
limited liability company ("Landlord"), to enter into a certain Office Lease
(the "Lease"), dated March 15, 2000, between Landlord and PEERLESS SYSTEMS
IMAGING PRODUCTS, INC., a Washington corporation ("Tenant"), as tenant of the
premises known as Creekside One Building, located at 20415 - 72nd Avenue South
in Kent, King County, Washington, PEERLESS SYSTEMS CORPORATION, a Delaware
corporation, 2381 Rosecrans Avenue, El Segundo, CA 90245 USA (the "Guarantor")
unconditionally and irrevocably guarantees the full, complete and prompt
performance of each and every obligation on the part of Tenant to be performed
under the Lease by Tenant irrespective of the validity, binding effect, legality
or enforceability of the Lease or whether the Lease has been duly executed by
Tenant, or any other circumstance which might now or hereafter constitute a
legal or equitable discharge or defense of Guarantor. Guarantor acknowledges
that it will receive a direct financial benefit by virtue of the execution and
delivery of the Lease.
2. Independent Liability. Guarantor agrees that its liability hereunder
---------------------
is independent of the liability of Tenant, and its successors and assigns, as
tenant under the Lease, and that a separate action or actions may be brought and
prosecuted against Guarantor whether or not Tenant, or its successors and
assigns, is joined in any such action or actions and whether or not Landlord has
first pursued any or all other remedies to which it may also be entitled,
against Tenant or otherwise.
3. Landlord's Authority. Guarantor authorizes Landlord, without notice or
--------------------
demand, from time to time, without affecting Guarantor's obligations hereunder,
to: (i) compromise, extend or otherwise change or modify any and all of the
provisions of the Lease, including, but not by way of limitation, increasing or
reducing the rent thereunder or releasing Tenant as to all or any portion of the
obligations hereby guaranteed; (ii) from time to time, and without inquiry as to
financial condition, release any other guarantor from its obligations, or accept
additional or substituted security for the performance of any obligations hereby
guaranteed; or (iii) release or subordinate any security for the performance of
any obligation hereby guaranteed .
4. Actions Not Affecting Guarantor's Obligations. Guarantor's obligations
---------------------------------------------
under this Guaranty shall be a continuing liability and shall in no way be
affected or diminished by reason of (i) any extension of time or other
indulgence that may at any time, and from time to time, be granted by Landlord
to Tenant; (ii) the release or discharge of Tenant in any creditors'
receivership, bankruptcy or other proceeding; (iii) the impairment, limitation
or modification of the liability or the obligations of Tenant or its trustee or
receiver, or such impairment, limitation or modification of Landlord's remedies
by virtue of the Bankruptcy Code or other statute or from a decision of any
court including the disaffirmance or rejection of the Lease in any such
proceeding; (iv) the assignment or other transfer of the Lease or its interest
therein by Tenant; or
1
<PAGE>
(v) the existence of any counterclaim, offset or other claim alleged by Tenant
in connections with Landlord's enforcement of its rights under this Guaranty.
5. Guarantor'S waivers. As further inducement to Landlord to enter into
-------------------
the Lease and in consideration for it, Guarantor expressly waives (i) any right
to require Landlord to proceed against Tenant or any other guarantor, proceed
against any security held from Tenant or any other guarantor or proceed against
or exhaust any other remedy in Landlord's power, and (ii) any right to notice of
nonperformance on the part of Tenant except as expressly provided for in the
Lease.
6. Subordination. Any indebtedness of Tenant now or hereafter held by
-------------
Guarantor is subordinated to the indebtedness of Tenant to Landlord without
reduction or affecting in any manner the liability of Guarantor under the other
provisions of this Guaranty.
7. Termination of Guarantor's Obligations. This Guaranty will continue in
---------------------------------------
effect until one day following the final payment and performance by Tenant under
the Lease.
8. Joint and Several Obligation. This Guaranty will be the joint and
----------------------------
several obligation of each of the undersigned, if there be more than one, and
will bind the individual and community property of each of them. Guarantor's
liability hereunder is coextensive with that of tenant and will be joint and
several.
9. Successors and Assigns. Guarantor's obligations hereunder will inure
----------------------
to the benefit of Landlord's successors and assigns, including by merger or
consolidation. Any reference in this Guaranty to Tenant includes the Tenant's
heirs and personal representatives.
10. Fees and Costs. If either party retains the services of an attorney in
--------------
connection with enforcing the terms of this Guaranty, or if suit is brought for
the recovery of the Base Rent or Additional Rent due under this Guaranty or for
the breach of any covenant or condition of this Guaranty during the term of this
Guaranty or after the expiration thereof, the substantially prevailing party
therein will be entitled to recover from the other party the substantially
prevailing party's reasonable attorneys' fees, witness fees and other court
costs incurred in connection therewith.
11. Choice of Law/Venue. The validity and interpretation of this Guaranty
-------------------
will be determined in accordance with the laws of the State of Washington. Venue
for any action hereunder shall be in King County, Washington.
12. Jurisdiction. Guarantor acknowledges and agrees that all disputes
------------
relating in any way to this Guaranty, including all actions to enforce this
Guaranty, will be dealt with and adjudicated in the state courts of Washington
or the federal court sitting in Washington; and Guarantor expressly and
irrevocably submits to the jurisdiction of such courts in any suit, action or
proceeding relating to this Guaranty.
13. Bankruptcy. Should Landlord be obligated by any bankruptcy or other
----------
law to repay Tenant or Guarantor or to any trustee or other representative any
amounts previously paid, then this Guaranty will be reinstated in the amount of
such repayment.
2
<PAGE>
14. Notice. Any notice of demand hereunder must be in writing and will be
------
deemed given (i) when delivered personally, or (ii) two (2) days after being
sent by United States certified or registered mail, return receipt requested,
postage prepaid to the address of Guarantor at PEERLESS SYSTEMS CORPORATION, a
Delaware corporation, 2381 Rosecrans Avenue, El Segundo, CA 90245 USA, or (iii)
upon receipt if sent by private courier service guaranteeing next day delivery,
addressed to Guarantor at the aforementioned address. Guarantor may change the
address for purposes of this paragraph by delivering to Landlord written notice
of such chance in accordance with the terms of this paragraph.
GUARANTOR:
PEERLESS SYSTEMS CORPORATION
/s/ CAROLYN M. MADUZA
-------------------------------------
Carolyn M. Maduza, Senior Vice President
of Finance and Chief Financial Officer
3
<PAGE>
EXHIBIT G
CONFIRMATION OF LEASE TERMS
Date: _______________________________
Tenant: _______________________________
Address: _______________________________
-------------------------------
RE: Confirmaton of Lease Terms with respect to that certain Office Lease
(the "Lease") dated ____________________, ______ by and between
INTRAROCK 1 LLC, a Delaware limited liability company, as Landlord,
and ______________________________, as Tenant, for ________ square
feet of Rentable Area on the _________ floor of Building _______
located at _______________, Kent, Washington.
Dear __________:
In accordance with the terms and conditions of the above referenced
Lease, Tenant accepts possession of the Premises and agrees as follows:
1. The Commencement Date of the Lease is _____________________;
2. The Termination Date of the Lease is ________________________.
3. The rentable area of the Premises is __________ square feet.
Please acknowledge your acceptance of possession and agreement to the terms
set forth above by signing all three (3) copies of this Commencement Letter in
the space provided and returning two (2) fully executed copies of the same to my
attention.
Sincerely,
Property Manager
Agreed and Accepted:
Tenant: PEERLESS SYTEMS IMAGING PRODUCTS
--------------------------------
By: /s/ GORDON HANSON
-----------------------------------
Name: Gordon Hanson
-----------------------------------
Title: VP & GM
-----------------------------------
Date: 3/17/00
------------------------------------
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<PAGE>
EXHIBIT H
RULES AND REGULATIONS
The following rules and regulations apply to the Premises, the Building,
the Land, the Complex and the appurtenances under that certain Office Lease
dated _______________, 2000 (the "Lease") between INTRAROCK 1 LLC, as Landlord
and PEERLESS SYSTEMS IMAGING PRODUCTS, INC. as Tenant. Capitalized terms have
the same meaning as defined in the Lease.
1. No signs, advertisements or notices may be painted or affixed to windows,
doors or other parts of the Building, except those of such color, size,
style and in such places as are first approved in writing by Landlord. Any
tenant identification and suite numbers at the entrance to the Premises
shall be installed by Landlord, at Tenant's cost and expense, using the
standard graphics for the Building. Except in connection with the hanging
of lightweight pictures and wall decorations, no nails, hooks or screws may
be inserted into any part of the Premises or Building except by the
Building maintenance personnel.
2. Plumbing fixtures and appliances may be used only for the purposes for
which designed, and no sweepings, rubbish, rags or other unsuitable
material may be thrown or placed in the fixtures or appliances. Damage
resulting to fixtures or appliances by Tenant, its agents, employees or
invitees, must be paid for by Tenant, and Landlord will not be responsible
for the damage.
3. Landlord will have the right to approve the weight, size, or location of
heavy equipment or articles in and about the Premises. Damage to the
Building by the installation, maintenance, operation, existence or removal
of property of Tenant will be repaired at Tenant's sole expense.
4. Landlord may provide and maintain in the first floor (main lobby) of the
Building an alphabetical directory board or other directory device listing
tenants, and no other directory will be permitted unless previously
consented to by Landlord in writing.
5. Tenant shall not place any lock(s) on any door in the Premises or Building
without Landlord's prior written consent and Landlord will have the right to
retain at all times and to use keys to all locks within and into the
Premises. A reasonable number of keys to the locks on the entry doors in the
Premises will be furnished by Landlord to Tenant at Tenant's cost, and
Tenant shall not make any duplicate keys. All keys must be returned to
Landlord at the expiration or early termination of this Lease.
6. All contractors, contractor's representatives and installation technicians
performing work in the Building will be subject to Landlord's prior
approval and shall be required to
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<PAGE>
comply with Landlord's standard rules, regulations, policies and
procedures, which may be revised from time to time.
7. Movement in or out of the Building of furniture or office equipment, or
dispatch or receipt by Tenant of merchandise or materials requiring the use
of elevators, stairways, lobby areas or loading dock areas, will be
restricted to hours designated by Landlord. Tenant shall obtain Landlord's
prior approval by providing a detailed listing of the activity. If approved
by Landlord, the activity will be under the supervision of Landlord and
performed in the manner required by Landlord. Tenant shall assume all risk
for damage to articles moved and injury to any persons resulting from the
activity. If equipment, property, or personnel of Landlord or of any other
party is damaged or injured as a result of or in connection with the
activity, Tenant shall be solely liable for any resulting damage or loss.
8. Tenant shall not obstruct sidewalks, doorways, vestibules, halls, stairways
and other similar areas nor will such areas be used by Tenant for any
purpose other than ingress and egress to and from the Premises. No rubbish,
litter, trash, or material may be placed, emptied, or thrown in those
areas. Tenant will not permit Tenant's employees to loiter in Common Areas
or elsewhere about the Building or Complex.
9. Tenant shall not: (a) make or permit any improper or objectionable noises
or odors in the Building; (b) solicit business or distribute, or cause to
be distributed, in any portion of the Building, handbills, promotional
materials or other advertising; or (c) conduct or permit other activities
in the Building that might, in Landlord's sole opinion, constitute a
nuisance.
10. No animals, except those assisting handicapped persons, will be brought
into the Building or kept in or about the Premises.
11. No flammable, explosive or dangerous fluids or substances will be used or
kept by Tenant in the Premises, Building or about the Complex. Tenant shall
not, without Landlord's prior written consent, use, store, install, spill,
remove, release or dispose of, within or about the Premises or any other
portion of the Complex, any asbestos-containing materials or any solid,
liquid or gaseous material now or subsequently considered toxic or
hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any
other applicable federal, state or local environmental law which may now or
later be in effect. Tenant shall comply with all laws pertaining to and
governing the use of these materials by Tenant, and shall remain solely
liable for the costs of abatement, removal and clean-up.
12. Tenant shall not use or occupy the Premises in any manner or for any
purpose which might injure the reputation or impair the present or future
value of the Premises, the
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<PAGE>
Building or the Complex. Tenant shall not use, or permit any part of the
Premises to be used, for lodging, sleeping or for any illegal purpose.
13. Deliveries to and from the Premises may be made only at the times, in the
areas and through the entrances and exits designated by Landlord. Tenant
shall not make deliveries to or from the Premises in a manner that might
interfere with the use by any other tenant of its premises or of the Common
Areas, any pedestrian use, or any use which is inconsistent with good
business practice.
14. Tenant shall not take any action which would violate Landlord's labor
contracts or which would cause a work stoppage, picketing, labor disruption
or dispute, or interfere with Landlord's or any other tenant's or
occupant's business or with the rights and privileges of any person
lawfully in the Building. Tenant shall take all actions necessary to
resolve any labor disruptions, and shall have pickets removed and, at the
request of Landlord, immediately terminate any work in the Premises that
gave rise to any labor disruption, until Landlord gives its written consent
for the work to resume. Tenant shall have no claim for damages against
Landlord, nor will the date of the commencement of the Term be extended as
a result of the above actions.
15. Tenant shall not install, operate or maintain in the Premises or in any
other area of the Building, electrical equipment that would overload the
electrical system beyond its capacity for proper, efficient and safe
operation as determined solely by Landlord. Tenant shall not furnish
cooling or heating to the Premises, including, without limitation, the use
of electronic or gas heating devices, without Landlord" prior written
consent. Tenant shall not use more than its proportionate share of
telephone lines and other telecommunication facilities available to service
the Building.
16. Tenant shall not operate or permit to be operated a coin or token operated
vending machine except for machines for the exclusive use of Tenant's
employees, and then only if the operation does not violate the lease of any
other tenant in the Building.
17. Bicycles and other vehicles are not permitted inside the Building or on the
walkways outside the Building, except in areas designated by Landlord.
18. Landlord may from time to time adopt systems and procedures for the
security and safety of the Building, its occupants, entry, use and
contents. Tenant, its agents, employees, contractors, guests and invitees
shall comply with Landlord's systems and procedures.
19. Landlord will have the right to prohibit the use of the name of the
Building or any other publicity by Tenant that in Landlord's sole opinion
may impair the reputation of the Building. Upon written notice from
Landlord, Tenant shall refrain from and discontinue such publicity
immediately.
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<PAGE>
20. Tenant shall not canvass, solicit or peddle in or about the Building or the
Property.
21. Neither Tenant nor its agents, employees, contractors, guests or invitees
shall smoke or permit smoking in the Common Areas, unless the Common Areas
have been declared a designated smoking area by Landlord, nor shall the
above parties allow smoke from the Premises to emanate into the Common
Areas or any other part of the Building. Landlord will have the right to
designate the Building (including the Premises) as a non-smoking building.
22. Landlord will have the right to establish further rules to assure the
Building presents a uniform exterior appearance.
-5-
<PAGE>
otherwise; however, such additional consideration shall be reduced by any
reasonable costs and expenses (including brokerage fees and tenant improvement
costs) incurred by Tenant in connection with the sublease or assignment.
(d) Entity Ownership. The cumulative transfer (i.e. in one or more
----------------
sales or transfers, by operation of law or otherwise) of an aggregate of fifty
percent (50%) or more of the voting stock issued and outstanding on the date of
this Lease is executed by Landlord, including by creation or issuance of new
stock of a corporation which is (i) owned by Tenant, (ii) the corporate assignee
of Tenant, or (iii) any corporation which is a general partner in a general or
limited partnership or member of a limited liability company which is the tenant
or an assignee of the tenant of this Lease; or the cumulative transfer of an
aggregate of fifty percent (50%) or more of the ownership interest in a general
or limited partnership, limited liability company or other entity which is the
tenant or an assignee of the tenant, by which an aggregate of fifty percent
(50%) or more of such ownership interest is vested in a person or persons who
are not general partners, members or other owners (except as the result of
transfer by gift or inheritance), shall be deemed a Transfer of this Lease and
shall be subject to the provisions of Section 16. For the purpose of Section 16,
any entity which has undergone any of the changes described in this Section
shall be deemed to be a transferee. The term "voting stock" means the stock
regularly entitled to vote for election of directors of the corporation; and any
stock, however denominated, which is convertible into such voting stock, shall
be treated for purposes of the foregoing as if it were in fact converted. The
two immediately preceding sentences, however, shall not be applicable to any
Tenant corporation the outstanding voting stock of which is listed on a national
securities exchange and actively traded "over the counter."
(e) Assignment by Landlord. If Landlord sells or otherwise transfers
----------------------
the Building(s), such purchaser or transferee shall be deemed to have assumed
Landlord's obligations hereunder, and Landlord shall thereupon be relieved of
all liabilities hereunder arising thereafter, but this Lease shall otherwise
remain in full force and effect and Tenant shall attorn to Landlord's successor.
SECTION 17. Destruction
-----------
(a) Partial Destruction. If the Premises are rendered partially
-------------------
untenantable by fire or other insured casualty, and if the damage is repairable
within sixty (60) days from the date of the occurrence (with the repair work and
preparations therefore to be done during regular working hours on regular work
days), landlord shall repair the Premises with due diligence, to the extent of
the insurance proceeds available (which shall be subject to the prior rights of
any Lender), and the monthly minimum rental shall be abated in the proportion
that the untenantable portion of the Premises bears to the whole thereof for the
period from the date of the casualty to the completion of the repairs, unless
the casualty results from Tenant's negligence or its breach of the terms hereof.
If thirty percent (30%) or more of the rentable area of the Building is
destroyed or damaged, regardless of whether the Premises are damaged, Landlord
may terminate this Lease as of the date
-22-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-13773, 333-63967, 333-82323) of our report dated March 2,
2000, with respect to the consolidated financial statements and schedule of
Peerless Systems Corporation included in the Annual Report (Form 10-K) for the
year ended January 31, 2000.
ERNST & YOUNG LLP
Los Angeles, California
April 25, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-13773, 333-63967, 333-82323) of Peerless
Systems Corporation of our report dated March 5, 1999, except as to the pooling
of interests with Auco, Inc. which is as of June 10, 1999, and except as to the
pooling of interests with HDE, Inc. which is as of December 20, 1999, relating
to the financial statements and financial statement schedule, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
April 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE PERIOD JANUARY 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 13,620
<SECURITIES> 15,251
<RECEIVABLES> 10,168
<ALLOWANCES> (175)
<INVENTORY> 0
<CURRENT-ASSETS> 39,845
<PP&E> 10,646
<DEPRECIATION> (4,081)
<TOTAL-ASSETS> 52,565
<CURRENT-LIABILITIES> 5,606
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 43,779
<TOTAL-LIABILITY-AND-EQUITY> 52,565
<SALES> 42,076
<TOTAL-REVENUES> 42,076
<CGS> 13,973
<TOTAL-COSTS> 13,973
<OTHER-EXPENSES> 23,970
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 1,209
<INCOME-PRETAX> 5,342
<INCOME-TAX> 1,901
<INCOME-CONTINUING> 3,441
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,441
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.22
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998
<PERIOD-START> FEB-01-1998 FEB-01-1997
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 6,132 4,520
<SECURITIES> 20,763 22,483
<RECEIVABLES> 10,543 6,557
<ALLOWANCES> (175) (175)
<INVENTORY> 0 0
<CURRENT-ASSETS> 39,232 31,955
<PP&E> 8,127 6,314
<DEPRECIATION> (2,677) (1,556)
<TOTAL-ASSETS> 49,887 42,886
<CURRENT-LIABILITIES> 7,755 8,742
<BONDS> 0 0
0 0
0 0
<COMMON> 13 13
<OTHER-SE> 38,416 33,695
<TOTAL-LIABILITY-AND-EQUITY> 49,887 42,886
<SALES> 41,077 30,958
<TOTAL-REVENUES> 41,077 30,958
<CGS> 14,482 10,545
<TOTAL-COSTS> 14,482 10,545
<OTHER-EXPENSES> 21,948 17,130
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,371 1,243
<INCOME-PRETAX> 6,018 4,526
<INCOME-TAX> 3,556 2,999
<INCOME-CONTINUING> 2,462 1,527
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,462 1,527
<EPS-BASIC> 0.19 0.12
<EPS-DILUTED> 0.16 0.11
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-2000 JAN-31-2000 JAN-31-2000
<PERIOD-START> NOV-01-1999 AUG-01-1999 MAY-01-1999 FEB-01-1999
<PERIOD-END> JAN-31-2000 OCT-31-1999 JUL-31-1999 APR-30-1999
<CASH> 13,620 6,742 8,951 11,581
<SECURITIES> 15,251 17,757 17,434 18,990
<RECEIVABLES> 10,168 14,498 9,038 6,719
<ALLOWANCES> (175) (175) (175) (175)
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 39,845 45,124 44,393 43,073
<PP&E> 10,646 10,373 9,655 9,116
<DEPRECIATION> (4,081) (3,628) (3,298) (2,975)
<TOTAL-ASSETS> 52,565 53,172 52,433 52,011
<CURRENT-LIABILITIES> 5,606 5,847 7,098 7,832
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 15 15 15 15
<OTHER-SE> 43,779 44,263 41,238 40,269
<TOTAL-LIABILITY-AND-EQUITY> 52,565 53,172 52,433 52,011
<SALES> 8,224 11,712 11,400 10,740
<TOTAL-REVENUES> 8,224 11,712 11,400 10,740
<CGS> 3,903 3,221 3,486 3,364
<TOTAL-COSTS> 3,903 3,221 3,486 3,364
<OTHER-EXPENSES> 5,806 5,246 7,310 5,607
<LOSS-PROVISION> 97 0 0 0
<INTEREST-EXPENSE> 286 309 312 302
<INCOME-PRETAX> (1,199) 3,554 916 2,071
<INCOME-TAX> (427) 1,260 209 859
<INCOME-CONTINUING> (772) 2,294 707 1,212
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (772) 2,294 707 1,212
<EPS-BASIC> (0.05) 0.16 0.05 0.09
<EPS-DILUTED> (0.05) 0.15 0.05 0.08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1999 JAN-31-1999 JAN-31-1999
<PERIOD-START> NOV-01-1998 AUG-01-1998 MAY-01-1998 FEB-01-1998
<PERIOD-END> JAN-31-1999 OCT-31-1998 JUL-31-1998 APR-30-1998
<CASH> 6,132 9,108 12,106 9,292
<SECURITIES> 20,763 18,413 15,508 20,495
<RECEIVABLES> 10,543 6,323 7,695 7,427
<ALLOWANCES> (175) (175) (175) (175)
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 39,232 36,810 38,278 37,597
<PP&E> 8,127 8,036 7,699 7,196
<DEPRECIATION> (2,677) (2,271) (2,023) (1,804)
<TOTAL-ASSETS> 49,887 46,106 47,039 47,622
<CURRENT-LIABILITIES> 7,755 7,105 7,195 9,252
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 13 13 13 13
<OTHER-SE> 38,416 37,007 36,857 35,777
<TOTAL-LIABILITY-AND-EQUITY> 49,887 46,106 47,039 47,622
<SALES> 10,649 8,808 10,344 11,276
<TOTAL-REVENUES> 10,649 8,808 10,344 11,276
<CGS> 3,345 3,618 3,418 4,101
<TOTAL-COSTS> 3,345 3,618 3,418 4,101
<OTHER-EXPENSES> 5,152 5,894 5,753 5,149
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 321 328 354 368
<INCOME-PRETAX> 2,473 (376) 1,527 2,394
<INCOME-TAX> 1,058 526 1,009 963
<INCOME-CONTINUING> 1,415 (902) 518 1,431
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<CHANGES> 0 0 0 0
<NET-INCOME> 1,415 (902) 518 1,431
<EPS-BASIC> 0.11 (0.07) 0.04 0.12
<EPS-DILUTED> 0.09 (0.07) 0.03 0.09
</TABLE>
