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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from _______________ to ______________.
Commission File Number: 0-21992
FOURTH SHIFT CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1437794
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Suite 450
7900 International Drive
Minneapolis, Minnesota 55425
(Address of principal executive office)
(612) 851-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 the Form 10-K. [ ]
As of March 13, 1998, the aggregate market value of the registrant's
Common Stock, $.01 par value, held by nonaffiliates of the registrant
was $24,790,000 (based on the closing sale price of common stock as of
March 13, 1998 as quoted on the Nasdaq National Market).
As of March 13, 1998, there were 9,900,653 shares of the registrant's
Common Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The responses to items 10, 11, 12 and 13 herein are incorporated by reference to
certain information in the Company's Definitive Proxy Statement for its Annual
Meeting of Shareholders to be held May 6, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
Fourth Shift Corporation (the "Company") is a developer and marketer of
client/server-based application software for industrial planning and
management processes. The Company's principal product, the Fourth
Shift-Registered Trademark- Manufacturing Software System for OBJECTS
("MSS"), is a family of integrated manufacturing and financial management
applications for intermediate-sized sites of manufacturing and distribution
enterprises. The MSS system operates in a Windows NT and Novell open
computing environment. Founded in 1982, the Company reincorporated in
Minnesota in 1984. In 1985, the Company introduced the first modules of the
MSS product line.
The period from 1992 through 1997 was a period of steady growth for the Company.
The Company both expanded the range of services it offers with the MSS product
line and the geography it covers. From 1992 to 1993, revenue increased 45%, as
the Company introduced six new modules of MSS, began selling third party
software that is compatible with MSS and established a new subsidiary in the
People's Republic of China. Revenue increased approximately 15% in 1994 as the
Company worked to expand sales both domestically and internationally, instituted
new service programs, introduced CD-Rom based training aids, and introduced a
release that combined the domestic and international versions of the MSS product
into a single version with increased functionality. Total revenue continued to
expand during 1995, increasing 24% over 1994, as the breadth of the MSS product
line continued to expand and the Company's sales continued to grow
internationally in Asia and the Pacific Rim. The Company introduced a graphical
user interface providing Windows operability and released a version of MSS for
the Windows NT operating system in 1995, together with new modules designed to
provide sales order processing and cash management functions. Revenues from the
Company's subsidiary in the People's Republic of China increased more than 175%
in 1995 as a result of increased market penetration in the People's Republic of
China and further expansion into Singapore and Malaysia. In 1996, the Company
experienced another year of growth, both internationally and domestically with
total revenue increasing 32% over 1995. In 1996, North American revenue growth
of 25% was accomplished through sales and marketing expansion and new product
offerings. The Company continued to expand its international operations in 1996
experiencing total international revenue growth of 51%. Revenue from the
Company's subsidiary in the People's Republic of China increased 70% over 1995
as a result of increased market penetration in China and expansion into
southeast Asia. Revenue increases were also posted in Europe, growing 32% in
1996.
The Company's operations during the period from 1993 to 1995 were affected by
attention devoted to a product line, the Just In Time Enterprise System ("JIT"),
that was acquired in December 1992 and sold in December 1995. JIT is a series
of information management software modules for industrial companies involved in
aerospace and defense and contract manufacturing which operate in the
UNIX/Oracle environment. Acquired from a start-up company in Texas, the Company
devoted substantial resources, including some of the proceeds from the initial
public offering of its common stock completed in July 1993, to improving the JIT
code and instituting sales and development procedures designed to improve the
profitability of the product line. Because of its drain on Company resources,
the product line (which was developed and marketed through a wholly-owned
subsidiary) was sold to the Interactive Group, Inc. ("IGI"). The JIT operations
are included in the Company's financial statements as discontinued operations.
In 1994, the Company began the development of its next generation technology
- -Fourth Shift OBJECTS technology (OBJECTS). Starting mid-1995, the Company
has been investing significant resources in the development of OBJECTS. In
July 1996 the Company completed a working model of software utilizing the
OBJECTS technology referred to as Fourth Shift OBJECTS Enterprise Software.
In early 1997, Fourth Shift OBJECTS Enterprise Software Release 1.0 was
distributed for beta testing with a general release in June 1997. Absent the
broad functionality of the established MSS product, Fourth Shift OBJECTS
Enterprise Software did not meet market expectations.
In December 1997, in conjunction with a restructuring plan (See Note 4 to the
Consolidated Financial Statements), the Company reevaluated its OBJECTS
development activities and product strategy. As a result of this evaluation,
the Company identified ways to combine some of the OBJECTS technology with the
functionality of the current MSS product, and redirected its development
activities accordingly. Because of this, the decision was made that
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Fourth Shift OBJECTS Enterprise Software would not continue as a separate
product, but that portions of the OJBECTS technology would be incorporated
into future releases of MSS. As of December 31, 1997, OBJECTS Release 1.0 is
no longer being marketed or licensed to customers. Pursuant to the
restructuring plan, certain employees and contractors were severed from the
Company and North American development activities were combined from two
groups into a single operation.
Total revenue expanded during 1997 at a rate slower than the historical average,
increasing 6% over 1996. North American revenue grew 10% over 1996 while
international revenue decreased by 3%. The North American growth was achieved
through sales and marketing expansion and increased product and service
offerings. New MSS product offerings included the development of an enhanced
graphical user interface, an engineering module, a screen customizer module, and
an enlarged database. The business in Europe showed continued growth in 1997,
with revenues increasing by 18% over 1996. This was accomplished through
expanded sales and marketing efforts, particularly in Continental Europe.
Revenues from the Company's subsidiary in the People's Republic of China
decreased 19% in 1997 primarily as a result of economic problems in Asia,
particularly in the last half of the year.
PRODUCTS - MSS FOR OBJECTS
The Company's principal product, the Fourth Shift-Registered Trademark-
Manufacturing Software System for OBJECTS ("MSS"), provides client/server
computing in the DOS/Windows/Windows NT/NetWare open system environments and an
integrated approach to the industrial planning and control processes known as
MRP II. A customer can combine any number of software modules within this
product line to provide on-line access to real-time information for MRP, bills
of material, capacity requirements planning, master production scheduling and
financial management. Information is communicated consistently among the
various functional modules of MSS through a common database, facilitating the
automatic updating of common information used by all applications. Using this
system, a customer can manage inventory to significantly reduce carrying costs,
manage material ordering to limit manufacturing shortages, manage manufacturing
to reduce finished goods surpluses or shortages, immediately access information
necessary to communicate customer order scheduling on-line, monitor overall
manufacturing and problem areas to maximize efficiency and quickly produce
financial reports that are consistent with manufacturing records.
MSS is a family of more than 40 integrated manufacturing, accounting, sales and
information management applications and third party products designed to support
decision-making in an industrial company. MSS is designed for and primarily
licensed to intermediate-sized manufacturing and distribution companies and
"stand-alone" sites of larger companies, that are in need of a broadly
functional but easily implemented, off-the-shelf application system for up to
and beyond 100 concurrent users. MSS is distributed with a shrink-wrap license
in standardized modules with extensive documentation and training aids. MSS is
modular, so users can begin with fundamental applications and add more
specialized functionality as their requirements evolve and grow.
In 1994, the Company introduced Mentor-TM-, a self-paced interactive CD-ROM
training tool. This product is a critical component of the Company's
performance support strategy, which supplements standard training classes while
serving as an update class for the occasional user. Mentor-TM- provides users
with constant interaction through hands-on exercises and includes over 200 job
function-oriented lessons covering manufacturing, finance, order processing and
system administration.
The Company believes that the following features of MSS allow it to compete
successfully with other LAN-based products: (i) MSS is an integrated and
flexible system designed to allow fast, multi-user access to data; (ii) MSS
includes over 40 integrated application modules and third party products that
have been refined to provide broad, deep functionality in MRP II applications,
including international features such as multiple currency and language
translation capabilities; (iii) MSS applications generally require fewer
keystrokes and screens per task than comparable products; (iv) MSS can be
rapidly and easily implemented through a standardized process using extensive
training aids, both interactive CD-ROM and classroom; (v) MSS is easy to use and
offers seamless integration with off-the-shelf word processing, electronic mail,
spreadsheet and other applications, (vi) MSS is offered with a comprehensive
support program with local, national and international support organizations,
and (vii) MSS is designed to encourage business process reengineering and
efficiency in its customers' manufacturing processes.
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MSS is designed for use with the DOS/Windows/Windows NT/NetWare operating
environments on both LANs and wide area networks and supports industry standard
networking protocols. The integrated system of MSS modules allows a customer to
communicate consistent priorities through a common database and on-line
inquiries and updates, establishing a framework in which an entire organization
can work together. MSS also provides a means to interface MSS with third-party
applications through the MSS connectivity modules. The Company licenses a
number of third-party software products that have been designed to operate with
MSS.
The following is a list of current MSS product line offerings:
<TABLE>
<CAPTION>
<S> <C> <C>
MANUFACTURING MODULES FINANCIAL MODULES THIRD-PARTY PRODUCTS
Inventory Management Financial Management Data Net, data collection system VisiBar,
-Inventory Control -Accounts Payable collection system
-Shipping -Accounts Receivable & Invoicing Integrated EDI System
-Lot Trace/Serialization -General Ledger Finite Capacity Planning
Manufacturing Operations Payroll Connection Rules-Based Configurator
-Manufacturing Order Management General Ledger Restructuring Package Cash Collection & Management
-Repetitive Manufacturing Multi-Currency Management Cycle Counting/Inventory
Product Definition Cash Management Management
-Bill of Material Manufacturing Variance Analysis
-Product Costing SYSTEM-WIDE MODULES Message Analysis & Reporting
Planning and Scheduling System Administration Formula Management
-Materials Requirements Planning -Configuration Remote Communications
Vendor Operations -System Control Customer Service System
-Purchasing -CIM Data Import Paperless Document Management
-Approved Vendor Sourcing -CIM Data Export Electronic Business Forms
Custom Products Manufacturing -Management Reports Automated Timekeeping
Co-Products Manufacturing -Framework for Windows Quote Management
Material Management/Analysis Executive Information System(EIS) Engineering Change Order
Operations Performance CIM Customizer Management
Shop Floor Tracking and Reporting Screen Customizer Forecast Management System
Engineering Module ISO9000 Implementation System
Bill of Material Analysis
SALES ACTIVITY MODULES Store Front Cash Collections System
Customer Operations
-Order Entry
-Advanced Price Book
Sales Analysis
Rules Based Pricing
Sales Order Processing
</TABLE>
The MANUFACTURING MODULES provide on-line information enabling users to solve
material shortage, excess inventory and manufacturing efficiency problems. The
Inventory Management Module, which maintains and provides inventory status
information, is the basic building block for all other manufacturing
applications. It works with the Planning and Scheduling Module, which
calculates the optimum manufacturing plan based on continual updates from other
modules; with the Product Definition Module, which maintains information
relating to the materials, resources, costs, and tools necessary to manufacture
each product; and with the Manufacturing Operations Module, which verifies
component availability, picks materials and calculates material usage variances.
The function of these modules can be further enhanced for use in specific
manufacturing environments with the Shop Floor Tracking and Reporting Module,
the Co-Products Manufacturing Module and the Custom Products Module. In
addition, the Vendor Operations Module helps buyers manage vendor relationships
and the Material Management/Analysis Module allows for simulations and
engineering-change control. The Engineering Module, new in 1997, permits
engineering information to be integrated with bill of material information.
The SALES ACTIVITY MODULES address customer service issues. The Sales Order
Processing Module gives customer service representatives on-line support for
entering and tracking orders. Representatives can act on credit problems and
reschedule orders to meet changing delivery dates. The Rules Based Pricing
Module further extends order entry
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functionality to allow the user to create pricing models for individual
customers or buying groups. Sales Analysis tracks detailed and summarized
sales information by item, customer, and order. Sales commissions are also
captured and tracked with the Sales Analysis Module.
The FINANCIAL MODULES are tightly integrated with the manufacturing and sales
activity modules so that financial transactions are automatically created as a
result of business activity. The Financial Management Module provides
comprehensive management of a company's financial position and generates
financial reports through the module's general ledger function. This module also
controls the processing of supplier invoices from invoice entry to check
printing and reconciliation. Similarly, customer invoicing, cash application,
and accounts receivable management is supported by the Financial Management
Module. The Multi-Currency Management Module offers exchange rate tracking and
allows transactions to be stated in the trading partners' currency. The Cash
Management Module allows customers to track cash transactions and banking
activity while providing period-end reconciliations of cash activity. The
Payroll Connection permits outside payroll services to download payroll
information into the general ledger portion of the Financial Management Module.
The SYSTEM-WIDE MODULES extend and enhance the manufacturing, sales activity and
financial modules. The System Administration Module is used to tailor the MSS
modules to each customer's needs, and contains key features such as audit
trails, multi-language support, VAT tax, system-wide security and Novell or
Windows NT support. The System Administration Module also provides CIM
connectivity to either commercial or user-developed third-party applications.
Open Database Connectivity (ODBC) is also provided under the System
Administration Module, this provides access to the MSS database via ODBC enabled
applications, i.e., MICROSOFT CORPORATION'S OFFICE SUITE OF PRODUCTS.
Additional system-wide modules such as Executive Information Systems (EIS), CIM
Customizer, and Screen Customizer complement the System Administration Module by
providing broader functionality. The EIS Module provides decision makers a key
performance measurement tool that displays a quick overview of the state of the
entire business. The CIM Customizer Module allows the user to extend the MSS
applications by embedding other application software into the processing flow of
the MSS system. The Screen Customizer permits the customers to configure
certain screens to fit their business application.
The typical customer licenses between $50,000 and $90,000 of MSS software. MSS
license revenue totaled $21,883,000 for the year ended December 31, 1997, or
approximately 42% of the overall revenue of the Company.
THIRD-PARTY PRODUCTS. The Company also licenses, implements and supports
third-party software and hardware products which are integrated to function
with the MSS software. These products extend the functionality of Fourth
Shift's software and provide a broader solution to Fourth Shift clients. At
December 31, 1997, the Company had 14 agreements with various third-party
software and hardware vendors to license third-party products. Third-party
products revenue totaled $3,298,000 during the year ended December 31, 1997.
SERVICES
The Company offers a broad range of services for its MSS product line,
including a comprehensive customer support program, implementation
consulting, network-related technical consulting, custom software development
and extensive training programs. Such services constituted 52%, 48%, and 49%
of the Company's revenue from continuing operations during 1997, 1996, and
1995, respectively.
CUSTOMER SUPPORT PROGRAM. The Company offers a standardized customer support
program ("CSP") for MSS. CSP is a comprehensive, fee-based program designed to
help customers obtain the maximum benefit from their business management
software. CSP subscribers pay an annual fee equal to approximately 15% of the
current list price of the modules licensed. Approximately 75% of the currently
active users of MSS products subscribe to CSP. The Company believes CSP is a
stable and reliable source of revenue, which the Company intends to continue to
emphasize to its new and existing customer base.
Included among the materials and services furnished through CSP are new product
releases, telephone technical and application support, a software tool kit, an
electronic bulletin board, and newsletter and application notes. Updated and
enhanced versions of the Company's software products are provided to CSP
subscribers as part of the annual subscription fee. Telephone support calls are
handled by manufacturing, financial and technical experts located in
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Fourth Shift offices in the United States, United Kingdom, People's Republic
of China, and Singapore. Additionally, certain distributors handle support
calls in Eastern Europe and the Middle East.
PROFESSIONAL SERVICES. The Company offers implementation consulting and
training for use of its MSS products, as well as custom software development
services. Implementation consulting services, available on a fee basis, include
implementation planning, project management and specialized custom training.
The Company offers a special implementation workshop designed to ease the MSS
implementation process, a readiness audit to identify problems prior to using
the system, business reviews to maximize the utility of the system once
installed and several benchmarking tests to measure performance against
competitors.
The Company offers a series of classroom and individual on-site training
options. Training includes classroom instruction at the Company's offices in
the United States, United Kingdom and People's Republic of China and at
authorized training centers or at customer sites. Customers may also purchase
Mentor-TM-, the self-paced interactive CD-Rom training module, to supplement
standard training classes while serving as an update class for the occasional
user.
The Company also offers, on a limited basis, custom software development
services to meet specific customer requirements, and to integrate MSS with a
customer's existing computer systems and/or third-party software providers.
MARKETS
MSS is licensed primarily to mid-sized manufacturing companies, or business
units of larger manufacturing companies, that generate more than $5 million of
revenue annually and require up to approximately 100 concurrent users. In
addition, MSS is licensed to manufacturing sites of Fortune 500 companies. MSS
is used by discrete manufacturers (which assemble or machine parts into finished
products), and by process manufacturers (which mix, separate and otherwise
combine or control ingredients to create finished products). It has broad
application and use in the electronics, industrial, machinery, medical device,
transportation, metal fabrication, food processing and chemical industries.
SALES AND MARKETING
The Company distributes its products and services through a direct sales force
and value-added resellers in major markets, and through sales agents in
secondary markets. The Company maintains regional sales offices located in San
Diego, Los Angeles, and San Ramon, California; Atlanta, Georgia; Boston,
Massachusetts; Chicago, Illinois; Cleveland, Ohio; Dallas, Texas; and Phoenix,
Arizona; in addition to its headquarters located in Minneapolis, Minnesota. The
Company sells directly through wholly owned subsidiaries in the United Kingdom,
Mexico, the People's Republic of China, South Africa, Malaysia, and Singapore,
and through distributors in the Americas, Europe, Africa, the Middle-East, and
Asia. During 1997, approximately 94% of the Company's software license revenue
was generated through direct sales personnel and 6% was generated through
resellers and agents. Of such software license revenues, approximately 65% was
generated in North America and 35% was generated abroad (see Note 10 to the
Consolidated Financial Statements).
The Company's direct sales personnel are compensated on a salary plus commission
basis with commissions paid monthly. This monthly commission plan assists the
Company in managing the level of its sales activity throughout the quarter. The
Company's reseller agreements generally provide that sales will be made by
authorized resellers on a nonexclusive basis from offices within a designated
territory. The agreements obligate the Company to license to the end-user
through a value added reseller (VAR) at specified prices and to provide training
to each reseller. The Company also maintains a staff of systems consultants who
offer pre- and post-sales support to the sales force and to customers.
The Company markets its products through advertising campaigns in national trade
periodicals, direct mail and telemarketing. These efforts are supplemented by
listings in relevant directories and trade show and conference appearances. The
Company also receives leads from its hardware and services vendors, customers
and various accounting and consulting firms.
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Sales cycles for the Company's products vary substantially based on the
degree of integration, consulting and training required and also on the
status of the customer's implementation of a hardware system. The product
sales cycle is usually four to six months from the time an initial sales
presentation is made to a customer until the software is delivered and
licensed. The Company's products are typically shipped within 48 hours of
receipt of order. Generally 40-50% of the price is paid when the order is
made and the balance is due 30 days after delivery of the product.
STRATEGIC ARRANGEMENTS
Part of the Company's sales and marketing strategy is to build and develop
relationships with companies that will play an important role in the successful
marketing of the Company's products. These companies include system software
suppliers (such as Microsoft Corporation) and database companies (such as Micro
Data Base Systems, Inc. and Microsoft Corporation). The Company uses products
from system software suppliers to develop the Company's application software
products. The suppliers also serve as technical references for future
prospects. Arrangements with database companies allow the Company to sublicense
database management systems with its products and to provide fee-based support
for licensees.
PRODUCT DEVELOPMENT
Historically, the Company has invested heavily in research and development.
During the years ended December 31, 1997, 1996, and 1995, the Company recorded
research and development expenses from continuing operations of $9,271,000,
$8,674,000, and $5,732,000, respectively. In addition, the Company capitalized
$3,819,000 in 1997 and $1,820,000 in 1996 of development costs related to the
development of OBJECTS functionality and related modules that had reached
technological feasibility. In June 1997, the Company introduced Release 1.0 of
OBJECTS for general distribution. In conjunction with this introduction, the
Company began amortizing all previously capitalized costs related to the
development of OBJECTS framework and Release 1.0 applications modules. The
amortization was based on a three-year economic life of the framework and
modules, and totaled $720,000 in 1997.
In December 1997 the Company evaluated its existing cost structure and the
future marketability of its products. As a result of this consideration, a
restructuring plan was implemented. In connection with this restructuring plan,
the Company recognized a restructuring charge totaling $2,566,000.
Approximately $936,000 was related to employee severance costs, costs to exit
office space that was no longer needed due to staff reductions, and prepaid
royalties relating to the OBJECTS product that had no future value.
Additionally, $1,630,000 of previously capitalized development costs were
expensed as a result of the change in product strategy (see Note 2 to the
Consolidated Financial Statements). As of December 31, 1997, OBJECTS Release
1.0 is no longer being marketed or licensed to customers. As such, the
remaining capitalized asset of $3,289,000 will not be amortized until the
underlying technology is incorporated into a product that is available for
general release. At that time, the remaining capitalized costs will be
amortized to expense over the product's estimated life.
In 1997, in addition to investing significant resources in the development of
OBJECTS, the Company continued to develop and enhance its MSS Product. New
modules, an expanded database, and additional third party product offerings were
added.
In 1998, the Company's product strategy will be focused on providing solutions
for the Company's primary customer base. Future releases will incorporate much
of the OBJECTS technology including the message bus, support for both Micro Data
Base Systems Inc. (MDBS) and Microsoft SQL Server databases, and multi-company,
multi-plant application functionality. Releases in early 1998 will provide the
only Internet ready application software release targeted for small to mid-size
manufacturers.
The computer industry is characterized by rapid technological advances, changes
in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and achieve market acceptance. In particular, the Company believes it must
continue to respond quickly to users' needs for broad functionality and
multiplatform support and to advances in hardware and operating systems.
Failure to anticipate or respond adequately to
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technological developments and customer requirements, or any significant
delays in product development or introduction, could result in a loss of
competitiveness and revenues. In the past, the Company has experienced
delays in the introduction of new products and product enhancements. These
development efforts are dependent upon the availability of adequate cash to
fund them. See "Item 7. Management's Discussion of Financial Condition and
Results of Operations." There can be no assurance that the Company will be
successful in developing and marketing new products or product enhancements
on a timely basis or that the Company will not experience significant delays
in the future, which could have a material adverse effect on the Company's
results of operations. In addition, there can be no assurance that new
products or product enhancements developed by the Company will achieve market
acceptance.
COMPETITION
The computer industry is intensely competitive and rapidly changing. Due to the
flexibility of the Company's products, the Company's competitors range from
providers of high-end industrial application software for use on mainframes and
minicomputers to providers of low-end application software for use on PCs and
LANs. Because of the wide functionality of the Company's product line,
competitors include providers of financial and business application software as
well as industrial and manufacturing resource planning software. The Company
competes generally on the basis of product features and functions, product
architecture, the ability to run on a variety of industry standard platforms,
technical support and other related services, ease of product integration with
third-party application software and price/performance. The ability to address
thoroughly the requirements for various forms of manufacturing (discrete,
process, etc.), efficiency of the user interfaces and commands, computational
speed and responsiveness, ease of implementation, support for application
integration, extensive training materials, and established local support and
training are key competitive factors with respect to MSS.
MSS currently competes primarily in the market for PC-based MRP II software.
The Company's primary competitors in this market include Micro MRP, Inc.,
Macola, Inc., Symix Systems, Inc., Dataworks Corporation, and QAD, Inc. In
addition, there are a number of smaller, regional companies that produce MRP II
software for PCs. The Company believes that purchases in this market are based
primarily on hardware platform and operating system (DOS/Windows/Windows
NT/NetWare for LANs versus UNIX systems), functionality, ease of implementation,
application integration and industry reviews. The Company believes that the MSS
product line competes favorably in the portion of this market intended for
DOS/Windows/Windows NT/NetWare operating systems and LANs.
The Company's products compete indirectly with providers of financial and
accounting software for PCs and other specialized applications in the markets it
serves. Competition from this market arises primarily when a customer is
seeking only a very narrow solution and the Company believes its products
compete favorably with such products on the basis of broad functionality and
complete vertical integration.
Many of the Company's competitors have greater financial, marketing and
technological resources than the Company. There can be no assurance that other
companies have not developed or marketed or will not develop or market software
products that are superior to those of the Company, that are offered at
substantially lower prices than those of the Company or that have achieved or
will achieve greater market acceptance than those of the Company.
INTELLECTUAL PROPERTY
The Company has registered its "FOURTH SHIFT", "FOURTH SHIFT OBJECTS ENTERPRISE
SOFTWARE", and "MENTOR" trademark for software services and products with the
United States Patent and Trademark Office and with the equivalent offices of
most foreign countries in which it does business. The Company also registers
the copyright on its MSS software products.
The Company regards its software as proprietary in that title to and ownership
of the software reside exclusively with the Company. The Company attempts to
protect its rights with a combination of trademark, copyright, employee and
third-party nondisclosure agreements. Despite these precautions, it may be
possible for unauthorized parties to copy or reverse-engineer portions of the
Company's products. While the Company's competitive position could conceivably
be threatened by its inability to protect its proprietary information, the
Company believes that
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copyright and trademark protection are less important to the Company's
success than other factors such as the knowledge, ability and experience of
the Company's personnel, name recognition and ongoing product development and
support.
The Company's software products are licensed to end users under a perpetual,
nontransferable, nonexclusive license that stipulates which modules can be used
and how many concurrent users may use them. The Company relies primarily on
"shrink wrap" licenses for the protection of MSS. A "shrink wrap" license
agreement is a printed license agreement included in the packaged MSS software
that sets forth the terms and conditions under which the licensee can use the
product, and binds the licensee by its acceptance and license of MSS to such
terms and conditions. Shrink wrap licenses typically are not signed by the
licensee and therefore may be unenforceable under the laws of certain
jurisdictions.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs could become increasingly the subject of infringement claims.
Although the Company's products have never been the subject of an infringement
claim, there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertion will not
require the Company to enter into royalty arrangements or result in costly
litigation.
PRODUCTION
The principal materials and components used in the Company's software products
include computer media, user manuals and training guides. The Company prepares
master software disks, user manuals and packaging. In some cases, the Company
uses third party vendors to duplicate disks containing its software and to print
the Company's user manuals, packaging and related materials. To date, the
Company has not experienced any material difficulties or delays in the
manufacture and assembly of its products, or material returns due to product
defects.
EMPLOYEES
As of December 31, 1997, the Company had 433 full-time employees, including 128
in sales and marketing, 101 in software programming and documentation, 131 in
customer support services and 73 in finance and administration. The Company's
employees are not represented by any collective bargaining organization and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Minneapolis, Minnesota, in
a leased facility consisting of roughly 58,000 square feet, occupied under a
lease expiring December 31, 1998. In conjunction with the expiration of the
lease, the Company will relocate its corporate headquarters in December 1998.
A 10-year lease has been signed for a new facility in Minneapolis, Minnesota
that consists of approximately 57,000 square feet. The Company also leases
15,400 square feet, approximately 8,700 square feet of which is subleased to
a third-party, of space for a second principal office in San Ramon,
California pursuant to leases expiring in August 1999. The Company leases
additional facilities for domestic operations in San Diego, Anaheim and San
Jose, California; Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois;
Cleveland, Ohio; Dallas, Texas; and Nashua, New Hampshire. In conjunction
with the December 1997 restructuring plan, the Company's San Jose office,
which encompasses 4,561 square feet, has been vacated and the Company is
actively seeking a sub-lessee. (See Note 4 of Notes to Consolidated Financial
Statements for information on the Company's restructuring plan). The Company
also leases facilities and offices for its international operations in
London, Paris, Mexico City, Johannesburg, Port Elizabeth, Malaysia,
Taiwan, Singapore and in Beijing, Tianjin, Guangzhou, Nanjing, and
Shanghai of the People's Republic of China. The Company believes that its
existing facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available as needed to accommodate
expansion of corporate operations and for additional sales offices. See Note
8 of Notes to Consolidated Financial Statements for information regarding the
Company's lease obligations.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. As of the date
of this filing, neither the Company nor any of its subsidiaries is a party to
any legal proceedings, the adverse outcome of which, in management's opinion,
would have a material adverse effect on the Company's results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
EXECUTIVE OFFICERS
Marion Melvin Stuckey, age 59, is the founder of the Company and has been the
Chief Executive Officer and Chairman of the Company since 1982. Prior to
forming the Company, Mr. Stuckey was an executive officer of Control Data
Corporation ("CDC"), a multinational computer hardware, peripherals and services
company, from 1975 to 1982. Prior to that Mr. Stuckey served in various sales,
marketing and management positions at IBM from 1960 to 1975.
Jimmie H. Caldwell, age 58, has been President, Chief Operating Officer and a
Director of the Company since 1984. Prior to that time, Mr. Caldwell served in
various positions at CDC from 1964 to 1984 and held the position of Vice
President of Operations for CDC's Peripheral Products Company when he left to
join the Company.
David G. Latzke, age 38, has been Vice President and Chief Financial Officer
since April 1994. Mr. Latzke joined the Company as director of special projects
in April 1993. From 1982 until April 1993, Mr. Latzke was a manager with the
Audit and Business Advisory Division of Arthur Andersen LLP
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NASDAQ Symbol
The Company's common stock trades on the NASDAQ National Market tier of The
NASDAQ Stock Market under the symbol FSFT.
Price Range of Common Stock
The following table sets forth the high and low sales price of
the Common Stock as quoted by the NASDAQ National Market System for
the periods indicated. Such prices include inter-dealer prices, and
may not include retail markup, markdown or commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
FISCAL 1996:
First Quarter 5 3/4 3 5/8
Second Quarter 10 1/2 4 1/2
Third Quarter 8 1/2 5 1/8
Fourth Quarter 8 1/8 5 1/8
FISCAL 1997:
First Quarter 6 1/8 3 5/8
Second Quarter 5 2 3/4
Third Quarter 5 3/4 4
Fourth Quarter 4 5/8 2 5/8
</TABLE>
As of December 31, 1997, there were 278 shareholders of record and, based on the
best available information, approximately 2,583 beneficial holders of the
Company's Common Stock. The Company has never paid cash dividends on its Common
Stock and currently intends to retain earnings for use in operations.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
(In Thousands, Except Per Share Data)
STATEMENT OF OPERATIONS DATA- 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUE:
Software license $21,883 $22,947 $17,128 $13,956 $11,615
Service 27,137 23,822 18,097 13,937 11,316
Third-party software and other 3,298 2,541 1,999 2,183 3,186
------- ------- ------- ------- -------
Total revenue 52,318 49,310 37,224 30,076 26,117
------- ------- ------- ------- -------
OPERATING EXPENSES:
Cost of licenses 2,767 2,601 1,708 1,455 1,577
Cost of services 13,209 11,747 8,868 6,356 5,357
Cost of third-party software and other 2,341 2,008 1,386 1,853 2,576
Selling, general and administrative 27,505 23,046 18,720 15,394 10,628
Product development 9,271 8,674 5,732 2,817 2,021
Restructuring charge 2,566 - 149 - -
------- ------- ------- ------- -------
Total operating expenses 57,659 48,076 36,563 27,875 22,159
------- ------- ------- ------- -------
Operating profit (loss) (5,341) 1,234 661 2,201 3,958
Other income (expense), net (432) (36) (158) 213 (23)
------- ------- ------- ------- -------
Income (loss) from continuing operations
before provision for income taxes (5,773) 1,198 503 2,414 3,935
Provision for income taxes 328 189 298 159 190
------- ------- ------- ------- -------
Income (loss) from continuing operations (6,101) 1,009 205 2,255 3,745
------- ------- ------- ------- -------
Discontinued operations:
Loss from discontinued operations - - (7,642) (4,977) (228)
Net gain on sale of discontinued operations 2,311 761 2,037 - -
------- ------- ------- ------- -------
Total discontinued operations 2,311 761 (5,605) (4,977) (228)
------- ------- ------- ------- -------
Net income (loss) $(3,790) $ 1,770 $ (5,400) $(2,722) $ 3,517
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic income (loss) per common share (1):
Continuing operations $ (.63) $ .11 $ .02 $ .24 $ .86
Discontinued operations .24 .08 (.60) (.54) (.05)
------- ------- ------- ------- -------
Basic income (loss) per share $ (.39) $ .19 $ (0.58) $ (0.30) $ 0.81
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Diluted income (loss) per common share (1):
Continuing operations $ (.63) $ .10 $ .02 $ .24 $ .51
Discontinued operations .24 .08 (.59) (.53) (.03)
------- ------- ------- ------- -------
Diluted income (loss) per share $ (.39) $ .18 $ (.57) $ (.29) $ .48
------- ------- ------- ------- -------
------- ------- ------- ------- -------
BALANCE SHEET DATA -
Working capital surplus (deficit) $(4,161) $ 847 $ 1,810 $ 5,055 $ 8,995
Total assets 31,429 31,172 24,494 23,066 20,740
Long-term obligations 1,299 2,304 275 269 -
Shareholders' equity 4,047 7,087 4,700 9,632 12,162
</TABLE>
(1) See Note 2 of notes to the Company's consolidated financial statements for
an explanation of the determination of shares used in the per common share
computation.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1997 Management's Discussion & Analysis of Financial Condition and Results of
Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition and should be read in
conjunction with the consolidated financial statements and notes thereto.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. The following Management's Discussion
and Analysis contains various "forward looking statements" within the meaning of
federal securities laws which represent management's expectations or beliefs
concerning future events, including statements regarding anticipated sales,
marketing and research and development expenditures, growth in revenue, capital
requirements and the sufficiency of cash to meet operating expenses. These, and
other forward looking statements made by the Company, must be evaluated in the
context of a number of factors that may affect the Company's financial condition
and results of operations, including the following:
- - The ability of the Company to continually enhance the Manufacturing
Software System for OBJECTS (MSS) product to meet ever changing market
demands for both functionality and new technology;
- - Fluctuations in quarterly operating results caused by changes in the
computer industry, buying patterns and general economic conditions;
- - The ability of the Company to successfully develop its MSS product to meet
European Monetary Union requirements;
- - The dependence of the Company on revenue from licensing of its MSS product;
- - The effects of changes in technology and standards in the computer
industry;
- - The significant competition among developers and marketers of industrial
software;
- - The ability of the Company to retain key employees;
- - The increasing size of the Company's international operations, particularly
in Asia;
- - The ability of the Company to manage expansion of international
distribution channels;
- - The dependence of the MSS product line on a third-party database management
system; and
- - Evolving standards regarding intellectual property protection for software
products in general.
SALE OF JUST IN TIME ENTERPRISE SYSTEMS, INC.
Effective December 31, 1995, the Company sold all of the capital stock of Just
In Time Enterprise Systems, Inc. (JIT), a wholly owned subsidiary of the
Company, along with certain net assets related to the operations of JIT in the
United Kingdom, to Interactive Group, Inc. (IGI). The Company received cash
proceeds of $1.5 million and a $2.5 million note that was collateralized by the
common stock of JIT, all receivables generated by JIT or from the JIT Enterprise
System and by the intellectual property rights in the JIT Enterprise System. In
addition, IGI agreed to pay an additional amount equal to 4% of the revenues
generated from the JIT Enterprise System after December 31, 1995, up to a total
of $1.2 million. This amount is also collateralized by JIT's common stock,
receivables, and intellectual property rights.
In connection with the sale of JIT, the Company recorded a 1995 gain on the sale
of $2,037,000, equal to the excess of the cash proceeds received over the
deficit book value of JIT, net of transaction costs. The Company deferred
13
<PAGE>
recognition of the gain associated with the note received in connection with the
sale and is recognizing the gain associated with this note, as well as the
additional amounts receivable based on revenues generated from the JIT
Enterprise System, as such amounts are deemed collectible. In 1996 the Company
recognized a gain totaling $761,000 related to cash received in 1996 and January
1997. In 1997 the Company recognized a gain of $2,311,000 relating to cash
received in 1997 and January 1998 (See Note 3). All income taxes related to
these transactions have been offset through the utilization of net operating
losses previously generated by JIT.
The operating results of JIT have been presented as discontinued operations in
the Company's consolidated financial statements. Accordingly, the discussion
contained herein relates to the continuing operations of the Company, unless
otherwise noted.
RESULTS OF OPERATIONS
REVENUE:
TOTAL REVENUE for the year ended December 31, 1997 increased 6% to $52,318,000
from $49,310,000 in 1996 and increased 32% to $49,310,000 from $37,224,000 in
1995. The overall growth in total revenue over the three-year period was
achieved through increased market penetration in North America and geographic
expansion internationally. North American total revenue increased 10% from 1996
to 1997 and increased 25% from 1995 to 1996. Total revenue from the Company's
subsidiary in Asia decreased 19% in 1997 following a 70% increase in 1996. The
1997 decrease in revenue was primarily a result of economic problems in Asia,
particularly in the last half of the year. Total revenue from the Company's
European subsidiary grew 18% in 1997 and 32% in 1996. The growth was the result
of continued market penetration in continental Europe. As a percentage of total
revenue, sales outside of North America accounted for 29% in 1997, 32% in 1996
and 28% in 1995.
SOFTWARE LICENSE REVENUE are fees paid by customers for the right to use the
Company's software system. Software license revenue decreased 5% to $21,883,000
in 1997 from $22,947,000 in 1996 and increased 34% to $22,947,000 in 1996 from
$17,128,000 in 1995. The decrease in license revenue in 1997 is attributable to
reduced license revenues in Asia. In North America, license revenues were
virtually even with 1996 results, and license revenue in Europe grew by 17%. As
stated above, economic problems in Asia resulted in reduced customer demand,
particularly in new system licenses, as fewer new manufacturing enterprises
opened, and those in place delayed capital expenditures. In North America,
competitive pressure and a shortage of experienced sales professionals depressed
license revenue in the first half of 1997. The new sales management effected a
strong second half of revenues and finished the year even with 1996. Growth in
1996 resulted from increased penetration in foreign markets, an increase in the
direct sales force, increased marketing and lead-generating activities and
increased acceptance of PC LAN-based manufacturing information systems.
SERVICE REVENUE includes customer support fees, training, consulting,
installation and project management. Service revenue increased 14% to
$27,138,000 in 1997 from $23,822,000 in 1996 and increased 32% to $23,822,000
in 1996 from $18,097,000 in 1995. The demand for services and support has
increased proportionately with the increase in the installed software license
base. In addition, the Company is strengthening its efforts to standardize and
promote its consulting and training offerings, as well as developing additional
value-added products and services for our customers. The Company believes that
services are an important component to the overall product line offering and
should grow in a manner consistent with the growth in the installed software
license base.
THIRD-PARTY SOFTWARE AND OTHER REVENUE are derived principally from the resale
of third-party software licenses (complementary applications) along with limited
hardware sales. These complementary applications have been integrated to
function with the MSS software and extend the functionality of MSS. Third-party
software and other revenue increased 30% to $3,298,000 in 1997 from $2,541,000
in 1996 and increased 27% to $2,541,000 in 1996 from $1,999,000 in 1995. The
increase in 1997 resulted from increased customer demand for broad ERP
functionality, both among new customers and in the Company's previously
installed base. The increase in 1996 was directly related to increases in MSS
license revenue, since third-party software is often licensed in conjunction
with the licensing of the MSS product.
14
<PAGE>
OPERATING EXPENSES:
COST OF LICENSES increased to $2,767,000 in 1997 from $2,601,000 in 1996 and
increased as a percentage of total license revenue to 13% in 1997 from 11% in
1996 and 10% 1995. The increase in these costs as a percent of license revenue
from 1996 to 1997 is due to increases in royalty costs paid to third-party
software suppliers whose products are embedded in and distributed with the MSS
product.
COST OF SERVICES increased to $13,209,000 in 1997 from $11,747,000 in 1996 and
$8,868,000 in 1995 and held flat as a percentage of service revenue at 49% for
all three years. Margins were favorably impacted in 1997 by improved customer
support margins due to productivity improvements and high customer support
renewal rates. This was offset by lower margins in consulting and training
services due to pricing pressures.
COST OF THIRD-PARTY PRODUCTS as a percentage of third-party products revenue was
71% in 1997, 79% in 1996, and 69% in 1995. The decrease from 1996 to 1997
resulted from the mix of products sold. The increase from 1995 to 1996 is due
to the mix of products sold combined with increases in fixed personnel costs and
increased costs associated with writing, supporting and maintaining the
interface between certain companion products and MSS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE increased to $27,505,000 in 1997
from $23,046,000 in 1996 and $18,720,000 in 1995. As a percentage of total
revenue, selling, general and administrative expense was 53% of total revenue in
1997, 47% in 1996 and 50% in 1995. The increase in spending in 1997 and 1996 is
due to the addition of sales and marketing personnel, and related commissions
earned, in connection with the Company's expanded market penetration in North
America and international markets. The rate of spending as a percent of revenue
decreased by three percentage points from 1995 to 1996 and increased by six
percentage points from 1996 to 1997. The decrease in the spending rate from
1995 to 1996 is due to the 32% growth in total revenue combined with an
increased emphasis on expense control particularly in the general and
administrative areas. The increase in the spending rate from 1996 to 1997 is
due primarily to growth in selling and marketing expenses in the second half of
1997. During the second half of 1997, the Company incurred additional costs to
reorganize and grow the sales organization, particularly in North America. Due
to the leadtime required to deploy additional sales personnel and resources, the
full benefits of this additional spending have not yet been realized through
increased revenue.
PRODUCT DEVELOPMENT EXPENSE was $9,271,000 or 18% of total revenue during 1997,
compared to $8,674,000 or 18% of total revenue in 1996 and $5,732,000 or 15% of
total revenue in 1995. The increased expense in 1996 and 1997 is a direct
result of increased headcount and support resources associated with the
development of the Company's object-oriented, communications-centric technology
(OBJECTS). The Company also completed several significant user enhancements
associated with the MSS product Release 6.0, including enhanced graphical user
interface features, an engineering module, a screen customizer module, and an
enlarged database. The Company's research and development activities are
conducted internally and consist primarily of software development--the writing
of code. The Company does not have any material fixed commitments for capital
expenditures in research and development. The Company believes that product
development spending is critical to the continuing success of the Company's
products and intends to continue to invest heavily in research and development.
Under Statement of Financial Accounting Standards No. 86 ("SFAS No. 86"),
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," capitalization of computer software development costs is to begin
upon the establishment of technological feasibility, limited to the net
realizable value of the software product, and cease when the software is
available for general release to customers.
Since mid-1995, the Company has been investing significant resources in the
development of OBJECTS and completed a working model of OBJECTS in July 1996.
The Company believes that the object-oriented framework under development is
highly reusable and that its economic life will be in excess of five years.
Costs associated with its development were therefore capitalized. The Company
also capitalized the development costs associated with certain "core" OBJECTS
modules that were anticipated to have an economic life in excess of three years.
In 1997 and 1996, the Company capitalized $3,819,000 and $1,820,000 of
development costs, respectively.
15
<PAGE>
In June 1997, the Company introduced Release 1.0 of OBJECTS for general
distribution. As such, the Company initiated amortization of all previously
capitalized costs related to the development of OBJECTS framework and Release
1.0 application modules. These costs were amortized assuming a three-year
economic life for the framework and modules. Amortization expense for 1997
totaled $720,000 and is presented as a component of product development expense.
In December 1997, in conjunction with the restructuring plan discussed below,
the Company reevaluated its OBJECTS development activities and product strategy.
As a result of this evaluation, the Company identified ways to combine some the
OBJECTS technology with the functionality of the current MSS product, and
redirected its development activities accordingly. Because of this redirection,
it was determined that components of the previously developed OBJECTS product,
particularly the application modules, would not be incorporated into planned
future product releases. As such, $1,630,000 of previously capitalized costs
related to these components, net of accumulated amortization, were charged to
restructuring expense in December 1997.
RESTRUCTURING CHARGE is the result of an evaluation of the Company's structure
and organization, primarily in the product development area. In December 1997,
the Company's development operations were restructured in conjunction with a
change in product strategy. Specifically, all North American development
activities were combined into a single operation - previously the Company
maintained two development groups. The restructuring charge totaled $2,566,000
and included $394,000 of severance costs for employees and contractors, $392,000
to provide for the cost to exit office space that was no longer needed as a
result of the staff reductions, and $150,000 of prepaid royalties relating to
the OBJECTS product that had no future value. In addition, $1,630,000 of
previously capitalized development costs were expensed as a result of the change
in product strategy.
A restructuring charge was also incurred during the second quarter of 1995.
Substantially all of this charge was associated with the JIT operations and
included in the loss reported from discontinued operations; however, a
restructuring charge of $149,000 was also provided related to the Company's
continuing operations. This charge was primarily related to employee severance
costs paid during 1995 and to provide for costs to be incurred under existing
contracts to exit office space that were no longer providing an economic benefit
to the Company.
OTHER INCOME (EXPENSE), NET is comprised principally of interest expense on
line-of-credit borrowings, equipment loans, and leases, net of interest income.
PROVISION FOR INCOME TAXES totaled $328,000 in 1997 versus $189,000 in 1996 and
$298,000 in 1995. The effective tax rate in 1995 and 1996 was reduced as a
result of the utilization of net operating loss carryforwards. The tax provision
for all years is comprised exclusively of state and foreign income taxes. The
Company has not recognized any benefits related to deferred taxes or net
operating loss carryforwards.
OPERATING PROFIT:
The Company reported an operating loss of $5,341,000 for 1997 compared to
operating profits of $1,234,000 for 1996 and $661,000 for 1995. The change in
operating results in 1997 compared with 1996 is a result of the restructuring
charge and other increases in operating expenses that were not entirely offset
by increased revenue.
The Company has historically experienced higher revenue and gross margin in its
fourth quarter compared to the other quarters. The Company attributes these
increases to customers' increased spending at the end of their calendar year
budgetary periods. The Company believes this pattern will continue.
FOREIGN CURRENCY EXCHANGE
Approximately 16% of the Company's total revenue in 1997, 14% in 1996 and 16% in
1995, was derived from sales denominated in foreign currencies. These sales were
made through certain foreign subsidiaries and were denominated in the
subsidiaries' functional currencies. The effect of foreign currency exchange
rate fluctuations versus the U.S. Dollar on these revenues is largely offset to
the extent expenses of the foreign subsidiary are incurred and paid for in that
same currency. None of these foreign operations have significant receivables,
obligations or commitments denominated in currencies other than these
operations' functional currencies.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operating activities was $1,775,000 in 1997 compared
to $3,163,000 in 1996 and $4,270,000 in 1995. In 1997, the net loss adjusted
for discontinued operations and noncash items resulted in a cash use of
$186,000. An additional cash use was the result of an increase in accounts
receivable of $994,000. These uses were offset by increases in accrued expenses
and deferred revenue of $1,730,000 and $1,455,000, respectively. The increase
in accounts receivable is a direct result of an increase in fourth quarter
sales. The increased accrued expenses results from reserves established for
restructuring charges, increased accrued commissions resulting from a change in
when commissions earned are paid, and costs of third-party software associated
with fourth quarter growth. The increase in deferred revenue results from the
continued growth of the business and increases in the number of annual customer
support contracts.
Cash used for investing activities was $3,377,000 in 1997 compared to $5,916,000
in 1996 and $201,000 in 1995. The decrease from 1996 to 1997 relates primarily
to decreased capital spending offset by increased capitalized software
development costs. Specifically, 1997 cash used for investing activities
includes $3,819,000 of capitalized software development costs and $1,200,000 for
purchases of furniture, fixtures and equipment. This is offset by the receipt
of $1,857,000 related to the sale of JIT.
Cash provided by financing activities was $1,445,000 in 1997 compared to
$1,665,000 in 1996 and $499,000 in 1995. The Company's financing activities
related primarily to line of credit borrowings in 1997 and net proceeds from the
Company's capital lease and equipment financing arrangements in 1996.
As discussed in Note 5 of Notes to Consolidated Financial Statements, in
November 1995, the Company entered into a $3,000,000 line-of-credit agreement
with a bank. Borrowings under the credit agreement were limited to the lesser of
the committed line or a borrowing base equal to 75% of eligible accounts
receivable, as defined. Borrowings were collateralized by the Company's accounts
receivable and all other assets of the Company and bear interest at prime plus
1.25%. In November 1996 the agreement was extended to November 1997 and the line
was increased to $5,000,000. The agreement was subsequently extended to
February 1998. The agreement contains restrictive covenants, which include the
maintenance of minimum tangible net worth and profitability levels as well as
certain financial ratios, as defined. At December 31, 1997 there were $2,000,000
in borrowings on the line. Although the Company was not in compliance with
certain financial covenants on December 31, 1997, the Company restored
compliance through restructuring this credit facility on March 2, 1998.
Under the new agreement, all outstanding balances under the old facility were
repaid and financed with borrowings under the new agreement. The new agreement
provides a credit line not to exceed $5,000,000 and expires in March 1999.
Actual borrowings are limited to a percentage of eligible accounts receivable
reduced by amounts outstanding under the Company's long term equipment facility
(see Note 6 to the Consolidated Financial Statements). Borrowings are
collaterized by the Company's accounts receivable and all other assets of the
Company and bear interest at prime plus 2%. The agreement contains restrictive
covenants that include the maintenance of minimum net worth. As of March 2,
1998, approximately $3,400,000 of borrowings were available to the Company under
the new agreement.
The Company does not have any material scheduled commitments for capital
expenditures during 1998. The Company believes that the $5,758,000 of cash and
cash equivalents on hand at December 31, 1997 together with anticipated cash
flows from operations and the Company's available line of credit will be
sufficient to fund operating cash needs for 1998. Beyond 1998, the Company plans
to consistently generate positive cash flows from operations; however, if this
does not occur, then the Company may need to seek additional funds through
equity or debt financing.
The Company has available net operating loss carryforwards of approximately
$19,400,000 and tax credit carryforwards of approximately $1,504,000 at December
31, 1997. The Company has not recognized any of these benefits in the related
financial statements.
17
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board (SFAS) No. 128,
"Earnings Per Share," in 1998. This statement requires presentation of basic
and diluted Earnings Per Share (EPS). Basic EPS is computed by dividing net
income by the number of weighted average common shares outstanding. Diluted EPS
reflects dilution of ownership from outstanding stock options, using the
treasury stock method. The Company has restated results for all prior years
presented.
Statement of Position (SOP) 97-2, "Software Revenue Recognition," issued in
October 1997, is effective for transactions entered into beginning January 1998.
This statement supersedes SOP 91-1 and provides guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
The Company is currently analyzing the implementation of SOP 97-2 and does not
believe it will have a material impact on the Company's financial condition or
results of operations.
The Financial Accounting Standards Board has released SFAS No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display in the
financial statements of total net income and the components of all other
nonowner changes in equity, referred to as comprehensive income. The Company
will adopt SFAS No. 130 in 1998 and is currently analyzing the impact it will
have on the disclosures in the financials statements.
The Financial Accounting Standards Board also has released SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires
disclosure of business and geographic segments in the consolidated financial
statements of the Company. The Company will adopt SFAS No. 131 in 1998 and is
currently analyzing the impact it will have on the disclosures in its financial
statements.
OTHER
The Company has analyzed the potential affect of the year 2000 issue on both the
application software that the Company licenses through sales cycles and
application software it uses in its internal operations. The Company has tested
all of the system software included in its products and determined that it will
not be affected. The Fourth Shift development environment has always supported
the use of century-compliant dates. The Information Technology Association of
America (ITAA) has certified that Fourth Shift enterprise software solutions are
year 2000 compliant. Additionally, the Company has requested and received
documentation from vendors currently supplying third party products addressing
year 2000 compliance. In most cases, vendors responses indicated that their
applications were either currently year 2000 compliant or that they would be
compliant by the end of 1998. In certain instances, vendors have not made a
commitment to become year 2000 compliant by the end of 1998. The Company is
evaluating alternative courses of action relating to these certain vendors and
anticipates resolution by the end of 1998. Based on this review, the Company
does not anticipate any material negative effect on the future operating results
or financial condition of the Company.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
ASSETS
1997 1996
-------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,758 $ 5,935
Accounts receivable, net 14,001 13,007
Inventories 482 596
Prepaid expenses 1,031 1,156
Current portion of note and other receivable 650 813
-------- ---------
Total current assets 21,922 21,507
-------- ---------
FURNITURE, FIXTURES AND EQUIPMENT, at cost:
Furniture and fixtures 2,644 2,309
Computer equipment 7,553 6,734
Leasehold improvements 1,150 1,080
Assets held under capital lease 2,784 2,110
Less- Accumulated depreciation and amortization (8,628) (6,093)
-------- ---------
Net furniture, fixtures and equipment 5,503 6,140
RESTRICTED CASH 715 500
NOTE RECEIVABLE - 1,121
SOFTWARE DEVELOPMENT COSTS, net 3,289 1,820
GOODWILL, net - 84
-------- ---------
Total assets $31,429 $31,172
-------- ---------
-------- ---------
</TABLE>
19
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In Thousands, Except Share and Per Share Data)
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
--------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term obligations $ 1,803 $ 868
Current portion of deferred gain on sale of subsidiary - 617
Revolving credit facility 2,000 -
Accounts payable 3,964 4,283
Accrued expenses 8,001 6,032
Deferred revenue 10,315 8,860
--------- --------
Total current liabilities 26,083 20,660
LONG-TERM OBLIGATIONS 1,299 2,304
DEFERRED GAIN ON SALE OF SUBSIDIARY - 1,121
COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 9)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares
authorized; 9,828,447, and 9,605,009 shares
issued and outstanding 98 96
Additional paid-in capital 30,640 29,872
Accumulated deficit (26,691) (22,881)
--------- --------
Total shareholders' equity 4,047 7,087
--------- --------
Total liabilities and shareholders' equity $31,429 $31,172
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
20
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Software license $21,883 $22,947 $17,128
Service 27,137 23,822 18,097
Third-party software and other 3,298 2,541 1,999
-------- -------- --------
Total revenue 52,318 49,310 37,224
-------- -------- --------
OPERATING EXPENSES:
Cost of licenses 2,767 2,601 1,708
Cost of services 13,209 11,747 8,868
Cost of third-party software and other 2,341 2,008 1,386
Selling, general and administrative 27,505 23,046 18,720
Product development 9,271 8,674 5,732
Restructuring charge 2,566 - 149
-------- -------- --------
Total operating expenses 57,659 48,076 36,563
-------- -------- --------
Operating profit (loss) (5,341) 1,234 661
OTHER EXPENSE, net (432) (36) (158)
-------- -------- --------
Income (loss) from continuing operations
before provision for income taxes (5,773) 1,198 503
PROVISION FOR INCOME TAXES 328 189 298
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (6,101) 1,009 205
-------- -------- --------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - - (7,642)
Net gain on sale of discontinued operations 2,311 761 2,037
-------- -------- --------
Total discontinued operations 2,311 761 (5,605)
-------- -------- --------
NET INCOME (LOSS) $(3,790) $ 1,770 $(5,400)
-------- -------- --------
-------- -------- --------
BASIC INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ (.63) $ .11 $ .02
Discontinued operations .24 .08 (.60)
-------- -------- --------
Basic income (loss) per common share $ (.39) $ .19 $ (0.58)
-------- -------- --------
-------- -------- --------
DILUTED INCOME (LOSS) PER COMMON SHARE:
Continuing operations $ (.63) $ .10 $ .02
Discontinued operations .24 .08 (.59)
-------- -------- --------
Diluted income (loss) per common share $ (.39) $ .18 $ (.57)
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
21
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
(In Thousands)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number of Par Additional Accumulated
Shares Value Paid-In Capital Deficit
--------- ----- --------------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 9,217 $92 $28,673 $ (19,133)
Common stock issued 149 2 345 -
Issuance of restricted shares - - 204 -
Net loss - - - (5,400)
Translation adjustment - - - (83)
--------- ----- --------------- -----------
BALANCE, December 31, 1995 9,366 94 29,222 (24,616)
Common stock issued 234 2 591 -
Issuance of restricted shares 5 - 59 -
Net income - - - 1,770
Translation adjustment - - - (35)
--------- ----- --------------- -----------
BALANCE, December 31, 1996 9,605 96 29,872 (22,881)
Common stock issued 223 2 758 -
Issuance of restricted shares - - 10 -
Net loss - - - (3,790)
Translation adjustment - - - (20)
--------- ----- --------------- -----------
BALANCE, December 31, 1997 9,828 $98 $30,640 $ (26,691)
--------- ----- --------------- -----------
--------- ----- --------------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
22
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(3,790) $1,770 $(5,400)
Adjustments to reconcile net income (loss)
to net cash provided by continuing operating
activities-
Noncash items:
Depreciation and amortization 3,339 2,065 1,312
Net gain on sale of discontinued operations (2,311) (761) (2,037)
Restructuring charge 2,566 - 149
Loss from discontinued operations - - 7,642
Other 10 60 205
Change in current operating items:
Accounts receivable, net (994) (2,878) (1,526)
Inventories 114 182 449
Prepaid expenses (25) (292) (82)
Accounts payable (319) 2,158 (2,149)
Accrued expenses 1,730 272 3,232
Deferred revenue 1,455 587 2,762
-------- -------- --------
Net cash provided by continuing
operating activities 1,775 3,163 4,557
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment (1,200) (4,162) (1,701)
Increase in restricted cash (215) (500) -
Capitalized software development costs (3,819) (1,820) -
Proceeds from sale of discontinued operations 1,857 566 1,500
-------- -------- --------
Net cash used for investing activities $(3,377) $(5,916) $(201)
-------- -------- --------
</TABLE>
23
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In Thousands)
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Payments of long-term obligations $(963) $(512) $(427)
Proceeds from equipment loans and capital leases 195 2,004 579
Borrowings on line of credit 2,000 1,350 2,200
Payments on line of credit borrowings - (1,350) (2,200)
Proceeds on issuance of common stock, net 213 173 60
-------- --------- ---------
Net cash provided by financing activities 1,445 1,665 212
CASH USED IN DISCONTINUED OPERATIONS - - (4,198)
EFFECT OF EXCHANGE RATE ON FOREIGN CASH BALANCES (20) (35) (83)
-------- --------- ---------
Change in cash and cash equivalents (177) (1,123) 287
CASH AND CASH EQUIVALENTS:
Beginning of year 5,935 7,058 6,771
-------- --------- ---------
End of year $5,758 $5,935 $7,058
-------- --------- ---------
-------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during each period for-
Interest $566 $338 $303
Income taxes $149 $140 $160
-------- --------- ---------
-------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
24
<PAGE>
FOURTH SHIFT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. NATURE OF BUSINESS AND COMPANY OPERATIONS:
Fourth Shift Corporation (a Minnesota corporation) and its subsidiaries
(collectively referred to as the Company) engage principally in the development,
marketing, licensing and support of integrated client/server application
software used for industrial planning and management processes, primarily for
use in the manufacturing industry. The Company's principal product, the Fourth
Shift Manufacturing Software System for OBJECTS (MSS) is a family of integrated
manufacturing and financial management applications for intermediate-sized sites
of manufacturing and distribution enterprises. The MSS system operates in a
Windows NT open computing environment.
The Fourth Shift JIT Enterprise System (JIT Enterprise System), which was
offered through Just In Time Enterprise Systems, Inc. (JIT), a subsidiary of the
Company, is an information management system for industrial companies involved
in aerospace and defense and contract manufacturing which operates in the
UNIX/Oracle environment. Effective December 31, 1995, the Company sold the
common stock of JIT (see Note 3.) The operating results of JIT have been
presented as discontinued operations in the accompanying consolidated financial
statements. Accordingly, the disclosures presented herein relate to the
continuing operations of the Company, unless otherwise noted.
Although the Company had a working capital deficit at December 31, 1997, the
Company believes that cash on hand, cash generated from operations, and cash
available under the Company's credit facility will be adequate to fund the
Company's operations through 1998.
The consolidated financial statements include the accounts of Fourth Shift
Corporation (Fourth Shift) and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Software license revenues derived from software license fees with standard
acceptance periods are recognized upon shipment of software if there are no
significant postdelivery obligations and collectibility is reasonably assured.
Insignificant contractual obligations are accrued at the time of revenue
recognition. For fixed-fee software arrangements, the Company recognizes
revenue on payments due within one year once all significant obligations have
been met and defers the portion of the total fee which is attributable to
insignificant undelivered services or products and recognizes this revenue as
the associated services or products are delivered.
Service revenue includes customer support fees, training, consulting,
installation and project management. Revenue from customer support agreements
for maintaining, supporting and providing periodic upgrades is recognized
ratably over the maintenance period, which in most cases is one year. Revenue
is recognized for other services at the time the service is performed.
Third-party software and other revenue is derived from the resale of third-party
licenses and hardware. Revenue is recognized upon delivery of the product.
SOFTWARE DEVELOPMENT COSTS
Capitalization of computer software development costs begins upon the
establishment of technological feasibility, limited to the net realizable value
of the software product, and ceases when the software product is available for
general release to customers. Amortization is computed on each product based
upon the greater of the amount
25
<PAGE>
computed on a units sold basis (ratio of gross product revenue to anticipated
future gross revenue for that product) or straight-line basis over the
remaining estimated economic life of the product. Costs of maintenance and
customer support are to be charged to expense when related revenue is
recognized or when those costs are incurred, whichever occurs first.
Historically, the development costs incurred by the Company during the period
between the achievement of technological feasibility, defined by the Company as
the existence of a working model of the product, and the point at which the
product is available for general release to customers, have not been material.
Accordingly, prior to 1996 the Company charged all software development costs
to expense as incurred. Beginning in the third quarter of 1996, the Company
began to capitalize development costs related to its next generation product,
Fourth Shift OBJECTS Enterprise Software (OBJECTS). The Company capitalized
$3,819,000 in 1997 and $1,820,000 in 1996 related to the development of OBJECTS
functionality and related modules that had reached technological feasibility.
In June 1997, the Company introduced Release 1.0 of OBJECTS for general
distribution. As such, the Company initiated amortization of all previously
capitalized costs related to the development of OBJECTS framework and Release
1.0 application modules. These costs were amortized assuming a three-year
economic life for the framework and modules. Amortization expense for 1997
totaled $720,000.
In conjunction with a December 1997 restructuring of the Company's product
development operations (See Note 4), the Company reevaluated its OBJECTS
development activities and product strategy. As a result of this evaluation,
the Company identified ways to combine some of the OBJECTS technology with the
functionality of the current MSS product, and redirected its development
activities accordingly. Because of this redirection, components of the
previously developed OBJECTS product will not be incorporated into planned
future product releases. As such, $1,630,000 of previously capitalized costs
related to these components, net of accumulated amortization, were charged to
restructuring expense in December 1997.
As of December 31, 1997, OBJECTS Release 1.0 is no longer being marketed or
licensed to customers. As such, the remaining capitalized asset will not be
amortized until such time as the underlying technology is incorporated into a
product that is available for general release. At that time, the remaining
capitalized costs will be amortized to expense over the product's estimated
economic life.
CASH EQUIVALENTS
The Company considers all highly liquid and short-term investments purchased
with a maturity of three months or less to be cash equivalents. Short-term
investments consist principally of government securities and mutual funds and
are stated at cost, which approximates market.
ACCOUNTS RECEIVABLE
Accounts Receivable are stated net of allowances for losses on uncollectible
accounts. At December 31, 1997 and 1996, this allowance was $773,000 and
$359,000 respectively.
INVENTORIES
Inventories consist of third-party software held for resale, computer
software media, instruction material and packaging, and are stated at the
lower of first-in, first-out cost or market.
PREPAID EXPENSES
Prepaid expenses consist principally of prepaid rents and rental deposits,
prepaid insurance premiums and deposits on capital leases.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost and are depreciated
principally under the straight-line method for financial and income tax
reporting purposes over estimated useful lives that range from three to five
years.
26
<PAGE>
RESTRICTED CASH
Restricted cash consists of cash pledged to support certain facilities leases.
These restrictions will decrease over time ending in 2006.
FOREIGN CURRENCY TRANSLATION
For the Company's foreign operations, assets and liabilities are translated at
year-end exchange rates, and items included in the consolidated statement of
operations are translated at average exchange rates prevailing during the year.
Translation adjustments, which have historically been insignificant, are
included in accumulated deficit in the accompanying consolidated balance sheets.
DEFERRED REVENUE
Deferred revenue primarily consists of customer support and other services for
which cash has been received but services have not been provided. Services that
must be provided relate to normal operations of the Company.
INCOME TAXES
The Company accounts for income taxes under the liability method of accounting.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates.
NET INCOME (LOSS) PER COMMON SHARE
In the fourth quarter of 1997 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share" and, retroactively,
restated the earnings (loss) per share (EPS) for 1996 and 1995. SFAS No. 128
requires presentation of basic and diluted EPS. Basic EPS is computed by
dividing net income by the number of weighted average common shares
outstanding. Diluted EPS reflects potential dilution from outstanding stock
options, using the treasury stock method.
Reconciliation of weighted average shares used in computing income (loss) per
share are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Weighted average common shares outstanding 9,738 9,567 9,354
Dilutive effect of stock options outstanding,
using the treasury stock method - 298 122
------- ------- --------
Shares used in computing diluted income (loss) per share 9,738 9,865 9,476
------- ------- --------
------- ------- --------
</TABLE>
RECLASSIFICATIONS
Certain amounts previously reported in the 1996 financial statements have been
reclassified to conform to the 1997 presentation. These reclassifications had
no effect on previously reported net income or shareholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Position (SOP) 97-2, "Software Revenue Recognition," issued in
October 1997, is effective for transactions entered into beginning in January
1998. This statement supersedes SOP 91-1 and provides guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. The Company
27
<PAGE>
is currently analyzing the implementation of SOP 97-2 and does not believe it
will have a material impact on the Company's financial condition or results
of operations.
The Financial Accounting Standards Board has released SFAS No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display in the
financial statements of total net income and the components of all other
nonowner changes in equity, referred to as comprehensive income. The Company
will adopt SFAS No. 130 in 1998 and is currently analyzing the impact it will
have on the disclosures in the financial statements.
The Financial Accounting Standards Board also has released SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires
disclosure of business and geographic segments in the consolidated financial
statements of the Company. The Company will adopt SFAS No. 131 in 1998 and is
currently analyzing the impact it will have on the disclosures in its financial
statements.
3. SALE OF JUST IN TIME ENTERPRISE SYSTEMS, INC.
Effective December 31, 1995, the Company sold all of the capital stock of JIT to
Interactive Group, Inc. (IGI). The Company received cash proceeds of $1,500,000
and a $2,500,000 note collateralized by the common stock of JIT, all receivables
generated by JIT or from the JIT Enterprise System and by the intellectual
property rights associated with the JIT Enterprise System. The note was
originally payable in quarterly installments over a period of three years and
bears interest at 8.75%. IGI also agreed to pay, commencing on December 31,
1998, an additional amount equal to 4% of the revenues generated from the JIT
Enterprise System after December 31, 1995, up to a total of $1,200,000.
In connection with the sale of JIT in 1995, the Company recognized a gain on the
sale of $2,037,000, equal to the excess of the cash proceeds received over the
deficit book value of JIT, net of transaction costs. The Company deferred
recognition of the gain associated with the note received from the sale and is
recognizing the gain associated with this note, as well as the additional
amounts receivable based on revenues generated from the JIT Enterprise System,
as such amounts are deemed collectible. In 1996 the Company recognized a gain
totaling $761,000 related to cash received in 1996 and January 1997.
In 1997 the Company recognized a gain on the sale totaling $2,311,000, of this
amount, $1,661,000 reflects early collections of the balance due under the note
receivable. In addition, in January 1998, an early payment of $650,000 of the
contingent fee based on JIT revenue was received.
Substantially all income taxes related to this transaction have been offset by
operating losses previously generated by JIT. In addition, all previously
generated net operating loss carryforwards related to JIT will continue to be
available to offset future taxable income of the Company, subject to the
limitations discussed in Note 7. The financial position and results of
operations of JIT have been reported separately as discontinued operations in
the accompanying consolidated financial statements. Revenues related to JIT
were $15,811,000 for the year ended December 31, 1995.
4. RESTRUCTURING CHARGES:
In the fourth quarter of 1997, the Company evaluated its structure and
organization, primarily in the product development area. This resulted in a
restructuring of the development operations and an associated change in product
strategy. All North American development activities were combined into a single
operation - previously the Company maintained two development groups. The
restructuring charge totaled $2,566,000 and included $394,000 of severance costs
for employees and contractors, $392,000 to provide for the cost to exit office
space that was no longer needed as a result of the staff reductions, and
$150,000 of prepaid royalties relating to the OBJECTS product that had no future
value. In addition, $1,630,000 of previously capitalized development costs were
expensed as a result of the change in product strategy (See Note 2). As of
December 31, 1997, approximately $936,000 of the total restructuring charge
remains to be paid in cash.
28
<PAGE>
In the second quarter of 1995, the Company evaluated its existing cost structure
and the future marketability of its products. As a result of this
consideration, the Company implemented a cost reduction plan that included a
restructuring of its operations. Substantially all of this plan was associated
with the JIT operations; however, a restructuring charge of $149,000 was also
provided related to the Company's continuing operations. This charge was
primarily related to employee severance costs, costs to exit office space and
losses incurred on the disposal of leaseholds and other equipment directly
related to the abandoned office space. As of December 31, 1996, substantially
all of this charge had been paid in cash.
5. REVOLVING CREDIT FACILITY:
In November 1995, the Company entered into a $3,000,000 line of credit agreement
with the Company's principal bank. Borrowings under the credit agreement were
limited to the lesser of the committed line or a borrowing base equal to 75% of
eligible accounts receivable, as defined. Borrowings were collateralized by the
Company's accounts receivable and all other assets of the Company and bear
interest at prime plus 1.25%. In November 1996 the agreement was extended to
November 5, 1997 and the line was increased to $5,000,000. This agreement was
subsequently extended to February 1998. Maximum borrowings in 1997 under this
facility were $2,000,000, with that amount outstanding at December 31, 1997.
This agreement contained restrictive covenants that included the maintenance of
minimum tangible net worth and profitability levels as well as certain financial
ratios, as defined. As of December 31, 1997, the Company was not in compliance
with certain of those covenants.
The Company restructured its credit facility with the bank with a new agreement
effective March 2, 1998. All balances outstanding under the old credit facility
were repaid on that date, and financed with borrowings under the new credit
facility. The new agreement provides a credit line not to exceed $5,000,000.
Actual borrowings are limited to a percentage of eligible accounts receivable,
with a deduction for the amounts outstanding under the long-term equipment
facility (See Note 6). Borrowings are collateralized by the Company's accounts
receivable and all other assets of the Company and bear interest at prime plus
2%. The agreement contains restrictive covenants that include the maintenance
of minimum tangible net worth. As of March 2, 1998, approximately $3,400,000 of
borrowings were available to the Company under the new agreement. The agreement
expires on March 2, 1999.
6. LONG-TERM OBLIGATIONS:
Long-term obligations consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Capital lease obligations, varying
interest rates, due in various
monthly installments through 2001 $ 1,335 $ 1,167
Bank equipment financing 1,767 2,005
Less current portion (1,803) (868)
------- --------
Long-term obligations $1,299 $2,304
------- --------
------- --------
</TABLE>
Future minimum payments under noncancelable capital leases, net of amounts
representing interest are $703,000 in 1998, $446,000 in 1999, $176,000 in 2000
and $10,000 in 2001.
At December 31, 1997, long-term obligations included capital lease obligations
of approximately $328,000 related to prior years' sale/leaseback arrangements
associated with certain of the Company's furniture, fixtures and equipment. No
gain or loss was recognized as a result of these transactions.
In April 1996, the Company entered into a $1,500,000 long-term equipment
facility with the Company's principal bank to finance the purchase of capital
equipment. The facility bears interest at 9.25% and is payable monthly.
Principal payments are due in thirty-six equal monthly installments starting in
May 1997 through April 2000. This facility is governed by the same restrictive
covenants as the revolving credit facility (See Note 5).
In September 1996, the Company entered into an additional $600,000 long-term
equipment facility to finance the purchase of capital equipment in connection
with international expansion. The facility bears interest at 9.5% and is
29
<PAGE>
payable monthly. Principal payments were originally due in thirty-six equal
monthly installments starting in October 1997 through September 2000. Under the
terms of the March 1998 revolving credit facility agreement, all amounts
outstanding under this equipment facility were repaid using proceeds from the
revolving credit facility. At December 31, 1997 the balance on this long-term
equipment facility was $550,000, which is included in the current portion of
long-term obligations.
Future minimum payments under these facilities (including prepayment described
above) are $1,100,000 in 1998, $500,000 in 1999 and $167,000 in 2000. The
carrying value of the Company's long-term obligations approximates fair value.
7. INCOME TAXES:
At December 31, 1997, the Company had available net operating loss carryforwards
of approximately $19,400,000 and tax credit carryforwards of approximately
$1,504,000. These net operating losses and tax credit carryforwards will expire
from 1999 to 2011.
The utilization of a portion of these net operating loss carryforwards may be
subject to Internal Revenue Code section 382 if certain significant investors
sell or purchase ownership interests. If an ownership change does occur, the
Company's ability to utilize its tax net operating loss carryforwards to offset
any future federal taxable income would be limited to a maximum amount in any
one year.
The provision for income taxes is comprised of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current tax provision:
State $105 $43 $42
Foreign 223 146 256
------ ------ ------
$328 $189 $298
------ ------ ------
------ ------ ------
</TABLE>
The Company records deferred taxes for the difference between the financial
reporting and income tax bases of certain assets and liabilities, computed in
accordance with tax laws in effect currently. The principal differences which
give rise to deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Net operating loss and tax credit
carryforwards $ 8,890 $7,670
Deferred gain on sale of JIT - 735
Accruals and reserves not currently
deductible for tax purposes 887 565
Capitalized R&D costs (1,304) (690)
Other (159) (57)
Less valuation allowance (8,314) (8,223)
-------- ---------
Net deferred taxes $ - $ -
-------- ---------
-------- ---------
</TABLE>
The Company has provided a valuation allowance for the net deferred tax benefit
resulting from net operating loss carryforwards and other differences between
the reported book and tax bases of certain assets and liabilities, as the
realizability of this net deferred tax benefit is not reasonably assured.
The Company's effective tax rate related to continuing operations differs from
the statutory federal income tax rate of 34% as a result of state and foreign
taxes.
30
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has operating leases for its corporate headquarters, additional
office space and for certain office equipment. The aggregate future minimum
rental payments under these leases, net of amounts to be received related to the
sublease of certain office space, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- ---------
<S> <C>
1998 $ 2,182
1999 2,163
2000 1,865
2001 1,820
2002 1,827
Thereafter 10,672
---------
$ 20,529
---------
---------
</TABLE>
Rent expense, including amounts paid under short-term arrangements, was
approximately $2,935,000, $2,340,000, and $2,478,000, in 1997, 1996 and 1995,
respectively.
LITIGATION
The Company is subject to litigation in the normal course of business. In the
opinion of management, the resolution of these matters will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
9. OPTIONS AND COMPENSATION PLANS:
STOCK OPTIONS
Under the terms of the Company's 1989 stock option plan (the 1989 Plan), options
granted to employees expire no later than ten years after the date of grant, and
the exercise price must be at least 100% of the fair market value of the shares
at the date of grant. The 1989 Plan covers both incentive and nonqualified
stock options and is limited to 200,000 total shares. Incentive stock options
granted to employees, who immediately before such grant owned stock directly or
indirectly representing more than 10% of the voting power of all classes of the
stock of the Company, may not be exercisable more than five years after the date
of grant and the exercise price per share must be at least 110% of the fair
market value of the shares at the date of grant. Options vest over varying
periods not to exceed five years. This plan is to remain in effect until
October 17, 1999.
In June 1993, the Company's board of directors approved a new stock option plan
(the 1993 Plan). The 1993 Plan covers both incentive and nonqualified stock
options and is limited to 2,250,000 shares. The 1993 Plan terminates in
June 2003.
31
<PAGE>
Stock option plan activity is summarized as follows:
<TABLE>
<CAPTION>
1993 Option Price
1989 Plan Plan Total Per Share
---------- -------- --------- --------------
<S> <C> <C> <C> <C>
Option shares outstanding at December 31, 1994 168,238 486,807 655,045 $2.00 -$8.25
Options granted - 549,750 549,750 $2.625-$6.50
Options exercised (3,100) - (3,100) $2.00
Options forfeited - (120,500) (120,500) $3.25-$5.375
---------- -------- --------- --------------
Option shares outstanding at December 31, 1995 165,138 916,057 1,081,195 $2.00-$8.25
Options granted 4,000 210,000 214,000 $3.75-$7.625
Options exercised (77,375) (3,250) (80,625) $2.00-$5.00
Options forfeited (400) (77,000) (77,400) $2.00-$8.25
---------- -------- --------- --------------
Option shares outstanding at December 31, 1996 91,363 1,045,807 1,137,170 $2.00-$8.25
Options granted 0 383,000 383,000 $3.25-$5.50
Options exercised (84,063) (14,375) (98,438) $2.00-$3.25
Options forfeited (3,300) (211,691) (214,991) $2.00-$8.25
---------- -------- --------- --------------
Option shares outstanding at December 31, 1997 4,000 1,202,741 1,206,741 $2.63-$8.25
---------- -------- --------- --------------
---------- -------- --------- --------------
<CAPTION>
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Options exercisable at year-end 524,586 379,172 247,879
Weighted average price of options exercisable at year-end $5.31 $4.79 $4.04
Weighted average fair market value of options granted $3.96 $4.03 $3.63
</TABLE>
32
<PAGE>
The Company accounts for these stock option plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with FASB Statement No. 123, the
Company's net income (loss) and earnings (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss): As reported $(3,790) $ 1,770 $(5,400)
Pro forma $(4,917) $ 984 $(5,834)
Basic income (loss) per common share: As reported $ (.39) $ .19 $ (.58)
Pro forma $ (.50) $ .10 $ (.62)
Diluted income (loss) per common share: As reported $ (.39) $ .18 $ (.57)
Pro forma $ (.50) $ .10 $ (.62)
</TABLE>
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
5.0 percent and expected life of 7.7 years for 1997, 1996, and 1995; expected
annualized volatility of 1.03, .85 and .99 for 1997, 1996 and 1995,
respectively.
OTHER EMPLOYEE COMPENSATION PLANS
The Company has a 401(k) plan that covers substantially all domestic employees
over 21 years of age with at least six months of continuous service. The
Company may make discretionary matching contributions to the plan based upon
employee contributions. The Company made matching contributions to this plan of
approximately $353,000 in 1996. No matching contributions were made in 1997 or
1995.
The Company has an employee stock purchase plan (the Stock Purchase Plan).
Under the Stock Purchase Plan, participating full-time employees and directors
of the Company are able to purchase shares of the Company's common stock at 85%
of market value, as defined. A total of up to 900,000 shares of the Company's
common stock has been reserved under the Stock Purchase Plan. In 1995, the
Company issued approximately 97,000 shares of its common stock, which were
purchased by participants of this plan during 1994. In 1996, the Company issued
150,000 shares of which 100,000 were purchased in 1995 and 50,000 through June
of 1996. In 1997, the Company issued 125,000 shares, of which 50,000 were
purchased in 1996 and 75,000 through June of 1997. The weighted average fair
value of shares purchased was $643,750 in 1997, $707,000 in 1996, and $266,000
in 1995.
BOARD OF DIRECTORS' COMPENSATION PLAN
The board of directors has approved a compensation plan whereby certain
directors may receive cash compensation for each directors' meeting attended or,
in lieu of cash payment, shares of common stock through the Company's Stock
Purchase Plan. The number of shares issued in lieu of cash fees is adjusted to
reflect the fair market value of the common stock in accordance with the
Company's Stock Purchase Plan. In addition, nonemployee directors are entitled
to receive options to purchase shares of the Company's common stock under this
plan. Total shares of approximately 22,000, 18,000, and 20,000 were issued
under this plan in 1997, 1996 and 1995, respectively. The expenses recognized
in connection with options issued to nonemployee directors was approximately
$77,000, $55,000, and $72,000 in 1997, 1996, and 1995 respectively.
33
<PAGE>
10. INTERNATIONAL OPERATIONS:
Sales, services and marketing operations outside the United States are conducted
principally through foreign sales subsidiaries and through various
representatives and distributorship arrangements. Financial information by
geographical segment is as follows (in thousands):
<TABLE>
<CAPTION>
North
America Asia Europe Eliminations Consolidated
--------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1997:
Revenue $37,050 $7,093 $8,175 $ - $52,318
Operating profit (loss) (5,414) (396) 469 - (5,341)
Total assets 26,511 3,531 4,168 (2,781) 31,429
1996:
Revenue $33,588 $8,786 $6,936 $ - $49,310
Operating profit (loss) (1,127) 1,253 1,108 - 1,234
Total assets 24,788 6,236 4,678 (4,530) 31,172
1995:
Revenue $26,785 $5,170 $5,269 $ - $37,224
Operating profit (loss) (737) 563 835 - 661
Total assets 20,981 3,960 3,243 (3,690) 24,494
</TABLE>
34
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following is a condensed summary of actual quarterly results of operations
for 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
First Second Third Fourth Total
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $10,805 $12,876 $13,433 $15,204 $52,318
Operating profit (loss) (1,450) (61) (219) (3,611) (5,341)
Income (loss) from continuing operations (1,496) (145) (394) (4,066) (6,101)
Results of discontinued operations 201 205 1,255 650 2,311
--------- -------- --------- --------- ---------
Net income (loss) $(1,295) $ 60 $ 861 $(3,416) $(3,790)
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Basic income (loss) per common share
Continuing operations $ ( .15) $ ( .01) $ ( .04) $ (.43) $ ( .63)
Discontinued operations .02 .02 .13 .07 .24
--------- -------- --------- --------- ---------
Basic income (loss) per common share $ ( .13) $ .01 $ .09 $ (.36) $ ( .39)
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Diluted income (loss) per common share:
Continuing operations $ ( .15) $ ( .01) $ ( .04) $ (.43) $ ( .63)
Discontinued operations .02 .02 .13 .07 .24
--------- -------- --------- --------- ---------
Diluted income (loss) per common share $ ( .13) $ .01 $ .09 $ (.36) $ ( .39)
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
<CAPTION>
1996
---------------------------------------------------------------------
First Second Third Fourth Total
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue $10,572 $12,423 $11,891 $14,424 $49,310
Operating profit 154 651 187 242 1,234
Income from continuing operations 126 567 162 154 1,009
Results of discontinued operations 184 188 193 196 761
--------- -------- --------- --------- ---------
Net income $ 310 $ 755 $ 355 $ 350 $ 1,770
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Basic income per common share:
Continuing operations $ .01 $ .06 $ .02 $ .02 $ .11
Discontinued operations .02 .02 .02 .02 .08
--------- -------- --------- --------- ---------
Basic income per common share $ .03 $ .08 $ .04 $ .04 $ .19
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Diluted income per common share:
Continuing operations $ .01 $ .06 $ .02 $ .01 $ .10
Discontinued operations .02 .02 .02 .02 .08
--------- -------- --------- --------- ---------
Diluted income per common share $ .03 $ .08 $ .04 $ .03 $ .18
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Fourth Shift Corporation:
We have audited the accompanying consolidated balance sheets of Fourth Shift
Corporation (a Minnesota corporation) and Subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fourth Shift Corporation and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 2, 1998
36
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 with respect to executive officers is
included under a separate caption entitled "Executive Officers" in Part I of the
Form 10-K. The information with respect to directors is incorporated by
reference to the information under the caption "Election of Directors-Nominees"
of the Company's definitive proxy statement for its May 6, 1998 Annual Meeting
of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information under the captions "Election of Directors-Director Compensation,"
"Executive Compensation - Summary Compensation Table," "Executive Compensation -
Stock Options," and "Executive Compensation - Long-Term Incentive Plan Awards"
of the Company's definitive proxy statement for its May 6, 1998 Annual Meeting
of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under caption "Security Ownership of Certain Beneficial Owners and
Management" of the Company's definitive proxy statement for its May 6, 1998
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Election of Directors-Director Compensation" of
the Company's definitive proxy statement for its May 6, 1998 Annual Meeting of
Shareholders.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements
1. See the Financial Statement information contained in Item 8 of this
Form 10-K
2. Financial Statement Schedules
No Financial Statement Schedules are required
b. Reports on Form 8-K:
None
c. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- -----------------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 4.1 of the Company's 10-Q
for the quarter ended March 31, 1994)
3.2 Bylaws of the Company, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1994)
4.1 Form of Certificate for Common Stock (incorporated by reference
to Exhibit 4.1 of Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed June 28, 1993 (File No. 33-63012))
10.1 1989 Stock Option Plan (incorporated by reference to Exhibit 10.4
of the Company's Registration Statement of Form S-1 filed May 19,
1993 (File No. 33-63012))
10.2 Fourth Shift Corporation 1994 Employee Stock Purchase Plan, as
amended (incorporated by reference to Exhibit 10.5 to the
Company's 10-K for the year ended December 31, 1994)
10.3 Fourth Shift Corporation 1993 Stock Incentive Plan, as amended
(incorporated by reference to Exhibit 10.6 to the Company's 10-K
for the year ended December 31, 1994)
10.4 Office Lease dated as of December 18, 1992 among the Company and
International Plaza Joint Venture, as amended (incorporated by
reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1 filed May 19, 1993 (File No. 33-63012))
10.5 Purchase and Sale Agreement, dated December 15, 1995, between
Fourth Shift Corporation and Interactive Group, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's 8-K
dated as of December 15, 1995)
10.6 Titanium Runtime Distribution License Agreement dated June 20,
1995 between Fourth Shift Corporation and Micro Data Base
Systems, Inc. (incorporated by reference to Exhibit 10.8 to the
Company's 10-K for the year ended December 31, 1995)
39
<PAGE>
10.7 License Agreement dated as of March 30, 1996 between Fourth Shift
Corporation and Teknekron Software Systems, Inc. (a.k.a. TIBCO)
(incorporated by reference to Exhibit 10.16 to the Company's 10-K
for the year ended December 31, 1996)
*10.8 Severance Pay Agreement dated October 21, 1997 between the
Company and Marion Melvin Stuckey
*10.9 Severance Pay Agreement dated October 21, 1997 between the
Company and Jimmie H. Caldwell
*10.10 Severance Pay Agreement dated October 21, 1997 between the
Company and David Latzke
10.11 Business Partner Agreement dated July 1, 1997 between Fourth
Shift Corporation and Micro Data Base Systems, Inc.
10.12 Tailored Technical Services Agreement dated July 1, 1997 between
Fourth Shift Corporation and Micro Data Base Systems, Inc.
10.13 Cooperative Sales Support Agreement dated July 1,1997 between
Fourth Shift Corporation and Micro Data Base Systems, Inc.
10.14 Office Lease dated November 12, 1997 between Fourth Shift
Corporation and Meridian Crossings LLC
10.15 Loan and Security Agreement dated March 2, 1998 as amended
between Fourth Shift Corporation and Silicon Valley Bank
23.1 Consent of Arthur Andersen LLP
27.0 Financial Data Schedule (For SEC use only)
</TABLE>
- ------------------------
*Management contract or compensatory plan.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 25, 1998.
Fourth Shift Corporation
By: /s/ MARION MELVIN STUCKEY
----------------------------
Marion Melvin Stuckey
Chairman and Chief Executive Officer
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 indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- -----
<S> <C> <C>
/s/ MARION MELVIN STUCKEY Chairman, Chief Executive Officer, March 25, 1998
- ------------------------------- (principal executive officer) and
Marion Melvin Stuckey Director
/s/ JIMMIE H. CALDWELL President, Chief Operating Officer and March 25, 1998
- ------------------------------- Director
Jimmie H. Caldwell
/s/ DAVID G. LATZKE Vice President and Chief Financial March 25, 1998
- ------------------------------- Officer, Treasurer and Secretary
David G. Latzke (principal financial officer)
/s/ MOLLY D. MONROE Vice President of Finance March 25, 1998
- ------------------------------- (principal accounting officer)
Molly D. Monroe
/s/ MICHAEL J. ADAMS Director March 26, 1998
- -------------------------------
Michael J. Adams
/s/ DAVID J. ALLIO Director March 26, 1998
- -------------------------------
David J. Allio
/s/ TONY J. CHRISTIANSON Director March 26, 1998
- -------------------------------
Tony J. Christianson
/s/ PORTIA ISAACSON Director March 26, 1998
- -------------------------------
Portia Isaacson
/s/ STEVE J. LAIR Director March 26, 1998
- -------------------------------
Steve J. Lair
/s/ ROBERT M. PRICE Director March 26, 1998
- -------------------------------
Robert M. Price
</TABLE>
41
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 21st day of October, 1997, between
Fourth Shift Corporation, 7900 International Drive, International Plaza, Suite
450, Bloomington, MN 55425 (such corporation, together with its subsidiaries,
hereinafter called the "Company") and M. M. Stuckey (hereinafter called
"Executive"), residing at 46 Red Birch Court, Danville, California 94506.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company under the circumstances described
herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the
best interests of the Company and its shareholders to provide stable conditions
of employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's ability to recruit highly qualified people; and
WHEREAS, Executive is a party to that certain Severance Pay Agreement
dated as of April 16, 1996 (the "Prior Agreement") and the Company wishes to
revise and restate such Agreement to ensure the continued attention of Executive
in the event of a Change of Control of the Company, as defined herein.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence of
a bid to take over control of the Company, and to induce Executive to remain in
the employ of the Company, and for other good and valuable consideration, the
Company and Executive agree as follows:
1. RESTATEMENT/TERM OF AGREEMENT.
This Agreement restates and replaces the Prior Agreement effective as
of the date hereof. This Agreement shall be for a two-year term commencing on
the date hereof and shall be automatically renewed for additional two-year terms
thereafter unless canceled in writing by either party hereto at least 60 days
prior to expiration of the initial or any renewal term; provided that this
Agreement shall continue for at least two years after a Change of Control that
occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur within
two years after such Change of Control, (x) all stock options in the Company (or
its successor as a result of the Change of Control) held by the terminated
Executive shall be accelerated so that they are fully exercisable by the
terminated Executive for the period after termination specified in such stock
options and (y) the terminated Executive shall be entitled to receive the cash
payment provided in Section 4 hereof:
(a) the Company shall have exercised its right to terminate the
Executive without cause; or
-1-
<PAGE>
(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the Executive who
desires to terminate his employment and set forth in reasonable detail the
facts and circumstances claimed to constitute Good Reason.
(ii) From and after the date of a Change in Control, the Company shall
have the right to terminate Executive from employment at any time during the
term of this Agreement for Cause (as defined in Section 3(iii) hereof), by
written notice to the Executive, specifying the particulars of the conduct of
Executive forming the basis for such termination, and Executive shall not be
entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during the
term of this Agreement, Executive shall not be removed from employment with the
Company except as provided in Section 2(i) or (ii) hereof or as a result of
Executive's Disability (as defined in Section 3(iv) hereof) or his death.
Executive's rights upon termination of employment prior to a Change in Control
or after the expiration of the term of this Agreement shall be governed by the
standard employment termination policy applicable to Executive in effect at the
time of termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective ten (10) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 promulgated under the Exchange Act), directly or indirectly,
of securities of the Company representing 30% or more of the combined
voting power of the Company's then outstanding securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its sole
and absolute discretion, that there has been a change in control of the
Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the employment
responsibilities held by Executive immediately prior to a Change in
Control. The assignment of Executive to an office that does not, or
responsibilities that do not, include the office and responsibilities
-2-
<PAGE>
of chief executive or principal executive of a publicly traded company
will not constitute assignment of comparable responsibility within the
meaning of this provision.
(b) a reduction by the Company in Executive's compensation
(including targeted bonus compensation) as in effect immediately prior
to a Change in Control;
(c) the Company's requiring Executive to be based anywhere other
than within fifty (50) miles of Executive's office location immediately
prior to a Change in Control, except for requirements of temporary
travel on the Company's business to an extent substantially consistent
with Executive's business travel obligations immediately prior to a
Change in Control;
(d) except to the extent otherwise required by applicable law, the
failure by the Company to continue in effect any benefit or compensation
plan, stock ownership plan, stock purchase plan, bonus plan, life
insurance plan, health-and-accident plan or disability plan in which
Executive is participating immediately prior to a Change in Control (or
plans providing Executive with substantially similar benefits), the
taking of any action by the Company which would adversely affect
Executive's participation in, or materially reduce Executive's benefits
under, any of such plans or deprive Executive of any material fringe
benefit enjoyed by Executive immediately prior to such Change in
Control, or the failure by the Company to provide Executive with the
number of paid vacation days to which Executive is entitled immediately
prior to such Change in Control in accordance with the Company's
vacation policy as then in effect; or
(e) the failure by the Company to obtain, as specified in Section
5(i) hereof an assumption of the obligations of the Company to perform
this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be
considered "Good Reason" if it occurs in connection with the Executive's
death or disability.
(iii) "Cause" shall mean termination by the Company of Executive's
employment based upon (a) the willful and continued failure by Executive
substantially to perform his duties and obligations (other than any such
failure resulting from his incapacity due to physical or mental illness) or
(b) the willful engaging by Executive in misconduct which is materially
injurious to the Company monetarily or otherwise. For purposes of this
paragraph, no act, or failure to act, on Executive's part shall be considered
"willful" unless done, or omitted to be done, by Executive in bad faith and
without his reasonable belief that his action or omission was in the best
interests of the Company.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term
disability plan of the Company.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to Section
2(i) hereof, Executive shall be entitled to receive the benefits specified in
this Section 4. The amounts due to Executive under subparagraphs (a) and (b)
of this Section 4 shall be paid to Executive not later than one business day
prior to the date that the termination of Executive's employment becomes
effective. Any payments due under this Agreement will be paid to Executive
or Oranco, as instructed by Executive, at Executive's sole discretion.
-3-
<PAGE>
(a) The Company shall pay to Executive:
(i) the full base salary earned by him and unpaid through the
date that the termination of Executive's employment becomes effective, at
the rate in effect at the time written notice of termination (voluntary or
involuntary) was given;
(ii) any amount earned by Executive as a bonus with respect to
the fiscal year of the Company preceding the termination of his employment
if such bonus has not theretofore been paid to Executive;
(iii) an amount equal to a pro rata portion, based on number of
days elapsed, of the bonus Executive would have earned for the year in
which termination is effective, assuming for such purposes that the Company
achieves targeted performance; and
(iv) an amount representing credit for any vacation earned or
accrued by him but not taken.
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall
(i) Pay as severance pay to Executive a lump-sum cash amount
equal to three (3) times Executive's average annualized cash and equivalent
compensation for the period consisting of the Executive's most recent five
taxable years ending before the date on which a Change in Control occurs
(or such portion of such period during which Executive performed services
for the Company);
(ii) Arrange to provide Executive and Executive's dependents (if
applicable) with welfare benefits (including, without limitation, medical,
life, and individual disability insurance coverage), perquisites and other
employee benefits, for the 36 months following such termination, that
provide substantially similar benefits, in terms of aggregate monetary
value, to Executive and Executive's dependents (if applicable) at
substantially similar costs to Executive as the welfare benefits,
perquisites and other employee benefits in effect immediately prior to the
Change in Control (or as in effect following the Change in Control, if
greater).
(c) The Company shall also pay to Executive all legal fees and
expenses incurred by Executive in seeking to obtain or enforce any right or
benefit provided to Executive by this Agreement, including any and all expenses
of arbitration in accordance with Section 12 below.
(d) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise. Except as provided in Section 4(b)(ii), the amount of any payment
or benefit provided in this Section 4 shall not be reduced by any
compensation earned by Executive as a result of any employment by another
employer.
(e) In the event Executive becomes entitled to payments under this
Section 4, the Company shall cause its independent auditors promptly to review,
at the Company's sole expense, the applicability of Section 4999 of the Code to
such payments. If such auditors shall determine that any payment or
distribution of any type by the Company to Executive or for Executive's benefit,
whether paid or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise (the "Total Payments"), would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are collectively referred to as the "Excise Tax"), then
Executive shall be entitled to receive an additional
-4-
<PAGE>
cash payment (a "Gross-Up Payment") within 30 days of such determination
equal to an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, Executive would
retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Total Payments. For purposes of the foregoing determination, Executive's
tax rate shall be deemed to be the highest statutory marginal state and
Federal tax rate (on a combined basis) (including Executive's share of
F.I.C.A. and Medicare taxes) then in effect. If no determination by the
Company's auditors is made prior to the time a tax return reflecting the
Total Payments is required to be filed by Executive, Executive will be
entitled to receive a Gross-Up Payment calculated on the basis of the Total
Payments reported by Executive in such tax return, within 30 days of the
filing of such tax return. In all events, if any tax authority determines
that a greater Excise Tax should be imposed upon the Total Payments than is
determined by the Company's independent auditors or reflected in Executive's
tax return pursuant to this Section 6, Executive shall be entitled to receive
the full Gross-Up Payment calculated on the basis of the amount of Excise Tax
determined to be payable by such tax authority from the Company within 30
days of such determination.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
(i) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise), to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to Executive, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for purposes
of implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Termination Date. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by
this Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given
when
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<PAGE>
delivered personally or mailed by regular, certified or registered mail,
return receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn.: Controller
If to Executive, to:
M. M. Stuckey
46 Red Birch Court
Danville, California 94506
Either party hereto may change its address for purposes of this Section 7 by
giving fifteen (15) days' prior notice to the other party hereto.
8. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be invalid
or unenforceable, the remainder of this Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable shall not be affected thereby, and each term and
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
9. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
10. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurrence of a "Change
of Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for
Non-Administered Arbitration of Business Disputes in effect as of the date of
this Agreement by a sole arbitrator. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. - 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration shall be Minneapolis,
Minnesota. The arbitrator is empowered to award damages in excess of
compensatory damages.
12. ENTIRE AGREEMENT. This Agreement supersedes any and all other
oral or written agreements or policies made relating to the subject matter
hereof, including the Prior Agreement;
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PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in
accordance with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in its name by a duly authorized officer, and Executive has hereunto set his
hand, all as of the date first written above.
Fourth Shift Corporation
By /s/ DAVID G. LATZKE
---------------------------
Its VP & CFO
-----------------------
/s/ MARION MELVIN STUCKEY
------------------------------
M. M. Stuckey
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EXHIBIT 10.9
AMENDED AND RESTATED
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 21st day of October, 1997, between
Fourth Shift Corporation, 7900 International Drive, International Plaza,
Suite 450, Bloomington, MN 55425 (such corporation, together with its
subsidiaries, hereinafter called the "Company") and J. H. Caldwell
(hereinafter called "Executive"), residing at 6209 St. Albans Circle, Edina,
Minnesota 55436.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company under the circumstances described
herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the best
interests of the Company and its shareholders to provide stable conditions of
employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's ability to recruit highly qualified people; and
WHEREAS, Executive is a party to that certain Severance Pay Agreement
dated as of April 16, 1996 (the "Prior Agreement") and the Company wishes to
revise and restate such Agreement to ensure the continued attention of
Executive in the event of a Change of Control of the Company, as defined
herein.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence
of a bid to take over control of the Company, and to induce Executive to
remain in the employ of the Company, and for other good and valuable
consideration, the Company and Executive agree as follows:
1. RESTATEMENT/TERM OF AGREEMENT.
This Agreement restates and replaces the Prior Agreement effective as of
the date hereof. This Agreement shall be for a two-year term commencing on
the date hereof and shall be automatically renewed for additional two-year
terms thereafter unless canceled in writing by either party hereto at least
60 days prior to expiration of the initial or any renewal term; provided that
this Agreement shall continue for at least two years after a Change of
Control that occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur
within two years after such Change of Control, (x) all stock options in the
Company (or its successor as a result of the Change of Control) held by the
terminated Executive shall be accelerated so that they are fully exercisable
by the terminated Executive for the period after termination specified in
such stock options and (y) the terminated Executive shall be entitled to
receive the cash payment provided in Section 4 hereof:
(a) the Company shall have exercised its right to terminate the
Executive without cause; or
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<PAGE>
(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the Executive
who desires to terminate his employment and set forth in reasonable detail
the facts and circumstances claimed to constitute Good Reason.
(ii) From and after the date of a Change in Control, the Company shall
have the right to terminate Executive from employment at any time during the
term of this Agreement for Cause (as defined in Section 3(iii) hereof), by
written notice to the Executive, specifying the particulars of the conduct of
Executive forming the basis for such termination, and Executive shall not be
entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during the term of
this Agreement, Executive shall not be removed from employment with the
Company except as provided in Section 2(i) or (ii) hereof or as a result of
Executive's Disability (as defined in Section 3(iv) hereof) or his death.
Executive's rights upon termination of employment prior to a Change in
Control or after the expiration of the term of this Agreement shall be
governed by the standard employment termination policy applicable to
Executive in effect at the time of termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective ten (10) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding
securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in control
of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the
employment responsibilities held by Executive immediately prior to a
Change in Control;
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<PAGE>
(b) a reduction by the Company in Executive's compensation
(including targeted bonus compensation) as in effect immediately prior
to a Change in Control;
(c) the Company's requiring Executive to be based anywhere other
than within fifty (50) miles of Executive's office location
immediately prior to a Change in Control, except for requirements of
temporary travel on the Company's business to an extent substantially
consistent with Executive's business travel obligations immediately
prior to a Change in Control;
(d) except to the extent otherwise required by applicable law,
the failure by the Company to continue in effect any benefit or
compensation plan, stock ownership plan, stock purchase plan, bonus
plan, life insurance plan, health-and-accident plan or disability plan
in which Executive is participating immediately prior to a Change in
Control (or plans providing Executive with substantially similar
benefits), the taking of any action by the Company which would
adversely affect Executive's participation in, or materially reduce
Executive's benefits under, any of such plans or deprive Executive of
any material fringe benefit enjoyed by Executive immediately prior to
such Change in Control, or the failure by the Company to provide
Executive with the number of paid vacation days to which Executive is
entitled immediately prior to such Change in Control in accordance
with the Company's vacation policy as then in effect; or
(e) the failure by the Company to obtain, as specified in
Section 5(i) hereof an assumption of the obligations of the Company to
perform this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be
considered "Good Reason" if it occurs in connection with the Executive's
death or disability.
(iii) "Cause" shall mean termination by the Company of Executive's
employment based upon (a) the willful and continued failure by Executive
substantially to perform his duties and obligations (other than any such
failure resulting from his incapacity due to physical or mental illness) or
(b) the willful engaging by Executive in misconduct which is materially
injurious to the Company monetarily or otherwise. For purposes of this
paragraph, no act, or failure to act, on Executive's part shall be considered
"willful" unless done, or omitted to be done, by Executive in bad faith and
without his reasonable belief that his action or omission was in the best
interests of the Company.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term
disability plan of the Company.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to Section
2(i) hereof, Executive shall be entitled to receive the benefits specified in
this Section 4. The amounts due to Executive under subparagraphs (a) and (b)
of this Section 4 shall be paid to Executive not later than one business day
prior to the date that the termination of Executive's employment becomes
effective. Any payments due under this Agreement will be paid to Executive
or Oranco, as instructed by Executive, at Executive's sole discretion.
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<PAGE>
(a) The Company shall pay to Executive:
(i) the full base salary earned by him and unpaid through the
date that the termination of Executive's employment becomes effective, at
the rate in effect at the time written notice of termination (voluntary or
involuntary) was given;
(ii) any amount earned by Executive as a bonus with respect to
the fiscal year of the Company preceding the termination of his employment
if such bonus has not theretofore been paid to Executive;
(iii) an amount equal to a pro rata portion, based on number of
days elapsed, of the bonus Executive would have earned for the year in
which termination is effective, assuming for such purposes that the Company
achieves targeted performance; and
(iv) an amount representing credit for any vacation earned or
accrued by him but not taken.
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall
(i) Pay as severance pay to Executive a lump-sum cash amount
equal to two (2) times Executive's average annualized cash and equivalent
compensation for the period consisting of the Executive's most recent five
taxable years ending before the date on which a Change in Control occurs
(or such portion of such period during which Executive performed services
for the Company);
(ii) Arrange to provide Executive and Executive's dependents (if
applicable) with welfare benefits (including, without limitation, medical,
life, and individual disability insurance coverage), perquisites and other
employee benefits, for the 36 months following such termination, that
provide substantially similar benefits, in terms of aggregate monetary
value, to Executive and Executive's dependents (if applicable) at
substantially similar costs to Executive as the welfare benefits,
perquisites and other employee benefits in effect immediately prior to the
Change in Control (or as in effect following the Change in Control, if
greater).
(c) The Company shall also pay to Executive all legal fees and expenses
incurred by Executive in seeking to obtain or enforce any right or benefit
provided to Executive by this Agreement, including any and all expenses of
arbitration in accordance with Section 11 below.
(d) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise. Except as provided in Section 4(b)(ii), the amount of any payment
or benefit provided in this Section 4 shall not be reduced by any
compensation earned by Executive as a result of any employment by another
employer.
(e) In the event Executive becomes entitled to payments under this
Section 4, the Company shall cause its independent auditors promptly to
review, at the Company's sole expense, the applicability of Section 4999 of
the Code to such payments. If such auditors shall determine that any payment
or distribution of any type by the Company to Executive or for Executive's
benefit, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the "Total Payments"), would be
subject to the excise tax imposed by Section 4999 of the Code, or any
interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are collectively referred to
as the "Excise Tax"), then Executive shall be entitled to receive an
additional
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<PAGE>
cash payment (a "Gross-Up Payment") within 30 days of such determination
equal to an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, Executive would
retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Total Payments. For purposes of the foregoing determination, Executive's
tax rate shall be deemed to be the highest statutory marginal state and
Federal tax rate (on a combined basis) (including Executive's share of
F.I.C.A. and Medicare taxes) then in effect. If no determination by the
Company's auditors is made prior to the time a tax return reflecting the
Total Payments is required to be filed by Executive, Executive will be
entitled to receive a Gross-Up Payment calculated on the basis of the Total
Payments reported by Executive in such tax return, within 30 days of the
filing of such tax return. In all events, if any tax authority determines
that a greater Excise Tax should be imposed upon the Total Payments than is
determined by the Company's independent auditors or reflected in Executive's
tax return pursuant to this Section 6, Executive shall be entitled to receive
the full Gross-Up Payment calculated on the basis of the amount of Excise Tax
determined to be payable by such tax authority from the Company within 30
days of such determination.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
(i) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise), to all or substantially all
of the business and/or assets of the Company, by agreement in form and
substance satisfactory to Executive, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company
would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Termination Date. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 5(i) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation
of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
heirs, distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver
by either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time.
7. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by
this Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given
when
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<PAGE>
delivered personally or mailed by regular, certified or registered mail,
return receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn.: Controller
If to Executive, to:
J. H. Caldwell
6209 St. Albans Circle
Edina, Minnesota 55436
Either party hereto may change its address for purposes of this Section 7 by
giving fifteen (15) days' prior notice to the other party hereto.
8. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application
of such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to
the fullest extent permitted by law.
9. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
10. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurrence of a "Change
of Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for
Non-Administered Arbitration of Business Disputes in effect as of the date of
this Agreement by a sole arbitrator. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. - 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration shall be Minneapolis,
Minnesota. The arbitrator is empowered to award damages in excess of
compensatory damages.
12. ENTIRE AGREEMENT. This Agreement supersedes any and all other oral
or written agreements or policies made relating to the subject matter hereof,
including the Prior Agreement;
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<PAGE>
PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in
accordance with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in its name by a duly authorized officer, and Executive has hereunto set his
hand, all as of the date first written above.
Fourth Shift Corporation
By /s/ MARION MELVIN STUCKEY
--------------------------------
Its CEO
----------------------------
/s/ JIMMIE H. CALDWELL
------------------------------------
J. H. Caldwell
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EXHIBIT 10.10
AMENDED AND RESTATED
SEVERANCE PAY AGREEMENT
This Agreement is made as of the 21st day of October, 1997, between
Fourth Shift Corporation, 7900 International Drive, International Plaza,
Suite 450, Bloomington, MN 55425 (such corporation, together with its
subsidiaries, hereinafter called the "Company") and David G. Latzke
(hereinafter called "Executive"), residing at 19600 Sweetwater Curve,
Shorewood, Minnesota 55331.
WITNESSETH THAT:
WHEREAS, it is the purpose of this Agreement to specify the financial
arrangements that the Company will provide to the Executive upon Executive's
separation from employment with the Company under the circumstances described
herein; and
WHEREAS, this Agreement is adopted in the belief that it is in the best
interests of the Company and its shareholders to provide stable conditions of
employment for Executive, thereby minimizing personnel turnover and enhancing
the Company's ability to recruit highly qualified people; and
WHEREAS, Executive is a party to that certain Severance Pay Agreement
dated as of April 16, 1996 (the "Prior Agreement") and the Company wishes to
revise and restate such Agreement to ensure the continued attention of
Executive in the event of a Change of Control of the Company, as defined
herein.
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Executive notwithstanding the possibility, threat or occurrence
of a bid to take over control of the Company, and to induce Executive to
remain in the employ of the Company, and for other good and valuable
consideration, the Company and Executive agree as follows:
1. RESTATEMENT/TERM OF AGREEMENT.
This Agreement restates and replaces the Prior Agreement effective as of
the date hereof. This Agreement shall be for a two-year term commencing on
the date hereof and shall be automatically renewed for additional two-year
terms thereafter unless canceled in writing by either party hereto at least
60 days prior to expiration of the initial or any renewal term; provided that
this Agreement shall continue for at least two years after a Change of
Control that occurs during the term of this Agreement.
2. TERMINATION OF EMPLOYMENT.
(i) If a Change in Control (as defined in Section 3(i) hereof) occurs
during the term of this Agreement and any of the following events occur
within two years after such Change of Control, (x) all stock options in the
Company (or its successor as a result of the Change of Control) held by the
terminated Executive shall be accelerated so that they are fully exercisable
by the terminated Executive for the period after termination specified in
such stock options and (y) the terminated Executive shall be entitled to
receive the cash payment provided in Section 4 hereof:
(a) the Company shall have exercised its right to terminate the
Executive without cause; or
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(b) the Executive shall have voluntarily exercised his option to
terminate his employment for Good Reason (as defined in Section 3(ii)
hereof). Notice of election of this option must identify the
Executive who desires to terminate his employment and set forth in
reasonable detail the facts and circumstances claimed to constitute
Good Reason.
(ii) From and after the date of a Change in Control, the Company shall
have the right to terminate Executive from employment at any time during the
term of this Agreement for Cause (as defined in Section 3(iii) hereof), by
written notice to the Executive, specifying the particulars of the conduct of
Executive forming the basis for such termination, and Executive shall not be
entitled to any payment pursuant to Section 4 for termination for Cause.
(iii) From and after the date of a Change in Control during the term of
this Agreement, Executive shall not be removed from employment with the
Company except as provided in Section 2(i) or (ii) hereof or as a result of
Executive's Disability (as defined in Section 3(iv) hereof) or his death.
Executive's rights upon termination of employment prior to a Change in
Control or after the expiration of the term of this Agreement shall be
governed by the standard employment termination policy applicable to
Executive in effect at the time of termination.
Any notice given by Executive pursuant to this Section 2 shall be
effective ten (10) business days after the date it is given by Executive.
3. DEFINITIONS
(i) A "Change in Control" shall mean the occurrence of any of the
following events as a result of a transaction or series of transactions:
(a) a change in control of the Company of a nature required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), whether or not the Company is then subject to such
reporting requirement;
(b) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding
securities;
(c) individuals who at the date hereof constitute the Board of
Directors of the Company cease to constitute a majority thereof,
PROVIDED THAT such change is the direct or indirect result of a proxy
fight and contested election for positions on the Board; or
(d) the Board of Directors of the Company determines, in its
sole and absolute discretion, that there has been a change in control
of the Company.
(ii) "Good Reason" shall mean the occurrence of any of the following
events:
(a) the assignment to Executive of employment responsibilities
which are not of comparable responsibility and status as the
employment responsibilities held by Executive immediately prior to a
Change in Control;
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(b) a reduction by the Company in Executive's compensation
(including targeted bonus compensation) as in effect immediately prior
to a Change in Control;
(c) the Company's requiring Executive to be based anywhere other
than within fifty (50) miles of Executive's office location
immediately prior to a Change in Control, except for requirements of
temporary travel on the Company's business to an extent substantially
consistent with Executive's business travel obligations immediately
prior to a Change in Control;
(d) except to the extent otherwise required by applicable law,
the failure by the Company to continue in effect any benefit or
compensation plan, stock ownership plan, stock purchase plan, bonus
plan, life insurance plan, health-and-accident plan or disability plan
in which Executive is participating immediately prior to a Change in
Control (or plans providing Executive with substantially similar
benefits), the taking of any action by the Company which would
adversely affect Executive's participation in, or materially reduce
Executive's benefits under, any of such plans or deprive Executive of
any material fringe benefit enjoyed by Executive immediately prior to
such Change in Control, or the failure by the Company to provide
Executive with the number of paid vacation days to which Executive is
entitled immediately prior to such Change in Control in accordance
with the Company's vacation policy as then in effect; or
(e) the failure by the Company to obtain, as specified in
Section 5(i) hereof an assumption of the obligations of the Company to
perform this Agreement by any successor to the Company.
Notwithstanding the foregoing, none of the forgoing events shall be
considered "Good Reason" if it occurs in connection with the Executive's
death or disability.
(iii) "Cause" shall mean termination by the Company of Executive's
employment based upon (a) the willful and continued failure by Executive
substantially to perform his duties and obligations (other than any such
failure resulting from his incapacity due to physical or mental illness) or
(b) the willful engaging by Executive in misconduct which is materially
injurious to the Company monetarily or otherwise. For purposes of this
paragraph, no act, or failure to act, on Executive's part shall be considered
"willful" unless done, or omitted to be done, by Executive in bad faith and
without his reasonable belief that his action or omission was in the best
interests of the Company.
(iv) "Disability" shall mean any physical or mental condition which
would qualify Executive for a disability benefit under the long-term
disability plan of the Company.
4. BENEFITS UPON TERMINATION UNDER SECTION 2(i)
Upon the termination of the employment of Executive pursuant to Section
2(i) hereof, Executive shall be entitled to receive the benefits specified in
this Section 4. The amounts due to Executive under subparagraphs (a) and (b)
of this Section 4 shall be paid to Executive not later than one business day
prior to the date that the termination of Executive's employment becomes
effective. Any payments due under this Agreement will be paid to Executive
or Oranco, as instructed by Executive, at Executive's sole discretion.
-3-
<PAGE>
(a) The Company shall pay to Executive:
(i) the full base salary earned by him and unpaid through the
date that the termination of Executive's employment becomes effective, at
the rate in effect at the time written notice of termination (voluntary or
involuntary) was given;
(ii) any amount earned by Executive as a bonus with respect to
the fiscal year of the Company preceding the termination of his employment
if such bonus has not theretofore been paid to Executive;
(iii) an amount equal to a pro rata portion, based on number of
days elapsed, of the bonus Executive would have earned for the year in
which termination is effective, assuming for such purposes that the Company
achieves targeted performance; and
(iv) an amount representing credit for any vacation earned or
accrued by him but not taken.
(b) In lieu of any further base salary payments to Executive for
periods subsequent to the date that the termination of Executive's employment
becomes effective, the Company shall
(i) Pay as severance pay to Executive a lump-sum cash amount
equal to one and one half (1 1/2) times Executive's average annualized cash
and equivalent compensation for the period consisting of the Executive's
most recent five taxable years ending before the date on which a Change in
Control occurs (or such portion of such period during which Executive
performed services for the Company);
(ii) Arrange to provide Executive and Executive's dependents (if
applicable) with welfare benefits (including, without limitation, medical,
life, and individual disability insurance coverage), perquisites and other
employee benefits, for the 6 months following such termination, that
provide substantially similar benefits, in terms of aggregate monetary
value, to Executive and Executive's dependents (if applicable) at
substantially similar costs to Executive as the welfare benefits,
perquisites and other employee benefits in effect immediately prior to the
Change in Control (or as in effect following the Change in Control, if
greater).
(c) The Company shall also pay to Executive all legal fees and expenses
incurred by Executive in seeking to obtain or enforce any right or benefit
provided to Executive by this Agreement, including any and all expenses of
arbitration in accordance with Section 11 below.
(d) Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise. Except as provided in Section 4(b)(ii), the amount of any payment
or benefit provided in this Section 4 shall not be reduced by any
compensation earned by Executive as a result of any employment by another
employer.
(e) In the event Executive becomes entitled to payments under this
Section 4, the Company shall cause its independent auditors promptly to
review, at the Company's sole expense, the applicability of Section 4999 of
the Code to such payments. If such auditors shall determine that any payment
or distribution of any type by the Company to Executive or for Executive's
benefit, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the "Total Payments"), would be
subject to the excise tax imposed by Section 4999 of the Code, or any
interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are collectively referred to
as the "Excise Tax"), then Executive shall be entitled to receive an
additional
-4-
<PAGE>
cash payment (a "Gross-Up Payment") within 30 days of such determination
equal to an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, Executive would
retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Total Payments. For purposes of the foregoing determination, Executive's
tax rate shall be deemed to be the highest statutory marginal state and
Federal tax rate (on a combined basis) (including Executive's share of
F.I.C.A. and Medicare taxes) then in effect. If no determination by the
Company's auditors is made prior to the time a tax return reflecting the
Total Payments is required to be filed by Executive, Executive will be
entitled to receive a Gross-Up Payment calculated on the basis of the Total
Payments reported by Executive in such tax return, within 30 days of the
filing of such tax return. In all events, if any tax authority determines
that a greater Excise Tax should be imposed upon the Total Payments than is
determined by the Company's independent auditors or reflected in Executive's
tax return pursuant to this Section 6, Executive shall be entitled to receive
the full Gross-Up Payment calculated on the basis of the amount of Excise Tax
determined to be payable by such tax authority from the Company within 30
days of such determination.
5. SUCCESSORS; BINDING AGREEMENT; ASSIGNMENT.
(i) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise), to all or substantially all
of the business and/or assets of the Company, by agreement in form and
substance satisfactory to Executive, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company
would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive terminated his
employment after a Change in Control for Good Reason, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Termination Date. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 5(i) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation
of law.
(ii) This Agreement is personal to Executive and Executive may not
assign or transfer any part of his rights or duties hereunder, or any
compensation due to him hereunder, to any other person. Notwithstanding the
foregoing, this Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
heirs, distributees, devisees and legatees.
6. MODIFICATION; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Executive and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver
by either party hereto at any time of any breach by the other party hereto
of, or compliance with, any condition or provision shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time.
7. NOTICE. All notices, requests, demands and all other
communications required or permitted by either party to the other party by
this Agreement (including, without limitation, any notice of termination of
employment) shall be in writing and shall be deemed to have been duly given
when
-5-
<PAGE>
delivered personally or mailed by regular, certified or registered mail,
return receipt requested, at the address of the other party, as follows:
If to the Company, to:
Fourth Shift Corporation
7900 International Drive
International Plaza
Suite 450
Bloomington, MN 55425
Attn.: Controller
If to Executive, to:
David G. Latzke
19600 Sweetwater Curve
Shorewood, Minnesota 55331
Either party hereto may change its address for purposes of this Section 7 by
giving fifteen (15) days' prior notice to the other party hereto.
8. SEVERABILITY. If any term or provision of this Agreement or the
application hereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application
of such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to
the fullest extent permitted by law.
9. HEADINGS. The headings in this Agreement are inserted for
convenience or reference only and shall not be a part of or control or affect
the meaning of this Agreement.
10. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11. GOVERNING LAW/ARBITRATION. This Agreement has been executed and
delivered in the State of Minnesota and shall in all respects be governed by,
and construed and enforced in accordance with, the laws of the State of
Minnesota, including all matters of construction, validity and performance.
Notwithstanding the foregoing, any dispute as to the occurrence of a "Change
of Control," or as to "Good Reason," shall be settled by final and binding
arbitration in accordance with the Center for Public Resources Rules for
Non-Administered Arbitration of Business Disputes in effect as of the date of
this Agreement by a sole arbitrator. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. - 1-16, and judgment upon the
award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration shall be Minneapolis,
Minnesota. The arbitrator is empowered to award damages in excess of
compensatory damages.
12. ENTIRE AGREEMENT. This Agreement supersedes any and all other oral
or written agreements or policies made relating to the subject matter hereof,
including the Prior Agreement;
-6-
<PAGE>
PROVIDED THAT, this Agreement shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in
accordance with their terms.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
in its name by a duly authorized officer, and Executive has hereunto set his
hand, all as of the date first written above.
Fourth Shift Corporation
By /s/ MARION MELVIN STUCKEY
------------------------------------
Its CEO
--------------------------------
/s/ DAVID G. LATZKE
---------------------------------------
David G. Latzke
-7-
<PAGE>
EXHIBIT 10.11
mdbs
Micro Data Base Systems, Inc.
Business Partner Agreement
This Agreement is between Fourth Shift Corporation (hereinafter referred to
as "Customer") and Micro Data Base Systems, Inc. (hereinafter referred to as
"mdbs").
WHEREAS: Customer desires to become a Business Partner of mdbs by fulfilling
the requirements thereof; and
WHEREAS: the parties have entered into a Tailored Technical Service
Agreement and a Cooperative Sales Support Agreement, copies of which are
attached hereto; and
WHEREAS: the parties recognize the benefits and responsibilities associated
with this Business Partner relationship.
THEREFORE, for due consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. ENTITLEMENTS AND OBLIGATIONS
a) Customer shall be accorded the status of Business Partner and shall be
entitled to all the rights and privileges thereof.
b) Customer shall receive Business Partner Pricing, as defined in
Addendum I of this Agreement, provided Customer is in full compliance
with the terms of this Agreement, the Tailored Technical Services
Agreement, and the Cooperative Sales Support Agreement.
c) In order to be a Business Partner, Customer must be a licensed end
user of mdbs Development System software.
d) Customer agrees that the contents of this Agreement and its Addenda,
and any extensions or modifications thereto, shall be held in strict
confidence and not released to any third party without the prior
written consent of mdbs, or as required by a court of competent
jurisdiction. This obligation shall survive termination of this
Agreement.
2. TERM
a) The term of this Agreement is July 1, 1997 through June 30, 1999.
b) mdbs shall have the right to terminate this Agreement in the event of
a breach by Customer by giving Customer written notice of termination.
This Agreement shall also terminate upon the termination or expiration
of either the Tailored Technical Services Agreement, or the
Cooperative Sales Support Agreement. A breach by Customer under
either the Tailored Technical Services Agreement or the Cooperative
Sales Support Agrement shall constitute a breach hereunder, and in
such event mdbs shall have the right to terminate this Agreement upon
written notice to Customer. A breach or termination of any of
Customer's End User or Runtime Distribution License Agreements shall
also constitute a breach hereunder, and in such event mdbs shall have
the right to terminate this Agreement upon written notice to Customer.
c) Upon termination of this Agreement, for any reason, all rights and
privileges of Customer regarding this Business Partner Agreement,
including but not limited to Business Partner pricing, shall cease
immediately, and mdbs' then current list prices, with no quantity or
other discounts, shall apply to any and all transactions from and
after the date of breach giving rise to mdbs' right to terminate. All
outstanding obligations of the parties existing at the time of any
such termination shall remain in full force and effect. Upon
termination, Customer will remit any appropriate price adjustments,
including that for any unused tokens. Any End User License Agreement
or Runtime Distribution License Agreement shall remain in full force
and effect unless and until terminated pursuant to those agreements.
d) In the event that termination of this Agreement is the result of
non-payment, violation of licensing agreements, or any other breach
of applicable agreements, mdbs will be entitled to all available
damages and remedies provided under all applicable agreements, and
as otherwise provided by law, including reimbursement for reasonable
attorney's fees and enforcement costs.
3. MISCELLANEOUS
a) No employment, joint venture, partnership or agency relationship is
created by this Agreement. Customer has no right or authority to bind
mdbs to any obligation or in any other manner. This Agreement is
governed by the laws of the State of Indiana, the United States and
the Universal Copyright Convention. Disputes, claims, and litigation
under this Agreement shall be subject to the exclusive venue and
jurisdiction of a court of competent authority in Tippecanoe County
in Indiana. This Agreement, the Tailored Technical Services
Agreement, and the Cooperative Sales Support Agreement represent the
entire agreement between the parties regarding the subject matter
pertaining hereto; no verbal representations are binding; any
amendment to this Agreement must be signed by both parties to be of
any force or effect.
b) If any provision of this Agreement (or portion thereof) is determined
to be invalid or unenforceable, the remaining provisions of this
Agreement shall not be affected thereby and shall be enforceable as
though said invalid or unenforecable provision (or portion thereof) is
not contained in this Agreement. The failure of either party to this
Agreement to insist upon the strict performance of any of the
provisions contained herein shall in no way constitute a waiver by
either in the performance of or compliance with any of the terms and
conditions set forth in this Agreement.
c) This Agreement may not be assigned without the prior written consent
of mdbs, which such consent will not be unreasonably withheld. mdbs
reserves the right to assign this Agreement.
Signed: Fourth Shift Corporation Micro Data Base Systems, Inc.
/s/ DAVID G. LATZKE August 22, 1997 /s/ CAROL A. MALLETT September 3, 1997
- ------------------------------------- ----------------------------------------
Signature and Date Signature and Date
David G. Latzke VP & CFO Carol A. Mallett Contract Administrator
- ------------------------------------- ----------------------------------------
Name and Title Name and Title
<PAGE>
EXHIBIT 10.12
mdbs
Micro Data Base Systems, Inc.
TAILORED TECHNICAL SERVICES AGREEMENT
This Agreement is between Fourth Shift Corporation (hereinafter referred to
as "Customer") and Micro Data Base Systems, Inc. (hereinafter referred to as
"mdbs").
WHEREAS: Customer desires a Tailored Technical Services Agreement to meet
its specific requirements; and
WHEREAS: mdbs will provide Customer with services and other support at the
rates and conditions set forth herein; and
WHEREAS: the parties intend to enter into an mdbs Business Partner Agreement.
NOW, THEREFORE, for due consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. ENTITLEMENTS AND OBLIGATIONS
a) mdbs will provide the services described in detail on Addendum I to
this Agreement.
b) Customer will provide payment(s) in accordance with the schedule on
Addendum II to this Agreement. Tailored Technical Services fees are
non-refundable.
c) For any breach of this or related Agreements, any discounts will end
and current list prices shall apply.
d) In order to execute this Agreement, Customer must be a licensed end
user of mdbs Development System software.
e) Customer agrees that the contents of this Agreement and its Addenda,
and any extensions or modifications thereto, shall be held in strict
confidence and not released to any third party without the prior
written consent of mdbs, or as required by a court of competent
jurisdiction. This obligation shall survive termination of this
Agreement.
2. TERM
a) The term of this Agreement is July 1, 1997 through June 30, 1998.
b) If a Business Partner Agreement is in effect, any termination or
expiration of this Agreement shall concurrently terminate the Business
Partner Agreement, and Customer will no longer be entitled to the
rights and privileges of Business Partner status. mdbs shall have
the right to terminate this Agreement in the event of a breach by
Customer by giving Customer written notice of termination. A
breach by Customer under either the Business Partner Agreement or
the Cooperative Sales Support Agreement shall constitute a breach
hereunder, and in such event mdbs shall have the right to terminate
this Agreement upon written notice to Customer. A breach or
termination of any of Customer's End User or Runtime Distribution
License Agreements shall also constitute a breach hereunder, and in
such event mdbs shall have the right to terminate this Agreement
upon written notice to Customer.
c) For any breach of this Agreement, as well as overdue payment, mdbs
shall have the right to immediately suspend all support services
including Technical Support Releases, and current list prices
shall apply for any other products and services.
d) In the event that termination of this Agreement is the result of
non-payment, violation of licensing agreements, or any other breach
of applicable agreements, mdbs will be entitled to all available
damages and remedies provided under all applicable agreements, and
as otherwise provided by law, including reimbursement for
reasonable attorney's fees and enforcement costs.
3. MISCELLANEOUS
a) No employment, joint venture, partnership or agency relationship is
created by this Agreement. Customer has no right or authority to
bind mdbs to any obligation or in any other manner. This Agreement
is governed by the laws of the State of Indiana, the United States
and the Universal Copyright Convention. Disputes, claims, and
litigation under this Agreement shall be subject to the exclusive
venue and jurisdiction of a court of competent authority in
Tippecanoe County in Indiana. This Agreement represents the entire
agreement between the parties regarding the subject matter
pertaining hereto; no verbal representations are binding; any
amendment to this Agreement must be signed by both parties to be of
any force or effect.
b) If any provision of this Agreement (or portion thereof) is
determined to be invalid or unenforceable, the remaining provisions
of this Agreement shall not be affected thereby and shall be
enforceable as though said invalid or unenforceable provision (or
portion thereof) is not contained in this Agreement. The failure of
either party to this Agreement to insist upon the strict performance
of any of the provisions contained herein shall in no way constitute
a waiver by either in the performance of or compliance with any of
the terms and conditions set forth in this Agreement.
c) This Agreement may not be assigned without the prior written consent
of mdbs, which such consent will not be unreasonably withheld. mdbs
reserves the right to assign this Agreement.
Signed: Fourth Shift Corporation Micro Data Base Systems, Inc.
/s/ DAVID G. LATZKE /s/ CAROL A. MALLETT
- ------------------------------------- ---------------------------------------
Signature Signature
David G. Latzke VP & CFO Carol A. Mallett Contract Administrator
- ------------------------------------- ----------------------------------------
Name and Title Name and Title
August 22, 1997 September 3, 1997
- ------------------------------------- ----------------------------------------
Date Date
<PAGE>
EXHIBIT 10.13
mdbs
Micro Data Base Systems, Inc.
COOPERATIVE SALES SUPPORT AGREEMENT
This Agreement is between Fourth Shift Corporation (hereinafter referred to
as "Customer") and Micro Data Base Systems, Inc. (hereinafter referred to as
"mdbs").
WHEREAS: Customer desires to enter into a Cooperative Sales Support
Agreement with mdbs; and
WHEREAS: mdbs also desires to enter into a Cooperative Sales Support Agreement
with Customer; and
WHEREAS: the parties intend to enter into an mdbs Business Partner Agreement.
NOW, THEREFORE, for due consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. ENTITLEMENTS AND OBLIGATIONS
a) mdbs and Customer will perform the cooperative sales support activities
described in detail on Addendum I to this Agreement.
b) mdbs and Customer agree to bear their own expenses related to this
Cooperative Sales Support Agreement unless otherwise specifically
agreed.
c) For any breach of this or related Agreements, any discounts will end
and current list prices shall apply.
d) In order to execute this Agreement, Customer must be a licensed end
user of mdbs Development System software.
e) Customer agrees that the contents of this Agreement and its Addenda,
and any extensions or modifications thereto, shall be held in strict
confidence and not released to any third party without the prior
written consent of mdbs, or as required by a court of competent
jurisdiction. This obligation shall survive termination of this
Agreement.
2. TERM
a) The term of this Agreement is July 1, 1997 through June 30, 1998.
b) If a Business Partner Agreement is in effect, any termination or
expiration of this Agreement shall concurrently terminate the Business
Partner Agreement, and Customer will no longer be entitled to the
rights and privileges of Business Partner status. mdbs shall have the
right to terminate this Agreement in the event of a breach by Customer
by giving Customer written notice of termination. A breach by
Customer under either the Business Partner Agreement or the Tailored
Technical Services Agreement shall constitute a breach hereunder, and
in such event mdbs shall have the right to terminate this Agreement
upon written notice to Customer. A breach or termination of any of
Customer's End User or Runtime Distribution License Agreements shall
also constitute a breach hereunder, and in such event mdbs shall have
the right to terminate this Agreement upon written notice to Customer.
c) In the event that termination of this Agreement is the result of
non-payment, violation of licensing agreements, or any other breach of
applicable agreements, mdbs will be entitled to all available damages
and remedies provided under all applicable agreements, and as
otherwise provided by law, including reimbursement for reasonable
attorney's fees and enforcement costs.
3. MISCELLANEOUS
a) No employment, joint venture, partnership or agency relationship is
created by this Agreement. Customer has no right or authority to bind
mdbs to any obligation or in any other manner. This Agreement is
governed by the laws of the State of Indiana, the United States and
the Universal Copyright Convention. Disputes, claims, and litigation
under this Agreement shall be subject to the exclusive venue and
jurisdiction of a court of competent authority in Tippecanoe County in
Indiana. This Agreement represents the entire agreement between the
parties regarding the subject matter pertaining hereto; no verbal
representations are binding; any amendment to this Agreement must be
signed by both parties to be of any force or effect.
b) If any provision of this Agreement (or portion thereof) is determined
to be invalid or unenforceable, the remaining provisions of this
Agreement shall not be affected thereby and shall be enforceable as
though said invalid or unenforceable provision (or portion thereof) is
not contained in this Agreement. The failure of either party to this
Agreement to insist upon the strict performance of any of the
provisions contained herein shall in no way constitute a waiver by
either in the performance of or compliance with any of the terms and
conditions set forth in this Agreement.
c) This Agreement may not be assigned without the prior written consent
of mdbs, which such consent will not be unreasonably withheld. mdbs
reserves the right to assign this Agreement.
Signed: Fourth Shift Corporation Micro Data Base Systems, Inc.
/s/ DAVID G. LATZKE /s/ CAROL A. MALLETT
- ------------------------------------- ----------------------------------------
Signature Signature
David G. Latzke VP & CFO Carol A. Mallett Contract Administrator
- ------------------------------------- ----------------------------------------
Name and Title Name and Title
August 22, 1997 September 3, 1997
- ------------------------------------- ----------------------------------------
Date Date
<PAGE>
EXHIBIT 10.14
LEASE
10.22.97 (7) MERIDIAN CROSSINGS I
THIS INDENTURE OF LEASE dated November 12, 1997, by and between MERIDIAN
CROSSINGS LLC, a Minnesota limited liability company (d/b/a TOLD Development
Company) ("Landlord"), and FOURTH SHIFT CORPORATION, a Minnesota corporation
("Tenant").
WITNESSETH:
FOR AND IN CONSIDERATION of the rents and covenants hereinafter set
forth and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
DATA SHEET
The following terms shall have the meanings set forth in this section,
unless otherwise specifically modified by provisions of this Lease:
(a) "FACILITY" OR "PROJECT": The Building and the Property including
all appurtenant easements and personal property used in connection with the
Building or Property located therein and thereon.
(b) "BUILDING": The approximately 184,718 rentable square foot
building which is located on the Property, the floor plan of which is
attached hereto as Exhibit A.
(c) "PROPERTY": The real property, known as Meridian Crossings I, 1205
West 77th Street, Richfield, Minnesota 55423, more particularly described on
Exhibit "B".
(d) "PREMISES": The areas outlined on Exhibit A. For purposes of this
Lease, Landlord and Tenant agree that the Premises shall be deemed to contain
approximately 57,000 rentable square feet of space located as follows:
23,303 rentable square feet on Floor 5;
23,303 rentable square feet on Floor 4; and
10,394 rentable square feet located on Floor 3.
Landlord and Tenant agree that upon completion by Tenant of its space
planning, Landlord's architect will reasonably determine and certify the
actual area of the Premises, pursuant to the standard set forth in Article
XXXIV hereto and it shall be deemed the area of the Premises.
<PAGE>
(e) "COMMENCEMENT DATE": November 1, 1998, subject to Article IV.
(f) "EXPIRATION DATE": October 31, 2008, or (10) full years from the
Commencement Date.
(g) "TERM": Ten (10) full years.
<PAGE>
(h) "BASE RENT":
<TABLE>
<CAPTION>
With respect to the follow- Annual Base Rent shall Payable in advance in equal
ing years of the Term: be as follows: monthly installments as follows:
- ----------------------------- -------------------------- --------------------------------------
<S> <C> <C>
Years 1 - 5 $14.50 per rentable square
foot of Premises
Years 5 - 10 $15.95 per rentable square
foot of Premises
</TABLE>
(i) "ADDITIONAL RENT": Tenant's Share of Operating Expenses, Tenant's
Share of Taxes, Service Charges and other payments to be made by Tenant to
Landlord pursuant to this Lease.
(j) "TENANT'S PERCENTAGE": Thirty-two and forty-eight hundredths
percent (32.48%). Tenant's Percentage shall be adjusted in the event of a
change in the number of rentable square feet of space in the Building or
Premises and as set forth in Article 2 herein.
(k) "GUARANTOR": Not applicable.
(l) "SECURITY DEPOSIT": $500,000.00 Letter of credit.
(m) "PERMITTED USE": For general office and related purposes
(including, for purposes of illustration and not limitation, vending machines
for non-public use, employee lunchroom (with microwave oven) and a computer
room and for no other purpose.
(n) NOTICE AND PAYMENT ADDRESSES:
Landlord: Meridian Crossings LLC
c/o TOLD Development Company
6900 Wedgwood Road, Suite #100
Maple Grove, MN 55311
Ph: #(612)420-9000
Attn: Law Department
Tenant:
PRIOR TO COMMENCEMENT DATE: Fourth Shift Corporation
7900 International Drive
Minneapolis, MN 55425
Attn: Chief Financial Officer
w/ a copy to: Fourth Shift Corporation
3000 Executive Parkway, Suite #140
San Ramone, CA 94583
Attn:
-------------------------------
AFTER COMMENCEMENT DATE: Fourth Shift Corporation
<PAGE>
1205 West 77th Street, Suite _______
Richfield, MN 55423
Attn: Chief Financial Officer
w/ a copy to: Fourth Shift Corporation
3000 Executive Parkway, Suite #140
San Ramone, CA 94583
Attn:
-------------------------------
(o) "LEASE YEAR": The twelve-month period commencing January 1 and
ending December 31, adjusted for partial Lease Years during which the Term
commences and terminates.
(p) "LANDLORD'S IMPROVEMENTS": Improvements to the Premises to be
performed by Landlord as set forth in Exhibit D.
(q) "BROKER OR TENANT REPRESENTATIVE": Welsh Companies and CB
Commercial.
(r) EXHIBITS: the following exhibits are attached to this Lease and
are incorporated herein by reference:
Rider to Lease
Exhibit A - Premises Exhibit D - Landlord's Improvements
Exhibit B - Legal Description & Exhibit E - Services
Site Plan Exhibit E-1 - Janitorial Specifications
Exhibit C - Rules and Regulations Exhibit F - Reserved Parking License
Exhibit G - Estoppel Certificate
Exhibit H - Letter of Credit Form
Exhibit I - Open Stairwell
<PAGE>
ARTICLE I
BASE RENT
1.01 Rent Reserved and Monthly Payments. In consideration of the
leasing of the Premises, Tenant agrees to pay to Landlord without setoff,
deduction or demand, unless specifically provided for herein, at the address
set forth in the Data Sheet, or at such other place as Landlord from time to
time may designate in writing, Base Rent as set forth in Article 2,
commencing on the Commencement Date and continuing on the first day of each
and every month thereafter for the next succeeding months during the balance
of the Term. If the Term commences on a date other than the first day of a
calendar month or ends on a date other than on the last day of a calendar
month, monthly rent for such partial month, as the case may be, shall be
obtained by multiplying the number of days in the term within such month by a
fraction, the numerator of which is the annual Base Rent and the denominator
of which is 365.
ARTICLE II
ADDITIONAL RENT
2.01 Additions to Base Rent. In addition to the Base Rent payable by
Tenant under the provisions of Article 1 hereof, Tenant shall pay to Landlord
"Additional Rent" as hereinafter provided.
2.02 Definitions. For purposes of this Article 2, the parties hereto
agree upon the following definitions:
A. The term "Taxes" shall mean and include all personal property
taxes of Landlord relating to Landlord's personal property located in
the Facility and used or useful in connection with the operation and
maintenance thereof, real estate taxes and installments of special
assessments, including interest thereon (excluding penalties or penalty
interest except to the extent resulting from late payments of Tenant),
relating to the Property and Facility, and all other governmental
charges, general and special, ordinary and extraordinary, foreseen as
well as unforeseen, of any kind and nature whatsoever, or other tax,
however described, that is levied or assessed by the United States of
America or the state in which the Facility is located or any political
subdivision thereof, against Landlord or all or any part of the Facility
as a result of Landlord's ownership of the Property or Facility, and due
and payable during the respective Lease Year. It shall not include any
gross receipts or income tax, estate tax, capital gains, or inheritance
tax of Landlord.
B. (1) The term "Operating Expenses" shall mean and include all
expenses incurred with respect to the maintenance and operation of the
Property and Facility, including without limitation the parking areas
and parking structures, as reasonably determined by Landlord's
accountant in accordance with generally accepted accounting principles
consistently followed, including, but not limited to, insurance
premiums, maintenance and repair costs, steam, electricity, water,
sewer, gas, and other utility charges; fuel, lighting,
<PAGE>
window washing, janitorial services, trash and rubbish removal; wages
payable to employees of Landlord whose duties are related directly to the
operation and maintenance of the Property and Facility pro rated for
time actually spent at the Property and excluding any personnel above
the rank of building superintendent; amounts paid to contractors or
subcontractors for work or services performed related directly to the
operation and maintenance of the Property and Facility; all costs of
uniforms, supplies and materials used in direct support of the operation
and maintenance of the Property and Facility; all payroll taxes,
unemployment insurance costs, vacation allowances, and the cost of
providing disability insurance or benefits, pensions, profit sharing
benefits, hospitalization, retirement or other so-called fringe
benefits; and any other expense imposed on Landlord, pursuant to law or
pursuant to any collective bargaining agreement covering such employees;
reasonable attorney's fees, and costs in connection with appeal or
contest of real estate taxes or valuation or other taxes or levies, and
such other expenses as may be ordinarily incurred in the operation and
maintenance of an office complex, including reasonable management fees
not to exceed three percent (3%) of gross rental income from the
Facility (for the purpose of this calculation, any free or abated rent
shall be included as if rent was being paid at the amount due
immediately after expiration of said free rent period), the cost of a
management office, and assessments reasonably attributable to the
Facility on account of costs incurred by any business park association
for the business park in which the Facility is located. Operating
Expenses shall also be deemed to include expenses incurred by Landlord
in connection with city sidewalks adjacent to the Property or other
public facility to which Landlord or the Facility is from time to time
subject in connection with operations of the Property and Facility.
(2) The term "Operating Expenses" shall not include any capital
improvement to the Facility, nor shall it include repairs, restoration
or other work occasioned by fire, windstorm or other insured casualty,
expenses incurred in leasing to or procuring tenants, costs that are
separately billed to tenants or any other expenses for which Landlord
receives reimbursement, leasing commissions, expenses for renovating
space for new tenants, legal expenses incident to enforcement by
Landlord of the terms of any lease, interest or principal payments on
any mortgage or other indebtedness, depreciation allowance or expense
other than depreciation on Building equipment to the extent expressly
permitted in paragraph 2.02(B)(3) of this Lease.
(3) Notwithstanding the foregoing, in the event Landlord installs
equipment in or makes improvements or alterations to the Facility that
are for the purpose of reducing energy costs, maintenance costs or other
Operating Expenses or that are required under any governmental laws,
regulations, or ordinances which were not required at the date of
commencement of the term of this Lease, Landlord may include in
Operating Expenses reasonable charges for interest on such investment
and reasonable charges for depreciation on the same so as to amortize
such investment over the reasonable life of such equipment, improvement
or alteration on a straight line basis provided, however, the annual
amount added to Operating Expenses for
<PAGE>
equipment, improvements or alterations ("Equipment") for the purpose of
reducing energy costs, maintenance costs or other Operating Expenses
shall not exceed Landlord's reasonable estimate (at the time of
installation, improvement, or alteration) of the annual savings
resulting from such Equipment.
C. The terms "Tenant's Share of Taxes" and "Tenant's Share of
Operating Expenses", unless specifically otherwise defined herein, shall
each mean the percentage that the rentable area of Tenant's Premises is
of the total rentable area in the Facility, subject to adjustment as set
forth in Paragraph D. If said percentage shall change during a Lease
Year, it shall be averaged by applicable days, and the average shall be
Tenant's Share for that year.
D. Notwithstanding anything herein to the contrary, it is agreed
that (i) in the event the Facility is not fully occupied during any
Lease Year, a reasonable and equitable adjustment shall be made by
Landlord to those charges only which vary with the occupancy of the
Facility in computing the Operating Expenses for such year so that the
Operating Expenses shall be adjusted to the amount that would have been
incurred had the Facility been fully occupied during such year, and (ii)
Tenant's share shall be amended for each Lease Year to the percentage
that the average rentable area of the Premises bears to the greater of
(y) ninety-five percent (95%) of the total rentable area of the Facility
for such Lease Year, or (z) to the total average rentable area leased
(pursuant to leases under which the term has commenced) in the Facility
for such Lease Year.
E. The term "Service Charge" shall mean any fee or other charge
for service specified in this Lease as payable by Tenant.
2.03 Additional Rent Estimates: As to each Lease Year after the
initial Lease Year, Landlord shall estimate for each such Lease Year (i) the
total amount of Taxes; (ii) the total amount of Operating Expenses; (iii)
Tenant's Share of Taxes; (iv) Tenant's Share of Operating Expenses; (v) the
computation of the annual and monthly rental payable during such Lease Year
as a result of increases or decreases in Tenant's Share of Taxes and Tenant's
Share of Operating Expenses. Said estimate shall be in writing and Landlord
shall use reasonable efforts to deliver or mail same to Tenant at the
Premises within ninety (90) days of the close of each Lease Year. Landlord
may adjust such estimates from time to time during the Lease Year.
2.04 Payment of Additional Rent Estimates. Tenant shall pay the
Additional Rent so estimated, in equal monthly installments, in advance, on
the first day of each month during each applicable Lease Year. In the event
that said estimate is delivered to Tenant after the first day of January of
the applicable Lease Year, said amount, so estimated, shall be payable as
Additional Rent, in equal monthly installments, in advance, on the first day
of each month over the balance of such Lease Year, with the number of
<PAGE>
installments being equal to the number of full calendar months remaining in
such Lease Year.
2.05 Annual Determination of Additional Rent. Upon completion of each
Lease Year, Landlord shall determine the actual amount of Taxes and Operating
Expenses for such Lease Year and Tenant's Share thereof and deliver a
written, itemized certification of the amounts thereof to Tenant. If Tenant
has paid less than its Share of Taxes or its Share of Operating Expenses for
any Lease Year, Tenant shall pay the balance of its Share of the same within
twenty (20) days after the receipt of such statement. If Tenant has paid
more than its Share of Taxes or its share of Operating Expenses for any Lease
Year, Landlord shall, at Tenant's option, either (i) promptly refund such
excess, or (ii) credit such excess against the most current monthly
installment or installments due Landlord for Base Rent and Additional Rent
estimates. A pro rata adjustment shall be made for a fractional Lease Year
occurring during the term of this Lease or any renewal or extension thereof
based upon the number of days of the term of this Lease during said Lease
Year as compared to three hundred sixty-five (365) days and all additional
sums payable by Tenant or credits due Tenant as a result of the provisions of
this Article 2 shall be adjusted accordingly.
2.06 Rental Taxes. Further, Tenant shall pay, also as Additional Rent,
any tax or excise on rents, gross receipts tax, or other tax, however
described, which is levied or assessed by the United States of America or the
state in which the Facility is located or any political subdivision
thereafter, against Landlord in respect to the Base Rent, Additional Rent, or
other charges reserved under this Lease or as a result of Landlord's receipt
of such rents or other charges accruing under this Lease, all of which shall
herein be termed "Rental Taxes"; provided, however, Tenant shall have no
obligation to pay income or capital gains taxes of Landlord.
2.07 Tenant's Taxes. Tenant shall pay, prior to delinquency, all taxes
assessed or levied upon its occupancy of the Premises, or upon the trade
fixtures, furnishings, equipment and all other personal property of Tenant
located in the Premises, and when possible, Tenant shall cause such trade
fixtures, furnishing, equipment and other personal property to be assessed
and billed separately from the property of Landlord. In the event any or all
of Tenant's trade fixtures, furnishings, equipment or other personal
property, or Tenant's occupancy of the Premises, shall be assessed and taxed
with the property of Landlord, 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 personal property.
ARTICLE III
OVERDUE AMOUNTS; RENT INDEPENDENT
<PAGE>
3.01 Payment of Rent. Any installment of Base Rent, Additional Rent,
or any other charges to be paid by Tenant accruing under the provisions of
this Lease that shall not be paid when due, shall bear interest at the rate
of two (2) points over the quoted prime rate of interest charged by Norwest
Bank Minnesota, N.A. (or its successor) per annum from the date when the same
is due until the same shall be paid, but if such rate exceeds the maximum
interest rate permitted by law, such rate shall be reduced to the highest
rate allowed by law under the circumstances. Landlord agrees that it will
waive the initial twenty (20) days interest accrued in any twelve (12)
consecutive month period. Tenant's covenants to pay the Base Rent and the
Additional Rent are independent of any other covenant, condition, provision
or agreement herein contained.
3.02 No Accord and Satisfaction. No payment by Tenant or receipt by
Landlord of a lesser amount than the Base Rent, Additional Rent, Service
Charge or other charges ("Rent") stipulated herein shall be deemed to be
other than on account of the earliest stipulated Rent, nor shall any
endorsement or statement on any check or letter accompanying any check or
payment as rent be deemed an accord and satisfaction, and Landlord shall
accept such check or payment without prejudice to Landlord's right to recover
the balance of such Rent or pursue any other remedy in this Lease.
ARTICLE IV
TERM AND COMMENCEMENT
4.01 Demise. Landlord hereby demises and leases to Tenant and Tenant
hereby rents and takes from Landlord the Premises for the Term and subject to
and with the benefit of the terms, covenants and conditions of this Lease to
be occupied and used by Tenant solely for the purposes stated on the Data
Sheet and for no other purpose. Landlord shall have the right to grant
exclusive rights to parties in the Facility to conduct service businesses
serving the Property but in no event shall this conflict with Tenant's use as
set forth on the Data Sheet.
4.02 Commencement Date. Tenant shall have and hold the same Premises,
without any liability or obligation on the part of Landlord to make any
alterations, improvements or repairs of any kind in or about the Premises,
except as expressly provided herein, for the Term set forth on the Data
Sheet, unless sooner terminated in the manner provided herein. The Term
hereof shall commence on the Commencement Date. Except as specifically set
forth in Section 27.2 hereinafter, if Landlord is unable to give possession
of the Premises on the Commencement Date because the construction of the
Facility or the completion of the Premises has not been sufficiently
completed to make the Premises ready for occupancy, or for any reason,
Landlord shall not be subject to any claims, damages or liabilities for the
failure to give possession on
<PAGE>
said date. Substantial completion of the Premises shall be evidenced by the
issuance of a certificate of occupancy (whether full or partial, temporary or
permanent) for the Premises, provided, however this provision shall not limit
Tenant's right to require Landlord to correct incomplete or defective work
pursuant to Section 4.03, in the Building or Premises. Under said
circumstances, the Rent reserved and covenant to pay same shall not commence
until possession of the Premises is given and the Premises are ready for
occupancy, whichever is earlier, and failure to give possession on the
Commencement Date shall in no way affect the validity of this Lease or the
obligations of Tenant hereunder, except that Tenant's obligation to make
rental and other required payments (other than pursuant to Article XXIII
herein) shall be deferred and there shall be a corresponding extension of the
Expiration Date.
4.03 Acceptance of Premises. The acceptance of possession by Tenant
shall be deemed conclusively to establish that the Premises and all other
improvements of the Facility required to be constructed by Landlord for use
thereof by Tenant have been completed unless Tenant notifies Landlord in
writing within thirty (30) days after commencement of the term as to any
items not completed. Tenant waives any claim as to matters not listed in
said notice other than latent defects for which Tenant provides Landlord
notice within twelve (12) months from substantial completion of the Premises.
ARTICLE V
SERVICES
5.01 Landlord's Services. Subject to including the cost thereof in
Article 2, Landlord shall provide services as stated in Exhibit "E", without
further charge except as expressly stated otherwise.
5.02 Interruption of Services. No interruption in, or temporary
stoppage of, any of the aforesaid services caused by repairs, renewals,
improvements, alterations, strikes, lockouts, labor controversy, accidents,
inability to obtain fuel or supplies or other causes shall be deemed an
eviction or disturbance of Tenant's use and possession, or render Landlord
liable for damages, by abatement of rent or otherwise or relieve Tenant from
any obligation herein set forth. In no event shall Landlord be required to
provide any heat, air conditioning, electricity or other service in excess of
that permitted by involuntary guidelines or laws, ordinances or regulations
of governmental authority.
5.03 Anything in this Lease to the contrary notwithstanding, Landlord
shall have the right to specially assess Tenant a Service Charge for
additional services specially requested by Tenant or other items of Operating
Expenses (and shall reduce the total of Operating Expenses accordingly) to
the extent Landlord can reasonably demonstrate Tenant's use or consumption
thereof due to hours of operation, equipment operated from the Premises, or
other reasons, warrant such assessment.
ARTICLE VI
<PAGE>
INSURANCE
6.01 Landlord's Insurance.
A. Landlord's Casualty Insurance. Landlord shall, as a portion of
Operating Expenses, keep the Facility insured for the benefit of Landlord in
an amount equivalent to the full replacement value thereof (excluding
foundation, grading and excavation costs) against (a) loss or damage by fire;
and (b) such other risk or risks of a similar or dissimilar nature as are
now, or may in the future be, customarily covered with respect to buildings
and improvements similar in construction, general location, use, occupancy
and design to the Facility, including, but without limiting, the generality
of the foregoing, windstorms, hail, explosions, vandalism, theft, malicious
mischief, civil commotion, law and ordinance, and such other coverage as may
be deemed necessary by Landlord, provided such additional coverage is
obtainable and provided such additional coverage is such as is customarily
carried with respect to buildings and improvements similar in construction,
general location, use, occupancy and design to the Facility.
B. Landlord's Liability Insurance. Landlord shall, as a portion of
the Operating Expenses, maintain, for its benefit and the benefit of its
managing agent and lender, commercial general liability insurance against
claims for personal injury, death or property damage occurring upon, in or
about the Facility.
These insurance provisions shall in no way limit or modify any of the
obligations of Tenant under any provision of this Lease.
6.02 Tenant's Insurance.
(a) Tenant's Casualty Insurance. Tenant shall keep all of its
machinery, equipment, furniture, fixtures, personal property (including also
property under the care, custody, or control of Tenant) and business
interests that may be located in, upon, or about the Premises insured for the
benefit of Tenant in an amount equivalent to the full replacement value or
insurable value thereof against (a) loss or damage by fire; and (b) such
other risk or risks of a similar or dissimilar nature as are now, or may in
the future be, customarily covered with respect to a tenant's machinery,
equipment, furniture, fixtures, personal property and business located in a
building similar in construction, general location, use, occupancy and design
to the Facility, including, but without limiting the generality of the
foregoing, windstorms, hail, explosions, vandalism, theft, malicious
mischief, civil commotion, and such other coverage as Tenant may deem
appropriate or necessary. Tenant shall have the right to provide this
coverage by means of blanket coverage.
<PAGE>
(b) Tenant's Liability Insurance. Tenant shall, at Tenant's sole cost
and expense maintain commercial general liability insurance against claims
for bodily and personal injury, death or property damage occurring upon, in
or about the Premises, such insurance to afford protection to the limit of
not less than One Million and No/100 Dollars ($1,000,000.00) per each
occurrence, and to the amount of not less than Two Million and No/100 Dollars
($2,000,000.00) in general aggregate. Such policies of insurance shall be
written in companies reasonably satisfactory to Landlord, naming Landlord,
its lender and Landlord's managing agent as additional insureds thereunder,
and certificate of such insurance shall be delivered to Landlord by the
company or agency issuing the same. Tenant agrees to include in such policy
contractual liability coverage insuring Tenant's indemnification obligations
provided for herein. Tenant shall have the right to provide this coverage by
means of blanket coverage.
6.03 Releases and Indemnity.
(a) Tenant's Indemnification. Tenant agrees to indemnify and save
Landlord and its managing agent harmless against and from any and all claims,
loss, damage and expense by or on behalf of any person or persons, firm or
firms, corporation or corporations, arising from any breach or default on the
part of Tenant in the performance of any covenant or agreement on the part of
Tenant to be performed, pursuant to the terms of this Lease, or arising from
any act or negligence on the part of Tenant or its agents, contractors,
servants, employees or licensees, or arising from any accident, injury or
damage to the extent caused by Tenant, its agents, and employees to any
person, firm or corporation occurring during the term of this Lease or any
renewal thereof, in or about the Premises and Project, and from and against
all costs, reasonable counsel fees, expenses and liabilities incurred in or
about any such claim or action or proceeding which may be brought thereon;
and in case any action or proceeding be brought against Landlord or its
managing agent by reason of any such claim, Tenant, upon notice from
Landlord, covenants to resist or defend such action or proceeding by counsel
reasonably satisfactory to Landlord.
(b) Landlord's Indemnification. Landlord agrees to indemnify and save
Tenant harmless against and from any and all claims, loss, damage and expense
by or on behalf of any person or persons, firm or firms, corporation or
corporations, arising from any breach or default on the part of Landlord in
the performance of any covenant or agreement on the part of Landlord to be
performed, pursuant to the terms of this Lease, or arising from any act or
negligence on the part of Landlord or its agents, contractors, servants,
employees or licensees, or arising from any accident, injury or damage to the
extent caused by Landlord, its agents, and employees to any person, firm or
corporation occurring during the term of this Lease or any renewal thereof,
in or about the Premises and Project, and from and against all costs,
reasonable counsel fees, expenses and liabilities incurred in or about any
such claims, actions or proceeding brought thereon; and in case any action or
proceeding is brought against Tenant by reason of any such
<PAGE>
claim, Landlord, upon notice from Tenant, covenants to resist or defend such
action or proceeding by counsel reasonably satisfactory to Tenant.
(c) Tenant's Waiver. Tenant agrees, to the extent not expressly
prohibited by law, that Landlord, its agents, employees and servants shall
not be liable, and Tenant waives all claims for damage to property and
business sustained during the term of this Lease by Tenant occurring in or
about the Facility, resulting directly or indirectly from any existing or
future condition, defect, matter or thing in the Premises, the Facility, or
any part thereof, or from equipment or appurtenances becoming out of repair
or from accident, or from any occurrence or act or omission of Landlord, its
agents, employees or servants, or any tenant or occupant of the Building or
any other person unless caused by the negligence or intentional act of
Landlord, its agents or employees. This paragraph shall apply especially,
but not exclusively, to damage caused as aforesaid or by the flooding of
basements or other subsurface areas, or by refrigerators, sprinkling devices,
air conditioning apparatus, water, snow, frost, steam, excessive heat or
cold, falling plaster, broken glass, sewage, gas, odors or noise, or the
bursting or leaking of pipes or plumbing fixtures, and shall apply equally,
whether any such damage results from the act or omission of other tenants or
occupants in the Facility or any other persons, and whether such damage be
caused by or result from any of the aforesaid, or shall be caused by or
result from other circumstances of a similar or dissimilar nature.
(d) Tenant's Liability. All property in the Facility or on the
Premises belonging to Tenant, its agents, employees, invitees or otherwise
located at the Premises, shall be at the risk of Tenant only, and Landlord
shall not be liable for damage thereto or theft, misappropriation or loss
thereof unless caused by the gross negligence or willful misconduct of
Landlord, it agents, or employees and Tenant agrees to defend and hold
Landlord, its agents, employees and servants harmless and indemnify them
against claims and liability for injuries to such property other than that
caused by the gross negligence or willful misconduct of Landlord, its agents,
or employees.
(e) Releases. Landlord and Tenant each agree that such policy or
policies of insurance for loss or damage by fire or other risks shall permit
releases of liability as herein provided and include a waiver of subrogation
clause as to Tenant and Landlord respectively. Each party hereto waives,
releases and discharges the other party from all claims or demands whatsoever
which the waiving party may have arising out of damage to or destruction of
the waiving party's property or loss of use thereof occasioned by fire of
other casualty, which such claim or demand may arise because of the
negligence or fault of the other party, its agents, employees, customers or
business invitees, or otherwise and the waiving party agrees to look to its
insurance coverage only in the event of such loss.
ARTICLE VII
<PAGE>
CERTAIN RIGHTS RESERVED BY LANDLORD
7.01 Rights Reserved. Landlord reserves the following rights
exercisable without notice unless otherwise noted and without liability to
Tenant and without affecting an eviction, constructive or actual, or
disturbance of Tenant's use of possession, or giving rise to any claim for
setoff or abatement of rent:
A. To control, install, affix and maintain any and all signs on
the Property, or on the exterior of the Facility and in the corridors, entrances
and other common areas thereof, except as provided in Article XXX hereof, and
except those signs within the Premises not visible from outside the Premises.
B. To reasonably designate, limit, restrict and control any service
in or to the Facility, including but not limited to the designation of sources
from which Tenant may obtain sign painting and lettering. Any restriction,
designation, limitation or control imposed by reason of this subparagraph shall
be imposed uniformly on Tenant and other tenants in the Facility.
C. To retain at all times and to use in appropriate instances, keys
or other means of access to all doors within and into the Premises. No locks
shall be changed without prior written consent of Landlord. This provision
shall not apply to Tenant's safes, or other areas maintained by Tenant for the
safety and security of monies, securities, negotiable instruments or like items.
D. To make repairs, alterations, additions, or improvements, whether
structural or otherwise, in and about the Facility, or any part thereof, and for
such purposes to enter upon the Premises, and during the continuation of any of
said work, to temporarily close doors, entryways, public spaces, and corridors
in the Facility and to temporarily interrupt or temporarily suspend services and
facilities.
E. To restrict or prohibit vending or dispensing machines of any
kind in or about the Premises for use by the general public (as opposed to
Tenant's employees and business invitees).
F. To approve the weight, size and location of safes and other heavy
equipment and articles in and about the Premises and the Facility and to require
all such items to be moved into and out of the Facility and the Premises only at
such times and in such manner as Landlord shall direct in writing.
ARTICLE VIII
ALTERATIONS AND IMPROVEMENTS
8.01 Alterations. Tenant shall not make any improvements, alterations,
additions or installations in or to the Premises (hereinafter referred to as
the "Work") without Landlord's prior written consent, which consent shall not
be unreasonably withheld, conditioned or delayed. Along with any request for
Landlord's consent and before commencement of the Work or delivery of any
<PAGE>
materials to be used in the Work to the Premises or into the Facility, Tenant
shall furnish Landlord with plans and specifications, names and addresses of
contractors, copies of contracts, necessary permits and licenses, and except
when Landlord, its agent or affiliate is contractor, an indemnification in
such form and amount as may be reasonably satisfactory to Landlord. Tenant
agree to defend and hold Landlord harmless from any and all claims and
liabilities of any kind and description that may arise out of or be connected
in any way with said improvements, alterations, additions or installations.
All work done by Tenant, its agents, employees, or contractors shall be done
in such a manner as to avoid labor disputes. Tenant shall pay the cost of
all such improvements, alterations, additions or installations, and also the
cost of painting, restoring, or repairing the Premises and the Facility
occasioned by such improvements, alterations, additions or installations.
Upon completion of the Work, Tenant shall furnish Landlord with contractor's
sworn affidavits and full and final waivers of liens, or receipted bills
covering all labor and materials expended and used. The Work shall comply
with all insurance requirements and all laws, ordinances, rules and
regulations of all governmental authorities and shall be constructed in a
good and workmanlike manner. Tenant shall permit Landlord to inspect
construction operations in connection with the Work. Tenant shall not be
allowed, without Landlord's reasonable approval, to perform such Work if such
action results or would result in a labor dispute or otherwise would
materially interfere with Landlord's operation of the Facility.
ARTICLE IX
REPAIRS
9.01 Tenant's Duty of Repair. Tenant shall, during the term of this
Lease, at Tenant's expense, keep the Premises in as good order, condition and
repair as they were at the time Tenant took possession of the same,
reasonable wear and tear and damage from fire and other casualties excepted.
Tenant shall keep the Premises in a neat and sanitary condition and shall not
commit any nuisance or waste on the Premises or in, on, or about the
Facility, throw foreign substances in the plumbing facilities, or waste any
of the utilities furnished by the Landlord. All uninsured damage or injury
to the Premises, or to the Facility caused by Tenant moving furniture,
fixtures, equipment, or other devices in or out of the Premises or Facility
or by installation or removal of furniture, fixtures, equipment, devices or
other property of Tenant, its agents, contractors, servants or employees, due
to carelessness, omission, neglect, improper conduct, or other cause of
Tenant, its servants, employees, agents, visitors, or licensees, shall be
repaired, restored and replaced promptly by Tenant at its sole cost and
expense to the reasonable satisfaction of Landlord. All repairs, restorations
and replacements shall be in quality and class equal to the original work.
9.02 Right of Entry. Landlord or its employees or agents shall have
the right to enter the Premises at any reasonable time or times for the
purpose of inspection, cleaning, repairs, altering, or improving the same but
nothing contained herein shall be construed as imposing any obligation on
Landlord to
<PAGE>
make any repairs, alterations or improvements that are the obligation of
Tenant. See Rider Article XXXI.
ARTICLE X
ASSIGNMENT AND SUBLETTING
10.01 Assignment by Tenant. Tenant shall not, without the prior
written consent of Landlord, which consent shall not be unreasonably withheld
delayed or conditioned, (i) transfer, pledge, mortgage or assign this Lease
or any interest hereunder; (ii) permit any assignment of this Lease by
voluntary act, operation of law or otherwise; (iii) sublet the Premises or
any part thereof; or (iv) permit the regular use of the Premise by any
parties other than Tenant, its agents and employees. Tenant shall seek such
written consent of Landlord by a written request therefore, setting forth
such information as Landlord may reasonably deem necessary. Tenant shall, by
notice in writing, advise Landlord of its intention from, on and after a
stated date which shall not be less than thirty (30) days after date of
Tenant's notice, to assign this Lease or sublet any part or all of the
Premises for the balance of the Term. Tenant's notice shall state the name
and address of the proposed assignee or subtenant and a true and complete
copy of the proposed assignment or sublease shall be delivered to Landlord
with Tenant's notice along with any consideration therefor. Landlord will not
unreasonably withhold, delay, or condition its consent to Tenant's assignment
of the Lease or subletting of such space and incidental rights to the party
identified in Tenant's notice.
10.02 Payment to Landlord.
A. Landlord will not unreasonably withhold, delay, or condition its
consent to Tenant's assignment of the Lease or subletting of such space and
incidental rights to the party identified in Tenant's notice, provided, however,
that in the event Landlord consents to any such assignment or subletting, and as
a condition thereto, Tenant shall pay to Landlord, fifty percent (50%) of all
net profit derived by Tenant from such assignment or subletting other than to
affiliates of Tenant. For purposes of the foregoing, net profit shall be deemed
to include, but not be limited to, the amount of all rent payable by such
assignee or sublessee in excess of the Base Rent and rent adjustments payable by
Tenant under this Lease, net of all reasonable expenses (including new tenant
improvements, commissions, rent abatement and similar costs of subleasing)
incurred by Tenant in obtaining said assignee or sublessee.
If a part of the consideration for such assignment or subletting
shall be payable other than in cash, the payment to Landlord shall be in cash
for its share of any non-cash consideration based upon the fair market value
thereof.
B. Tenant shall furnish to Landlord upon request a complete
statement, certified by an independent certified public accountant, setting
forth in
<PAGE>
detail the computation of all profit, pursuant to generally accepted accounting
principles. Tenant agrees that Landlord shall have the right to review its
books and records used to determine profit for the assignment or sublease. Any
profit shall be paid to Landlord within fifteen (15) days of receipt by Tenant
of all payments made from time to time by such assignee or sublessee to Tenant.
10.03 Terms of Sublease. Any subletting or assignment hereunder
shall not release or discharge Tenant of or from any liability, whether past,
present or future, under this Lease, and Tenant shall continue fully liable
thereunder unless Landlord shall agree otherwise in writing. The subtenant
or assignee shall agree in a form satisfactory to Landlord to comply with and
be bound by all of the terms, covenants, conditions, provisions and
agreements of this Lease to the extent of the space sublet or assigned, and
Tenant shall deliver to Landlord promptly after execution an executed copy of
each such sublease or assignment and an agreement of compliance by each such
subtenant or assignee. Consent by Landlord to any assignment of this Lease or
to any subletting of the Premises shall not be a waiver of Landlord's rights
under this Article as to any subsequent assignment or subletting.
10.04 As long as Tenant remains a publicly-held corporation, a transfer
of any shares in Tenant shall not be deemed an assignment under this Lease.
10.05 Miscellaneous. Any sale, assignment, mortgage, transfer, or
subletting of this Lease which is not in compliance with the provisions of
this Article 10 shall be of no effect and void. Landlord's right to assign
its interest in this Lease shall remain unqualified.
ARTICLE XI
DAMAGE BY FIRE OR OTHER CASUALTY
11.01 Premises Destruction. If fire or other casualty shall render the
whole or any material portion of the Premises untenantable, then:
A. If the Premises can reasonably be expected to be made tenantable
within two hundred ten (210) days from the date of such event, Landlord shall
repair and restore the Premises and the Facility to as near their condition
prior to the fire or other casualty as is reasonably possible within such two
hundred ten (210) day period (subject to delays for causes beyond Landlord's
reasonable control) and notify Tenant that it will be doing so, such notice to
be mailed within thirty (30) days from the date of such damage or destruction,
and this Lease shall remain in full force and effect, but the Rent for the
period during which the Premises are untenantable shall be abated pro rata
(based upon the portion of the Premises which is untenantable).
B. If the Premises cannot reasonably be expected to be made
tenantable within two hundred ten (210) days from the date of such event, either
<PAGE>
Landlord or Tenant by notice in writing to the other mailed within forty-five
(45) days from the date of such damage or destruction, may terminate this Lease
effective upon a date within thirty (30) days from the date of such notice.
11.02 Complex Destruction. In the event that more than fifty
percent (50%) of the value of the Facility is damaged or destroyed by fire or
other casualty, and irrespective of whether damage or destruction can be made
tenantable within two hundred ten (210) days thereafter, then at Landlord's
option, by written notice to Tenant, mailed within thirty (30) days from the
date of such damage or destruction, Landlord may terminate this Lease
effective upon a date within ninety (90) days from the date of such notice to
Tenant. In the event of a termination of this Lease pursuant to this Article
11, Rent shall be apportioned on a per diem basis to the date of the fire or
casualty. If fifty percent (50%) or more of the value of the Facility is
damaged and destroyed by fire or other casualty during the last year of the
Lease Term and Tenant's Premises are substantially damaged and made
untenantable, Tenant may, upon thirty (30) days written notice to Landlord
mailed within thirty (30) days from the date of such damage or destruction,
terminate this Lease effective upon the date of notice.
11.03 Duty to Repair; Rent Abatement. If fire or other casualty shall
render the whole or any part of the Premises untenantable and the Premises
cannot reasonably be expected to be made tenantable within two hundred ten
(210) days from the date of such event and neither Landlord nor Tenant
terminates this Lease pursuant to its right herein; or in the event that more
than fifty percent (50%) of the value of the Facility is damaged or destroyed
by fire or other casualty, and neither party hereto terminates this Lease
pursuant to the options granted herein, or in the event that fifty percent
(50%) or less of the value of the Facility is damaged or destroyed by fire or
other casualty and neither the whole nor any material portion of the Premises
is rendered untenantable, then Landlord shall repair and restore the Premises
and the Facility to as near their condition prior to the fire or other
casualty as is reasonably possible, the work to be commenced and prosecuted
with all due diligence and speed (subject to delays for causes beyond
Landlord's reasonable control), and the Rent for the period during which the
Premises are untenantable shall be abated pro rata (based upon the portion of
the Premises that is untenantable). In no event shall Landlord be obligated
to repair or restore any special equipment or improvements installed by
Tenant at Tenant's expense.
ARTICLE XII
EMINENT DOMAIN
12.01 Public Taking. If the whole of or any substantial part of the
Premises is taken by any public authority under the power of eminent domain,
or taken in any manner for any public or quasi-public use, so as to render
(in Tenant's reasonable judgment) the remaining portion of the Premises
unsuitable
<PAGE>
for the purposes intended hereunder, then the term of this Lease shall cease
as of the day possession shall be taken by such public authority and Landlord
shall make a pro rata refund of any prepaid Rent. All damages awarded for
such taking under the power of eminent domain or any like proceedings shall
belong to and be the property of Landlord, Tenant hereby assigning to
Landlord its interest, if any, in said award. In the event that fifty
percent (50%) or more of the building area or fifty percent (50%) or more of
the value of the Facility is taken by public authority under the power of
eminent domain, then, at Landlord's option, by written notice to Tenant,
mailed within sixty (60) days from the date possession shall be taken by such
public authority, Landlord may terminate this Lease effective upon a date
within ninety (90) days from the date of such notice to Tenant.
12.02 Tenant's Election. Further, if the whole or any material part
of the Premises is taken by public authority under the power of eminent
domain, or taken in any manner for any public or quasi-public use, so as to
render the remaining portion of the Premises unsuitable in Tenant's
reasonable opinion, for the purposes intended hereunder, upon delivery of
possession to the condemning authority pursuant to the proceedings, Tenant
may, at its option, terminate this Lease as to the remainder of the Premises
by written notice to Landlord, such notice to be given to Landlord within
sixty (60) days after Tenant receives notice of the taking. Tenant shall not
have the right to terminate this Lease pursuant to the preceding sentence
unless (i) the business of Tenant conducted in the portion of the Premises
taken cannot, in Tenant's reasonable judgment, be carried on with
substantially the same utility and efficiency in the remainder of the
Premises [or any substitute space securable by Tenant pursuant to clause (ii)
hereof]; and (ii) Tenant cannot secure substantially similar (in Tenant's
reasonable judgment) alternate space upon the same terms and conditions as set
forth in this Lease (including rental) from Landlord in the Facility. Any
notice of termination shall specify a date no more than one hundred sixty (160)
days after the giving of such notice as the date for such termination.
12.03 Tenant's Damages. Anything in this Article 12 to the contrary
notwithstanding, Tenant shall have the right to prove in any condemnation
proceedings and to receive any separate award which may be made for damages
to or condemnation of Tenant's movable trade fixtures and equipment and for
moving expenses; provided, however, Tenant shall in no event have any right
to receive any award for its interest in this Lease or for loss of leasehold.
12.04 Restoration and Rent. Anything in this Article 12 to the
contrary notwithstanding, in the event of a partial condemnation of the
Facility or the Premises and this Lease is not terminated, Landlord shall, at
its sole cost and expense, expeditiously restore the Premises and Facility to
a complete architectural unit and the Base Rent provided for herein during
the period from and after the date of delivery of possession pursuant to such
proceedings to the termination of this Lease shall be reduced to a sum equal
to the product of the
<PAGE>
Base Rent provided for herein multiplied by the area of the Premises restored
after the condemnation.
ARTICLE XIII
SURRENDER OF PREMISES
13.01 Surrender by Tenant. On the last day of this Lease, or on the
sooner termination thereof, Tenant shall peaceably surrender the Premises in
good condition and repair consistent with Tenant's duty to make repairs as
herein provided. On or before the last day of the term of this Lease, or the
date of sooner termination thereof, Tenant shall, at its sole cost and
expense, remove all of its property and trade fixtures and equipment from the
Premises, and all property not removed shall be deemed abandoned. Tenant
hereby appoints Landlord its agent to remove all property of Tenant from the
Premises upon termination of this Lease and to cause its transportation and
storage for Tenant's benefit, all at the sole cost and risk of Tenant, and
Landlord shall not be liable for damage, theft, misappropriation or loss
thereof, and Landlord shall not be liable in any manner in respect thereto.
Tenant shall pay all costs and expenses of such removal, transportation and
storage. Tenant shall leave the Premises in good order, condition and
repair, reasonable wear and tear and damage from fire and other casualty
excepted. Tenant shall reimburse Landlord upon demand for any expenses
incurred by Landlord with respect to removal, transportation, or storage of
abandoned property and with respect to restoring said Premises to good order,
condition and repair. All alterations, additions and fixtures, other than
Tenant's trade fixtures and equipment, that have been made or installed by
either Landlord or Tenant upon the Premises, shall remain the property of
Landlord and shall be surrendered with the Premises as a part thereof.
Tenant shall promptly surrender all keys for the Premises to Landlord at the
place then fixed for the payment of Rent and shall inform Landlord of
combinations on any vaults, locks and safes left on the Premises.
13.02 Holding Over. In the event Tenant remains in possession of
the Premises after expiration of this Lease, and without the execution of a
new lease, but with Landlord's written consent, it shall be deemed to be
occupying the Premises as a tenant from month-to-month, subject to all the
provisions, conditions and obligations of this Lease insofar as the same can
be applicable to a month-to-month tenancy, except that the Base Rent shall be
escalated to Landlord's then current Base Rent for the Premises according to
Landlord's then current rental rate schedule for prospective tenants. In the
event Tenant remains in possession of the Premises after expiration of this
Lease and without the execution of a new lease and without Landlord's written
consent, Tenant shall be deemed to be occupying the Premises without claim of
right and Tenant shall pay a charge for each day of occupancy an amount equal
to one hundred fifty percent (150%) of the Base Rent and Additional Rent (on
a daily basis) then currently being charged by Landlord on new leases in the
Facility for space similar to the Premises.
<PAGE>
ARTICLE XIV
DEFAULT
14.01 Remedies Cumulative. All rights and remedies of Landlord herein
enumerated shall be cumulative and are not intended to be exclusive of any
other remedies or means of redress to which Landlord may lawfully be entitled
in case of any breach or threatened breach of Tenant of any provision of this
Lease. The failure of Landlord to insist in any one or more cases upon the
strict performance of any of the covenants of this Lease or to exercise any
option herein contained shall not be construed as a waiver or relinquishment
for the future of such covenant or option. A receipt by Landlord of Rent
with knowledge of the breach of any covenant hereof (other than breach of the
obligation to pay the portion of such Rent paid) shall not be deemed a waiver
of such breach, and no waiver by Landlord or Tenant of any provisions of this
Lease shall be deemed to have been made unless expressed in writing and
signed by Landlord or Tenant, as the case may be. In addition to the other
remedies in this Lease provided, Landlord or Tenant shall be entitled to the
restraint by injunction of the violation or attempted or threatened violation
of the covenants, conditions and provisions of this Lease.
14.02 Tenant Change in Status. If, during the term of this Lease or
any renewal term, (i) Tenant shall make an assignment for the benefit of
creditors, or (ii) a voluntary petition be filed by Tenant under any law
having for its purpose the adjudication of Tenant a bankrupt, or Tenant be
adjudged a bankrupt pursuant to an involuntary petition in bankruptcy and the
same not be dismissed or stayed within sixty (60) days of its filing, or
(iii) a receiver be appointed for the property of Tenant by reason of the
insolvency of Tenant, or (iv) any department of the state or federal
government, or any officer thereof, duly authorized, shall take possession of
the business or property of Tenant by reason of the insolvency of Tenant and
such action not be stayed or terminated within sixty (60) days thereafter,
then, the occurrence of any of such contingencies shall be deemed a breach of
this Lease and this Lease shall ipso facto upon the happening of any of said
contingencies be terminated and the same shall expire as fully and completely
as if the day fixed for the expiration of the initial term of this Lease or
any renewal term, as the case may be, had occurred, and Tenant will then quit
and surrender the Premises, but Tenant shall remain liable as hereinafter
provided. As used in this paragraph, the term "Tenant" shall also mean any
guarantor of Tenant's obligations under this Lease.
14.03 Tenant Breach. If, during the initial term of this Lease or any
renewal term, (i) Tenant defaults in any payment of the Rent expressly
reserved hereunder for ten (10) days after receipt of written notice thereof,
or any part of the same; (ii) Tenant shall default in fulfilling any of the
covenants, obligations, or agreements of this Lease (other than the covenants
for the payment of Rent
<PAGE>
payable by Tenant hereunder), or (iii) this Lease, without the prior written
consent of Landlord or except as expressly permitted, shall be assigned,
pledged, mortgaged, transferred, or sublet in any manner, and such default in
(ii) shall continue for thirty (30) days after service of notice of the
default by Landlord, or in the event of a default or contingency set forth in
(ii) hereinabove cannot with due diligence be cured within a period of thirty
(30) days, if Tenant fails to proceed promptly after the service of said
notice and with all due diligence to commence to cure the same and thereafter
to prosecute the curing of such default with all due diligence [it being
intended that in connection with a default not susceptible of being cured
with diligence within thirty (30) days, the time within which Tenant is to
cure the same shall be extended for such period as may be reasonably necessary
to complete the same with all due diligence], Landlord, at its option, may
pursue the remedies as set forth hereinafter.
14.04 Remedies upon Default. In the event of a default by Tenant as
set forth hereinabove, Landlord, at its option, may (i) terminate this Lease
and upon such termination Tenant will quit and surrender the Premises to
Landlord but Tenant shall remain liable as hereinafter provided, or (ii)
without terminating the Lease, Landlord or Landlord's agent or servant may
re-enter the Premises and remove all persons and all or any property
therefrom, either by summary dispossession proceedings or otherwise, without
being liable to indictment, prosecution, or damage therefore and repossess
and enjoy the Premises, together with all additions, alterations and
improvements, without such re-entry and repossession working a forfeiture or
waiver of the Rents to be paid and the covenants to be performed by Tenant
during the full term of this Lease.
A. Reletting.
(1) Upon termination of this Lease or expiration of Tenant's right to
occupy the Premises by reason of the happening of any of the foregoing
events, or in any other manner or circumstances whatsoever, whether
with or without legal proceedings, by reason of or based upon or
arising out of a default or breach of this Lease on the part of
Tenant, Landlord may, at its option, at any time and from time to time
relet the Premises or any part or parts thereof, for the account of
Tenant or otherwise, and receive and collect the rent therefore,
applying the same first to the payment of such expenses as Landlord
may have incurred in recovering possession of the Premises, including
the attorney's fees and expenses for putting the same into good order
and condition or preparing or altering the same for re-rental to the
extent Landlord deems necessary or desirable and all other
commercially reasonable expenses, commissions and charges paid,
assumed or incurred by Landlord in or about reletting the Premises and
then to the fulfillment of the covenants of Tenant hereunder. Any
such reletting herein provided for may be for the remainder of the
initial term or any renewal term of this Lease, as originally granted,
or for a longer or shorter period;
<PAGE>
Landlord shall have the right to change the character and use made
of the Premises, and Landlord shall not be required to accept any
substitute tenant offered by Tenant or to observe any instructions
given by Tenant about reletting.
(2) In any such case, and whether or not the Premises or any part
thereof be relet, Tenant shall pay to Landlord the Base Rent and
all Additional Rent and other charges required to be paid by Tenant
up to the later of the time of such termination of the Lease or of
such recovery of possession of the Premises by Landlord, as the
case may be, and thereafter, except in a case in which liability of
Tenant (as hereinafter provided), arises by reason of the happening
of the insolvency of Tenant, Tenant covenants and agrees, if
required by Landlord, to pay to Landlord until the end of the
initial term of this Lease, or any renewal term, as the case may
be, the equivalent of the amount of all Rent reserved hereunder,
and all other charges required to be paid by Tenant, less the net
proceeds of reletting, if any. Landlord shall have the election in
place of holding Tenant so liable forthwith to recover against
Tenant as damages for loss of the bargain and not as a penalty, an
aggregate sum which at the time of such termination of this Lease
or of such recovery of possession of the Premises by Landlord, as
the case may be, represents the then present worth of the excess,
if any, of the aggregate of the Rent and all other charges payable
by Tenant hereunder that would have accrued for the balance of the
initial term, or any renewal term, as the case may be, over the
then present worth of the fair market rents and all other charges
for the Premises for the balance of such term.
14.05 Remedies Upon Insolvency. If this Lease shall terminate by
reason of the bankruptcy or insolvency of Tenant, as above set forth,
Landlord shall be entitled, notwithstanding any other provisions of this
Lease or any present or future law, to recover from Tenant or Tenant's estate
(in lieu or the equivalent of the amount of all rent unpaid at the time of
such termination) as damages for loss of the bargain, and not as a penalty,
an aggregate sum which, at the time of such termination of this Lease,
represents the excess, if any, of the then present worth of the aggregate of
the Rent and other charges payable by Tenant hereunder that would have
accrued for the balance of the initial term and/or renewal term, as the case
may be, over the then present worth of the fair market rents and all other
charges for the Premises for the balance of the initial term or any renewal
term, as the case may be, unless any statute or rule of law governing the
proceedings in which such damages are to be proved shall limit the amount of
such claim capable of being so proved. In such case, Landlord shall be
entitled to prove, as damages by reason of such breach and termination, the
maximum amount allowed by law or statute. Nothing herein contained shall
limit or prejudice Landlord's right to prove and obtain as liquidated damages
arising out of such breach or termination the maximum
<PAGE>
amount allowed by any such statute or rule of law which may govern the
proceedings in which such damages are to be proved whether or not such amount
be greater, equal to, or less than the amount of the excess of the then
present worth of the rent and all other charges reserved herein over the then
present worth of the fair market rents and all other charges, referred to
above.
14.06 Fees and Expenses. Tenant shall pay, upon demand, all of
Landlord's costs, charges and expenses, including reasonable attorney's fees
and fees of agents and others retained by Landlord, for the enforcement of
Tenant's obligations hereunder or incurred by Landlord in any litigation,
negotiation or transaction in which Tenant causes Landlord without Landlord's
fault to become involved or concerned. The prevailing party in any
litigation concerning this Lease shall recover all reasonable attorney's fees
and other expenses in addition to costs taxable at law.
ARTICLE XV
SUBORDINATION AND ESTOPPEL
15.01 Subordination of Lease. This Lease shall be subject and
subordinate to any mortgage, deed of trust or ground lease now or hereafter
placed upon the Premises, the Facility, the Property, or any portion thereof
by Landlord, its successors or assigns, and to amendments, replacements,
renewals and extensions thereof, provided that any holder of any mortgage or
deed of trust shall, as a condition for such subordination, agree not to
disturb Tenant's Lease or occupancy of the premises provided Tenant is not in
default beyond the period allowed for cure hereunder.
A. Subject to the foregoing provision of this Section 15.01,
Tenant agrees at any time hereafter, upon demand, to execute and deliver any
instruments, releases, or other documents reasonably acceptable to Tenant
that may reasonably be required for the purpose of subjecting and
subordinating this Lease, as above provided, to the lien of any such
mortgage, deed of trust or ground lease. The above subordination shall be
effective without the necessity of the execution and delivery of any further
instruments on the part of Tenant to effectuate such subordination.
Notwithstanding anything hereinabove contained in this Article 15, in the
event the holder of any mortgage, deed of trust or ground lease, shall so
elect, then, and in such event, upon any such holder or landlord notifying
Tenant to that effect in writing, this lease shall be deemed prior and
superior in lien to such mortgage, deed of trust, ground lease, whether this
Lease is dated prior to or subsequent to the date of such mortgage, deed of
trust or ground lease and Tenant shall execute such attornment agreement as
may be reasonably requested by said holder.
B. Provided that the mortgagee, ground lessor or trust deed
holder under any first mortgage, ground lease, first deed of trust or other
security instrument shall have notified Tenant in writing (by the way of a
notice of
<PAGE>
assignment of lease or otherwise) of its address, Tenant shall give
such mortgagee, ground lessor or trust deed holder, or other secured
party ("Mortgagee"), simultaneously with delivery of notice to Landlord,
by registered or certified mail, a copy of any such notice of default
served upon Landlord. Tenant further agrees that said Mortgagee shall
have the right to cure any alleged default during the same period that
Landlord has to cure such default.
C. Tenant agrees from time to time upon not less than ten (10)
days prior written request by Landlord to deliver to Landlord a
statement in writing certifying in the form set forth on Exhibit "G"
attached hereto and made a part hereof by reference (i) this Lease is
unmodified and in full force and effect (or if there have been
modifications, that the Lease as modified is in full force and effect
and stating the modifications); (ii) the dates to which the rent and
other charges have been paid; (iii) Landlord is not default in any
provision of this Lease or, if in default, the nature thereof specified
in detail; (iv) the amount of monthly rental currently payable by
Tenant; (v) the amount of any prepaid rent, and (vi) such other matters
as may reasonably be requested by Landlord or any Mortgagee or
prospective purchaser of the Facility.
ARTICLE XVI
HAZARDOUS MATERIALS
16.01 Landlord warrants and represents to Tenant, that, to the best
of Landlord's knowledge and after reasonable inquiry, the Premises and
Landlord's Improvements will be in compliance with all applicable
environmental laws, rules, requirements, orders, directives, ordinances and
regulations of the United States of America or any state, city or municipal
government or lawful authority having jurisdiction or affecting the Premises
(collectively "Environmental Laws") and that none of the insulation materials
or any other materials within the Premises are or contain asbestos, or any
other known Regulated Material as defined below. Except as set forth in
Sections 16.03 and 16.05, Landlord shall, at its expense, take all action
necessary to ensure that the Facility complies with all Environmental Laws
and that the Facility is, and remains at all times, safe for use and
occupancy.
16.02 Except as set forth in Sections 16.03 and 16.05, Landlord
shall defend, indemnify and save Tenant, its officers, directors, agents and
employees, harmless from and against all claims, obligations, demands,
actions, proceedings and judgments, loss, damage, liability and expense
(including reasonable attorneys' fees and expenses) which any one or more of
them may sustain in connection with any non-compliance with any environmental
condition affecting the Facility resulting from violation of environmental
laws which are not caused by or resulting from Tenant's use and occupancy of
the Premises or Facility. This indemnity shall not apply to Landlord's
Mortgagee, successors-in-interest to Mortgagee or anyone acquiring the
Premises through Landlord's Mortgagee.
<PAGE>
16.03 Tenant shall at Tenant's own cost and expense, timely comply with
all applicable, rules, requirements, orders, directives, ordinances and
regulations arising from Tenant's use and occupancy of the Premises,
including but not limited to the Environmental Laws, and shall indemnify,
defend, save and hold harmless Landlord, its directors, officers, agents and
employees from and against any and all claims, demands, losses and
liabilities (including reasonable attorneys' fees) resulting from any
violation of the Environmental Laws when caused by or results from Tenant's
use and occupancy of the Premises.
16.04 The provisions of this Article 16 shall survive the expiration or
earlier termination of this Lease.
16.05 A. The following terms and conditions regarding environmental
matters and the Premises are included in this Lease:
(1) For the purpose of this Lease, the phrase "Regulated
Materials" shall include, but shall not be limited to, those
materials or substances defined as "hazardous substances",
"hazardous materials", "hazardous waste", "toxic substances",
"toxic pollutant" or other similar designations under the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, 42 U.S.C. 9601, ET SEQ., the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901, ET
SEQ., the Hazardous Materials Transportation Act, 49 U.S. C.
1801, ET SEQ., or regulations promulgated pursuant thereto
(herein "Environmental Laws"). "Tenant's Regulated Materials"
shall mean those Regulated Materials, brought onto, created,
stored at, handled, or generated at the Premises by or on behalf
of Tenant, its agents, employees, contractors (other than
Landlord), subtenants, assignees, suppliers or other invitees.
"Landlord's Regulated Materials" shall mean all other "Regulated
Materials" including those brought onto, created, stored at,
handled or generated at the Premises by Landlord, its agents,
employees, contractors, subtenants, assignees, suppliers or other
invitees. Also the phrase "Governmental Agency or Agencies"
means any federal, state, local or foreign government, political
subdivision, court, agency or other entity, body, organization or
group exercising any executive, legislative, judicial,
quasi-judicial, regulatory or administrative function of
government.
B. Tenant hereby covenants to Landlord and its Mortgagee that:
(1) Except for the obligations of Landlord pursuant to Section
16.01 and 16.02, Tenant shall (x) comply and shall instruct
<PAGE>
all occupants of the Premises to comply with all federal, state
and local laws, rules, regulations and orders with respect to
the discharge, generation, removal, transportation, storage and
handling of Tenant's Regulated Materials, (y) remove any Tenant's
Regulated Materials immediately upon discovery of the same, and
(z) pay or cause to be paid all costs associated with such
removal;
(2) Tenant shall keep the Premises free of any lien imposed
pursuant to any state or federal law, rule regulation or order in
connection with the existence of Tenant's Regulated Materials on
the Premises;
(3) Tenant shall not install or permit to be installed on the
Premises any Tenant's Regulated Material including, but not
limited to, asbestos, asbestos-containing materials, urea
formaldehyde insulation or any other chemical or substance which
has been determined to be a hazard to health and environment
other than supplies and materials used in the ordinary course of
its business and for which use all applicable laws, ordinances,
rules and regulations are complied with;
(4) Tenant shall not cause or permit to exist as a result of an
intentional or unintentional act or omission on the part of
Tenant or any occupant of the Premises, a releasing, spilling,
leaking, pumping, emitting, poring, emptying or dumping of any
Tenant's Regulated Materials onto the Premises or into
surrounding waters or other lands; and
(5) Tenant shall promptly provide a copy of any summons,
citation, directive, letter or other communication which it
receives from any Government Agency or Agencies concerning any
Regulated Matters on the Premises.
C. It shall constitute a Default hereunder and either party shall
be entitled to exercise all remedies available to it hereunder if:
(1) Tenant or Landlord shall fail to comply with the
covenants contained in this Article 16 within thirty (30) days
after notice or fails to commence such compliance within such
time and diligently continues such compliance to completion;
(2) any Tenant's or Landlord's Regulated Materials
are hereafter found to exist on the Premises or in its soil or
<PAGE>
groundwater and such Regulated Materials come to be on the
Premises because of the act, omission or breach of this Lease
by Landlord or Tenant, or any of their agents, employees,
contractors, subtenants or assignees, as to Tenant, on or
after the date Tenant takes possession or enters the Premises
to commence work, and either party shall fail within
seventy-five (75) days after notice thereof, to commence and
diligently pursue such actions as are necessary to remove the
same from the Premises or Facility or obtain any and all
necessary no action or no association letters for the Premises
or Facility and Landlord or Tenant such that no further action
need be taken to satisfy the applicable environmental agency;
or
(3) any summons, citation, directive, letter or other
communication, written or oral, shall be issued by any
Governmental Agency or Agencies concerning the matters
described in Subparagraph 16.05A(1) above and Landlord or
Tenant fail to cure the condition occasioning the same within
the time limit set forth in this Section 16.05C.
In the event Landlord or Tenant fails to comply with the terms of
this Article 16, each party hereby grants the other and its employees and
agents an irrevocable and non-exclusive license to enter the Premises in
order to inspect, conduct testing and remove Tenant or Landlord's Regulated
Materials. All costs of such inspection, testing and removal related to
Tenant's Regulated Materials shall be due and payable from Tenant as
Additional Rent hereunder upon demand, and all costs relating to Landlord's
Regulated Materials incurred by Tenant shall be paid by Landlord to Tenant
upon demand.
16.06 The representations, covenants and indemnifications given by
Tenant to Landlord and Landlord to Tenant in this Article 16 shall be a
separate agreement between the parties, and shall survive any termination of
the Lease.
16.07 Landlord warrants and represents that it is not otherwise aware
of any violation of the statutes, rules and regulations set forth in Section
16.05A(i) above as it relates to the Premises or Facility except, however,
that Landlord has received an off-site source and no association letter from
the Minnesota Pollution Control Agency dealing with apparent groundwater
contamination affecting the Facility resulting from dry-cleaning solvent
released by a former dry-cleaning operation previously located adjacent to
the Facility.
16.08 Landlord hereby covenants to Tenant that Landlord shall comply
with all federal, state and local laws, rules, regulations and orders with
respect to the discharge, generation, removal, transportation, storage and
handling of Landlord's Regulated Materials, (y) remove any Landlord's
Regulated Materials
<PAGE>
required by said laws to be removed immediately upon discovery thereof; and
(z) pay or cause to be paid all costs associated with such removal. It shall
constitute a default by Landlord if Landlord fails to comply with this
covenant within seventy-five (75) days after Tenant mails notice to Landlord
hereof or fails to commence such compliance within such time and diligently
continue such compliance to completion.
ARTICLE XVII
MISCELLANEOUS
17.01 Further Terms. The parties also agree:
A. Tenant represents that Tenant has dealt directly with and
only with the broker or tenant representative set forth on the Data Sheet, in
connection with this Lease and that insofar as Tenant knows, no other broker
or tenant representative negotiated or participated in negotiations of this
Lease or submitted or showed the Premises or is entitled to any commission in
connection therewith. Landlord shall be responsible for payment of Welsh
Companies and CB Commercial arising from this Lease.
B. All notices, demands and requests shall be in writing, and
shall be effectively served by forwarding such notice, demand or request by
certified or registered mail, postage prepaid, addressed to the respective
party at the address set forth on the Data Sheet, or at such other address as
such party may hereafter designate by written notice to the other party, in
which case said notice shall be effective at the time of mailing such notice.
C. All rights and remedies of Landlord under this Lease or that
may be provided by law may be executed by Landlord in its own name,
individually, or by its agent of whose appointment Tenant shall have written
notice in the name of Landlord, and all legal proceedings for the enforcement
of any such rights or remedies, including those set forth in Article 14, may
be commenced and prosecuted to final judgment and execution by Landlord or
its agent.
D. Landlord covenants and agrees that Tenant, upon paying the
Base Rent, Additional Rent and other charges herein provided for and
observing and keeping the covenants, agreements and conditions of this Lease
on its part to be kept and performed, shall lawfully and quietly hold, occupy
and enjoy the Premises during the term of this Lease.
E. The covenants and agreements herein contained shall bind
and inure to the benefit of the Landlord, its successors and assigns, and
Tenant and its permitted successors and assigns.
<PAGE>
F. If any term or provision of this Lease shall to any extent
be held invalid or unenforceable, the remaining terms and provisions of this
Lease shall not be affected thereby, but each term and provisions of this
Lease shall not be affected thereby, but each term and provision of this
Lease shall be valid and enforced to the fullest extent permitted by law.
This Lease shall be construed and enforced in accordance with the laws of the
state in which the Premises are located.
G. (1) Subsequent to the Commencement Date and payment by
Landlord of the allowances set forth in Section 22.0 (a) and (b) and any
signage allowance (as opposed to the refurbishment allowance) due to Tenant
under Section 22.0(c) for exterior Building signage initially installed by
Tenant, the term "Landlord" as used in this Lease so far as covenants or
obligations on the part of Landlord are concerned shall be limited to mean
and include only the owner or owners of the Facility at the time in question,
and in the event of any transfer or transfers or conveyances in which the
transferee assumes all obligations of Landlord under the Lease accruing after
said transfer, the then grantor shall be automatically freed and released
from all personal liability accruing from and after the date of such transfer
or conveyance as respects the performance of any conveyance or obligation on
the part of Landlord contained in this Lease to be performed, it being
intended hereby that the covenants and obligations contained in this Lease on
the part of Landlord shall be binding on the Landlord, its successors and
assigns, only during and in respect to their respective successive periods of
ownership.
(2) In the event of a sale or conveyance by Landlord of the
Facility or any part of the Facility, the same shall operate to release
Landlord from any future liability upon any of the covenants or conditions
herein contained and in such event Tenant agrees to look solely to the
responsibility of the successor in interest of Landlord in and to this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees to attorn to the purchaser or grantee, which shall be personally
obligated on this Lease only so long as it is the owner of Landlord's
interest in and to this Lease.
H. The marginal or topical headings of the several Articles and
sections are for convenience only and do not define, limit or construe the
contents of said Articles and sections.
I. All preliminary negotiations and written commitments are
merged into and incorporated in this Lease, except for written collateral
agreements executed contemporaneously herewith.
J. This Lease can only be modified or amended by an agreement
in writing signed by the parties hereto. No receipt of money by Landlord
from Tenant or any other person after termination of this Lease or after the
service of any notice or after the commencement of any suit, or after final
judgment for
<PAGE>
possession of the Premises shall reinstate, continue or extend the term of
this Lease or affect any such notice, demand or suit, or imply consent for
any action for which Landlord's consent is required, unless specifically
agreed to in writing by Landlord. Any amounts received by Landlord may be
allocated to any specific amounts due from Tenant to Landlord as Landlord
determines.
K. Landlord shall have the right to close any portion of the
building area or land area to the extent as may, in Landlord's reasonable
opinion, be necessary to prevent a dedication thereof or the accrual of any
rights to any person or the public therein. Landlord shall at all times have
full control, management and direction of the Facility, subject to the rights
of Tenant in the Premises, and Landlord reserves the right at any time and
from time to time to reduce, increase, enclose or otherwise change the size,
number and location of buildings, layout and nature of the Facility and the
other tenancies, premises and buildings included in the Facility, to
construct additional buildings and additions to any building, and to create
additional rentable areas through use and/or enclosure of common areas, or
otherwise, and to place signs on the Facility, and upon reasonable advance
written notice to Tenant to change the name, address, number or designation
by which the Facility is commonly known. In the event the notice of name
change is less than nine (9) months in advance of the effective date,
Landlord shall pay the reasonable costs of replacement stationery, business
cards and similar items on which the name of the Building is utilized.
Landlord will not name the Building after a direct competitor of Tenant. No
implied easements are granted by this Lease. Tenant shall have the
nonexclusive right in common with Landlord and tenants and occupants of the
Facility, to ingress and egress to and through the common areas of the
Facility.
L. Tenant shall permit Landlord (or its designees) to erect,
use, maintain, replace and repair pipes, cables, conduits, plumbing, vents,
and telephone, and other wires or other items, in, to and through the
Premises in chases, floors or above the dropped ceiling, as and to the extent
that Landlord may now or hereafter deem necessary or appropriate for the
proper operation and maintenance of the Facility.
M. Employees or agents of Landlord have no authority to make or
agree to make a lease or other agreement or undertaking in connection
herewith. The submission of this document for examination does not
constitute an offer to lease, or a reservation of, or option for, the
Premises. This document becomes effective and binding only upon execution
and delivery hereof by the proper officers of Landlord and by Tenant. Tenant
confirms that Landlord and its agents have made no representations or
promises with respect to the Premises or the making of or entry into this
Lease except as in this Lease expressly set forth, and agrees that no claim
or liability shall be asserted by Tenant against Landlord for, and Landlord
shall not be liable by reason of, breach of any representations or promises
not expressly stated in this Lease. This Lease, except for the Building
Rules and Regulations, in respect to which subparagraph
<PAGE>
"P" of this Article shall prevail, can be modified or altered only by
agreement in writing between Landlord and Tenant, and no act or omission of
any employee or agent of Landlord shall alter, change or modify any of the
provisions hereof.
N. Tenant shall perform, observe and comply with the Building
Rules and Regulations of the Facility, as set forth in Exhibit C attached
hereto, with respect to the safety, care and cleanliness of the Premises and
the Facility, and the preservation of good order thereon, and, upon written
notice thereof to Tenant, Tenant shall perform, observe, and comply with any
reasonable changes, amendments or additions thereto consistent with Tenant's
rights under this Lease as from time to time shall be established and deemed
advisable by Landlord for tenants of the Facility. Landlord shall not be
liable to Tenant for any failure of any other tenant or tenants of the
Facility to comply with such Building Rules and Regulations.
O. All rights and occupancy of Tenant herein shall be subject
to all governmental laws, ordinances and regulations, and Tenant shall comply
with the same.
P. All obligations of Tenant hereunder not fully performed as
of the expiration or earlier termination of the term of this Lease shall
survive the expiration or earlier termination of the term hereof, including,
without limitation, all payment obligations with respect to Operating
Expenses and Real Estate Taxes and all obligations concerning the condition
of the Premises.
Q. Subsequent to delivering occupancy of the Premises to Tenant
substantially completed and all improvements paid in full including payment
to Tenant by Landlord of the allowances set forth in Section 22.0 (a) and (b)
hereof, and any signage allowance (as opposed to the refurbishment allowance)
due to Tenant under Section 22.0(c) for exterior Building signage initially
installed by Tenant, Tenant agrees to look solely to Landlord's interest in
the Facility for the recovery of any judgment from Landlord, it being agreed
that Landlord, or if Landlord is a partnership, its partners whether general
or limited, or if Landlord is a corporation, its directors, officers or
shareholders, shall never be personally liable for any such judgment.
R. The Tenant, if any, shall furnish to Landlord promptly upon
demand, a corporate resolution, proof of due authorization of partners, or
other appropriate documentation reasonably requested by Landlord evidencing
the due authorization of Tenant to enter into this Lease.
ARTICLE XVIII
OTHER PROVISIONS
18.01 Addenda. The provisions set forth in the Exhibits attached to
this Lease are hereby incorporated by reference.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease to be
effective on the day and year first above written.
LANDLORD: MERIDIAN CROSSINGS LLC, A MINNESOTA
LIMITED LIABILITY COMPANY
By: Meridian Properties Real Estate
Development LLC, a Minnesota limited
liability company, its manager
By: /s/ BRYANT J. WANGARD
-------------------------------------
Bryant J. Wangard
Its: Manager
TENANT: FOURTH SHIFT CORPORATION, A MINNESOTA
CORPORATION
By: /S/ DAVID G. LATZKE
-------------------------------------
Its: VP & CFO
ACKNOWLEDGMENT: Meridian Properties Real Estate
Development LLC has executed the Lease
solely for purposes of Section 27.2 of the
Lease and for no other purpose.
MERIDIAN PROPERTIES REAL ESTATE
DEVELOPMENT LLC, a Minnesota limited
liability company
By: /s/ BRYANT J. WANGARD
-------------------------------------
Bryant J. Wangard
Its: Manager
<PAGE>
RIDER TO LEASE
ARTICLE XIX
OPTION TO RENEW
Section 19.0 Tenant shall have the right, subject to the provisions
hereinafter provided, to extend the term of this Lease for one (1) period of
five (5) each on the terms and provisions of this Article provided hereafter,
such five (5) year renewal period being sometimes herein referred to as a
"Renewal Term". The conditions to such renewal shall be as follows:
(a) That this Lease is in full force and effect and Tenant is not in
default in the performance of any of the terms, covenants and
conditions herein contained, in respect to which notice of default has
been given hereunder which has not been or is not being remedied in
the time limited in this Lease, at the time of exercise of the right
of renewal, but Landlord shall have the right at its sole discretion
to waive the non-default conditions herein;
(b) That such Renewal Term shall be on the same terms, covenants and
conditions as in this Lease provided; provided, however, that annual
Base Rent for each such renewal space on the date such renewal term
shall commence in relation to comparable (in quality and location)
office space located in the relevant market area which shall be deemed
to be the Southwest Minneapolis 494 corridor. The fair market Base
Rent of the Premises shall be determined as of the date six (6) months
prior to commencement of the Renewal Term. Provided Tenant has
properly elected to renew the term of this Lease, and if Landlord and
Tenant fail to agree at least eleven (11) months prior to commencement
of the applicable Renewal Term upon the fair market Base Rent of the
Premises, the amount of the fair market Base Rent of the Premises
shall be determined by arbitration in accordance with the provisions
of Article 20 hereof. The fair market Base Rent of the Premises shall
be based upon the highest and best use of the Premises and shall be
determined separately on a per square foot basis for the initial
Premises and each separate additional space added to the Premises, if
any, pursuant to Tenant's options to expand herein. In no event shall
the Base Rent of the Premises for the Renewal Term be less than the
Base Rent payable by Tenant under the terms of this Lease immediately
prior to commencement of such applicable Renewal Term.
(c) That Tenant shall exercise its right to a Renewal Term provided
herein, if at all, by notifying Landlord in writing of its election to
exercise the right to renew the term of this Lease no later than the
date two hundred seventy (270) days prior to the date of commencement
of the applicable Renewal Term. Upon notification with respect to
such renewal, and for a period of thirty (30) days thereafter, the
parties hereto shall make a good faith effort to agree upon the fair
market Base Rent of the Premises for such renewal term. Any agreement
reached by the parties hereto with respect to such fair market Base
Rent of the Premises for such renewal term shall be expressed in
writing and shall be executed by the parties hereto, and a copy
thereof delivered to each of the parties. In the event that
<PAGE>
Landlord and Tenant fail to agree within the thirty (30) day time
prior set forth in this subparagraph (c), the fair market Base Rent
for the Premises for such Renewal Term shall be determined by
arbitration in the manner set forth in Article 20 ("Arbitration")
hereof. However, such arbitrators shall be directed to determine the
fair market Base Rent for the Premises as above provided and in
determining same said appraisers shall be instructed to make said
appraisal independently, without consulting with each other. Upon
established date at an established time all three (3) arbitrators
shall simultaneously submit their determinations as to fair market
Base Rent, such determinations to be submitted in sealed envelopes
and to be opened jointly by Landlord and Tenant. The fair market
Base Rent for the Renewal Term shall be determined by averaging
the two (2) arbitrators' fair market Base Rent determinations
which are closets in amount to each other (or if one appraisal is
less than one of the other appraisals and more than the other
appraisal by the same amount, all three appraisals shall be
averaged).
ARTICLE XX
ARBITRATION
Section 20.0 Any disagreement, dispute or determination required by or
arising under the provisions of Article XIX ("Option to Renew"), of this
Lease requiring arbitration shall be carried on and concluded in accordance
with the provisions of paragraphs (a) and (b) hereof:
(a) In each case where it shall become necessary to resort to arbitration,
and the subject of the arbitration is to determine fair market Base
Rent, all arbitrators appointed by or on behalf of either party or
appointed pursuant to the provisions hereof shall be MAI members of
the American Institute of Real Estate Appraisers with not less than
ten (10) years of experience in the appraisal of improved commercial
and industrial real estate in the Minneapolis, Minnesota metropolitan
area and be devoting substantially all of their time to professional
appraisal work at the time of appointment and be in all respects
impartial and disinterested. In determining fair market Base Rent the
arbitrators shall consider the status of tenant improvements in the
Premises in comparison to leasehold improvements in market comparables
and shall take into consideration that no leasing commission is
payable in respect to any leasing by Tenant or Landlord as compared to
market comparables where such commissions may be payable.
(b) The party desiring such arbitration shall give written notice to that
effect to the other party, specifying in such notice the name, address
and professional qualifications of the person designated to act as
arbitrator on its behalf. Within twenty (20) days after service of
such notice, the other party shall give written notice to the party
desiring such arbitration specifying the name, address and
professional qualifications of the person designated to act as
arbitrator on its behalf. If the two (2) arbitrators so selected
cannot agree within fifteen (15) days after the appointment of the
second arbitrator, the two (2) arbitrators shall, within ten (10) days
thereafter, select a third arbitrator. The decision of the
arbitrators so
<PAGE>
chosen shall be given within a period of thirty (30) days after the
appointment of such third arbitrator. Each party shall pay the
fees and expenses of the arbitrator appointed by or on behalf of
such party and the fees and expenses of the third arbitrator shall
be borne equally by both parties. If the party receiving a request
for arbitration fails to appoint its arbitrator within the time
above specified, or if the two (2) arbitrators so selected cannot
agree on the selection of the third arbitrator within the time
above specified, then either party, on behalf of both parties, may
request such appointment of such second or third arbitrator within
the time above specified, as the case may be, by application to any
Judge of the District Court of the County of Hennepin, State of
Minnesota, upon ten (10) days prior written notice to the other
party of such intent. The arbitrators so selected shall have all
rights and powers conferred on them by the Uniform Arbitration Act
of the state in which the Premises are situated, and except as
otherwise provided for herein, the arbitration proceedings shall
be carried on and governed by such Act.
ARTICLE XXI
RIGHT OF NOTICE
Section 21.0 Landlord agrees, from time to time, upon written request of
Tenant to advise Tenant as to space available on the third floor of the
Facility ("Notice Space"), provided Tenant treats such information as
confidential and does not disclose said information. If during the initial
or any renewal term of this Lease any occupied area on the third (3rd) floor
of the Facility is vacated or to be vacated by the present tenant, its
successors and assigns, and Landlord desires to lease any of such space
(subject to the terms of Article XXV herein), Landlord shall deliver a notice
of such intent to lease in writing to Tenant offering to lease such space to
Tenant upon the terms and conditions (including rent) as set forth in the
Lease for the Premises initially demised except that (i) if the space was
previously unimproved Tenant shall receive an "Allowance" per rentable square
foot of the as leased Notice Space (as determined as set forth below) for
tenant improvements pro rated for the number of years remaining in the
initial Term from the date the term commences on the Notice Space so leased,
and (ii) if the space was previously improved, the Tenant shall accept the
Premises in "as-is" condition without contribution from Landlord for tenant
improvements. For purposes of this Section 21.0, "Allowance" shall be
determined as follows:
Upon completion of Landlord's Improvements, Landlord shall determine an
"Allowance" number to be used for purposes of Section 21.0 hereof based
upon the cost to Landlord of all Landlord's Improvements to the Premises
below the finished ceiling, specifically excluding from such costs (i) any
amounts reimbursed by Tenant, and (ii) the amount of the Construction
Allowance set forth in Section 23.1; and including an amount equal to the
upgrade cost set forth in Section 23.1 (b)(8) for the executive offices, if
any, added in the to be leased Notice Space. Said net amount shall be
divided by the rentable area of the Premises and said amount shall be the
Allowance per rentable square foot utilized in this Section 21.0. Landlord
shall provide reasonable evidence documenting said costs if requested by
Tenant. In addition to the Allowance, the allowance described in Section
22.0(b) shall be
<PAGE>
provided to Tenant for each rentable square foot of space so taken under
this Section 21.0.
Tenant shall have ten (10) business days from receipt of such notice to
deliver Landlord notice that Tenant desires to execute the lease amendment
with Landlord for such proposed space upon the conforming terms and
conditions specified in Landlord's notice. If Tenant fails to deliver such
notice to Landlord within such ten (10) business day period or fails to
execute an amendment as above provided within an additional ten (10) business
day period, Landlord may lease such space to a third party. These rights of
Tenant herein shall become inoperative as to any space in respect to which
the Tenant does not exercise its rights to lease as set forth herein or in
respect to space for which Tenant does not execute the lease amendment within
the above required ten (10) day period. The Term shall commence on the Notice
Space to be leased the first date that said space is available for Tenant to
take possession, if the space has previously been fit-up or thirty (30) days
after the space is made available to Tenant if said space has not previously
been improved.
Landlord agrees, that Tenant shall have the right, until December 10, 1997 to
expand the Premises initially demised by up to 5,000 rentable square feet and
Landlord agrees that it will retain at a minimum approximately 5,000 rentable
square feet adjacent to the Premises (in a location acceptable to Landlord
which results in a readily leasable configuration for the balance of the
third floor not leased to Tenant). Said space shall be leased to Tenant upon
all of the terms, conditions and rent set forth herein for the Premises
initially intended to be demised hereunder, except that there shall be no
Section 23.1 Construction Allowance other than for item (b)(8), to the
extent executive offices are included in such additional space and there
shall be included the Space Planning Allowance set forth in Section 22.0(b).
Section 21.1 Landlord agrees that all office space on the third floor of
the Building shall be subject to the provisions of this Article 21.1.
Landlord agrees that without the written consent of Tenant it will not
initially lease any office space on the third floor of the Building either
(i) that is larger than 5,000 rentable square feet, or (ii) for a term that
terminates after November 1, 2003 (including all options to renew or extend
the term of said lease) or in the alternative does not allow Landlord to
relocate said premises. The term "initially lease" refers to the first lease
of said space to a tenant.
ARTICLE XXII
TENANT ALLOWANCES
Section 22.0 Provided Tenant is not in default under the terms of the
Lease, has taken possession of the Premises and paid the Base Rent due for
the initial one (1) month of the Term, Landlord shall provide and pay to
Tenant the following allowances:
(a) Moving Allowance: Three Hundred Thousand dollars ($300,000.00),
payable thirty (30) days after the Commencement Date, irrespective of
actual moving costs.
<PAGE>
(b) Space Planning Allowance: Eighty-five cents ($ .85) per rentable
square foot of Premises initially demised for space planning performed
by Tenant's space planner and all costs associated with Tenant's jet
plan previously completed by Tenant's architect, irrespective of the
actual costs of said space planning.
(c) Signage and Refurbishment Allowance: Collectively in the amount of
One Hundred Fifty Thousand and NO/100 Dollars ($150,000.00). Tenant
shall have the right to utilize said allowance for the actual,
demonstrable costs of designing, manufacturing, and installing the
exterior building sign more particularly described in Article XXX
hereof. Any amount used for said signage shall be deducted from the
One Hundred Fifty Thousand and NO/100 Dollars ($150,000.00) and the
balance shall be utilized by Tenant for refurbishment of the Premises
and be due and payable to Tenant at the end of the fifth full year of
the Lease Term.
ARTICLE XXIII
LANDLORD'S IMPROVEMENTS
Section 23.0 Landlord, in addition to the payment of the allowance set
forth in Section 23.1, and Section 22.0, at its sole cost and expense, shall
construct and improve the Building and Premises in accordance with the
outline plans and specifications which are indicated and specified on Exhibit
"D" attached hereto and incorporated herein by reference ("Outline Plans and
Specifications"). Prior to or simultaneously with the execution and delivery
of this Lease, Landlord has furnished Tenant, for information purposes only,
with copies of all available plans and specifications for the Base Building
requested by Tenant. Thereafter, Landlord agrees upon request to provide from
time to time, any plan or specification modifications which affect Tenant's
Premises. Tenant shall provide, at its sole cost and expense, complete
construction plans and specifications ("Construction Documents") for all
improvements to the Premises based on the Outline Plans and Specifications on
or before February 15, 1998. Upon receipt of said Construction Documents,
Landlord shall submit same to its contractor for development of mechanical
electrical and plumbing ("MEP") plans and specifications based upon said
Construction Documents. Landlord shall have ten (10) business days to review
the Construction Documents and provide Tenant with detailed comments and
recommendations. Upon receipt of the MEP plans and specifications, Landlord
shall provide copies of same to Tenant for Tenant's review and comment, which
shall occur within ten (10) business days of said delivery. In the event
Landlord and Tenant are unable to agree as to the final Construction
Documents (including MEP plans and specifications) on or before February 25,
1998, either party, upon ten (10) days' written notice to the other, may
request arbitration of said dispute. If arbitration is requested, the
procedure described in Article XIX (c) and Article XX shall be utilized,
except the arbitrators shall be design professionals (architects or
engineers) with at least ten (10) years experience in design and construction
of office buildings in the Minneapolis-St. Paul metropolitan area, all
licensed to do business in Minnesota. Landlord shall not be required to
install any improvements to the Premises except those specified on Exhibit
"D" or such changes required by the municipalities in its review and approval
of the
<PAGE>
Construction Documents as to their compliance with local building codes
unless the timing, price and all other matters relating to such other
improvements have been agreed upon in writing between Landlord and Tenant.
Anything herein to the contrary notwithstanding, in the event Tenant desires
any improvements in excess of those set forth on Exhibit "D" or any change
orders after final approval of Construction Documents, Landlord shall provide
same [not to exceed the final amount of (i) the Construction Allowance
described below, and (ii) the Moving Allowance set forth in Article XXII
hereof], and the costs of such excess improvements shall be charged against
Tenant by reducing the Construction Allowance and Moving Allowance amounts
provided for in Article XXII herein on a "dollar-for-dollar" basis. Landlord
will agree to additional improvements costing in excess of the Construction
Allowance and Moving Allowing provided Tenant shall be responsible for timely
payment of Landlord's increased costs therefor pursuant to a standard
construction draw process (monthly). Landlord agrees that the charge to
Tenant for change orders shall be a direct pass through of the cost charged
Landlord by its General Contractor. Further, and anything herein to the
contrary notwithstanding, in the event of a delay in delivery to Landlord of
complete Construction Documents for the improvements in the Premises in
accordance herewith, which results in delay in construction of the Landlord's
Improvements due to Tenant's failure to deliver its Construction Documents
complete in all manners (including selection of all finishes) in accordance
with the above requirements, the Lease shall in any event commence on
November 1, 1998, subject to extension for any portion of such delay not
caused by such delay by Tenant. Tenant shall, in any event, be responsible
at its sole costs and expense to provide all cabling, wiring and furniture
and equipment necessary for its business, provided any cabling and wiring in
the Building or Premises shall be removed by Tenant at its sole cost and
expense upon expiration of the Term or earlier termination of the Lease.
Tenant's rights to enter the Premises are as set forth in Article XXVI. In
the event of a delay in delivery of the Premises after November 1, 1998, any
portion of the delay caused independently by Landlord (not resulting from a
delay caused by Tenant) shall not act to excuse Landlord for the penalties
set forth in Section 27.2 hereof and Landlord shall be excused from such
penalties only to the extent the delay was the result of the action or
inaction of Tenant.
Section 23.1 Construction Allowance. Landlord shall provide to Tenant a
Construction Allowance of Sixty Thousand and NO/100 Dollars ($60,000.00) to
be used by Tenant solely for the purpose of providing upgrades to Landlord's
Improvements from those specified on Exhibit "D" in the following areas:
(a) WOOD AND PLASTIC -
2. Reception desk;
3. Boardroom A\V cabinets; and
4. CIM Center.
(b) FINISHES -
6. Upgrade specialty carpet in reception, elevators, lobby, CIM
Center and Boardroom;
7. Stone or wood accent flooring in elevator lobby and reception;
<PAGE>
8. Upgrade carpet in executive offices;
9. EDS floor in computer room; and
10. Upgrade ceiling tile in CIM Center and Boardroom.
(c) ELECTRICAL -
3. Upgrade lighting in lobby, reception, CIM Center, Boardroom,
Training Rooms and Customer Conference Rooms.
Landlord's contractor shall provide all such upgraded finishes as
selected by Tenant, subject to the Sixty Thousand and NO/100 Dollars
($60,000.00) allowance limitation. Tenant may elect to exceed any allowance
amount at its sole cost and expense provided that no delays result in
Landlord's construction and Tenant provides Landlord with acceptable means of
payment for said excess improvements. Any improvements to be paid by Tenant
by utilization of an allowance or otherwise, shall be performed on an open
book basis and to the extent feasible considering schedule, market conditions
and construction coordination, bid out to the trades by Landlord's general
contractor; Landlord's general contractor shall use reasonable efforts under
the circumstances described above to bid all material portions of the job to
three (3) separate, responsible bidders. Tenant may add subcontractors to
the bid list, if done in a timely, responsible manner. Said improvements
shall be performed by Landlord's general contractor at cost plus five percent
(5%) without any additional upcharge by Landlord.
ARTICLE XXIV
PARKING RIGHTS OF TENANT
Section 24.0 Facility Parking. Tenant shall have the right in common with
other tenants to have the use for its employees and invitees of the common
parking facilities at the Facility, such use to be in common with the other
tenants in the Facility. Landlord reserves the right to designate and
redesignate areas of the appurtenant common parking facilities where Tenant,
its agents, employees and invitees shall park and may exclude Tenant, its
agents, employees and invitees from parking in other areas as designated and
redesignated by Landlord; provided, however, Landlord shall not be liable to
Tenant for the failure of any tenant, its invitees, employees, agents and
customers to abide by Landlord's designations or restrictions. Landlord
shall have the right to designate, and Tenant shall thereupon have the right
to use as the exclusive parking spaces to be used by Tenant, its agents,
employees and invitees, only that percentage that the rentable office area of
the Premises bears to the rentable office area of the Facility. Tenant, its
agents, employees and invitees shall not use more (in absolute numbers) of
the common parking facilities at the Facility (exclusive of the underground
garage) than Tenant could use if Landlord made the designations permitted
herein. Anything in this Lease to the contrary notwithstanding, all costs
and expenses of such special parking control, signs in connection therewith,
and costs of any enforcement shall be an Operating Expense pursuant to the
provisions of Article II G hereof.
Section 24.1 Reserved Parking. In addition thereto, Landlord hereby rents to
Tenant and Tenant leases from Landlord three (3) contract executive reserved
parking stalls on the lower level of the Facility for the Term of this Lease.
Tenant agrees to execute the reserved stall parking lease attached hereto as
Exhibit "F" upon execution of this Lease.
<PAGE>
The rental for said reserved stalls shall be $95.00 per stall per month
during the initial ten (10) year Term of this Lease. Tenant, upon request,
may license up to seven (7) additional stalls at the same initial rate, and
Landlord shall provide same if available at the time of request.
ARTICLE XXV
INITIAL EXPANSION RIGHT
Section 25.0 On or before December 10, 1997, Tenant shall have the right to
increase the area of the Premises by 5,700 rentable square feet upon written
notice to Landlord, said additional area to be located on the third floor of
the Building.
ARTICLE XXVI
INSTALLATION OF TENANT'S TRADE FIXTURES
Section 26.0 Tenant shall be allowed to install its fixtures and furniture
and equipment in the Premises during the final sixty (60) days of
construction of Landlord's Improvements provided that Tenant does not thereby
interfere with the completion of Landlord's Improvements or occasion any
labor dispute as a result of such installation and provided further that
Tenant does hereby agree to assume all risk of loss or damage to such
property and other personal property of Tenant, and to indemnify, defend and
hold harmless Landlord from any loss or damage to such property and other
personal property of Tenant, and to indemnify, defend and hold harmless
Landlord from any loss or damage to such trade fixtures and improvements and
property, and from all liability, loss or damage arising from any injury to
the property of Landlord, or its contractors, subcontractors or material men
and any death or personal injury to any person or persons arising out of such
installations. Tenant shall be responsible for loss or damage (including
loss of rents from Tenant) arising out of delays caused by interference with
Landlord's Improvements.
ARTICLE XXVII
LANDLORD'S RIGHT TO RELOCATE TENANT
Section 27.0 Landlord may, by providing notice to Tenant on or before
January 1, 1998, relocate the Premises from the third, fourth and fifth
floors of Phase I, Meridian Crossings to the sixth, seventh and eighth floors
of Phase II of Meridian Crossings located immediately adjacent to the north
of the Phase I Building. Said Phase II Building is to be constructed
utilizing the same Base Building Plans and Specifications (allowing minor
deviation in design-build portions of the Base Building) as were utilized in
the construction of Phase I, except that a link may be designed at the first
level to connect to Phase I. In such event, the Lease would be assigned to
the Landlord controlled entity which will own Phase II and Tenant agrees, to
the extent required, to reaffirm the Lease. The Commencement Date and all
other terms and conditions set forth in this Lease shall remain in full force
and effect except that the Premises will be located in a different building,
on different floors as stated above.
<PAGE>
Section 27.1 Landlord agrees that any additional reasonable third party,
out-of-pocket costs incurred by Tenant in conforming (as opposed to
redesigning) the Construction Documents prepared for Phase I to Phase II
shall be paid for by Landlord.
Section 27.2 Landlord agrees that in the event Landlord exercises its right
to relocate Tenant into Phase II, in such event if Landlord fails to deliver
possession of the Premises substantially completed and ready for Tenant's
occupancy (other than for delays resulting from the failure of Tenant to
perform its covenants and obligations under this Lease within the timetable
required herein) on or before November 1, 1998, Landlord shall be responsible
to reimburse Tenant for all costs and damages resulting from Landlord's
failure to deliver possession of the Premises to Tenant on or before November
1, 1998 including but not limited to holdover rent and other lease charges
and liabilities in excess of the amount due from Tenant under its existing
lease immediately prior to November 1, 1998 ("Holdover Costs"). Failure to
give possession of the Premises on or before November 1, 1998 shall in no way
affect the validity of this Lease or the obligations of Tenant hereunder.
Tenant agrees to use all reasonable efforts to minimize and mitigate the
Holdover Costs. Meridian Properties Real Estate Development LLC acknowledges
that it shall be liable to Tenant for any costs, damages or liabilities
arising under this Section 27.2 hereof.
Landlord agrees that it can not unilaterally require Tenant to relocate to
Phase II if the footings and foundations of the building for Phase II are not
substantially completed on or before January 1, 1998. If, said footings and
foundations are not substantially completed by January 1, 1998, Tenant shall
have the right to approve such transfer and shall not unreasonably withhold
its consent if Landlord can reasonably demonstrate assurance of its ability
to meet the November 1, 1998 Commencement Date.
ARTICLE XXVIII
REAL ESTATE TAX REBATE
Section 28.0 During the initial ten (10) year Term of the Lease only,
provided Tenant is not in default beyond the notice and cure period set
forth herein, Landlord agrees to pay and rebate to Tenant two (2) times per
Lease Year (approximately in April and November), ten percent (10%) of the
amount of real estate taxes only (excluding special assessments included
within the real estate tax bill issued by the taxing authority and paid or
payable by Tenant) actually paid by Tenant to Landlord pursuant to Article II
hereof. The initial payment would occur in 1999. And except that the
parties shall enter into an amendment to this lease giving both parties
equivalent rights in the Phase II building, including without limitation,
equivalent expansion rights under Article XXI and XXV hereof, and including
appropriate modification of the design schedule.
<PAGE>
ARTICLE XXIX
SECURITY DEPOSIT
Section 29.0 Within ten (10) business days of full execution hereof, Tenant
shall deposit with Landlord the sum of Two Hundred Fifty Thousand Dollars
($250,000.00) in the form of an irrevocable sight draft Letter of Credit in
form attached hereto as Exhibit "H", and issued by a Silicon Valley Bank as
and for a security deposit for the full and faithful performance by Tenant of
each and every term, provision, covenant and condition of this Lease. Said
Letter of Credit shall be automatically increased to the sum of Five Hundred
Thousand Dollars ($500,000.00) upon the date thirty (30) days prior to the
scheduled commencement of tenant improvement work in the Premises by
Landlord. Such Letter of Credit shall be issued in the name of Landlord in
the form attached hereto as Exhibit "H" shall be held by Landlord. In the
event that Tenant defaults in respect to any of the terms, provisions,
covenants and conditions of this Lease, including, but not limited to, the
payment of any rentals or other charges or items to be paid or provided for
by Tenant, Landlord may use, apply or retain the whole or any part of the
security so deposited for the payment of any such rentals in default or for
any other sum which Landlord may expend or be required to expend by reason of
Tenant's default, including, but not limited to, any damages or deficiency in
the reletting of the Premises, whether such damages or deficiency may accrue
before or after re-entry by Landlord. It is expressly understood and agreed
that such deposit is not an advance rental deposit or a measure of
Landlord's damages in case of Tenant's default. Upon application of any part
of the deposit by Landlord as provided herein, Tenant shall pay to Landlord
on demand the amount so applied in order to restore the security deposit to
its original amount. Any application of the deposit by Landlord shall not be
deemed to have cured Tenant's default except to the extent of payment
resulting from such application provided the security deposit is immediately
restored to the full amount held prior to said application. Landlord agrees,
for the period prior to November 1, 1998, to provide Tenant with an
allowance, to be paid upon the Commencement Date, equal to one-half (1/2) of
the fee charged by the Bank for issuance of the Letter of Credit. Tenant
shall provide Landlord with evidence of the fee charged by the issuing bank,
and Tenant agrees it will negotiate the best available fee from said bank for
issuance.
In the event of a bona fide sale of the Building of which the Premises
are a part, Landlord shall have the right to transfer the security deposit to
its vendee for the benefit of Tenant, and thereafter Landlord shall be
released of all liability for the return of such deposit and Tenant agrees to
look to said vendee for the return of its security deposit. Upon request,
Tenant will re-issue the Letter of Credit in the name of vendee, subject to
payment by Landlord of reasonable administrative and legal costs of
reissuance. It is agreed that this Article XXIX shall apply to every
transfer or assignment made of the security deposit to any new landlord.
This security deposit shall not be assigned or encumbered by Tenant. It
is expressly understood that the re-entry of the Premises by Landlord for any
default on the part of Tenant prior to the expiration of the term of this
Lease shall not be deemed a termination of this Lease so as to entitle Tenant
to recover the security deposit, and the
<PAGE>
security deposit shall be retained and remain in the possession of Landlord
until the end of the term of this Lease, except as set forth below.
Actions by Landlord against Tenant for breach of this Lease shall in no
way be limited or restricted by the amount of this security deposit and
resort to such deposit shall not waive any other rights or constitute an
election of remedies which Landlord may have.
Notwithstanding the foregoing provisions, if , as of November 1, 1999,
there have been no uncured defaults by Tenant under this Lease, and the Lease
is then in full force and effect, the amount of the security deposit held by
Landlord shall be reduced to Four Hundred Thousand and NO/100 Dollars
($400,000.00) and a replacement Letter of Credit supplied evidencing the new
amount shall be substituted for the above Letter of Credit; and, if, as of
November 1, 2000, there have been no uncured defaults by Tenant under this
Lease, and the Lease is then in full force and effect, the amount of the
security deposit held by Landlord shall be reduced to Three Hundred Thousand
and NO/100 Dollars ($300,000.00) and a replacement Letter of Credit supplied
evidencing the new amount shall be substituted for the above Letter of
Credit; and, if, as of November 1, 2001, there have been no uncured defaults
by Tenant under this Lease, and the Lease is then in full force and effect,
the amount of the security deposit shall be reduced to Two Hundred Thousand
and NO/100 Dollars ($200,000.00) and a replacement Letter of Credit supplied
evidencing the new amount shall be substituted for the above Letter of
Credit; and, if, as of November 1, 2002 there have been no uncured defaults
by Tenant and the Lease remains in full force and effect, the amount of the
security deposit shall be reduced to One Hundred Thousand and NO/100 Dollars
($100,000.00) and a replacement Letter of Credit supplied evidencing the new
amount shall be substituted for the above Letter of Credit; and, if, as of
November 1, 2003 there have been no uncured defaults by Tenant under this
Lease and the Lease is then in full force and effect, the requirement for a
security deposit hereunder shall be terminated, and the security deposit then
held by Landlord shall be returned to Tenant.
ARTICLE XXX
EXTERIOR BUILDING SIGNAGE
Section 30.0 Landlord shall allow Tenant the non-exclusive right to erect a
sign on the exterior of the Facility, which sign shall be Tenant's name
and/or "logo", all at Tenant's sole cost and expense. Tenant shall pay all
costs of maintenance thereof and shall keep same in good condition, order and
repair at its sole cost and expense and shall remove same prior to
termination of the Term of this Lease and shall repair and restore any damage
to the Facility caused by such installation and/or removal. Any such sign
shall be subject to the terms of any restrictive covenants recorded in
connection with the Property and all applicable laws, ordinances and
regulations. Landlord (at its cost) has designed the Building such that the
brackets and connectors, including electric feeds, are existing in the
curtain wall and curtain wall system to support exterior signage.
ARTICLE XXXI
<PAGE>
NOTICE UPON ENTRY
Section 31.0 Anything in this Lease to the contrary notwithstanding,
Landlord shall give Tenant reasonable notice, written or oral, in the event
Landlord intends to enter the Premises for purposes of inspection, repair,
maintenance or alterations of the Facility or Premises, but in no event shall
more than twenty-four (24) hours notice be required and no notice shall be
required in the event of routine janitorial services or an emergency.
Landlord shall perform its repair or other operations in the Premises with
all due diligence and care and, in connection therewith, shall interfere with
the business of Tenant as little as reasonably possible under the
circumstances; provided, however, nothing herein shall require Landlord to
perform any necessary work during other than normal business hours.
ARTICLE XXXII
INTERRUPTION OF SERVICE
Section 33.0 Interruption of Services. No interruption in, or temporary
stoppage of, any of the aforesaid services caused by repairs, renewals,
improvements, alterations, strikes, lockouts, labor controversy, accidents,
inability to obtain fuel or supplies or other causes beyond Landlord's
reasonable control shall be deemed an eviction or disturbance of Tenant's use
and possession, or render Landlord liable for damages, by abatement of rent
or otherwise or relieve Tenant from any obligation herein set forth. In no
event shall Landlord be required to provide any heat, air conditioning,
electricity or other service in excess of that permitted by voluntary or
involuntary guidelines or laws, ordinances or regulations of governmental
authority.
ARTICLE XXXIII
COMMUNICATION ANTENNA
Section 33.0 Landlord licenses Tenant to use up to 100 square feet of the
rooftop area of the Facility in a location reasonably designated by Landlord
for the purpose of installing an antenna (if such dish is not larger than
ten feet (10') in diameter and the top of such dish is not more than six feet
(6') above the roof) and for the use and operation of that antenna and the
area reasonably necessary to connect the antenna by cable to the Premises.
Said installation shall be in accordance with plans and specifications
approved by Landlord (which approval shall not unreasonably be withheld) to
include the means of attaching the portion of such equipment to the roof of
the Facility or improvements located thereon and to include painting or
screening reasonably acceptable to Landlord. Tenant shall have the
responsibility to secure all necessary approvals from State, Federal and
other governmental authorities to construct, operate and maintain such
equipment. All such equipment shall be operated, constructed and maintained
by Tenant in accordance with applicable laws, ordinances, rules and
regulations in compliance with the requirements of the insurers of the
Facility and in accordance with reasonable rules and regulations of Landlord
relating to use of the roof. Tenant shall indemnify and defend Landlord from
and against all loss, claim damage and expense arising out of the
construction, maintenance and operation of such equipment. Said antenna may
be used
<PAGE>
solely for internal business purposes of Tenant and shall in no event be used
for any commercial purpose. All work in connection with such equipment shall
be done by Tenant as an alteration or improvement under Article VIII hereof;
provided, no such action shall materially interfere with work being performed
by Landlord or cause a labor dispute. Tenant shall give to Landlord notice
of any notices which Tenant receives from third parties that any of the
equipment is or may be in violation of any law, ordinance, or regulation.
Tenant shall pay all taxes of any kind or nature whatsoever levied upon said
equipment and all licensing fees, franchise taxes and other charges, expenses
and other costs of any nature whatsoever relating to the construction,
ownership, maintenance and operation of said equipment. Landlord shall
provide reasonable access for Tenant to the roof. Tenant agrees to refrain
from interference with the operation of radio, television or other
electromagnetic radiation and reception facilities or AM or FM broadcasting
and two-way radio and microwave transmission in and around the Facility which
comply with U.S. Government regulations. Nothing herein shall prevent
Landlord from licensing others to use the roof in other areas of the Facility
for development, installation and operation of electromagnetic radiation and
reception facilities or FM broadcasting and two-way radio and microwave
transmission. Landlord agrees that in any other leases or licenses of
antenna on the Facility roof, that such leases and licenses will contain
similar language prohibiting interference with other rooftop antenna as is
contained herein.
ARTICLE XXXIV
MEASUREMENT OF RENTABLE AREA
Section 34.0 In respect to measurement of rentable area of the Building or
Premises or any expansion area added to the Premises, if any, pursuant to the
terms of this Lease, Landlord shall first determine the useable area and
rentable area of each floor (using the BOMA measurement standard ANSI-BOMA
265.1 - 1996). The Landlord shall add the (i) total rentable area of the
Building, and (ii) the total useable area as determined for each floor
measured using the aforementioned standard and then divide (i) by (ii) to
determine the building rentable/useable factor ("Factor"). Finally, for each
floor of the Premises, Landlord shall multiply Tenant's useable area by the
Factor to determine Tenant's rentable square foot area for each floor. The
total of said rentable square foot area for each floor of the Premises shall
be deemed to be the rentable square foot area of the Premises, subject to
change pursuant to Section 2.02 D herein. The same methodology shall be
utilized to determine and/or adjust the total Building rentable area and
usable area.
<PAGE>
EXHIBIT "A"
PREMISES
<PAGE>
EXHIBIT "B"
LEGAL DESCRIPTION
Lot 3, Block 3, Cloverleaf Addition, according to the recorded plat thereof,
and situate in Hennepin County, Minnesota.
In the event Landlord exercises its right to relocate the Tenant Premises
into the Phase II Building. The legal description shall be replaced with the
following:
Lot 2, Block 3, Cloverleaf Addition, according to the recorded plat thereof,
and situate in Hennepin County, Minnesota.
Landlord shall have the right to replat or otherwise modify the plat of Block
3 Cloverleaf Addition necessary in its reasonable discretion to develop Lot
2, Block 3 thereof.
<PAGE>
EXHIBIT "B"
SITE PLAN
<PAGE>
EXHIBIT C
BUILDING RULES AND REGULATIONS
1. Any sign, lettering, picture, notice or advertisement installed on
or in any part of the Premises and visible from the exterior of the Facility,
or visible from the exterior of the Premises, shall be installed at Tenant's
sole cost and expense, and in such manner, character and style as Landlord
may approve in writing. Anything herein to the contrary notwithstanding,
approval as to signs shall be subject to Landlord's approval which may be
withheld in Landlord's sole discretion. In the event of a violation of the
foregoing by Tenant, Landlord may remove the same without any liability and
may charge the expense incurred by such removal to Tenant. See Article XXX
as to Tenant's exterior Building signage.
2. No awning or other projection shall be attached to the outside
walls of the Facility. No curtains, blinds, shades or screens visible from
the exterior of the Facility or visible from the exterior of the Premises
shall be attached to or hung in, or used in connection with any window or
door of the Premises without the prior written consent of Landlord. Such
curtains, blinds, shades, screens or other fixtures must be of a quality,
type, design and color, and attached in the manner approved by Landlord.
3. Tenant, its servants, employees, customers, invitees and guests
shall not obstruct sidewalks, entrances, passages, corridors, vestibules,
halls, or stairways in and about the Facility which are used in common with
other tenants and their servants, employees, customers, guests and invitees,
and which are not a part of the Premises of Tenant. Tenant shall not place
objects against glass partitions or doors or windows which would be unsightly
from the Facility corridors or from the exterior of the Facility and will
promptly remove any such objects upon notice from Landlord.
4. Tenant shall not make excessive noises, cause disturbances or
vibrations or use or operate any electrical or mechanical devices that emit
excessive sound or other waves or disturbances or create obnoxious odors, any
of which may be offensive to the other tenants and occupants of the Facility,
or that would interfere with the operation of any device, equipment, radio,
television broadcasting or reception from or within the Facility or elsewhere
and shall not place or install any projections, antennas, aerials or similar
devices inside or outside of the Premises or on the Facility. SEE RIDER
ARTICLE XXXIII.
5. Tenant shall not waste electricity, water or air conditioning
furnished by Landlord, if any, and shall cooperate fully with Landlord to
insure the most effective operation of the Facility's heating and air
conditioning systems.
6. Tenant assumes full responsibility for protecting its space from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed and secured after normal business hours.
7. In no event shall Tenant bring into the Facility inflammables, such
as gasoline, kerosene, naphtha and benzine, or explosives or any other
article of intrinsically dangerous nature. If, by reason of the failure of
Tenant to comply with the provisions of this subparagraph, any insurance
premium for all or any part of the Facility shall at any time be increased,
Tenant shall make immediate Payment of the whole of the increased insurance
premium, without waiver of any of Landlord's other rights at law or in equity
for Tenant's breach of this Lease.
8. Tenant shall comply with all applicable federal, state and
municipal laws, ordinances and regulations, and building rules and shall not
directly or indirectly make any use of the Premises which may be prohibited
by any of the foregoing or which may be dangerous to persons or property or
may increase the cost of insurance or require additional insurance coverage.
Exhibit C - Page 1 of 3
<PAGE>
9. Landlord shall have the right to prohibit any advertising by Tenant
which in Landlord's reasonable opinion tends to impair the reputation of the
Facility, and upon written notice from Landlord, Tenant shall refrain from or
discontinue such advertising. SEE ARTICLE XXX AS TO TENANT'S SIGNAGE.
10. The Premises shall not be used for lodging, sleeping or for any
immoral or illegal purpose.
11. Tenant and Tenant's servants, employees, agents, visitors and
licensees shall observe faithfully and comply strictly with the foregoing
rules and regulations and such other and further reasonable and appropriate
rules and regulations consistent with the provisions of this Lease as
Landlord or Landlord's agent may from time to time adopt. Reasonable notice
of any additional rules and regulations shall be given in such manner as
Landlord may reasonably elect.
12. Unless expressly permitted by the Landlord, no additional locks or
similar devices shall be attached to any door or window and no keys other
than those provided by the Landlord shall be made for any door. If more than
two keys for one lock are desired by the Tenant, the Landlord may provide the
same upon payment by the Tenant. Upon termination of this Lease or of the
Tenant's possession, the Tenant shall surrender all keys of the Premises and
shall explain to the Landlord all combination locks on safes, cabinets and
vaults.
13. Any carpeting cemented down by Tenant shall be installed with a
releasable adhesive. In the event of a violation of the foregoing by Tenant,
Landlord may charge the expense incurred by such removal to Tenant.
14. The water and wash closets, drinking fountains and other plumbing
fixtures shall not be used for any purpose other than those for which they
were constructed, and no sweepings, rubbish, rags, coffee grounds or other
substances shall be thrown therein. All damages resulting from any misuse of
the fixtures shall be borne by the Tenant who, or whose servants, employees,
agents, visitors or licensees, shall have caused the same. No person shall
waste water by interfering or tampering with the faucets or otherwise.
15. No pipe, conduit, cable, line or the like for water, gas, sewage,
drainage, steam, electricity, or any other energy or service shall be
installed or maintained on the Premises, except with the prior written
permission of Landlord. Tenant shall not overload any utilities serving the
Premises.
16. No dog or other animal shall be allowed in the Facility.
17. All loading, unloading, receiving or delivery of goods, supplies or
disposal of garbage or refuse shall be made only through entryway provided
for such purposes. Tenant shall be responsible for any damage to the
Facility or the property of its employees or others and injuries sustained by
any person whomsoever resulting from the use or moving of such articles in or
out of the Premises, and shall make all repairs and improvements required by
Landlord or governmental authorities in connection with the use or moving of
such articles.
18. All safes, equipment or other heavy articles shall be carried in or
out of the Premises only in such manner as shall be prescribed in writing by
Landlord, and Landlord shall in all cases have the right to specify the
proper position of any such safe, equipment or other heavy article, which
shall only be used by Tenant in a manner which will not interfere with or
cause damage to the Premises or the Facility in which they are located, or to
the other tenants or occupants of said Facility. Tenant shall be responsible
for any damage to the Facility or the property of its employees or others and
injuries sustained by any person whomsoever resulting from the use or moving
of such articles in or out of the Premises, and shall make all repairs and
improvements required by Landlord or governmental authorities in connection
with the use or moving of such articles.
Exhibit C - Page 2 of 3
<PAGE>
19. Canvassing, soliciting, and peddling in or about the Facility is
prohibited and each Tenant shall cooperate to prevent the same.
20. Tenant shall not use, generate, transport, store, treat or dispose
of any hazardous substances, toxic chemical, pollutant or other material
regulated by the Comprehensive Environmental Response, Compensation and
Liability Act of 1985 or in the so-called Minnesota Superfund Bill or any
similar law or regulation without Landlord's written approval of each such
substance. Landlord shall not unreasonably withhold its approval of use by
Tenant of such substances needed in Tenant's business operations so long as
Landlord is satisfied that Tenant will use appropriate measures to avoid
release thereof.
21. No on-street parking shall be allowed anywhere on the Premises,
either on public streets or private roads. No overnight parking of trucks or
cars shall be permitted anywhere on the Premises, unless such trucks or cars
are parked inside buildings. Tenant shall have the right on a temporary
basis, from time to time, to park employee vehicles overnight in the parking
areas of the Project.
22. The Premises shall not be used for any of the following purposes:
full service laundry; taxidermy; mobile home and prefabricated home sales and
rentals; the sales, repair and servicing of motor vehicles, construction
equipment and farm equipment; clubs, lodges and/or community halls; sawmills;
storage of school or recreational vehicles; truck terminals, moving and
storage establishments; drive-in theaters; golf driving ranges; asphalt or
asphalt products manufacture; automobile, truck, construction equipment or
farm equipment assembly plants; coal storage, milling and processing; and
kennels and animal hospitals (commercial and noncommercial); heavy machinery
manufacture and repair; livestock slaughtering or preparation for packing;
manufacturing of metal alloys or foils; and railroad manufacture and repair.
23. Tenant shall maintain the Premises in a safe, clean, neat and
sanitary condition and in a first-class commercial manner.
24. Wherever in these Building Rules and Regulations the word "Tenant"
occurs, it is understood and agreed that it shall mean Tenant's associates,
employees, agents, clerks, servants, invitees and visitors. Wherever the
word "Landlord" occurs, it is understood and agreed that it shall mean
Landlord's assigns, agents, clerks, servants, and visitors.
25. Landlord shall have the right to enter upon the Premises at all
reasonable hours upon reasonable notice to Tenant except in case of
emergency, for the purpose of inspecting the same.
26. Landlord shall have the right to enter the Premises upon reasonable
notice to Tenant except in case of emergency, at hours convenient to the
Tenant for the purpose of exhibiting the same to prospective tenants within
the one hundred twenty (120) day period prior to the expiration of this
Lease, and may place signs advertising the Premises for rent on the exterior
of said Premises at any time within said one hundred twenty (120) day period.
SEE RIDER ARTICLE XXXI.
27. Tenant, its servants, employees, customers, invitee and guests
shall, when using the common parking facilities, if any, in and around the
Facility, observe and obey all signs regarding fire lanes and no parking
zones, and when parking always park between the designated lines. Landlord
reserves the right to tow away, at the expense of the owner, any vehicle
which is improperly parked or parked in a no parking zone. All vehicles
shall be parked at the sole risk of the owner, and Landlord assumes no
responsibility for any damage to or loss of vehicles.
28. In case of invasion, mob, riot, public excitement, or other
commotion, Landlord reserves the right to prevent access to the Facility
during the continuance of the same by closing the doors or otherwise, for the
safety of the tenants or the protection of the Facility and the property
therein.
Exhibit C - Page 3 of 3
<PAGE>
Landlord shall in no case be liable for damages for any error or other action
taken with regard to the admission to or exclusion from the Facility of any
person.
29. All entrance doors to the Premises shall be locked when the
Premises are not in use. All common corridor doors, if any, shall also be
closed during times when the air conditioning equipment in the Facility is
operating so as to prevent overload thereon.
30. Landlord reserves the right at any time and from time to time to
reasonably rescind, alter or waive, in whole or in part, any of these Rules
and Regulations when it is deemed necessary, desirable, or proper, in
Landlord's judgment, for its best interest or for the best interest of the
tenants of the Facility provided any such changes are consistent with and do
not conflict with the Lease terms.
Exhibit C - Page 4 of 3
<PAGE>
EXHIBIT D
ADDITIONAL LEASEHOLD IMPROVEMENT SPECIFICATIONS
In addition to the preliminary plan, Landlord will incorporate the following
items into its turnkey proposal.
CONCRETE
1. An open stair from floors 2 and 4 and an enclosed stair from floors
4-5. The design of the open stairs is subject to Landlord's
reasonable approval (see Exhibit "I").
WOOD AND PLASTIC
1. Upper and lower cabinets in all coffee stations and break room area.
FINISHES
1. Acoustical insulation at interior partitions of executive offices and
internal conference rooms.
2. Slab to slab partitions (CIM Center, Boardroom, training rooms, large
conference room, computer rooms).
3. Fabric wallcovering at reception, elevator lobby, CIM Center, and
Boardroom.
4. Vinyl wall covering providing on 25% of the walls within the space.
5. Upgrade upon area carpet quality over building standard (28 to 30
ounce level loop, not to exceed 25% of the space).
10. Drywall ceiling in upgrade areas in reception area, elevator lobby and
stairs.
MECHANICAL
1. Separate mechanical zones in computer areas, large conference rooms,
and training rooms.
2. Water taps at coffee bars.
3. Sink at seven (7) coffee locations.
ELECTRICAL
1. Additional capacity on electrical panels and supply for load.
2. Electrical outlets and wiring per plan dated April 2, 1997.
<PAGE>
EXHIBIT "E"
OFFICE SERVICES
A. Landlord Services:
1. Landlord, subject to including the costs thereof in Article II, shall
provide the following services during the term of this lease:
(a) Air conditioning and heating service for normal purposes shall be
provided in Landlord's good business judgment for
comfortable occupancy Monday through Friday during the hours
of 7:00 a.m. through 6:00 p.m., and on Saturday during the
hours of 8:00 a.m. through 1:00 a.m., except recognized
holidays. Tenant agrees not to use any apparatus or device,
in or upon or about the Premises which in any way may
increase the amount of such service usually consumed therein
when the Premises are occupied, and will not connect any
apparatus or device to the cooling or heating system of the
Building for the purpose of using additional or unusual
amounts of such services, without written consent of
Landlord, which consent may be conditioned upon payment of
additional charges by Tenant. The HVAC shall be designed to
meet the following criteria and Landlord shall use all
reasonable efforts to operate the HVAC to meet said design
criteria:
(1) Summer - Outdoor conditions 92 DEG. Fahrenheit
dry bulb, 75 DEG. Fahrenheit wet bulb (2 1/2"
coincidence); indoor conditions 75 DEG. Fahrenheit
dry bulb, 50% relative humidity maximum.
(2) Winter - Outdoor conditions minimum 19 DEG. Fahrenheit
dry bulb; 72 DEG. Fahrenheit dry bulb, inside, minimum
relative humidity 20%. Landlord will take appropriate
corrective action using existing Building equipment
and prudent operating standards should minimum
relative humidity drop below 20%.
(b) Electricity only for building standard lighting, typewriters,
adding machines, calculators, personal computers, small
reproduction machines and other similar small office
equipment, it being expressly understood that to the extent
the electricity is used for any other purpose or if Tenant's
use shall exceed normal and customary usage levels for
office purposes, additional charges shall be payable by
Tenant to Landlord in such amounts as Landlord may
reasonably determine necessary to cover the costs of such
increased use, or, at Landlord's option, Landlord may
require Tenant to install a separate electrical meter at
Landlord's sole expense. Any separate computer room will be
separately metered and such costs shall be a Service Charge
to Tenant.
(c) Water for drinking, lavatory and toilet purposes from the regular
Building supply (at the prevailing temperature) through
fixtures installed by Landlord (or by Tenant with Landlord's
written consent).
(d) Standard interior janitorial and cleaning services in the common
areas of the Building and the Premises five (5) days per
week pursuant to the janitorial specifications attached as
Exhibit E-1. Tenant shall not procure any janitorial or
cleaning services for the Premises without Landlord's prior
written consent and then only subject to supervision by
Landlord and by janitorial or cleaning contractors or
employees at all times reasonably satisfactory to Landlord.
(e) Window washing of all windows in the premises, both inside and
out, at such times as Landlord shall deem necessary, but in
no event less than twice per year.
<PAGE>
(f) Lawn and shrub care, snow plowing and removal, maintenance of the
structure, roof, mechanical and electrical equipment of the
Building, excluding those items specifically excepted
elsewhere in this Lease.
(g) Passenger elevator service will be provided 24 hours per day,
seven days per week, in common with other tenants by
operatorless automatic elevators. During Tenant move-in,
the freight elevator shall be available for Tenant's
exclusive use. After business hours, additional elevator(s)
will be made available for Tenant's exclusive use during
move-in. Landlord shall have the right to restrict the
number of elevators to be in operation during evenings,
Saturdays, Sundays and holidays.
(h) Landlord shall initially supply card keys for access to the
Facility at no cost; replacements for lost or damaged card
keys shall be made available at reasonable cost to Tenant.
The card keys will access the main doors to the Building and
the elevators. Landlord will use all reasonable efforts to
allow Tenant to utilize Landlord's card keys to access the
Premises provided any such Tenant Premises' system shall be
provided and installed by Tenant at its sole cost and
expense.
(i) Landlord shall provide a building directory in the lobby of the
Building. Tenant may list its name and suite numbers in
said directory. In the elevator lobbies on full floors
occupied by Tenant, Tenant may place identification signage,
subject to approval of design, location and attachment
method by Landlord.
<PAGE>
EXHIBIT "F"
RESERVED PARKING LICENSE
RESERVED SPACE
PARKING GARAGE LICENSE
THIS LICENSE, made this 12 day of November, 1997, between MERIDIAN
CROSSINGS LLC, A MINNESOTA LIMITED LIABILITY COMPANY, Licensor, and FOURTH
SHIFT CORPORATION, A MINNESOTA CORPORATION, Licensee, whose address is 1205
West 77th Street, Richfield, MN 55423.
1. Licensor hereby licenses Licensee the right to park three (3)
automobile(s) in the lower level Parking Garage at the Facility known and
described as Meridian Crossings I, located at 1201 West 77th Street,
Richfield, MN 55423 for a ten (10) year term beginning on the Rental
Commencement Date, as hereinafter described, and ending October 31, 2008.
2. Anything herein to the contrary notwithstanding, this License shall
in any event terminate no earlier or later than the date of termination of
the term (including any renewal terms or extensions) of the Lease between
Landlord as, Licensor and Licensee, as Tenant, for space in said Facility,
such Lease dated NOVEMBER 12, 1997. Upon a breach of this Agreement notice
given in accordance with the terms of such Lease and failure of the breaching
party to cure within thirty (30) days of such notice, the non-breaching party
shall have all remedies available herein and under the Lease.
3. Licensee agrees to pay as a monthly fee for such License the sum of
Two Hundred and Eighty-five Dollars and NO/100 ($285.00) for the total of
three (3) stalls licensed payable on or before the first day of each month in
advance. The monthly fee may be changed by Licensor as of the first day of
the Renewal Term by giving not less than thirty (30) days advance written
notice thereof to Licensee. In the event Licensee objects to the revised fee
as established by Licensor, it may cancel this License effective upon the
adjustment date, as to all or any portion of the spaces licensed hereunder,
by written notice to Licensor provided such written notice is given to
Licensor within fifteen (15) days after receipt by Licensee of the notice of
the escalation by Licensor. Licensor agrees to charge Licensee the same fee
charged other Licensees entering into Licenses at or about the same time
period as the revised fee is charged hereunder.
4. In the event any of the fee is not paid when due or Licensee is
otherwise in default hereunder, Licensor may, at its option, cancel this
agreement by written notice to Licensee if Licensee fails to cure such
default within thirty (30) days after written notice by Licensor to Licensee.
5. This License is for the Reserved Parking Space(s) designated as
follows:
Only vehicles designated by Licensee to Licensor may be parked or stored
thereon, provided, however, that Licensee may change its automobile
designation at any time upon written notice to Licensor or for temporary use
upon notification given to the ramp
<PAGE>
attendant, if any. No more than one (1) automobile per space licensed
hereunder shall be parked or stored under Licensee's rights hereunder at any
one time.
6. This License is for self-service storage or parking only and does
not include the rights to any additional services, which services may be made
available by Licensor from time to time at an additional charge.
7. Except for same resulting solely from the willful act of Licensor,
it is understood that Licensor and its agent and employees shall not be
liable for loss or damage to any vehicle parked or stored by Licensee or
under Licensee's rights herein and/or to the contents thereof caused by fire,
theft, explosion, freezing of circulation system of any automobile, strikes,
riots, or by any other causes and Licensee (1) waives any claim against
Licensor for and in respect thereto, and (2) hereby agrees to indemnify and
defend Licensor against all claims for any loss or damage to any such vehicle
or its contents from any cause whatsoever, whether or not caused by
Licensor's act or omission. It is further expressly understood that the
relationship between Licensor and Licensee constitutes a License to use said
Parking Garage subject to the terms and conditions herein only and that
neither such relationship nor the storage or parking of any automobile
thereunder shall constitute a bailment nor create the relationship of bailor
and bailee.
8. Licensee shall not assign any of its rights under this agreement
separately from the Lease in any manner whatsoever without the prior written
consent of Licensor, which shall not unreasonably be withheld provided such
assignment is collateral to an assignment of the Lease referred to in
Paragraph 2 hereof.
9. All notices hereunder shall be given as set forth in the Lease.
The addresses of either party may be changed at any time by written notice by
the party to be notified in the manner above specified.
10. In the event the Parking Ramp above-referenced shall be damaged by
fire or other casualty, rendering the Ramp unusable by Licensee, the fee
provided for herein shall be abated (pro rata based on the portion of
Licensee's stalls which are unusable) from the date the Parking Garage
becomes unusable until it again becomes useable. Further, if all of any part
of the Parking Garage is taken by eminent domain proceedings, Licensor shall
be entitled to all of the award in the proceedings and may terminate this
agreement in the event of a total taking or reduce the number of stalls
licensed hereunder in preparation to the extent of any partial taking upon
written notice to Licensee. If the Parking Garage is damaged by fire or
other casualty, Licensor will cause the it to be repaired with all due
diligence and the fee will abate until repaired.
11. This License Agreement shall be subject and subordinate to any
mortgage, deed of trust or ground lease now or hereafter placed on the above
described Facility or any portion thereof and to replacements, renewals and
extensions thereof, and Licensee upon request by Licensor shall execute
reasonable instruments (in form reasonably satisfactory to Licensor)
acknowledging such subordination. It is agreed so long as Licensee be not in
<PAGE>
default in payment of fee provided for herein and performance of all
covenants, agreements and conditions by it to be performed under this
agreement, such subordination shall not interfere with, hinder or molest
Licensee's rights to continue to license the stalls licensed hereunder in
accordance with the terms of this agreement as against mortgagee, trustee or
ground lessor or their successors or assigns. The mortgagee, trustee or
ground lessor shall, issue its non-disturbance agreement to Licensee.
Further, if any mortgagee shall succeed to the rights of Licensor under this
agreement, or to ownership of the Parking Garage, whether through possession
or foreclosure or the delivery of a deed to the Parking Garage, then, upon
the written request of such mortgagee so succeeding to Licensor's rights
hereunder, Licensee shall attorn to and recognize such mortgagee as
Licensee's licensor under this agreement, and shall promptly execute and
deliver any instrument that such mortgagee may reasonably request to evidence
such attornment (whether before or after making of the mortgage). In the
event of any other transfer of Licensor's interest hereunder, upon the
written request of the transferee and Licensor, Licensee shall attorn to and
recognize such transferee as Licensee's licensor under this agreement and
shall promptly execute and deliver any instrument that such transferee and
Licensor may reasonably request to evidence such attornment.
12. Licensee covenants not to suffer any waste or damage or
disfigurement or injury to the Parking Garage or the Facility.
13. Subject to the abatement provided for in Paragraph 10 hereof,
Licensor shall have the right to temporarily close any portion of the
Parking Garage and deny access thereto in connection with any repairs or in
an emergency, as it may require, without liability, cost, or abatement of
fee, but except for damage, destruction or condemnation, the closure shall
not exceed fourteen (14) consecutive business days.
14. Licensee shall perform, observe and comply with such Parking
Garage rules of the Facility as may be reasonably adopted by Licensor in
respect to the use and operation of said Parking Garage.
15. Licensee shall, when using the parking facilities of said Ramp,
observe and obey all signs regarding fire lanes and no-parking zones, and
when parking always park between designated lines. Licensor reserves the
right to tow away, or otherwise impound, at the expense of the owner or
operator, any vehicle which is improperly parked or parked in a no-parking
zone. Overnight parking shall be allowed only as reasonably acceptable to
Licensor. Licensor agrees to provide, except in the case of an emergency,
ten (10) business days prior written notice, to Licensee prior to any
prohibition on overnight parking.
16. In the event a key or other access device is supplied by Licensor
to Licensee in connection with the rights granted herein, Licensee will
surrender such key or access device to Licensor upon termination of this
agreement.
<PAGE>
17. Licensor covenants and agrees that Licensee, upon paying the
charges herein provided for and observing and keeping the covenants,
agreements and conditions of this License Agreement on its part to be kept
and performed, shall lawfully hold, occupy and enjoy all the rights and
privileges granted herein during the term of this agreement without hindrance
or molestation by Licensor, its agents, servants, employees, guests, invitees
or any other persons claiming under Licensor.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
MERIDIAN CROSSINGS LLC, A
MINNESOTA LIABILITY COMPANY MINNESOTA CORPORATION
By By /s/ DAVID G. LATZKE
---------------------------------
Bryant J. Wangard
Its: Manager Its VP & CFO
-----------
<PAGE>
EXHIBIT 10.15
SIILCON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: FOURTH SHIFT CORPORATION
ADDRESS: 7900 INTERNATIONAL DRIVE
MINNEAPOLIS, MN 55425
DATE: MARCH 2, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address
is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s)
named above (jointly and severally, the "Borrower"), whose chief executive
office is located at the above address ("Borrower's Address"). The Schedule
to this Agreement (the "Schedule") shall for all purposes be deemed to be a
part of this Agreement, and the same is an integral part of this Agreement.
(Definitions of certain terms used in this Agreement are set forth in Section
8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its* , up to the amounts (the "Credit Limit") shown
on the Schedule, provided no Default or Event of Default has occurred and is
continuing, and subject to deduction of any Reserves for accrued interest and
such other Reserves as Silicon deems proper from time to time.
*GOOD FAITH BUSINESS JUDGMENT
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth
to the contrary in this Agreement. Interest shall be payable monthly, on the
last day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the
same rate as the other Loans. Silicon may, in its discretion, charge
interest to Borrower's Deposit Accounts maintained with Silicon. Regardless
of the amount of Obligations that may be outstanding from time to time,
Borrower shall pay Silicon minimum monthly interest during the term of this
Agreement in the amount set forth on the Schedule (the "Minimum Monthly
Interest").
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to
pay Silicon interest on the outstanding amount of any Overadvance, on demand,
at a rate equal to the interest rate which would otherwise be applicable to
the Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Silicon and
are not refundable.
1.5 LETTERS OF CREDIT. [Not Applicable]
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to Silicon a security
interest in all of Borrower's interest in the following, whether now owned or
hereafter acquired, and wherever located (collectively, the "Collateral"):
All Inventory, Equipment, Receivables, and General Intangibles, including,
without limitation, all of Borrower's Deposit Accounts, and all money, and
all property now or at any time in the future in Silicon's possession
(including claims and credit balances), and all proceeds (including proceeds
of any insurance policies, proceeds of proceeds and claims against third
parties), all products and all books and records related to any of the
foregoing (all of the foregoing, together with all other property in which
Silicon may now or in the future be granted a lien or security interest, is
referred to herein, collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower
covenants that the following representations will continue to be true*, and
that
-1-
<PAGE>
Borrower will at all times comply with all of the following covenants:
*(AND IF ANY OF THE FOLLOWING REPRESENTATIONS BECOMES UNTRUE IN THE FUTURE
DUE TO A CHANGE IN APPLICABLE LAW, BORROWER WILL IMMEDIATELY TAKE SUCH ACTION
AS IS REQUIRED IN ORDER TO BE IN COMPLIANCE WITH SUCH NEW APPLICABLE LAW AND
IN ORDER FOR THE REPRESENTATIONS TO CONTINUE TO BE TRUE)
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and
will continue to be qualified and licensed to do business in all
jurisdictions in which any failure to do so would have a material adverse
effect on Borrower. The execution, delivery and performance by Borrower of
this Agreement, and all other documents contemplated hereby (i) have been
duly and validly authorized, (ii) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by
equitable principles and by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to creditors' rights generally), and
(iii) do not violate Borrower's articles or certificate of incorporation, or
Borrower's by-laws, or any law or any material agreement or instrument which
is binding upon Borrower or its property, and (iv) do not constitute grounds
for acceleration of any material indebtedness or obligation under any
material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are
all prior names of Borrower and all of Borrower's present and prior trade
names. Borrower shall give Silicon 30 days' prior written notice before
changing its name or doing business under any other name. Borrower has
complied, and will in the future comply, with all laws relating to the
conduct of business under a fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at
the locations set forth on the Schedule. Borrower will give Silicon at least
30 days prior written notice before opening any additional place of business,
changing its chief executive office, or moving any of the Collateral to a
location other than Borrower's Address or one of the locations set forth on
the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and
will remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now
has, and will continue to have, a first-priority perfected and enforceable
security interest in all of the Collateral, subject only to the Permitted
Liens, and Borrower will at all times defend Silicon and the Collateral
against all claims of others. None of the Collateral now is or will be
affixed to any real property in such a manner, or with such intent, as to
become a fixture. Borrower is not and will not become a lessee under any real
property lease pursuant to which the lessor may obtain any rights in any of
the Collateral and no such lease now prohibits, restrains, impairs or will
prohibit, restrain or impair Borrower's right to remove any Collateral from
the leased premises. Whenever any Collateral is located upon premises in
which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall,
whenever requested by Silicon, use its best efforts to cause such third party
to execute and deliver to Silicon, in form acceptable to Silicon, such
waivers and subordinations as Silicon shall specify, so as to ensure that
Silicon's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and
effect, and will comply with all the terms of, any lease of real property
where any of the Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or
business of Borrower. Borrower is now and will continue to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely
pay, all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good
faith contests Borrower's obligation to pay the taxes by appropriate
proceedings promptly and diligently instituted and conducted, (ii) notifies
Silicon in writing of the commencement of, and any material development in,
the proceedings, and (iii) posts bonds or takes any other steps required to
keep the contested taxes from becoming a lien upon any of the Collateral.
Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming
due and payable by Borrower. Borrower has paid, and shall continue to pay
all amounts necessary to fund all present and future pension, profit sharing
and deferred compensation plans in accordance with their terms, and Borrower
has not and will not withdraw from participation in, permit partial or
complete termination of, or permit the occurrence of any other event with
respect to, any such plan which could result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
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<PAGE>
successors or any other governmental agency. Borrower shall, at all times,
utilize the services of an outside payroll service providing for the
automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and
local laws and regulations relating to Borrower, including, but not limited
to, those relating to Borrower's ownership of real or personal property, the
conduct and licensing of Borrower's business, and all environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of Borrower,
or in any material impairment in the ability of Borrower to carry on its
business in substantially the same manner as it is now being conducted.
Borrower will promptly inform Silicon in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or
against Borrower involving any single claim of* or more, or involving* or
more in the aggregate.
*$250,000
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to
purchase or carry any "margin stock" or to extend credit to others for the
purpose of purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans
are requested by Borrower shall, on the date each Loan is requested and made,
(i) represent an undisputed bona fide existing unconditional obligation of
the Account Debtor created by the sale, delivery, and acceptance of goods or
the rendition of services in the ordinary course of Borrower's business, and
(ii) meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales
and other transactions underlying or giving rise to each Receivable shall
fully comply with all applicable laws and governmental rules and regulations.
All signatures and indorsements on all documents, instruments, and
agreements relating to all Receivables are and shall be genuine, and all such
documents, instruments and agreements are and shall be legally enforceable in
accordance with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments
of all Receivables, and schedules of collections, all on Silicon's standard
forms; provided, however, that Borrower's failure to execute and deliver the
same shall not affect or limit Silicon's security interest and other rights
in all of Borrower's Receivables, nor shall Silicon's failure to advance or
lend against a specific Receivable affect or limit Silicon's security
interest and other rights therein. Loan requests received after 12:00 Noon
will not be considered by Silicon until the next Business Day. * with each
such schedule and assignment, Borrower shall furnish Silicon with copies (or,
at Silicon's request, originals) of all contracts, orders, invoices, and
other similar documents, and all original shipping instructions, delivery
receipts, bills of lading, and other evidence of delivery, for any goods the
sale or disposition of which gave rise to such Receivables, and Borrower
warrants the genuineness of all of the foregoing. Borrower shall also
furnish to Silicon an aged accounts receivable trial balance in such form and
at such intervals as Silicon shall request. In addition, Borrower shall
deliver to Silicon the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or
securing any Receivables, immediately upon receipt thereof and in the same
form as received, with all necessary indorsements, all of which shall be with
recourse. Borrower shall also provide Silicon with copies of all credit
memos** within two days after the date issued.
*IF REQUESTED BY SILICON, TOGETHER
**IN EXCESS OF $20,000
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until a Default or an Event of Default has
occurred. Borrower shall hold all payments on, and proceeds of, Receivables
in trust for Silicon, and Borrower shall immediately deliver all such
payments and proceeds to Silicon in their original form, duly endorsed in
blank, to be applied to the Obligations in such order as Silicon shall
determine. Silicon may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Silicon may specify, pursuant to a blocked account
agreement in such form as Silicon may specify. Silicon or its designee may,
at any time, notify Account Debtors that the Receivables have been assigned
to Silicon.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower*, to be applied to the Obligations in
such order as Silicon shall determine; provided that, if no Default or Event
of Default has occurred, Borrower shall not be obligated to remit to Silicon
the proceeds of the sale of worn out or obsolete equipment disposed of by
Borrower in good faith in an arm's length transaction for an aggregate
purchase price of $25,000 or less (for all such transactions in any fiscal
year). Borrower agrees that it will not commingle proceeds of Collateral
with any of Borrower's other funds
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or property, but will hold such proceeds separate and apart from such other
funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth
elsewhere in this Agreement.
*(PROVIDED, HOWEVER, BORROWER MAY HOLD AND SUBMIT TO SILICON ON A WEEKLY
BASIS UP TO $500 OF PROCEEDS IN THE AGGREGATE ARISING FROM THE DISPOSITION OF
ANY COLLATERAL)
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables; Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in
full, or agree to do any of the foregoing, except that Borrower may do so,
provided that: (i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, and in arm's length
transactions, which are reported to Silicon on the regular reports provided
to Silicon; (ii) no Default or Event of Default has occurred and is
continuing; and (iii) taking into account all such discounts settlements and
forgiveness, the total outstanding Loans will not exceed the Credit Limit.
Silicon may, at any time after the occurrence of an Event of Default, settle
or adjust disputes or claims directly with Account Debtors for amounts and
upon terms which Silicon considers advisable in its reasonable credit
judgment and, in all cases, Silicon shall credit Borrower's Loan account with
only the net amounts received by Silicon in payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary
course of its business, Borrower shall promptly determine the reason for such
return and promptly issue a credit memorandum to the Account Debtor in the
appropriate amount (sending a copy to Silicon). In the event any attempted
return occurs after the occurrence of any Event of Default, Borrower shall
(i) hold the returned Inventory in trust for Silicon, (ii) segregate all
returned Inventory from all of Borrower's other property, (iii) conspicuously
label the returned Inventory as Silicon's property, and (iv) immediately
notify Silicon of the return of any Inventory, specifying the reason for such
return, the location and condition of the returned Inventory, and on
Silicon's request deliver such returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters
relating to the Receivables, by means of mail, telephone or otherwise, either
in the name of Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss
or destruction of, any goods, the sale or other disposition of which gives
rise to a Receivable, or for any error, act, omission, or delay of any kind
occurring in the settlement, failure to settle, collection or failure to
collect any Receivable, or for settling any Receivable in good faith for less
than the full amount thereof, nor shall Silicon be deemed to be responsible
for any of Borrower's obligations under any contract or agreement giving rise
to a Receivable. Nothing herein shall, however, relieve Silicon from
liability for its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as
Silicon may reasonably require, and Borrower shall provide evidence of such
insurance to Silicon, so that Silicon is satisfied that such insurance is, at
all times, in full force and effect. All such insurance policies shall name
Silicon as an additional loss payee, and shall contain a lenders loss payee
endorsement in form reasonably acceptable to Silicon. Upon receipt of the
proceeds of any such insurance, Silicon shall apply such proceeds in
reduction of the Obligations as Silicon shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Silicon shall release to Borrower insurance proceeds with
respect to Equipment totaling less than $100,000, which shall be utilized by
Borrower for the replacement of the Equipment with respect to which the
insurance proceeds were paid. Silicon may require reasonable assurance that
the insurance proceeds so released will be so used. If Borrower fails to
provide or pay for any insurance, Silicon may, but is not obligated to,
obtain the same at Borrower's expense. Borrower shall promptly deliver to
Silicon copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports
with respect to Borrower (including budgets, sales projections, operating
plans and other financial documentation), as Silicon shall from time to time
reasonably specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on
one Business Day's notice, Silicon, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy Borrower's books and
records. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have
the right to disclose any such information to its auditors, regulatory
agencies, and attorneys, and pursuant to any subpoena or other legal process.
The foregoing inspections and audits shall be at Borrower's expense and the
charge therefor shall be $500 per person per day (or such higher amount as
shall represent Silicon's then current standard charge for the same), plus
reasonable out of pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first obtaining Silicon's written consent, which may be conditioned
upon such accounting firm, service bureau or other third party agreeing to
give Silicon the same rights with respect to access to books and records and
related rights as Silicon has under this Loan Agreement. Borrower waives the
benefit of any accountant-client privilege or other evidentiary privilege
precluding or limiting the disclosure, divulgence or
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delivery of any of its books and records (except that Borrower does not waive
any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule,
Borrower shall not, without Silicon's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter
into any other transaction outside the ordinary course of business; (iv) sell
or transfer any Collateral, except for the sale of finished Inventory in the
ordinary course of Borrower's business, and except for the sale of obsolete
or unneeded Equipment in the ordinary course of business; (v) store any
Inventory or other Collateral with any warehouseman or other third party;
(vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or
other contingent basis; (vii) make any loans of any money or other assets*;
(viii) incur any debts, outside the ordinary course of business, which would
have a material, adverse effect on Borrower or on the prospect of repayment
of the Obligations; (ix) guarantee or otherwise become liable with respect to
the obligations of another party or entity; (x) pay or declare any dividends
on Borrower's stock (except for dividends payable solely in stock of
Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's stock; (xii) make any change in Borrower's
capital structure which would have a material adverse effect on Borrower or
on the prospect of repayment of the Obligations; or (xiii) pay total
compensation, including salaries, fees, bonuses, commissions, and all other
payments, whether directly or indirectly, in money or otherwise, to
Borrower's executives, officers and directors (or any relative thereof) in an
amount in excess of the amount set forth on the Schedule; or (xiv) dissolve
or elect to dissolve. Transactions permitted by the foregoing provisions of
this Section are only permitted if no Default or Event of Default would occur
as a result of such transaction.
*IN EXCESS OF $20,000
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any
manner relating to Borrower, Borrower shall, without expense to Silicon, make
available Borrower and its officers, employees and agents and Borrower's
books and records, to the extent that Silicon may deem them reasonably
necessary in order to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully
consummate the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that
the Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to
terminate this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days
after written notice of termination is given to Silicon; or (ii) by Silicon
at any time after the occurrence of an Event of Default*, without notice,
effective immediately. If this Agreement is terminated by Borrower or by
Silicon under this Section 6.2**, Borrower shall pay to Silicon a termination
fee in an amount equal to one percent (1.0%) of the Maximum Credit Limit***.
The termination fee shall be due and payable on the effective date of
termination and thereafter shall bear interest at a rate equal to the highest
rate applicable to any of the Obligations.
*WHICH IS STILL CONTINUING
**PRIOR TO THE FIRST ANNIVERSARY OF THIS AGREEMENT
***PROVIDED, HOWEVER, NO SUCH TERMINATION FEE SHALL BE CHARGED IF THE CREDIT
FACILITY HEREUNDER IS REPLACED WITH A NEW FACILITY FROM ANOTHER DIVISION OF
SILICON VALLEY BANK.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations*, whether evidenced by installment notes or otherwise, and
whether or not all or any part of such Obligations are otherwise then due and
payable. Without limiting the generality of the foregoing, if on the
Maturity Date, or on any earlier effective date of termination, there are
any outstanding Letters of Credit issued by Silicon or issued by another
institution based upon an application, guarantee, indemnity or similar
agreement on the part of Silicon, then on such date Borrower shall provide to
Silicon cash collateral in an amount equal to the face amount of all such
Letters of Credit plus all interest, fees and cost due or to become due in
connection therewith, to secure all of the Obligations relating to said
Letters of Credit, pursuant to Silicon's then standard form cash pledge
agreement. Notwithstanding any termination of this Agreement, all of
Silicon's security interests in all of the Collateral and all of the terms
and provisions of this Agreement shall continue in full force and effect
until all Obligations have been paid and performed in full; provided that,
without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further
Loans after termination. No termination shall in any way affect or impair
any right or remedy of Silicon, nor shall any such termination relieve
Borrower of any Obligation to Silicon, until all of the Obligations have been
paid and performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement, Silicon shall promptly deliver
to Borrower termination statements, requests for reconveyances and such other
documents as may be required to fully terminate Silicon's security interests.
*(INCLUDING, WITHOUT LIMITATION, ALL OBLIGATIONS RELATING TO THE DOMESTIC
TERM LOAN)
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an "Event of Default" under this Agreement, and
Borrower shall give Silicon immediate written notice thereof: (a) Any
warranty, representation, statement, report or certificate made or delivered
to Silicon by Borrower or any of Borrower's officers, employees or agents,
now or in the future, shall
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be untrue or misleading in a material respect; or (b) Borrower shall fail to
pay when due any Loan or any interest thereon or any other monetary
Obligation; or (c) the total Loans and other Obligations outstanding at any
time shall exceed the Credit Limit; or (d) Borrower shall fail to comply with
any of the financial covenants set forth in the Schedule or shall fail to
perform any other non-monetary Obligation which by its nature cannot be
cured; or (e) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within 5 Business Days after the date
due; or (f) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral
which is not cured within 10 days after the occurrence of the same; or (g)
any default or event of default occurs under any obligation secured by a
Permitted Lien, which is not cured within any applicable cure period or
waived in writing by the holder of the Permitted Lien; or (h) Borrower
breaches any material contract or obligation, which has or may reasonably be
expected to have a material adverse effect on Borrower's business or
financial condition; or (i) Dissolution, termination of existence, insolvency
or business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit
of creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower
or any guarantor of any of the Obligations under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in
effect, which is not cured by the dismissal thereof within 30 days after the
date commenced; or (k) revocation or termination of, or limitation or denial
of liability upon, any guaranty of the Obligations or any attempt to do any
of the foregoing, or commencement of proceedings by any guarantor of any of
the Obligations under any bankruptcy or insolvency law; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any
attempt to do any of the foregoing, or commencement of proceedings by or
against any such third party under any bankruptcy or insolvency law; or (m)
Borrower makes any payment on account of any indebtedness or obligation which
has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated
such indebtedness or obligations terminates or in any way limits his
subordination agreement; or (o) Borrower shall generally not pay its debts
as they become due, or Borrower shall conceal, remove or transfer any part of
its property, with intent to hinder, delay or defraud its creditors, or make
or suffer any transfer of any of its property which may be fraudulent under
any bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a
material adverse change in Borrower's business or financial condition; or (q)
Silicon, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Silicon had no knowledge on the effective date or
because of the occurrence of an event on or subsequent to the effective date.
Silicon may cease making any Loans hereunder during any of the above cure
periods, and thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any
time thereafter, Silicon, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one
or more of the following: (a) Cease making Loans or otherwise extending
credit to Borrower under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable, and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation; (c) Take possession of any or all of the Collateral wherever it
may be found, and for that purpose Borrower hereby authorizes Silicon without
judicial process to enter onto any of Borrower's premises without
interference to search for, take possession of, keep, store, or remove any of
the Collateral, and remain on the premises or cause a custodian to remain on
the premises in exclusive control thereof, without charge for so long as
Silicon deems it reasonably necessary in order to complete the enforcement of
its rights under this Agreement or any other agreement; provided, however,
that should Silicon seek to take possession of any of the Collateral by Court
process, Borrower hereby irrevocably waives: (i) any bond and any surety or
security relating thereto required by any statute, court rule or otherwise as
an incident to such possession; (ii) any demand for possession prior to the
commencement of any suit or action to recover possession thereof; and (iii)
any requirement that Silicon retain possession of, and not dispose of, any
such Collateral until after trial or final judgment; (d) Require Borrower to
assemble any or all of the Collateral and make it available to Silicon at
places designated by Silicon which are reasonably convenient to Silicon and
Borrower, and to remove the Collateral to such locations as Silicon may deem
advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private
sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other
than oral announcement at the time scheduled for sale. Silicon shall have
the right to conduct such disposition on Borrower's premises without charge,
for such time or times as Silicon deems reasonable, or on Silicon's premises,
or elsewhere and the Collateral need not be located at the place of
disposition. Silicon may directly or through any affiliated company purchase
or lease any Collateral at any such public disposition, and if permissible
under applicable law, at any private disposition. Any sale or other
disposition of Collateral shall not relieve Borrower of any liability
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Borrower may have if any Collateral is defective as to title or physical
condition or otherwise at the time of sale; (g) Demand payment of, and
collect any Receivables and General Intangibles comprising Collateral and, in
connection therewith, Borrower irrevocably authorizes Silicon to endorse or
sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and
remove therefrom payments made with respect to any item of the Collateral or
proceeds thereof, and, in Silicon's sole discretion, to grant extensions of
time to pay, compromise claims and settle Receivables and the like for less
than face value; (h) Offset against any sums in any of Borrower's general,
special or other Deposit Accounts with Silicon; and (i) Demand and receive
possession of any of Borrower's federal and state income tax returns and the
books and records utilized in the preparation thereof or referring thereto.
All reasonable attorneys' fees, expenses, costs, liabilities and obligations
incurred by Silicon with respect to the foregoing shall be added to and
become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of
the Obligations. Without limiting any of Silicon's rights and remedies, from
and after the occurrence of any Event of Default, the interest rate
applicable to the Obligations shall be increased by an additional four
percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in
a newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Silicon, with or without the Collateral being present; (iv) The sale
commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the
purchase price in cash or by cashier's check or wire transfer is required;
(vi) With respect to any sale of any of the Collateral, Silicon may (but is
not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same. Silicon shall be free
to employ other methods of noticing and selling the Collateral, in its
discretion, if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents)
at any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that Silicon may, in its sole discretion, deem
advisable in order to perfect and maintain Silicon's security interest in the
Collateral, or in order to exercise a right of Borrower or Silicon, or in
order to fully consummate all the transactions contemplated under this
Agreement, and all other present and future agreements; (b) Execute on behalf
of Borrower any document exercising, transferring or assigning any option to
purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any
real or personal property which is part of Silicon's Collateral or in which
Silicon has an interest; (c) Execute on behalf of Borrower, any invoices
relating to any Receivable, any draft against any Account Debtor and any
notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of
Lien, claim of mechanic's, materialman's or other lien, or assignment or
satisfaction of mechanic's, materialman's or other lien; (d) Take control in
any manner of any cash or non-cash items of payment or proceeds of
Collateral; endorse the name of Borrower upon any instruments, or documents,
evidence of payment or Collateral that may come into Silicon's possession;
(e) Endorse all checks and other forms of remittances received by Silicon;
(f) Pay, contest or settle any lien, charge, encumbrance, security interest
and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and
other documents in connection therewith; (h) Pay any sums required on account
of Borrower's taxes or to secure the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that relates
to any of the Collateral and obtain payment therefor; (j) Instruct any third
party having custody or control of any books or records belonging to, or
relating to, Borrower to give Silicon the same rights of access and other
rights with respect thereto as Silicon has under this Agreement; and (k) Take
any action or pay any sum required of Borrower pursuant to this Agreement and
any other present or future agreements. Any and all reasonable sums paid and
any and all reasonable costs, expenses, liabilities, obligations and
attorneys' fees incurred by Silicon with respect to the foregoing shall be
added to and become part of the Obligations, shall be payable on demand, and
shall bear interest at a rate equal to the highest interest rate applicable
to any of the Obligations. In no event shall Silicon's rights under the
foregoing power of attorney or any of Silicon's other rights under this
Agreement be deemed to indicate that Silicon is in control of the business,
management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Silicon shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other persons legally entitled
thereto; Borrower shall remain liable to Silicon for any deficiency. If,
Silicon, in its sole discretion, directly or indirectly enters into a
deferred payment or other credit transaction with any purchaser at any sale
of Collateral, Silicon shall have the option, exercisable at any time, in its
sole discretion, of either reducing the Obligations by the principal amount
of purchase price or deferring the reduction of the Obligations until the
actual receipt by Silicon of the cash therefor.
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7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Silicon shall have all the other rights and remedies
accorded a secured party under the California Uniform Commercial Code and
under all other applicable laws, and under any other instrument or agreement
now or in the future entered into between Silicon and Borrower, and all of
such rights and remedies are cumulative and none is exclusive. Exercise or
partial exercise by Silicon of one or more of its rights or remedies shall
not be deemed an election, nor bar Silicon from subsequent exercise or
partial exercise of any other rights or remedies. The failure or delay of
Silicon to exercise any rights or remedies shall not operate as a waiver
thereof, but all rights and remedies shall continue in full force and effect
until all of the Obligations have been fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable.
"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"BUSINESS DAY" means a day on which Silicon is open for business.
"CODE" means the Uniform Commercial Code as adopted and in effect in
the State of California from time to time.
"COLLATERAL" has the meaning set forth in Section 2.1 above.
"DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the code.
"ELIGIBLE INVENTORY" [NOT APPLICABLE].
"ELIGIBLE RECEIVABLES" means Receivables arising in the ordinary course
of Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on
such considerations as Silicon may from time to time deem appropriate.
*Without limiting the fact that the determination of which Receivables are
eligible for borrowing is a matter of Silicon's discretion, the following
(the "MINIMUM ELIGIBILITY REQUIREMENTS") are the minimum requirements for a
Receivable to be an Eligible Receivable: (i) the Receivable must not be
outstanding for more than 90 days from its invoice date**, (ii) the
Receivable must not represent progress billings, or be due under a
fulfillment or requirements contract with the Account Debtor, (iii) the
Receivable must not be subject to any contingencies (including Receivables
arising from sales on consignment, guaranteed sale or other terms pursuant to
which payment by the Account Debtor may be conditional), (iv) the Receivable
must not be owing from an Account Debtor with whom the Borrower has any
dispute (whether or not relating to the particular Receivable), (v) the
Receivable must not be owing from an Affiliate of Borrower, (vi) the
Receivable must not be owing from an Account Debtor which is subject to any
insolvency or bankruptcy proceeding, or whose financial condition is not
acceptable to Silicon, or which, fails or goes out of a material portion of
its business, (vii) the Receivable must not be owing from the United States
or any department, agency or instrumentality thereof (unless there has been
compliance, to Silicon's satisfaction, with the United States Assignment of
Claims Act), (viii) the Receivable must not be owing from an Account Debtor
located outside the United States or Canada (unless pre-approved by Silicon
in its discretion in writing, or backed by a letter of credit satisfactory to
Silicon, or FCIA insured satisfactory to Silicon), (ix) the Receivable must
not be owing from an Account Debtor to whom Borrower is or may be liable for
goods purchased from such Account Debtor or otherwise. Receivables owing from
one Account Debtor will not be deemed eligible Receivables to the extent they
exceed 25% of the total eligible Receivables outstanding. In addition, if
more than 50% of the Receivables owing from an Account Debtor are outstanding
more than 90 days from their invoice date (without regard to unapplied
credits) or are otherwise not eligible Receivables, then all Receivables
owing from that Account Debtor will be deemed ineligible for borrowing.
Silicon may, from time to time, in its discretion, revise the Minimum
Eligibility Requirements, upon written notice to the Borrower.
*ELIGIBLE RECEIVABLES SHALL ALSO INCLUDE RECEIVABLES RELATING TO
MAINTENANCE CONTRACT BILLINGS, WHICH SILICON, IN ITS SOLE JUDGMENT, SHALL
DEEM ELIGIBLE FOR BORROWING, BASED ON SUCH CONSIDERATIONS AS SILICON MAY FROM
TIME TO TIME DEEM APPROPRIATE (THE "MAINTENANCE RECEIVABLES").
**PROVIDED, HOWEVER, THAT WITH RESPECT TO ANY RECEIVABLE FOR WHICH EXTENDED
PAYMENT TERMS HAVE BEEN GRANTED ("EXTENDED TERM RECEIVABLES"), AND PROVIDED
ALL PRIOR PAYMENTS DUE ON SUCH EXTENDED TERM RECEIVABLES HAVE BEEN MADE, THE
PORTION OF SUCH EXTENDED TERM RECEIVABLES WHICH IS DUE AND PAYABLE WITHIN THE
CURRENT 90 DAY PAYMENT PERIOD OF SUCH INVOICE WILL BE DEEMED AN ELIGIBLE
RECEIVABLE
"EQUIPMENT" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any
interest in any of the foregoing, and all attachments, accessories,
accessions, replacements, substitutions, additions or improvements to any of
the foregoing, wherever located.
"EVENT OF DEFAULT" means any of the events set forth in Section 7.1 of
this Agreement.
"GENERAL INTANGIBLES" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security
and other deposits, rights in all litigation presently or hereafter pending
for any cause or claim (whether in contract, tort or otherwise), and all
judgments
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<PAGE>
now or hereafter arising therefrom, all claims of Borrower against Silicon,
rights to purchase or sell real or personal property, rights as a licensor or
licensee of any kind, royalties, telephone numbers, proprietary information,
purchase orders, and all insurance policies and claims (including without
limitation life insurance, key man insurance, credit insurance, liability
insurance, property insurance and other insurance), tax refunds and claims,
computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower, all
rights to indemnification and all other intangible property of every kind and
nature (other than Receivables).
"INVENTORY" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at
any time owing by Borrower to Silicon, whether evidenced by this Agreement or
any note or other instrument or document, whether arising from an extension
of credit, opening of a letter of credit, banker's acceptance, loan,
guaranty, indemnification or otherwise, whether direct or indirect
(including, without limitation, those acquired by assignment and any
participation by Silicon in Borrower's debts owing to others), absolute or
contingent, due or to become due, including, without limitation, all
interest, charges, expenses, fees, attorney's fees, expert witness fees,
audit fees, letter of credit fees, collateral monitoring fees, closing fees,
facility fees, termination fees, minimum interest charges and any other sums
chargeable to Borrower under this Agreement or under any other present or
future instrument or agreement between Borrower and Silicon.
"PERMITTED LIENS" means the following: (i) purchase money security
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens consented to in writing by Silicon, which consent shall
not be unreasonably withheld; (v) security interests being terminated
substantially concurrently with this Agreement; (vi) liens of materialmen,
mechanics, warehousemen, carriers, or other similar liens arising in the
ordinary course of business and securing obligations which are not
delinquent; (vii) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above
in clauses (i) or (ii) above, provided that any extension, renewal or
replacement lien is limited to the property encumbered by the existing lien
and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase; (viii) Liens in favor of customs and revenue
authorities which secure payment of customs duties in connection with the
importation of goods. Silicon will have the right to require, as a condition
to its consent under subparagraph (iv) above, that the holder of the
additional security interest or lien sign an intercreditor agreement on
Silicon's then standard form, acknowledge that the security interest is
subordinate to the security interest in favor of Silicon, and agree not to
take any action to enforce its subordinate security interest so long as any
Obligations remain outstanding, and that Borrower agree that any uncured
default in any obligation secured by the subordinate security interest shall
also constitute an Event of Default under this Agreement.
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms
of obligations at any time owing to Borrower, all guaranties and other
security therefor, all merchandise returned to or repossessed by Borrower,
and all rights of stoppage in transit and all other rights or remedies of an
unpaid vendor, lienor or secured party.
"RESERVES" means, as of any date of determination, such amounts as
Silicon may from time to time establish and revise in good faith reducing the
amount of Loans and Letters of Credit which would otherwise be available to
Borrower under the lending formula(s) provided in the Schedule: (a) to
reflect events, conditions, contingencies or risks which, as determined by
Silicon in good faith, do or may affect either (i) the Collateral or any
other property which is security for the Obligations or its value, (ii) the
assets, business or prospects of Borrower or any Guarantor or (iii) the
security interests and other rights of Silicon in the Collateral (including
the enforceability, perfection and priority thereof), or (b) to reflect
Silicon's good faith belief that any collateral report or financial
information furnished by or on behalf of Borrower or any Guarantor to Silicon
is or may have been incomplete, inaccurate or misleading in any material
respect, or (c) in respect of any state of facts which Silicon determines in
good faith constitutes an Event of Default or may, with notice or passage of
time or both, constitute an Event of Default.
OTHER TERMS. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in
accordance with generally accepted accounting principles, consistently
applied. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon
(including proceeds of Receivables and payment of the Obligations in full)
shall be deemed applied by Silicon on account of the Obligations three
Business Days after receipt by Silicon of immediately available funds, and,
for purposes of the foregoing, any such funds received after 12:00 Noon on
any day shall be deemed received on the next Business Day. Silicon shall
not, however, be required to credit Borrower's account for the amount of any
item of
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<PAGE>
payment which is unsatisfactory to Silicon in its sole discretion, and
Silicon may charge Borrower's loan account for the amount of any item of
payment which is returned to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to
the Obligations, in such order and manner as Silicon shall determine in its
sole discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same
rate applicable to the Loans. Silicon may also, in its discretion, charge
any monetary Obligations to Borrower's Deposit Accounts maintained with
Silicon.
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless
Borrower notifies Silicon in writing to the contrary within thirty days after
each account is rendered, describing the nature of any alleged errors or
admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by
one party to the other party. Notices to Silicon shall be directed to the
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in
full force and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Silicon and
supersede all prior and contemporaneous negotiations and oral representations
and agreements, all of which are merged and integrated in this Agreement.
THERE ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE
PARTIES WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN
AGREEMENTS SIGNED BY THE PARTIES IN CONNECTION HEREWITH.
9.8 WAIVERS. The failure of Silicon at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or
any other present or future agreement between Borrower and Silicon shall not
waive or diminish any right of Silicon later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect
any other default, whether prior or subsequent, and whether or not similar.
None of the provisions of this Agreement or any other agreement now or in the
future executed by Borrower and delivered to Silicon shall be deemed to have
been waived by any act or knowledge of Silicon or its agents or employees,
but only by a specific written waiver signed by an authorized officer of
Silicon and delivered to Borrower. Borrower waives demand, protest, notice
of protest and notice of default or dishonor, notice of payment and
nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or
guaranty at any time held by Silicon on which Borrower is or may in any way
be liable, and notice of any action taken by Silicon, unless expressly
required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred
or suffered by Borrower or any other party through the ordinary negligence of
Silicon, or any of its directors, officers, employees, agents, attorneys or
any other Person affiliated with or representing Silicon, but nothing herein
shall relieve Silicon from liability for its own gross negligence or willful
misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Silicon,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs Silicon incurs in order to do the following:
prepare and negotiate this Agreement and the documents relating to this
Agreement; obtain legal advice in connection with this Agreement or Borrower;
enforce, or seek to enforce, any of its rights; prosecute actions against, or
defend actions by, Account Debtors; commence, intervene in, or defend any
action or proceeding; initiate any complaint to be relieved of the automatic
stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim,
third-party claim, or other claim; examine, audit, copy, and inspect any of
the Collateral or any of Borrower's books and records; protect, obtain
possession of, lease, dispose of, or otherwise enforce Silicon's security
interest in, the Collateral; and otherwise represent Silicon in any
litigation relating to Borrower. IN SATISFYING BORROWER'S OBLIGATION
HEREUNDER TO REIMBURSE SILICON FOR ATTORNEYS FEES, BORROWER MAY, FOR
CONVENIENCE, ISSUE CHECKS DIRECTLY TO SILICON'S ATTORNEYS, LEVY, SMALL &
LALLAS, BUT BORROWER ACKNOWLEDGES AND AGREES THAT LEVY, SMALL & LALLAS IS
REPRESENTING ONLY SILICON AND NOT BORROWER IN CONNECTION WITH THIS AGREEMENT.
If either Silicon or
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<PAGE>
Borrower files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover
its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of,
execution upon or defense of any order, decree, award or judgment. All
attorneys' fees and costs to which Silicon may be entitled pursuant to this
Paragraph shall immediately become part of Borrower's Obligations, shall be
due on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Silicon; provided,
however, that Borrower may not assign or transfer any of its rights under
this Agreement without the prior written consent of Silicon, and any
prohibited assignment shall be void. No consent by Silicon to any assignment
shall release Borrower from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against Silicon, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or
any other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Silicon, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of
an action or proceeding in a court of competent jurisdiction by the filing of
a complaint within one year after the first act, occurrence or omission upon
which such claim or cause of action, or any part thereof, is based, and the
service of a summons and complaint on an officer of Silicon, or on any other
person authorized to accept service on behalf of Silicon, within thirty (30)
days thereafter. Borrower agrees that such one-year period is a reasonable
and sufficient time for Borrower to investigate and act upon any such claim
or cause of action. The one-year period provided herein shall not be waived,
tolled, or extended except by the written consent of Silicon in its sole
discretion. This provision shall survive any termination of this Loan
Agreement or any other present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe,
limit, define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between
the parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any
rule of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part
of the consideration to Silicon to enter into this Agreement, Borrower (i)
agrees that all actions and proceedings relating directly or indirectly to
this Agreement shall, at Silicon's option, be litigated in courts located
within California, and that the exclusive venue therefor shall be Santa Clara
County; (ii) consents to the jurisdiction and venue of any such court and
consents to service of process in any such action or proceeding by personal
delivery or any other method permitted by law; and (iii) waives any and all
rights Borrower may have to object to the jurisdiction of any such court, or
to transfer or change the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT,
ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT
OR OTHERWISE.
BORROWER:
FOURTH SHIFT CORPORATION
BY /S/ MARION MELVIN STUCKEY
---------------------------------
PRESIDENT OR VICE PRESIDENT
BY /S/ DAVID G. LATZKE
---------------------------------
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /S/ CHRISTOPHER C. HILL
---------------------------------
TITLE VICE PRESIDENT
------------------------------
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[LOGO] SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: FOURTH SHIFT CORPORATION
ADDRESS: 7900 INTERNATIONAL DRIVE
MINNEAPOLIS, MN 55425
DATE: MARCH 2, 1998
This Schedule forms an integral part of the Loan and Security Agreement
between Silicon Valley Bank and the above-borrower of even date.
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1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of:
(i) $5,000,000 at any one time outstanding (the
"Maximum Credit Limit"); or
(ii) the sum of:
(a) 75% of the amount of Borrower's Eligible
Receivables (as defined in Section 8 above),
excluding, however, Maintenance Receivables
(as defined in Section 8 above); PLUS
(b) 65% of the amount of Borrower's eligible
Maintenance Receivables which are (I) until
April 30, 1998, not outstanding more than 60
days from its invoice date, and (II) after
April 30, 1998, not outstanding more than 30
days from its invoice date; PLUS
(c) The unpaid principal balance of the Domestic
Term Loan.
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2. INTEREST.
INTEREST RATE (Section 1.2):
A rate equal to the "Prime Rate" in effect from
time to time, plus 2.0% per annum. Interest shall
be calculated on the basis of a 360-day year for
the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate upon
which other rates charged by Silicon are based, and
it is not necessarily the best rate available at
Silicon. The interest rate applicable to the
Obligations shall change on each date there is a
change in the Prime Rate. With respect to the
Domestic Term Loan, the interest rate shall be as
set forth in the Existing Loan Documents.
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SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
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MINIMUM MONTHLY
INTEREST (Section 1.2): None.
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3. FEES (Section 1.4):
Loan Fee: $50,000, payable concurrently herewith. (Any
Commitment Fee previously paid by the Borrower in
connection with this loan shall be credited against
this Fee.)
Collateral
Monitoring
Fee: $1,200, per calendar month, payable in arrears
(prorated for any partial calendar month at the
beginning and at termination of this Agreement).
Unused Line Fee: Borrower shall pay Silicon an Unused Line Fee, in
addition to all interest and other fees payable
hereunder. The amount of the Unused Line Fee shall
be 0.125% per month multiplied by an amount equal
to the Maximum Credit Limit minus the average daily
balance of the outstanding Loans. The Unused Line
Fee shall be computed and paid monthly, in arrears
(prorated for any partial calendar month at the
beginning and at termination of this Agreement),
and shall be due on the last day of each calendar
month.
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4. MATURITY DATE
(Section 6.1): One year from the date of this Agreement, subject to
automatic renewal as provided in Section 6.1 above,
and early termination as provided in Section 6.2
above.
With respect to the Domestic Term Loan, the maturity
date thereof shall be as set forth in the Existing
Loan Documents, subject to the provisions of Section
6.3 above.
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5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of
the end of each month, except as otherwise
specifically provided below:
MINIMUM TANGIBLE
NET WORTH: Borrower shall maintain a Tangible Net Worth of not
less than ($250,000).
DEFINITIONS. For purposes of the foregoing financial covenants,
the following terms shall have the following
meanings:
"Current assets", "current liabilities" and
"liabilities" shall have the meanings ascribed to
them by generally accepted accounting principles.
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<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
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"Tangible Net Worth" shall mean the excess of total
assets over total liabilities, determined in
accordance with generally accepted accounting
principles, with the following adjustments:
(A) there shall be excluded from assets: (i)
notes, accounts receivable and other obligations
owing to the Borrower from its officers or other
Affiliates, and (ii) all assets which would be
classified as intangible assets under generally
accepted accounting principles, including
without limitation goodwill, licenses, patents,
trademarks, trade names, copyrights, capitalized
software and organizational costs, licenses and
franchises
(B) there shall be excluded from liabilities:
all indebtedness which is subordinated to the
Obligations under a subordination agreement in
form specified by Silicon or by language in the
instrument evidencing the indebtedness which is
acceptable to Silicon in its discretion.
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6. REPORTING.
(Section 5.3):
Borrower shall provide Silicon with the following:
1. Monthly Receivable agings, aged by invoice
date, and Extended Terms Receivables agings,
aged by invoice date, and Maintenance
Receivables agings, aged by invoice date, all
within fifteen days after the end of each month.
2. Monthly accounts payable agings, aged by
invoice date within fifteen days after the end
of each month.
3. Monthly outstanding or held check registers
within thirty days after the end of each month.
4. Monthly reconciliations of Receivable agings
(aged by invoice date), and transaction reports
not less frequently than thirty days after the
end of each month.
5. Monthly unaudited financial statements, as soon
as available, and in any event within thirty
days after the end of each month.
6. Monthly Compliance Certificates, within thirty
days after the end of each month, in such form
as Silicon shall reasonably specify, signed by
the Chief Financial Officer of Borrower,
certifying that as of the end of such month
Borrower was in full compliance with all of the
terms and conditions of this Agreement, and
setting forth calculations showing compliance
with the financial covenants set forth in this
Agreement and such other information as Silicon
shall reasonably request.
7. Quarterly unaudited financial statements, as
soon as available, and in any event within
thirty days after the end of each fiscal
quarter of Borrower.
8. Annual operating budgets (including income
statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal
year of Borrower within thirty days after the
end of each fiscal year of Borrower.
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SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
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9. Annual financial statements, as soon as
available, and in any event within 120 days
following the end of Borrower's fiscal year,
certified by independent certified public
accountants acceptable to Silicon.
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7. COMPENSATION
(Section 5.5): Not Applicable.
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8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): See Representations and Warranties of Borrower
dated March 5, 1998.
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): See Representations and Warranties of Borrower
dated March 5, 1998.
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): See Representations and Warranties of Borrower
dated March 5, 1998.
OTHER LOCATIONS AND
ADDRESSES
(Section 3.3): See Representations and Warranties of Borrower
dated March 5, 1998.
MATERIAL ADVERSE
LITIGATION
(Section 3.10): None
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SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
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9. OTHER COVENANTS
(Section 5.1): Borrower shall at all times comply with all of the
following additional covenants:
(1) BANKING RELATIONSHIP. Borrower shall at all
times maintain its primary banking relationship
with Silicon.
(2) FOREIGN TERM NOTE. Concurrently with the
initial Loan made under this Agreement, Borrower
shall cause all Obligations pertaining to that
certain Promissory Note executed by Borrower in
favor of Silicon, dated September 24, 1996 and
in the original principal amount of $600,000 to
be paid and performed in full.
(3) COPYRIGHT FILINGS. Borrower has previously
executed and delivered to Silicon that certain
Collateral Assignment, Patent Mortgage and
Security Agreement dated October 23, 1995
(the "Intellectual Property Agreement").
Within 120 days after the date hereof, Borrower
shall (i) cause all of its unregistered software
to be filed for registration with the United
States Copyright Office (the "Copyrights'), (ii)
cause the Intellectual Property Agreement to be
amended to include such Copyrights and (iii)
cause such amendment to filed in the Copyright
Office.
Borrower: Silicon:
FOURTH SHIFT CORPORATION SILICON VALLEY BANK
BY /s/ MARION MELVIN STUCKEY BY /s/ CHRISTOPHER C. HILL
-------------------------------- ------------------------------------
President or Vice President Title Vice President
------------------------------
BY /s/ DAVID G. LATZKE
--------------------------------
Secretary or Ass't Secretary
3/16/95 -
-5-
<PAGE>
[LOGO] SILICON VALLEY BANK
AMENDMENT TO LOAN DOCUMENTS
BORROWER: FOURTH SHIFT CORPORATION
DATE: MARCH 2, 1998
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower"), with
reference to the various loan and security agreements and other documents,
instruments and agreements between them, including but not limited to that
certain Loan and Security Agreement dated November 6, 1995 (as amended,
collectively, the "Existing Loan Documents").
The Parties agree to amend the Existing Loan Documents, as follows:
1. PRESENT LOAN BALANCE. Borrower acknowledges that the present unpaid
principal balance of the Borrower's indebtedness, liabilities and obligations
to Silicon under the Existing Loan Documents, including interest accrued
through March 5, 1998 is $ 3,599,799.95 (the "Present Loan Balance"), and
that said sum is due and owing without any defense, offset, or counterclaim
of any kind.
2. AMENDMENT TO EXISTING LOAN DOCUMENTS. The Existing Loan Documents
are hereby amended in their entirety to read as set forth in the Loan and
Security Agreement being executed concurrently (collectively, the "New Loan
Documents"). The Borrower acknowledges that the Present Loan Balance shall be
the opening balance of the Loans pursuant to the New Loan Documents as of the
date hereof, and shall, for all purposes, be deemed to be Loans made by
Silicon to the Borrower pursuant to the New Loan Documents. Notwithstanding
the execution of the New Loan Documents, the following Existing Loan
Documents shall continue in full force and effect and shall continue to
secure all present and future indebtedness, liabilities, guarantees and other
Obligations (as defined in the New Loan Documents): That portion of the
Existing Loan Documents pertaining to Equipment Advances in the original
aggregate principal amount of $1,500,000 (the "Domestic Term Loan"); all
standard documents of Silicon entered into by the Borrower in connection with
Letters of Credit and/or Foreign Exchange Contracts; all security agreements,
collateral assignments and mortgages, including but not limited to those
relating to patents, trademarks, copyrights and other intellectual property;
all lockbox agreements and/or blocked account agreements; and all UCC-1
financing statements and other documents filed with governmental offices
which perfect liens or security interests in favor of Silicon. In addition,
in the event the Borrower has previously issued any stock options, stock
purchase warrants or securities to Silicon, the same and all documents and
agreements relating thereto shall also continue in full force and effect.
3. GENERAL PROVISIONS. This Amendment and the New Loan Documents set
forth in full all of the representations and agreements of the parties with
respect to the subject matter
<PAGE>
LEVY, SMALL & LALLAS
TRANSMITTAL NOTE
- -------------------------------------------------------------------
Page 2
hereof and supersede all prior discussions, representations, agreements and
understandings between the parties with respect to the subject hereof.
BORROWER: SILICON:
FOURTH SHIFT CORPORATION SILICON VALLEY BANK
BY /S/ MARION MELVIN STUCKEY BY /S/ CHRISTOPHER C. HILL
--------------------------------- -------------------------------
PRESIDENT OR VICE PRESIDENT TITLE VICE PRESIDENT
BY /S/ DAVID G. LATZKE
---------------------------------
SECRETARY OR ASS'T SECRETARY
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement File Nos. 33-68894, 33-80480, 33-93756, and 33-08507.
/s/ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FOURTH SHIFT
CORPORATION BALANCE SHEET FOR THE PERIOD ENDED 12/31/97 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE TWELVE-MONTH PERIOD ENDED 12/31/97 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,758
<SECURITIES> 0
<RECEIVABLES> 14,651<F1>
<ALLOWANCES> 0
<INVENTORY> 482
<CURRENT-ASSETS> 21,922
<PP&E> 14,131
<DEPRECIATION> 8,628
<TOTAL-ASSETS> 31,429
<CURRENT-LIABILITIES> 26,083
<BONDS> 1,299
0
0
<COMMON> 98
<OTHER-SE> 3,949
<TOTAL-LIABILITY-AND-EQUITY> 31,429
<SALES> 25,181
<TOTAL-REVENUES> 52,318
<CGS> 5,108
<TOTAL-COSTS> 18,317
<OTHER-EXPENSES> 432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,773)
<INCOME-TAX> 328
<INCOME-CONTINUING> (6,101)
<DISCONTINUED> 2,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,790)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
<FN>
<F1>THESE ASSETS VALUES REPRESENT AMOUNTS NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
</FN>
</TABLE>
