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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-21958
QRS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 68-0102251
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
1400 MARINA WAY SOUTH, RICHMOND, CALIFORNIA 94804
(Address of principal executive offices,
including zip code)
(510) 215-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 per share
(Title of Class)
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 amendments to
this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of February 8, 1999 was approximately $433,531,834 based upon the
closing price of $50.375 for shares of the Registrant's common stock as reported
by the Nasdaq National Market). Shares of common stock held by each officer,
director and holder of five percent or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares of common stock outstanding as of February 8, 1999: 8,606,091
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following documents are incorporated by reference
into this Report on Form 10-K where indicated:
1. QRS Corporation Proxy Statement for the Annual Meeting of Stockholders
to be held on or about May 11, 1999, Part III.
The exhibit index appears on Pages 45-47.
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QRS CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1 Business......................................................................................... 3
ITEM 2 Facilities....................................................................................... 14
ITEM 3 Legal Proceedings................................................................................ 14
ITEM 4 Submission of Matters to a Vote of Security Holders.............................................. 14
PART II
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters............................ 15
ITEM 6 Selected Financial Data.......................................................................... 16
ITEM 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 17
ITEM 7a Quantitative and Qualitative Disclosures About Market Risk....................................... 23
ITEM 8 Financial Statements............................................................................. 24
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................................. 41
PART III
ITEM 10 Directors and Executive Officers of the Registrant............................................... 41
ITEM 11 Executive Compensation........................................................................... 44
ITEM 12 Security Ownership of Certain Beneficial Owners and Management................................... 44
ITEM 13 Certain Relationships and Related Transactions................................................... 44
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 45
SIGNATURES....................................................................................... 48
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED "FORWARD-LOOKING"
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. THESE FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES, AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE LISTED UNDER "BUSINESS--RISK
FACTORS" AND ELSEWHERE HEREIN, AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN
THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
Effective May 11, 1998, QuickResponse Services, Inc. changed its corporate name
to QRS Corporation ("QRS" or the "Company"). The Company is a leading provider
of electronic commerce merchandising and logistics solutions that optimize its
customers' performance throughout the retail demand chain. The Company's
products and services are organized and managed as a single product family,
which includes Catalog Services, Network Services, Inventory Management
Services, Logistics Management Services and Professional Services. The Company
provides its retailer, vendor and carrier customers with a single source for
implementing network- centric demand chain management solutions.
The Company's primary products and services, described more completely below in
"Business--QRS Services," are as follows:
- - QRS Catalog Services includes QRS KEYSTONE, a comprehensive product
information database. QRS KEYSTONE was the first, independent product
information database using the industry standard Universal Product Code
("U.P.C.") numbering system. It is a central repository of timely,
complete, and accurate vendor product information. Retailers and vendors
access QRS KEYSTONE can electronically exchange industry standard business
documents using QRS CONCOURSE.
- - QRS Network Services includes QRS CONCOURSE and QRS ALLIANCE. QRS CONCOURSE
is the connecting service that provides two-way electronic transmission of
business data while its partner service, QRS ALLIANCE, allows any size
manufacturer, retailer or vendor to exchange business documents with its
partners electronically.
- - QRS Inventory Management Services ("IMS") includes QRS CATALYST, QRS
MARINER and QRS HORIZON. QRS CATALYST is a management tool that transforms
sales into actionable information. It enables users to track which products
are selling by U.P.C. and store location to aid in buying and manufacturing
decisions. QRS MARINER is an effectively managed tool for increasing sales
velocity. It is a collaborative solution for retailers and vendors that
utilize a stock of models and daily sales information to determine
recommended order quantity and electronically communicates and tracks the
flow of reordered items. QRS HORIZON is a forecasting tool to project
consumer demand.
- - QRS Logistics Management Services ("LMS") provides logistics information to
improve merchandise movement and inventory management. QRS LMS allows
retailers and vendors to tender and track motor freight shipments to
carriers, using QRS CONCOURSE, and provide delivery performance reporting.
QRS LMS represents a single source of information that provides trading
partners with the data necessary to evaluate carrier performance and
efficiency.
- - QRS Professional Services provides education and consulting services using
strategic tools and industry expertise. The professional services team
enables QRS customers to realize even greater benefits from QRS products.
The Company's business is subject to various risks and uncertainties that are
described herein under "Risk Factors."
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The Company was incorporated in California in 1985 and reincorporated into
Delaware in October 1997. In the fourth quarter of 1997, QRS created a wholly
owned Canadian sales subsidiary, QRS Canada, Inc. and during the third quarter
of 1998, the Company created a wholly owned United States subsidiary, QRS Sales
and Services Corporation. Except as otherwise noted, all references to the
Company and QRS refer to the Company and its subsidiaries.
At December 31, 1998, the Company had 292 employees. The Company's principal
executive offices are located at 1400 Marina Way South, Richmond, California
94804, and its telephone number is 510-215-5000.
INDUSTRY BACKGROUND
The United States general merchandise retail industry accounts for revenues in
excess of $2.4 trillion, with approximately 20 retailers recording sales in
excess of $136 billion. As competitive pressures within the industry have
intensified, retailers have focused increasingly upon the importance of
efficient demand chain management to improve their financial performance.
Failure to manage merchandise to meet customer demand results in lost sales.
Kurt Salmon Associates ("KSA"), an independent global management consulting firm
specializing in the retail industry, estimated in a 1997 study that in the soft
goods industry alone, inefficiencies such as inadequate information, excess
inventories and slow communications between vendors and retailers result in over
$25 billion in lost revenues each year. In addition, KSA estimated that the
opportunity exists for $102 billion in annual savings across all general
merchandise and consumer durables markets. Demand chain management is a complex
problem. For example, the average department store carries more than one million
stockkeeping units ("SKUs") at a time--some carry as many as five million--each
unique in terms of product style, size and color. Each retailer's SKUs are
produced by hundreds, or in some cases thousands, of vendors. These vendors are
required to manage rapid production and accurate delivery of ordered merchandise
to multiple retail locations. To address these issues, retailers and vendors
have in recent years sought to develop strategies for optimizing selection,
availability and flow of information and merchandise while minimizing absolute
inventory levels. QRS' network- centric applications align closely with its
customers' needs in providing solutions to improve the efficiencies throughout
the retail demand chain.
Technology has made significant contributions to the evolution of merchandise
management. The replacement of cash registers with point of sale terminals
during the 1980s made possible automatic price look-up and merchandise tracking.
These capabilities, and the rapid spread of bar coding, soon led to the retail
industry's adoption of a standardized product identification, numbering and
communication format. Known as the universal product code, or U.P.C., this
standard has greatly increased the efficiency with which retailers and vendors
can mark, track and exchange product information.
During the same period, advances in data communications and the availability of
public data networks fostered the use of computers for the electronic
transmission of transaction documents, including purchase orders, invoices and
shipping instructions. Such paperless transactions are widely referred to as
electronic data interchange, or EDI. In conjunction with the broad use of
standard U.P.C.-based data, EDI has benefited retailers by lowering costs,
reducing errors and improving the timeliness of the merchandise ordering
process.
Despite the benefits of EDI, retailers have continued to rely on paper U.P.C.
catalogs or magnetic tapes published by each vendor as their primary source of
product information. Although updated frequently, such information quickly
becomes outdated and as a result these catalogs and tapes cannot provide the
real-time information necessary for quick response merchandise management. In
order to efficiently implement merchandise management, retailers and vendors
need an independent, reliable, centralized database containing U.P.C. product
information accessible through a reliable and secure data network.
The growing adoption of the internet and related technologies by business
entities is significantly changing the industry. Internet technologies expand
the market for electronic commerce products to include smaller and less
sophisticated segments, and increase the awareness of all segments of the
market. Increasing competition and more rapid change also accompanies the growth
in market opportunity.
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COMPANY PRODUCTS AND SERVICES
In order to improve the flow of information, goods and services throughout the
retail demand chain, the Company offers a range of products and services,
including QRS KEYSTONE (catalog services), QRS CONCOURSE and QRS ALLIANCE
(network services), QRS CATALYST (sales analysis), QRS MARINER (replenishment),
QRS HORIZON, (forecasting), QRS LMS (logistics management services), and QRS
Professional Services (implementation, training and support). The Company
considers these services to be a single product family, which may be implemented
incrementally, allowing customers to integrate functions over time within their
organizations and with their trading partners.
In recognition of the growing importance of the internet and internet related
technologies in the electronic commerce industry, all QRS products incorporate
internet protocol (IP) to facilitate efficient and cost effective electronic
commerce with all trading partners, regardless of size.
QRS CATALOG SERVICES. QRS KEYSTONE is the retail industry's largest U.P.C.
database. As of December 31, 1998, it contained over 67 million U.P.C. entries
and supported a vendor customer base of approximately 7,300 companies. QRS
KEYSTONE classifies a vendor's merchandise entries by name, merchandise
classification, style number and U.P.C., as well as by size, color and other
relevant characteristics. The U.P.C. classification system underlies all
subsequent transaction processing. When loaded into the database, the data is
screened for accuracy and completeness by the Company's software and is further
reviewed by a Company customer support representative. Vendor information is
protected and is available only to trading partners approved by the vendor.
Pricing of QRS KEYSTONE is based upon the formation of trading partnerships
between vendors and retailers. Each time a retailer accesses a vendor's data in
QRS KEYSTONE, a trading partnership is formed and a specific fee is charged for
that month. In addition to the trading partnership charges, a usage fee is
charged based on the actual number of records the retailer retrieves from QRS
KEYSTONE.
There are four methods to access the UPC database: QRS KEYSTONE Genesis, the
original mainframe interface that was developed in 1988; QRS KEYSTONE for
Windows, developed in 1996, which provides additional ordering information
through the enhancement of extended data elements as well as providing new
filtering techniques; QRS KEYSTONE REALTIME, which is a proprietary
computer-to-computer communication interface system providing retailers with a
method of data retrieval from QRS KEYSTONE via their own host; and QRS KEYSTONE
WEB, developed in the fourth quarter of 1997, which is a web-based interface for
vendors and retailers.
QRS NETWORK SERVICES. QRS Network Services consists of QRS CONCOURSE and QRS
ALLIANCE. QRS CONCOURSE is a portfolio of services offering one of the
industry's most secure, reliable and cost effective connectivity packages. It is
designed to remove from customers the distracting demands of providing wide area
network connectivity, allowing customers to focus on their core competencies.
QRS ALLIANCE is a family of electronic commerce enablement tools offering a
complete spectrum of solutions for trading partners of all sizes. QRS ALLIANCE
provides services that allow retailers to achieve 100% electronic commerce with
their trading partners. Products such as QRS QUICKSTEP, an easy-to-use,
Windows-based client facilitate quick implementation of smaller partners. QRS
PASSKEY enables major vendors to achieve 100% electronic commerce with their
independent retail trading partners, while allowing independent retailers to
electronically access information and purchase product from their vendors. QRS
EC SERVICE BUREAU is a comprehensive electronic commerce and EDI enablement
service that saves vendors from investing in systems and in-house expertise.
Within QRS Network Services, QRS INTERNET SERVICES enables organizations to
benefit from a connected world with Internet access, content hosting, web
security, web development and Internet security services.
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QRS INVENTORY MANAGEMENT SERVICES (IMS). QRS IMS is an integrated
network-centric suite of inventory management applications that includes QRS
CATALYST (sales analysis), QRS MARINER (replenishment), and QRS HORIZON (a
forecasting tool). Based on individual manufacturer and retailer needs, QRS IMS
is intended to increase both retailers' and manufacturers' sales by having the
right merchandise at the right place at the right time.
QRS CATALYST provides tools for the retailer and vendor to enhance inventory
management. With QRS CATALYST, both retailers and their vendors can view sales
in an easy-to-use Windows environment. The information is available by product,
size, color and specific store location. This service provides immediate
information on which products are best sellers and which are slow movers.
QRS MARINER is a superior offering compared to competitor products in the market
because it permits replenishment models to be run daily, by U.P.C. and by store
location. This provides optimum merchandise management at the SKU level on a
daily basis. Most in-house and third-party applications are run monthly or
bi-monthly and require large capital and operating cost investments. Because all
components of QRS MARINER are network-centric, the Company believes that capital
and operating costs for both the retailer and the manufacturer will be reduced.
QRS HORIZON enables both retailers and their vendors to forecast sales for up to
53 weeks using seasonal and promotional variables. QRS HORIZON supports a
variety of statistical methods, allowing users to facilitate informed buying and
production decisions.
QRS LOGISTICS MANAGEMENT SERVICES (LMS). QRS LMS has approximately 150 enabled
customers and is a market leader in providing logistical information and
communication services. QRS LMS enables shippers to tender and track motor
freight shipments to carriers via QRS CONCOURSE and provides delivery
performance reporting. QRS LMS allows the capture, transmission, storage and
management of shipment information. This provides customers with electronic
access to real-time information and allows both retailers and manufacturers to
conduct electronic commerce for tendering, freight invoicing and other
functions, track the current status of intransit shipments and notify affected
parties of impending service failures.
The proactive notification of potential service failures and easy access to
accurate, timely information helps eliminate the uncertainty surrounding
individual orders or shipments. This generally leads to a reduction in costs and
order-fulfillment cycles as distribution channels become more efficient.
QRS PROFESSIONAL SERVICES. QRS Professional Services provides a team of
experienced consultants to assist retailers and manufacturers design and execute
an electronic commerce plan using strategic tools and industry expertise.
Through analysis of their businesses, QRS Professional Services can determine
what solutions are needed within an organization and what changes or
enhancements should be made to internal systems and/or processes.
The components of QRS Professional Services include: Strategic Consulting,
Readiness Study, Operational Analysis, Implementation Management and Educational
Programs.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company's marketing strategy is to provide a comprehensive inter-enterprise
solution for retail demand chain management. The Company's marketing activities
include participation in industry conventions, trade shows and user groups. The
Company's sales and marketing personnel include numerous individuals with prior
retail, replenishment, transportation and EDI experience.
The Company utilizes experienced software development and customer service
personnel to assist customers in implementing and using the Company's catalog
and network services. The Company operates a 24-hour hotline for customers to
call with questions and problems and has a program to regularly contact its
customers by
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telephone to ensure customer satisfaction, currency of catalog data and
maximization of trading partner opportunities.
The Company provides the capability for any trading partner to trade with any
other trading partner using electronic commerce solutions. Retailers generally
transact business with a number of vendors and vice versa. Generally, the larger
partner, and more advanced user of electronic commerce, is referred to as the
"hub." The Company works with the larger "hubs" to facilitate and standardize
their electronic commerce processes with their many "spokes," or smaller
partners.
In addition to its own sales force, the Company also benefits from the marketing
efforts of International Business Machines Corporation ("IBM"). IBM, in
coordination with the Company, actively promotes the use of its network services
in the retail industry. The Company cooperates with IBM marketing teams to
generate leads and qualify prospects. IBM field sales personnel currently are
compensated for generating EDI revenue for IBM through customer use of QRS
services. On December 8, 1998, AT&T and IBM announced a definitive agreement
pursuant to which AT&T agreed to purchase IBM's Global Network and corporate
networking business. It is the Company's understanding that its network services
agreement will not be transferred to AT&T pursuant to this transaction. See "IBM
Relationship."
RETAILER AND VENDOR CUSTOMERS
The Company markets its services to retailers and vendors, primarily in the
United States and Canada. As of December 31, 1998, the Company's Catalog and
Network Services were being utilized by 240 retailers, representing many
segments of the retail industry, with an emphasis in apparel and department
store retailers. The Company's customers also included 7,329 general merchandise
vendors, selling a variety of goods ranging from apparel and shoes to cosmetics
to electronics and automotive goods.
The Company's customer base of retailers, vendors and shippers increased 25%
from approximately 6,180 customers at December 31, 1997 to approximately 7,719
customers at December 31, 1998. Its QRS KEYSTONE customer base increased by 17%
from approximately 1,800 at December 31, 1997 to approximately 2,100 at December
31, 1998. The number of U.P.C.s active in QRS KEYSTONE grew 18% from 57 million
at December 31, 1997 to 67 million at December 31, 1998. At December 31, 1998,
124 retailers used QRS KEYSTONE, including 21 who required their vendors to use
QRS KEYSTONE.
The Company provides services and generates revenues by enabling certain hub
customers and their trading partners to conduct business over the Company's
network. Due to the large number of trading partners that transact business with
each other, including one or more hub customers, the difficulty of allocating
trading partner network services to individual hub customers, and the
differences in the manner in which hub customers and trading partners allocate
the cost of network services among each other, the Company cannot precisely
attribute revenues to particular trading relationships. While the Company
continues to refine its estimation techniques, the Company believes that no
individual customer or hub customer trading partnership exceeded 10% of total
revenues for any of the three years in the period ended December 31, 1998.
COMPETITION
The Company believes it provides a competitive advantage through its
interenterprise database, its retail focus, relationships and expertise, its
daily management of inventory at the U.P.C. and store level, and its network-
centric applications, which significantly lower customers' capital requirements.
The Company competes on the basis of service offerings, availability and quality
of support, implementation services, sales and marketing resources and price.
The Company's competitors include a number of companies providing EDI and
related network services to retailers and vendors. The EDI services business is
highly competitive, and competitive pricing may materially and adversely affect
the prices the Company can charge for its services. Competition may also affect
the Company's ability to attract new customers and retain and expand
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business with its existing customers and may impact negatively the range of
services offered to its customers. The Company expects competition to increase
as more companies enter the market and existing competitors continue to change
and expand their product offerings. Several companies, including General
Electric Information Services Company, Sterling Commerce, Inc. and others, offer
EDI and certain other network services, including a U.P.C. catalog. In-house
systems and third-party software providers are the Company's largest competitors
relative to QRS IMS. Competitors for the Company's QRS LMS offerings are
primarily other freight carriers who provide outsourcing to customers.
The Company differentiates itself from its competitors in part by providing the
U.P.C. catalog containing product information from the largest number of
vendors. The Company's business and results of operations could be materially
and adversely affected if other competitors introduce catalogs or if any
competitor provides a catalog that is superior to the Company's catalog. Many of
the Company's existing and potential competitors have financial, marketing or
technological resources that exceed those of the Company, and there can be no
assurance that the Company will be able to compete successfully. Some large
retailers and vendors operate private computer networks for transacting business
with their trading partners. It is possible that additional retailers and
vendors, including certain of the Company's existing customers, may develop and
implement similar private networks, thereby reducing the demand for the
Company's services.
IBM RELATIONSHIP
The Company does not operate its own Value-Added Network and has formed a
strategic alliance with IBM to outsource the Company's network operation
requirements. IBM charges the Company for the network services used by the
Company's customers. These charges are subject to specified volume discounts and
allowance.
The Company entered into an agreement with IBM for the purchase of $250 million
of network services over a three-year period commencing January 1, 1998. The
agreement includes specified annual minimum purchases and a graduated adjustment
charge if total purchases fall below the total minimum amount. The Company met
the minimum purchases in 1998 and based on historical and projected usage,
believes that the purchase requirements during the remaining two-year period
will be met.
On December 8, 1998, AT&T and IBM announced a definitive agreement pursuant to
which AT&T agreed to purchase IBM's Global Network and corporate networking
business. This announcement reflected IBM's intent to exit the
telecommunications infrastructure side of its network business while focusing on
its e-business related services. The services purchased from IBM under its
agreement include both network connectivity and e-business related value added
services. Upon close of the AT&T acquisition, it is anticipated that the Company
will continue to acquire its network service requirements from IBM with the
delivery of a portion of these services to be undertaken by AT&T.
Additionally, the Company and IBM signed a Retail Industry Marketing agreement
under which the Company provides to IBM certain professional services related to
the retail industry. The Company recognized revenues of $1,000,000 in the fourth
quarter of 1997 and $1,000,000 during the year ended December 31, 1998 as a
result of this agreement.
DATA CENTER
The Company operates its primary data center at its Richmond, California
offices. The data center operates 24 hours a day, seven days a week, and is
connected to the Company's network provider through three leased data circuits
in two routings to ensure availability. The data center consists primarily of
leased mainframe, client/server, disk storage, tape drive and other peripheral
technology to provide on-line, batch and back-up operations. Catalog data is
backed up and shipped off site daily. The Company's facility and data center are
both secured with controlled access doors and the data center is equipped with a
Halon fire protection system, an Uninterrupted Power Supply, and a diesel
generator permitting 24 hours of continuous electrical power. The data
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center has a separate, isolated power source from the remainder of the facility.
The Company has contracted for an alternative operations facility in the event
of physical disaster.
PRODUCT DEVELOPMENT
The Company is focused on the development and upgrading of its valued-added
applications (QRS Catalog Services, QRS IMS and QRS LMS) and its network
services technology and architecture. The Company is not involved with the
development, maintenance and operation of the IBM Value-Added Network used to
run network applications used by the Company and many of its customers.
In 1998, 1997 and 1996, the Company expensed $4,309,000, $4,365,000 and
$3,127,000, respectively, of product development costs and capitalized
$2,555,000, $1,274,000 and $245,000, respectively, related to the development
and enhancement of the QRS KEYSTONE catalog interface, an Internet-based EDI
product (QRS QUICKSTEP), QRS IMS, and new technology and architecture research.
In order to compete actively in the market of EDI applications, the Company
plans to continue to invest in the development of new and existing software
products and technology. Capitalized software development costs are amortized
over three years. The Company's product development effort consists of in-house
development of software applications and integration of third-party software
tools to provide service offerings and contracted software development.
PROPRIETARY RIGHTS
The Company regards certain features of its software and documentation as
proprietary information and relies on a combination of contract, copyright,
trademark and trade secret laws and other measures for its protection. Although
data provided to QRS by its vendor customers is not proprietary to the Company,
the Company seeks to protect its U.P.C. catalog applications through copyright
laws. The Company has no patents, and existing copyright laws afford only
limited protection. The Company believes that, because of the rapid pace of
technological change in the electronic commerce industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of the Company's employees, product enhancements and the
timeliness and quality of support services.
UNIQUEST
On May 20, 1993, the Company sold its software and services business to
Uniquest, a publicly held company. The gain recognized from the sale of this
business for the year ended December 31, 1993 was $1,441,000. In connection with
the sale, the Company entered into various agreements with the buyer, including
the sublease of approximately 40,000 square feet of office space through June
30, 2000. Minimum monthly lease payments ranged from $53,000 to $75,000 through
the seven-year term of the lease.
At December 31, 1993, Uniquest was delinquent in its payments and owed the
Company approximately $1,358,000 under sublease and data center cost sharing
agreements. As a result, the Company provided an allowance of $1,018,000 against
these receivables and made additional provisions of $2,009,000 against
nonpayment of future obligations. The result of the allowance and provision
described was to reduce the gain from the sale of the software and services
business by $3,027,000. A $1,700,000 reserve, provided in 1992 for lease
payments related to another vacant building, was included in the sublease loss
reserves at December 31, 1993.
In May 1995, Uniquest ceased operations and made an assignment of assets for the
benefit of its creditors. In connection with the cessation of Uniquest's
operations, the Company's sublease with Uniquest was terminated. The Company
received a payment of $923,000 and wrote off the balance of a note for
delinquent rent and data cost sharing amounts of approximately $1,158,000
against the sublease loss reserves. The Company filed a claim with the
Creditors' Committee for unsecured amounts owed by Uniquest totaling
approximately $740,000. During 1995 the Company recorded $164,000 as sublease
income and $77,000 as data center cost
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reimbursements from Uniquest as reductions of occupancy expense and data center
cost of sales, respectively. There were no sublease income or data center cost
reimbursements recorded in 1996 and 1997.
During the quarter ended March 31, 1998, outstanding matters with regard to the
Uniquest bankruptcy were substantially resolved; accordingly, the Company
recognized a gain on sale of software and services business of $1,494,000 less
applicable income taxes of $598,000 for these discontinued operations. The
remaining sublease loss reserve of $480,000 at March 31, 1998, representing the
provisions established for nonpayment by Uniquest of future sublease obligations
was reclassified to deferred rent and other and will be amortized over the
remaining lease term through June 30, 2010.
RISK FACTORS
INTENSE COMPETITION. The Company competes with a number of companies providing
electronic commerce services to retailers and vendors. The electronic commerce
services business is highly competitive, and competitive pricing may materially
adversely affect the prices the Company can charge. Competition may also affect
the Company's ability to gain new customers and retain and expand business with
its existing customers, and the range of services offered to its customers. The
Company expects competition to increase as more companies enter the market and
existing competitors continue to change and expand their product offerings. Many
of the Company's existing and potential competitors have financial, marketing or
technological resources that exceed those of the Company, and there can be no
assurance that the Company will be able to compete successfully. Some large
retailers and vendors operate private computer networks for transacting business
with their trading partners. It is possible that additional retailers and
vendors, including certain of the Company's existing customers, may develop and
implement similar private networks, thereby reducing the demand for the
Company's services.
IBM has, under certain license and maintenance agreements with the Company, the
right to market the Company's catalog applications in competition with the
Company, in return for prescribed royalty and maintenance payments. IBM has
informed the Company that various types of information regarding such matters as
IBM's current activities, intentions, plans and projections with respect to its
business are confidential to IBM and, accordingly, will not be disclosed.
Although the Company does not believe that IBM has any current intention to
enter the Company's market, there can be no assurance that IBM will not exercise
its license rights and become a competitor, and the Company's inability to
obtain information may limit the Company's ability to provide for any such
contingency. If IBM were to become a competitor, the Company's business and
results of operations could be materially adversely affected. On December 8,
1998, AT&T and IBM announced a definitive agreement pursuant to which AT&T
agreed to purchase IBM's Global Network and corporate networking business. The
Company does not have any insight into the intentions of AT&T to enter the
Company's market. See "Dependence on IBM."
DEPENDENCE ON KEY CUSTOMERS. While none of the Company's customers accounted for
more than 10% of total revenues for any of the three years in the period ended
December 31, 1998, the Company's customers include several key hubs who
represent a significant amount of the Company's business. The Company provides
services and generates revenues by enabling certain hub customers and their
trading partners to conduct business over the Company's network. While the
estimated revenues attributable to each hub customer and revenues from its
trading partners related only to that hub customer do not exceed 10%, the
estimated revenues attributable to all of the billings of a certain hub customer
and 100 percent of its trading partners may exceed 10%.
Because of the large number of trading partners that transact business with each
other, the difficulty of allocating trading partner network services to any
particular hub customer, and differences in the manner in which hub customers
and trading partners allocate the cost of network services among each other, the
Company cannot precisely attribute revenues to particular hub customer programs.
In addition, one or more of the Company's retail customers could elect either to
develop their own catalog and EDI services or to transfer all or a significant
portion of their trading activities to a competitor. Any such transfer
10
<PAGE>
could result in many of that retailer's vendor partners electing not to maintain
their U.P.C. catalog information with the Company. Any transfer that results in
a loss or significant reduction in the Company's catalog and network services
business could have a material adverse effect on the Company's business and
results of operations. See "Business - Retailer and Vendor Customers" and Note 8
of the Notes to the Financial Statements.
DEPENDENCE ON IBM. Since 1988, the Company has used the IBM Value-Added Network
("VAN") to provide customers with certain electronic commerce services,
including EDI and connectivity. Currently, IBM solely controls the maintenance
and operation of the VAN. Upon close of the AT&T acquisition of IBM's Global
Network, it is anticipated that the Company will continue to acquire its network
service requirements from IBM with the delivery of a portion of these services
to be undertaken by AT&T. The Company depends on the IBM VAN for a substantial
part of its revenues and such dependence is expected to continue for the
foreseeable future. Since the Company has no right to control the maintenance
and operation of the VAN, decision with respect to such matters may have a
material impact on the Company's business and results of operations. In
addition, disruption or unavailability of the IBM VAN could have a material
adverse effect on the Company's business and results of operations.
IBM currently charges the Company for the network services used by its
customers. These charges are subject to specified volume discounts and
allowances. In the event that IBM and AT&T decide to increase the prices that it
charges the Company or reduces the amount of discounts or allowances, there can
be no assurance that the Company will be able to pass along these changes to its
customers. If it cannot do so, the Company's business and results of operations
could be materially adversely affected. The Company has an agreement with IBM
for the purchase of $250 million of network services over a three-year period
beginning January 1, 1998. The agreement includes specified annual minimum
purchases and a graduated adjustment charge if total purchases fall below the
minimum amount. The Company met the minimum purchases in 1998 and based on
historical and projected usage, believes that the purchase requirements during
the remaining two-year period will be met. Additionally, the Company and IBM
signed a Retail Industry Marketing agreement under which the Company provides to
IBM certain professional services related to the retail industry. The Company
recognized revenues of $1,000,000 in the fourth quarter of 1997 and $1,000,000
during the year ended December 31, 1998 as a result of this agreement. On
December 8, 1998, AT&T and IBM announced a definitive agreement pursuant to
which AT&T agreed to purchase IBM's Global Network and corporate networking
business. It is the Company's understanding that the network services agreement
will not be transferred to AT&T pursuant to this transaction.
While the Company believes that it is the only remarketer of IBM network
services to the retail industry, the Company does not have an exclusive
arrangement with IBM. If IBM and AT&T marketed their network services directly
to the Company's customers or permitted a competitor of QRS to use and remarket
these services to the retail industry, the Company's business and results of
operations could be materially adversely affected. IBM and AT&T are free to
compete against the Company, and there can be no assurance that IBM and AT&T
will not choose to compete with the Company in the future.
IBM provides the Company's customers certain EDI implementation and support
services. If IBM and AT&T were unable or unwilling to provide these services,
the Company would either have to provide these services directly or arrange for
a third party to provide such services. There can be no assurance that the
Company would be able to do so on a timely basis, if at all, or that the costs
of any such arrangements would not materially adversely affect the Company's
business and results of operations. See "Business - Value-Added Network
Services."
TECHNOLOGICAL CHANGE. The EDI services industry is characterized by continuously
evolving standards and technology. The Company's ability to anticipate or guide
retail industry standards, to continue to apply advances in network technology
and to develop new catalog and other applications will be a significant factor
in the Company's ability to grow and remain competitive. Because the Company's
current pricing structure is partially based on the number of characters
transmitted, the Company's business and results of operations could be
materially adversely affected if new compression technology were introduced
which reduces the number of
11
<PAGE>
characters needed to electronically transmit business documents. In addition,
new technologies could be developed or enhanced that could make existing catalog
and EDI services technologically obsolete. There can be no assurance that the
Company will be able to respond in a timely manner to technological changes or
that the ability of competitors to successfully incorporate evolving standards
and technologies into new services will not render the Company's services
noncompetitive. The failure by the Company to adapt to or incorporate new
standards or technology could have a material adverse effect on the Company's
business and results of operation.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS. The Company's future growth depends on
its successful and timely introduction of new products and services in markets
that do not currently exist or are just emerging. The Company, however, has not
yet completed development of all of these services and there can be no assurance
that the Company will successfully complete any such development or that if such
development is completed, the Company's planned introduction of these services
will realize market acceptance or will meet the technical or other requirements
of potential customers.
Software products as complex as those used in the electronic commerce industry
may contain undetected errors or failures when first introduced or when new
versions are released. If software errors are discovered after introduction, the
Company could experience delays or lost revenues during the period required to
correct these errors. There can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of, or delay in, market acceptance, which could have a material adverse
effect on the business, results of operations and financial condition of the
Company. See "Business - Product Development."
DEPENDENCE ON DATA CENTER. QRS Catalog Services runs on a computer system
contained in the Company's data center facility in Richmond, California. The
data center is located in a single facility and the Company has no present
intention of establishing an additional data center in a separate location. The
Company utilizes fault- tolerant IBM mainframe computer equipment. The Company
has arranged for use of off-site computer facilities, if necessary, and has
taken other precautions to protect itself and its customers from events that
could interrupt delivery of the Company's services. These precautions include
off-site storage of back-up data, fire protection and physical security systems
and an early warning detection and Halon fire extinguishing system.
Notwithstanding these precautions, there can be no assurance that a fire,
earthquake or other natural disaster affecting the data center would not disable
the Company's computer system. The Company's data center connects to the IBM San
Francisco hub. In the event that service through this location is interrupted,
the Company has back-up access through the IBM Seattle hub. Any significant
damage to the Company's data center or disruption of its connectivity to the IBM
network could have a material adverse effect on the Company's business and
results of operations. See "Business - Data Center."
ABILITY TO MANAGE GROWTH. The Company has significantly increased its service
offerings and customers. Maintaining profitability during a period of expansion
will depend, among other things, on the Company's ability to manage effectively
its operations. Difficulties in managing continued growth could have a material
adverse effect on the Company's business and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon the performance of its executive officers and other key employees,
particularly the members of senior management. The Company has no "key
personnel" life insurance for any of its senior management and does not
currently intend to purchase any such policies. There is no assurance that QRS
will be able to continue to attract and retain the qualified personnel necessary
for the development of its business. The loss of the services of key personnel
or the failure to recruit necessary additional personnel could have a material
adverse effect on the Company's business and results of operations.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company relies on a
combination of copyright, trade secret and trademark laws and nondisclosure
agreements to protect its proprietary rights. Existing copyright laws afford
only limited protection. While the Company uses both internal proprietary and
IBM network security measures, it may be possible for unauthorized third parties
to copy the Company's products and services or to reverse
12
<PAGE>
engineer or otherwise obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products and services is
difficult. Further, the laws of certain countries in which the Company's
products or services may be distributed may not protect the Company's products
or services and intellectual rights to the same extent as the laws of the United
States. If unauthorized third parties copy or reverse engineer or otherwise
obtain and use information the Company regards as proprietary, the Company's
business and results of operations could be materially adversely affected.
THE INTERNET. Although the Company believes that the Internet will provide
opportunities to expand the electronic commerce market, there can be no
assurance that the Company's efforts to exploit such opportunities will be
successful or that increased usage of the Internet for electronic commerce or
increased competition will not adversely affect the business, results of
operations, and financial condition of the Company.
FACTORS AFFECTING OPERATION RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. The Company's future quarterly operating results may vary and reduced
levels of earnings or losses could be experienced in one or more quarters.
Fluctuations in the Company's quarterly operating results could result from a
variety of factors, including changes in the levels of revenues derived from
each product, the timing of new service announcements by the Company or its
competitors, changes in pricing policies by the Company or its competitors,
market acceptance of new and enhanced versions of the products and services of
the Company or its competitors, the size and timing of significant orders,
changes in operation expenses, changes in the Company's strategy, the
introduction of alternative technologies, the effect of potential acquisitions
and industry and general economic factors. The Company has limited or no control
over many of these factors.
GOVERNMENT REGULATORY AND INDUSTRIAL POLICY RISKS. Current regulations and laws
governing the telecommunications industry generally do not apply to providers of
electronic commerce services and products. Except for government regulations in
certain foreign countries (which may affect the provision of certain of the
Company's services or use of certain of its products) and regulations governing
the ability of the Company to disclose the contents of communications by its
customers, there are no government regulations pertaining to the pricing,
service characteristics or capabilities, geographic distribution or quality
control features of the Company's electronic commerce services or products.
There exists, however, the risk that governmental policies affecting the
electronic commerce industry could be implemented by executive order,
legislation, administrative order, or otherwise. If such policies are adopted,
they could have a material adverse effect on the business, results of
operations, and financial condition of the Company.
VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock has
fluctuated significantly since the initial public offering in August 1993. The
market price of the Common Stock could be subject to significant fluctuations in
the future based on factors such as announcements of new products by QRS or its
competitors, quarterly fluctuations in the Company's financial results or other
electronic commerce services companies' financial results, changes in analysts'
estimates of the Company's financial performance, general conditions in the
electronic commerce services industry and conditions in the financial markets.
In addition, the stock market in general has experienced extreme price and
volume fluctuations, which have particularly affected the market prices for many
high technology companies and which have often been unrelated to the operating
performance of the specific companies. Many technology companies, including the
Company, have recently experienced historic highs in the market price of their
equity securities. There can be no assurance that the market price of the Common
Stock will not decline substantially from such historic highs, or otherwise
continue to experience significant fluctuations in the future.
13
<PAGE>
ITEM 2. FACILITIES
The Company leases approximately 86,000 square feet of office space in Richmond,
California for its corporate headquarters and has contracted to lease an
additional 48,000 square feet starting in early 2000. A lease for 63,000 square
feet expires on June 30, 2010. A future lease starting in early 2000 for 48,000
square feet expires on June 30, 2010. An existing lease for 23,000 square feet
expires when the previous lease commences, or on June 30, 2000 and includes two
5-year extension periods through June 30, 2010. Management believes that the
Company's current and future facilities and extension agreements are adequate
for its level of business and growth requirements.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has been traded in the over-the-counter market on the
Nasdaq National Market under the symbol QRSI since the Company's initial public
offering in August 1993. According to records of the Company's transfer agent,
the Company had approximately 101 stockholders of record as of February 8, 1999.
Because many of such shares are held by brokers and other institutions on behalf
of stockholders, the Company is unable to estimate the total number of
beneficial holders of the Common Stock. The following table sets forth the low
and high sales prices of the Company's Common Stock for the two-year period
ended December 31, 1998:
<TABLE>
<CAPTION>
Period Ended Low High
- ------------------------------------------------------ -------------------- ------------------
<S> <C> <C>
Quarters ended December 31, 1997:
First Quarter $26.38 $35.25
Second Quarter 23.88 39.06
Third Quarter 31.00 39.50
Fourth Quarter 31.75 38.31
Quarters ended December 31, 1998:
First Quarter 33.25 53.50
Second Quarter 29.31 51.75
Third Quarter 27.00 37.69
Fourth Quarter 21.38 48.00
</TABLE>
DIVIDEND POLICY
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has paid no cash dividends on its Common Stock and does
not anticipate declaring dividends on its Common Stock in the foreseeable
future.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share data)
-----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 1998 (1) 1997 1996 1995 (1) 1994
------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $91,926 $71,632 $56,746 $42,134 $31,382
Operating earnings 16,116 12,639 9,442 2,479 5,311
Earnings from continuing
operations before income taxes 18,267 14,625 11,019 3,961 5,980
Income tax expense (benefit) 7,113 5,850 4,408 1,574 (7,985)
Discontinued operations:
Gain from sale of software and
services business (2) 896 - - - -
------------- ----------- ----------- ------------- -------------
Net earnings $12,050 $8,775 $6,611 $2,387 $13,965
------------- ----------- ----------- ------------- -------------
------------- ----------- ----------- ------------- -------------
Basic earnings per share:
Continuing operations $1.31 $1.04 $0.79 $0.29 $1.74
Discontinued operations 0.10 - - - -
------------- ----------- ----------- ------------- -------------
Net earnings per share $1.41 $1.04 $0.79 $0.29 $1.74
------------- ----------- ----------- ------------- -------------
------------- ----------- ----------- ------------- -------------
Diluted earnings per share:
Continuing operations $1.26 $1.01 $0.77 $0.28 $1.67
Discontinued operations 0.10 - - - -
------------- ----------- ----------- ------------- -------------
Net earnings per share $1.36 $1.01 $0.77 $0.28 $1.67
------------- ----------- ----------- ------------- -------------
------------- ----------- ----------- ------------- -------------
</TABLE>
(1) 1998 and 1995 results include write-off of purchased in-process research and
development of $967,000 and $4,318,000, respectively.
(2) See Note 6 to Consolidated Financial Statements.
<TABLE>
<CAPTION>
December 31,
(in thousands)
---------------------------------------------------------------------------------
BALANCE SHEET DATA 1998 1997 1996 1995 1994
-------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Working capital $50,909 $42,544 $29,416 $30,248 $23,024
Total assets 83,005 64,002 55,946 46,592 39,910
Stockholders' equity 67,954 54,729 43,570 35,430 31,427
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED "FORWARD-LOOKING"
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. THESE FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES, AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE LISTED UNDER "BUSINESS - RISK
FACTORS" AND ELSEWHERE HEREIN, AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN
THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION.
GENERAL
The Company's products and services are organized and managed as a single
product family, which includes Catalog Services, Network Services, Inventory
Management Services (IMS), Logistics Management Services (LMS), and Professional
Services. The Company derives revenues from five principal and related sources:
the transmission of standard business documents over a network, monthly charges
for accessing Catalog Services, IMS-related fees based on negotiated monthly
service charges, LMS fees, and consulting fees. Network Services pricing is
based primarily on the volume of characters, the type of network access
utilized, and incorporates discounts based on volume.
DELAWARE REINCORPORATION
On October 21, 1997, the Company reincorporated in Delaware (the
"Reincorporation") through the merger (the "Merger") of QuickResponse Services,
Inc., a California corporation ("QRS-California"), with and into the Company. As
a result of the Merger, the outstanding shares of QRS-California were
automatically converted into shares of the Company.
SUBSIDIARIES
In the fourth quarter of 1997, QRS created a wholly owned Canadian sales
subsidiary, QRS Canada, Inc. and during the third quarter of 1998, the Company
created a wholly owned United States subsidiary, QRS Sales and Services
Corporation.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain line items in the Company's statements of
operations:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
Revenues 100% 100% 100%
Cost of sales 56 56 60
--------------------- --------------------- ----------------------
Gross profit 44 44 40
Operating expenses:
Sales and marketing 13 13 11
Product development 5 6 6
General and administrative 8 7 7
In-process technology expense
related to acquisitions 1 - -
--------------------- --------------------- ----------------------
Total operating expenses 27 26 24
--------------------- --------------------- ----------------------
Operating earnings 17 18 16
Interest income 2 2 3
--------------------- --------------------- ----------------------
Earnings before income taxes and
extraordinary item 19% 20% 19%
--------------------- --------------------- ----------------------
--------------------- --------------------- ----------------------
</TABLE>
REVENUES
Revenues increased from $56.7 million in 1996 to $71.6 million in 1997 and to
$91.9 million in 1998, representing increases of 26% from 1996 to 1997 and 28%
from 1997 to 1998. These increases were primarily attributable to an overall
increase in customer base, higher usage of Network and Catalog Services, pricing
adjustments and expanded product offerings. The number of retailers and vendors,
including carriers, increased from 5,178 at December 31, 1996 to 6,180 at
December 31, 1997 and to 7,719 at December 31, 1998. The number of catalog
trading partnerships increased as a result of the increase in the number of
customers and their trading links with each other. Customers increased the
number, type and size of transactions transmitted over the network, as well as
the utilization of Catalog Services. The Company expanded its product offerings
in the Network Services, IMS and Professional Services product family.
COST OF SALES
Cost of sales consists primarily of the cost of purchasing network services, the
cost of the Company's data centers and technical customer support services. Cost
of sales increased from $33.8 million in 1996 to $40.5 million in 1997 and to
$51.1 million in 1998. These increases were principally due to increases in
purchased network services reflecting growth in network services purchased under
a long-term contract, discounted based upon a multi-year volume commitment,
pricing adjustments and an expanded customer support group reflecting growth in
customers and products. Cost of sales as a percentage of revenues decreased from
60% in 1996 to 56% in 1997 primarily due to increases in higher margin revenue
from Catalog Services, increased operating efficiencies in data center
operations, and higher discounts on purchased network services. These margin
benefits were partially offset by increased sales of certain lower margin
network services and volume discounts earned by larger customers. Cost of sales
as a percent of revenues was 56% in 1998 which reflects a yield improvement at
certain non-hub customers, offset by short-term cost increases from recent
service bureau acquisitions.
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<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of personnel and related costs in
the Company's sales and marketing organizations as well as the costs of various
marketing programs. Sales and marketing expenses increased from $6.5 million in
1996 to $9.0 million in 1997 and to $12.1 million in 1998, reflecting the
general increase in the number of customers and the size of the Company's
operations. Sales and marketing expenses represented 11% of revenues in 1996 and
13% in each of 1997 and 1998. The increase as a percentage of revenues was due
to the Company's expansion of its retailer and vendor-specific coverage and
growth in its program sales and enablement organization, the group responsible
for rapidly enabling trading partners for key hub customers.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses consist primarily of personnel and equipment costs
related to research, development and implementation of new services and
enhancement of existing services. Product development expenses increased from
$3.1 million in 1996 to $4.4 million in 1997 and decreased slightly to $4.3
million in 1998, and represented 6% of revenues in each of 1996 and 1997 and 5%
of revenues in 1998. In 1996, 1997 and 1998, the Company capitalized $245,000,
$1,274,000 and $2,555,000 of product development costs, respectively. The
increase in capitalized product development costs from 1996 to 1997 and to 1998
is due to increased product development on products which had reached
technological feasibility.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel and related
costs of the Company's finance and administrative organizations, as well as
professional fees and other costs. General and administrative expenses increased
from $3.9 million in 1996 to $5.1 million in 1997 and to $7.3 million in 1998
and represented 7% of revenues in each of 1996 and 1997 and 8% in 1998. The
increase from 1996 to 1997 and to 1998 was primarily due to increased headcount
to support a larger organization and investments in infrastructure.
ACQUISITIONS
In October 1995, the Company acquired certain assets and liabilities of ShipNet
Systems, Inc. ("ShipNet"), a provider of transportation logistics services. The
total acquisition cost was $4.9 million, including $200,000 paid in cash,
assumption of certain liabilities of $3.3 million; shutdown, relocation and
severance expenses of $1.1 million associated with integrating ShipNet's
operations; and $300,000 in transaction costs related to the acquisition.
The acquisition was accounted for as a purchase transaction. In connection with
the acquisition and in conjunction with the Company's capitalized software
policies, $4.3 million of the purchase price was allocated to in-process
research and development and, as technological feasibility had not been
established and no alternative future uses existed at the acquisition date,
charged to expense. The Company allocated $584,000 of the purchase price to
current assets and property and equipment. The Company spent approximately
$600,000 and $330,000 in 1996 and 1997, respectively, in order to complete the
development of the acquired in-process products.
During the third quarter of 1998, the Company acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of Mueller
Associates, Inc., dba the EDI Connection, both service bureaus. The total
acquisition cost was $4.2 million, comprised of $3.0 million paid in cash;
35,000 shares of Common Stock valued at $802,000 issued from the Company's
treasury stock account; liabilities assumed of $194,000 and $206,000 in
transaction costs related to the acquisitions. The acquisitions were
accounted for as purchase transactions.
In connection with the acquisitions and in conjunction with the Company's
capitalized software policies, $967,000, representing approximately 23% of the
purchase price of $4.2 million, was allocated to in-process
19
<PAGE>
research and development. As technological feasibility had not been established
and no alternative future uses existed at the acquisition dates, this in-process
research and development was charged to expense. The five acquired projects
under development increase automation and reduce manual processes, replace
third-party software, and/or migrate existing products to a single platform. The
estimated costs to complete these projects are approximately $600,000 and these
projects will be completed by the end of 1999. The acquired companies had
expended approximately $200,000 on these projects prior to acquisition. The
values for the technology under development were estimated through the income
approach by discounting to present value cash flows to be derived from the
future products. The revenue and expense projections were based on historical
trends and future expectations for both the Company and the acquired companies.
The Company did not anticipate any operating expense reductions as a result of
synergy. A discount rate was developed by computing the weighted average cost of
capital of established companies similar in operations and then increased to
reflect the additional risk for technology under development since these
products have not reached technological feasibility.
The Company allocated $3.2 million of the purchase price to current assets,
property and equipment and intangible assets. The amounts allocated to current
assets and property and equipment were based on the fair market value of the
related assets and the amounts allocated to intangible assets were determined on
the basis of the appraised value of the related intangible assets.
The Company expects no further disbursements related to the acquisition
transactions.
The appraisal techniques used in the Company's acquisitions included certain
assumptions, including, the extent, character and utility, the income generating
or cost-savings attributes, the nature and timing of the functional or economic
obsolescence and the relative risk and uncertainty associated with an investment
in intangible assets.
INTEREST INCOME
Interest income consists primarily of interest earned on cash, cash equivalents
and investment securities. Interest income increased from $1.6 million in 1996
to $2.0 million in 1997 and to $2.2 million in 1998. The increase in 1998 is
primarily due to higher balances in the Company's cash, cash equivalents and
investment securities accounts.
INCOME TAX EXPENSE
The Company's income tax expense was $4.4 million, $5.9 million and $7.1 million
for fiscal years 1996, 1997 and 1998, respectively. The Company's effective
income tax rate was 40% in each of 1996 and 1997 and 39% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $42.5 million at December 31, 1997
to $50.1 million at December 31, 1998. Cash, cash equivalents and short-term
marketable securities available-for-sale increased from $33.8 million at
December 31, 1997 to $43.6 million at December 31, 1998. At December 31, 1997
and 1998, $1 million and $1.5 million, respectively, of marketable securities
available-for-sale were classified as non-current assets and, therefore, were
not included in working capital. Total assets increased from $64.0 million at
December 31, 1997 to $83.0 million at December 31, 1998, while total liabilities
increased from $9.3 million at December 31, 1997 to $15.1 million at December
31, 1998.
During 1995, the Company acquired certain assets of ShipNet for $4.9 million
including the assumption of certain liabilities, relocation, personnel and
transaction costs. The Company disbursed approximately $2.3 million, $1.2
million and $1.2 million of such funds in 1995, 1996 and 1997, respectively. In
addition, the Company acquired the assets of Custom Information Systems
Corporation and the outstanding common shares of Mueller Associates, Inc., dba
The EDI Connection, during the third quarter of 1998. The total acquisition cost
was $4.2 million, comprised of $3.0 million paid in cash; 35,000 of common
shares valued at $802,000 issued from the
20
<PAGE>
treasury stock account; liabilities assumed of $194,000 and $206,000 in
transaction costs related to the acquisitions.
Management believes that the cash, cash equivalents and marketable securities
available-for-sale at December 31, 1998 and cash anticipated to be generated
from future operations will be sufficient for the Company to meet its working
capital needs and capital expenditures through 1999. However, the Company may
choose to raise additional cash through the sale of equity or debt prior to such
time. The Company has no plans to pay dividends with respect to Common Stock in
the foreseeable future.
YEAR 2000 COMPLIANCE
INTRODUCTION - The Year 2000 issue involves computer programs and embedded
microprocessors in computer systems and other equipment that utilize two digits
rather than four to define the applicable year. These systems may be programmed
to assume that all two digit dates are preceded by "19," causing "00" to be
interpreted as 1900 rather than 2000. This could result in the possible failure
of those programs and devices to properly recognize date sensitive information
when the year changes to 2000. Systems that do not properly recognize date
sensitive information could generate erroneous data or a system failure. The
following discussion regarding Year 2000 matters constitutes a "Year 2000
Readiness Disclosure" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
The Company has conducted an evaluation of the actions necessary to confirm that
its business critical computer and other systems will be able to function
without disruption with respect to the application of dating systems in the Year
2000. This evaluation was conducted with the assistance of consulting services.
The completed deliverable from that review is a detailed Year 2000 readiness
plan.
The Company's plan objective is to achieve an uninterrupted transition into the
Year 2000. The scope of the Year 2000 plan includes: (1) information technology
("IT") such as software and hardware, (2) non-IT systems or embedded technology
such as micro-controllers contained in various safety systems, facilities and
utilities, and (3) readiness of key third parties, including suppliers and
customers. The Company's remedial actions are scheduled for completion during
the third quarter of 1999. However, there can be no assurance that the remedial
actions being implemented by the Company will be completed by the time necessary
to avoid Year 2000 compliance problems.
INFORMATION TECHNOLOGY SYSTEMS - Based on this evaluation, the Company is
upgrading, replacing, and testing many of its IT systems to achieve Year 2000
readiness. Because the Company was founded 11 years ago, the Company believes
that its mainframe systems are largely Year 2000 capable, and that its PC and
midrange based systems will require the majority of attention.
NON INFORMATION TECHNOLOGY SYSTEMS - The Company believes that its
non-information technology Year 2000 exposure is relatively low, since the
Company's product delivery is primarily executed through very modern computer
equipment and related technology that does not have dated, embedded chip
deployment.
PRODUCT AND SERVICE OFFERINGS - The Company has completed a Year 2000 assessment
of its currently offered products and services. Based on this assessment, the
Company believes that its currently offered products and EC services are Year
2000 ready, or will be ready by the third quarter of 1999 through new product
releases or modifications to internal systems. The Company believes that a small
percentage of its customers who receive product support from the Company are
operating product versions that may not be Year 2000 ready or products or
product versions that the Company has replaced or intends to replace with
comparable Year 2000 ready products. The Company believes that the majority of
these customers are migrating and will continue to migrate to Year 2000 ready
versions and products through new releases, which the Company is strongly
encouraging. The Company does not believe that customers who license or migrate
to Year 2000 ready versions of its products, or customers who purchase the
Company's EC services, will experience any Year 2000 failures caused by such
products or services. However, there can be no assurance caused that the
Company's expectations and beliefs as
21
<PAGE>
to these matters will prove to be accurate. Moreover, the Company's products
employ, and the provision of its services requires the use of, systems comprised
of third-party hardware and software, some of which may not be Year 2000 ready.
THIRD PARTY READINESS - The Company has a process in place to assess the Year
2000 readiness of its business critical vendors and customers, and is working
with these vendors and customers on Year 2000 readiness issues. There can be no
assurances that the systems of other parties upon which the company relies will
be made Year 2000 ready on a timely basis. The Company utilizes third party
vendor equipment, telecommunications products and software products. Disruptions
with respect to computer systems of vendors or customers, whose systems are
outside the control of the Company, could impair the ability of the Company to
provide services to its customers, and could have a material adverse effect upon
the Company's financial condition and results of operations, or require the
Company to incur unanticipated expenses to remedy any problems. See "Risk
Factors Dependence on Data Center."
COSTS - The Company expended approximately $425,000 in 1998 on activities to
prepare for Year 2000 readiness. Approximately $155,000 was for assessments and
customer notification, and $270,000 was for testing and product and
infrastructure modifications. The Company currently estimates that it will cost
an additional $1,200,000, budgeted primarily under its Information Technology
division, prior to January 1, 2000, to modify its in-house information systems,
other systems and internally developed software products affected by the Year
2000 issue. The Company estimates that of the remaining costs, twenty-five
percent (25%) will be for assessment and customer notification, and seventy-five
percent (75%) will be for testing and modifications. All costs associated with
Year 2000 compliance are being funded with cash flow generated from operations
and existing cash balances and are being expensed as incurred.
ADDITIONAL RISKS - Additional aspects of the Year 2000 issue may pose risks to
be considered in evaluating the future growth of the Company. Some commentators
predict that normal purchasing patterns and trends in the industry may be
affected by customers replacing or upgrading applications or systems to address
the Year 2000 issue. The Company has not experienced any discernable trend
indicating a recent or impending material reduction in demand for the Company's
products and services. Furthermore, some commentators have also predicted that a
significant amount of litigation may arise out of Year 2000 readiness issues.
While the Company has not been subject to any Year 2000 claims or lawsuits to
date, there can be not assurance that customers or former customers will not
bring claims or lawsuits against the Company seeking compensation for losses
associated with Year 2000 related failures. A material adverse outcome in a Year
2000 claim or lawsuit could have a material adverse effect on the Company's
business, financial condition and results of operations.
CONTINGENCY PLANING - Contingency plans are under development to address those
business critical systems that may not be Year 2000 ready, in the event the
Company is unable to complete its remedial actions in the planned time frame.
The Company believes that the most reasonably likely worst case scenario is that
a small number of vendors and/or customers will have lingering Year 2000
compliance problems, resulting in additional support for these customers, and
the substitution of a higher number of software vendors than currently
anticipated. As a part of the assessment process, the Company will develop
contingency plans for those business critical vendors or large customers who are
either unable or unwilling to develop remedial plans to become Year 2000 ready.
The Company expects that these plans will involve the acceleration of its Year
2000 readiness activity and the application of additional resources. It is
expected that these contingency plans will be in place by the third quarter of
1999.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investment portfolio of marketable
securities. The Company does not use derivative financial instruments in its
investment portfolio. The stated objectives of the Company's investment
guidelines are to preserve principal, meet liquidity needs and deliver
maximum yield subject to the previous conditions. The guidelines limit
maturity, limit concentration, and limit eligible investments to high credit
quality US issuers, such as the US Treasuries and agencies of the US
Government, and highly rated banks and corporations. The Company's marketable
securities profile includes only those securities with active secondary or
resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average interest
rates due by date of maturity for the Company's marketable securities. The
Company's guidelines do not permit investments with maturities in excess of 24
months. At December 31, 1998, the weighted average maturity of the marketable
securities portfolio was less than 187 days.
<TABLE>
<CAPTION>
MATURITY
----------------------------------- FAIR VALUE AT
(Amounts in thousands) 1999 2000 TOTAL DECEMBER 31, 1998
------ ------ ------- --------------------
<S> <C> <C> <C> <C>
Corporate Bonds $6,931 $6,931 $6,976
Average interest rate 5.47% 5.47%
US Government Agencies $1,500 $1,500 1,518
Average interest rate 5.57% 5.37%
--------------- --------------- --------------- -------------------------
Total Investment Portfolio $6,931 $1,500 $8,431 $8,494
--------------- --------------- --------------- -------------------------
-------------------------
Average interest rate 5.47% 5.57% 5.36%
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
FOREIGN CURRENCY RISK
The Company has no significant investments outside the US and does not have
material foreign currency risk.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 25
Consolidated Balance Sheets 26
Consolidated Statements of Earnings
and Comprehensive Earnings 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30-40
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
QRS Corporation:
We have audited the accompanying consolidated balance sheets of QRS Corporation
and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of earnings and comprehensive earnings,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 28, 1999
25
<PAGE>
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $36,642 $16,091
Marketable securities, available-for-sale................................... 6,976 17,694
Accounts receivable - net of allowance for doubtful accounts of $1,036 in 1998
and $873 in 1997.......................................................... 19,059 14,567
Deferred income tax assets.................................................. 816 870
Prepaid expenses and other.................................................. 1,179 1,260
-------------- --------------
Total current assets......................... 64,672 50,482
-------------- --------------
Property and equipment:
Furniture and fixtures...................................................... 2,476 2,162
Equipment................................................................... 9,133 7,622
Leasehold improvements.................................................... 2,249 1,800
-------------- --------------
13,858 11,584
Less accumulated depreciation............................................... 5,708 4,062
-------------- --------------
Total property and equipment.............................................. 8,150 7,522
-------------- --------------
Marketable securities, available-for-sale 1,518 1,000
Deferred income tax assets 1,578 2,576
Capitalized product development costs - net of accumulated amortization
of $3,482 in 1998 and $2,818 in 1997 4,136 2,245
Intangible assets - net of accumulated amortization of $225 in 1998 2,805 -
Other assets 146 177
-------------- --------------
Total assets $83,005 $64,002
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $7,914 $ 3,733
Accrued incentive......................................................... 1,710 588
Income taxes payable...................................................... 1,823 906
Accrued vacation.......................................................... 818 564
Other accrued liabilities................................................. 1,498 653
Current portion of sublease loss reserves................................... 1,494
-------------- --------------
Total current liabilities.............................. 13,763 7,938
Deferred rent and other.................................................... 1,288 1,335
-------------- --------------
Total liabilities.................................. 15,051 9,273
-------------- --------------
Commitments and contingencies (Note 7)...................................... - -
Stockholders' equity:
Preferred stock - $0.01 par value; 10,000,000 shares authorized; none issued
and outstanding.......................................................... - -
Common stock - $0.001 par value; 20,000,000 shares authorized;
8,587,241 shares outstanding in 1998 and 8,531,366 in 1997............... 66,002 63,864
Treasury stock at cost (25,550 shares in 1998 and 1,300 shares in 1997)... (740) (35)
Accumulated other comprehensive earnings (loss) - unrealized gain (loss)
on investments 63 (9)
Retained earnings (deficit)............................................... 2,629 (9,091)
-------------- -------------
Total stockholders' equity.............................................. 67,954 54,729
-------------- -------------
Total liabilities and stockholders' equity................................. $83,005 $64,002
-------------- -------------
-------------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues................................................ $91,926 $71,632 $56,746
Cost of sales........................................... 51,140 40,450 33,802
----------------- ----------------- -----------------
Gross profit............................................ 40,786 31,182 22,944
----------------- ----------------- -----------------
Operating expenses:
Sales and marketing................................... 12,080 9,041 6,512
Product development................................... 4,309 4,365 3,127
General and administrative............................ 7,314 5,137 3,863
In-process technology expense related to acquisitions. 967 - -
----------------- ----------------- -----------------
Total operating expenses........................... 24,670 18,543 13,502
----------------- ----------------- -----------------
Operating earnings...................................... 16,116 12,639 9,442
Interest income ........................................... 2,151 1,986 1,577
----------------- ----------------- -----------------
Earnings from continuing operations before income taxes. 18,267 14,625 11,019
Income tax expense ..................................... 7,113 5,850 4,408
----------------- ----------------- -----------------
Earnings from continuing operations after income taxes.. 11,154 8,775 6,611
Discontinued operations:
Gain from sale of software and services business........ 896 - -
----------------- ----------------- -----------------
Net earnings............................................ 12,050 8,775 6,611
Other comprehensive earnings (loss):
Unrealized gain (loss) from marketable securities available-
or-sale................................................ 72 (51) 42
----------------- ----------------- -----------------
Total comprehensive earnings............................ $12,122 $8,724 $6,653
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Basic earnings per share:
Continuing operations ..................................... $1.31 $1.04 $0.79
Discontinued operations.................................... 0.10 - -
----------------- ----------------- -----------------
Net earnings per share..................................... $1.41 $1.04 $0.79
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Shares used to compute basic earnings per share ........ 8,541 8,464 8,346
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Diluted earnings per share:
Continuing operations .................................. $1.26 $1.01 $0.77
Discontinued operations ................................ 0.10 - -
----------------- ----------------- -----------------
Net earnings per share ................................. $1.36 $1.01 $0.77
----------------- ----------------- -----------------
Shares used to compute diluted earnings per share ...... 8,858 8,727 8,613
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
COMMON STOCK Other Retained
Comprehensive Earnings Stockholders'
SHARES Amount Earnings (Loss) (Deficit) Equity
---------------------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.................... 8,305,824 $ 59,907 $ (24,477) $ 35,430
Stock option compensation................... 35 35
Exercise of stock options, including tax
benefit................................... 80,190 1,141 1,141
Issuance of common stock under
Employee Stock Purchase Plan.............. 19,206 306 306
Exercise of warrant......................... 2,000 5 5
Other comprehensive earnings-unrealized
gain on marketable securities available- $ 42 42
for-sale..................................
Net earnings................................ 6,611 6,611
--------------- ------------- ---------------- ------------- ----------------
Balance, December 31, 1996.................. 8,407,220 61,394 42 (17,866) 43,570
Purchase of treasury stock.................. (1,300) (35) (35)
Stock option compensation................... 26 26
Exercise of stock options, including tax
benefit................................... 103,270 2,015 2,015
Issuance of common stock under
Employee Stock Purchase Plan.............. 17,176 416 416
Exercise of warrant......................... 5,000 13 13
Other comprehensive loss-unrealized
loss on marketable securities available-
for-sale.................................. (51) (51)
Net earnings................................ 8,775 8,775
--------------- ------------- ---------------- ------------- ----------------
Balance, December 31, 1997.................. 8,531,366 63,829 (9) (9,091) 54,729
Purchase of treasury stock.................. (59,250) (1,837) (1,837)
Reissuance of treasury stock................ 35,000 1,132 (330) 802
Exercise of stock options, including tax
benefit................................... 65,550 1,686 1,686
Issuance of common stock under
Employee Stock Purchase Plan.............. 14,575 452 452
Other comprehensive earnings-unrealized
gain on marketable securities available- 72 72
for-sale..................................
Net earnings................................ 12,050 12,050
--------------- ------------ --------------- ------------ -----------------
Balance, December 31, 1998.................. 8,587,241 $ 65,262 $ 63 $ 2,629 $ 67,954
--------------- ------------ --------------- ------------ -----------------
--------------- ------------ --------------- ------------ -----------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- -------------- ----------------
<S> <C> <C> <C>
Operating activities:
Net earnings.......................................................... $12,050 $ 8,775 $ 6,611
Adjustment to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization........................................... 3,429 1,718 1,153
Loss from disposal of property and equipment............................ 134 - -
Stock compensation...................................................... - 26 35
In-process technology expense related to acquisitions................... 967 - -
Gain from sale of software and services business........................ (896) - -
Changes in:
Accounts receivable................................................... (4,214) (5,273) (1,262)
Prepaid expenses and other............................................ 131 (119) (329)
Deferred income tax assets............................................ 1,684 3,902 3,877
Other assets.......................................................... (276) (2) (8)
Accounts payable...................................................... 4,181 (1,747) 1,898
Other accrued liabilities............................................. 2,141 510 1,149
Deferred rent and other............................................... (47) (632) (682)
---------------- --------------- ----------------
Net cash provided by operating activities......................... 19,284 7,158 12,442
---------------- --------------- ----------------
Investing activities:
Marketable securities - available for sale, net....................... 10,272 (155) (572)
Purchase of property and equipment.................................... (3,192) (5,925) (1,551)
Capitalization of product development costs........................... (2,555) (1,274) (245)
Acquisition of businesses, net of cash acquired and stock issued...... (2,927) - -
Payment of liabilities assumed in the acquisition of ShipNet.......... - (1,234) (1,151)
---------------- -------------- ----------------
Net cash provided by (used in) investing activities............. 1,598 (8,588) (3,519)
---------------- --------------- ----------------
Financing activities:
Proceeds from employee stock purchase plan issuances.................... 452 416 306
Exercise of stock options............................................... 1,054 1,105 328
Exercise of warrants.................................................... - 13 5
Purchase of treasury stock.............................................. (1,837) (35) -
---------------- --------------- ----------------
Net cash provided by (used in) financing activities............... (331) 1,499 639
---------------- --------------- ----------------
Net increase in cash and cash equivalents................................. 20,551 69 9,562
Cash and cash equivalents at beginning of year............................ 16,091 16,022 6,460
---------------- -------------- ----------------
Cash and cash equivalents at end of year.................................. $36,642 $16,091 $16,022
---------------- -------------- ----------------
---------------- -------------- ----------------
Other cash flow information:
Taxes paid during the year........................................... $5,742 $ 1,074 $ 498
---------------- -------------- ----------------
---------------- -------------- ----------------
Noncash investing and financing activities:
Tax benefit from stock options exercised................................. $632 $ 910 $ 813
Reissuance of treasury stock............................................. 802 - -
Unrealized gain (loss) on marketable securities available-for-sale....... 72 (51) 42
</TABLE>
During the third quarter of 1998, the Company acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of The EDI
Connection with the allocation of the purchase price, as follows:
<TABLE>
<CAPTION>
<S> <C>
Working capital other than cash $ (71)
Property and equipment 110
Goodwill 736
Other intangible assets 1,987
In-process technology 967
Less: Common stock issued in connection with acquisitions (802)
----------------
Acquisitions, net of cash acquired of $23 and stock issued $2,927
----------------
----------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
<PAGE>
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF THE BUSINESS
The Company's products and services are organized and managed as a single
product family, which includes Catalog Services, Network Services, Inventory
Management Services ("IMS"), Logistics Management Services ("LMS"), and
Professional Services. The Company derives revenues from five principal and
related sources: the transmission of standard business documents over a
network, monthly charges for accessing Catalog Services, IMS-related fees
based on negotiated monthly service charges, LMS fees, and consulting fees.
Network Services pricing is based primarily on the volume of characters
transmitted and the type of network access utilized. Network Services pricing
also incorporates discounts based on volume.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
During the third quarter of 1998 and fourth quarter of 1997, the Company created
wholly owned United States and Canadian subsidiaries, QRS Sales and Services
corporation and QRS Canada, Inc., respectively. The accompanying financial
statements include the accounts of QRS Corporation and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated.
REVENUE RECOGNITION
All services revenues are recognized in the month in which the service is
performed.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents.
MARKETABLE SECURITIES, AVAILABLE-FOR-SALE
The Company classifies its portfolio of marketable debt securities as "Available
for Sale" under Statement of Financial Accounting Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
classifies those marketable securities that mature in less than one year as
short-term marketable securities.
INTANGIBLE ASSETS
Intangible assets include goodwill and certain contracts purchased in connection
with the acquisitions of businesses, and are amortized on a straight-line basis
over their estimated useful lives, which range from three to seven years.
Amortization expense was $225,000 in 1998.
PRODUCT DEVELOPMENT COSTS
The Company capitalizes certain development costs related to its product
offerings based upon the establishment of technological feasibility. Capitalized
development costs are amortized over various periods up to three years. The
capitalization and ongoing assessment of recoverability of development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological and economic feasibility,
and estimated economic life. Costs incurred to maintain existing product
offerings are expensed as incurred. For the years ended december 31, 1998, 1997
and 1996, the Company capitalized product development costs of $2,555,000,
$1,274,000 and $245,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives, which are generally three years for
software and five years for equipment and hardware. Leasehold improvements are
amortized over the remaining period of the lease or over the estimated useful
life of the improvement, whichever is shorter. Depreciation expense for the
years ended december 31, 1998, 1997 and 1996 was $2,540,000, $1,490,000 and
$924,000, respectively.
30
<PAGE>
STOCK OPTION COMPENSATION
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation,"effective for the Company's year ended December 31, 1996. SFAS
No. 123 established accounting and disclosure requirements using a fair-value
based method of accounting for stock-based employee compensation plans. As
allowed under provisions of SFAS No. 123, the Company has chosen to continue
the intrinsic value based method and provides pro forma disclosures of net
earnings and earnings per share as if the accounting provisions of SFAS No.
123 had been adopted; therefore such adoption has no effect on the Company's
earnings or cash flows. See note 10.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 requires a dual presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net earnings by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company adopted SFAS No. 128 in the year ended December
31, 1997 as required and restated earnings per share ("EPS") data for all prior
periods to conform with SFAS No. 128.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and equivalents, customer
receivables, accounts payable, and certain other accrued liabilities. The
carrying amounts of these items are a reasonable estimate of their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily 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 balance
sheet dates and the reported amounts of revenues and expenses for the periods
presented. Actual results could differ from these estimates.
COMPREHENSIVE EARNINGS
Effective January 1, 1998, the Company adopted SFAS No.130, "Reporting
Comprehensive Income." As required by SFAS No. 130, the Company classifies as
components of comprehensive earnings, all items recognized under accounting
standards, which include net earnings and unrealized gains and losses on
marketable securities that are classified as available-for-sale. The adoption of
this new accounting standard had no effect on the financial position of the
Company.
SEGMENT DISCLOSURES
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company organizes and
manages its products and services as a single product family, and accordingly,
the required disclosures under SFAS No. 131 regarding the Company's products and
services are made to the face of the financial statements. The adoption of SFAS
No. 131 Had no effect on the financial position of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
31
<PAGE>
NOTE 3: MARKETABLE SECURITIES, AVAILABLE FOR SALE
Marketable securities, available-for-sale are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Debt issued by:
U.S. Government Agencies $ 1,500 $ 18 $ 1,518
Corporate bonds 6,931 57 $ (12) 6,976
---------------- --------------- ---------------- -----------------
Total marketable securities 8,431 75 (12) 8,494
Less long -term marketable
securities, available-for-sale 1,500 18 - 1,518
---------------- --------------- ---------------- -----------------
Short-term marketable
securities, available-for-sale $ 6,931 $ 57 $ (12) $ 6,976
---------------- --------------- ---------------- -----------------
---------------- --------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Debt issued by:
U.S. Government Agencies $ 9,995 $10 $ 10,005
Corporate bonds 8,708 2 $(21) 8,689
---------------- --------------- ---------------- -----------------
Total marketable securities 18,703 12 (21) 18,694
Less long-term marketable
securities, available-for-sale 999 1 - 1,000
---------------- --------------- ---------------- -----------------
Short-term marketable
securities, available-for-sale $ 17,704 $11 $(21) $ 17,694
---------------- --------------- ---------------- -----------------
---------------- --------------- ---------------- -----------------
</TABLE>
The long-term marketable securities held at December 31, 1998 have contractual
maturities of two years or less.
NOTE 4: INCOME TAXES
The Company accounts for income taxes using the asset and liability method under
SFAS No. 109, "Accounting for Income Taxes."
The Company provides a deferred tax expense or benefit for differences between
financial accounting and tax reporting. Deferred income taxes represent
operating loss carryforwards, tax credit carryforwards and future net tax
effects resulting from temporary differences between the financial statement and
tax bases of assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse.
32
<PAGE>
The income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 consisted of (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $4,604 $ 1,813 $ 906
State 1,456 1,045 438
-------------------- -------------------- -------------------
6,060 2,858 1,344
-------------------- -------------------- -------------------
Deferred:
Federal 1,154 2,749 2,519
State (101) 243 545
-------------------- -------------------- -------------------
1,053 2,992 3,064
-------------------- -------------------- -------------------
Total $7,113 $5,850 $4,408
-------------------- -------------------- -------------------
-------------------- -------------------- -------------------
</TABLE>
Significant components of the Company's deferred tax balances as of December 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 1998 31, 1997
-------------------- ---------------------
<S> <C> <C>
Deferred tax assets:
Minimum tax credit carryforwards $ - $ 393
Research and development credit carryforwards - 898
Purchased in-process research and development 1,203 898
Allowance for doubtful accounts 387 318
Other reserves not currently deductible 1,370 1,224
Deferred rent 555 344
State taxes 132 36
------------------- -------------------
Total deferred income tax assets 3,647 4,111
Deferred tax liabilities:
Depreciation 347 247
Deducted research and development expenses 906 418
------------------- -------------------
Total deferred income tax liabilities 1,253 665
------------------- -------------------
Deferred income tax assets, net $ 2,394 $ 3,446
------------------- -------------------
------------------- -------------------
</TABLE>
A reconciliation of the federal statutory tax rate to the Company's effective
tax rate is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory tax rate........ $6,394 35% $5,118 35% $3,746 34%
State income taxes, net of federal
tax benefit.......................... 881 5 880 6 649 6
Other.................................. (162) (1) (148) (1) 13 -
----------- ------------ ------------- ----------- ------------ -------------
Total.................................. $7,113 39% $5,850 40% $4,408 40%
----------- ------------ ------------- ----------- ------------ -------------
----------- ------------ ------------- ----------- ------------ -------------
</TABLE>
For income tax purposes, the Company had no remaining and no expired federal
research and development credit carryforwards as of December 31, 1998.
33
<PAGE>
NOTE 5: ACQUISITIONS
In October 1995, the Company acquired certain assets and liabilities of ShipNet
Systems, Inc. ("ShipNet"), a provider of transportation logistics services. The
total acquisition cost was $4,902,000, comprised of $200,000 paid in cash,
assumption of certain liabilities of $3,302,000, shutdown, relocation and
severance expenses of $1,100,000 associated with rationalizing ShipNet's
operations, and $300,000 in transaction costs related to the acquisition.
The acquisition was accounted for as a purchase transaction. In connection with
the acquisition and in conjunction with the Company's capitalized software
policies, $4,318,000 of the purchase price was allocated to in-process research
and development, and as technological feasibility had not been established and
no alternative future uses existed at the acquisition date, charged to expense.
The Company allocated $584,000 of the purchase price to current assets and
property and equipment. The Company completed the relocation of acquired assets
in the third quarter of 1997 and anticipates no further expense related to the
acquisition of ShipNet.
During the third quarter of 1998, the Company acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of Mueller
Associates, Inc., dba the EDI Connection, both service bureaus. The total
acquisition cost was $4,152,000; comprised of $2,950,000 paid in cash; 35,000 of
common shares valued at $802,000 issued from the Company's treasury stock
account; liabilities assumed of $194,000 and $206,000 in transaction costs
related to the acquisitions.
The acquisitions were accounted for as purchase transactions. In connection with
the acquisitions and in conjunction with the Company's capitalized software
policies, $967,000 of the purchase price was allocated to in- process research
and development, and as technological feasibility had not been established and
no alternative future uses existed at the acquisition dates, charged to expense.
The Company allocated $3,185,000 of the purchase price to current assets,
property and equipment and intangible assets. The amounts allocated to current
assets and property and equipment were based on the fair market value of the
related assets and the amounts allocated to intangible assets were determined on
the basis of the appraised value of the related intangible assets.
The appraisal techniques used in the Company's acquisitions included certain
assumptions, including, the extent, character and utility, the income generating
or cost-savings attributes, the nature and timing of the functional or economic
obsolescence and the relative risk and uncertainty associated with an investment
in intangible assets.
NOTE 6: SUBLEASE LOSS RESERVES AND DISCONTINUED OPERATIONS
On May 20, 1993, the Company divested its software and services business to
Uniquest, a publicly held company. In connection with the sale, the Company
entered into various agreements with the buyer, including the sublease of
approximately 40,000 square feet of office space through June 30, 2000. Minimum
monthly lease payments ranged from $53,000 to $75,000 through the seven-year
term of the lease.
At December 31, 1993, Uniquest owed the Company approximately $1,358,000, which
was delinquent under sublease and data center cost sharing agreements. As a
result, the Company provided an allowance of $1,018,000 against these
receivables and made additional provisions of $2,009,000 against nonpayment of
future obligations. The result of the allowance and provision described was to
reduce the gain from sale of the software and services business by $3,027,000. A
$1,700,000 reserve provided in 1992 for lease payments related to another vacant
building was added to sublease loss reserves at December 31, 1993.
In May 1995, Uniquest ceased operations and made an assignment of assets for the
benefit of its creditors. In connection with the cessation of Uniquest's
operations, the Company's sublease with Uniquest was terminated. The Company
received a payment of $923,000 and wrote off the balance of a note for
delinquent rent and data cost sharing amounts of approximately $1,158,000
against the sublease loss reserves. The Company filed a claim with the
Creditors' Committee for unsecured amounts owed by Uniquest totaling
approximately $740,000. During 1995, the Company recorded $164,000 as sublease
income and $77,000 as data center cost
34
<PAGE>
reimbursements from Uniquest as reductions of occupancy expense and data
center-cost of sales, respectively. There were no sublease income or data cost
reimbursements during 1996 and 1997.
During the quarter ended March 31, 1998, outstanding matters with regard to the
Uniquest bankruptcy were substantially resolved; accordingly, the Company
recognized a gain on sale of software and services business of $1,494,000 less
applicable income taxes of $598,000 for these discontinued operations. The
remaining sublease loss reserve of $480,000 at March 31, 1998, representing the
provisions established for nonpayment by Uniquest of future sublease obligations
was reclassified to deferred rent and other and will be amortized over the
remaining lease term through June 30, 2010.
NOTE 7: COMMITMENTS AND CONTINGENCIES
The Company entered into an agreement with IBM for the purchase of $250 million
of network services over a three-year period commencing January 1, 1998. The
agreement includes specified annual minimum purchases and a graduated adjustment
charge if total purchases fall below the total minimum amount. The Company met
the minimum purchases in 1998, and based on historical and projected usage,
believes that the purchase requirements during the remaining two-year period
will be met.
Additionally, the Company and IBM signed a Retail Industry Marketing
agreement under which the Company provides to IBM certain professional
services related to the retail industry. The Company recognized revenues of
$1,000,000 in the fourth quarter of 1997 and $1,000,000 during the year ended
December 31, 1998 as a result of this agreement.
On December 8, 1998, AT&T Corporation announced a definitive agreement pursuant
to which AT&T agreed to purchase IBM's Global Network and corporate networking
business. Upon close of the AT&T acquisition, it is anticipated that the Company
will continue to acquire its network service requirements from IBM with the
delivery of a portion of these services to be undertaken by AT&T.
The Company leases office buildings and certain equipment under various
non-cancelable operating lease agreements expiring through the year 2010. The
leases for office buildings generally provide renewal options and additional
rents based on increases in operating expenses of the buildings.
The Company's corporate building lease agreement provided for significant
periods of "free rent" when no cash was required. The total cash payments over
the life of the lease were divided by the total number of months in the lease
period and the average rent is charged to expense each month during the lease
period. During the periods of "free rent," this expense creates a deferred
liability which is amortized to expense over the life of the lease.
Total rent expense related to these operating leases charged to continuing
operations for the years ended December 31, 1998, 1997 and 1996 was $1,781,000,
$1,372,000 and $1,331,000, respectively.
35
<PAGE>
At December 31, 1998, future minimum payments under long-term operating leases
are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999.................................................... $ 1,764
2000.................................................... 2,538
2001................................................... 2,780
2002................................................... 2,650
2003................................................... 2,385
2004 & thereafter...................................... 13,851
------------------
Total $25,968
------------------
------------------
</TABLE>
NOTE 8: MAJOR TRADING PARTNERSHIP PROGRAMS
The Company provides services and generates revenues by enabling certain hub
customers and their trading partners to conduct business over the Company's
network. Due to the large number of trading partners that transact business with
each other, including one or more hub customers, the difficulty of allocating
trading partner network services to individual hub customers, and the
differences in the manner in which hub customers and trading partners allocate
the cost of network services among each other, the Company cannot precisely
attribute revenues to particular trading relationships. While the Company
continues to refine its estimation techniques, the Company believes that no
individual customer or hub customer trading partnership exceeded 10% of total
revenues for any of the three years in the period ended December 31, 1998.
NOTE 9: RETIREMENT SAVINGS PLANS
The Company has a 401(k) plan, which is a defined contribution plan for all
eligible employees. The plan allows discretionary, matching employer
contributions of up to 50% of the maximum allowable employee contribution
($10,000 in 1998, $9,500 in 1997 and 1996). The matching employer contributions
charged to continuing operations during 1998, 1997 and 1996 were approximately
$522,000, $324,000 and $238,000, respectively.
Effective December 1, 1997, the Company established a non-qualified deferred
compensation plan for certain employees whose contributions and the related
employer matching contributions under the 401(k) plan are restricted under the
Internal Revenue Code. The supplemental employer matching contributions under
this plan charged to continuing operations during 1998 were $32,000.
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS
In 1989, the Board of Directors approved a Non-Qualified Stock Option Plan (the
"Plan"). The Plan was amended in 1990. The plan provides for the granting of
options to certain employees and directors to purchase shares of common stock of
the Company at prices determined by the Board of Directors.
In June 1993, the Board of Directors adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan provides for the purchase of common
stock by eligible employees. A total of 150,000 shares of common stock has been
reserved for purchase under the Purchase Plan. The purchase price per share is
85% of the lower of (i) the fair market value of the Common stock on the
participant's entry date (first business day in January, April, July and October
each year) into a purchase period (first business day in January and through the
last business day in December each year) or (ii) the fair market value on the
annual purchase date (the last business day in December each year). For a
participant whose entry date is subsequent to the start date of the purchase
period (first business day in January each year), the clause (i) value will not
be less than the fair market value of the Common stock on the start date of the
purchase period. In 1998 and 1997, employees acquired 14,575 and 17,176 shares
of common stock, respectively, under the Purchase Plan.
36
<PAGE>
In June 1993, the Board of Directors also approved the 1993 Stock Option/Stock
Issuance Plan (the "1993 Plan"). A total of 1,850,000 shares of common stock has
been reserved for issuance under this plan. The 1993 Plan is divided into three
separate components: (i) the Discretionary Option Grant Program under which key
employees (including officers), certain non-employee directors and consultants
may, at the discretion of the Plan Administrator, be granted options to purchase
shares of Common Stock at an exercise price not less than 85% of the fair market
value of such shares on the grant date, (ii) the Automatic Option Grant Program
under which option grants will automatically be made at periodic intervals to
certain non-employee members of the Board to purchase shares of Common Stock at
an exercise price equal to 100% of the fair market value of the option shares on
the grant date, and (iii) the Stock Issuance Program under which key employees
(including officers), certain non-employee and consultants may, in the Plan
Administrator's discretion, be issued shares of Common Stock directly, either
through the purchase of such shares at a price not less than 85% of their fair
market value at the time of issuance or as a bonus tied to the performance of
services or the Company's attainment of financial objectives, without any cash
payment required of the recipient.
All outstanding options under the 1993 plan have been granted at fair market
value on the date of grant and vest in equal annual installments over periods up
to four years. Outstanding options granted under earlier plans were granted at
fair market value or lesser values, and vest over different periods, primarily
over periods up to four years.
Stockholders approved additional allocations of 500,000 shares of common stock
to the Stock Option Pool under the 1993 Plan in each of May 1995 and May 1996
(1,000,000 shares total). Stockholders approved additional allocations of
350,000 shares of common stock to the Stock Option Pool under the 1993 Plan in
May 1998.
In December 1997, the Board of Directors approved the 1997 Special Non-Officer
Stock Option Plan, which permits the Company to grant options to purchase up to
150,000 shares of common stock. The persons eligible to receive options through
this plan are those employees who are neither executive officers of the Company
nor members of the Board of Directors.
The following table shows the activity in the Company's stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------------- -----------------
<S> <C> <C>
Balance, December 31, 1995 (93,276 exercisable at $9.72 weighted average
price per share) 669,286 $12.94
Granted................................................................................ 265,750 29.79
Exercised............................................................................... (80,190) 4.09
Canceled............................................................................... (15,500) 12.82
--------------- -----------------
Balance, December 31, 1996 (205,408 exercisable at $13.70 weighted average
price per share) 839,346 18.96
Granted................................................................................ 614,650 31.64
Exercised............................................................................... (103,270) 10.70
Canceled............................................................................... (42,245) 23.74
--------------- -----------------
Balance, December 31, 1997 (320,580 exercisable at $18.36 weighted average
price per share) 1,308,481 25.54
--------------- -----------------
Granted................................................................................... 465,350 29.65
Exercised................................................................................. (65,550) 16.09
Canceled.................................................................................. (82,725) 33.23
--------------- -----------------
Balance, December 31, 1998 (574,007 exercisable at $23.51 weighted average
price per share 1,625,556 $26.70
--------------- -----------------
--------------- -----------------
</TABLE>
37
<PAGE>
Warrants issued in connection with a line of credit and the public offering to
purchase 16,756 shares of common stock at $2.50 To $18.50 Were outstanding at
December 31, 1998. These warrants expire upon 30 day notification of the warrant
holder. Options to purchase approximately 45,971 shares of common stock were
available for future grants under the plans as of December 31, 1998.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its employee stock-based compensation plans. Accordingly, no compensation cost
has been recognized for its Stock Option Plans. Had compensation cost for the
Company's stock-based plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123,
The Company's net earnings and net earnings per share would have been decreased
to the proforma amounts indicated in the following table. As 1996 was the
initial phase-in period for applying this Statement, the proforma results
indicated are not necessarily representative of the effects on proforma
disclosures of net earnings for future periods as they exclude options that were
granted prior to January 1, 1995, with vesting periods in 1995 and later.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET EARNINGS
As reported $12,050 $ 8,775 $ 6,611
-------------------- --------------------- ----------------------
-------------------- --------------------- ----------------------
Proforma $9,145 $ 6,916 $ 5,489
-------------------- --------------------- ----------------------
-------------------- --------------------- ----------------------
BASIC EARNINGS PER SHARE
As reported $1.41 $ 1.04 $ 0.79
-------------------- --------------------- ----------------------
-------------------- --------------------- ----------------------
Proforma $1.07 $ 0.82 $ 0.66
-------------------- --------------------- ----------------------
-------------------- --------------------- ----------------------
DILUTED EARNINGS PER SHARE
As reported $1.36 $ 1.01 $ 0.77
-------------------- --------------------- ----------------------
-------------------- --------------------- ----------------------
Proforma $1.03 $ 0.79 $ 0.64
-------------------- --------------------- ----------------------
-------------------- --------------------- ----------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 1998, 1997 and 1996 under the 1993 Plan and
for purchases made in 1998, 1997 and 1996 under the Employee Stock Purchase
Plan: risk-free interest rates are 4.59% In 1998, 5.91% In 1997 and 6.07% In
1996; expected volatility is 56.3% In 1998, 51.4% In 1997 and 51.0% In 1996;
expected lives in all years are 18 months beyond each incremental vesting period
(total life of 2 to 5.5 years, depending upon each grant's individual vesting
schedule). No dividends are assumed for any plan in any year. The weighted
average fair value of options granted during 1998, 1997 and 1996 was $13.62,
$14.18 And $13.27, respectively.
The status of options outstanding as of December 31, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- -------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ------------------ ---------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
$5.25-5.25 25,700 4.3 $5.25 25,700 $5.25
9.00-12.50 64,795 5.3 10.39 64,545 10.40
14.13-19.13 296,036 6.4 16.69 171,598 17.57
21.88-31.88 1,056,825 8.8 28.97 252,415 29.31
35.56-48.00 182,200 8.7 38.64 59,749 38.06
- ----------------- ------------------ ---------------- ------------------ ------------------ -----------------
$5.25-48.00 1,625,556 8.2 $26.70 574,007 $23.51
- ----------------- ------------------ ---------------- ------------------ ------------------ -----------------
- ----------------- ------------------ ---------------- ------------------ ------------------ -----------------
</TABLE>
38
<PAGE>
NOTE 11: TREASURY STOCK
On April 22, 1997, the Company announced that its Board of Directors has
authorized the repurchase from time to time of up to $5 million of its common
stock in both open market and block transactions. The Board of Directors
authorized a $5 million increase in this repurchase amount on October 16, 1998.
Shares purchased under this program will be held in the corporate treasury for
future use including employee stock option grants and the employee stock
purchase plan. The Company may discontinue purchases of its Common Stock at any
time that management determines additional purchases are not warranted. The
Company has repurchased 60,550 shares since the inception of the buyback
program, of which 59,250 shares were repurchased during 1998 for $1,837,000 and
1,300 shares were repurchased during 1997 for $35,000. During the third quarter
of 1998, the Company reissued 35,000 shares of treasury stock at $802,000 in
connection with the acquisition of businesses (See Note 5).
NOTE 12: QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1998 QUARTERLY
---------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER YEAR
IN THOUSANDS, EXCEPT PER ENDED ENDED ENDED ENDED ENDED
SHARE DATA MARCH 31, JUNE 30, SEPT. 30, DEC.31, DEC. 31,
1998 1998 1998 1998 1998
------------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $20,034 $20,830 $23,618 $27,444 $91,926
Gross profit 8,779 9,146 10,299 12,562 40,786
Earnings from continuing 2,463 2,659 2,471 3,561 11,154
operations
Discontinued operations 896 - - - 896
Net earnings 3,359 2,659 2,471 3,561 12,050
Basic earnings per share:
Continuing operations 0.29 0.31 0.29 0.42 1.31
Discontinued operations 0.10 - - - 0.10
Net earnings 0.39 0.31 0.29 0.42 1.41
Diluted earnings per share:
Continuing operations 0.28 0.30 0.28 0.40 1.26
Discontinued operations 0.10 - - - 0.10
Net earnings 0.38 0.30 0.28 0.40 1.36
</TABLE>
<TABLE>
<CAPTION>
1997 QUARTERLY
------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER YEAR
ENDED ENDED ENDED ENDED ENDED
IN THOUSANDS, EXCEPT PER MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
SHARE DATA 1997 1997 1997 1997(1) 1997
-------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $16,354 $17,003 $18,253 $20,022 $71,632
Gross profit 7,231 7,389 7,759 8,803 31,182
Net earnings 1,925 2,095 2,254 2,501 8,775
Basic earnings per share 0.23 0.25 0.27 0.29 1.04
Diluted earnings per share 0.22 0.24 0.26 0.29 1.01
</TABLE>
(1) See Note 7
39
<PAGE>
NOTE 13: EARNINGS PER SHARE
The Company calculates basic EPS and diluted EPS in accordance with SFAS No.
128. Basic EPS is calculated by dividing net earnings for the period by the
weighted average common shares outstanding for that period. Diluted EPS takes
into account the effect of dilutive instruments, such as stock options, and uses
the average share price for the period in determining the number of incremental
shares that are to be added to the weighted average number of shares
outstanding.
The following is a summary of the calculation of the number of shares used in
calculating basic and diluted EPS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- -----------------------
<S> <C> <C> <C>
Shares used to compute basic EPS 8,541,366 8,464,000 8,345,679
Add: Effect of dilutive securities 316,913 263,396 267,321
----------------------- --------------------- -----------------------
Shares used to compute diluted EPS 8,858,279 8,727,396 8,613,000
----------------------- --------------------- -----------------------
----------------------- --------------------- -----------------------
</TABLE>
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Peter R. Johnson (2)(3) 50 Chairman of the Board of Directors
John Simon 42 Chief Executive Officer and Director
Shawn M. O'Connor 39 President and Chief Operating Officer
Peter Papano 49 Chief Financial Officer and Secretary
Philip Woodworth 42 Vice President, Product Marketing
Glenn DuBois 45 Vice President, Sales
Philip Swift 48 Vice President, Information Services
Tania Amochaev (3) 49 Director
Steven D. Brooks (2)(3) 47 Director, Chairman of the Audit Committee
H. Lynn Hazlett, Ph.D. 62 Director
John P. Dougall 55 Director
Garth Saloner, Ph.D. (1)(2) 44 Director, Chairman of the Compensation Committee
Philip Schlein (1) 65 Director
Garen K. Staglin (1)(3) 54 Director, Chairman of the Executive Committee
</TABLE>
(1) Member of the compensation committee.
(2) Member of the audit committee.
(3) Member of the executive committee.
Mr. Johnson founded the Company in 1985 and has been Chairman of the Board since
the Company's inception. Mr. Johnson served as President of the Company from
October 1985 to September 1987 and as Chief Executive Officer of the Company
from September 1987 to March 1991 and again from January 1992 to May 1993. Mr.
Johnson has been President, Chief Executive Officer and Chairman of Peter R.
Johnson & Associates since 1984 and President, Chief Executive Officer and
Chairman of Galaxy Brands International since 1996. Before founding the Company,
Mr. Johnson was a corporate general manager of the Myer Emporium Limited, a
large retailer in Australia. Mr. Johnson served as the Chief Executive Officer
of Uniquest Incorporated from December 1993 to December 1994. From 1995 to the
present, Mr. Johnson has been a private investor in and a consultant to
technology companies. Mr. Johnson is a director of Meridian Data, a software
and systems company, and of several privately held companies. Mr. Johnson also
serves as Chairman and director of NSB, a United Kingdom publicly held company.
Mr. Simon was named Chief Executive Officer in July 1998 and a director of the
Company in December 1997. Mr. Simon has held various positions with the Company
since 1988, including President from January 1998 until July 1998 and Executive
Vice President from January 1994 to December 1997. From 1980 to 1988, Mr. Simon
was employed by Carter Hawley Hale Stores, Inc., a retail company, most recently
as Senior Program Manager of its Information Services Division, and prior to
that held a number of merchandising, store management and information services
positions.
Mr. O'Connor joined the Company in February 1995 and became Vice President,
Chief Financial Officer and Secretary in March 1995. Mr. O'Connor was named
Chief Operating Officer in January 1998 and President in July 1998, and
currently serves in these two capacities. Before joining the Company, from 1992
to 1994, Mr. O'Connor was Vice President and Chief Financial Officer for
Diasonics Ultrasound, Inc., a medical equipment manufacturer ("Diasonics
Ultrasound"). From 1988 to 1992, Mr. O'Connor held various management positions
with Diasonics Ultrasound.
41
<PAGE>
Mr. Papano joined the Company in August 1998 as Vice President, Finance, Chief
Financial Officer and Secretary. Prior to joining the Company, from 1991 to May
1998, Mr. Papano served in two principal capacities at Knight-Ridder Information
Inc. (now known as the Dialog Corporation), a company in the information
business that primarily provides online search and current awareness information
products, including Chief Financial Officer from January 1994 to December 1997
and Senior Director of Finance from 1991 to December 1993. In addition, Mr.
Papano served as Chief Financial Officer for a subsidiary of Dialog Corporation
from December 1997 until May 1998. He began his career with GTE Corporation in
local and long distance telephone operations.
Mr. Woodworth was named Vice President, Product Marketing in October 1998. Mr.
Woodworth is responsible for the Company's products and product management and
the development of Internet and Internet technology services that complement the
retail industry and demand chain initiatives that the Company sponsors on behalf
of its retailer customers, vendors and carriers. Mr. Woodworth has worked for
the Company for over nine years and has held various positions, including Vice
President of Sales and Director of Projects. Prior to joining the Company, Mr.
Woodworth was employed in the data processing industry for 19 years.
Mr. DuBois joined the Company in July 1997 as Vice President, Sales. Prior to
joining the Company, from July 1996 to June 1997, he was Vice President of Sales
for the LizWear Division of Liz Claiborne, Inc., a manufacturer of apparel.
From July 1991 to July 1996, Mr. DuBois was with the Lee Division of VF
Corporation, initially as Director of Business Systems and Planning and,
beginning in 1994, as Regional Vice President of Sales. Prior to that, from
1983 to 1991, Mr. DuBois served in various management roles in both retail
relations and systems for Levi Strauss.
Mr. Swift joined the Company in October 1996 as Vice President, Product
Development and was named Vice President, Information Services in January 1998.
Before joining the Company, from January 1992 to September 1996, Mr. Swift was
Department Head of Information Products at VISA, a credit card transaction
processing company. From 1989 to 1991, Mr. Swift was Senior Project Manager at
Matson Navigation, a shipping company.
Ms. Amochaev was named a director of the Company in May 1992. Ms. Amochaev
served as President of the Company from May 1992 until February 1997 and as
Chief Executive Officer from May 1993 until February 1997. Before joining the
Company, from 1988 to 1992, Ms. Amochaev was Chief Executive Officer of Natural
Language, Inc., a client server database tool software company. From 1984 to
1987, Ms. Amochaev was President and Chief Executive Officer of Comserv
Corporation, a manufacturing applications software company that was sold in 1987
to Management Science America. Ms. Amochaev currently serves as a director of
Walker Interactive Systems, Inc., a financial software company, Government
Technology Services, Inc., a computer reseller to the government, and Symantec
Corporation, a software company.
Mr. Brooks was named a director of the Company in January 1994. Mr. Brooks is
a Managing Director at Broadview Capital Partners ("Broadview"), a private
equity firm focused upon investments in the technology sector. Mr. Brooks
joined Broadview in February 1999. From September 1997 to February 1999, Mr.
Brooks served as a Managing Director of Donaldson, Lufkin & Jenrette Securities
Corporation, an investment banking firm. From January 1997 to August 1997, Mr.
Brooks was a private investor and a consultant to technology companies. From
1994 to December 1996, Mr. Brooks served as Managing Director and head of Global
Technology Investment Banking at Union Bank of Switzerland Securities, LLC.
From 1988 to 1994 Mr. Brooks was a private investor and consultant to high
technology firms. From 1986 to 1988, Mr. Brooks served as Managing Partner of
investment banking at Robertson, Stephens & Co., an investment bank. In
addition to QRS, Mr. Brooks is a Director of Paychex, Inc., a national payroll
processing and business services company, and VERITAS Software Corporation, a
systems management software company, as well as several private companies.
42
<PAGE>
Dr. Hazlett was named a director of the Company in 1994. Dr. Hazlett served as
Chief Executive Officer of the Company from February 1997 to June 1998. He also
served as President of the Company from February 1997 to January 1998 and was a
consultant to the Company from 1995 until February 1997. From January 1994 to
February 1997, Dr. Hazlett owned and operated Supply Chain Associates, a retail
supply chain consultancy practice. Dr. Hazlett served as Vice President,
Business Systems at VF Corporation, a global apparel manufacturer, from 1989 to
January 1995. From 1984 to 1989, Dr. Hazlett served as President and Chief
Executive Officer of Information and Communications, Inc., a division of Carson
Pirie Scott & Company, a conglomerate comprised of 33 department stores, 400
specialty stores and a mail order catalog business. Prior to that, Dr. Hazlett
served as Corporate Vice President and Chief Information Officer at Levi Strauss
& Co., a manufacturer of apparel. Dr. Hazlett is a director of the National
Industries for the Blind, a non-profit organization, and TriNet Corporation, a
provider of human resource services.
Mr. Dougall has been a director of the Company since July 1990. On February 5,
1999, Mr. Dougall became Group Chief Executive Officer for Plessy Asia Pacific.
From December 1997 to February 1999, Mr. Dougall was a private investor. From
November 1996 to November 1997, Mr. Dougall served as Chairman and Chief
Executive Officer for Aristocrat Leisure Limited, an Australian publicly listed
company and a supplier to gambling and entertainment companies. From January
1992 to September 1996, Mr. Dougall served as Chief Executive Officer of AWA
Limited, an electronics and telecommunications company. Mr. Dougall held
various executive positions with the Company from July 1990 to January 1992,
serving as President of the Company from February 1991 to June 1991 and as
President and Chief Executive Officer from June 1991 to January 1992. From
February 1988 to June 1990, Mr. Dougall was the Executive Director of Paxus
Corporation, a software services and outsourcing firm.
Dr. Saloner was named a director of the Company in December 1993. Dr. Saloner
has served as the Robert A. Magowan Professor of Strategic Management and
Economics at the Graduate School of Business at Stanford University since 1990.
He served as Associate Dean for Academic Affairs and Director of Research and
Course Development at Stanford from 1993 to 1996. From 1982 to 1990, Dr.
Saloner was a professor in the Economics Department of the Massachusetts
Institute of Technology. Dr. Saloner is a director of Charles River Associates,
an economic consulting firm, Brilliant Digital Entertainment, Inc., a 3D
animation firm, and Next Stage Entertainment, a firm engaged in building a
network of live entertainment theaters.
Mr. Schlein was named a director of the Company in February 1996. Mr. Schlein
has been a general partner of BMS Partners L.P., a venture partner of U.S.
Venture Partners, a venture capital firm, since April 1985. Mr. Schlein held
various executive positions with R.H. Macy & Company, Inc. from September 1957
to December 1973 and was President and Chief Executive Officer of its Macy's
California division from January 1974 to January 1985. Mr. Schlein currently
serves as a director of Burnham Pacific Incorporated, a commercial real estate
development and leasing company, Ross Stores, Inc., a clothing store chain,
Resound Corporation, a hearing devise manufacturing company, XOOM.com, Inc., an
e-commerce company, and bebe stores, inc., a producer of contemporary women's
apparel and accessories. Additionally, Mr. Schlein served as a director of
Apple Computer, Inc. from 1979 to 1987.
Mr. Staglin was named a director of the Company in 1991. Since 1991, Mr.
Staglin has served as the Chief Executive Officer and Chairman of the Board of
Directors of Safelite Glass Corporation, a replacement auto glass manufacturing
and retailing company. From 1980 to 1991, Mr. Staglin was a Vice President and
General Manager of Automatic Data Processing, a computer networking services
company. Mr. Staglin has been the owner and manager of Staglin Vineyards from
1985 to the present. Mr. Staglin currently serves as a director of First Data
Corporation, a supplier of computer services for credit card processing and
other financial services, and CyberCash, Inc., a provider of secure transaction
services for the Internet. In 1994, Mr. Staglin was named a member of the
Advisory Council to the Stanford Graduate School of Business.
43
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 11 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 1998, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Executive Compensation
and Other Information," the information required by this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 12 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 1998, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Security Ownership of
Certain Beneficial Owners and Management," the information required by this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 13 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 1998, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Certain Relationships
and Related Transactions" the information required by this item.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed or incorporated by reference as part of this
form 10-K:
(A) ITEMS FILED AS PART OF REPORT:
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or
not required or because the required information is included
in the financial statements or notes thereto.
(B) REPORTS ON FORM 8-K
None
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
2.1 Agreement and Plan of Merger of QuickResponse Delaware, Inc. and
QuickResponse Services, Inc.*****
3.1 Certification of Incorporation of the Company.*****
3.2 Certificate of Correction of Certificate of Incorporation of the
Company.*****
3.3 Bylaws of the Company.*****
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company.
4.1 Specimen of Common Stock Certificate of the Registrant.*
10.1 1993 Stock Option/Stock Insurance Plan and forms of agreement
thereunder.*
10.2 Employee Stock Purchase Plan.*
10.3 Form of 1990 Nonqualified Stock Option Agreement.*
10.4 Employment Agreement dated April 22, 1992 between the Registrant and
Tania Amochaev.*
10.5 Employment Agreement dated March 1, 1993 between the Registrant and
Tania Amochaev.*
10.6 Form of Indemnification Agreement.*
10.7 Lease Agreement dated April 27, 1990 between the Registrant and
Schooner Drive Associates, a California Limited Partnership.*
10.8 Sublease dated May 1, 1993 between the registrant and PRJ&, Inc.*
10.9 Preferred Stock Purchase and Debt Consolidation Agreement, dated as of
March 22, 1991 among the Registrant, Peter R. Johnson and
International Business Machines Corporation.*
10.10 First Amendment dated as of May 20, 1993 to the Preferred Stock
Purchase and Debt Consolidation Agreement among the Registrant, Peter
R. Johnson, and International Business Machines Corporation.*
45
<PAGE>
10.11 Replacement Consolidated Convertible Notes dated March 22, 1991 issued
to International Business Machines Corporation.*
10.12 Security Agreement dated as of March 22, 1991 between the Registrant
and International Business Machines Corporation.*
10.13 Warrant dated March 22, 1991 issued to International Business Machines
Corporation.*
10.14 License Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*
10.15 First Amendment dated as of May 20, 1993 to the License Agreement
between the Registrant and International Business Machines
Corporation.*
10.16 Maintenance and Support Agreement dated March 22, 1991 between the
Registrant and International Business Machines Corporation.*
10.17 First Amendment dated as of May 20, 1993 to the Maintenance and
Support Agreement between the Registrant and International Business
Machines Corporation.*
10.18 Marketing Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*
10.19 Common Stock Purchase Agreement dated April 3, 1989 by and among
Registrant and Retail Shopping International (Aust) Pty. Ltd.,
Barclays Investment Pty. Ltd., and Peter R. Johnson.*
10.20 Business Loan Agreement dated May 30, 1990 between Registrant and
Silicon Valley Bank as amended on June 3, 1993.*
10.22 Warrant dated July 16, 1992 issued to Steven D. Brooks.*
10.23 Warrant dated March 31, 1993 issued to Steven D. Brooks.*
10.24 # Volume Discount Agreement dated December 16, 1991 between the
Registrant and International Business Machines Corporation.*
10.25 Facilities and Cost Sharing Agreement dated May 1, 1993 between the
Registrant and PRJ&, Inc.*
10.26 Data Center Services Agreement dated April 30, 1993 between the
Registrant and PRJ&, Inc.*
10.27 Agreement and Plan of Merger dated May 20, 1993 among the Registrant,
Uniquest Incorporated, PRJ Acquisition Corp. and PRJ&, Inc.*
10.28 Consent and Release Agreement dated as of May 20, 1993 among the
Registrant, PRJ&, Inc., Peter R. Johnson, Uniquest Incorporated and
International Business Machines Corporation.*
10.29 Separation Agreement dated May 1, 1993 between the Registrant and
PRJ&, Inc.*
10.30 Assignment, Bill of SALE and Assumption Agreement dated as of May 20,
1993 between the Registrant and PRJ&, Inc.*
10.31 Escrow Agreement dated May 20, 1993 among the Registrant, Uniquest
Incorporated and Bank of America NT&SA.*
10.32 Pledge Agreement dated as of May 20, 1993 between the Registrant and
International Business Machines Corporation.*
10.33 Agreement dated as of July 13, 1993 between the Registrant and
International Business Machines Corporation.*
10.34 # Advantis Industry Remarketer Agreement dated as of January 6, 1994
between Advantis and the Registrant.**
10.35 Uniquest Forbearance Agreement between Uniquest Incorporated and the
Registrant.**
10.36 # International Remarketer Agreement dated as of November 11, 1996
between Advantis and the Registrant.***
10.37 # Employment Agreement dated as of February 6, 1997 between Registrant
and Lynn Hazlett.***
10.38 Reserved.
46
<PAGE>
10.39 Fourth Amendment, dated August 7, 1997, to Lease Agreement between the
Registrant and Marina Westshore Partners, LLC, successor in interest
to Schooner Drive Association, a California Limited Partnership.****
10.40 Option Agreement dated August 7, 1997 between the Registrant and
Marina Westshore Partners, LLC.****
10.41 # Employment Agreement dated as of December 24, 1997 between
Registrant and John Simon.*****
10.42 # Employment Agreement dated as of December 24, 1997 between
Registrant and Shawn O'Connor.*****
10.43 # Retail Management Agreement dated as of December 31, 1997 between
Registrant and International Business Machines Corporation.*****
10.44 # Business Partner Agreement dated December 31, 1997 between
Registrant and International Business Machines Corporation.*****
10.45 1997 Non-Officer Stock Plan.*****
10.46 Non-qualified Deferred Compensation Plan.*****
10.47 ## Employment Agreement dated as of March 8, 1999 between Registrant
and John Simon.
10.48 ## Employment Agreement dated as of March 8, 1999 between Registrant
and Shawn O'Connor.
10.49 Fifth Amendment, dated November 20, 1998, to Lease Agreement between
the Registrant and Marina Westshore Partners, LLC.
10.50 Lease Agreement, dated, MAY 15, 1998, between the Registrant and
Marina Westshore Partners, LLC.
10.51 First Amendment, dated November 20, 1998, between the Registrant and
Marina Westshore Partners, LLC
10.52 Lease Agreement, dated November 20, 1998, between the Registrant and
Marina Bay Partners.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 Power of Attorney (see page 44).
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to Exhibit of same number of the Registrant's
Registration Statement on Form S-1 (Registration No. 33-63938).
** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
*** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
**** Incorporated by reference to Exhibit of same number filed with the
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.
***** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
# Confidential treatment has been granted with respect to portions of this
document.
## Confidential treatment has been requested with respect to portions of this
document.
47
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 24th day of March, 1999.
QRS CORPORATION
/s/ Peter Papano
---------------------------------------------------
Peter Papano, Chief Financial Officer and Secretary
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Peter Papano, acting
alone, his true and lawful attorney-in-fact with authority to execute in the
name of each person, and to file with the Securities and Exchange Commission,
together with any exhibits thereto and other documents therewith, any and all
amendments to this Annual Report on Form 10-K for the fiscal year ended December
31, 1998 necessary or advisable to enable QRS Corporation to comply with the
Securities Exchange Act of 1934, any rules, regulations and requirements of the
Securities and Exchange Commission in respect thereof, which amendments may make
such other changes in the report as the aforesaid attorney-in-fact executing the
same deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 has been signed
by the following persons in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
<S> <C>
/s/ John S. Simon March 24, 1999
- ----------------------------------------------------------------------
John S. Simon, Chief Executive Officer and Director
/s/ Peter R. Johnson March 24, 1999
- ----------------------------------------------------------------------
Peter R. Johnson, Chairman of the Board of Directors
/s/ Tania Amochaev March 24,1999
- ----------------------------------------------------------------------
Tania Amochaev, Director
/s/ Steven D. Brooks March 24,1999
- ----------------------------------------------------------------------
Steven D. Brooks, Director
/s/ John P. Dougall March 24,1999
- ----------------------------------------------------------------------
John P. Dougall, Director
/s/ H. Lynn Hazlett March 24,1999
- ----------------------------------------------------------------------
H. Lynn Hazlett, Director
/s/ Philip Schlein March 24,1999
- ----------------------------------------------------------------------
Philip Schlein, Director
/s/ Garen K. Staglin March 24,1999
- ----------------------------------------------------------------------
Garen K. Staglin, Director
/s/ Garth Saloner March 24,1999
- ----------------------------------------------------------------------
Garth Saloner, Director
</TABLE>
48
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
<S> <C>
2.1 Agreement and Plan of Merger of QuickResponse Delaware, Inc. and
QuickResponse Services, Inc.*****
3.1 Certification of Incorporation of the Company.*****
3.2 Certificate of Correction of Certificate of Incorporation of the
Company.*****
3.3 Bylaws of the Company.*****
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company.
4.1 Specimen of Common Stock Certificate of the Registrant.*
10.1 1993 Stock Option/Stock Insurance Plan and forms of agreement
thereunder.*
10.2 Employee Stock Purchase Plan.*
10.3 Form of 1990 Nonqualified Stock Option Agreement.*
10.4 Employment Agreement dated April 22, 1992 between the Registrant and
Tania Amochaev.*
10.5 Employment Agreement dated March 1, 1993 between the Registrant and
Tania Amochaev.*
10.6 Form of Indemnification Agreement.*
10.7 Lease Agreement dated April 27, 1990 between the Registrant and
Schooner Drive Associates, a California Limited Partnership.*
10.8 Sublease dated May 1, 1993 between the Registrant and PRJ&, Inc.*
10.9 Preferred Stock Purchase and Debt Consolidation Agreement, dated as of
March 22, 1991 among the Registrant, Peter R. Johnson and
International Business Machines Corporation.*
10.10 First Amendment dated as of May 20, 1993 to the Preferred Stock
Purchase and Debt Consolidation Agreement among the Registrant, Peter
R. Johnson, and International Business Machines Corporation.*
10.11 Replacement Consolidated Convertible Notes dated March 22, 1991 issued
to International Business Machines Corporation.*
10.12 Security Agreement dated as of March 22, 1991 between the Registrant
and International Business Machines Corporation.*
10.13 Warrant dated March 22, 1991 issued to International Business Machines
Corporation.*
10.14 License Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*
10.15 First Amendment dated as of May 20, 1993 to the License Agreement
between the Registrant and International Business Machines
Corporation.*
10.16 Maintenance and Support Agreement dated March 22, 1991 between the
Registrant and International Business Machines Corporation.*
10.17 First Amendment dated as of May 20, 1993 to the Maintenance and
Support Agreement between the Registrant and International Business
Machines Corporation.*
10.18 Marketing Agreement dated March 22, 1991 between the Registrant and
International Business Machines Corporation.*
10.19 Common Stock Purchase Agreement dated April 3, 1989 by and among
Registrant and Retail Shopping International (Aust) Pty. Ltd.,
Barclays Investment Pty. Ltd., and Peter R. Johnson.*
10.20 Business Loan Agreement dated May 30, 1990 between Registrant and
Silicon Valley Bank as amended on June 3, 1993.*
10.22 Warrant dated July 16, 1992 issued to Steven D. Brooks.*
10.23 Warrant dated March 31, 1993 issued to Steven D. Brooks.*
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.24 # Volume Discount Agreement dated December 16, 1991 between the
Registrant and International Business Machines Corporation.*
10.25 Facilities and Cost Sharing Agreement dated May 1, 1993 between the
Registrant and PRJ&, Inc.*
10.26 Data Center Services Agreement dated April 30, 1993 between the
Registrant and PRJ&, Inc.*
10.27 Agreement and Plan of Merger dated May 20, 1993 among the Registrant,
Uniquest Incorporated, PRJ Acquisition Corp. and PRJ&, Inc.*
10.28 Consent and Release Agreement dated as of May 20, 1993 among the
Registrant, PRJ&, Inc., Peter R. Johnson, Uniquest Incorporated and
International Business Machines Corporation.*
10.29 Separation Agreement dated May 1, 1993 between the Registrant and
PRJ&, Inc.*
10.30 Assignment, Bill of Sale and Assumption Agreement dated as of May 20,
1993 between the Registrant and PRJ&, Inc.*
10.31 Escrow Agreement dated May 20, 1993 among the Registrant, Uniquest
Incorporated and Bank of America NT&SA.*
10.32 Pledge Agreement dated as of May 20, 1993 between the Registrant and
International Business Machines Corporation.*
10.33 Agreement dated as of July 13, 1993 between the Registrant and
International Business Machines Corporation.*
10.34 # Advantis Industry Remarketer Agreement dated as of January 6, 1994
between Advantis and the Registrant.**
10.35 Uniquest Forbearance Agreement between Uniquest Incorporated and the
Registrant.**
10.36 # International Remarketer Agreement dated as of November 11, 1996
between Advantis and the Registrant.***
10.37 # Employment Agreement dated as of February 6, 1997 between Registrant
and Lynn Hazlett.***
10.38 Reserved.
10.39 Fourth Amendment, dated August 7, 1997, to Lease Agreement between the
Registrant and Marina Westshore Partners, LLC, successor in interest
to Schooner Drive Association, a California Limited Partnership.****
10.40 Option Agreement dated August 7, 1997 between the Registrant and
Marina Westshore Partners, LLC.****
10.41 # Employment Agreement dated as of December 24, 1997 between
Registrant and John Simon.*****
10.42 # Employment Agreement dated as of December 24, 1997 between
Registrant and Shawn O'Connor.*****
10.43 # Retail Management Agreement dated as of December 31, 1997 between
Registrant and International Business Machines Corporation.*****
10.44 # Business Partner Agreement dated December 31, 1997 between
Registrant and International Business Machines Corporation.*****
10.45 1997 Non-Officer Stock Plan.*****
10.46 Non-qualified Deferred Compensation Plan.*****
10.47 ## Employment Agreement dated as of March 8, 1999 between Registrant
and John Simon.
10.48 ## Employment Agreement dated as of March 8, 1999 between Registrant
and Shawn O'Connor.
10.49 Fifth Amendment, dated November 20, 1998, to Lease Agreement between
the Registrant and Marina Westshore Partners, LLC.
10.50 Lease Agreement, dated, May 15, 1998, between the Registrant and
Marina Westshore Partners, LLC.
10.51 First Amendment, dated November 20, 1998, between the Registrant and
Marina Westshore Partners, LLC
10.52 Lease Agreement, dated November 20, 1998, between the Registrant and
Marina Bay Partners.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
24.2 Power of Attorney (see page 44).
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to Exhibit of same number of the Registrant's
Registration Statement on Form S-1 (Registration No. 33-63938).
** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
*** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
**** Incorporated by reference to Exhibit of same number filed with the
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.
***** Incorporated by reference to Exhibit of same number filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
# Confidential treatment has been granted with respect to portions of this
document.
## Confidential treatment has been requested with respect to portions
52
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
QUICKRESPONSE SERVICES, INC.
a Delaware corporation
(pursuant to Section 242 of
the Delaware General Corporation Law)
The undersigned, H. Lynn Hazlett, HEREBY CERTIFIES AS FOLLOWS:
FIRST: The name of the corporation (hereinafter called the "Corporation")
is QuickResponse Services, Inc.
SECOND: The Certificate of Incorporation of said Corporation, which was
originally incorporated in Delaware on June 23, 1997 under the name
QuickResponse Delaware, Inc., and whose name was corrected by Certificate of
Correction on October 21, 1997 to the Corporation's current name of
QuickResponse Services, Inc., is hereby amended by striking out Article First
thereof and by substituting in lieu of said Article First, the following new
Article First:
"FIRST: The name of this corporation is QRS Corporation."
THIRD: The amendment of the Certificate of Incorporation of the Corporation
herein certified has been duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment of Certificate of Incorporation this 8th day of May, 1998.
/S/ H. LYNN HAZLETT
----------------------------------------
H. Lynn Hazlett, Chief Executive Officer
<PAGE>
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
EXHIBIT 10.47
EMPLOYMENT AGREEMENT BETWEEN REGISTRANT AND JOHN SIMON
March 8, 1999
Mr. John S. Simon
10 Tenaya Lane
Novato, CA 94947
Dear John,
Following the close of our 1998 business, the development of our 1999 plan, and
our recent discussions, it is with pleasure that I confirm our verbal offer for
your continued employment with QRS Corporation. The following summarizes our
offer:
POSITION:
- --------
Chief Executive Officer
You will have an overall corporate perspective and responsibility as Chief
Executive Officer. You are also an elected member of the Board of Directors. You
will have direct responsibility for the following functions:
- - Strategy and planning
- - Business Development
- - Sales
- - Marketing
REPORTING TO:
- -------------
Chairman and Board of Directors
KEY OBJECTIVES:
- ---------------
As a key executive of QRS, your focus in 1999 should be on successfully
addressing the critical issues facing QRS:
- - Increase revenue growth rate to exceed 30%
- - Significantly reduce product time to market
- - Improve product profitability and gross margins
- - Ensure high quality and timely service
- - Achieve Y2K readiness
- - Hire, retain and provide growth opportunities for employees
Furthermore, as a key executive of QRS you should ensure continued focus on the
long-term mission of QRS:
- - We are The leader in network-centric, inter-enterprise electronic commerce
solutions that materially improve our customers' performance.
- - We serve the global consumer goods demand chain.
- - We exceed customer expectations for service quality.
- - We are recognized as THE place to work by our employees.
- - We provide superior returns to our shareholders.
Finally, as a key executive of QRS you also have as continuing, significant
responsibility the development and maintenance of an environment at QRS that
fosters and emulates the tenants of QRS's core values among its associates.
ANNUAL COMPENSATION:
- --------------------
Your annual compensation will be administered by me and reviewed by the
Compensation Committee of the Board of Directors.
- - Your base compensation will be $240,000 per year.
<PAGE>
- - In addition, your targeted annual incentive compensation will be $160,000
or approximately 67 % of your base compensation.
- - Therefore, the annual total target compensation (base plus incentive at
100%) shall be $400,000.
Your compensation, including incentives, will be reviewed in the first quarter
of each year (unless there is a change in objectives, location, etc. in which
case it will be reviewed at that time), to ensure that it continues to be
equitable, appropriate to the location, and provide appropriate incentives and
support to the agreed objectives.
ANNUAL INCENTIVE COMPENSATION COMPONENTS:
- -----------------------------------------
1. General Corporate Financial Objectives (60%) - Incentive compensation
payment is subject to the achievement of the Company's overall financial
objectives as defined by the 1999 Plan as approved by the Board of
Directors. Should the Company not achieve these financial objectives,
incentive compensation will be subjectively determined based upon your
performance against your objectives and the Company's determination as to
available incentive compensation funding.
A. Achieve [*] QRS Revenue (30%) - Paid at year end on a prorata
basis from a minimum of 80% of plan and linearly thereafter with
results to 100% of plan. There is no payment below 50% attainment, and
payments accelerate proportionately with results over plan paid at
125% on achievement of 105% of plan and paid at 150% on achievement of
110% of plan. There is a maximum payout of $100,000 on this incentive.
B. Achieve [*] QRS Net Income (30%) - Paid at year end on a prorata
basis from a minimum of 80% of plan and linearly thereafter with
results to 100% of plan. There is no payment below 50% attainment, and
payments accelerate proportionately with results over plan paid at
125% on achievement of 105% of plan and paid at 150% on achievement of
110% of plan. There is a maximum payout of $100,000 on this incentive.
2. Personal Strategies and Objectives (40%) - Incentive compensation payment
is subject to fulfillment of your responsibilities as Chief Executive
Officer. While specific objectives particular to the Company's objectives
for 1999 are identified to measure your performance for incentive
compensation, such measurements assume the overall performance of you and
your direct reporting organization in the achievement of departmental
responsibilities, service levels and the support of overall Company
objectives.
A. Ensure the development and successful implementation of new sources of
recurring revenue [*] (10%) - Paid at year end based on an
assessment of your success at achieving new, incremental sources of
recurring revenue that average [*] per month [*].
[*]. Ensure the success, [*], of small product lines (10%) - Paid at
year end based on an assessment of your success at either
developing and implementing strategies that ensure high growth and
accceptable margins for small product lines [*].
* Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406.
<PAGE>
C. Ensure company congruance with QRS values, mission, and management
process (10%) - Paid at year end based on an assessment of your
success at ensuring effective associate, management, executive, and
Board congruance with, commitment to, and appropriate growth of these
components of the QRS culture and process, including the effective
integration of QRS values, mission, and management process of any
acquired companies, organizations, or personnel.
D. Ensure the timely development and implementation of long term
strategic initiatives (10%) - Paid at year end based on an assessment
of your success at managing the planning and activities related to
Long Term strategic initiatives presented to and approved by the
Board, including but not limited to extending the retail industry
solutions of QRS, electronic commerce and E-retailing solutions, and
strategic mergers and acquisitions.
Your incentive plan will be part of the overall 1999 QRS incentive compensation
plan. As Chief Executive Officer you will be expected to participate as an
Executive Host at portions of the 1999 Presidents Club for high performance
associates.
LONG TERM INCENTIVES
- --------------------
Non-qualified options to purchase an additional 40,000 shares of common stock in
QRS at a price of $26.13 have been granted to you as of October 16, 1998 by the
Board of Directors. These options vest over four years and are subject to the
terms of the Company's 1993 Stock Option/Stock Issuance Plan, a copy of which is
available for your review.
In addition, the Compensation Committee of the Board recognizes that, under the
exercise schedule of your December 24, 1997 performance stock option grant of
50,000 shares, 1998 performance fufilled the first year requirement for
accelerated full vesting of these options and, should 1999 performance fulfill
the second year requirement as well, these options shall accelerate and become
immediately exercisable for all shares.
BENEFITS
- --------
In addition to the benefits available to all QRS associates as defined in the
Employee Handbook, as President and COO you are provided with additional
benefits as follows:
- - Life Insurance - The company shall purchase and maintain in effect
additional term life insurance for you with a death benefit of
$1,000,000.00 with beneficiary to be designated by yourself. You will have
the option of continuing this additional term life insurance coverage at
your own expense in the event of the termination of your employment. This
additional insurance benefit is taxable and will be reported for tax
purposes as additional income to you.
- - Disability Insurance - The company shall purchase and maintain in effect
additional disability insurance sufficient to provide you with an income
equal to 66% of your targeted annual compensation while you are disabled
and unable to perform the duties of your current employment with QRS. You
will have the option of continuing this additional disability insurance
coverage at your own expense in the event of the termination of your
employment. This additional insurance benefit is taxable and will be
reported for tax purposes as additional income to you.
- - Liability Insurance - The company shall purchase and maintain in effect
sufficient Officer's liability insurance to provide you with reasonable
coverage, including the provision of legal counsel and/or reimbursement of
appropriate legal fees you pay personally, against all liability claims and
judgements arising from your legal exercise of your duties as an Officer of
QRS, including any actions filed after you cease your duties as an Officer
or in the event of the termination of your employment. The Company shall
also provide in its bylaws full indemnification for the QRS officers to the
maximum extent permissible under Delaware law.
TERMINATION AND SEVERENCE
- -------------------------
This position is for no set period or term and just as you have the right to
resign your position, at any time, for any reason, QRS reserves the right to
terminate your employment, at any time, with or without cause, with or without
notice.
In the event your employment is terminated without cause, you will become
entitled to twelve (12) months of severance pay equal in the aggregate to your
targeted total annual compensation and benefits at the level in effect at the
time of your termination. Your severance payments will be made in accordance
with the Company's standard payroll practices for current employees and will be
subject to the Company's collection of all applicable withholding taxes.
<PAGE>
For purposes of this agreement, termination "for cause" shall mean a termination
of your employment for any of the following reasons: (1) your failure to
substantially perform the material duties of your position with the Company
after a written demand for substantial performance is delivered to you by the
Company which specifically identifies the manner in which you have not
substantially performed those duties and which provides a reasonable period for
you to cure those deficiencies; (2) a material breach by you of your obligations
under any confidential or proprietary information agreements with the Company or
of any of your fiduciary obligations as an officer of the Company, (3) your
failure to follow in a material respect the reasonable policies or directives
established on an employee-wide basis by the Company, after written notice to
you indicating the policies or directives with which you are not in material
compliance, (4) any willful misconduct on your part having a material
detrimental effect on the Company or (5) any unauthorized activity on your part
which creates a material conflict of interest between you and the Company after
you have been provided with a reasonable opportunity to refrain from that
activity.
CHANGE OF CONTROL BENEFITS
- --------------------------
A. Should there occur a Corporate Transaction or a Change in Control (as
those terms are defined in the Company's 1993 Stock Option/Stock
Issuance Plan) and either (i) your employment is subsequently
terminated without cause or (ii) you subsequently resign by reason of
a material change in your base compensation, your targeted annual
incentive compensation, your annual total target compensation, or your
benefits (for this purpose, 15% will be deemed a material reduction),
a material reduction in your duties or responsibilities, or a change
in your principal place of employment by more than 50 miles, then you
will be entitled to twelve (12) months of severance pay equal in the
aggregate to your targeted total annual compensation and benefits at
the level in effect at the time of your termination or resignation or
(if greater) at the level in effect immediately prior to the Corporate
Transaction or Change in Control. Your severance payments will be made
in accordance with the Company's standard payroll practices for
current employees and will be subject to the Company's collection of
all applicable withholding taxes.
B. This Paragraph B incorporates the special acceleration provisions of
the Company's 1993 Stock Option/Stock Issuance Plan and accordingly
applies to any and all options which you hold under the 1993 Plan at
the time of a Corporate Transaction or Change in Control, including
all options you currently hold and any options subsequently granted to
you under the 1993 Plan. To extent any of those options are not to be
assumed by the successor entity (or parent company) in the Corporate
Transaction or otherwise continued in effect following the Change in
Control or are not replaced with a cash incentive program which
preserves the spread existing at the time of such Corporate
Transaction or Change in Control on any shares for which your options
are not otherwise at that time exercisable (the excess of the fair
market value of those shares over the exercise price), then those
options shall, immediately prior to the specified effective date for
the Corporate Transaction or Change in Control, become exercisable for
all the shares at the time subject to those options and may be
exercised for all or any portion of those shares as fully vested
shares. The acceleration of your options pursuant to this Paragraph B
will not be subject to the limitation of Paragraph C below, even if
the options which are not to be assumed or continued in effect or
otherwise replaced with a cash incentive program were granted on or
after December 24, 1997.
C. This Paragraph C applies only to options granted to you under the
Company's 1993 Stock Option/Stock Issuance Plan on or after December
24, 1997. In the event of a Corporate Transaction or Change in Control
during your period of employment with the Company, all of your post
December 23, 1997 options will, immediately prior to the specified
effective date for the Corporate Transaction or Change in Control,
become exercisable for all the shares at the time subject to those
options, whether or not those options are to be assumed or replaced
with a cash incentive program, and those accelerated options may be
exercised for all or any portion of the option shares as fully vested
shares. Such acceleration of your post December 23, 1997 options will,
however, be limited to the extent (and only to the extent) necessary
to assure that the option parachute payment attributable to the
accelerated vesting of those options would not constitute an excess
parachute payment under Internal Revenue Code Section 280G(b).
D. To the extent one or more of your options do not accelerate upon a
Corporate Transaction or Change in Control by reason of the provisions
of Paragraph B or the limitation of Paragraph C above, those options
will continue to become exercisable in accordance with the original
exercise schedule indicated in the respective grant notices for those
options. However, should either (i) your employment be subsequently
terminated without cause or (ii) you subsequently resign by reason of
a material change in your base compensation, your targeted annual
incentive compensation, your annual total target compensation, or your
benefits (for this purpose, 15% will be deemed a material reduction),
a material reduction in your duties or responsibilities, or a change
in your principal place of employment by more than 50 miles, within
twenty four (24) months following such Corporate Transaction or Change
in Control, then each of your post December 23, 1997 options, to the
extent outstanding at that time but not
<PAGE>
otherwise fully exercisable, shall automatically accelerate and become
immediately exercisable for all the option shares and may be exercised
for any or all of those shares as fully vested shares at any time
prior to the expiration or sooner termination of the option term. Your
pre-December 24, 1997 options will not be subject to acceleration upon
such an involuntary termination or resignation.
E. Any of your options (whether granted before or after December 23,
1997) which are assumed by the successor entity (or parent company) in
the Corporate Transaction or are otherwise continue in effect
following the Change in Control transaction shall be appropriately
adjusted to apply and pertain to the number and class of securities
which would have been issued to you in the consummation of such
Corporate Transaction or Change in Control had the options been
exercised immediately prior to such event. Appropriate adjustments
shall also be made to the option prices payable per share, provided
the aggregate option prices payable shall remain the same.
Thank you for a great year in 1998. I look forward to continuing to work with
you in 1999.
Sincerely,
Peter R. Johnson
Chairman of the Board
cc: Garth Saloner, Chairman, Compensation Committee of the Board of Directors
To accept this sign and date below and return to me prior to February 19, 1999.
<PAGE>
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
EXHIBIT 10.48
EMPLOYMENT AGREEMENT BETWEEN REGISTRANT AND SHAWN O'CONNOR
March 8, 1999
Mr. Shawn M. O'Connor
1010 Dunhill Court
Danville, CA 94506
Dear Shawn,
Following the close of our 1998 business, the development of our 1999 plan, and
our recent discussions, it is with pleasure that I confirm our verbal offer for
your continued employment with QRS Corporation. The following summarizes our
offer:
POSITION:
- ---------
President and Chief Operating Officer
You will have an overall corporate perspective and responsibility as President
and COO. You will attend Board of Directors meetings at the invitation of the
Board. You will have direct responsibility for the following functions:
- - Customer Support
- - Product Development and Data Center Operations
- - Research and Architecture
- - Finance and Administration
- - Human Resources
REPORTING TO:
- -------------
Chief Executive Officer
KEY OBJECTIVES:
- ---------------
As a key executive of QRS, your focus in 1999 should be on successfully
addressing the critical issues facing QRS:
- - Increase revenue growth rate to exceed 30%
- - Significantly reduce product time to market
- - Improve product profitability and gross margins
- - Ensure high quality and timely service
- - Achieve Y2K readiness
- - Hire, retain and provide growth opportunities for employees
Furthermore, as a key executive of QRS you should ensure continued focus on the
long-term mission of QRS:
- - We are The leader in network-centric, inter-enterprise electronic commerce
solutions that materially improve our customers' performance.
- - We serve the global consumer goods demand chain.
- - We exceed customer expectations for service quality.
- - We are recognized as THE place to work by our employees.
- - We provide superior returns to our shareholders.
Finally, as a key executive of QRS you also have as continuing, significant
responsibility the development and maintenance of an environment at QRS that
fosters and emulates the tenants of QRS's core values among its associates.
ANNUAL COMPENSATION:
- --------------------
Your annual compensation will be administered by me and reviewed by the Chairman
and the Compensation Committee of the Board of Directors.
- - Your base compensation will be $225,000 per year.
<PAGE>
- - In addition, your targeted annual incentive compensation will be $145,000
or approximately 64% of your base compensation.
- - Therefore, the annual total target compensation (base plus incentive at
100%) shall be $370,000.
Your compensation, including incentives, will be reviewed in the first quarter
of each year (unless there is a change in objectives, location, etc. in which
case it will be reviewed at that time), to ensure that it continues to be
equitable, appropriate to the location, and provide appropriate incentives and
support to the agreed objectives.
ANNUAL INCENTIVE COMPENSATION COMPONENTS:
- -----------------------------------------
1. General Corporate Financial Objectives (60%) - Incentive compensation
payment is subject to the achievement of the Company's overall financial
objectives as defined by the 1999 Plan as approved by the Board of
Directors. Should the Company not achieve these financial objectives,
incentive compensation will be subjectively determined based upon your
performance against your objectives and the Company's determination as to
available incentive compensation funding.
C. Achieve [*] QRS Revenue (30%) - Paid at year end on a prorata basis
from a minimum of 80% of plan and linearly thereafter with results to
100% of plan. There is no payment below 50% attainment, and payments
accelerate proportionately with results over plan paid at 125% on
achievement of 105% of plan and paid at 150% on achievement of 110% of
plan. There is a maximum payout of $100,000 on this incentive.
D. Achieve [*] QRS Net Income (30%) - Paid at year end on a prorata
basis from a minimum of 80% of plan and linearly thereafter with
results to 100% of plan. There is no payment below 50% attainment, and
payments accelerate proportionately with results over plan paid at
125% on achievement of 105% of plan and paid at 150% on achievement of
110% of plan. There is a maximum payout of $100,000 on this incentive.
2. Personal Strategies and Objectives (40%) - Incentive compensation payment
is subject to fulfillment of your responsibilities as President and Chief
Operating Officer. While specific objectives particular to the Company's
objectives for 1999 are identified to measure your performance for
incentive compensation, such measurements assume the overall performance of
you and your direct reporting organization in the achievement of
departmental responsibilities, service levels and the support of overall
Company objectives.
E. Ensure an efficient and timely development process (10%) - Paid at
year end based on an assessment of your success at delivering QRS
products for sales and marketing with a dramatically faster
development cycle while maintaining high quality standards and
ensuring efficient use of development resources.
F. Ensure achievment of targeted service levels and Y2K readiness (10%) -
Paid at year end based on an assessment of your success at achieving
high targeted service levels across all QRS products and services.
This service level measurement should be both internal and customer
survey based. Timely compliance with year 2000 date issues is a key
component of the 1999 service level objectives.
* Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406.
<PAGE>
G. Ensure an efficient and integrated Human Resources department plan
(10%) - Paid at year end based on an assessment of your success at
managing a substantive improvement to the HR services at QRS,
including timely and efficient recruitment, identification and
retention of key employees, productive and motivating compensation and
benefit plans, training that develops critical skills for QRS success
and simple and efficient HR administration.
H. Ensure the timely development and implementation of long term
strategic initiatives (10%) - Paid at year end based on an assessment
of your success at managing the planning and activities related to
Long Term strategic initiatives presented to and approved by the
Board, including but not limited to IBM, capital structure and
investment banking improvements, and strategic mergers and
acquisitions.
Your incentive plan will be part of the overall 1999 QRS incentive compensation
plan. One of your duties as President and COO will be to manage and host the
1999 Presidents Club for high performance associates.
LONG TERM INCENTIVES
- --------------------
Non-qualified options to purchase an additional 40,000 shares of common stock in
QRS at a price of $26.13 have been granted to you as of October 16, 1998 by the
Board of Directors. These options vest over four years and are subject to the
terms of the Company's 1993 Stock Option/Stock Issuance Plan, a copy of which is
available for your review.
In addition, the Compensation Committee of the Board recognizes that, under the
exercise schedule of your December 24, 1997 performance stock option grant of
50,000 shares, 1998 performance fufilled the first year requirement for
accelerated full vesting of these options and, should 1999 performance fulfill
the second year requirement as well, these options shall accelerate and become
immediately exercisable for all shares.
BENEFITS
- --------
In addition to the benefits available to all QRS associates as defined in the
Employee Handbook, as President and COO you are provided with additional
benefits as follows:
- - Life Insurance - The company shall purchase and maintain in effect
additional term life insurance for you with a death benefit of
$1,000,000.00 with beneficiary to be designated by yourself. You will have
the option of continuing this additional term life insurance coverage at
your own expense in the event of the termination of your employment. This
additional insurance benefit is taxable and will be reported for tax
purposes as additional income to you.
- - Disability Insurance - The company shall purchase and maintain in effect
additional disability insurance sufficient to provide you with an income
equal to 66% of your targeted annual compensation while you are disabled
and unable to perform the duties of your current employment with QRS. You
will have the option of continuing this additional disability insurance
coverage at your own expense in the event of the termination of your
employment. This additional insurance benefit is taxable and will be
reported for tax purposes as additional income to you.
- - Liability Insurance - The company shall purchase and maintain in effect
sufficient Officer's liability insurance to provide you with reasonable
coverage, including the provision of legal counsel and/or reimbursement of
appropriate legal fees you pay personally, against all liability claims and
judgements arising from your legal exercise of your duties as an Officer of
QRS, including any actions filed after you cease your duties as an Officer
or in the event of the termination of your employment. The Company shall
also provide in its bylaws full indemnification for the QRS officers to the
maximum extent permissible under Delaware law.
<PAGE>
TERMINATION AND SEVERENCE
- -------------------------
This position is for no set period or term and just as you have the right to
resign your position, at any time, for any reason, QRS reserves the right to
terminate your employment, at any time, with or without cause, with or without
notice.
In the event your employment is terminated without cause, you will become
entitled to twelve (12) months of severance pay equal in the aggregate to your
targeted total annual compensation and benefits at the level in effect at the
time of your termination. Your severance payments will be made in accordance
with the Company's standard payroll practices for current employees and will be
subject to the Company's collection of all applicable withholding taxes.
For purposes of this agreement, termination "for cause" shall mean a termination
of your employment for any of the following reasons: (1) your failure to
substantially perform the material duties of your position with the Company
after a written demand for substantial performance is delivered to you by the
Company which specifically identifies the manner in which you have not
substantially performed those duties and which provides a reasonable period for
you to cure those deficiencies; (2) a material breach by you of your obligations
under any confidential or proprietary information agreements with the Company or
of any of your fiduciary obligations as an officer of the Company, (3) your
failure to follow in a material respect the reasonable policies or directives
established on an employee-wide basis by the Company, after written notice to
you indicating the policies or directives with which you are not in material
compliance, (4) any willful misconduct on your part having a material
detrimental effect on the Company or (5) any unauthorized activity on your part
which creates a material conflict of interest between you and the Company after
you have been provided with a reasonable opportunity to refrain from that
activity.
CHANGE OF CONTROL BENEFITS
- --------------------------
A. Should there occur a Corporate Transaction or a Change in Control (as
those terms are defined in the Company's 1993 Stock Option/Stock
Issuance Plan) and either (i) your employment is subsequently
terminated without cause or (ii) you subsequently resign by reason of
a material change in your base compensation, your targeted annual
incentive compensation, your annual total target compensation, or your
benefits (for this purpose, 15% will be deemed a material reduction),
a material reduction in your duties or responsibilities, or a change
in your principal place of employment by more than 50 miles, then you
will be entitled to twelve (12) months of severance pay equal in the
aggregate to your targeted total annual compensation and benefits at
the level in effect at the time of your termination or resignation or
(if greater) at the level in effect immediately prior to the Corporate
Transaction or Change in Control. Your severance payments will be made
in accordance with the Company's standard payroll practices for
current employees and will be subject to the Company's collection of
all applicable withholding taxes.
B. This Paragraph B incorporates the special acceleration provisions of
the Company's 1993 Stock Option/Stock Issuance Plan and accordingly
applies to any and all options which you hold under the 1993 Plan at
the time of a Corporate Transaction or Change in Control, including
all options you currently hold and any options subsequently granted to
you under the 1993 Plan. To extent any of those options are not to be
assumed by the successor entity (or parent company) in the Corporate
Transaction or otherwise continued in effect following the Change in
Control or are not replaced with a cash incentive program which
preserves the spread existing at the time of such Corporate
Transaction or Change in Control on any shares for which your options
are not otherwise at that time exercisable (the excess of the fair
market value of those shares over the exercise price), then those
options shall, immediately prior to the specified effective date for
the Corporate Transaction or Change in Control, become exercisable for
all the shares at the time subject to those options and may be
exercised for all or any portion of those shares as fully vested
shares. The acceleration of your options pursuant to this Paragraph B
will not be subject to the limitation of Paragraph C below, even if
the options which are not to be assumed or continued in effect or
otherwise replaced with a cash incentive program were granted on or
after December 24, 1997.
C. This Paragraph C applies only to options granted to you under the
Company's 1993 Stock Option/Stock Issuance Plan on or after December
24, 1997. In the event of a Corporate Transaction or Change in Control
during your period of employment with the Company, all of your post
December 23, 1997 options will, immediately prior to the specified
effective date for the Corporate Transaction or Change in Control,
become exercisable for all the shares at the time subject to those
options, whether or not those options are to be assumed or replaced
with a cash incentive program, and those accelerated options may be
exercised for all or any portion of the option shares as fully vested
shares. Such acceleration of your post December 23, 1997 options will,
however, be limited to the extent (and only to the
<PAGE>
extent) necessary to assure that the option parachute payment
attributable to the accelerated vesting of those options would not
constitute an excess parachute payment under Internal Revenue Code
Section 280G(b).
D. To the extent one or more of your options do not accelerate upon a
Corporate Transaction or Change in Control by reason of the provisions
of Paragraph B or the limitation of Paragraph C above, those options
will continue to become exercisable in accordance with the original
exercise schedule indicated in the respective grant notices for those
options. However, should either (i) your employment be subsequently
terminated without cause or (ii) you subsequently resign by reason of
a material change in your base compensation, your targeted annual
incentive compensation, your annual total target compensation, or your
benefits (for this purpose, 15% will be deemed a material reduction),
a material reduction in your duties or responsibilities, or a change
in your principal place of employment by more than 50 miles, within
twenty four (24) months following such Corporate Transaction or Change
in Control, then each of your post December 23, 1997 options, to the
extent outstanding at that time but not otherwise fully exercisable,
shall automatically accelerate and become immediately exercisable for
all the option shares and may be exercised for any or all of those
shares as fully vested shares at any time prior to the expiration or
sooner termination of the option term. Your pre-December 24, 1997
options will not be subject to acceleration upon such an involuntary
termination or resignation.
E. Any of your options (whether granted before or after December 23,
1997) which are assumed by the successor entity (or parent company) in
the Corporate Transaction or are otherwise continue in effect
following the Change in Control transaction shall be appropriately
adjusted to apply and pertain to the number and class of securities
which would have been issued to you in the consummation of such
Corporate Transaction or Change in Control had the options been
exercised immediately prior to such event. Appropriate adjustments
shall also be made to the option prices payable per share, provided
the aggregate option prices payable shall remain the same.
Thank you for a great year in 1998. I look forward to continuing to work with
you in 1999.
Sincerely,
John S. Simon
Chief Executive Officer
cc: Peter Johnson, Chairman of the Board
Garth Saloner, Chairman, Compensation Committee of the Board of Directors
To accept this sign and date below and return to me prior to February 19, 1999.
I accept this ongoing position with QRS on these terms and conditions on the
terms above, and understand and agree that it supercedes any other agreeement,
written or oral, I may have with QRS and/or John Simon with respect employment
or compensation by QRS including salary, incentive, options, termination and
severance.
- ------------------- --------------------, 1999
Shawn M. O'Connor
<PAGE>
EXHIBIT 10.49
FIFTH AMENDMENT TO LEASE
This Fifth Amendment to Lease ("Amendment") is made and entered into as
of November 20,1998 by and between MARINA WESTSHORE PARTNERS, LLC a California
limited liability company ("Landlord") and QRS CORPORATION, a Delaware
corporation ("Tenant").
RECITALS
A. Landlord's predecessor in interest and Tenant's predecessor in
interest entered into that certain lease captioned "Marina Bay Business Park
Phase I Office Lease" dated April 27, 1990, which lease has been amended by
that certain First Amendment of Lease dated July 1, 1992, that certain Second
Amendment to Lease dated August 20, 1993, that certain Third Amendment to
Lease dated as of October 8, 1993, and that certain Fourth Amendment to Lease
dated as of August 7, 1997, as amended (the "Lease").
B. Concurrent with the execution of this Fifth Amendment, Tenant and
Landlord's affiliate,, Marina Bay Partners, LLC ("MBP") are entering into a
lease (the "Phase II Lease") pursuant to which MBP will construct additional
premises for Tenant in a new building (the "New Building") on property
immediately adjacent to the property on which Building A is located.
C. Tenant desires to have the right to have Landlord construct a
connecting corridor between the New Building and Building A to facilitate access
of
<PAGE>
Tenant and Tenant's employees between the Premises and Tenant's premises in the
New Building, and Landlord is willing to construct such corridor, on the terms
and conditions described below.
NOW, THEREFORE, for mutual consideration, the receipt and adequacy of
which is hereby acknowledged, Landlord and Tenant hereby amend the Lease as
follows:
1. Provided Tenant, in its sole discretion, has approved the Costs of
Work (as defined in EXHIBIT B attached hereto, concurrent with MBP commencing
construction of the New Building, Landlord shall commence construction of and
diligently complete a connecting corridor between Building A and the New
Building, and related improvements, including an outdoor patio and landscaping.
The Costs of Work shall be born by Landlord and Tenant in the manner provided in
said EXHIBIT B, which, among other things, provides that Landlord shall provide
Tenant an allowance for such Costs in the amount of $100 per square foot of
Rentable Area of the connecting corridor (the "TI Allowance"). Such connecting
corridor shall be approximately 1,500 square feet, shall be located
substantially as shown on the diagram attached to this Fifth Amendment
as EXHIBIT A, shall be constructed in accordance with plans approved by Tenant
pursuant to EXHIBIT B attached hereto, and the improvements with respect thereto
shall include an outdoor patio and landscaping to be constructed and installed
in accordance with said approved plans. Notwithstanding the foregoing, Landlord
has not represented to Tenant that the City of Richmond will approve the
construction of the
2
<PAGE>
connecting corridor, and Landlord shall not be obligated to construct the
connecting corridor unless Landlord obtains all necessary approvals therefor
from the City of Richmond. Landlord agrees to exercise due diligence and
commercially reasonable efforts to obtain such approvals from the City of
Richmond. Tenant confirms that the Phase II Lease is not contingent upon
Landlord's success in obtaining such approvals.
2. Upon completion of the Connecting Corridor (as defined in EXHIBIT B
attached hereto), Landlord shall cause its Architect to determine the Rentable
Area of the Connecting Corridor in accordance with BOMA standards. If Tenant
wishes to verify Landlord's determination of the Rentable Area of the Connecting
Corridor, then within thirty (30) days of Tenant's receipt of the determination
by Landlord's architect of the Rentable Area of the Connecting Corridor, Tenant
shall have the right to cause an independent architect to verify Landlord's
determination. If Tenant's determination of the Rentable Area the Connecting
Corridor differs from Landlord's, the dispute shall be resolved by an
independent architect jointly selected by Landlord's architect and Tenant's
architect. The Rentable Area of the Connecting Corridor shall be added to the
63,360 square feet of Rentable Area of the Premises, and the Fixed Rent shall be
increased to reflect such Rentable Area of the Connecting Corridor, based on the
Fixed Rent in effect for the Premises. The Fixed Rent shall be so adjusted and
payable commencing on the Commencement Date (as defined in the Phase II Lease)
for Tenant's payment of Fixed Rent Under the Phase II Lease, and upon such
date, the Connecting Corridor shall become a part of the
3
<PAGE>
Premises, and Tenant's Share of Operating Expenses shall be adjusted to include
the Rentable Area of the Connecting Corridor as provided in the Lease. At that
time, Landlord and Tenant shall jointly sign a letter confirming the total
Rentable Area of the Premises, the adjusted Fixed Rent, the Fixed Rent that will
become payable on July 1, 2000 and thereafter through the remainder of the Term,
and Tenant's Share of Operating Expenses.
3. Paragraph 3 of the Fourth Amendment to Lease provides as follows:
"Notwithstanding the provisions of Article Five of the Lease, for each
12-month period commencing September 1, 1997 through August 31, 2002, Tenant's
obligation to pay Operating Expenses shall not exceed $75,000. If for any of
said five 12-month periods the share of Operating Expenses allocated to Tenant;
based on 49.9% of Operating Expenses, exceeds $75,000, the amount in excess
shall accrue and the aggregate excess amounts shall be payable by Tenant to
Landlord as Additional Charges in 36 equal monthly payments commencing June 1,
2007."
It is agreed that the foregoing limitation on Tenant's payment of
Operating Expenses shall not apply as to the Connecting Corridor portion of the
Premises.
4. This Amendment may be executed in several counterparts, each of
which shall be deemed an original, but all of which shall constitute one and the
same document.
5. All terms defined in the Lease shall have the same meaning when used
in this Amendment, unless otherwise defined in this Amendment.
6. This Amendment shall be effective as of the date of this Amendment
and, except as amended herein, the Lease shall remain in full force and effect.
IN WITNESS WHEREOF the parties have executed this Amendment as of the
day and year first above written.
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QRS CORPORATION,
a Delaware corporation
By: /s/ Peter Papano
------------------------------
Name: Peter Panano
----------------------------
Its: VP FINANCE
----------------------------
MARINA WESTSHORE PARTNERS,
LLC, a California limited
liability company
By /s/ Richard R. Poe
-------------------------------
Richard R. Poe
Its Manager
5
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EXHIBIT A
DIAGRAM OF CONNECTING CORRIDOR
6
<PAGE>
EXHIBIT B
CONNECTING CORRIDOR IMPROVEMENTS
This Work Letter is incorporated into and made a part of that certain Fifth
Amendment to Lease between Marina Westshore Partners, LLC and QRS Corporation.
All initial-capitalized terms used in this Work Letter and not otherwise defined
herein shall have the meanings ascribed to them elsewhere in the Lease.
ARTICLE 1
GENERAL PROVISIONS
1.1 CONNECTING CORRIDOR. Landlord and Tenant shall plan and design,
and Landlord shall construct certain improvements (the "Connecting Corridor") in
accordance with the provisions of this Work Letter and the Fifth Amendment to
Lease of which this Exhibit B is a part.
1.2 CORRIDOR WORK. The planning, design and construction of the
Connecting Corridor, including the related outdoor patio area and landscaping
are referred to collectively as "Corridor Work."
1.3 COSTS OF THE WORK. For purposes of this Work Letter, "Costs of the
Work" shall mean and include all: (a) architect's, engineer's and consultants'
fees and costs; (b) deposits, fees and costs for building and other permits,
licenses and approvals; (c) tests and inspections; (d) security; (e) insurance
and bond premiums; (f) utilities; (g) all amounts payable to any contractors,
subcontractors, suppliers and vendors; and (h) all other charges, fees, expenses
and other costs incurred or arising in connection with the Corridor Work.
1.4 CONSTRUCTION STANDARDS. The Connecting Corridor shall be
constructed by Landlord in a good and workmanlike manner, free from defects in
workmanship and materials and in accordance with all applicable laws, including
without limitation, the Americans with Disabilities Act.
ARTICLE 2
IMPROVEMENT PLANS
2.1 PLANS FOR CONNECTING CORRIDOR. Landlord agrees to perform the
Corridor Work in accordance with drawings, specifications and other plans
necessary for the development, approval and construction of the Connecting
Corridor (collectively, the "Plans") reasonably approved by Landlord and Tenant.
The Plans shall be prepared by TSH Architects, or another architectural firm
selected by Landlord and reasonably approved by Tenant (the "Architect"). From
time to time as reasonably requested by Landlord or the Architect, Tenant shall
meet with the Architect to provide Architect sufficient information to enable
Architect to prepare preliminary plans for review and approval by Landlord and
Tenant, which approval shall not be
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unreasonably withheld. Upon approval of the preliminary plans, Tenant shall
again from time to time, as reasonably requested by Landlord or Architect meet
with the Architect to provide Architect sufficient information to enable
Architect to prepare the final plans and specifications for review and approval
by Landlord and Tenant, which approval shall not be unreasonably withheld. Each
of Landlord and Tenant shall within 15 days of receipt of the preliminary plans
or the Plans (as the case may be), approve or disapprove the Plans. In the event
of disapproval, the disapproving party shall state its reasons for disapproval
and the parties thereafter shall work together in good faith to reach prompt
agreement upon modifications to such plans.
ARTICLE 3
CONSTRUCTION OF CORRIDOR
3.1 SELECTION OF GENERAL CONTRACTOR. Landlord shall employ a general
contractor to perform the construction of the Corridor Work. Landlord shall
obtain bids from two or more general contractors selected by Landlord. Such
contractors shall be subject to the approval of Tenant prior to the bid process,
which approval shall not be unreasonably withheld; provided however that Tenant
hereby agrees that the general contractor hired by Landlord's affiliate Marina
Bay Partners to construct the New Building adjacent to the Premises shall be
deemed acceptable to Tenant as a general contractor who may bid the Corridor
Work. Such Work shall be bid on a maximum guaranteed amount basis, and
Landlord shall select the general contractor that submits the lowest bid (or
Landlord's general contractor if it is not the low bidder, but agrees to perform
the Work for the amount of the lowest bid).
3.2. PAYMENT FOR COSTS OF THE WORK. Upon selection of the general
contractor and approval by Tenant, in its sole discretion, of the Costs of the
Work, prior to commencement of the construction of the Connecting Corridor,
Tenant shall advance to Landlord 50% of the amount of the Costs of the Work, if
any, in excess of the TI Allowance (which is $100.00 per square foot of Rentable
Area of the Connecting Corridor, which Rentable Area shall exclude the outdoor
patio). If the initial estimate of the Costs of the Work exceeds the TI
Allowance, Tenant may request changes to the Plans to reduce the Costs of the
Work. Such changes to the Plans shall be made at Tenant"s sole cost and expense.
If notwithstanding such changes, the Costs of the Work still exceeds the TI
Allowance and Tenant in its sole discretion elects to have Landlord proceed with
construction of the Connecting Corridor, Tenant shall advance 50% of the Costs
of the Work in excess of the TI Allowance. The funds so advanced to Landlord
shall be held in trust by Landlord and used solely to construct the Connecting
Corridor.
3.3 CHANGE ORDERS. Tenant shall be responsible, subject to initial
exhaustion of the TI Allowance, for all costs relating to changes in the
Corridor Work that arise
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from changes in the Plans after commencement of construction that are requested
by Tenant, and 50% of the costs relating to changes in the Corridor Work that
arise from changes in the Plans after commencement of construction not
requested by Tenant, including without limitation, changes required by the (City
of Richmond. Any such changes in the Corridor Work arising from changes in the
Plans shall be submitted by the general contractor to both Landlord and Tenant
for their prompt approval, which shall not be unreasonably withheld, and the
costs for such changes shall be set forth in written change orders approved by
Tenant and signed by Landlord. Concurrent with Tenant's approval of each change
order, Tenant shall advance to Landlord the additional costs (if any) set
forth therein for which Tenant is responsible hereunder. The funds so advanced
to Landlord shall be held in trust by Landlord and used solely to construct
the Connecting Corridor.
<PAGE>
EXHIBIT 10.50
MARINA BAY BUSINESS PARK
OFFICE LEASE
By and Between
MARINA WESTSHORE PARTNERS, LLC
a California limited liability company
and
QRS CORPORATION
a Delaware corporation
Dated as of May 15, 1998
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TABLE OF CONTENTS
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Section 1. DEFINITIONS..................................................... 1
1.1 Buildings....................................................... 1
1.2 Common Area..................................................... 1
1.3 Environmental Law............................................... 1
1.4 Expiration Date................................................. 1
1.5 Hazardous Material.............................................. 1
1.6 Interest Rate................................................... 2
1.7 Lease Year...................................................... 2
1.8 Operating Expenses.............................................. 2
1.9 Permitted Use................................................... 3
1.10 Premises........................................................ 3
1.11 Property........................................................ 3
1.12 Real Property Taxes............................................. 3
1.13 Rentable Area................................................... 4
1.14 Tenant Improvements............................................. 4
1.15 Tenant's Share.................................................. 4
1.16 Term............................................................ 4
Section 2. LEASE OF PREMISES............................................... 4
2.1 Premises........................................................ 4
2.2 Landlord's Reserved Rights...................................... 4
2.3 No Representations or Warrants.................................. 4
Section 3. TERM............................................................ 5
3.1 Initial Term.................................................... 5
Section 4. RENT: ADDITIONAL CHARGES........................................ 5
4.1 Fixed Monthly Rent and Additional Charges....................... 5
4.2 Net Lease....................................................... 5
Section 5. PAYMENT OF OPERATING EXPENSES................................... 5
5.1 Payment By Tenant............................................... 5
5.2 Manner of Payment............................................... 5
5.3 Adjustments to Operating Expenses............................... 6
5.4 Tenant's Inspection and Audit Rights............................ 6
Section 6. TAXES PAYABLE BY TENANT......................................... 6
Section 7. CONDITION AND OPERATION OF THE BUILDING......................... 7
7.1 As Is........................................................... 7
7.2 Security........................................................ 7
Section 8. USE AND COMPLIANCE WITH LAWS.................................... 7
8.1 Use of Premises................................................. 7
8.2 No Nuisance..................................................... 7
8.3 Compliance with Laws and Insurance Requirement.................. 7
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8.4 Hazardous Materials............................................. 7
(a) Prohibition on Use of Hazardous Materials................... 7
(b) Permitted Hazardous Materials............................... 8
(c) Compliance with Environmental Laws.......................... 8
(d) Routine Monitoring.......................................... 8
(e) Notice to Landlord.......................................... 9
(f) Landlord's Right to Participate............................ 9
(g) Tenant's Indemnity.......................................... 9
(h) Remedial Work............................................... 10
Section 9. ALTERATIONS, TENANT'S PROPERTY, TENANTS WORK AND LIENS.......... 10
9.1 Alterations by Tenant........................................... 10
9.2 Title to Alterations............................................ 10
9.3 Liens........................................................... 10
Section 10. REPAIRS AND MAINTENANCE......................................... 11
10.1 Landlord's Obligations.......................................... 11
10.2 Tenant's Obligations............................................ 11
Section 11. UTILITIES....................................................... 11
11.1 Utilities....................................................... 11
11.2 Interruption.................................................... 11
Section 12. DAMAGE OR DESTRUCTION............................................ 12
12.1 Loss Covered by Insurance....................................... 12
(a) Repairs Which Can Be Completed Within Four (4) Months....... 12
(b) Repairs Which Cannot Be Completed Within Four (4) Months.... 12
12.2 Loss Not Covered by Insurance................................... 13
12.3 Destruction During Final Year................................... 13
12.4 Destruction of Tenant's Personal Property, Tenant Improvements
or Property of Tenant's Employees............................... 13
Section 15. INSURANCE AND INDEMNITY......................................... 13
13.1 Insurance on Tenant's Property.................................. 13
13.2 Tenant's Liability Insurance.................................... 14
13.3 Fire and Extended Coverage Insurance............................ 14
13.4 Waiver of Subrogation........................................... 14
13.5 Tenant's Indemnity.............................................. 14
13.6 Landlord's Indemnity............................................ 15
Section 14. EMINENT DOMAIN.................................................. 15
14.1 Effect of Taking................................................ 15
14.2 Award........................................................... 15
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14.3 Abatement of Rent............................................... 15
Section 15. SUBLEASE AND ASSIGNMENT......................................... 16
15.1 Consent Required................................................ 16
15.2 Notice.......................................................... 16
15.3 Conditions of Approval.......................................... 16
15.4 Cost of Processing Requests..................................... 16
15.5 Scope of Assignment............................................. 16
15.6 Assumption of Obligations....................................... 17
15.7 Excess Rent; Recapture Rights................................... 17
Section 16. DEFAULT REMEDIES................................................ 17
16.1 Events of Default............................................... 17
(a) Vacation or Abandonment..................................... 17
(b) Nonpayment of Money......................................... 17
(c) Other Obligations........................................... 18
(d) Insolvency.................................................. 18
16.2 Notice to Tenant................................................ 18
(a) Nonpayment of Money......................................... 18
(b) Other Obligations........................................... 18
16.3 Remedy Upon Occurrence of Uncured Event of Default............... 18
16.4 Damages Upon Termination........................................ 19
16.5 Computation of Rent and Other Amounts for Purposes
of Default...................................................... 19
16.6 Landlord's Right to Perform on Tenant's Breach.................. 19
16.7 Landlord's Defaults............................................. 20
(a) Notice and Cures; Landlord's Liability...................... 20
(b) Recovery Against Landlord................................... 20
16.8 Waiver; Remedies Cumulative..................................... 20
Section 17. SUBORDINATION, ATTORNMENT AND ESTOPPELS......................... 21
17.1 Subordination................................................... 21
17.2 Attornment by Tenant; Non Disturbance........................... 21
17.3 Certificates.................................................... 21
Section 18. FEES AND EXPENSES; PAYMENT...................................... 22
18.1 Interest On Past Due Obligations................................ 22
18.2 Late Charges.................................................... 22
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Section 19. ACCESS TO PREMISES.............................................. 22
19.1 Landlord Access................................................. 22
19.2 NTI Access...................................................... 22
Section 20. NOTICES......................................................... 23
Section 21. RULES AND REGULATIONS........................................... 23
Section 22. SECURITY DEPOSIT................................................ 24
Section 23. SURRENDER OF PREMISES ON TERMINATION............................ 24
Section 24. MISCELLANEOUS................................................... 24
24.1 Successors and Assigns.......................................... 24
24.2 Construction.................................................... 25
24.3 Integration..................................................... 25
24.4 Light, Air, View, Signs, Etc.................................... 25
24.5 Holding Over.................................................... 25
24.6 Counterparts.................................................... 26
24.7 Broker's Commissions............................................ 26
24.8 Landlord's Consents............................................. 26
24.9 Amendments...................................................... 26
24.10 Confidentiality................................................. 26
24.11 Attorneys' Fees................................................. 26
24.12 No Discrimination............................................... 27
Section 25. PARKING AND SIGNAGE............................................. 27
25.1 Parking......................................................... 27
25.2 Signage......................................................... 27
Section 26. EXPANSION OPTION................................................ 27
Section 27. OPTION TO EXTEND................................................ 28
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<PAGE>
BASIC LEASE INFORMATION
MARINA BAY BUSINESS PARK
OFFICE LEASE
Lease Date: Dated as of May 15, 1998
Landlord: Marina Westshore Partners, LLC, a
California limited liability company
Address of Landlord: c/o Penterra Company
1391 Marina Way South
Richmond, CA 94804
Tenant: QRS Corporation, a Delaware corporation
Address of Tenant: (prior to QRS Corporation
Commencement Date; thereafter 1400 Marina Way South
at the Premises: Richmond, CA 94804
Premises: Portion of Building C of Marina Bay Business
Park Phase I, Richmond, California, more
specifically set forth on the floor plan
attached as EXHIBIT A.
Rentable Area of the
Premises: 5,588 Square Feet
Term: The period from the Commencement Date to the
Expiration Date.
Commencement Date: May 15, 1998.
Expiration Date: December 31, 2000.
Tenant's Share: 4.34%
Fixed Rent (Monthly): PERIOD OF TERM AMOUNT
-------------- ------------
Commencement Date through $8,550.00/mo.
Expiration Date
Option to Extend: One (1) five (5) year option, more
specifically set forth in Section 27 of this
Lease.
Security Deposit: $8,550.00
Brokers: N/A
Exhibits: Exhibit A Floor Plan
Exhibit B Legal Description
Exhibit C Work Letter
NOTE: This Basic Lease Information is provided solely as a convenience to
summarize certain Lease provisions and is not intended as a complete summary
of all material terms and conditions of the Lease. In the event of any
inconsistency between any information shown on this Basic Lease Information
and the provisions of the Lease, the provisions of the Lease govern.
<PAGE>
MARINA BAY BUSINESS PARK OFFICE LEASE
This Lease is made and entered in to as of the date specified in the
Basic Lease Information, by and between MARINA WESTSHORE PARTNERS, LLC, a
California limited liability company ("LANDLORD"), and the Tenant identified
in the Basic Lease Information.
IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS CONTAINED IN
THIS LEASE, THE PARTIES AGREE AS FOLLOWS:
SECTION 1. DEFINITIONS
Certain terms used in this Lease and the Exhibits attached to this Lease
shall have the meaning set forth below for each such term. Certain other
terms shall have the meaning set forth elsewhere in this Lease and the
Exhibits attached to this Lease.
1.1 BUILDINGS. The three (3) office buildings and related improvements
located on the real property described in EXHIBIT B attached to this Lease.
Any enlargements to the Buildings or additional improvements on the real
property described in EXHIBIT B attached to this Lease shall be included in
the definition of Buildings for purposes of this Lease.
1.2 COMMON AREA. All of the Property, excluding the Buildings.
1.3 ENVIRONMENTAL LAW. Any federal, state or local law, ordinance or
regulation or policy applicable to the Premises during the Term, relating to
the environment, health and safety, any Hazardous Materials (including,
without limitation, the use, handling, transportation, production, disposal,
discharge or storage thereof) or to Tenant's use of the Premises, or to
industrial hygiene or the environmental conditions on, under or about the
Property, including, without limitation, soil, groundwater and indoor and
ambient air conditions.
1.4 EXPIRATION DATE. The Lease shall expire on December 31, 2000
("Expiration Date"). The Expiration Date is subject to extension pursuant to
the provisions of Section 27 of this Lease.
1.5 HAZARDOUS MATERIAL. Any hazardous or toxic substance, material or
waste the storage, use, or disposition of which is or becomes regulated by
any local governmental authority with jurisdiction, the State of California
or the United States Government during the Term. The term "Hazardous
Material" includes, without limitation, any material or substance which is
(i) defined during the Term as hazardous or extremely hazardous pursuant to
Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of
the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 ET SEQ.
(42 U.S.C. 6903), (iii) defined as a "hazardous substance" pursuant to
Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act
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42 U.S.C. 9601 ET SEQ. (42 U.S.C. 9601) or (iv) is listed or defined as a
"hazardous waste", "hazardous substance", or other similar designation by any
regulatory scheme of the State of California or the U.S. Government that is
similar to the foregoing.
1.6 INTEREST RATE. The per annum rate equal to the lesser of (i) the
reference rate, or succeeding similar index, of Bank of America, N.T. & S.A.
in effect from time to time plus two percent (2%), or (ii) the maximum rate
allowed by applicable usury law.
1.7 LEASE YEAR. A period of twelve (12) consecutive calendar months
during the Term, commencing with the Commencement Date if the Commencement
Date is the first day of a calendar month, or commencing with the first day
of the month following the Commencement Date if the Commencement Date is not
the first day of a calendar month. The first Lease Year shall include the
period between the Commencement Date and the first day of the month following
the Commencement Date if the Commencement Date is not the first day of a
calendar month. The last Lease Year shall consist of the period between the
date on which the Term expires or terminates and the day after the last day
of the preceding Lease Year.
1.8 OPERATING EXPENSES. All expenses and costs of every kind and nature
actually incurred and paid by Landlord in, or properly allocable to, a
calendar year, in connection with the ownership, management, operation,
maintenance, repair and preservation of the Property. Specifically, but
without limiting the generality of the foregoing, Operating Expenses shall
include the following: (a) wages, salaries, payroll burdens and all related
expenses and benefits of all on-site and off-site employees to the extent
attributable to the operation, repair and maintenance of the Property; (b)
all supplies, materials, tools and rental equipment to the extent used in
connection with the ownership, operation, management, repair and maintenance
of the Property; (c) property management fees and other costs of property
management, maintenance and other services for the Property and the equipment
therein which management fees shall not exceed four percent (4%) of gross
rental revenues from the Property; (d) reasonable legal and accounting costs
for the Property; provided, however, that legal expenses shall not include
the cost of negotiating leases, termination of leases, extension of leases,
legal costs incurred in proceedings against any specific tenant or in
connection with any breach by Landlord of this Lease or refinancing of the
Property; (e) premiums and all additional costs for all insurance carried
with respect to the Property (whether or not such insurance is required to
be carried pursuant to the terms of this Lease, but limited to the type and
amount of insurance customarily carried by owners of property comparable to
the Property); (f) costs of all repairs, service, service contracts and
general maintenance of the Property; (g) all maintenance and operating costs
for the Common Area and the cost of performing Landlord's maintenance and
repair obligations as provided in Section 10; (h) all Real Property Taxes;
(i) subject to the exclusion of capital items set forth below, all costs and
expenses levied, incurred or required to be paid either directly or
indirectly, in order to comply with laws, statutes, ordinances, rules and
regulations or the requirements of governmental or public authorities with
respect to the Property, or the operation of the Buildings, or any portion
thereof such as parking facilities, sources of air pollution, traffic, storm
water run-off or other adverse environmental effects, and transit taxes,
2
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assessments or fees; and (j) amortization of capital improvements made to the
Property by Landlord which result in a net annual reduction to the operating
costs of the Property, with amortization over such period as Landlord shall
reasonably determine to be the projected useful life of such capital
improvement, together with interest thereon at the rate paid by Landlord on
funds borrowed for the purpose of making such capital improvements, or at the
Interest Rate if Landlord does not borrow funds for such purpose. Operating
Expenses shall exclude the following: (1) any depreciation of the Buildings or
other improvements on the Property or of the equipment used in connection
therewith; (2) any expense for which Landlord is reimbursed pursuant to any
insurance policy, warranty or other means of recovery from third parties; (3)
any costs (including permit, license and inspection fees) of improving space
for any other tenant of the Buildings; (4) any real estate brokerage
commissions or finders fees, advertising and promotional expenditures; (5)
any capital improvements except those described in clause (k) above; (6) any
rental under any ground or underlying lease; (7) any financing costs,
including principal and interest payments; (8) any penalties, fines, interest
or other charges attributable to the late payment of any Real Property Taxes
or other Operating Expenses; (9) Landlord's general overhead and
administrative expenses; (10) any expenses or costs incurred by Landlord as a
result of special services, privileges or amenities provided to tenants on an
individual basis rather than generally to all tenants; and (11) any expenses
or costs incurred by Landlord with respect to facilities for the benefit of
tenants of the Buildings other than Tenant. In calculating Operating
Expenses, (i) the total Operating Expenses charged to the tenants of the
Buildings shall in no event be greater than actual total Operating Expenses
for the Property; (ii) no item of Operating Expenses shall be included more
than once; (iii) Landlord shall comply with generally accepted accounting
principles, consistently applied.
1.9 PERMITTED USE. General office purposes and research and development.
Tenant shall not use any portion of the Premises for any use that is
currently categorized as a biolevel-3 or higher use, unless such use is
permitted by the City of Richmond and all other governmental authorities with
jurisdiction over the Property. Landlord shall cooperate with Tenant in
obtaining any permits, licenses or other governmental approvals required or
necessary for Tenant's business at the Premises.
1.10 PREMISES. The portion of Property described in the Basic Lease
Information and designated on EXHIBIT A, together with the appurtenant right
to use the Common Area in common with the Yacht Club and other tenants of the
Property, subject to the Rules and Regulations.
1.11 PROPERTY. The Buildings and that certain real property located in
the City of Richmond, County of Contra Costa, State of California, more
particularly described in EXHIBIT B hereto.
1.12 REAL PROPERTY TAXES. "Real Property Taxes" includes: (i) all real
estate taxes and assessments, and all other taxes relating to, or levied,
assessed or imposed on, the Property, or any portion thereof, or interest
therein; and (ii) all other taxes, assessments, charges, levies, fees, or
penalties of any kind and nature imposed, levied, assessed, charged,
conformed or collected by any governmental authority or other entity either
directly or indirectly (A) for public
3
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improvements, user, maintenance or development fees, transit, housing,
police, fire, open space, streets, sidewalks, utilities, job training or
other governmental services or benefits, and (B) upon or with respect to the
development, possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy of, or business operations in, the
Property. All special or one-time assessments shall be amortized over the
longest period allowed by the applicable taxing authority. Real Property
Taxes shall exclude: (1) taxes or assessments against the personal property
of Tenant or any other tenant of the Buildings; and (2) income, franchise,
estate or gift taxes of Landlord.
1.13 RENTABLE AREA. The number of square feet in the Buildings, or
portions of the Buildings, calculated by Landlord, measured from the outside
walls of the Buildings, calculated in accordance with the most recent
American National Standard published by the Building Owners and Managers
Association International. The Rentable Area of the Premises is set forth on
the Basic Lease Information, shall be binding on Landlord and Tenant, and
shall be adjusted if Landlord materially adjusts the size of the Buildings,
calculated in accordance with the most recent American National Standard
published by the Building Owners and Managers Association International.
1.14 TENANT IMPROVEMENTS. The improvements to the Premises that may be
constructed by Tenant during the Term of this Lease as to the unfinished
portions of the Premises, including new restroom facilities, HVAC systems,
drop ceilings and floor coverings pursuant to EXHIBIT C hereto.
1.15 TENANT'S SHARE. The percentage share described in the Basic Lease
Information, which is equal to the Rentable Area of the Premises divided by
the Rentable Area of the Buildings (128,160).
1.16 TERM. The period from the Commencement Date to the Expiration Date.
SECTION 2. LEASE OF PREMISES
2.1 PREMISES. Landlord leases to Tenant and Tenant leases from Landlord
the Premises, subject to and upon all the terms, covenants and conditions
contained in this Lease.
2.2 LANDLORD'S RESERVED RIGHTS. Landlord reserves the right, without
unreasonable interference with Tenant's use and without diminution of
Tenant's usable space or other rights hereunder, including but not limited to
the right of access to alter or relocate any Building and any Common Area
facility or any other common facility, and to make changes or alterations
therein or enlargements thereof.
2.3 NO REPRESENTATIONS OR WARRANTIES. Neither Landlord nor Landlord's
agent have made any representations or warranties with respect to the
Premises, the Property or this Lease except as expressly set forth in this
Lease, and no rights, casements or licenses are or shall be acquired by
Tenant by implication or otherwise unless expressly set forth in this Lease.
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SECTION 3. TERM
3.1 INITIAL TERM. This Lease shall be effective as of the date hereof.
The Term shall commence on the Commencement Date set forth in the Basic Lease
information and shall expire on the Expiration Date unless the Term is
earlier terminated as provided in this Lease or extended as provided in this
Lease. Notwithstanding the foregoing, if Landlord, for any reason, cannot
deliver vacant possession of the Premises to Tenant as of the Commencement
Date, the Commencement Date and Expiration Date shall be revised to conform
to the date of Landlord's actual delivery of possession of the Premises. In
such event, Landlord and Tenant shall execute a letter confirming the
Commencement Date and Expiration Date of this Lease.
SECTION 4. RENT: ADDITIONAL CHARGES
4.1 FIXED MONTHLY RENT AND ADDITIONAL CHARGES. Commencing on the
Commencement Date, Tenant shall pay to Landlord Fixed Rent in the amounts and
during the periods described in the Basic Lease Information. Fixed Rent
shall be payable by Tenant in consecutive monthly installments on or before
the first day of each month, in advance. If the Commencement Date occurs on a
day other than the first day of a calendar month, or if the Expiration Date
occurs on a day other than the last day of a calendar month, then the Fixed
Rent for such fractional month shall be prorated upon a daily basis based
upon a thirty (30) day calendar month. Tenant shall also pay to Landlord all
Additional Charges required under this Lease ("ADDITIONAL CHARGES"),
including without limitation all amounts due pursuant to the provisions of
Section 5 and Section 6. Except as otherwise provided in this Lease, all
payments of Fixed Rent and Additional Charges ("RENT") shall be made without
prior demand or notice and without offset, deduction or counterclaim, in
lawful money of the United States of America. Such payments shall be made at
Landlord's Address.
4.2 NET LEASE. Except as otherwise provided herein, this shall be a
triple net lease and Rent shall be paid to Landlord absolutely net of all
costs and expenses incurred by Landlord in the ownership, maintenance,
management, repair, preservation and operation of the Property.
SECTION 5. PAYMENT OF OPERATING EXPENSES
5.1 PAYMENT BY TENANT. Tenant shall pay to Landlord Tenant's Share of
the Operating Expenses for each calendar year. The monthly estimated Tenant's
Share of Operating Expenses is $1,173.48.
5.2 MANNER OF PAYMENT. On or before the Commencement Date, with respect
to estimated Operating Expenses payable during the first calendar year of the
Term, and December 31 of each calendar year during the Term, or as soon
thereafter as practicable, Landlord shall furnish to Tenant a statement
setting forth the estimated Operating Expenses for the subsequent calendar
year. On the Commencement Date, and on the first day of each calendar month
during each ensuing calendar year, Tenant shall pay in advance to Landlord
Tenant's Share of one-twelfth (1/12th) of the most recent estimated Operating
Expenses; provided,
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however, that if such notice is not given in December, Tenant shall continue
to pay to Landlord Tenant's Share of one-twelfth (1/12th) of the Estimated
Operating Expenses of the previous calendar year until the month after such
statement is given. Within one hundred twenty (120) days after the end of
each calendar year during the Term or as soon thereafter as practicable,
Landlord shall furnish to Tenant a statement of the actual Operating Expenses
for such calendar year. If Tenant's Share of the estimated Operating Expenses
paid by Tenant during such calendar year is (x) less than Tenant's Share of
the actual Operating Expenses for such period as shown on Landlord's
statement, then Tenant shall pay the difference to Landlord within 30 days
after the date of Landlord's statement, or (y) more than Tenant's Share of
the actual Operating Expenses for such period, then Tenant shall be allowed a
credit on future payments of Estimated Operating Expenses for the amount of
such excess, or, if the statement is given by Landlord with respect to the
calendar year in which the term expires, Landlord shall pay such excess to
Tenant together with such statement.
5.3 ADJUSTMENTS TO OPERATING EXPENSES. If at any time, but no more than
once each calendar year, it appears to Landlord that the actual Operating
Expenses for any calendar year during the Term will exceed the estimated
Operating Expenses set forth in Landlord's statement to Tenant by more than
five percent (5%), then Landlord shall have the right by notice to Tenant to
revise the estimated Operating Expenses for such year and subsequent payments
thereof shall, commencing with the first month after which Tenant receives
such notice, be increased based upon such revised statement.
5.4 TENANT'S INSPECTION AND AUDIT RIGHTS. Tenant or Tenant's authorized
agent or representative, including a certified public accountant retained by
Tenant, shall have the right to inspect the books and records of Landlord
relating to Operating Expenses after giving reasonable prior written notice to
Landlord and during the business hours of Landlord at Landlord's office at
Marina Bay or at such other location in Richmond, California as Landlord may
designate, for the purpose of verifying Landlord's statement of Operating
Expenses. If Tenant has an audit performed of such books and records by a
certified public accountant and such audit reveals an overstatement of
Operating Expenses by Landlord of more than five percent (5%), then Landlord
shall, within thirty (30) days after receipt of such audit, reimburse to
Tenant any excess Operating Expenses previously paid to Landlord by Tenant
and Landlord shall reimburse Tenant for the cost of such audit.
SECTION 6. TAXES PAYABLE BY TENANT
In addition to payment of Fixed Rent and Operating Expenses, Tenant shall
pay prior to delinquency, any and all taxes, assessments, license fees,
levies, businesses taxes, impositions, transit development fees, assessments
or charges for housing funds, service payments, in lieu taxes or fees, and
any other governmental fees, excises or charges of any kind or character,
general and special, ordinary and extraordinary, whether or not customary or
now within the contemplation of the parties hereto, levied against, upon,
measured by or attributable to Tenant's use of the Premises, excluding Real
Estate Taxes and taxes based upon Landlord's taxable income.
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SECTION 7. CONDITION AND OPERATION OF THE BUILDING
7.1 AS IS. Except as specifically provided for herein, Landlord
represents and warrants, to its knowledge, that the Buildings and the
Property are in compliance with all material requirements of all municipal,
county, state and federal governmental authorities in effect as of the date
of this Lease and that the Building systems supplying utilities and services
to the Premises are in good working order and condition as of the
Commencement Date. Except as so provided, no representation or warranty is
made or shall be deemed made by Landlord concerning the nature, quality or
suitability for Tenant's business of the Buildings or the Premises, and
Tenant shall have no rights against Landlord by reason of such matters except
as otherwise expressly set forth in this Lease.
7.2 SECURITY. Tenant shall be solely responsible for security in the
Premises. Landlord shall have no obligations regarding the security of the
Premises or the Property.
SECTION 8. USE AND COMPLIANCE WITH LAWS
8.1 USE OF PREMISES. Tenant shall use and occupy the Premises during the
Term solely for the Permitted Use.
8.2 NO NUISANCE. Tenant shall not suffer, permit or commit any waste,
nor allow, suffer or permit any odors, vapors, steam, water, vibrations,
noises or undesirable effects to emanate from the Premises or from any
apparatus, equipment or installation in the Premises or outside the Premises
which would violate any applicable governmental law, order, rule, ordinance
or regulation. Tenant shall not allow, suffer or permit the Premises or any
use thereof to constitute a nuisance or interfere with the safety, comfort
or enjoyment of the Property by Landlord or any other occupants of the
Buildings.
8.3 COMPLIANCE WITH LAWS AND INSURANCE REQUIREMENTS. Tenant, at Tenant's
sole cost and expense, shall comply during the Term with all applicable laws,
orders, rules, ordinances and regulations of federal, state, county and
municipal authorities. Tenant shall not do anything, or permit anything to be
done, in or about the Premises that shall (a) invalidate or be in conflict
with the provisions of any fire, public liability or other insurance policies
covering the Buildings or any property located therein, or (b) subject
Landlord to any liability or responsibility for injury to any person or
property by reason of any business operation or other practice being
conducted in the Premises. Notwithstanding the foregoing, unless arising as
a result of its specific use of the Premises, Tenant need not perform any
structural or other major renovations, improvements or additions to the
Premises as part of such compliance.
8.4 HAZARDOUS MATERIALS. Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Premises.
(a) PROHIBITION ON USE OF HAZARDOUS MATERIALS. Subject to the provisions
of Section 8.4(b) of this Lease, Tenant shall not use, generate, manufacture,
produce, store, release,
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discharge, or dispose of, on, under or about the Premises or any part of the
Property or transport to or from the Premises or any part of the Property any
Hazardous Material or allow its employees, agents, contractors, licensees,
invitees or subtenants (collectively, "TENANT'S AGENTS") to do so.
(b) PERMITTED HAZARDOUS MATERIALS. Notwithstanding any other provision
of this Lease, Tenant shall be permitted to use, generate, manufacture,
produce and store in, and transport to and from the Premises Hazardous
Materials so long as: (a) each of the Hazardous Materials is used, generated,
manufactured, produced or stored in, or transported to and from, the Premises
only to the extent necessary for Tenant's operation of its business at the
Premises, and (b) the conditions set forth in this Section 8.4 are complied
with.
(c) COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant shall comply with and
shall cause Tenant's Agents to comply with, and shall keep and maintain the
Premises and cause Tenant's Agents to keep and maintain the Premises in
compliance with, all Environmental Laws. Tenant shall, at its own expense
prior to Tenant's use and occupancy, procure, maintain in effect and comply
with all conditions of any and all permits, licenses and other governmental
and regulatory approvals required for Tenant's use of the Premises. Tenant
shall cause any and all Hazardous Materials removed from the Premises to be
removed and transported solely by duly licensed handlers to duly licensed
facilities for final disposal of such materials and wastes or as may otherwise
be permitted under applicable Environmental Laws. Only materials that, under
all applicable governmental laws, orders, rules, ordinances and regulations,
may be disposed of into the drains are permitted to be put into the drains at
the Premises. Tenant shall make available to Landlord for inspection and
copying upon reasonable advance notice and during the business hours of
Tenant each and all of the following to the extent the same are required by
applicable law to be maintained on-site at the Premises: (a) a copy of each
hazardous material management plan or similar document required by any
federal, state or local governmental or regulatory authority to be submitted
by Tenant; (b) copies of all permits, licenses and other governmental and
regulatory approvals with respect to the use of Hazardous Materials; (c)
copies of hazardous waste manifests reflecting the legal and proper disposal
of all Hazardous Materials removed from the Premises; and (d) copies of all
reports, studies and written results of tests or inspections concerning the
Premises or any part of the Property with respect to Hazardous Materials
(collectively "DOCUMENTS").
(d) ROUTINE MONITORING. Upon commencing any activity involving Hazardous
Materials on the Premises, and continuing thereafter throughout the Term,
Tenant shall initiate and maintain any reporting and/or monitoring system
required under all applicable Environmental Laws to ensure the routine
monitoring of the levels of Hazardous Materials which may be present on,
under or about the Premises or any part of the Property resulting from
Tenant's activities. At Landlord's written request, Tenant shall provide
Landlord copies of such reports, if any, as are provided by Tenant to any
governmental agency.
(1) LANDLORD'S RIGHT TO INSTALL TESTING WELLS. Provided it does not
unreasonably interfere with Tenant's business operations on the Premises,
Landlord may
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install permanent or other testing wells or devices at or about the Premises
or any part of the Property, and may cause the ground water to be tested
to detect the presence of Hazardous Materials at least once every twelve
(12) months during the term of the Lease by use of such wells or devices
as are then customarily used for such purposes. The costs of any such
tests shall be borne solely by the Tenant if, following the initiation of
such testing, the presence of Hazardous Materials in violation of
Environmental Laws or this Lease is detected to the extent Tenant or
Tenant's Agents are responsible therefor. Tenant's obligations under this
Section 8.4(d)(1) shall survive for a period of one year after the
expiration or earlier termination of this Lease.
(2) LANDLORD'S RIGHT TO INSPECT. Provided it does not unreasonably
interfere with Tenant's business operations on the Premises, Landlord,
Lender and their representatives shall have the right, at any time, but
not more often than once every six months, upon at least three (3)
business days' prior notice (except in an emergency) to enter the
Premises during Tenant's business hours to: (i) conduct any testing,
monitoring and analysis for Hazardous Materials; (ii) review any
Documents, materials, inventory, or notices to or from governmental or
regulatory authorities relating to Tenant's use of Hazardous Materials
at the Premises; and (iii) review all storage, use, transportation and
disposal facilities and procedures required to be maintained by
applicable law for the storage, use, transportation and disposal of
Hazardous Materials.
(c) NOTICE TO LANDLORD. Tenant shall give written notice to Landlord
promptly after Tenant receives notice of any of the following: (i) any
proceeding or inquiry by, notice from, or order of any governmental
authority (including, without limitation, the California State Department
of Health Services) with respect to the presence of any Hazardous
Material on, under or about the Premises or any part of the Property or
the migration thereof from or to other property; and (ii) all claims made
or threatened by any third party against Tenant, the Premises or any part
of the Property relating to any loss or injury resulting from any
Hazardous Materials. Tenant shall give written notice to Landlord
promptly after Tenant becomes aware of any spill, release, discharge or
nonroutine disposal of Hazardous Materials of a reportable quantity with
respect to the Premises or operations at the Premises by Tenant or
Tenant's Agents. Tenant shall also promptly provide copies to Landlord of
all reports pertaining to the use, generation, manufacture, release,
discharge or disposal of Hazardous Materials on the Premises that tenant
provides to any governmental body or agency.
(f) LANDLORD'S RIGHT TO PARTICIPATE. If Landlord is joined in any legal
proceeding or action affecting the Premises or any part of the Property
initiated in connection with any Environmental Law, and if such
proceeding or action is brought in connection with a Release (as defined
in Section 8.4(g) below) or Hazardous Materials by Tenant or Tenant's
Agents, Tenant shall defend Landlord, or at Tenant's option pay
Landlord's reasonable attorneys fees in connection therewith.
(g) TENANT'S INDEMNITY. Tenant shall protect, defend, indemnify and hold
harmless Landlord, its directors, officers, partners, employees, agents,
successors and assigns from and
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against any and all claims, fines, judgements, penalties, losses,
damages, costs, expenses or liability (including reasonable attorneys'
fees and costs) to the extent directly arising out of or attributable to
the use, generation, manufacture, production, storage, release,
threatened release, discharge or disposal of any Hazardous Material on,
under or about the Premises or any part of the Property by Tenant or
Tenant's Agents or the transportation of any Hazardous Material to or
from the Premises (collectively, a "RELEASE") by Tenant or Tenant's
Agents including, without limitation: the costs of any investigation,
monitoring, removal, restoration, abatement, repair, cleanup,
detoxification or other ameliorative work of any kind or nature
(collectively "REMEDIAL WORK") and the preparation and implementation of
any closure, remedial or other required plans, as required by
Environmental Laws. For purposes of this Section 8.4(g), any acts or
omissions of Tenant or Tenant's Agents (whether or not they are
negligent, intentional, willful or unlawful) shall be strictly
attributable to Tenant. Tenant's obligations under this Section 8.4(g)
shall survive for a period of one year after the expiration or earlier
termination of this Lease.
(h) REMEDIAL WORK. Upon any spill or release of a reportable quantity of
Hazardous Material by Tenant or Tenant's Agents, Tenant shall, subject to
Section 8.4(f) of this Lease, promptly notify Landlord of the spill or
release of Hazardous Material and shall, at its sole expense, commence to
perform and thereafter diligently prosecute to completion such Remedial
Work as required under Environmental Laws.
SECTION 9. ALTERATIONS, TENANT'S PROPERTY, TENANT'S WORK AND LIENS
9.1 ALTERATIONS BY TENANT. Tenant shall not make or allow to be be made any
structural alterations, additions or improvements in or to the Premises
whatsoever (collectively, "ALTERATIONS") without first (i) providing Landlord
with copies of the plans and specifications for the Alterations, and (ii)
obtaining Landlord's prior written consent, which consent shall not be
unreasonably withheld. All Alterations undertaken by Tenant shall be done in
accordance with the provisions of EXHIBIT C to this Lease.
9.2 TITLE TO ALTERATIONS. Tenant's Improvements and any other Alterations,
paid for by Tenant shall be Tenant's property during the Term. Except as
expressly set forth below, upon expiration of the Term or termination of this
Lease, all Alterations shall become the Property of Landlord and shall be
surrendered to Landlord, in the condition required by this Lease.
9.3 LIENS. Tenant shall keep the Premises and the Property free from any
liens arising out of any (i) work performed by or for Tenant or any person
claiming through or under Tenant or material furnished to or for the Premises
before or during the Term by or for Tenant or any person claiming through or
under Tenant, and (ii) obligations incurred by or for Tenant or any
person claiming through or under Tenant before or during the Term. Landlord
shall have the right at all times to post and keep posted on the Premises
any notices permitted or required by law with respect to any mechanics',
materialmen's and other liens. In addition to all other requirements
contained in this Lease, Tenant shall give to Landlord at least ten (10)
business days prior notice of commencement of any construction on the
Premises.
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SECTION 10. REPAIRS AND MAINTENANCE
10.1 LANDLORD'S OBLIGATIONS. As a part of the consideration for the leasing
of the Premises, and subject to the obligations of Tenant set forth in this
Lease, Landlord shall maintain, in good condition, the following: (i) the
Common Area, (ii) the foundations, (iii) exterior walls, (iv) the structural
portions of the roof of the Buildings, (v) all window frames, (vi) all
gutters and down spouts on the Building, and (vii) structural elements of the
Buildings. Landlord shall have no obligation to commence any repairs or
replacements hereunder until the expiration of fifteen (15) days following
written notice from Tenant to Landlord of the need therefor. Notwithstanding
the foregoing, in the event of any emergency, Landlord shall in good faith and
with diligence to cause necessary repairs to be made as soon as possible.
Except as set forth in Section 16.7 hereof, Tenant waives any right now or
hereafter granted by law to make any repairs under this Section 10.1 upon
Landlord's failure to do so hereunder. Except as set forth in Section 16.7
hereof, Landlord shall not be liable for and, except as provided in Section
12, there shall be no abatement of Rent with respect to any injury or to
interference with Tenant's business arising from any repairs, maintenance,
alteration or improvement in or to any portion of the Buildings, including
the Premises, or in or to the fixtures, appurtenances and equipment therein.
Except as otherwise expressly provided herein, Tenant hereby waives and
releases its rights under Sections 1941, 1941.1, 1942 and 1942.5 of the
California Civil Code or under any similar law now or hereinafter in effect.
10.2 TENANT'S OBLIGATIONS. Tenant shall be solely responsible for all
janitorial services for the Premises and may select persons to perform such
services in its reasonable discretion. Tenant at its sole expenses shall
clean, keep, and maintain in good order, condition, and repair and replace
when necessary the Premises and every part thereof (but excluding only the
items which Landlord is obligated to maintain, repair or replace under
Section 10.1).
SECTION 11. UTILITIES
11.1 UTILITIES. Landlord shall provide water, sewer, gas and electrical
connections to the Premises and separate metering facilities therefor. Tenant
shall promptly pay as the same becomes due, all charges for water, gas,
electricity, telephone, sewer service, waste pickup and any other utilities,
materials or services furnished directly to or used by Tenant on or about the
Premises during the Lease Term.
11.2 INTERRUPTION. If Tenant is unable to conduct its ordinary business
activities in the Premises because of any failure or interruption of any
utility to the Premises for a period in excess of thirty (30) consecutive
days (except if due to the negligence or willful misconduct of Tenant's Agents
or if due to Tenant's failure to make repairs to the Premises as required
hereunder), unless Landlord is exercising commercially reasonable efforts to
restore the utility, Tenant shall have the right to terminate this Lease,
without any liability to Landlord, upon five (5) days' prior written notice.
Nothwithstanding the foregoing, in the event such failure or interruption is
caused by damage or destruction covered by Section 12 hereof, the provisions
of Section 12 shall apply in lieu of the foregoing. Except as set forth in
this Section or in Section 12
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hereof, failure by Landlord to furnish any service herein specified or any
cessation thereof due to accident, making of repairs, alterations or
improvements, weather, unusual difficulty or ability to obtain services or
supplies from sources usually used for the Property, labor difficulties or
other causes beyond Landlord's reasonable control shall not render Landlord
liable in any respect for damages of any kind, nor be construed as an
eviction of Tenant nor work an abatement of Rent.
SECTION 12. DAMAGE OR DESTRUCTION
12.1 LOSS COVERED BY INSURANCE. If, at any time prior to the expiration
or termination of this Lease, the Premises or the Building in which the
Premises are located is wholly or partially damaged or destroyed by a
casualty, which loss to Landlord is (except for any applicable deductible)
fully covered by insurance maintained by Landlord or for Landlord's benefit
(or required to be maintained by Landlord pursuant to Section 13), which
casualty renders the Premises totally or partially inaccessible or unusable
by Tenant in the ordinary conduct of Tenant's business, then;
(a) REPAIRS WHICH CAN BE COMPLETED WITHIN FOUR (4) MONTHS. Within twenty
(20) days of notice to Landlord of such damage or destruction, Landlord shall
provide Tenant with notice of its determination of whether the damage or
destruction can be repaired within four (4) months of such damage or
destruction without the payment of overtime or other premiums. If all repairs
to such Premises or Building can, in Landlord's reasonable judgment, be
completed within four (4) months following the date of such damage or
destruction without the payment of overtime or other premiums, Landlord
shall, at Landlord's expense, repair the same and this Lease shall remain in
full force and effect and a proportionate reduction of the Rent shall be
allowed Tenant for such portion of the Premises as shall be rendered
inaccessible or unusable to Tenant, and which is not used by Tenant, during
the period of time that such portion is unusable or inaccessible and not used
by Tenant.
(b) REPAIRS WHICH CANNOT BE COMPLETED WITHIN FOUR (4) MONTHS. If all
such repairs to the Building and Premises cannot, in Landlord's reasonable
judgment, be completed within four (4) months following the date of notice
to Landlord of such damage or destruction without the payment of overtime or
other premiums, Landlord shall notify Tenant of such determination and either
Landlord or Tenant may, at its option, upon written notice to the other party
given within thirty (30) days after the occurrence of such damage or
destruction, elect to terminate this Lease as of the date of the occurrence
of such damage or destruction. In the event that neither Landlord nor Tenant
elects to terminate this Lease in accordance with the foregoing provisions,
then Landlord shall, at Landlord's expense, repair such damage or
destruction, and in such event, this Lease shall continue in full force and
effect but the Rent shall be proportionately reduced as hereinabove provided
in Section 12.1 (a); provided, however, that if any such repair is not
commenced by Landlord within thirty (30) days after the occurrence of such
damage or destruction or is not substantially completed by Landlord within
eight (8) months after the occurrence of such damage or destruction, then in
either such event Tenant may, at its option, upon written notice to Landlord,
elect to terminate this Lease as of the date of the occurrence of such damage
or destruction.
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12.2 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Building in
which the Premises are located is totally or partially damaged or destroyed
from a casualty, which loss to Landlord is not fully covered (except for any
deductible) by insurance maintained by Landlord or for Landlord's benefit (or
required to be maintained by Landlord pursuant to Section 13), Landlord may,
at its option, upon written notice to Tenant within thirty (30) days after
notice to Landlord of the occurrence of such damage or destruction, elect to
restore or repair such damage or destruction, or Landlord may elect to
terminate this Lease so long as Landlord terminates every other lease in the
Building which was affected by the casualty. Notwithstanding the foregoing,
Landlord may not elect to terminate this Lease if (i) the uninsured portion
of the damage is less than ten percent (10%) of the replacement cost of the
Building and/or (ii) Landlord does not elect to terminate the leases of all
other tenants in the Building who are similarly affected by such damage
and/or destruction. If Landlord elects to repair or restore such damage or
destruction, this Lease shall continue in full force and effect but the Rent
shall be proportionately reduced as provided in Section 12.1(a). If Landlord
does not elect by notice to Tenant to repair such damage the Lease shall
terminate. Notwithstanding the foregoing, if all repairs to the Premises or
the Building cannot, in Landlord's reasonable judgment, be completed within
four (4) months following the date of such damage or destruction without the
payment of overtime or other expenses, then either Landlord or Tenant may at
its option, upon written notice to the other party given within thirty (30)
days after the occurrence of such damage or destruction, elect to terminate
this Lease as of the date of the occurrence of such damage or destruction.
12.3 DESTRUCTION DURING FINAL YEAR. Notwithstanding anything to the
contrary contained in Sections 12.1 and 12.2 hereof, if the Premises or the
Building in which the Premises are located is wholly or partially damaged or
destroyed within the final twelve (12) months of the Term of this Lease, or,
if the Option to Extend pursuant to Section 27 hereof has been exercised,
during the last year of any Extended Term, so that Tenant shall be prevented
from using the Premises for sixty (60) consecutive days due to such damage or
destruction, then either Landlord or Tenant may, at its option, by notice to
the other party within thirty (30) days after the occurrence of such damage
or destruction, elect to terminate this Lease.
12.4 DESTRUCTION OF TENANT'S PERSONAL PROPERTY, TENANT IMPROVEMENTS OR
PROPERTY OF TENANT'S EMPLOYEES. In the event of any damage to or destruction
of the Premises or the Building, under no circumstances shall Landlord be
required to repair any injury, or damage to, or make any repairs to or
replacements of Tenant's Improvements. Landlord shall have no responsibility
for any contents placed or kept in or on the Premises or the Building by
Tenant or Tenant's agents or employees.
SECTION 13. INSURANCE AND INDEMNITY
13.1 INSURANCE ON TENANT'S PROPERTY. Tenant shall during the Term
provide insurance coverage against loss or damage by fire and such other
risks as are from time to time included in a standard of special extended
coverage endorsement insuring Tenant's merchandise, trade fixtures,
furnishings, equipment and all other items of personal property of Tenant.
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13.2 TENANT'S LIABILITY INSURANCE. Tenant shall procure at its sole cost
and expense and keep in effect from the date of this Lease and at all times
during the Term either comprehensive general liability insurance or
commercial general liability insurance applying to the use or occupancy of
the Premises, and contractual liability insurance applying to Tenant's
indemnity obligations under this Lease with respect to bodily injury,
property damage, or other loss covered by Tenant's liability insurance. Such
coverage shall be written by insurance companies reasonably acceptable to
Landlord and its Lender and shall have a minimum combined single limit of
liability of at least two million dollars ($2,000,000.00). All such policies
shall be written to apply to all bodily injury, property damage or other
covered loss occurring during the policy term, shall be endorsed to add
Landlord as an additional named insured, to provide that such coverage shall
be primary and that any insurance maintained by Landlord shall be excess
insurance only. All such insurance shall provide for severability of
interests; shall provide that an act or omission of one of the named insureds
shall not reduce or avoid coverage to the other named insureds; and shall
afford coverage for all claims based on acts, omissions, injury and damage,
which claims occurred or arose (or the onset of which occurred or arose) in
whole or in part during the policy period.
13.3 FIRE AND EXTENDED COVERAGE INSURANCE. Landlord shall maintain
insurance on the Buildings and the Premises against damage by fire and those
perils now specified in the most current standard extended coverage
endorsement in an amount equal to the full insurable cost of the Buildings
and the Premises, excluding any of Tenant's Improvements and Alterations, as
reasonably determined by Landlord, exclusive of excavations and foundations
and subject to such "deductibles" as Landlord may reasonably determine. In
addition, Landlord shall maintain loss of rent insurance and a policy of
commercial general liability and property damage insurance. All insurance
proceeds payable under Landlord's insurance carried hereunder shall by
payable solely to Landlord.
13.4 WAIVER OF SUBROGATION. To the extent permitted by law and without
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the
other on account of any and all claims Landlord or Tenant may have against
the other with respect to any risk insured against by insurance actually
carried, or required to be carried hereunder. Each casualty insurance policy
carried by Landlord or Tenant hereunder, or which either may obtain with
respect to the Premises or the Property independent of obligations hereunder,
shall provide that the insurer waives all rights of recovery by way of
subrogation against Landlord or Tenant in connection with all matters
included within the scope of the waiver of recovery contained in this Section
13.4.
13.5 TENANT'S INDEMNITY. To the fullest extent permitted by law, Tenant
shall indemnify Landlord, and its officers, directors, partners, employees,
servants, and agents, and all mortgagees or beneficiaries of Landlord's
interest in all or any portion of the Property, (collectively, "RELATED
ENTITIES") against and save Landlord and its Related Entities harmless from
and defend Landlord and Related Entities through attorneys reasonably
satisfactory to Landlord from and against any and all claims, loss, cost
liability, damage and expense including,
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without limitation, penalties, fines and reasonable attorneys' fees
(collectively, "CLAIMS"), incurred in connection with or arising in whole or
in part from the activities of Tenant or Tenant's Related Entities, or any
negligence or willful misconduct by Tenant or Tenant's Related Entities,
excluding any Claims to the extent arising out of: (i) the negligence or
willful misconduct of Landlord or Landlord's Related Entities, or (ii)
Landlord's breach of this Lease.
13.6 LANDLORD'S INDEMNITY. To the fullest extent permitted by law,
Landlord shall indemnify Tenant and its officers, directors, shareholders,
partners, employees, servants and agents (collectively "RELATED ENTITIES")
against and save Tenant and its Related Entities harmless from and defend
Tenant and its Related Entities through attorneys reasonably satisfactory to
Tenant from and against any and all Claims incurred in connection with or
arising in whole or in part from the activities of Landlord or Landlord's
Related Entities or any negligence or willful misconduct of Landlord or
Landlord's Related Entities, excluding any Claims to the extent arising out
of: (i) the negligence or willful misconduct of Tenant or Tenant's Related
Entities, or (ii) Tenant's breach of this Lease.
Section 14. EMINENT DOMAIN
14.1 EFFECT OF TAKING. If all of the premises is condemned or taken in
any manner before or during the Term for public or quasi-public use, or any
transfer of the Premises is made in avoidance of an exercise of the power of
eminent domain (each of which acts shall be referred to as a "TAKING"), this
Lease shall automatically terminate as of the date of the vesting of title as
a result of such taking. If a part of the Premises is so taken, this Lease
shall automatically terminate as to the portion of the Premises so taken as
of the date of the vesting of title as a result of such taking. If such
portion of the Property is taken as to render the Property incapable of
economically feasible operation or to require a substantial alteration or
reconstruction of the remaining portions thereof, this Lease may be
terminated by Landlord, as of the date of the vesting of title as a result of
such taking, by written notice to Tenant within sixty (60) days following
notice to Landlord of the date of which said vesting will occur. If such
portion of the Premises is taken as, in the reasonable opinion of Tenant, to
materially impair the ability of Tenant to use and conduct its business from
the Premises, this Lease may be terminated by Tenant as of the date of the
vesting of title as a result of such taking, by written notice to Landlord
within sixty (60) days following notice to Tenant of the date of which said
vesting will occur.
14.2 AWARD. Landlord shall be entitled to the entire award for any
taking; provided, however, that Landlord shall have no interest in any award
made to Tenant for its leasehold interest, relocation expenses, the taking of
personal property and fixtures belonging to Tenant or the interruption of or
damage to Tenant's business, or attributable to improvements of the Premises
actually paid by Tenant.
14.3 ABATEMENT OF RENT. In the event of a partial or temporary taking
that does not result in a termination of this Lease as to the entire
Premises, the Rent shall abate in proportion to the portion of the Premises
taken or rendered untenable by such taking. Tenant hereby waives
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and releases its rights under Section 1265.130 of the California Code of
Civil Procedure or any similar statute now or hereafter in effect.
Section 15. SUBLEASE AND ASSIGNMENT
15.1 CONSENT REQUIRED. Subject to Section 15.5 hereof, Tenant shall not
sell, assign, encumber, pledge or otherwise transfer or hypothecate all or
any part of the Premises or Tenant's leasehold estate hereunder (each such
act is referred to herein as an "ASSIGNMENT"), or sublet the Premises or any
portion thereof or permit the Premises to be occupied by anyone other than
Tenant (each such act is referred to herein as a "SUBLEASE") without
Landlord's prior written consent in each instance, which consent shall not be
unreasonably withheld.
15.2 NOTICE. Tenant shall have no right to enter into an Assignment or a
Sublease unless Tenant shall have first requested in writing Landlord's
consent to such Assignment or Sublease. Any request by Tenant for Landlord's
consent to a specific Assignment or Sublease shall include (a) the name of
the proposed assignee, subtenant or occupant, (b) the nature of the proposed
assignee's, subtenant's or occupant's business to be carried on in the
Premises, (c) a copy of the proposed Assignment or Sublease, and (d) such
financial information as Landlord may reasonably request concerning the
proposed assignee, subtenant or occupant or its business.
15.3 CONDITIONS OF APPROVAL. Without limiting the circumstances under
which it may be reasonable for Landlord to withhold its consent to an
Assignment or Sublease, it is expressly agreed that it shall be reasonable
for Landlord to withhold its consent if Landlord reasonably determines that
(i) the character or value of the Buildings are likely to be adversely
affected during the Term as a result of such Assignment or Sublease, or (ii)
the financial condition of the proposed new tenant or subtenant at the time
of the proposed Assignment or Sublease is, in the reasonable opinion of
Landlord, insufficient to meet the obligations of Tenant being assigned to
such new tenant or subtenant.
15.4 COST OR PROCESSING REQUEST. Tenant shall reimburse Landlord for
Landlord's reasonable attorney's fees for the review and documentation of any
proposed Assignment or Sublease within thirty (30) days after Landlord gives
notice to Tenant of the amount thereof, together with reasonable documentation
supporting such fees.
15.5 SCOPE of ASSIGNMENT. Any sale or other transfer of a majority of
(i) the partnership interests in Tenant or any beneficial interest therein,
if Tenant is a partnership, or (ii) the capital stock in Tenant or any
beneficial interest therein, if Tenant is a corporation, shall be an
Assignment for purposes of this Lease. The sale or other transfer of more
than fifty percent (50%), by value, of the assets of Tenant used in
conducting its business in the Premises shall also constitute an Assignment
for purposes of this Lease. Notwithstanding anything to the contrary
contained in this Section 15, Tenant may assign or sublet the Premises, or
any portion thereof, without Landlord's consent, to any entity which controls,
is controlled by or is under common control with Tenant, or to any entity
resulting from the merger or consolidation with Tenant, or to any entity
which acquires all or substantially all the assets of Tenant as a going
concern of the
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business that is being conducted on the Premises, and any such Assignment
shall not be subject to the provisions of Section 15.7 below.
15.6 ASSUMPTION OF OBLIGATIONS. Each assignee, subtenant or other
transferee of all or a portion of Tenant's interest hereunder, other than
Landlord, shall assume, as provided in this Section 15.6, all obligations of
Tenant under this Lease and shall be and remain liable jointly and severally
with Tenant for the payment of Rent, and for the performance of all the
terms, covenants, conditions and agreements herein contained on Tenant's part
to be performed during the Term; provided, however, that a sublessee shall
be liable to Landlord for Rent only in the amount set forth in the Sublease.
15.7 EXCESS RENT; RECAPTURE RIGHTS. Landlord's right to the portion of
excess rent specified in this Section 15.7 is expressly reserved from the
grant of Tenant's leasehold estate. Landlord shall have such right to such
portion of the excess rent in the event of any Assignment or Sublease by any
succeeding subtenant or assignee, regardless of whether (i) the instrument
effecting any such Assignment or Sublease provides such right to Landlord, or
(ii) Landlord has approved such an instrument which fails to provide such
right to Landlord. If Landlord consents to any Assignment or Sublease, then
Tenant shall pay to Landlord within five (5) business days after Tenant's
receipt thereof, 50% of any and all consideration, as calculated pursuant to
the following sentence, received by Tenant on account of such transaction,
howsoever the same may be denominated, and in the case of Subleases, to the
extent that such consideration exceeds the pro rata portion of the Fixed Rent
and other charges payable by Tenant hereunder attributable to the sublet
portion of the Premises, based on the net Rentable Area of the Premises and
the net Rentable Area of the Premises sublet. In calculating the
consideration subject to the preceding sentence, the following items shall be
deducted therefrom: (a) the reasonable costs paid by Tenant for additional
improvements installed in the portion of the Premises subject to such
assignment or sublease by Tenant for the specific subtenant or assignee in
question, amortized over the term of such assignment or sublease with interest
thereon at the rate paid by Tenant on funds borrowed for the purpose of
making such improvements or at the Interest Rate if Tenant does not borrow
funds for such purpose and (b) reasonable leasing commissions paid by Tenant
in connection with such assignment or subletting.
Section 16. DEFAULT: REMEDIES
16.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "EVENT OF DEFAULT" by Tenant;
(a) VACATION OR ABANDONMENT. Abandonment of the Premises for a
continuous period in excess of ninety (90) days.
(b) NONPAYMENT OF MONEY. Failure to pay Rent or any other sum due and
payable by Tenant under this Lease.
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(c) OTHER OBLIGATIONS. Failure to perform any term, obligation,
condition, agreement or covenant under this Lease, other than nonpayment of
money;
(d) INSOLVENCY. The admission by Tenant in writing of its inability to
pay its debts as they become due; the filing by Tenant of a petition seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, the filing by Tenant of an answer admitting or failing timely to
contest a material allegation of a petition filed against Tenant in any such
proceedings or, if within thirty (30) days after the commencement of any
proceeding against Tenant seeking any such relief, such proceeding shall not
have been dismissed; the appointment of a receiver or trustee to take
possession of all or substantially all of the assets of Tenant unless such
appointment is vacated or annulled within sixty (60) days; a general
assignment by Tenant for the benefit of creditors; any action or proceeding
commenced by Tenant under any insolvency or bankruptcy act, or under any
other statute or regulation having as its purpose the protection of
creditors, or any such action commenced against Tenant and not discharged
within thirty (30) days after the date of commencement, or the attachment,
execution or other judicial seizure of all or substantially all of Tenant's
assets or the Premises, if such attachment or other seizure remains
undismissed or undischarged for a period of ten (10) days after the levy
thereof.
16.2 NOTICE TO TENANT. Upon the occurrence of any Event of Default,
Landlord shall give Tenant written notice thereof, specifying the Event of
Default and the provisions of this Lease breached by Tenant and Tenant shall
have the right to cure such Event of Default within the time periods,if any,
hereinafter specified.
(a) NONPAYMENT OF MONEY. For failure to pay Rent or any other sum,
within ten (10) days after Landlord's notice.
(b) OTHER OBLIGATIONS. For failure to perform any term, obligation,
condition, agreement or covenant under this Lease, other than nonpayment of
monies, thirty (30) days after Landlord's notice. Notwithstanding the
foregoing, if such failure cannot reasonably be cured within such 30-day
period, Tenant shall continue to have the right to cure and shall not be in
default under this Lease if Tenant commences within such 30-day period such
cure and thereafter diligently prosecutes the same to completion. No notice
of cure period shall be required or applicable hereunder for any Event of
Default specified in Section 16.1(d) except as expressly set forth in Section
16.1(d) of this Lease.
16.3 REMEDY UPON OCCURRENCE OF UNCURED EVENT OF DEFAULT. On the
occurrence of an uncured Event of Default, Landlord shall have the right
either (i) to terminate this Lease, and at any time thereafter recover
possession of the Premises, or any part thereof, and expel and remove
therefrom Tenant and any other person occupying the same, by any lawful
means, and again repossess and enjoy the Premises without prejudice to any of
the remedies that Landlord may have under this Lease, or at law or equity by
reason of the Event of Default or of such termination, or (ii) to continue
this Lease in effect for so long as Landlord does not so terminate Tenant's
right to possession, and enforce all Landlord's rights and remedies under
this Lease,
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including the right to (A) recover Fixed Rent and Additional Charges as they
become due, or (B) relet the Premises at such rental and upon such terms and
conditions as Landlord, in its reasonable discretion, may deem advisable. Acts
of maintenance, preservation or efforts to lease the Premises, the
appointment of a receiver upon application of Landlord to protect Landlord's
interest under this Lease, or re-entry or taking of possession of the
Premises by Landlord hereunder, shall not constitute an election to terminate
Tenant's right to possession unless specific written notice of such
termination is given to Tenant hereunder. Notwithstanding any relating
without termination, Landlord may at any time thereafter elect to terminate
this Lease pursuant to this Section 16.3. Provided Tenant cooperates with
Landlord, Landlord agrees to make reasonable efforts to mitigate its damages
arising from an uncured Event of Default by Tenant.
16.4 DAMAGES UPON TERMINATION. If Landlord terminates this Lease
pursuant to Section 16.3, Landlord may exercise all rights and remedies
available to a landlord at law or in equity, including, without limitation,
the right to recover from Tenant: (i) the worth at the time of award of the
unpaid Rent and other amounts payable by Tenant hereunder which had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the unpaid Rent and such other amounts which would have been
earned after termination until the time of the award exceeds the amount of
loss of Rent and such other amounts that the Tenant proves could have been
reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid Rent and such other amounts for the balance of the term
after the time of the award exceeds the amount of loss of Rent and such other
amounts that the Tenant proves could be reasonably avoided; and (iv) any
other amount necessary to compensate Landlord for all the direct costs
proximately caused by Tenant's failure to perform its obligations under this
Lease or which, in the ordinary course of things, would be likely to result
therefrom. The "worth at the time of award" of the amounts referred to in
clauses (i) and (ii) shall be computed with Interest. The "worth at the time
of award" of the amount referred to in clause (iii) shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco, California, plus one percent (1%). As used herein "time of
award" shall mean either the date upon which Tenant pays to Landlord the
amount recoverable by Landlord as hereinabove set forth, or the date of entry
of any determination, order or judgment, of any court or other legally
constituted body determining the amount recoverable, whichever first occurs.
16.5 COMPUTATION OF RENT AND OTHER AMOUNTS FOR PURPOSES OF DEFAULT. For
purposes of Section 10.4, unpaid Rent and other amounts which would have
accrued and become payable under this Lease shall consist of the sum of:
(i) the total Fixed Rent for the balance of the Term, plus (ii) a computation
of Tenant's Share of the Operating Expenses for the balance of the Term.
16.6 LANDLORD'S RIGHT TO PERFORM ON TENANT'S BREACH. In addition to any
other right or remedy of Landlord hereunder, upon the occurrence of an
uncured Event of Default and without waiving or releasing Tenant from any
obligation of Tenant hereunder, Landlord may (but shall not be required) to
cure such uncured Event of Default for the account of Tenant.
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Landlord shall not be responsible or liable to Tenant for any loss or damage
that may be caused to Tenant's stock or business by reason of effecting cure
hereunder, unless caused by the gross negligence or willful misconduct of
Landlord or Landlord's Agents. All sums paid by Landlord and all costs and
expenses incurred by Landlord in connection with such cure (including
attorneys' fees), together with interest thereon at the Interest Rate from
the respective dates of Landlord's payment of each item of cost or expenses,
shall be payable by the Tenant on demand.
16.7 LANDLORD'S DEFAULTS.
(a) NOTICE AND CURES; LANDLORD'S LIABILITY. If Landlord fails to perform
any of its obligations under this Lease, then Tenant shall give Landlord
written notice thereof, specifying with particularity the breach claimed by
Tenant. Except for Landlord's failure to make repairs required under Section
10.1, Landlord shall have the right to cure such breach during the 30-day
period following receipt of Tenant's notice hereunder, unless such breach
cannot reasonably be cured within such 30-day period, in which event Landlord
shall not be in default under this Lease if Landlord commences within such
30-day period such cure and thereafter diligently prosecutes the same to
completion. Notwithstanding the foregoing, if such breach causes immediate
damage to Tenant's personal property or the ordinary conduct of Tenant's
business, such as roof leaks, Landlord shall use commercially reasonable
efforts to cure such breach as soon as possible. In addition, in the event
Landlord fails to cure such breach within the time period set forth herein,
Tenant shall have the right, but not the obligation, to cure such breach and
the reasonable costs and expenses incurred by Tenant in connection with such
cure, together with interest thereon at the Interest Rate from the respective
date(s) of Tenant's payment of each item of cost or expense, shall be payable
by Landlord upon demand. If the Premises, or any portion thereof, are at any
time subject to any mortgage or a deed of trust, and either Landlord or the
mortgagee or beneficiary has notified Tenant of the existence of such
mortgage or deed of trust, Tenant shall serve on the mortgagee or beneficiary
thereunder concurrent copies of any notice of default served on Landlord
hereunder at the last address for such mortgagee or beneficiary of which
Tenant has received notice from Landlord.
(b) RECOVERY AGAINST LANDLORD. Tenant shall look solely to Landlord's
interest in the Property for the recovery of any judgment against Landlord.
Landlord, or if Landlord is a partnership, its partners whether general or
limited, or if Landlord is a corporation, its directors, officers and
shareholders, shall not be personally liable for any such judgment.
16.8 WAIVER; REMEDIES CUMULATIVE. Failure of Landlord or Tenant to
declare an Event of Default immediately upon the occurrence thereof, or delay
in taking any action in connection therewith, shall not waive such Event of
Default, but Landlord or Tenant shall have the right to declare any such
Event of Default at any time thereafter. No waiver by Landlord or Tenant of
an Event of Default, or any agreement, term, covenant or condition
contained in this Lease, shall be effective or binding on the other party
unless made in writing and no such waiver shall be implied from any omission
by Landlord or Tenant to take action with respect to such Event of Default or
other such manner.
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SECTION 17. SUBORDINATION, ATTORNMENT AND ESTOPPELS
17.1 SUBORDINATION. Without the necessity of any additional document
being executed by Tenant for the purpose of effecting a subordination, this
Lease, and all of Tenant's rights under this Lease, shall be subject and
subordinate at all times to the lien of any mortgage or deed of trust or
other security instrument (and any advances or interest thereunder) that may
now exist or hereafter be executed in any amount for which the Property or
any portion thereof, is specified as security, and all modifications,
renewals, supplements, consolidations and replacements thereof, provided that
the rights of Tenant herein are not disturbed so long as Tenant is not in
default. If any such mortgagee or beneficiary so elects in writing, then this
Lease shall be superior to the lien of the mortgage or deed of trust held by
such mortgagee or beneficiary, whether this Lease is dated or recorded before
or after such mortgage or trust deed. Tenant shall promptly execute and
deliver, upon demand by Landlord and in substantially the form reasonably
requested by Landlord, any additional documents evidencing the priority or
subordination of this Lease, provided such documents contain the
nondisturbance agreement described in Section 17.2 hereof.
17.2 ATTORNMENT BY TENANT: NON DISTURBANCE. Upon enforcement of any
rights or remedies under any mortgage or deed of trust to which this Lease is
subordinated (including, without limitation, proceedings for judicial or
power of sale foreclosure, or deed in lieu of foreclosure delivered by
Landlord to the mortgagee or beneficiary thereunder), Tenant shall attorn to
the purchaser or transferee under such right or remedy and recognize such
purchaser or transferee as Landlord under this Lease. If Tenant attorns
hereunder, then, so long as there is no uncured Event of Default, Tenant
shall not be disturbed in its possession of the Premises. Tenant shall
execute and deliver any reasonable document or instrument required by such
purchaser or transferee confirming the attornment hereunder.
17.3 CERTIFICATES. Tenant, at any time during the Term and from time to
time, shall execute, acknowledge and deliver to Landlord, addressed (at
Landlord's request) to any prospective purchaser or mortgagee of any part of
the Property a certificate stating: (a) that Tenant has accepted the Premises
(or, if Tenant has not done so, that Tenant has not accepted the Premises and
specifying the reasons therefor), (b) the Commencement Date and Expiration
Date of this Lease, (c) that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that this Lease is in full
force and effect as modified and stating the modifications), (d) whether or
not Tenant is aware of any then existing defenses against the enforcement of
any of the obligations of Tenant under this Lease (and, if so, specifying
same), (e) whether or not Tenant is aware of any then existing defaults by
Landlord in the performance of its obligations under this Lease (or acts or
omissions which would constitute defaults if uncured after notice), and, if
so, specifying same, (f) the dates, if any, to which the Rent and Additional
Charges and other amounts under this Lease have been paid, (g) Tenant's use
of and knowledge with respect to Hazardous Materials under, over and upon the
Premises, and (h) any other information and statements that may reasonably be
required by Landlord. In addition, Landlord, at any time during the Term and
from time to time upon reasonable request by Tenant,
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shall execute, acknowledge and deliver to Tenant, addressed to Tenant, a
certificate containing, if true, the matters described in the foregoing items
(b), (c), (f), and any other information and statements that may reasonably
be required by Tenant. It is intended that any such certificate of Tenant may
be relied upon by any prospective purchaser or mortgagee of all or any part
of the Property.
SECTION 18. FEES AND EXPENSES; PAYMENT
18.1 INTEREST ON PAST DUE OBLIGATIONS. Unless otherwise specifically
provided herein, any amount due from Tenant to Landlord under this Lease
(including, without limitation, any payment of Rent) which is not paid within
ten (10) after written notice to Tenant (except no notice need be given for
failure to make any payment of Fixed Rent) shall bear interest from the due
date until paid at the Interest Rate. The payment of such interest shall not
alone excuse or cure any default under this Lease.
18.2 LATE CHARGES. Tenant acknowledges that late payment by Tenant to
Landlord of Rent will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord by the
terms of any encumbrance and note secured by any encumbrance covering the
Premises. Therefore, in addition to the provisions of Section 18.1, if any
installment of Rent due from Tenant is not received within ten (10) days
after written notice to Tenant (except no notice need be given for failure to
make any payment of Fixed Rent) by Landlord, Tenant shall pay to Landlord an
additional sum of five percent (5%) of the overdue Rent as a late charge. The
parties agree that this late charge represents a fair and reasonable estimate
of the costs that Landlord will incur by reason of late payment by Tenant.
SECTION 19. ACCESS TO PREMISES
19.1 LANDLORD ACCESS. Landlord reserves for itself and its agents,
employees and independent contractors the right to enter the Premises at all
reasonable times and upon reasonable notice (i) to inspect the Premises,
(ii) to supply any service to be provided by Landlord to Tenant hereunder,
(iii) to show the Premises to prospective purchasers, mortgagees or tenants,
(iv) to post notices of non-responsibility, (v) to determine whether Tenant is
complying with its obligations under this Lease, (vi) to alter, improve or
repair the Premises or any other portion of the Buildings and (vii) for any
other lawful purpose not inconsistent with Tenant's rights hereunder. Any
entry by Landlord or Landlord's Agents pursuant to this section shall, except
in the case of any emergency, be upon forty-eight (48) hours' advance notice
to Tenant. Landlord shall comply with Tenant's security, safety and other
procedures applicable to the Premises and shall not unreasonably interfere
with Tenant's use of the Premises or the conduct of Tenant's business therein
while in the Premises. Provided Landlord complies with the requirements of
this section, Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, any right to abatement of Rent,
or any other loss occasioned by
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Landlord's exercise of any of its rights under this Section 19, unless caused
by the negligence or willful misconduct of Landlord or its agents, employees
or contractors. Landlord shall have the right to use any and all means that
Landlord may reasonably deem necessary or proper in order to obtain entry to
any portion of the Premises in an emergency.
19.2 NTI ACCESS. Tenant acknowledges that the Fire Department for the
City of Richmond may require an emergency access exit through the hallways of
the Premises for the benefit of Neurobiological Technologies, Inc. (""NTI''),
the tenant occupying space adjacent to Tenant, and agrees to cooperate with
the Fire Department and NTI to provide such emergency access exit through the
hallways of the Premises in the event such emergency access is required.
Tenant agrees to cooperate with NTI in order to develop safety and security
procedures and systems for emergency access through the doors separating the
Premises and the premises occupied by NTI.
SECTION 20. NOTICES
Except as otherwise expressly provided in this Lease, any bills,
statements, notices, demands, requests or other communications given or
required to be given under this Lease shall be effective only if rendered or
given in writing, and either sent by overnight delivery service or registered
or certified mail, return receipt requested, addressed (a) to Tenant (i) at
the Premises, or (ii) at Tenant's last known address or at any place where
Landlord believes that Tenant or any agent or employee of Tenant may be
found, if sent subsequent to Tenant's vacating, deserting, abandoning or
surrendering the Premises, (b) to Landlord at Landlord's Address, or (c) to
either Landlord or Tenant at such other address as either Landlord or Tenant
may designate as its new address for such purpose by notice given to the
other in accordance with the provisions of this Section 20. Any such bill,
statement, notice, demand, request or other communications shall be deemed to
have been rendered or given (i) on the date it is officially recorded as
delivered to the intended recipient by return receipt or equivalent, and, in
the absence of such record of delivery, the effective date shall be presumed
to have been the third (3rd) business day after the date when it shall have
been deposited in the mail as provided in this Section 20 if sent by
registered or certified mail. If Tenant is notified of the identity and
address of any mortgagee of Landlord, Tenant shall give to such mortgagee by
registered or certified mail written notice of any default by Landlord or
failure by Landlord to perform any of its obligations hereunder.
SECTION 21. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the rules and
regulations for the Buildings, a copy of which has been provided to Tenant,
and all reasonable modifications thereof and additions thereto which are
applicable to multiple tenants and which do not adversely affect Tenant in a
material way from time to time put into effect by Landlord. Landlord shall
have the right to promulgate different rules and regulations applicable to
different portions of the Buildings, but Landlord shall not have the right to
promulgate different rules and regulations applicable only to Tenant. If
there is any conflict between the terms of the rules and regulations and any
provision of this Lease, the terms of this Lease shall govern. Landlord shall
not be responsible
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for the nonperformance by any other tenant or occupant of the Buildings of
any of such rules and regulations. Landlord's consent where required under
the rules and regulations shall not be unreasonably withheld, conditioned or
delayed.
SECTION 22. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord the Security Deposit, if any, set
forth in the Basic Lease Information upon execution of this Lease, as
security for Tenant's faithful performance of its obligations under this
Lease. Landlord and Tenant agree that the Security Deposit may be commingled
with other funds of Landlord. If Tenant fails to pay any Rent or other
amount when due and payable under this Lease, or fails to perform any of the
terms hereof, Landlord may appropriate and apply or use all or any portion of
the Security Deposit for Rent payments or any other amount then due and
unpaid, for payment of any amount for which Landlord has become obligated as
a result of Tenant's default or breach, and Landlord may so apply or use this
deposit without prejudice to any other remedy Landlord may have by reason of
Tenant's default or breach. If Landlord so uses any of the Security Deposit,
Tenant shall, within ten (10) days after written demand therefor, restore the
Security Deposit to the full amount originally deposited; Tenant failure to
do so shall constitute an act of default hereunder. If Tenant performs all
of tenant's obligations hereunder, the Security Deposit, or so much thereof
as has not theretofore been applied by Landlord, shall be returned to Tenant
(or to the last permitted assignee, if any, of Tenant's interest hereunder)
within fifteen (15) days after the end of the Lease. If Landlord sells its
interest in the Premises, Landlord shall deliver this deposit to the
purchaser of Landlord's interest and thereupon be relieved of any further
liability or obligation with respect to the Security Deposit.
SECTION 23. SURRENDER OF PREMISES ON TERMINATION
On the Expiration Date or earlier termination of the Term, Tenant shall
quit and surrender the Premises to the Landlord, broom clean, in good order,
condition and repair as required by Section 10.1, ordinary wear and tear,
fire and other casualties, acts of God or other causes beyond the control of
the Tenant excepted, and Tenant shall comply with the provisions of Section
9.2 of this Lease. Unless Landlord expressly agrees in writing to the
contrary, Tenant shall remove all machinery, equipment, trade fixtures and
materials that Tenant has placed on the Premises and Tenant shall repair any
and all damage to the Premises caused by Tenant's removal of such equipment,
machinery, trade fixtures and materials.
SECTION 24. MISCELLANEOUS
24.1 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 15
regarding assignment and subleasing by Tenant, the terms, covenants and
conditions contained in this Lease shall bind and inure to the benefit of
Landlord and Tenant and, except as otherwise provided herein, their
respective personal representatives and successors and assigns; provided,
however, that upon the sale, assignment or transfer by Landlord (or by any
subsequent landlord)
24
<PAGE>
of its interest in the Buildings or the property as owner or lessee,
including any transfer upon or in lieu of foreclosure or by operation of law,
Landlord (or subsequent landlord) shall be relieved from all subsequent
obligations or liabilities under this Lease. Provided that Landlord delivers
the Security Deposit, if any, to its successor, Landlord shall have no
further liability to Tenant with respect thereto.
24.2 CONSTRUCTION. This Lease shall be governed by and construed in
accordance with the laws of the State of California. Any actions or
proceedings brought under this Lease, or with respect to any matter arising
under or out of this Lease, shall be brought and tried only in courts located
in the County of Contra Costa, California (excepting appeal courts).
24.3 INTEGRATION. The terms of this Lease are intended by the parties
as a final expression in their agreement with respect to such terms as are
included in this Lease, and may not be contradicted by evidence of any prior
or contemporaneous agreement, arrangement, understanding or negotiation
(whether oral or written). The parties further intend that this Lease
constitute the complete and exclusive statement of its terms, and no
extrinsic evidence whatsoever may be introduced in any judicial proceeding
involving this Lease. The language in all parts of this Lease shall in all
cases be construed as a whole and in accordance with its fair meaning and not
restricted for or against any party.
24.4 LIGHT, AIR, VIEW, SIGNS, ETC. Tenant covenants and agrees that no
diminution of light, air or view, or any impairment of the visibility of the
Premises from inside or outside the Buildings, by any structure or other
object that may be hereafter erected (whether or not by Landlord) shall
entitle Tenant to any reduction of Rent under this Lease, constitute an
actual or constructive eviction of Tenant, result in any liability of
Landlord to Tenant, or in any other way affect this Lease or Tenant's
obligations hereunder. Landlord shall have the exclusive right to use all
exterior walls, roofs and other portions of the Buildings for signs, notices
and other reasonable promotional purposes. Tenant shall not place or allow
to be placed in, on or about the Buildings any sign or other notice
indicating Tenant's desire to assign this Lease or sublet the Premises.
24.5 HOLDING OVER. If Tenant remains in possession of the Premises
after the expiration of the Term with the express written consent of Landlord
and without executing a new lease, then such holding over shall be deemed a
tenancy from month-to-month, subject to all conditions, provisions and
obligations of this Lease. No holding over by Tenant after the Term shall
operate to extend the Term. In the event of any unauthorized holding over,
Landlord and Tenant agree that Landlord's damages, including any claims for
damages by any other tenant to whom Landlord may have leased all or any part
of Premises, would be difficult to establish. Landlord and Tenant desire to
liquidate the damages payable to Landlord in the event Tenant holds over
after the term without Landlord's consent and therefore agree upon damages
payable by Tenant to Landlord in a daily amount of the monthly Fixed Rent in
effect immediately prior to holding over, which daily amount shall increase
by five percent (5%) per day but in no event more than 100%, such that for
example, on the tenth day, the increase for
25
<PAGE>
such day would be 50%. Landlord and Tenant agree that the above described
formula to establish damages is fair and reasonable.
24.6 COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24.7 BROKER'S COMMISSION. Landlord shall pay all brokers commissions
payable to the Brokers listed in the Basic Lease Information in connection
with this transaction. Tenant represents and warrants that other than such
Brokers, Tenant has not entered into any agreement or incurred or created any
obligation which might require Landlord to pay any broker's commission,
finder's fee or other commission or fee relating to the leasing of the
Premises, unless disclosed to and accepted by Landlord in writing before the
date hereof, and Tenant shall defend, indemnify and hold harmless Landlord
from and against any claims for any such commissions or fees by anyone
claiming by or though Tenant.
24.8 LANDLORD'S CONSENTS. Unless otherwise expressly provided in this
Lease, all consents and approvals to be given by Landlord may be withheld for
any reason or no reason, at Landlord's sole discretion, and any such action
shall not be deemed inconsistent with any covenant of good faith and fair
dealing otherwise implied by law to be a part of this Lease. Landlord's
failure to respond to a request for consent or approval from tenant with
thirty (30) days (or such other period as may be provided in this Lease)
shall be deemed to constitute the granting of such consent or approval.
24.9 AMENDMENTS. No amendments or modifications of this lease or any
agreements in connection therewith shall be valid unless in writing duly
executed by both Landlord and Tenant.
24.10 CONFIDENTIALITY. Landlord shall keep and maintain as confidential
and shall not disclose to third parties all information, documents and other
data supplied by Tenant to Landlord pursuant to or in connection with this
Lease that Tenant identifies as confidential at the time Tenant provides such
information to Landlord; provided, however, that Landlord may disclose such
information, documents and other data to its counsel and consultants who
agree to keep it confidential and to the extent required by applicable
governmental laws, orders, rules, ordinances and regulations.
24.11 ATTORNEYS' FEES. If either party becomes a party to any
litigation concerning this Lease, the Premises, or the Property by reason of
any act or omission of its authorized representative, the party that causes
the other party to become involved in the litigation shall be liable to the
party involved for reasonable attorneys' fees and court costs incurred by it
in the litigation. If either party commences an action against the other
party arising out of or in connection with this Lease, or institutes any
proceeding in a bankruptcy or similar court which has jurisdiction over the
other party or any or all of its property or assets, the prevailing party
shall be entitled to have and
26
<PAGE>
recover from the losing party reasonable attorneys' fees and court costs.
"PREVAILING PARTY" within the meaning of this Section 24.11 shall include a
party who dismisses an action for recovery hereunder in exchange for payment
of the sums allegedly due, performance of covenants allegedly breached or
consideration substantially equal to the relief sought in the action.
24.12 NO DISCRIMINATION. There shall be no discrimination against or
segregation of any person or group of persons, on account of race, color,
creed, religion, sex, marital status, national origin, or ancestry, in the
leasing, subleasing, transferring, use, occupancy, tenure, or enjoyment of
the Premises, nor shall Tenant or any person claiming under or through
Tenant, establish or permit any such practice of discrimination or
segregation with reference to the selection, location, number, use, or
occupancy, of tenants, lessees, sublessees, subtenants, or vends in the
Premises affecting the Premises. Landlord shall deliver to Tenant a copy of
(a) any Covenants, Conditions and Restrictions affecting the Premises; and
(b) any rules and regulations governing Tenant's use of the Premises. Tenant
hereby acknowledges receipt of the aforementioned documents.
SECTION 25. PARKING AND SIGNAGE
25.1 PARKING. During the Term, Tenant shall have the non-exclusive right
to three (3) parking spaces per 1,000 square feet of the Rentable Area in the
Premises (18 spaces). The parking spaces shall be in the areas designated by
Landlord from time to time for non-exclusive Tenant parking. Tenant shall
abide by any and all reasonable parking regulations and rules applicable to
multiple tenants established from time to time by Landlord.
25.2 SIGNAGE. Tenant shall not affix, paint, erect or inscribe any sign,
projection, awning, or advertisement of any kind to any part of the Premises,
Building or Property, including, without limitation, the inside or outside of
windows or doors, without the written consent of Landlord which shall not be
unreasonably withheld, conditioned or delayed so long as such signage is
consistent with signage generally approved by Landlord for the Property.
SECTION 26. EXPANSION OPTION
26.1 OPTION. Provided this Lease is in full force and effect and Tenant
is not in default hereunder, Tenant shall have the option ("Expansion
Option") from the date of this Lease until May 31, 2000 to lease all and not
part of the adjacent space in the Building currently occupied by NTI,
consisting of approximately 6,912 square feet of space (the "Expansion
Space"), upon Tenant's receipt of written notice from Landlord ("Expansion
Space Notice") stating that the Expansion Space has become available for
lease by Tenant. If Tenant fails to exercise the Expansion Option within
thirty (30) days following Tenant's receipt of the Expansion Space Notice,
the Extension Option shall lapse and be of no further force and effect. NTI's
current lease with Landlord expires on April 30, 1999 with an option by NTI
to extend its lease with Landlord for an additional year. Accordingly, Tenant
acknowledges that the Expansion Space may never become available. TENANT
HEREBY FURTHER ACKNOWLEDGES AND AGREES THAT BY EXERCISING ITS EXPANSION
OPTION HEREUNDER, TENANT SHALL BE DEEMED TO HAVE EXERCISED ITS OPTION TO EXTEND
27
<PAGE>
THIS LEASE PURSUANT TO SECTION 27 BELOW FOR AN ADDITIONAL FIVE (5) YEAR TERM
COMMENCING UPON THE EXPIRATION OF THE INITIAL TERM OF THIS LEASE.
26.2 EXPANSION SPACE COMMENCEMENT DATE. The "Expansion Space
Commencement Date" shall occur on the earlier of (i) the date Tenant enters
into occupancy of all or any portion of the Expansion Space for the purpose
of conducting Tenant's business thereon or (ii) the date which shall occur
sixty (60) days after Landlord delivers vacant possession of the Expansion
Space to Tenant. Notwithstanding anything contained herein to the contrary,
(i) Landlord shall not be obligated to lease and deliver the Expansion Space
to Tenant if at the time of Landlord's Expansion Space Notice or if, at or
prior to delivery of the Expansion Space, an Event of Default shall have
occurred and be continuing hereunder and (ii) in the event Landlord shall not
deliver possession of all or any portion of the Expansion Space to Tenant on
or before the Expansion Space Commencement Date for any reason other that the
willful default of Landlord. Landlord shall not be deemed in default of or
otherwise liable to Tenant for any claims, damages or liabilities in
connection therewith and the Term of this Lease with respect to the Expansion
Space shall commence on the date Landlord delivers possession of the
Expansion Space to Tenant; provided however that if the Expansion Space to
Tenant; provided however that if the Expansion Space is not available by
reason of the holding over or the retention of possession by any tenants or
occupants thereof, Landlord shall promptly and diligently take all steps
which are commercially reasonable to obtain possession thereof.
26.3 EXPANSION SPACE TERMS. In the event Tenant exercises its Expansion
Option as provided herein, from and after the Expansion Space Commencement
Date, The Premises shall thereafter include the Expansion Space and this
Lease shall continue on the same terms and conditions except that (i) the
fixed Monthly Rent shall be an amount equal to $19,125,000 and (ii) Tenant's
Share of Operating Expenses and Real Estate Taxes shall increase to 9.75% to
reflect the inclusion of the Expansion Space in the Premises. The Expansion
Space shall be delivered in its "AS IS" condition and Landlord shall have no
obligation to perform any work or alternations in order to prepare the
Expansion Space for Tenant's initial occupancy.
SECTION 27. OPTION TO EXTEND
Provided this Lease is in full force and effect and Tenant is not in
default hereunder, Tenant shall have the right to extend the Term of this
Lease for one (1) five (5) year term ("Extended Term") upon prior written
notice to Landlord given not later than six (6) months prior to the
expiration of the initial Term ("Extension Notice") unless previously
exercised by Tenant under Section 26 of this Lease. It is understood and
agreed that Tenant's submittal of Tenant's Extension Notice shall bind Tenant to
a five (5) year extension of this Lease. The Extended Term shall be on the same
terms and conditions as provided in this Lease, except that (i) Tenant shall
occupy the Premises in its then "AS IS" condition and (ii) if Tenant has not
<PAGE>
exercised its Expansion Option in Section 26 above, the Fixed Monthly Rent
for the extended Term shall be as follows:
<TABLE>
<CAPTION>
YEAR FIXED MONTHLY RENT
---- ------------------
<S> <C>
January 1, 2001 - $8,807.00
December 31, 2001
January 1, 2002 - $9,071.00
December 31, 2002
January 1, 2003 - $9,343.00
December 31, 2003
January 1, 2004 - $9,623.00
December 31, 2004
January 1, 2005 - $9,912.00
December 31, 2005
</TABLE>
In the event Tenant has exercised its Expansion Option in Section 26
above, the Fixed Monthly Rent shall be as follows:
<TABLE>
<CAPTION>
YEAR FIXED MONTHLY RENT
---- ------------------
<S> <C>
January 1, 2001 - $19,699.00
December 31, 2001
January 1, 2002 - $20,290.00
December 31, 2002
January 1, 2003 - $20,898.00
December 31, 2003
January 1, 2004 - $21,525.00
December 31, 2004
January 1, 2005 - $22,171.00
December 31, 2005
</TABLE>
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have each caused their duly
authorized representatives to execute this lease on their respective behalf
as of the day and year first above written.
LANDLORD:
MARINA WESTSHORE PARTNERS, LLC,
a California limited liability company
By: /s/ Richard R. Poe
-------------------------------
Richard R. Poe, Its Manager
TENANT:
QRS CORPORATION,
a Delaware corporation
By: /s/ Shawn O'Connor
-------------------------------
Name: Shawn O'Connor
Title: Chief Operating Officer
<PAGE>
EXHIBIT A
---------
FLOOR PLAN
<PAGE>
EXHIBIT B
---------
LEGAL DESCRIPTION
<PAGE>
EXHIBIT B
---------
ORDER NO. 19003
The land referred to in this report is situated in the state of California,
County of CONTRA COSTA, and is described as follows:
CITY OF RICHMOND
PARCELS A AND C OF SUBDIVISION N.S. 758-89, FILED OCTOBER 3, 1989, IN BOOK
142 OF PARCEL MAPS, PAGES 36 & 37, CONTRA COSTA COUNTY RECORDS.
EXCEPTING THEREFROM:
EXCEPTING FROM A PORTION OF THE ABOVE DESCRIBED PARCEL:
ALL OIL, GAS AND OTHER HYDROCARBON AND MINERAL SUBSTANCES LYING NOT LESS THAN
500 FEET BELOW THE SURFACE OF SAID LAND, PROVIDED THAT GRANTOR, ITS
SUCCESSORS AND ASSIGNS SHALL NOT HAVE THE RIGHT TO GO UPON THE SURFACE OF
SAID LAND FOR THE PURPOSE OF EXTRACTING SAID OIL, GAS OR OTHER HYDROCARBON
AND MINERAL SUBSTANCES, NOR FOR ANY PURPOSE IN CONNECTION THEREWITH, BUT
SHALL HAVE THE RIGHT TO EXTRACT AND REMOVE SAID OIL, GAS AND OTHER
HYDROCARBON AND MINERAL SUBSTANCE BY MEANS OF SLANT DRILLED WELLS OR SIMILAR
METHODS LOCATED ON ADJACENT OR NEARBY LAND OR BY OTHER MEANS WHICH SHALL NOT
REQUIRE ENTRY UPON THE SURFACE OF SAID LAND, AS RESERVED IN THE DEEDS FROM
SANTA FE LAND IMPROVEMENT COMPANY, RECORDED SEPTEMBER 16, 1977, IN BOOK 3506,
PAGES 381 AND 415, OFFICIAL RECORDS.
ALSO EXCEPTING FROM A PORTION OF THE ABOVE DESCRIBED PARCEL:
ALL OIL, GAS, MINERALS AND GEOTHERMAL ENERGY EXISTING 500 FEET BELOW THE
SURFACE OF THE LANDS CONVEYED BY THIS DEED TO THE RICHMOND REDEVELOPMENT
AGENCY, HOWEVER, THIS RESERVATION OF RIGHTS TO SAID OIL, GAS, MINERAL AND
GEOTHERMAL ENERGY SHALL NOT INCLUDE ANY RIGHTS TO UTILIZE THE SURFACE OF THE
LANDS CONVEYED HEREIN FOR ACCESS: THE RESERVED RIGHT TO EXPLOIT SAID OIL,
GAS, MINERAL AND GEOTHERMAL ENERGY IS LIMITED TO SLANT DRILLING OR SIMILAR
METHODS FROM ADJACENT OR NEARBY PROPERTIES WITH SAID DRILLING TO BE AT LEAST
200 FEET BELOW THE SURFACE OF SAID CONVEYED LANDS, AND IN ANY EVENT SUCH
SLANT DRILLING SHALL BE DONE IN A MANNER AND AT SUCH DEPTH AS TO NOT ENDANGER
THE SAFETY OF ANY IMPROVEMENTS ERECTED HEREAFTER UPON THE LANDS CONVEYED
HEREIN, AS EXCEPTED IN THE DEED FROM THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA, A PUBLIC CALIFORNIA CORPORATION, RECORDED MARCH 29, 1979, IN BOOK
9283, OR, PAGE 983.
ASSESSOR'S PARCEL NO. 560-181-036
<PAGE>
EXHIBIT C
---------
WORK LETTER
The Work Letter is incorporated into and made a part of that certain
Marina Bay Business Park Office Lease between Marina Westshore Partners, LLC
and QRS Corporation. All initial-capitalized terms used in this Work Letter
and not otherwise defined herein shall have the meanings ascribed to them
elsewhere in the Lease.
ARTICLE 1
GENERAL PROVISIONS
------------------
1.1 TENANT IMPROVEMENTS. Tenant shall plan, design and construct
certain office improvements (the "Tenant Improvements") in accordance with
the provisions of this Work Letter and all other applicable terms and
conditions of the Lease.
1.2 TENANT'S WORK. The planning, design and construction of the Tenant
Improvements are referred to collectively as "Tenant's Work."
1.3 COSTS OF THE WORK. For purposes of this Work Letter, "Costs of the
Work" shall mean and include all: (a) architect's, engineer's and consultants'
fees and costs; (b) deposits, fees and costs for building and other permits,
licenses and approvals; (c) tests and inspections; (d) security; (e) insurance
and bond premiums; (f) utilities; (g) all amounts payable to any contractors,
subcontractors, suppliers and vendors; and (h) all other charges, fees,
expenses and other costs incurred or arising in connection with any
particular work.
1.4 CONSTRUCTION STANDARDS. The Tenant Improvements shall be
constructed by Tenant in a good and workmanlike manner, free from material
defects in workmanship and materials and in accordance with Section 9 of this
Lease and all applicable laws.
ARTICLE 2
IMPROVEMENT PLANS
-----------------
21. PLANS FOR TENANT IMPROVEMENTS. Tenant agrees at Tenant's sole cost and
expense, to perform the Tenant's Work in accordance with drawings,
specifications and other plans necessary for the development, approval and
construction of the Tenant Improvements (collectively, the "Plans")
reasonably approved by Landlord, Landlord shall have the right to reasonably
approve the general contractor for Tenant's Work. Tenant shall submit the
Plans for Tenant's Work to Landlord and shall reimburse Landlord for all
reasonable costs which Landlord may incur in connection with the granting
approval of Tenant's Work. Landlord shall, within thirty (30) days of receipt
of the Plans, approve or disapprove the Plans. In the event of disapproval,
Landlord shall state its reasons for disapproval and the parties thereafter
shall work together in good faith to reach prompt agreement upon
modifications to the Plans. Tenant shall file a notice of completion after
completion of Tenant's Work and provide Landlord with a copy thereof.
2.2 EFFECT OF LANDLORD'S ACCEPTANCE. Tenant acknowledges that
Landlord's review of the Plans are not being undertaken solely for Landlord's
benefit, and Landlord shall not be
<PAGE>
EXHIBIT 10.51 FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("Amendment") is made and entered into as
of November 20,1998 by and between MARINA WESTSHORE PARTNERS, LLC, a California
limited liability company ("Landlord") and QRS CORPORATION, a Delaware
corporation ("Tenant").
RECITALS
A . Landlord and Tenant entered into that certain lease captioned
"Marina Bay Business Park Office Lease" dated as of May 15, 1998 (the "Lease") -
B . Landlord and Tenant have discussed modifications to the Lease,
including the addition of certain space to the premises, and have reached an
agreement thereon, as set forth below.
NOW, THEREFORE, for mutual consideration, the receipt and adequacy of
which is hereby acknowledged, Landlord and Tenant hereby amend the Lease as
follows:
1. The Basic Lease Information is hereby amended as follows,
effective January 1, 1999: (i) the Rentable Area of the Premises is increased
by 16,940 Square Feet ("Additional Space") for a total of 22,528 Square Feet;
(ii) the Additional Space is shown on revised EXHIBIT A attached hereto,
which replaces the original EXHIBIT A attached to the Lease (iii) the Fixed
Rent payable monthly is increased $34,467.84 ($413,614.08 per annum); (iv)
Tenant's Share is increase to 17.58%; and (v) the Security Deposit is
increased to $34,467.84. Tenant shall pay Landlord the $25,917.84 increase in
the Security Deposit within five days after mutual execution of this
Amendment.
2. Section 3.1 is amended by adding the following language at the end
of such Section:
Tenant and an affiliate of Landlord, Marina Bay Partners, LLC ("MBP")
have entered into a lease (the "MBP Lease") for certain real property adjacent
to the Property in contemplation of MBP constructing an office building thereon
in which Tenant will occupy approximately 47,625 square feet (the "New
Premises"). The New Premises are intended to replace the Premises leased by
Tenant under this Lease. Accordingly, and subject to MBP's completion of the New
Premises pursuant to the MBP Lease, upon the occurrence of the Commencement Date
as defined in the MBP Lease and Tenant's vacation of the Premises in the
condition required Under this Lease, this Lease shall terminate and Tenant
shall have no further obligations hereunder, including without limitation, the
obligation to pay Rent.
<PAGE>
3. Landlord shall make the following improvements to the Additional
Space, such improvements to be completed by Landlord in a good and workmanlike
manner prior to January 1, 1999:
(a) Landlord shall prepare for office use the existing Galaxy
Brands warehouse space of approximately 7,250 square feet by installing new
building standard carpeting in the color selected by Tenant, HVAC and drop
ceiling improvements consistent with such improvements in the office portions of
the Premises currently occupied by Tenant.
(b) Landlord shall install windows in place of the roll-up doors
and roll-up knockout panels on the west side of Building C, consistent with the
windows currently in place on the west side of Building C.
(c) Landlord shall upgrade and expand the existing restrooms in
the Additional Space by installing a shower and two toilets in the women's
restroom and one toilet and one urinal in the men's restroom, such improvements
to be building standard quality and in compliance with all applicable laws,
including without limitation, the Americans With Disabilities Act.
4. Landlord shall provide Tenant access to the Additional Space prior
to January 1, 1999 to enable Tenant to make the following improvements thereto:
Tenant may recarpet the portions of the Additional Space that Landlord is not
recarpeting pursuant to Section 3(a) above. Tenant may also repair and repaint
any damaged areas of the Additional Space. Tenant may make other improvements to
the Additional Space, subject to Tenant's compliance, with Section 9.1 of the
Lease. To the extent that Tenant performs any work hereunder prior to January 1,
1999, Tenant shall schedule and perform such work to minimize interference with
Landlord's performance and completion of the improvements to be made by Landlord
pursuant to Section 3 above.
5. Section 26 of the Lease is amended by deleting Sections 26.1, 26.2
and 26.3 therefrom, and adding a new Section 26.1 to read in full as follows:
26.1 EXPANSION SPACE. In the event that NTI vacates the space in
the Building currently occupied by NTI, consisting of approximately 6,912 square
feet of space (the "Expansion Space"), Tenant shall have the option to add the
Expansion Space to the Premises. Tenant shall have thirty (30) days following
Tenant's receipt of written notice from Landlord that the Expansion Space will
be vacated by NTI to provide notice of exercise of such option. In the event
that Tenant so exercises its option hereunder, the Expansion Space shall become
a part of the Premises effective upon the later of the date that NTI vacates
such space or thirty (30) days following the date that Tenant gives Landlord
its exercise notice. The Expansion Space shall be leased by Tenant in an "AS
IS" condition, Fixed Rent for the Expansion Space shall be paid on the same
basis per square foot as Fixed Rent on the existing Premises, Tenant's Share
shall be increased to reflect the additional
2
<PAGE>
square footage of the Premises, and the Lease shall be amended to reflect the
inclusion of the Expansion Space.
6. LXR Biotechnologies, Inc. occupies certain space adjacent to the
Premises constituting approximately 32,000 square feet (the "LXR Space").
Provided no event of default by Tenant under the Lease has occurred and is
continuing at the time the LXR Space (or portion thereof) becomes available,
if any portion of the LXR Space becomes available for lease from Landlord,
Tenant shall have the right of first refusal to lease all of the LXR Space,
or any portion of the LXR Space selected by Tenant, provided such portion is
adjacent to the Premises. Tenant may exercise its right with regard to the
LXR Space ("LXR Space Option") by giving Landlord written notice of exercise
(the "Exercise Notice") within 30 days of Tenant's receipt of Landlord's
written notice that the LXR Space has become available for lease from
Landlord. Tenant's exercise notice shall identify the portion (if not all) of
the LXR Space to be leased by Tenant (the "Added LXR Space"). In the event
that Tenant exercises the LXR Space Option, the Added LXR Space shall be
leased by Tenant in an "AS IS" condition, Fixed Rent for the Added LXR Space
shall be paid on the same basis per square foot as Fixed Rent on the existing
Premises, Tenant's Share shall be increased to reflect the additional square
footage of the Premises, and the Lease shall be amended to reflect the
inclusion of the Added LXR Space. Landlord acknowledges that no other tenant
of Marina Bay Business Park or any other party has a right of first refusal
or expansion option with respect to the LXR Space.
7. Section 27 of the Lease is amended to read in full as follow:
Section 27. OPTION TO EXTEND
Provided no event of default by Tenant under the Lease has occurred and
is continuing at the time of delivery of an Extension Notice, Tenant shall have
the right to extend the Term of this Lease for two (2) five (5) year terms (each
an "Extended Term") upon prior written notice to Landlord given not later
than six (6) months prior to the expiration of the initial Term ("Extension
Notice"); provided however that the Extension Notice must be given as to the
second Extended Term not later than twenty-four (24) months prior to the
expiration of the first Extended Term. It is understood and agreed that Tenant's
submittal of each Extension Notice shall bind Tenant to a five (5) year
extension of this Lease. Each Extended Term shall be on the same terms and
conditions as provided in this Lease, except that (i) Tenant shall occupy the
Premises in its then "AS IS" condition, (ii) the Fixed Monthly Rent from
January, 1, 2001 through December 31, 2001, shall be $1.58 per square foot of
Rentable Area of the Premises, and (iii) thereafter, the Fixed Monthly Rent
shall be $1.60 per square foot of Rentable Area of the Premises.
8. This Amendment shall be effective upon execution by Landlord and
Tenant and, except as amended herein, the Lease shall remain in full force and
effect.
3
<PAGE>
9. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF the parties have executed this Amendment as of the
day and year first above written.
LANDLORD:
MARINA WESTSHORE PARTNERS,
LLC, a California limited liability company
By: /s/ Richard R. Poe
----------------------------------------
Richard R. Poe
Its: Manager
TENANT:
QRS CORPORATION,
a Delaware corporation
By: /s/ Peter Papano
----------------------------------------
Name: Peter Pano
Title: VP FINANCE
By:
---------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.52
MARINA BAY BUSINESS PARK
OFFICE LEASE
By and Between
MARINA BAY PARTNERS, LLC
a California limited liability company
and
QRS CORPORATION,
a Delaware corporation
Dated as of November 20, 1998
<PAGE>
BASIC LEASE INFORMATION
MARINA BAY BUSINESS PARK
OFFICE LEASE
<TABLE>
<CAPTION>
<S> <C>
LEASE DATE: Dated as of November 20, 1998
LANDLORD: Marina Bay Partners, LLC, a California limited liability
company
ADDRESS OF LANDLORD: c/o Penterra Company
1391 Marina Way South
Richmond, CA 94804
TENANT: QRS Corporation, a Delaware corporation
ADDRESS OF TENANT: (PRIOR TO QRS Corporation
COMMENCEMENT DATE; THEREAFTER AT 1400 Marina Way South
THE PREMISES: Richmond, CA 94804
PREMISES: Portion of first and second floors of Building at Marina
Bay Business Park Phase I,
Richmond, California, more
specifically set forth on the
floor plan attached as EXHIBIT A
RENTABLE AREA OF THE PREMISES: 47,625 Square Feet
TERM: The period from the Commencement Date to the
Expiration Date.
COMMENCEMENT DATE: Upon delivery of possession of the Premises "Ready for
Occupancy".
EXPIRATION DATE: June 30, 2010.
TENANT'S SHARE: 49.91%
FIXED RENT (MONTHLY): PERIOD OF TERM FIXED RENT
Commencement Date through $71,437.50/mo.
June 30, 2000 ($1.50/rsf)
7/1/2000 through 6/30/2010 $76,200.00/mo.
($1.60/rsf)
SECURITY DEPOSIT: S71,500
BROKERS: None
</TABLE>
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TABLE OF CONTENTS
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EXHIBITS: Exhibit A Floor Plan
Exhibit B Legal Description
Exhibit C Build Out of Initial TI's
Exhibit D Tenant's Improvements Work Letter
</TABLE>
NOTE: THIS BASIC LEASE INFORMATION IS PROVIDED SOLELY AS A CONVENIENCE TO
SUMMARIZE CERTAIN LEASE PROVISIONS AND IS NOT INTENDED AS A COMPLETE SUMMARY
OF ALL MATERIAL TERMS AND CONDITIONS OF THE LEASE. IN THE EVENT OF ANY
INCONSISTENCY BETWEEN ANY INFORMATION SHOWN ON THIS BASIC LEASE INFORMATION AND
THE PROVISIONS OF THE LEASE, THE PROVISIONS OF THE LEASE GOVERN.
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MARINA BAY BUSINESS PARK
OFFICE LEASE
(QRS CORPORATION, PHASE II BUILDING)
This Lease is made and entered in to as of the date specified in the
Basic Lease Information, by and between MARINA BAY PARTNERS, LLC, a California
limited liability company ("LANDLORD"), and the Tenant identified in the Basic
Lease Information.
IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS CONTAINED IN
THIS LEASE, THE PARTIES AGREE AS FOLLOWS:
SECTION 1. DEFINITIONS
Certain terms used in this Lease and the Exhibits attached to this
Lease shall have the meaning set forth below for each such term. Certain other
terms shall have the meaning set forth elsewhere in this Lease and the Exhibits
attached to this Lease.
1.1 BUILDING. The office building and related improvements to be
constructed by Landlord on the real property described in EXHIBIT B attached to
this Lease. Any enlargements to the Building or additional improvements on the
real property described in EXHIBIT B attached to this Lease shall be included in
the definition of Building for purposes of this Lease.
1.2 COMMON AREA. All of the Property, excluding those portions of the
Building not designated for the exclusive use of Tenant or other tenants, such
as the lobbies, elevators and common bathrooms, entrances, stairways and
accessways.
1.3 ENVIRONMENTAL LAW. Any federal, state or local law, ordinance or
regulation or policy applicable to the Premises during the Term, relating to
the environment, health and safety, any Hazardous Materials (including, without
limitation, the use, handling, transportation, production, disposal, discharge
or storage thereof) or to Tenant's use of the Premises, or to industrial hygiene
or the environmental conditions on, under or about the Property, including,
without limitation, soil, groundwater and indoor and ambient air conditions.
1.4 EXPIRATION DATE. The Lease shall expire on June 3O, 2010
("Expiration Date"). The Expiration Date is subject to extension pursuant to the
provisions of Section 26 of this Lease.
1.5 HAZARDOUS MATERIAL. Any hazardous or toxic substance, material or
waste the storage, use, or disposition of which is or becomes regulated by,
any local governmental authority with jurisdiction, the State of California
or the United States Government during the Term. The term "Hazardous Material"
includes, without limitation, any material or substance which is (i) defined
during the Term as hazardous or extremely hazardous pursuant to Article 11 of
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Title 22 of the California Administrative Code, Division 4, Chapter 20,
(ii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. 6901 ET SEQ. (42 U.S.C. 6903),
(iii) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
9601 ET SEQ. (42 U.S.C. 9601) or (iv) is listed or defined as a "hazardous
waste", "hazardous substance", or other similar designation by any regulatory
scheme of the State of California or the U.S. Government that is similar to the
foregoing.
1.6 INTEREST RATE. The per annum rate equal to the lesser of (i) the
reference rate, or succeeding similar index, of Bank of America, N.T. & S.A. in
effect from time to time plus two percent (2%), or (ii) the maximum rate allowed
by applicable usury law.
1.7 LEASE YEAR. A period of twelve (12) consecutive calendar months
during the Term, commencing with the Commencement Date if the Commencement
Date is the first day, of a calendar month, or commencing with the first day of
the month following the Commencement Date if the Commencement Date is not the
first day of a calendar month. The first Lease Year shall include the period
between the Commencement Date and the first day of the month following the
Commencement Date if the Commencement Date is not the first day of a calendar
month. The last Lease Year shall consist of the period between the date on which
the Term expires or terminates and the day after the last day of the preceding
Lease Year.
1.8 OPERATING EXPENSES. All expenses and costs of every kind and nature
actually incurred and paid by Landlord in, or properly allocable to, a calendar
year, in connection with the ownership, management, operation, maintenance,
repair and preservation of the Property. Specifically, but without limiting the
generality of the foregoing, Operating Expenses shall include the following:
(a) wages, salaries, payroll burdens and all related expenses and benefits of
all on-site and off-site employees to the extent attributable to the operation,
repair and maintenance of the Property; (b) all supplies, materials, tools and
rental equipment to the extent used in connection with the ownership, operation,
management, repair and maintenance of the Property; (c) property management fees
and other costs of property management, maintenance and other services for the
Property and the equipment therein which management fees shall not exceed four
percent (4%) of gross rental revenues from the Property; (d) reasonable legal
and accounting costs for the Property; provided, however, that legal expenses
shall not include the cost of negotiating leases, termination of leases,
extension of leases, legal costs incurred in proceedings against any specific
tenant or in connection with any breach by Landlord of this Lease or refinancing
of the Property; (e) premiums and all additional costs for all insurance carried
with respect to the Property (whether or not such insurance is required to be
carried pursuant to the terms of this Lease, but limited to the type and amount
of insurance customarily carried by owners of property comparable to the
Property); (f) costs of all repairs, service, service contracts and general
maintenance of the Property; (g) all maintenance and operating costs for the
Common Area and the cost of performing Landlord's maintenance and repair
obligations as provided in Section 10; (h) all Real Property Taxes; (i) subject
to the exclusion of
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capital items set forth below, all costs and expenses levied, incurred or
required to be paid, either directly or indirectly, in order to comply with
laws, statutes, ordinances, rules and regulations or the requirements of
governmental or public authorities with respect to the Property, or the
operation of the Building, or any portion thereof such as parking facilities,
sources of air pollution, traffic, storm water run-off or other adverse
environmental effects, and transit taxes, assessments or fees; and
(j) amortization of capital improvements made to the Property by Landlord which
result in a net annual reduction to the operating costs of the Property, with
amortization over such period as Landlord shall reasonably determine to be the
projected useful life of such capital improvement, together with interest
thereon at the rate paid by Landlord on funds borrowed for the purpose of making
such capital improvements, or at the Interest Rate if Landlord does not borrow
funds for such purpose. Operating Expenses shall exclude the following: (1) any
depreciation of the Building or other improvements on the Property or of the
equipment used in connection therewith; (2) any expense for which Landlord is
reimbursed pursuant to any insurance policy, warranty or other means of recovery
from third parties; (3) any costs (including permit, license and inspection
fees) of improving space for any other tenant of the Building; (4) any real
estate brokerage commissions or finders fees, advertising and promotional
expenditures; (5) any capital improvements except those described in clause
(j) above; (6) any rental under any ground or underlying lease; (7) any
financing costs, including principal and interest payments; (8) any penalties,
fines, interest or other charges attributable to the late payment of any Real
Property Taxes or other Operating Expenses; (9) Landlord's general overhead and
administrative expenses; (10) any expenses or costs incurred by Landlord as a
result of special services, privileges or amenities provided to tenants on an
individual basis rather than generally to all tenants; (11) any expenses or
costs incurred by Landlord with respect to facilities for the benefit of tenants
of the Building other than Tenant; (12) costs resulting from any failure of the
Building, as of the Commencement Date, to comply with all laws, ordinances,
regulations and codes in effect at the time of completion of construction of the
Building; (13) salaries or fringe benefits or personnel above the grade of
general manager; (14) the cost (including attorneys' fees and disbursements) of
any judgment, settlement or arbitration award resulting from any tort liability;
(15) the cost of or expenditures for any repairs in accordance with Sections 12
or 14 of this Lease; (16) costs and expenses incurred in connection with the
initial construction on the Property or the Building, whether above or below
ground; (17) costs of repairs, abatement, removal or clean-up of any Hazardous
Materials; (18) any costs or expenses that are incurred directly or indirectly
with respect to Landlord's indemnity obligations under this Lease; (19) any
costs or expenses that are incurred to make any of Landlord's representations or
warranties under this Lease true or correct; and (20) the cost of defects in the
design or construction of the Building, its structural components, the Building
systems or the Initial TI's (as defined in Section 7.2 of this Lease). In
calculating Operating Expenses, (i) the total Operating Expenses charged to the
tenants of the Building shall in no event be greater than actual total Operating
Expenses for the Property; (ii) no item of Operating Expenses shall be
included more than once; (iii) Landlord shall comply, with generally accepted
accounting principles, consistently applied.
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1.9 PERMITTED USE. General office purposes and research and
development. Tenant shall not use any portion of the Premises for any use that
is currently categorized as a biolevel-3 or higher use, unless such use is
permitted by the City of Richmond and all other governmental authorities with
jurisdiction over the Property. Landlord shall cooperate with Tenant in
obtaining any permits, licenses or other governmental approvals required or
necessary for Tenant's business at the Premises.
1.10 PREMISES. The portion of the Building described in the Basic Lease
Information and designated on EXHIBIT A, together with the appurtenant right to
use the Common Area in common other tenants of the Property, subject to the
Rules and Regulations.
1.11 PROPERTY. The Building and that certain real property located in
the City of Richmond, County of Contra Costa, State of California, more
particularly described in EXHIBIT B hereto.
1.12 REAL PROPERTY TAXES. "Real Property Taxes" includes: (i) all
real estate taxes and assessments, and all other taxes relating to, or
levied, assessed or imposed on, the Property, or any portion thereof, or
interest therein; and (ii) all other taxes, assessments, charges, levies,
fees, or penalties of any kind and nature imposed, levied, assessed, charged,
conformed or collected by any governmental authority or other entity either
directly or indirectly (A) for public improvements, user, maintenance or
development fees, transit, housing, police, fire, open space, streets,
sidewalks, utilities, job training or other governmental services or
benefits, and (B) upon or with respect to the development, possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy of, or business operations in, the Property. All special or
one-time assessments shall be amortized over the longest period allowed by
the applicable taxing authority. Real Property Taxes shall exclude: (1) taxes
or assessments against the personal property of Tenant or any other tenant of
the Building; and (2) income, franchise, estate or gift taxes of Landlord.
1.13 RENTABLE AREA. The number of rentable square feet in the Building,
or portions of the Building, calculated by Landlord, measured from the outside
walls of the Building, calculated in accordance with the most recent American
National Standard published by the Building Owners and Managers Association
International. The Rentable Area of the Premises as set forth on the Basic Lease
Information is an estimate. Upon completion of the Building and the Premises,
Landlord shall cause its architect to determine the Rentable Area of the
Building and the Premises, and such calculation shall be binding on Landlord and
Tenant. Notwithstanding the foregoing, if Tenant wishes to verify Landlord's
determination of the Rentable Area of the Building and the Premises, then within
sixty (60) days of the determination by Landlord's architect of the Rentable
Area of the Building and the Premises, Tenant shall have the right to cause an
independent architect to verify Landlord's determination. If Tenant's
determination of the Rentable Area of the Building and the Premises differs from
Landlord's, the dispute shall be resolved by an independent architect jointly
selected by Landlord and Tenant. The Rentable
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Area shall be adjusted, calculated in accordance with the most recent American
National Standard published by the Building Owners and Managers Association
International, if Landlord materially adjusts the size of the Building. Tenant
acknowledges that lobbies, elevators, bathrooms and core areas will cause the
usable area of the Premises to be approximately 10% less than the Rentable Area
of the Premises.
1.14 TENANT'S IMPROVEMENTS. The Alterations to the Premises that may be
constructed by Tenant during the Term of this Lease pursuant to Section 9.1 and
EXHIBIT D hereto.
1.15 TENANT'S SHARE. The percentage share described in the Basic Lease
Information, which shall be equal to the Rentable Area of the Premises divided
by the Rentable Area of the Building, shall be recalculated and adjusted as
appropriate, upon determination of such Rentable Areas pursuant to Section 1.13.
1.16 TERM. The period from the Commencement Date to the Expiration
Date.
SECTION 2. LEASE OF PREMISES
2.1 PREMISES. Landlord leases to Tenant and Tenant leases from Landlord
the Premises, subject to and upon all the terms, covenants and conditions
contained in this Lease.
2.2 LANDLORD'S RESERVED RIGHTS. Landlord reserves the right, without
unreasonable interference with Tenant's use of the Premises or parking and
without diminution of Tenant's usable space or other rights hereunder, including
but not limited to the right of access, and subject to Section 11.2 of this
Lease, to alter the Common Area.
2.3 NO REPRESENTATIONS OR WARRANTIES. Neither Landlord nor Landlord's
agent have made any representations or warranties with respect to the Premises,
the Property or this Lease except as expressly set forth in this Lease, and no
rights, easements or licenses are or shall be acquired by Tenant by implication
or otherwise unless expressly set forth in this Lease.
SECTION 3. TERM
3.1 INITIAL TERM. This Lease shall be effective as of the date hereof.
The Term shall commence on the Commencement Date and shall expire on the
Expiration Date unless the Term is earlier terminated as provided in this Lease
or extended as provided in this Lease. The Commencement Date shall be the date
that Landlord delivers the Premises to Tenant in "Ready For Occupancy"
condition, which shall mean that (a) construction of the Building and the
Initial TI's (as defined in Section 7.2) is substantially completed, as
confirmed in writing by Landlord's architect, subject to items that are
customarily referred to as "punch list items", and (b) a final or temporary
certificate of occupancy has been issued for Tenant to occupy, the Premises;
provided however if such construction is delayed or the certificate of
occupancy, is not issued due to the
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acts or omissions of Tenant under EXHIBIT C (a "Tenant Delay"), then for
purposes hereof, the Commencement Date shall be deemed to be the date that the
Commencement Date would actually have occurred but for such Tenant Delay. Tenant
and Tenant's architect shall have the right to inspect the Premises and deliver
to Landlord within ten (10) days of the Commencement Date a list of the
"punch-list items" which need to be completed. Landlord, upon receipt of such
notice, shall proceed with reasonable diligence to complete the punch-list items
to a reasonably satisfactory condition. Landlord covenants to exercise
commercially reasonable efforts to commence construction within thirty (30) days
after the date of this Lease, and upon commencement, to diligently complete such
construction. Notwithstanding the foregoing, if Landlord has so exercised
commercially reasonable efforts to commence construction but has not commenced
construction on or before May 15, 1999, then either party upon notice to the
other given on or before June 1, 1999, may elect to terminate this Lease;
provided however that Tenant may not so terminate this Lease if Landlord has
been prevented from commencing construction on or before May 15, 1999 due to a
Tenant Delay. If either party so elects to terminate this Lease, the Lease
shall be deemed terminated as of the date the notice is given, Landlord shall
return to Tenant any payments made by Tenant to Landlord hereunder, and neither
party shall have further rights under this Lease nor further obligations to the
other hereunder. If Landlord, for any reason other than a Tenant Delay, has not
delivered vacant possession of the Premises in "Ready for Occupancy" condition
within twenty-four (24) months after the date of this Lease, Tenant may
terminate this Lease and Landlord shall return to Tenant any payments made by
Tenant to Landlord hereunder, and neither party shall have further rights under
this Lease nor further obligations to the other hereunder. As construction nears
completion, Landlord shall notify Tenant of the estimated Commencement Date at
least thirty (30) days prior to tendering possession of the Premises to Tenant
"Ready for Occupancy". Promptly after the Commencement Date and subject to
Tenant's rights under Section 1.13 of this Lease, Landlord and Tenant shall
execute a letter confirming the Commencement Date, the Rentable Area of the
Building, the Rentable Area of the Premises, and the Monthly Fixed Rent based
thereon.
SECTION 4. RENT: ADDITIONAL CHARGES
4.1 FIXED MONTHLY RENT AND ADDITIONAL CHARGES. Commencing on the
Commencement Date, Tenant shall pay to Landlord Fixed Rent in the amounts and
during the periods described in the Basic Lease Information. Fixed Rent shall be
payable by Tenant in consecutive monthly installments on or before the first
day of each month, in advance. If the Commencement Date occurs on a day other
than the first day of a calendar month, or if the Expiration Date occurs on a
day other than the last day of a calendar month, then the Fixed Rent for such
fractional month shall be prorated upon a daily basis based upon a thirty (30)
day calendar month. Tenant shall also pay to Landlord all Additional Charges
required under this lease ("ADDITIONAL CHARGES"), including without
limitation all amounts due pursuant to the provisions of Section 5 and Section
6. Except as otherwise provided in this Lease, all payments of Fixed Rent
and Additional Charges ("RENT") shall be made without prior demand or notice
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and without offset, deduction or counterclaim, in lawful money of the United
States of America. Such payments shall be made at Landlord's Address.
4.2 NET LEASE. Except as otherwise provided herein, this shall be a
triple net lease, and Fixed Rent shall be paid to Landlord, plus Tenant's share
of Operating Expenses, and Additional Charges payable by Tenant.
SECTION 5. PAYMENT OF OPERATING EXPENSES
5.1 PAYMENT BY TENANT. Tenant shall pay to Landlord Tenant's Share of
the Operating Expenses for each calendar year.
5.2 MANNER OF PAYMENT. On or before the Commencement Date, with respect
to estimated Operating Expenses payable during the first calendar year of the
Term, and December 31 of each calendar year during the Term, or as soon
thereafter as practicable, Landlord shall furnish to Tenant a statement setting
forth the estimated Operating Expenses for the subsequent calendar year. On the
Commencement Date, and on the first day of each calendar month during each
ensuing calendar year, Tenant shall pay in advance to Landlord Tenant's Share of
one-twelfth (1/12th) of the most recent estimated Operating Expenses; provided,
however, that if such notice is not given in December, Tenant shall continue to
pay to Landlord Tenant's Share of one-twelfth (1/12th) of the Estimated
Operating Expenses of the previous calendar year until the month after such
statement is given. Within one hundred twenty (120) days after the end of each
calendar year during the Term or as soon thereafter as practicable, Landlord
shall furnish to Tenant a statement of the actual Operating Expenses for such
calendar year. If Tenant's Share of the estimated Operating Expenses paid by
Tenant during such calendar year is (x) less than Tenant's Share of the actual
Operating Expenses for such period as shown on Landlord's statement, then Tenant
shall pay the difference to Landlord within thirty (30) days after the date of
Landlord's statement, or (y,) more than Tenant's Share of the actual Operating
Expenses for such period, then Tenant shall receive a credit on the Rent next
due for the amount of such excess, or, if the statement is given by Landlord
with respect to the calendar year in which the Term expires, Landlord shall pay
such excess to Tenant together with such statement.
5.3 ADJUSTMENTS TO OPERATING EXPENSES. If at any time, but no more
than once each calendar year, it appears to Landlord that the actual Operating
Expenses for any calendar year during the Term will exceed the estimated
Operating Expenses set forth in Landlord's statement to Tenant by more than five
percent (5%), then Landlord shall have the right by notice to Tenant to revise
the estimated Operating Expenses for such year and subsequent payments thereof
shall, commencing with the first month after which Tenant receives such notice,
be increased based upon such revised statement.
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5.4 TENANT'S INSPECTION AND AUDIT RIGHTS. Tenant or Tenant's authorized
agent or representative, including a certified public accountant retained by
Tenant, shall have the right to inspect the books and records of Landlord
relating to Operating Expenses after giving reasonable prior written notice to
Landlord and during the business hours of Landlord at Landlord's office at
Marina Bay or at such other location in Richmond, California as Landlord may
designate, for the purpose of verifying Landlord's statement of Operating
Expenses. If Tenant has an audit performed of such books and records by a
certified public accountant and such audit reveals an overstatement of Operating
Expenses by Landlord of more than five percent (5%), then Landlord shall, within
thirty (30) days after receipt of such audit, reimburse to Tenant any excess
Operating Expenses previously paid to Landlord by Tenant and Landlord shall
reimburse Tenant for the cost of such audit.
SECTION 6. TAXES PAYABLE BY TENANT
In addition to payment of Fixed Rent and Operating Expenses, Tenant
shall pay prior to delinquency, any and all taxes, assessments, license fees,
levies, business taxes, impositions, transit development fees, assessments or
charges for housing funds, service payments, in lieu taxes or fees, and any
other governmental fees, excises or charges of any kind or character, general
and special, ordinary and extraordinary, whether or not customary or now within
the contemplation of the parties hereto, levied against, upon, measured by or
attributable to Tenant's occupancy of the Premises, excluding Real Estate Taxes
(which are paid by Tenant through Operating Expense reimbursements) and taxes
based upon Landlord's taxable income.
SECTION 7. CONDITION AND OPERATION OF THE BUILDING
7.1 INITIAL CONDITION. Landlord represents and warrants that upon
completion of construction of the Building and site improvements related
thereto, the Building and the Property will be in compliance in all material
respects with, all applicable municipal, county, state and federal laws,
ordinances, regulations and codes in effect as of the date of completion of
such construction, including without limitation, the Americans with Disabilities
Act ("ADA") and that the Building systems supplying utilities and services to
the Premises, including without limitation, HVAC, plumbing and electrical
systems, will be in good working order and condition as of the Commencement
Date. Except as so provided, no representation or warranty is made or shall be
deemed made by Landlord concerning the nature, quality or suitability for
Tenant's business of the Building or the Premises, and Tenant shall have no
rights against Landlord by reason of such matters except as otherwise expressly
set forth in this Lease.
7.2 INITIAL BUILDOUT OF PREMISES. Landlord shall, at its sole cost and
expense, construct the Building in conformance with elevations approved by the
City of Richmond, it being the intent of Landlord and Tenant that the exterior
of the Building be consistent in appearance with the existing buildings at
Phase I of Marina Bay Business Park. Furthermore, Landlord shall construct,
in accordance with EXHIBIT C attached hereto, the interior of Tenant's
Premises (the
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"Initial TI's"). As set forth in EXHIBIT C, the cost of construction of the
Initial TI's (including without limitation, all permits, architectural and
design costs, and hard costs of construction) shall be paid Landlord and Tenant
as follows: Landlord shall be responsible for the first $25.00 per square foot
of Rentable Area of the Premises (presently estimated at $1,190,625), which
amount is referred to herein as the "TI ALLOWANCE". All Costs of Work (as
defined in EXHIBIT C) in excess of the TI Allowance shall be the responsibility
of Tenant.
7.3 SECURITY. Tenant shall be solely responsible for security in the
Premises. Landlord shall have no obligations regarding the security of the
Premises or the Property.
SECTION 8. USE AND COMPLIANCE WITH LAWS
8.1 USE OF PREMISES. Tenant shall use and occupy the Premises during
the Term solely for the Permitted Use.
8.2 NO NUISANCE. Tenant shall not suffer, permit or commit any waste,
nor allow, suffer or permit any odors, vapors, steam, water, vibrations, noises
or undesirable effects to emanate from the Premises or from any apparatus,
equipment or installation in the Premises or outside the Premises which would
violate any applicable governmental law, order, rule, ordinance or regulation.
Tenant shall not allow, suffer or permit the Premises or any use thereof to
constitute a nuisance or interfere with the safety, comfort or enjoyment of the
Property by Landlord or any other occupants of the Building.
8.3 COMPLIANCE WITH LAWS AND INSURANCE REQUIREMENTS. Tenant, at
Tenant's sole cost and expense, shall comply during the Term with all
applicable laws, orders, rules, ordinances and regulations of federal, state,
county and municipal authorities. Tenant shall not do anything, or permit
anything to be done, in or about the Premises that shall (a) invalidate or be
in conflict with the provisions of any fire, public liability or other
insurance policies covering the Building or any property located therein, or
(b) subject Landlord to any liability or responsibility for injury to any
person or property by reason of any business operation or other practice
being conducted in the Premises. Notwithstanding the foregoing, unless
arising as a result of its specific use of the Premises, Tenant need not
perform any structural or other major renovations, improvements or additions
to the Premises as part of such compliance.
8.4 HAZARDOUS MATERIALS. Landlord and Tenant agree as follows with
respect to the existence or use of Hazardous Materials on the Premises.
(a) PROHIBITION ON USE OF HAZARDOUS MATERIALS. Subject to the
provisions of Section 8.4(b) of this Lease, Tenant shall not use, generate,
manufacture, produce, store, release, discharge, or dispose of, on, under or
about the Premises or any part of the Property or transport to or from the
Premises or any part of the Property any Hazardous Material or allow its
employees, agents, contractors, licensees, invitees or subtenants
(collectively, "TENANT'S AGENTS") to do so.
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(b) PERMITTED HAZARDOUS MATERIALS. Notwithstanding any other provision
of this Lease, Tenant shall be permitted to use, generate, manufacture, produce
and store in, and transport to and from the Premises Hazardous Materials so long
as: (a) each of the Hazardous Materials is used, generated, manufactured,
produced or stored in, or transported to and from, the Premises only to the
extent necessary for Tenant's operation of its business at the Premises, and
(b) the conditions set forth in this Section 8.4 are complied with.
(c) COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant shall comply with and
shall cause Tenant's Agents to comply with, and shall keep and maintain the
Premises and cause Tenant's Agents to keep and maintain the Premises in
compliance with, all Environmental Laws. Tenant shall, at its own expense prior
to Tenant's use and occupancy, procure, maintain in effect and comply with all
conditions of any and all permits, licenses and other governmental and
regulatory approvals required for Tenant's use of the Premises. Tenant shall
cause any and all Hazardous Materials removed from the Premises to be removed
and transported solely by duly licensed handlers to duly licensed facilities for
final disposal of such materials and wastes or as may otherwise be permitted
under applicable Environmental Laws. Only materials that, under all applicable
governmental laws, orders, rules, ordinances and regulations, may be disposed of
into the drains are permitted to be put into the drains at the Premises. Tenant
shall make available to Landlord for inspection and copying upon reasonable
advance notice and during the business hours of Tenant each and all of the
following to the extent the same are required by applicable Environmental Laws
to be maintained on-site at the Premises: (a) a copy of each hazardous material
management plan or similar document required by any federal, state or local
governmental or regulatory authority to be submitted by Tenant; (b) copies of
all permits, licenses and other governmental and regulatory approvals with
respect to the use of Hazardous Materials; (c) copies of hazardous waste
manifests reflecting the legal and proper disposal of all Hazardous Materials
removed from the Premises; and (d) copies of all reports, studies and written
results of tests or inspections concerning the Premises or any part of the
Property with respect to Hazardous Materials (collectively "DOCUMENTS")
(d) ROUTINE MONITORING. Upon commencing any activity involving Hazardous
Materials on the Premises, and continuing thereafter throughout the Term, Tenant
shall initiate and maintain any reporting and/or monitoring system required
under all applicable Environmental Laws to ensure the routine monitoring of the
levels of Hazardous Materials which may be present on, under or about the
Premises or any part of the Property resulting from Tenant's activities. At
Landlord's written request, Tenant shall provide Landlord copies of such
reports, if any, as are provided by Tenant to any governmental agency.
(1) LANDLORD'S RIGHT TO INSTALL TESTING WELLS. Provided it does
not unreasonably interfere with Tenant's business operations on or access to the
Premises, Landlord may install permanent or other testing wells or devices
at or about the Premises or any part of the Property, and may cause the
ground water to be tested to detect the presence of Hazardous Materials not
more than once every twelve (12) months during the
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term of the Lease by the use of such wells or devices as are then customarily
used for such purposes. The costs of any such tests shall be come solely by
Tenant if, following the initiation of such testing, the presence of Hazardous
Materials in violation of Environmental Laws or this Lease is detected to the
extent Tenant or Tenant's Agents are responsible therefor. Tenant's obligations
under this Section 8.4(d)(1) shall survive for a period of one year after the
expiration or earlier termination of this Lease.
(2) LANDLORD'S RIGHT TO INSPECT. Provided it does not unreasonably
interfere with Tenant's business operations on or access to the Premises,
Landlord, its lender and their representatives shall have the right, at any
time, but not more often than once every twelve (12) months, upon at least three
(3) business days' prior notice (except in an emergency) to enter the Premises
during Tenant's business hours to: (i) conduct any testing, monitoring and
analysis for Hazardous Materials; (ii) review any Documents, materials,
inventory, or notices to or from governmental or regulatory authorities relating
to Tenant's use of Hazardous Materials at the Premises; and (iii) review all
storage, use, transportation and disposal facilities and procedures required to
be maintained by applicable law for the storage, use, transportation and
disposal of Hazardous Materials.
(e) NOTICE TO LANDLORD. Tenant shall give written notice to Landlord
promptly after Tenant receives notice of any of the following: (i) any
proceeding or inquiry by, notice from, or order of any governmental authority
(including, without limitation, the California State Department of Health
Services) with respect to the presence of any Hazardous Material on, under or
about the Premises or any part of the Property or the migration thereof from or
to other property; and (ii) all claims made or threatened by any third party
against Tenant, the Premises or any part of the Property relating to any loss or
injury resulting from any Hazardous Materials. Tenant shall give written notice
to Landlord promptly after Tenant becomes aware of any spill, release, discharge
or nonroutine disposal of Hazardous Materials of a reportable quantity with
respect to the Premises or operations at the Premises by Tenant or Tenant's
Agents. Tenant shall also promptly provide copies to Landlord of all reports
pertaining to the use, generation, manufacture, release, discharge or disposal
of Hazardous Materials on the Premises that Tenant provides to any governmental
body or agency.
(f) LANDLORD'S RIGHT TO PARTICIPATE. If Landlord is joined in any legal
proceeding or action affecting the Premises or any part of the Property
initiated in connection with any Environmental Law, and if such proceeding or
action is brought in connection with a Release (as defined in Section 8.4(g)
below) of Hazardous Materials by Tenant or Tenant's Agents, Tenant shall defend
Landlord, or at Tenant's option pay, Landlord's reasonable attorneys fees in
connection therewith.
(g) TENANT'S INDEMNITY. Tenant shall protect. defend. indemnity and
hold harmless Landlord, its directors. officers, partners, employees, agents,
successors and assigns from and against any and all claims, fines, judgments.
penalties, losses, damages, costs, expenses or
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liability (including reasonable attorneys' fees and costs) to the extent
directly arising out of or attributable to the use, generation, manufacture,
production, storage, release, threatened release, discharge or disposal of any
Hazardous Material on, under or about the Premises or any part of the Property
by Tenant or Tenant's Agents or the transportation of any Hazardous Material to
or from the Premises (collectively, a "RELEASE") by Tenant or Tenant's Agents
including, without limitation: the costs of any investigation, monitoring,
removal, restoration, abatement, repair, cleanup, detoxification or other
ameliorative work of any kind or nature (collectively "REMEDIAL WORK") and the
preparation and implementation of any closure, remedial or other required plans,
as required by Environmental Laws. For purposes of this Section 8.4(g), any acts
or omissions of Tenant or Tenant's Agents (whether or not they are negligent,
intentional, willful or unlawful) shall be strictly attributable to Tenant.
Tenant's obligations under this Section 8.4(g) shall survive for a period of one
year after the expiration or earlier termination of this Lease.
(h) REMEDIAL WORK. Upon any spill or release of a reportable quantity
of Hazardous Materials by Tenant or Tenant's Agents, Tenant shall, subject to
Section 8.4(f) of this Lease, promptly notify Landlord of the spill or
release of Hazardous Materials and shall, at its sole expense, commence to
perform and thereafter diligently prosecute to completion such Remedial Work
as is required under Environmental Laws.
(i) LANDLORD'S REPRESENTATION. Landlord represents and warrants that, to
the best of Landlord's knowledge, (a) as of the date of this Lease the Property
complies, and as of the Commencement Date will comply, with applicable
Environmental Laws and (b) as of the date of this Lease there are, and as of the
Commencement Date there will be, no Hazardous Materials on, under or about the
Property; provided however, the Property and the Building may contain building
materials which are classified as Hazardous Materials, provided that those
materials are customarily and lawfully used in the construction of improvements
similar to those constructed thereon.
Section 9. ALTERATIONS, TENANT'S PROPERTY, TENANT'S WORK AND LIENS
9.1 ALTERATIONS By TENANT. Tenant shall not make or allow to be made any
structural alterations, additions or improvements in or to the Premises
whatsoever (collectively, "ALTERATIONS") without first (i) providing Landlord
copies of the plans and specifications for the Alterations, and (ii) obtaining
Landlord's prior written consent, which consent shall not be unreasonably
withheld, conditioned or delayed. All Alterations undertaken by Tenant shall be
done in accordance with the provisions of EXHIBIT D to this Lease. Upon
expiration of the Lease, Tenant shall have no obligation to remove all
Alterations to which Landlord has given its consent.
9.2 TITLE TO ALTERATIONS. The Initial TI's shall be and remain the
Property of Landlord. Tenant's Improvements and any other Alterations paid for
by Tenant shall be Tenant's property during the Term. Upon expiration of the
Term or termination of this Lease, all Alterations shall
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become the Property of Landlord and shall be surrendered to Landlord, in the
condition required by this Lease.
9.3 LIENS. Tenant shall keep the Premises and the Property free from
any liens arising out of any (i) work performed by or for Tenant or any person
claiming through or under Tenant or material furnished to or for the Premises
before or during the Term by or for Tenant or any person claiming through or
under Tenant, and (ii) obligations incurred by or for Tenant or any person
claiming through or under Tenant before or during the Term. Landlord shall have
the right at all times to post and keep posted on the Premises any notices
permitted or required by law with respect to any mechanics', materialmen's and
other liens. In addition to all other requirements contained in this Lease,
Tenant shall give to Landlord at least ten (10) business days prior notice of
commencement of any construction on the Premises.
SECTION 10. REPAIRS AND MAINTENANCE
10.1 LANDLORD'S OBLIGATIONS. As a part of the consideration for the
leasing of the Premises, and subject to the obligations of Tenant set forth in
this Lease, Landlord shall maintain, in good condition, the following: (i) the
Common Area, (ii) the foundations, (iii) exterior walls, (iv) the structural
portions of the roof of the Building, (v) all window frames (vi) all gutters and
down spouts on the Building, (vii) structural elements of the Building, and
(viii) all Building systems, including without limitation, HVAC, plumbing and
electrical. Landlord shall in good faith and with due diligence cause necessary
repairs to be made as soon as reasonably practicable. Except as set forth in
Section 16.7 hereof, Tenant waives any right now or hereafter granted by law to
make any repairs under this Section 10.1 upon Landlord's failure to do so
hereunder. Except as set forth in Section 16.7 hereof, Landlord shall not be
liable for and, except as provided in Section 12, there shall be no abatement of
Rent with respect to, any injury to or interference with Tenant's business
arising from any repairs, maintenance, alteration or improvement in or to any
portion of the Building, including the Premises, or in or to the fixtures,
appurtenances and equipment therein. Except as otherwise expressly provided
herein, Tenant hereby waives and releases its rights under Sections 1941,
1941.1, 1942 and 1942.5 of the California Civil Code or under any similar law
now or hereafter in effect.
10.2 TENANT'S OBLIGATIONS. Tenant shall be solely responsible for all
janitorial services for the Premises and may select persons to perform such
services in its reasonable discretion. Tenant at its sole expense, and subject
to normal wear and tear, casualty, acts of God and other causes beyond the
control of Tenant, shall clean. keep, and maintain the interior of the Premises
in good order and condition and repair and replace when necessary the
non-structural elements of the Premises (but excluding items which Landlord is
obligated to maintain, repair or replace under Section 1O.1
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SECTION 11. UTILITIES
11.1 UTILITIES. Landlord shall provide water, sewer, gas, and
electrical connections to the Premises and separate metering facilities
therefor. Tenant shall promptly pay, as the same become due, all charges for
water, gas, electricity, telephone, sewer service, waste pick-up and any other
utilities, materials or services furnished directly to or used by Tenant on or
about the Premises during the Lease Term.
11.2 INTERRUPTION. If Tenant is unable to conduct its ordinary
business activities in the Premises because of any failure or interruption of
any utility to the Premises for a period in excess of thirty (30) consecutive
days (except if due to the negligence or willful misconduct of Tenant's
Agents or if due to Tenant's failure to make repairs to the Premises as
required hereunder), unless Landlord is exercising commercially reasonable
efforts to restore the utility, Tenant shall have the right to terminate this
Lease, without any liability to Landlord, upon five (5) days' prior written
notice. Notwithstanding the foregoing, in the event such failure or
interruption is caused by damage or destruction covered by Section 12 hereof,
the provisions of Section 12 shall apply in lieu of the foregoing. Except as
set forth in this section or in Section 12 hereof, failure by Landlord to
furnish any service herein specified or any cessation thereof due to
accident, making of repairs, alterations or improvements, weather, unusual
difficulty or ability to obtain services or supplies from sources usually
used for the Property, labor difficulties or other causes beyond Landlord's
reasonable control shall not render Landlord liable in any respect for
damages of any kind, nor be construed as an eviction of Tenant nor work an
abatement of Rent.
SECTION 12. DAMAGE OR DESTRUCTION
12.1 LOSS COVERED BY INSURANCE. If, at any time prior to the expiration
or termination of this Lease, the Premises or the Building in which the Premises
are located is wholly or partially damaged or destroyed by a casualty, which
loss to Landlord is (except for any applicable deductible) fully covered by
insurance maintained by Landlord or for Landlord's benefit (or required to be
maintained by Landlord pursuant to Section 13), which casualty renders the
Premises totally or partially inaccessible or unusable by Tenant in the ordinary
conduct of Tenant's business, then:
(a) REPAIRS WHICH CAN BE COMPLETED WITHIN NINE MONTHS. Within twenty
(20) days of notice to Landlord of such damage or destruction, Landlord shall
provide Tenant with notice of its determination of whether the damage or
destruction can be repaired within nine (9) months of such damage or destruction
without the payment of overtime or other premiums. If all repairs to such
Premises or Building can, in Landlord's reasonable judgment, be completed within
nine (9) months following the date of such damage or destruction without the
payment of overtime or other premiums, Landlord, upon receipt of the insurance
proceeds with respect thereto, shall at Landlord's expense promptly commence
and diligently proceed to repair the same and this Lease shall remain in full
force and effect and a proportionate reduction of the Rent shall be allowed
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Tenant for such portion of the Premises as shall be rendered inaccessible or
unusable to Tenant, and which is not used by Tenant, during the period of time
that such portion is unusable or inaccessible and not used by Tenant.
(b) REPAIRS WHICH CANNOT BE COMPLETED WITHIN NINE MONTHS. If all such
repairs to the Building and Premises cannot, in Landlord's reasonable judgment,
be completed within nine (9) months following the date of notice to Landlord of
such damage or destruction without the payment of overtime or other premiums,
Landlord shall notify Tenant of such determination and either Landlord or Tenant
may, at its option, upon written notice to the other party given within thirty
(30) days after the occurrence of such damage or destruction, elect to terminate
this Lease as of the date of the occurrence of such damage or destruction.
Notwithstanding the foregoing, if the damage does not affect the Premises,
Landlord cannot terminate the Lease unless Landlord concurrently terminates all
other leases in the Building. In the event that neither Landlord nor Tenant
elects to terminate this Lease in accordance with the foregoing provisions, then
Landlord, upon receipt of the insurance proceeds with respect thereto, shall at
Landlord's expense promptly commence and diligently proceed to repair such
damage or destruction, and in such event, this Lease shall continue in full
force and effect but the Rent shall be proportionately reduced as hereinabove
provided in Section 12.1(a); provided, however, that if any such repair is not
commenced by Landlord within sixty (60) days after Landlord's receipt of the
insurance proceeds to which it is entitled on account of such damage or
destruction or is not substantially completed by Landlord within ten (10) months
after the occurrence of such damage or destruction, then in either such event
Tenant may, at its option, upon prompt written notice to Landlord, elect to
terminate this Lease.
12.2 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Building in which
the Premises are located is totally or partially damaged or destroyed from a
casualty, which loss to Landlord is not fully covered (except for any
deductible) by insurance maintained by Landlord or for Landlord's benefit (or
required to be maintained by Landlord pursuant to Section 13), Landlord may, at
its option, upon written notice to Tenant within thirty (30) days after notice
to Landlord of the occurrence of such damage or destruction, elect to restore or
repair such damage or destruction, or Landlord may elect to terminate this
Lease so long as Landlord terminates every other lease in the Building which was
affected by, the casualty. Notwithstanding the foregoing, Landlord may not elect
to terminate this Lease if (i) the uninsured portion of the damage is less than
ten percent (10%) of the replacement cost of the Building and/or (ii) Landlord
does not elect to terminate the leases of all other tenants in the Building who
are similarly affected by such damage and/or destruction. If Landlord elects to
repair or restore such damage or destruction, Landlord shall promptly commence
and diligently proceed to repair such damage and this Lease shall continue in
full force and effect but the Rent shall be proportionately reduced as provided
in Section 12.1(a). If Landlord does not elect by notice to Tenant to
repair such damage the Lease shall terminate as of the date of the casualty.
Notwithstanding the foregoing, if all repairs to the Premises or the Building
required under this Section 12.2 cannot, in Landlord's reasonable
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judgment, be completed within four (4) months following the date of such damage
or destruction without the payment of overtime or other expenses, then either
Landlord or Tenant may at its option, upon written notice to the other party
given within thirty (30) days after the occurrence of such damage or
destruction, elect to terminate this Lease as of the date of the occurrence of
such damage or destruction.
12.3 DESTRUCTION DURING FINAL YEAR. Notwithstanding anything to the
contrary contained in Sections 12.1 and 12.2 hereof, if the Premises or the
Building in which the Premises are located is wholly or partially damaged or
destroyed within the final twelve (12) months of the Term of this Lease, so
that Tenant shall be prevented from using the Premises for forty five (45)
consecutive days due to such damage or destruction, then either Landlord or
Tenant may, at its option, by notice to the other party within thirty (30) days
after the occurrence of such damage or destruction, elect to terminate this
Lease effective as of the date of casualty.
12.4 DESTRUCTION OF TENANT'S PERSONAL PROPERTY, TENANT IMPROVEMENTS OR
PROPERTY OF TENANT'S EMPLOYEES. In the event of any damage to or destruction of
the Premises or the Building, under no circumstances shall Landlord be required
to repair any injury, or damage to, or make any repairs to or replacements of
Tenant's Improvements but Landlord shall be obligated to repair or replace the
Initial TI's. Landlord shall have no responsibility for any contents placed or
kept in or on the Premises or the Building by Tenant or Tenant's agents or
employees.
SECTION 13. INSURANCE AND INDEMNITY
13.1 INSURANCE ON TENANT'S PROPERTY. Tenant shall during the Term
provide insurance coverage against loss or damage by fire and such other risks
as are from time to time included in a standard or special extended coverage
endorsement insuring Tenant's merchandise, trade fixtures, furnishings,
equipment and all other items of personal property of Tenant.
13.2 TENANT'S LIABILITY INSURANCE. Tenant shall procure at its sole
cost and expense and keep in effect from the date of this Lease and at all times
during the Term either comprehensive general liability insurance or commercial
general liability insurance applying to the use or occupancy of the Premises,
and contractual liability insurance applying to Tenant's indemnity obligations
under this Lease with respect to bodily injury, property damage, or other loss
covered by Tenant's liability insurance. Such coverage shall be written by
insurance companies reasonably acceptable to Landlord and its Lender and shall
have a minimum combined single limit of liability of at least three million
dollars ($3,000,000.00). All such policies shall be written to apply to all
bodily injury, property damage or other covered loss occurring during the
policy term, shall be endorsed to add Landlord as an additional named insured,
to provide that such coverage shall be primary and that any insurance
maintained by Landlord shall be excess insurance only. All such insurance shall
provide for severability of interests; shall provide that an act or omission of
one of the named insureds shall not reduce or
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avoid coverage to the other named insureds; and shall afford coverage for all
claims based on acts, omissions, injury and damage, which claims occurred or
arose (or the onset of which occurred or arose) in whole or in part during the
policy period.
13.3 FIRE AND EXTENDED COVERAGE INSURANCE. Landlord shall maintain
insurance on the Building and the Premises against damage by fire and those
perils now specified in the most current standard extended coverage endorsement
in an amount equal to the full insurable cost of the Building and the Premises,
excluding any of Tenant's Improvements and Alterations, as reasonably determined
by Landlord, exclusive of excavations and foundations and subject to such
"deductibles" as Landlord may reasonably determine. In addition, Landlord shall
maintain loss of rent insurance and a policy of commercial general liability and
property damage insurance. All insurance proceeds payable under Landlord's
insurance carried hereunder shall by payable solely to Landlord.
13.4 WAIVER OF SUBROGATION. To the extent permitted by law and without
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
on account of any and all claims Landlord or Tenant may have against the other
with respect to any risk insured against by insurance actually carried, or
required to be carried hereunder. Each casualty insurance policy carried by
Landlord or Tenant hereunder, or which either may obtain with respect to the
Premises or the Property independent of obligations hereunder, shall provide
that the insurer waives all rights of recovery by way of subrogation against
Landlord or Tenant in connection with all matters included within the scope of
the waiver of recovery contained in this Section 13.4.
13.5 TENANT'S INDEMNITY. To the fullest extent permitted by law, Tenant
shall indemnify Landlord, and its officers, directors, partners, employees,
servants, and agents, and all mortgagees or beneficiaries of Landlord's interest
in all or any portion of the Property, (collectively, "RELATED ENTITIES")
against and save Landlord and its Related Entities harmless from and defend
Landlord and Related Entities through attorneys reasonably satisfactory to
Landlord from and against any and all claims, loss, cost, liability, damage and
expense including, without limitation, penalties, fines and reasonable
attorneys' fees (collectively, "CLAIMS"), incurred in connection with or arising
in whole or in part from the activities of Tenant or Tenant's Related Entities,
or any negligence or willful misconduct by Tenant or Tenant's Related Entities,
excluding any Claims to the extent arising out of: (i) the negligence or willful
misconduct of Landlord or Landlord's Related Entities, or (ii) Landlord's breach
of this Lease.
13.6 LANDLORD'S INDEMNITY. To the fullest extent permitted by law,
Landlord shall indemnify Tenant and its officers, directors, shareholders,
partners, employees, servants and agents (collectively "RELATED ENTITIES")
against and save Tenant and its Related Entities harmless from and defend Tenant
and its Related Entities through attorneys reasonably satisfactory to Tenant
from and against any and all Claims incurred in connection with or arising in
whole or in part from the activities of Landlord or Landlord's Related Entities
or any
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negligence or willful misconduct of Landlord or Landlord's Related Entities,
excluding any Claims to the extent arising out of: (i) the negligence or willful
misconduct of Tenant or Tenant's Related Entities, or (ii) Tenant's breach of
this Lease.
SECTION 14. EMINENT DOMAIN
14.1 EFFECT OF TAKING. If all of the Premises is condemned or taken in
any manner before or during the Term for public or quasi-public use, or any
transfer of the Premises is made in avoidance of an exercise of the power of
eminent domain (each of which acts shall be referred to as a "TAKING"), this
Lease shall automatically terminate as of the date of the vesting of title as a
result of such taking. If a part of the Premises is so taken, this Lease shall
automatically terminate as to the portion of the Premises so taken as of the
date of the vesting of title as a result of such taking. If such portion of the
Property is taken as to render the Property incapable of economically feasible
operation or to require a substantial alteration or reconstruction of the
remaining portions thereof, this Lease may be terminated by Landlord, as of the
date of the vesting of title as a result of such taking, by written notice to
Tenant within sixty (60) days following notice to Landlord of the date of which
said vesting will occur. If such portion of the Premises is taken as, in the
reasonable opinion of Tenant, to materially impair the ability of Tenant to use
and conduct its business from the Premises, this Lease may be terminated by
Tenant as of the date of the vesting of title as a result of such taking, by
written notice to Landlord within sixty (60) days following notice to Tenant of
the date of which said vesting will occur.
14.2 AWARD. Landlord shall be entitled to the entire award for any
taking; provided, however, that Landlord shall have no interest in any award
made to Tenant for its leasehold interest, relocation expenses, the taking of
personal property and fixtures belonging to Tenant or the interruption of or
damage to Tenant's business, or attributable to improvements of the Premises
actually paid by Tenant.
14.3 ABATEMENT OF RENT. In the event of a partial or temporary taking
that does not result in a termination of this Lease as to the entire Premises,
the Rent shall abate in proportion to the portion of the Premises taken or
rendered untenable by such taking. Tenant hereby waives and releases its rights
under Section 1265.130 of the California Code of Civil Procedure or any similar
statute now or hereafter in effect.
SECTION 15. SUBLEASE AND ASSIGNMENT
15.1 CONSENT REQUIRED. Subject to Section 15.5 hereof, Tenant shall not
sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any
part of the Premises or Tenant's leasehold estate hereunder (each such act is
referred to herein as an "ASSIGNMENT"), or sublet the Premises or any
portion thereof or permit the Premises to be occupied by anyone other than
Tenant (each such act is referred to herein as a "SUBLEASE") without
Landlord's prior written
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consent in each instance, which consent shall not be unreasonably withheld and
shall be given or withheld within ten (10) business days after Tenant's delivery
of request therefor, together with all information required to be provided to
Landlord under Section 15.2.
15.2 NOTICE. Tenant shall have no right to enter into an Assignment or
a Sublease unless Tenant shall have first requested in writing Landlord's
consent to such Assignment or Sublease. Any request by Tenant for Landlord's
consent to a specific Assignment or Sublease shall include (a) the name of the
proposed assignee, subtenant or occupant, (b) the nature of the proposed
assignee's, subtenant's or occupant's business to be carried on in the Premises,
(c) a copy of the proposed Assignment or Sublease, and (d) such
financial information as Landlord may reasonably request concerning the proposed
assignee, subtenant or occupant or its business.
15.3 CONDITIONS OF APPROVAL. Without limiting the circumstances under
which it may be reasonable for Landlord to withhold its consent to an Assignment
or Sublease, it is expressly agreed that it shall be reasonable for Landlord to
withhold its consent if Landlord reasonably determines that (i) the character or
value of the Building are likely to be adversely affected during the Term as a
result of such Assignment or Sublease, or (ii) the financial condition of the
proposed new tenant or subtenant at the time of the proposed Assignment or
Sublease is, in the reasonable opinion of Landlord, insufficient to meet the
obligations of Tenant being assigned to such new tenant or subtenant.
15.4 COST OF PROCESSING REQUEST. Tenant shall reimburse Landlord for
Landlord's reasonable attorneys' fees for the review and documentation of any
proposed Assignment or Sublease within thirty (30) days after Landlord gives
notice to Tenant of the amount thereof, together with reasonable documentation
supporting such fees.
15.5 SCOPE OF ASSIGNMENT. Any sale or other transfer of a majority of
(i) the partnership interests in Tenant or any beneficial interest therein,
if Tenant is a partnership, or (ii) the capital stock in Tenant, or any
beneficial interest therein, if Tenant is a corporation, shall be an Assignment
for purposes of this Lease. The sale or other transfer of more than fifty
percent (50%), by value, of the assets of Tenant used in conducting its business
in the Premises shall also constitute an Assignment for purposes of this Lease.
Notwithstanding anything to the contrary contained in this Section 15, Tenant
may assign or sublet the Premises, or any portion thereof, without Landlord's
consent, to any entity which controls, is controlled by or is under common
control with Tenant, or to any entity resulting from the merger or consolidation
with Tenant, or to any entity which acquires all or substantially all the assets
of Tenant as a going concern of the business that is being conducted on the
Premises, and any such Assignment shall not be subject to the provisions of
Section 15.7 below.
15.6 ASSUMPTION OF OBLIGATIONS. Each assignee subtenant or other
transferee of all or a portion of Tenant's interest hereunder, other than
Landlord, shall assume, as provided in this Section 15.6, all obligations of
Tenant under this Lease and shall be and remain liable jointly, and
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severally with Tenant for the payment of Rent, and for the performance of all
the terms, covenants, conditions and agreements herein contained on Tenant's
part to be performed during the Term; provided, however, that a sublessee shall
be liable to Landlord for Rent only in the amount set forth in the Sublease.
15.7 EXCESS RENT; RECAPTURE RIGHTS. Landlord's right to the portion of
excess rent specified in this Section 15.7 is expressly reserved from the grant
of Tenant's leasehold estate. Landlord shall have such right to such portion of
the excess rent in the event of any Assignment or Sublease by any succeeding
subtenant or assignee, regardless of whether (i) the instrument effecting any
such Assignment or Sublease provides such right to Landlord, or (ii) Landlord
has approved such an instrument which fails to provide such right to Landlord.
If Landlord consents to any Assignment or Sublease, then Tenant shall pay to
Landlord within five (5) business days after Tenant's receipt thereof, 50% of
any and all consideration, as calculated pursuant to the following sentence,
received by Tenant on account of such transaction, howsoever the same may be
denominated, and in the case of Subleases, to the extent that such consideration
exceeds the pro rata portion of the Fixed Rent and other charges payable by
Tenant hereunder attributable to the sublet portion of the Premises, based on
the net Rentable Area of the Promises and the net Rentable Area of the Premises
sublet. In calculating the consideration subject to the preceding sentence, the
following items shall be deducted therefrom: (a) the reasonable costs paid by
Tenant for additional improvements installed in the portion of the Premises
subject to such assignment or sublease by Tenant for the specific subtenant or
assignee in question, amortized over the term of such assignment or sublease
with interest thereon at the rate paid by Tenant on funds borrowed for the
purpose of making such improvements or at the Interest Rate if Tenant does not
borrow funds for such purpose and (b) reasonable leasing commissions paid by
Tenant in connection with such assignment or subletting.
Section 16. DEFAULT: REMEDIES
16.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "EVENT OF DEFAULT" by Tenant:
(a) ABANDONMENT. Abandonment of the Premises without payment of Rent.
Tenant's vacation of the Premises and concurrent efforts to sublet the Premises
or assign the Lease is not an abandonment of the Premises, provided that Tenant
is timely paying Rent.
(b) NONPAYMENT OF MONEY. Failure to pay Rent or any other sum due
and payable by Tenant under this Lease.
(c) OTHER OBLIGATIONS. Failure to perform any term, obligation,
condition, agreement or covenant under this Lease, other than nonpayment of
money.
(d) INSOLVENCY. The admission by Tenant in writing of its
inability to pay its debts as they become due; the filing by Tenant of a
petition seeking any reorganization, arrangement,
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composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, the filing by Tenant of an answer
admitting or failing timely to contest a material allegation of a petition filed
against Tenant in any such proceedings or, if within thirty (30) days after the
commencement of any proceeding against Tenant seeking any such relief, such
proceeding shall not have been dismissed; the appointment of a receiver or
trustee to take possession of all or substantially all of the assets of Tenant
unless such appointment is vacated or annulled within sixty (60) days; a general
assignment by Tenant for the benefit of creditors; any action or proceeding
commenced by Tenant under any insolvency or bankruptcy act, or under any other
statute or regulation having as its purpose the protection of creditors, or any
such action commenced against Tenant and not discharged within thirty (30) days
after the date of commencement, or the attachment, execution or other judicial
seizure of all or substantially all of Tenant's assets or the Premises, if such
attachment or other seizure remains undismissed or undischarged for a period of
ten (10) days after the levy thereof.
16.2 NOTICE TO TENANT. Upon the occurrence of any Event of Default,
Landlord shall give Tenant written notice thereof, specifying the Event of
Default and the provisions of this Lease breached by Tenant and Tenant shall
have the right to cure such Event of Default within the time periods, if any,
hereinafter specified.
(a) NONPAYMENT OF MONEY. For failure to pay Rent or any other sum,
within ten (10) days after Landlord's notice.
(b) OTHER OBLIGATIONS. For failure to perform any term, obligation,
condition, agreement or covenant under this Lease, other than nonpayment of
monies, thirty (30) days after Landlord's notice. Notwithstanding the foregoing,
if such failure cannot reasonably be cured within such 30-day period, Tenant
shall continue to have the right to cure and shall not be in default under this
Lease if Tenant commences within such 30-day period such cure and thereafter
diligently prosecutes the same to completion. No notice or cure period shall be
required or applicable hereunder for any Event of Default specified in Section
16.1(d) except as expressly set forth in Section 16.1(d) of this Lease.
16.3 REMEDY UPON OCCURRENCE OF UNCURED EVENT OF DEFAULT. On the
occurrence of an uncured Event of Default, Landlord shall have the right either
(i) to terminate this Lease, and at any time thereafter recover possession of
the Premises, or any part thereof, and expel and remove therefrom Tenant and any
other person occupying the same, by any lawful means, and again repossess and
enjoy the Premises without prejudice to any of the remedies that Landlord may
have under this Lease, or at law or equity by reason of the Event of Default or
of such termination, or (ii) to continue this Lease in effect for so long as
Landlord does not so terminate Tenant's right to possession, and enforce all
Landlord's rights and remedies under this Lease, including the right to
(A) recover Fixed Rent and Additional Charges as they become due, or(B) relet
the Premises at such rental and upon such terms and conditions as Landlord, in
its reasonable discretion, may deem advisable. Acts of maintenance, preservation
or efforts to lease
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the Premises, the appointment of a receiver upon application of Landlord to
protect Landlord's interest under this Lease, or re-entry or taking of
possession of the Premises by Landlord hereunder, shall not constitute an
election to terminate Tenant's right to possession unless specific written
notice of such termination is given to Tenant hereunder. Notwithstanding any
relating without termination, Landlord may at any time thereafter elect to
terminate this Lease pursuant to this Section 16.3. Provided Tenant cooperates
with Landlord, Landlord agrees to make reasonable efforts to mitigate its
damages arising from an uncured Event of Default by Tenant.
16.4 DAMAGES UPON TERMINATION. If Landlord terminates this Lease
pursuant to Section 16.3, Landlord may exercise all rights and remedies
available to a landlord at law or in equity, including, without limitation,
the right to recover from Tenant: (i) the worth at the time of award of the
unpaid Rent and other amounts payable by Tenant hereunder which had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the unpaid Rent and such other amounts which would have been
earned after termination until the time of the award exceeds the amount of
loss of Rent and such other amounts that the Tenant proves could have been
reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid Rent and such other amounts for the balance of the term
after the time of the award exceeds the amount of loss of Rent and such other
amounts that the Tenant proves could be reasonably avoided; and (iv) any
other amount necessary to compensate Landlord for all the direct costs
proximately caused by Tenant's failure to perform its obligations under this
Lease or which, in the ordinary course of things, would be likely to result
therefrom. The "worth at the time of award" of the amounts referred to in
clauses (i) and (ii) shall be computed with Interest. The "worth at the time
of award" of the amounts referred to in clause (iii) shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco, California, plus one percent (1%). As used herein, "time of
award" shall mean either the date upon which Tenant pays to Landlord the
amount recoverable by Landlord as hereinabove set forth, or the date of entry
of any determination, order or judgment, of any court or other legally
constituted body determining the amount recoverable, whichever first occurs.
16.5 COMPUTATION OF RENT AND OTHER AMOUNTS FOR PURPOSES OF DEFAULT. For
purposes of Section 16.4, unpaid Rent and other amounts which would have accrued
and become payable under this Lease shall consist of the sum of: (i) the total
Fixed Rent for the balance of the Term, plus (ii) a computation of Tenant's
Share of the Operating Expenses for the balance of the Term.
16.6 LANDLORD'S RIGHT TO PERFORM ON TENANT'S BREACH. In addition to
any other right or remedy of Landlord hereunder, upon the occurrence of an
uncured Event of Default and without waiving or releasing Tenant from any
obligation of Tenant hereunder, Landlord may (but shall not be required) to cure
such uncured Event of Default for the account of Tenant. Landlord shall not be
responsible or liable to Tenant for any loss or damage that may be caused to
Tenant's stock or business by reason of effecting cure hereunder, unless caused
by the gross
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negligence or willful misconduct of Landlord or Landlord's Agents. All sums paid
by Landlord and all costs and expenses incurred by Landlord in connection with
such cure (including attorneys' fees), together with interest thereon at the
Interest Rate from the respective dates of Landlord's payment of each item of
cost or expense, shall be payable by Tenant on demand.
16.7 LANDLORD'S DEFAULTS.
(a) NOTICE AND CURES: LANDLORD'S LIABILITY. If Landlord fails to
perform any of its obligations under this Lease, then Tenant shall give
Landlord written notice thereof, specifying with particularity the breach
claimed by Tenant. Except for Landlord's failure to make repairs required
under Section 10.1, Landlord shall have the right to cure such breach during
the 30-day period following receipt of Tenant's notice hereunder, unless such
breach cannot reasonably be cured within such 30-day period, in which event
Landlord shall not be in default under this Lease if Landlord commences
within such 30-day period such cure and thereafter diligently prosecutes the
same to completion. Notwithstanding the foregoing, if such breach causes
immediate damage to Tenant's personal property or the ordinary conduct of
Tenant's business, such as roof leaks, Landlord shall use commercially
reasonable efforts to cure such breach as soon as possible. In addition, in
the event Landlord fails to cure such breach within the time period set forth
herein, Tenant shall have the right, but not the obligation, to cure such
breach and the reasonable costs and expenses incurred by Tenant in connection
with such cure, together with interest thereon at the Interest Rate from the
respective date(s) of Tenant's payment of each item of cost or expense, shall
be payable by Landlord upon demand. If the Premises, or any portion thereof,
are at any time subject to any mortgage or a deed of trust, and either
Landlord or the mortgagee or beneficiary has notified Tenant of the existence
of such mortgage or deed of trust, Tenant shall serve on the mortgagee or
beneficiary thereunder concurrent copies of any notice of default served on
Landlord hereunder at the last address for such mortgagee or beneficiary of
which Tenant has received notice from Landlord, and such mortgagee or
beneficiary shall have an additional period of 30 days after expiration of
Landlord's cure period to accomplish the cure of Landlord's default.
(b) RECOVERY AGAINST LANDLORD. Tenant shall look solely to
Landlord's interest in the Property for the recovery of any judgment against
Landlord. Landlord, or if Landlord is a partnership, its partners whether
general or limited, or if Landlord is a corporation, its directors, officers
and shareholders, shall not be personally liable for any such judgment.
16.8 WAIVER; REMEDIES CUMULATIVE. Failure of Landlord or Tenant to
declare an Event of Default immediately upon the occurrence thereof, or delay
in taking any action in connection therewith, shall not waive such Event of
Default, but Landlord or Tenant shall have the right to declare any such
Event of Default at any time thereafter. No waiver by Landlord or Tenant of
an Event of Default, or any agreement, term, covenant or condition contained
in this Lease, shall be effective or binding on the other party unless made
in writing and no such waiver shall be
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implied from any omission by Landlord or Tenant to take action with respect to
such Event of Default or other such matter.
SECTION 17. SUBORDINATION, ATTORNMENT AND ESTOPPEL
17.1 SUBORDINATION. Without the necessity of any additional document
being executed by Tenant for the purpose of effecting a subordination, this
Lease, and all of Tenant's rights under this Lease, shall be subject and
subordinate at all times to the lien of any mortgage or deed of trust or other
security instrument (and any advances or interest thereunder) that may now exist
or hereafter be executed in any amount for which the Property or any portion
thereof, is specified as security, and all modifications, renewals, supplements,
consolidations and replacements thereof, provided that the rights of Tenant
herein are not disturbed so long as no Event of Default by Tenant shall have
occurred and be continuing. If any such mortgagee or beneficiary so elects in
writing, then this Lease shall be superior to the lien of the mortgage or deed
of trust held by such mortgagee or beneficiary, whether this Lease is dated or
recorded before or after such mortgage or trust deed. Tenant shall promptly
execute and deliver, upon demand by Landlord and in substantially the form
reasonably requested by Landlord, any additional documents evidencing the
priority or subordination of this Lease, provided such documents contain the
nondisturbance agreement described in Section 17.2 hereof.
17.2 ATTORNMENT BY TENANT: NON DISTURBANCE. Upon enforcement of any
rights or remedies under any mortgage or deed of trust to which this Lease is
subordinated (including, without limitation, proceedings for judicial or
power of sale foreclosure, or deed in lieu of foreclosure delivered by
Landlord to the mortgagee or beneficiary thereunder), Tenant shall attorn to
the purchaser or transferee under such right or remedy and recognize such
purchaser or transferee as Landlord under this Lease. If Tenant attorns
hereunder, then, so long as there is no uncured Event of Default, Tenant
shall not be disturbed in its possession of the Premises. Tenant shall
execute and deliver any reasonable document or instrument required by such
purchaser or transferee confirming the attornment hereunder.
17.3 CERTIFICATES. Each of Tenant and Landlord, at any time during
the Term and from time to time, shall execute, acknowledge and deliver to the
requesting party, addressed to such party or any prospective purchaser or
mortgagee of any part of the Property a certificate stating: (a) that Tenant
has accepted the Premises (or, if Tenant has not done so, that Tenant has not
accepted the Premises and specifying the reasons therefor), (b) the
Commencement Date and Expiration Date of this Lease, (c) that this Lease is
unmodified and in full force and effect (or, if there have been
modifications, that this Lease is in full force and effect as modified and
stating the modifications), (d) whether or not the requested party is aware
of any then existing defenses against the enforcement of any of the
obligations of the requested party under this Lease (and, if so, specifying
same), (e) whether or not the requested party is aware of any then existing
defaults by the requesting party in the performance of its obligations under
this Lease (or acts or omissions which would constitute defaults if uncured
after notice), and, if so, specifying same,
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(f) the dates, if any, to which the Rent and Additional Charges and other
amounts under this Lease have been paid, (g) use of and knowledge with respect
to Hazardous Materials by Tenant or Landlord under, over and upon the Premises,
and (h) any other information and statements that may reasonably be required by
the requesting party.
SECTION 18. FEES AND EXPENSES; PAYMENT
18.1 INTEREST ON PAST DUE OBLIGATIONS. Unless otherwise specifically
provided herein, any amount due from Tenant to Landlord under this Lease
(including, without limitation, any payment of Rent) which is not paid within
ten (10) after written notice to Tenant (except no notice need be given for
failure to make any payment of Fixed Rent) shall bear interest from the due date
until paid at the Interest Rate. The payment of such interest shall not alone
excuse or cure any default under this Lease.
18.2 LATE CHARGES. Tenant acknowledges that late payment by Tenant to
Landlord of Rent will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord by the
terms of any encumbrance and note secured by any encumbrance covering the
Premises. Therefore, in addition to the provisions of Section 18.1, if any
installment of Rent due from Tenant is not received within ten (10) days after
written notice to Tenant (except no notice need be given for failure to make any
payment of Fixed Rent) by Landlord, Tenant shall pay to Landlord an additional
sum of five percent (5%) of the overdue Rent as a late charge. The parties agree
that this late charge represents a fair and reasonable estimate of the costs
that Landlord will incur by reason of late payment by Tenant.
Section 19. ACCESS TO PREMISES
19.1 LANDLORD ACCESS. Landlord reserves for itself and its agents,
employees and independent contractors the right to enter the Premises at all
reasonable times and upon reasonable notice (i) to inspect the Premises. (ii) to
supply any service to be provided by Landlord to Tenant hereunder, (iii) to show
the Premises to prospective purchasers, mortgagees or tenants, (iv) to post
notices of non-responsibility, (v) to determine whether Tenant is complying
with its obligations under this Lease. (vi) to alter, improve or repair the
Premises or any other portion of the Building and (vii) for any other lawful
purpose not inconsistent with Tenant's rights hereunder. Any entry by, Landlord
or Landlord's Agents pursuant to this section shall, except in the case of any
emergency, be upon forty eight (48) hours' advance written or oral notice to
Tenant. Landlord shall comply with Tenant's security, safety and other
procedures applicable to the Premises and shall not unreasonably interfere with
Tenant's use of the Premises or the conduct of Tenant's business therein while
in the Premises. Provided Landlord complies with the requirements of this
section. Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy,
or quiet
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enjoyment of the Premises, any right to abatement of Rent, or any other loss
occasioned by Landlord's exercise of any of its rights under this Section 19,
unless caused by the negligence or willful misconduct of Landlord or its agents,
employees or contractors. Landlord shall have the right to use any and all means
that Landlord may reasonably deem necessary or proper in order to obtain entry
to any portion of the Premises in an emergency.
Section 20. NOTICES
Except as otherwise expressly provided in this Lease, any bills,
statements, notices, demands, requests or other communications given or required
to be given under this Lease shall be effective only if rendered or given in
writing, and either sent by overnight delivery service or registered or
certified mail, return receipt requested, addressed (a) to Tenant (i) at the
Premises, or (ii) at Tenant's last known address or at any place where Landlord
believes that Tenant or any agent or employee of Tenant may be found, if sent
subsequent to Tenant's vacating, deserting, abandoning or surrendering the
Premises, (b) to Landlord at Landlord's Address, or (c) to either Landlord or
Tenant at such other address as either Landlord or Tenant may designate as its
new address for such purpose by notice given to the other in accordance with the
provisions of this Section 20. Any such bill, statement, notice, demand, request
or other communication shall be deemed to have been rendered or given (i) on the
date it is officially recorded as delivered to the intended recipient by return
receipt or equivalent, and, in the absence of such record of delivery, the
effective date shall be presumed to have been the third (3rd) business day after
the date when it shall have been deposited in the mail as provided in this
Section 20 if sent by registered or certified mail. If Tenant is notified of the
identity and address of any mortgagee of Landlord, Tenant shall give to such
mortgagee by registered or certified mail written notice of any default by
Landlord or failure by Landlord to perform any of its obligations hereunder.
Section 21. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the rules and
regulations for the Building, a copy of which has been provided to Tenant, and
all reasonable modifications thereof and additions thereto which are applicable
to multiple tenants and which do not adversely affect Tenant in a material way
from time to time put into effect by Landlord. Landlord shall have the right to
promulgate different rules and regulations applicable to different portions of
the Building, but Landlord shall not have the right to promulgate rules and
regulations applicable only to Tenant. If there is any conflict between the
terms of the rules and regulations and any provision of this Lease, the terms of
this Lease shall govern. Landlord shall not be responsible for the
nonperformance by any other tenant or occupant of the Building of any of such
rules and regulations. Landlord's consent where required under the rules and
regulations shall not be unreasonably, withheld, conditioned or delayed.
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Section 22. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord the Security Deposit, if any,
set forth in the Basic Lease Information within five (5) days after mutual
execution of this Lease, as security for Tenant's faithful performance of its
obligations under this Lease. Landlord and Tenant agree that the Security
Deposit may be commingled with other funds of Landlord. If Tenant fails to pay
any Rent or other amount when due and payable under this Lease, or fails to
perform any of the terms hereof, Landlord may appropriate and apply or use all
or any portion of the Security Deposit for Rent payments or any other amount
then due and unpaid, for payment of any amount for which Landlord has become
obligated as a result of Tenant's default or breach, and for any loss or damage
sustained by Landlord as a result of Tenant's default or breach, and Landlord
may so apply or use this deposit without prejudice to any other remedy Landlord
may have by reason of Tenant's default or breach. If Landlord so uses any of the
Security Deposit, Tenant shall, within ten (10) days after written demand
therefor, restore the Security Deposit to the full amount originally deposited;
Tenant' failure to do so shall constitute an act of default hereunder. If Tenant
performs all of Tenant's obligations hereunder, the Security Deposit, or so
much thereof as has not theretofore been applied by Landlord, shall be returned
to Tenant (or to the last permitted assignee, if any, of Tenant's interest
hereunder) within fifteen (15) days after the end of the Lease. If Landlord
sells its interest in the Premises, Landlord shall deliver this deposit to the
purchaser of Landlord's interest and thereupon be relieved of any further
liability or obligation with respect to the Security Deposit.
Section 23. SURRENDER OF PREMISES ON TERMINATION
On the Expiration Date or earlier termination of the Term, Tenant shall
quit and surrender the Premises to Landlord, broom clean, in good order,
condition and repair as required by Section 10.1, ordinary wear and tear, fire
and other casualties, acts of God or other causes beyond the control of Tenant
excepted, and Tenant shall comply with the provisions of Section 9.2 of this
Lease. Unless Landlord expressly agrees in writing to the contrary, Tenant
shall remove all machinery, equipment, trade fixtures and materials that Tenant
has placed on the Premises and Tenant shall repair any and all damage to the
Premises caused by Tenant's removal of such equipment, machinery, trade fixtures
and materials.
Section 24. MISCELLANEOUS
24.1 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 15
regarding assignment and subleasing by Tenant, the terms, covenants and
conditions contained in this Lease shall bind and inure to the benefit of
Landlord and Tenant and, except as otherwise provided herein, their respective
personal representatives and successors and assigns; provided, however, that
upon the sale, assignment or transfer by Landlord (or by any subsequent
landlord) of its interest in the Building or the Property as owner or lessee,
including any transfer upon or in lieu of foreclosure or by operation of
law, Landlord (or subsequent landlord) shall be relieved
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from all subsequent obligations or liabilities under this Lease. Provided that
Landlord delivers the Security Deposit, if any, to its successor, Landlord shall
have no further liability to Tenant with respect thereto.
24.2 CONSTRUCTION. This Lease shall be governed by and construed in
accordance with the laws of the State of California. Any actions or proceedings
brought under this Lease, or with respect to any matter arising under or out of
this Lease, shall be brought and tried only in courts located in the County of
Contra Costa, California (excepting appellate courts).
24.3 INTEGRATION. The terms of this Lease are intended by the parties
as a final expression of their agreement with respect to such terms as are
included in this Lease, and may not be contradicted by evidence of any prior or
contemporaneous agreement, arrangement, understanding or negotiation (whether
oral or written). The parties further intend that this Lease constitute the
complete and exclusive statement of its terms, and no extrinsic evidence
whatsoever may be introduced in any judicial proceeding involving this Lease.
The language in all parts of this Lease shall in all cases be construed as a
whole and in accordance with its fair meaning and not restricted for or against
any party.
24.4 LIGHT, AIR, VIEW, SIGNS, ETC. Tenant covenants and agrees that no
diminution of light, air or view, or any impairment of the visibility of the
Premises from inside or outside the Building, by any structure or other object
that may hereafter be erected (whether or not by Landlord) shall entitle Tenant
to any reduction of Rent under this Lease, constitute an actual or constructive
eviction of Tenant, result in any liability of Landlord to Tenant, or in any
other way affect this Lease or Tenant's obligations hereunder. Landlord shall
have the exclusive right to use all exterior walls, roofs and other portions of
the Building for signs, notices and other reasonable promotional purposes.
Tenant shall not place or allow to be placed in, on or about the Building any
sign or other notice indicating Tenant's desire to assign this Lease or sublet
the Premises .
24.5 HOLDING OVER. If Tenant remains in possession of the Premises
after the expiration of the Term with the express written consent of Landlord
and without executing a new lease, then such holding over shall be deemed a
tenancy from month-to-month, subject to all conditions, provisions and
obligations of this Lease. No holding over by Tenant after the Term shall
operate to extend the Term. In the event of any unauthorized holding over,
Landlord and Tenant agree that Landlord's damages, including any claims for
damages by any other tenant to whom Landlord may, have leased all or any part of
the Premises, would be difficult to establish. Landlord and Tenant desire to
liquidate the damages payable to Landlord in the event Tenant holds over after
the term without Landlord's consent and therefore agree upon damages payable by
Tenant to Landlord in a daily amount equal to 1/30th of the monthly Fixed Rent
in effect immediately, prior to the holding over which daily amount shall
increase by five percent (5%) per day but in no event more than 100%,
such that for example, on the tenth day the increase for
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such day would be 50%. Landlord and Tenant agree that the above described
formula to establish damages is fair and reasonable.
24.6 COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24.7 BROKER'S COMMISSIONS. Landlord shall pay all brokers commissions
payable to the Brokers listed in the Basic Lease Information in connection with
this transaction. Tenant represents and warrants that other than such Brokers,
Tenant has not entered into any agreement or incurred or created any obligation
which might require Landlord to pay any broker's commission, finder's fee or
other commission or fee relating to the leasing of the Premises, unless
disclosed to and accepted by Landlord in writing before the date hereof, and
Tenant shall defend, indemnify and hold harmless Landlord from and against any
claims for any such commissions or fees by anyone claiming by or through Tenant.
24.8 LANDLORD'S CONSENTS. Unless otherwise expressly provided in this
Lease, all consents and approvals to be given by Landlord may be withheld for
any reason or no reason, at Landlord's sole discretion, and any such action
shall not be deemed inconsistent with any covenant of good faith and fair
dealing otherwise implied by law to be a part of this Lease. Landlord's failure
to respond to a request for consent or approval from Tenant with thirty (30)
days (or such other period as may be provided in this Lease) shall be deemed to
constitute the granting of such consent or approval.
24.9 AMENDMENTS. No amendments or modifications of this lease or any
agreements in connection therewith shall be valid unless in writing duly
executed by both Landlord and Tenant.
24.10 CONFIDENTIALITY. Landlord shall keep and maintain as confidential
and shall not disclose to third parties all information, documents and other
data supplied by Tenant to Landlord pursuant to or in connection with this Lease
that Tenant identifies as confidential at the time Tenant provides such
information to Landlord; provided, however, that Landlord may disclose such
information, documents and other data to its counsel and consultants who agree
to keep it confidential and to the extent required by applicable governmental
laws, orders, rules, ordinances and regulations.
24.11 ATTORNEYS' FEES. If either party becomes a party to any
litigation concerning this Lease, the Premises, or the Property by reason of
any act or omission of the other party or its authorized representatives. and
not by reason of any act or omission of the party that becomes a party to
that litigation, or any act or omission of its authorized representative, the
party that causes the other party, to become involved in the litigation shall
be liable to the party, involved for reasonable attorneys' fees and court
costs incurred by it in the litigation. If either party commences an action
against the other party arising out of or in connection with this Lease, or
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institutes any proceeding in a bankruptcy or similar court which has
jurisdiction over the other party or any or all of its property or assets, the
prevailing party shall be entitled to have and recover from the losing party
reasonable attorneys' fees and court costs. "PREVAILING PARTY" within the
meaning of this Section 24.11 shall include a party who dismisses an action for
recovery hereunder in exchange for payment of the sums allegedly due,
performance of covenants allegedly breached or consideration substantially equal
to the relief sought in the action.
24.12 NO DISCRIMINATION. There shall be no discrimination against or
segregation of any person or group of persons, on account of race, color, creed,
religion, sex, marital status, national origin, or ancestry, in the leasing,
subleasing, transferring, use, occupancy, tenure, or enjoyment of the Premises,
nor shall Tenant or any person claiming under or through Tenant, establish or
permit any such practice of discrimination or segregation with reference to the
selection, location, number, use, or occupancy, of tenants, lessees, sublessees,
subtenants, or vends in the Premises. Landlord shall deliver to Tenant a copy of
(a) any Covenants, Conditions and Restrictions affecting the Premises; and (b)
any rules and regulations governing Tenant's use of the Premises. Tenant hereby
acknowledges receipt of the aforementioned documents.
Section 25. PARKING AND SIGNAGE
25.1 PARKING. During the Term, Tenant shall have the non-exclusive
right to three (3) parking spaces per 1,000 square feet of the Rentable Area in
the Premises. The parking spaces shall be in the areas designated by Landlord
from time to time for non-exclusive Tenant parking. Tenant shall abide by any
and all reasonable parking regulations and rules applicable to multiple tenants
established from time to time by Landlord.
25.2 SIGNAGE. Tenant shall not affix, paint, erect or inscribe any
sign, projection, awning, or advertisement of any kind to any part of the
Premises, Building, or Property, including, without limitation, the inside or
outside of windows or doors, without the written consent of Landlord which
shall not be unreasonably withheld, conditioned or delayed so long as such
signage is consistent with signage generally approved by Landlord for the
Property. Landlord agrees that subject to Tenant obtaining permission from the
City of Richmond to the extent required therefor, Tenant may place signage on
the Premises and the Property substantially the same as Tenant's signage on
Phase I of Marina Bay Business Park.
Section 26. OPTION TO EXTEND
26.1 EXERCISE OF OPTION. Provided this Lease is in full force and
effect and no Event of Default has occurred and is continuing at the time of
Tenant's delivery, of the Extension Notice, Tenant shall have the right to
extend the Term of this Lease for two five (5) year terms (each an "Extended
Term") upon prior written notice of extension to Landlord given not later
than twelve (12) months prior to the expiration of the initial Term or the
Extended Term, as the case
30
<PAGE>
may be ("Extension Notice"). It is understood and agreed that Tenant's submittal
of each Extension Notice shall bind Tenant to a five (5) year extension of this
Lease. Each Extended Term shall be on the same terms and conditions as provided
in this Lease, except that (i) Tenant shall occupy the Premises in its then "AS
IS" condition, and (ii) the Fixed Monthly Rent for the Extended Term shall be
the greater of (x) 95% of the Fixed Monthly Rent in effect immediately prior to
the commencement date of the Extended Term, or (y) the fair market rent as of
the date that is eleven (11) months prior to the commencement of the Extended
Term, as determined below:
26.2 FAIR MARKET RENT DETERMINATION. The fair market rent of the
Premises as of the commencement of each Extended Term shall be determined as
follows. Within fifteen (15) days after Landlord's receipt of the Extension
Notice, Landlord shall notify Tenant of Landlord's reasonable opinion of the
fair market rental value of the Premises. If Landlord and Tenant do not agree as
to such fair market rental value within fifteen (15) days of Tenant's receipt of
Landlord's notice, the fair market rental value shall be determined pursuant to
the procedures set forth below.
26.3 APPRAISAL. Not later than ten (10) days after the expiration of
the second 15-day period described above, each of the parties shall select a
qualified real estate appraiser with at least five years of appraisal experience
who is familiar with rental value of similar property in the
Richmond/Berkeley/Oakland/Alameda area and the two appraisers so selected shall
appraise the fair market rental value of the Premises. If the two appraisals
differ and the higher of the two does not exceed the lower by ten percent (10%),
the two appraisals shall be averaged to determine the fair market rental value
of the Premises. If the two appraisals differ by more than ten percent (10%),
the two appraisers shall select a third person similarly qualified to act as a
third appraiser; provided however that if the two appraisers are unable to agree
on a third person to act as an appraiser, the third appraiser shall be selected
by lot from names submitted by the two other appraisers. The third appraisal
shall be promptly completed and if two of the three appraisers agree, their
determination shall be the fair market rental value; if no two agree, the
parties shall determine the fair market rental value by averaging the
appraisals; provided, however, that if the lowest appraisal is less than ninety
percent (90%) of the middle appraisal, then such lowest appraisal shall be
disregarded in determining the average and the highest appraisal shall be
disregarded in determining the average if the highest appraisal is more than one
hundred ten percent (110%) of the middle appraisal. Landlord and Tenant shall
each pay the appraiser it selects and one-half (1/2) of the costs and expenses
of the third appraiser, if a third appraiser is necessary.
26.4 DEFINITION OF FAIR MARKET RENTAL VALUE. "Fair Market Rental Value"
shall mean the fair market annual rental amount per rentable square foot that
Landlord has accepted in current, comparable, new transactions in Marina Bay
Business Park for comparable space, for a comparable period of time, from
non-expansion, non-renewal, and non-equity, tenants, or if there are not a
sufficient number of current comparable transactions in Marina Bay Business
Park, what a willing, comparable, new, non-expansion, non-renewal, non-equity,
tenant would
31
<PAGE>
pay, and a willing comparable landlord of a comparable building with comparable
vacancy factors in the vicinity of the Building would accept, at arm's length
for a comparable amount of space for a comparable period of time, in either case
giving appropriate consideration to the annual rental rates per rentable square
foot, the standard of measurement by which the rentable square footage is
measured, the ratio of rentable square feet to usable square feet, the type of
escalation clauses, the extent of liability under the escalation clauses, and
abatement provisions reflecting free rent and/or no rent during the period of
construction or any other period during the lease term, brokerage commissions,
if any, which would be payable by Landlord in a comparable transaction, length
of the lease term, size and location of premises being leased, a fair market
tenant improvement allowances and other generally applicable conditions of
tenancy for the number of rentable square feet in the Premises so that Tenant
will obtain the same rent and other economic benefits.
IN WITNESS WHEREOF, Landlord and Tenant have each caused their duly
authorized representatives to execute this Lease on their respective behalf as
of the day and year first above written.
LANDLORD:
MARINA BAY PARTNERS, LLC,
a California limited liability company
By: /s/ Richard R. Poe
--------------------------------------
Richard R. Poe, Its Manager
TENANT:
QRS CORPORATION.
a Delaware corporation
By: /s/ Peter Papano
--------------------------------------
Name: Peter Papano
------------------------------------
Title: VP FINANCE
-----------------------------------
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
32
<PAGE>
EXHIBIT A
FLOOR PLAN
33
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION
Portions of Lots 31 and 32, Section 24, and portions of Lots 1 and 2, Section
25, Township 1 North, Range 5 West, Mount Diablo Base and Meridian of "Map
No. 1 of Salt Marsh and Tidelands" filed June 11, 1997, Rack Map No. 9,
Official Records, Contra Costa County, State of California, further described
as follows:
PARCEL B
Commencing at the Southeastern corner of said Parcel Map (142 PM 36)
and along the Southern boundary of said Parcel Map, North 88DEG051'44"
West 39.50 feet to the Point of Beginning; thence
South 01DEG08'16" West 422.81 feet; thence
South 46DEG08'1 6" West 22.63 feet; thence
South 01DEG08'16" West 115.43 feet; thence
North 88DEG51'44" West 16.50 feet; thence
South 01DEG08'16" West 64.61 feet; thence
South 61DEG08'16" West 215.27 feet to a point on a non-tangent curve;
thence
Along said non-tangent curve to the left, having a radius of 50.00
feet, the center which bears South 68DEG15'34" West, through a central angle of
35DEG47'44", an arc distance of 31.24 feet; thence
Along a non-tangent line North 17DEG00'00" West 131.50 feet; thence
South 73DEG00'00" West 2.50 feet; thence
North 17DEG00'00" West 2.98 feet; thence
Along a tangent curve to the right, having a radius of 931.00 feet,
through a central angle of 18DEG08'16", an arc distance of 294.72 feet; thence
Along a tangent line North 01DEG08'16" East 286.37 feet to the
Southern boundary of said Parcel Map (142 PM 36); thence
Along said Southern boundary South 88DEG51'44" East 329.5 feet to the
point of beginning.
Containing an area of 4.7317 acres, more or less.
<PAGE>
EXHIBIT C
BUILD OUT OF INITIAL TI'S
This Work Letter is incorporated into and made a part of that certain
Marina Bay Business Park Office Lease between Marina Bay Partners, LLC and QRS
Corporation. All initial-capitalized terms used in this Work Letter and not
otherwise defined herein shall have the meanings ascribed to them elsewhere in
the Lease.
ARTICLE I
GENERAL PROVISIONS
1.1 INITIAL TI'S. Landlord shall plan and design, and Landlord
shall construct certain office improvements (the "Initial TI's") in
accordance with the provisions of this Work Letter and all other applicable
terms and conditions of the Lease.
1.2 INITIAL TI Work. The planning, design and construction of the
Initial TI's are referred to collectively as "Initial TI Work."
1.3 COSTS OF THE Work. For purposes of this Work Letter, "Costs of the
Work" shall mean and include all: (a) architect's, engineer's and consultants'
fees and costs; (b) deposits, fees and costs for building and other permits,
licenses and approvals; (c) tests and inspections; (d) security; (e) insurance
and bond premiums; (f) utilities; (g) all amounts payable to any contractors,
subcontractors, suppliers and vendors; and (h) all other charges, fees, expenses
and other costs incurred or arising in connection with the Initial TI Work.
Costs of the Work shall exclude all costs of construction of the Building shell,
which shall be bome solely by Landlord.
1.4 CONSTRUCTION STANDARDS. The Initial TI's shall be constructed by
Landlord in a good and workmanlike manner, free from material defects in
workmanship and materials and in accordance with Section 7.2 and all applicable
laws, including without limitation, the Americans with Disabilities Act.
ARTICLE 2
IMPROVEMENT PLANS
2.1 PLANS FOR INITIAL TI's. Landlord agrees to perform the Initial TI
Work in accordance with drawings, specifications and other plans necessary for
the development, approval and construction of the Initial TI's (collectively,
the "Plans") reasonably approved by Landlord and Tenant. The Plans shall be
prepared by TSH Architects, or another architectural firm selected by Landlord
and reasonable approved by Tenant (the "Architect"). From time to time as
reasonably requested by Landlord or the Architect, Tenant shall meet with the
Architect to provide Architect sufficient information to enable Architect to
prepare preliminary plans for review and approval by Landlord and Tenant, which
approval shall not be unreasonably withheld. Upon approval of the preliminary
plans, Tenant shall again from time to time. as reasonably requested by Landlord
or Architect meet with the Architect to provide Architect sufficient information
to enable Architect to prepare the final plans and specifications for review
and approval by Landlord and Tenant, which approval shall not be
unreasonably withheld. Each of Landlord and Tenant shall within 15 days of
receipt of the preliminary plans or the Plans (as the case may be),
approve or disapprove the Plans. In the event of disapproval, the disapproving
party shall state its reasons for disapproval and the parties thereafter shall
work together in good faith to reach prompt agreement upon modifications to
such plans.
<PAGE>
ARTICLE 3
CONSTRUCTION OF INITIAL TI'S
3.1 SELECTION OF GENERAL CONTRACTOR. Landlord shall employ a general
contractor to perform the construction of the Initial TI Work. Landlord shall
obtain bids from two or more general contractors selected by Landlord. Such
contractors shall be subject to the approval of Tenant prior to the bid process,
which approval shall not be unreasonably withheld; provided however that Tenant
hereby agrees that the general contractor hired by Landlord to construct the
Building shall be deemed acceptable to Tenant as a general contractor who may
bid the Initial TI Work. Such Work shall be bid on a maximum guaranteed amount
basis, and Landlord shall select the general contractor that submits the lowest
bid (or Landlord's general contractor if it is not the low bidder, but agrees to
perform the Work for the amount of the lowest bid).
3.2. PAYMENT FOR COSTS OF THE WORK. Upon selection of the general
contractor and reasonable approval by Tenant of the Costs of the Work, prior to
commencement of the construction of the Initial TI's, Tenant shall advance to
Landlord the amount of the Costs of the Work, if any, in excess of the TI
Allowance, which TI Allowance, as set forth in Section 7.2 of the Lease, is
$25.00 per square foot of Rentable Area. The funds so advanced to Landlord shall
be held in trust by Landlord and used solely to construct the Initial TI's.
3.3 CHANGE ORDERS. Tenant shall be responsible, subject to initial
exhaustion of the TI Allowance, for all costs relating to changes in the Initial
TI Work that arise from changes in the Plans after commencement of construction
that are requested by Tenant or required by the City of Richmond. Any such
changes in the Initial TI Work arising from changes in the Plans shall be
submitted by the general contractor to both Landlord and Tenant for their prompt
approval, which shall not be unreasonably withheld, and the costs for such
changes shall be set forth in written change orders approved by Tenant and
signed by Landlord. Concurrent with Tenant's approval of each change order,
Tenant shall advance to Landlord the additional costs (if any) set forth
therein. The funds so advanced to Landlord shall be held in trust by Landlord
and used solely to construct the Initial TI's.
<PAGE>
EXHIBIT D
TENANT'S IMPROVEMENTS WORK LETTER
This Work Letter is incorporated into and made a part of that certain
Marina Bay Business Park Office Lease between Marina Bay Partners, LLC and QRS
Corporation. All initial-capitalized terms used in this Work Letter and not
otherwise defined herein shall have the meanings ascribed to them elsewhere in
the Lease.
ARTICLE 1
GENERAL PROVISIONS
1.1 TENANT IMPROVEMENTS. If Tenant desires to construct Alterations (as
defined in Section 9.1 of the Lease) to the Premises after construction of the
Initial TI's, Tenant shall plan, design and construct such Alterations (the
"Tenant Improvements") in accordance with the provisions of this Work Letter and
Section 9 of the Lease.
1.2 TENANT'S WORK The planning, design and construction of the Tenant
Improvements are referred to collectively as "Tenant's Work."
1.3 COSTS OF THE WORK. For purposes of this Work Letter, "Costs of the
Work" shall mean and include all: (a) architect's, engineer's and consultants'
fees and costs; (b) deposits, fees and costs for building and other permits,
licenses and approvals; (c) tests and inspections; (d) security; (e) insurance
and bond premiums; (f) utilities; (g) all amounts payable to any contractors,
subcontractors, suppliers and vendors; and (h) all other charges, fees, expenses
and other costs incurred or arising in connection with the Tenant's Work.
1.4 CONSTRUCTION STANDARDS. The Tenant Improvements shall be
constructed by Tenant in a good and workmanlike manner, free from material
defects in workmanship and materials and in accordance with Section 9 of this
Lease and all applicable laws.
ARTICLE 2
IMPROVEMENT PLANS
2.1 PLANS FOR TENANT IMPROVEMENTS. Tenant agrees at Tenant's sole cost
and expense, to perform the Tenant's Work in accordance with drawings,
specifications and other plans necessary for the development, approval and
construction of the Tenant Improvements (collectively, the "Plans") reasonably
approved by Landlord. Landlord shall have the right to reasonably approve the
general contractor for Tenant's Work. Tenant shall submit the Plans for Tenant's
Work to Landlord and shall reimburse Landlord for all reasonable costs which
Landlord may incur in connection with the granting approval of Tenant's Work.
Landlord shall, within ten (10) business days of receipt of the Plans, approve
or disapprove the Plans. In the event of disapproval, Landlord shall state its
reasons for disapproval and the parties thereafter shall work together in good
faith to reach prompt agreement upon modifications to the Plans. Tenant shall
file a notice of completion after completion of Tenant's Work and provide
Landlord with a copy thereof.
<PAGE>
2.2 EFFECT OF LANDLORD'S ACCEPTANCE. Tenant acknowledges that Landlord's
review of the Plans are not being undertaken solely for Landlord's benefit, and
Landlord shall not be understood or deemed, by its review and acceptance of such
Plans, to make any representation or warranty as to their correctness, accuracy,
compliance with applicable law or any other quality, or to undertake any duty to
Tenant or any other persons. As between Landlord and Tenant, Tenant shall remain
solely responsible for the design of the Tenant Improvements and Landlord shall
have no liability to Tenant or any other person in connection with its review
and acceptance of the Plans.
ARTICLE 3
PAYMENT FOR WORK
3.1 COSTS OF THE WORK FOR TENANT IMPROVEMENTS. Tenant shall pay the
Costs of the Work incurred in connection with the Tenant Improvements.
ARTICLE 4
PERMITS
4.1 TENANT'S PERMITS. Before starting the Tenant Improvements, Tenant
shall procure, and provide Landlord with copies of, all permits, licenses,
consents, notices and other approvals necessary to commence such Work from all
public and quasi-public authorities with jurisdiction. During and upon
completion of the Tenant Improvements, Tenant shall: (a) procure, and provide
Landlord with copies of, all necessary permits, licenses, consents and other
approvals, (b) comply with the directions, orders and other requirements of all
building and other inspectors and representatives of public and quasi-public
authorities with jurisdiction; and (c) comply with the reasonable requirements
of any insurance underwriting board or insurance carrier insuring Tenant,
Landlord or the Premises. Tenant shall keep Landlord generally informed of the
status of, and Landlord shall have the right to participate and shall cooperate
with Tenant in the procurement of, Tenant's building permit for the Tenant
Improvements.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF QRS CORPORATION
QRS Canada, Inc. (a Quebec corporation)
QRS Sales and Services Corporation (a Delaware Corporation)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-67138, Registration Statement No. 33-74734, Registration Statement No.
33-94878, Registration Statement No. 33-66944, Registration Statement No.
333-66837, and Post-Effective Amendments No. 1 and No. 2 to Registration
Statements No. 33-6944, No. 33-67138, No. 33-74734 and No. 33-94878 of QRS
Corporation on Forms S-8 of our report dated January 28, 1999, appearing in the
Annual Report on Form 10-K of QRS Corporation for the year ended December 31,
1998.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 24, 1999
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