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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended MARCH 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number: 0-23132
OBJECTSHARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0143293
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16811 HALE AVENUE, SUITE A, IRVINE, CALIFORNIA 92606-5020
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 833-1122
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(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
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing sale price of the Common Stock on June
22, 1998, as reported by Nasdaq was $ 23,759,387. Shares of Common Stock held by
each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not a conclusive determination for other purposes. As of June 22, 1998, the
registrant had outstanding 12,254,595 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its 1998 Annual Meeting
of Stockholders (the "Proxy Statement"), which shall be filed with the
Securities and Exchange Commission within 120 days after the Registrant's fiscal
year end, are incorporated by reference in Part III of this Form 10-K Report.
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PART I
ITEM 1. BUSINESS
1a. GENERAL
ObjectShare, Inc. ("ObjectShare" or the "Company") develops, markets
and supports fully object-oriented application development tools for use in
development of distributed client/server/web applications. The Company also
provides a comprehensive range of services, including customer support, training
and consulting as integral components of a complete solution. The Company's
primary products are VisualWorks, VisualWave and Distributed Smalltalk, which
are application development environments ("ADEs") based on the Smalltalk
programming language, and PARTS for Java, a visual programming environment based
on the Java programming language. VisualWorks, the Company's primary ADE,
provides a powerful visual programming environment that enables programmers to
develop, deploy, and maintain applications ranging from workgroup and
departmental applications to complex enterprise-wide mission-critical
client/server applications. VisualWorks applications are portable across
multiple platforms. VisualWave is an extension of the VisualWorks environment
that allows a VisualWorks application to be enhanced for deployment on the
Internet. The Company's Distributed Smalltalk ("DST") tool set, when used in
conjunction with VisualWorks or VisualWave, provides a proven architecture for
developing mission-critical, enterprise-wide distributed applications. PARTS for
Java is a complete ADE for creating Java applets and applications.
The Company changed its name to ObjectShare, Inc. from
"ParcPlace-Digitalk, Inc." in September 1997. ParcPlace-Digitalk, Inc. was
formed by the merger of ParcPlace Systems, Inc. with Digitalk, Inc. in August
1995. ParcPlace Systems, Inc. was organized in 1988 in cooperation with Xerox
Corporation to commercialize object-oriented technology. The Company acquired
ObjectShare Systems, Inc. in July 1996 and Polymorphic Software, Inc. in October
1996. The Company acquired rights to the trademark "ObjectShare" in the
acquisition of ObjectShare Systems, Inc., but the adoption of the name
"ObjectShare" as the Company's name was not otherwise related to the acquisition
transaction.
This Form 10-K includes a number of forward-looking statements that
are subject to certain risks and uncertainties that could cause the Company's
actual results and financial position to be affected negatively as events unfold
in the market for the Company's products. These events include, but are not
limited to, the risks inherent in the development and marketing of relatively
new technologies, and the Company's ability to deliver competitive products,
retain key employees and maintain sufficient sales revenue to fund ongoing
research and development. The Company will not update or revise any such
forward-looking statements to reflect events or circumstances that may arise
after this report is filed and that may have an effect on the Company's overall
performance. A more thorough discussion of these factors is presented in Section
1.b "Risk Factors" and elsewhere in this report.
BACKGROUND
OBJECT ORIENTED APPLICATION DEVELOPMENT
Object-oriented application development represents a widely accepted
approach to develop software applications. The basic concept of object-oriented
technology is to construct software in terms of objects, which are independent
modules that can be modified independently from each other, reused in new
applications, and reused and extended to create new objects. Thus,
object-oriented technology can offer substantial productivity gains by enabling
programmers to reuse more of their application code in developing new
applications or adding new functionality to existing applications. Because new
functions can be added incrementally without changing existing objects,
applications developed using object-oriented programming are also more easily
maintained without risking the integrity of the entire system. The reusability
of tried-and-tested objects results in higher-quality code and reduced
maintenance requirements. Since independent objects can be combined to form new
objects, a complex system can be created from simpler sub-structures. These
characteristics of object-oriented systems make them well suited for the
complexity of larger-scale systems, such as those needed to support
enterprise-wide mission-critical business applications.
Smalltalk is a pure object-oriented programming language. As a pure
object-oriented language, Smalltalk provides all of the intended benefits of
object programming: direct business modeling, an easy-to-learn syntax, rapid
development of new objects, incremental changes to existing objects, and easy
and safe reuse of objects. Such benefits make Smalltalk generally more suitable
to corporate application development than object-based extensions of other
programming languages, such as C++, which is an object-oriented extension of C.
Both C and C++ are too complex and low level to provide a pragmatic solution for
the vast majority of corporate applications. In addition, although the C++
language provides for object orientation, it allows programmers to revert to
procedural programming techniques, thereby potentially limiting the benefits of
object-oriented programming.
Java is also an object-oriented programming language, and is being
used primarily for development of Web-based applications. Although Java does not
yet have the extensive class libraries, server capability, or testing and
deployment in corporate applications that Smalltalk, particularly in the
Company's implementation, has, Java has achieved extremely rapid and broad
acceptance.
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CLIENT/SERVER/WEB COMPUTING
In recent years, many organizations have moved their information
systems from mainframe and mini-computer based architectures to distributed
client/server computing environments. Client/server systems typically consist of
multiple desktop PC and workstation clients linked in a network to one or more
high-performance servers. This computing architecture has several benefits: (i)
client/server computing enables end-users to access and share enterprise-wide
data and applications, (ii) additional clients, servers and other computing
resources can easily be added to the network in cost-effective increments and
(iii) because of the distributed nature of client/server systems, organizations
can improve the overall effectiveness of their computing resources by
appropriately distributing application logic, processing and data among clients
and servers.
The distribution of functionality among objects and the ability of
objects to communicate with each other makes object-oriented technology ideally
suited for the client/server environment. Client/server architectures are based
upon the distribution of functionality among different computers on a network
and the ability of clients and servers to communicate via message-passing.
Object-oriented technology is based on a similar message-passing architecture in
which objects on clients and servers throughout a network can easily communicate
to comprise an enterprise-wide client/server application. Distributed computing
standards like the Common Object Request Broker Architecture ("CORBA") enhance
communication among objects.
The Internet is a global web of computer networks. This "network of
networks" allows any computer attached to the Internet to talk to any other,
using the Internet Protocol. Much of the recent growth in Internet use by
businesses and individuals has been driven by the emergence of the World Wide
Web (the "Web"), a format for delivering graphical information over the
Internet. The Web, based on a client/server model and a set of standards for
information access and navigation, can be accessed using client "browser"
software that allows non-technical users to exploit the capabilities of the
Internet. As an increasing number of organizations provide their employees with
Web access from their desktops, an opportunity is emerging for internal
information systems and enterprise applications hosted on internal Web servers.
These systems are referred to as the "intranet." An intranet enables
organizations to extend their internal information systems and enterprise
applications to geographically dispersed facilities, remote offices, and mobile
employees using Web browsers and server software.
Client/server/web computing refers to application development and
delivery systems for business software that will operate in both a client/server
environment and on the Internet and/or Intranet without modification or
recompilation.
DISTRIBUTED COMPUTING
Distributed computing is based on the ability to distribute
applications across a network. Early application networks provided simple data
or procedural interfaces among software programs that needed to interact. The
complexity of such a system expands geometrically as the number of discrete
application components in such a system increases. Managing application networks
larger than a single enterprise can be an impossible task unless distributed
components can communicate with each other without the need to understand each
interface in the distributed network of components.
Distributed objects resolve this crucial problem by using standards
that support sending messages to and receiving messages from other objects
regardless of location. Distributed objects can reside on different machines and
on an intranet or the Internet, and they can migrate from one host to the other,
surviving beyond the life of a current host. A majority of distributed objects
adhere to CORBA, a standard for object messaging maintained by the Object
Management Group ("OMG"). The main advantage of CORBA is the ability to
transparently interoperate with other languages that support CORBA. Messages
between objects are converted into language-neutral forms that are processed by
an object request broker ("ORB"), which carries the translated message from one
object to another.
THE OBJECTSHARE SOLUTION
The Company provides a fully object-oriented software development
environment and related training and consulting services to support the
development of mission-critical, enterprise-wide client/server/web applications.
The Company's strategy has been to offer a complete solution to its customers to
enable them to capitalize on the advantages of object-oriented technology.
Complete, Integrated Application Development Environment. The Company
believes that customers developing client/server/web or distributed computing
applications require a complete, powerful, robust and extensible development
environment as a foundation for their development efforts. VisualWorks provides
a fully integrated graphical user interface ("GUI") builder, access to multiple
databases, cross-platform portability, true object-oriented visual programming
in the Smalltalk language, and an extensive library of pre-developed classes and
methods that support its environment. VisualWave, as an extension of
VisualWorks, provides the capabilities to develop applications that are ready to
be deployed on the Internet in the familiar VisualWorks development environment.
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Comprehensive Service and Support. The Company believes that service
and support is a critical factor for customer success. The Company offers
comprehensive customer service, training, support, and on-site assistance and
consulting as integral components of its overall customer solution. The
Company's training and consulting personnel assist customers in becoming
productive quickly, setting up a development infrastructure appropriate to
customer requirements and the implementation of object-oriented technology, and
provide ongoing support of deployed applications and enterprise-wide distributed
computing solutions.
PRODUCTS
The Company offers a line of object-oriented application development
tools for the client/server/web and distributed computing markets. The Company's
primary products are VisualWorks, VisualWave, Distributed Smalltalk ("DST"),
related products based on the Smalltalk programming language, and PARTS for
Java, which is based on the Java programming language. This family of
object-oriented application development environments provides the following
significant customer benefits:
Improved Information Systems Productivity. The Company's products are designed
to increase the productivity of IS organizations by reducing the overall effort
required to develop and maintain an application.
- Reduced Development Effort. True object-oriented development
environments allow programmers to take advantage of code reuse,
prototyping of partial systems and incremental development. By fully
adhering to the concepts of true object-oriented programming, the
Company's software tools can reduce the time and resources required
to develop an application when compared to structured programming
languages.
- Reduced Maintenance Effort. Because the Company's development tools
allow objects to be developed and tested independently and
applications to be modified by adding new objects incrementally,
applications can be more easily maintained without risking the
integrity of the entire system. In addition, changes made to an
original object are immediately made available to every application
or applications using that object, thereby speeding maintenance and
enhancement.
Enterprise-Wide Capability. The Company's products enable customers to develop
mission-critical applications that operate throughout the enterprise.
- Portability. The Company's products provide a solution to the
heterogeneous computing environments prevalent in most large
organizations today. Applications written in VisualWorks are
instantly portable across the most commonly used client and server
platforms.
- Scalability. Scalability refers to the size and complexity of
applications that can be developed. The Company's products provide
for the development of fully scalable applications ranging from
workgroup or departmental applications to enterprise-wide,
mission-critical applications deployed on complex networks with
thousands of users in multiple locations.
- Development for Client/Server/Web Computing. The architecture of the
Company's products enables customers to develop applications for the
server, the client, or the Web. The products accommodate flexibility
in computing architectures, and allow the developer to adjust the
distribution of data, presentation and applications among clients,
servers and the Web, depending on the requirements of the business
function being implemented.
- Development for Distributed Computing. By combining the application
development capabilities of VisualWorks and the distributed component
technology of DST, the Company provides a toolset and architecture
for developing mission-critical, enterprise-wide distributed
applications for the Internet. In a distributed computing
architecture, the processing of various application tasks is
distributed across network systems, rather than being centralized in
a specific location. This model of distribution enables corporations
to improve efficiency and performance of the overall enterprise
network by leveraging the computing power of multiple systems for a
given task, either with systems that would be otherwise underutilized
or with systems that are geographically closer to the user.
Following is a description of the Company's products:
VISUALWORKS AND ADD-ON PRODUCTS FOR VISUALWORKS
VisualWorks is a robust application development environment for corporate
developers building client and server applications. It includes these key
features:
- The ObjectShare Smalltalk language and its extensive class library,
and a full set of integrated development tools, providing all the
benefits of true object-oriented programming.
- Instant, zero-cost portability across PC (Windows, Windows NT and
OS/2), UNIX, and Macintosh platforms. VisualWorks' compiler
architecture enables deployment across platforms without any
reprogramming or recompiling.
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- A Database Application Creator that allows developers to create basic
database applications without any Smalltalk or SQL programming. The
Database Application Creator includes an "ObjectLens" that allows
developers to combine relational database systems with
object-oriented programming technology for client and server
applications, a "Visual Data Modeler" that allows developers to
manipulate database schemas and relationships between databases and
applications, and other capabilities for rapid database application
development.
- A GUI builder that enables developers to create user interface
specifications using a visual "paint-and-build" approach. The GUI
builder includes a "ChameleonView" feature that lets developers
preview the look of their application on multiple platforms.
- A Reusable Application Framework used to generate a working prototype
application from the user interface specification.
- The ability to develop applications that reside on servers and run
without client user interfaces.
- The capability to perform multi-threading operations.
VisualWorks Advanced Tools provides a variety of specialized Smalltalk-based
tools to optimize applications. These tools include browsers, allocation and
time profilers, a parser compiler, a class reporter, and a benchmark facility.
VisualWorks Business Graphics is a data presentation tool for building and
incorporating business graphics into applications developed using VisualWorks.
VisualWorks Database Connect products provide the additional code necessary to
connect VisualWorks to Oracle, Sybase and DB2 relational databases. Because
VisualWorks has an open Application Programming Interface (API) for drivers,
additional connections can be made to other databases.
VisualWorks DLL and C Connect provides tools and interfaces that enable an
easier and tighter integration of VisualWorks applications with C programs. By
using these tools, a VisualWorks developer can link VisualWorks applications to
external C code libraries and applications available in today's open systems
environment.
VISUALWAVE
VisualWave Development Environment ("VisualWave") is an object-oriented
development tool for creating applications that operate across the Web, either
on an internal "intranet" or over the Internet. VisualWave includes the same
object-oriented application development features as VisualWorks but also
includes a set of advanced tools for creating a Web application. End-users can
interact with the application through the Web using a Web "browser" such as
Netscape Navigator or Microsoft Internet Explorer connected to a VisualWave
Internet Application Server. Unlike most Web tools, which provide only for
broadcasting of static information or simple interaction via forms, VisualWave
allows end-users to connect through the Web to a dynamic application, fully
integrated with client/server systems. VisualWave offers the following features:
- Graphical tools that provide automatic generation of the Web
interface and allow developers to incorporate dynamic graphics into
their applications.
- Session management, enabling a true two-way dialog between the
end-user and the application.
- A personal Web server for testing Web applications before deployment.
- Support for most Web servers and browsers.
- A full-featured object-oriented application development environment.
VisualWave Internet Application Server ("VisualWave Server") is an Internet
application server for deploying Web applications developed using VisualWave.
The VisualWave Server provides the ability to relay application requests from
Web servers to VisualWave applications. It can be used with most available Web
servers, including those from Netscape and Microsoft, in a wide variety of
configurations, including both a single Web server interfacing with multiple
VisualWave Servers or multiple Web servers interfacing with one or more
VisualWave Servers. The "Server Console" feature provides complete control over
all aspects of server operation, including application management and network
operations. Applications can be updated using the VisualWave Development
Environment and can be "hot-loaded" into a running server, making them rapidly
available to users.
DISTRIBUTED SMALLTALK
Distributed Smalltalk ("DST") is a powerful development tool for building
multi-tiered distributed applications, is designed to help developers build
enterprise-wide solutions for client/server-based environments. Fully integrated
with VisualWorks, DST provides application frameworks for the development of
multi-tiered client/server
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applications. DST combines the Common Object Request Broker Architecture (CORBA)
implementation, powerful testing and tuning tools, reusable frameworks, and an
open and flexible architecture in the development of distributed applications.
OTHER PRODUCTS FOR USE WITH VISUALWORKS AND VISUALWAVE
ENVY/Developer for VisualWorks and ENVY/Developer for VisualWave are component
management environments that are fully integrated with the VisualWorks and
VisualWave development environments. ObjectShare is a reseller of
ENVY/Developer, which is provided by a third party. ENVY/Developer facilitates
application development by a group of developers. It also assists with
incremental application development and provides a complete history of an
application's development. The product includes a version control feature that
helps manage the software development process and a configuration management
feature that allows a developer to configure an application by specifying
particular objects to be included.
JAVA PRODUCTS
PARTS for Java, which is offered in Professional, Standard and Lite versions is
a complete application development environment that furnishes end-to-end
productivity in the creation of distributed Java applets and applications. All
versions offer the following features:
- Drag-drop- and-wire visual programming.
- Full support for assembly of JavaBeans, which is a reusable software
component, into new applications.
- The ability to choose the compiler and runtime environment.
- Support for CORBA and Remote Method Invocation (RMI), for use in
distributed or network applications.
- Powerful tools for developing client/server/web solutions: a browser
for browsing and editing source code and class hierarchies; an open
tool set for selecting compilers and other tools; and an editor for
creating and maintaining selecting compilers and other tools, and for
creating and maintaining Java classes.
PARTS for Java is shipped with jKit/Grid and jKit/GO. jKit/Grid is a
set of Java components that provide powerful grid, table and hierarchical to
enable UIs for Java applets and applications. jKit/GO provides a rich Java
framework for graphic objects. jKit/GO lets developers applets and applications
go beyond text, tables, lists, and buttons. With jKit/GO developers can build
graphical applications on a well-designed framework of reusable components,
including graphic objects, tools, and visual handles. jKit/Grid and jKit/GO
allow developers to make applications more visually appealing, more usable, and
to produce them more efficiently.
PARTS for Java Professional provides integrated version control and
configuration management, allowing projects and files to be stored in PVCS
repositories; automated support for the creation of database applications using
Java Data Base Connectivity (JDBC); and support for Active/X.
The Company distributes the PARTS products through its direct sales
force and select resellers, and, to a limited extent, through retail sales
channels and over the Web.
VISUALSMALLTALK ENTERPRISE
In February 1997, as part of its restructuring effort, the Company
announced that it would not continue to enhance VisualSmalltalk Enterprise and
related products. The Company will continue to provide support to current
licensees of VisualSmalltalk Enterprise.
PROFESSIONAL SERVICES AND SUPPORT
To help ensure successful development of mission-critical business
applications, ObjectShare provides its customers with a full range of
professional services and support. The Company's training programs, consulting
services and technical support complement the Company's object-oriented
application development tools, allowing the Company to provide a complete
solution for corporate application developers seeking the benefits of
object-oriented technology. Charges for training, consulting and support are not
bundled with license fees. As of March 31, 1998, the Company had 30 employees
providing training and consulting services and 15 providing customer support.
In addition to the on-line and printed documentation provided with
its products, ObjectShare offers extensive training to its customers. The
Company offers courses focusing on the concepts of object-oriented programming,
as well as courses in the use of the Company's application development
environments, add-on tools, and developer productivity tools.
For customers requiring experienced object-oriented developers, the
Company offers consulting services. The Company provides both short-term and
long-term project assistance at customer sites to help ensure a project's
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success and an accelerated transfer of skills. In addition, the Company offers
ObjectSupport, a technical support service that includes a hotline to technical
support engineers, and an Internet service which allows customers with support
to search for answers to common questions and problems.
STRATEGIC RELATIONSHIPS
Overview
ObjectShare has established a number of strategic relationships with
management consultants, system integrators, and computer system and software
providers. The Company believes that its relationships with other product and
service providers for client/server computing will encourage and reinforce the
decision by corporations to entrust their strategic mission-critical
applications to the Company's products. The Company has strived to establish
strategic alliances to make object-oriented technology a clear choice for large
organizations, and to make the ObjectShare Smalltalk language a standard and
safe choice.
Management Consultants and System Integrators. ObjectShare has
marketing, training, reselling and development relationships with leading
management consultants and system integrators that help corporations reengineer
their business models and implement client/server computing solutions. As
facilitators for many customers migrating to client/server architectures and
object-oriented technology, management consultants and system integrators help
to encourage use of the Company's products. In addition, as these service
providers gain experience with object-oriented technology and expand their own
class libraries, they may be able to offer customized solutions to their clients
at prices competitive with prepackaged software solutions. The Company has
strategic relationships with organizations such as: American Management Systems,
Andersen Consulting, Arbor Intelligence, Cambridge Technology, Computer Sciences
Corporation, Gemini Consulting, Intelligent Environments, MCI Systemhouse,
Morgan, Parker, Johnson, Object Wave, and SPL Worldgroup. It has also
established technology partnerships with organizations such as Rational, Arbor
Intelligence, Intersolv, Oracle, Applied Reasoning, IC&K, and Unisys. We
collaborate on projects, cross sell products, and services, etc. These
relationships are non-exclusive, are not all subject to written agreements and
may be discontinued at any time.
Computer System and Software Providers. ObjectShare has established
development, marketing and reseller relationships with many computer system and
software providers. These companies have large sales organizations dedicated to
providing companies with the computing hardware and database technology
necessary to migrate to client/server architectures. Because organizations
considering a change to client/server and object-oriented technologies typically
seek counsel from their computer system and software providers, it is important
that these providers are familiar with and understand the Company's technology
and its benefits. In addition, by forming strategic relationships with these
companies, ObjectShare benefits from their established industry leadership
positions, sales presence and technology. The Company has such relationships
with the following companies: Digital, Gemstone, Hewlett-Packard, IBM, Informix,
Mercury Interactive, Object Design, Oracle Corporation, and Sun Microsystems.
These relationships are non-exclusive, are not all subject to written agreements
and may be discontinued at any time.
SALES AND MARKETING
The Company markets its products to large business and governmental
organizations, both domestic and international. To address the range of sales
opportunities, the Company relies on the coordinated efforts of its direct sales
force and system engineering personnel, as well as on distribution agreements
with a limited number of authorized domestic VARs and resellers. The Company
also has international distribution arrangements covering Europe, Southeast
Asia, South America, Australia, South Africa, Israel and the Pacific Rim. As of
March 31, 1998, the Company's sales and marketing organization consisted of 23
employees in the United States, the United Kingdom, Germany and Japan.
The Company uses a team sales approach. The direct sales force
focuses on selling to major accounts and provides face-to-face contact with
customers. Sales engineering personnel work with the direct sales force to
perform demonstrations at customer sites and provide pre-sales assistance
including analysis of the customer's technical requirements.
In support of the sales organization, the marketing department
positions, promotes and markets the Company's products. Marketing personnel are
engaged in a variety of activities including public relations, direct marketing,
trade shows, advertising, seminars, newsletters and promotion of customer
success stories through brochures and press placements.
PRODUCT DEVELOPMENT
The Company believes that the timely development of new products and
enhancements to existing products is essential to maintain its competitive
position. Since the founding of the Company and the transfer of certain
technology from Xerox PARC, the Company has developed its products internally
or, in certain instances, has acquired technology from third parties and
consultants. The Company intends to continue to enhance its product lines in
response to technological evolution and customer requirements. The Company
cannot provide any
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assurances that it will deliver any specific product enhancements, or that the
delivery of such enhancements will be timely or have a significant affect on
product sales.
As of March 31, 1998, the Company's product development staff
consisted of 23 employees. The Company's total expenses for research and
development, including capitalized software development costs, for fiscal years
ended March 31, 1998, 1997, and 1996 were and $4.6 million, $8.9 million, and
$10.3 million, respectively, representing 23%, 24%, and 21% of net revenues for
each fiscal period.
EMPLOYEES
As of March 31, 1998, the Company had 112 full-time employees,
consisting of 23 in product development, 23 in sales and marketing, 21 in
finance and administration, 15 in customer support, and 30 in training and
professional services. No employees are covered by any collective bargaining
agreements. The Company believes that its relationships with its employees are
good. The future success of the Company depends in a large part on its ability
to attract and retain qualified personnel. The loss of the services of one or
more of the Company's key employees could have a material adverse effect on the
Company's ability to deliver new products and generate license and associated
revenues, thereby affecting the Company's operating results and financial
condition. The Company maintains competitive compensation, benefits and equity
participation programs. Competition for qualified personnel is intense, and
there can be no assurance that the Company will be able to attract and retain
qualified personnel in the future.
In September 1997, as part of a restructuring to bring its operating
expenses in line with current and projected revenues, the Company reduced its
total headcount by approximately 30 people, including employees and contractors,
down to 112 at March 31, 1998.
1b. BUSINESS RISKS
In addition to the other information set forth in this report, the
following are certain risks that should be considered with regard to the Company
and its common stock.
LACK OF ACCEPTANCE OF SMALLTALK
The Company's application development tools are largely based on the
Smalltalk programming language. The Company believes that it must expand its
offering of products and services beyond its traditional Smalltalk base due in
large part to corporate users' reluctance to make new or additional investments
in Smalltalk-based applications. This reluctance correlates to the perception
that Java has emerged as the leading programming language for future
object-oriented application development, and was compounded by the Company's
operational difficulties from fiscal 1996 through the first half of fiscal 1998.
The losses caused customers to become concerned about the Company's ability to
continue to maintain, support and enhance its product line. Because the Company
is a leading vendor among a small number of vendors providing Smalltalk-based
tools, such concerns exacerbated customer reluctance to make investments in the
Parts for Java-Professional Edition Smalltalk programming language generally,
and the Company's products in particular. In addition, use of the Company's
Smalltalk-based products requires user-organizations to make a substantial
investment in the retraining of programmers, which can be expensive and can
reduce the productivity of programmers during the training period, or to hire
experienced Smalltalk programmers, which are in scarce supply. The Company
believes that Smalltalk continues to provide certain significant advantages over
competing programming languages, but if these advantages are not recognized by
corporate users as having sufficient value to their organizations, the downward
trend in sales of Smalltalk-based application development tools may continue,
which would have a material adverse effect on the Company's results of
operations. In recognition of these factors, Java-based tools such as Parts for
Java-Professional Edition and the multi-lingual services solution strategies
were developed and are being implemented.
NEED FOR CONTINUED ACCEPTANCE OF OBJECT-ORIENTED TECHNOLOGY
The Company currently derives substantially all of its revenue from
its product family of object-oriented application development environments and
related products and services and expects this concentration to continue for the
foreseeable future. As a result, any factor adversely affecting the demand for,
or pricing of, object-oriented application development environments and related
products and services, would have a material adverse effect on the Company's
business and results of operations. In addition, the future success of the
Company's current product family depends upon continued market acceptance of
object-oriented technology, particularly acceptance by corporate users for
mission-critical applications. Because object-oriented technology represents a
fundamental shift in programming methodology, it requires a substantial
investment in the retraining of programmers, which can discourage organizations
from choosing object-oriented tools. Even if organizations choose to make the
investment required to use object-oriented technology, there can be no assurance
that they will choose products based on the Smalltalk language, such as the
Company's products, or that the Company will be successful in the market for
object-oriented application development environments, which is already crowded
with larger and better-funded competitors such as Oracle, IBM, Sun Microsystems
and Symantec. There are a number of potential approaches to implementing object
technology, including the use of languages other than Smalltalk, such as C++,
object
7
<PAGE> 9
extensions of COBOL, Java, object-based third-generation programming languages
("3GLs"), and other new languages and software tools that may currently be under
development or that may be developed in the future.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. Fluctuations
may be caused by numerous factors including, but not limited to, those discussed
above. License revenues in any quarter depend on orders shipped in the quarter.
The Company generally ships orders as received and, as a result, has little or
no backlog. Quarterly revenues and operating results therefore depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. Historically, the Company has received a substantial portion of its
product orders in the last month of the quarter, with a concentration of such
orders in the last week. Delays in the receipt of orders can therefore cause
significant fluctuations in quarterly license revenues. In addition, license
revenues in quarters after a new product release may be affected by the amount
of upgrade revenue, which tends to increase soon after the release of a new
product and then decline rapidly. License revenues may also be affected by
seasonal trends, which may include: relatively lower sales in the summer months
when many businesses experience lower sales; relatively higher sales in December
as many customers complete annual budget cycles; and relatively higher sales in
the Company's last fiscal quarter as a result of efforts to meet sales quotas,
with correspondingly lower sales in the following quarter. Service revenues tend
to fluctuate as consulting projects, which may continue over several quarters,
are undertaken or completed. Operating results may also fluctuate due to factors
such as the demand for the Company's products, the mix of products and services,
the size and timing of customer orders, the introduction of new products and
product enhancements by the Company or its competitors, changes in the
proportion of revenues derived from licenses versus service fees, commencement
or conclusion of significant consulting projects, changes in the level of
operating expenses, and competitive conditions in the industry. Because the
Company's staffing and other operating expenses are based on anticipated
revenues, operating results will be adversely affected if the anticipated level
of revenues is not realized in the expected quarter or over the course of the
year. The Company's results in recent quarters are not necessarily indicative of
future results and the Company believes that period-to-period comparisons of its
financial results should not be relied upon as the sole indicator of future
performance, although such comparisons may be useful in establishing an overall
trend in financial results.
RESTRUCTURING CHARGES AND MERGER RELATED COSTS
Restructuring and merger related expenses reflect charges recorded in
connection with the restructuring of operations in the second quarter of fiscal
1998, and in the third and fourth quarters of fiscal 1997, and expenses incurred
as a result of the merger of with Digitalk, Inc. in the second quarter of fiscal
1996. In the restructurings, the Company reduced its total headcount by an
aggregate of approximately 160 people, including employees and contractors, down
to 112 at March 31, 1998. These actions were taken in an effort to reduce the
Company's ongoing operating expenses. The Company recorded restructuring charges
in the second quarter of fiscal 1998 of $2.6 million and in the third and fourth
quarters of fiscal 1997 of approximately $2.2 million and $3.0 million,
respectively, to cover severance benefits, the closing of excess facilities,
write-down of acquired intangible assets related to discontinued products, and
the write-down of excess computer equipment and office furniture.
VOLATILITY OF STOCK PRICE
The market for the Company's common stock is highly volatile. The
trading price of the Company's common stock has been and will likely continue to
be subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations, and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the market in which the Company does business,
or relating to the Company specifically, have in the past resulted and could in
the future result in an immediate and adverse effect on the market price of the
Company's common stock.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for software for client/server/web computing environments
is characterized by rapidly changing technology, evolving industry standards,
and frequent new product introductions. The Company must continually update its
existing products to keep them current with changing customer needs, technology,
and competitive products. New technologies could render existing products
obsolete. If the Company is unable to enhance its existing products and
introduce new products in response to changing customer requirements, or if such
products are not introduced on a timely basis, fail to receive market
acceptance, or contain significant errors, the Company's business and results of
operations will be materially and adversely affected.
In particular, the market for the Company's products has been
adversely affected by the emergence of Java as the dominant language for
developing web-based client applications. Many of the Company's customers have
chosen to evaluate the capabilities of Java-based products before making
additional investments in the Company's products, which has had a direct adverse
impact on license revenues. Also, the growth of the Internet as a means of
communicating information about competitive products has shortened the average
development cycle for the Company's products and the average life cycle for the
Company's products. This has caused an increase in
8
<PAGE> 10
competition in the market for the Company's products and a requisite increase in
development expenses as the Company strives to release products on a shorter
cycle with significant additional functions. The failure of others to develop or
enhance technologies that are critical to broad public acceptance and use of the
Internet may also affect the Company's ability to market its products for
Internet application development. These factors also helped to influence the
need for the Company to provide Java-based development tools to remain
competitive.
COMPETITION
The market for application development tools for large-scale
client/server/web computing environments is intensely competitive and the
Company expects competition to continue to increase. The Company's competitors
include a broad range of companies that develop and market tools and languages
for software application development, including IBM (whose competing offerings
include a development environment based on Smalltalk and another based on Java),
Borland, Forte, Informix, Microsoft, Oracle, Sun Microsystems, Sybase and
Symantec. Many of the Company's current and prospective competitors have
significantly greater financial, technical, manufacturing, and marketing
resources than the Company. Moreover, these companies may produce additional
products competitive with those of the Company and there can be no assurance
that the Company could compete effectively with such products. In particular,
several competitors have introduced entry-level Java-based application
development environments, which may, for the near term, satisfy the requirements
of a significant number of corporate users who are beginning to develop
applications in Java.
The principal competitive factors affecting the market for the
Company's products include product functionality, quality and reliability, the
timing of product introductions, customer support and price. Based on a
combination of these factors, the Company believes that it will have to
incorporate significant additional functions in a relatively short period of
time for its products to remain competitive. There can be no assurance that the
Company will be able to do so or that the Company will be successful in the face
of increasing competition from new products and enhancements introduced by
existing competitors and by new companies entering the market.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success depends upon its proprietary technology. The
Company relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures, and licensing arrangements to establish and protect
its proprietary rights. In addition, the Company currently holds one patent. As
part of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and corporate
partners, and limits access to and distribution of its software, documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology
independently. In addition, effective protection of intellectual property rights
may be unavailable or limited in certain foreign countries.
The Company provides its products to end-users primarily under
"shrink-wrap" license agreements, which could be held unenforceable in whole or
in part in various jurisdictions. The Company makes a portion of its source code
available to its customers, which increases the likelihood of misappropriation
or other misuse of the Company's products.
The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that software product developers
will increasingly be subject to such claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation or might require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
In its product offerings, ObjectShare uses certain products and
technologies of various third-party software developers, including both complete
products offered as extensions of the Company's product line and technology used
in the enhancement of internally developed products. Such products and
technologies are obtained from the third-party providers under contractual
license agreements, which in some cases are for limited time periods and in some
cases provide that such licenses may be terminated under certain circumstances.
There can be no assurances that the Company will be able to maintain adequate
relations with these third-party providers, that these third-party providers
will commit adequate development resources to maintain these products and
technologies, or that the license agreements that are for limited time periods
will be renewed upon termination. ObjectShare has established a number of
strategic relationships with management consultants, system integrators, and
computer system and software providers. These companies provide software
development, marketing, reselling, and training services that the Company
believes are important to its existing and future business. These relationships
are non-exclusive and may be discontinued at any time.
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<PAGE> 11
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend upon its ability to attract
and retain highly qualified personnel. Loss of key personnel or inability to
hire and retain qualified personnel could have a material adverse effect on the
Company's business and results of operations. Competition for qualified
personnel is intense and has recently intensified in the Company's geographic
and industry segments. The loss of key personnel, or an inability to hire
qualified personnel will adversely affect the Company's business and results of
operations.
MANAGING A CHANGING BUSINESS; BUSINESS COMBINATIONS
Since its inception, the Company has experienced changes in its
operations which have placed significant demands on the Company's
administrative, operational, and financial resources. The Company has
experienced both rapid growth and substantial downturns, which have caused
extreme stresses on the organization, both in the immediate term and in the
longer term. In recent years, the Company has implemented a number of
restructurings and reductions in its workforce, including most recently a
restructuring in September 1997. As a result, the Company has incurred a number
of risks associated with its reduced operating size and capabilities. These
risks include an increased sensitivity to employee turnover, with a greater
likelihood that turnover would have a significant negative effect on the
Company's operations, potentially causing delays in product delivery schedules;
a reduced ability to pursue diversified research and development efforts,
particularly for projects that are not profitable in the near term; and the need
for the Company to effectively manage dramatically changing operations.
The Company may acquire other companies, products, or technologies in
the future. There can be no assurances that these acquisitions can be
effectively integrated, that such acquisitions will not result in costs and
liabilities adversely affecting the Company's results of operations and
financial condition, or that the Company will obtain the anticipated benefits of
such acquisitions.
INTERNATIONAL OPERATIONS
Approximately 31%, 32%, and 31% of the Company's net revenues for the
years ended March 31, 1998, 1997, and 1996, respectively, were attributable to
international sales. The majority of international revenues to date have been
derived from license revenues. International sales are made primarily through
distributors, and are therefore largely dependent on the efforts of these third
parties. Other risks associated with international operations include tariff
regulations and requirements for export licenses, customer or governmental
requirements for local-language versions of products; unexpected changes in
regulatory requirements; longer accounts receivable payment cycles; difficulties
in managing international operations; potentially adverse tax consequences;
economic and political instability; restrictions on repatriation of earnings;
foreign exchange translation and transaction exposure; and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
countries do not protect the Company's products and intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that such factors will not have an adverse effect on the Company's
future international sales and, consequently, on the Company's business,
financial position, and results of operations.
1c. EXECUTIVE OFFICERS
Pursuant to General Instruction G(3) to Form 10-K, the information
regarding executive officers that is otherwise required to be included in Item
10 is set forth in this Item 1 so that, in reliance on Instruction 3 to Item
401(b) of Regulation S-K, it need not be included in the Proxy Statement.
Eugene L. Goda, 62, joined the Company as President and Chief
Executive Officer, and Chairman of the Board, on June 10, 1997. From November
1995 until joining the Company, Mr. Goda was a consultant and private investor.
From October 1991 to October 1995, Mr. Goda served as CEO of Simulation
Sciences, Inc., a software company that develops and markets simulation tools.
From July 1989 to September 1991, he served as CEO of Meridian Software Systems,
a systems software provider. He is also a director of Powerwave Technologies,
Inc.
Glenn J. Brown, 42, joined the Company as Vice President and Chief
Financial Officer in January 1998. From 1987 until joining the Company, he held
various positions with Lucas Aerospace, a division of LucasVarity, an aerospace
system supplier, including Group Vice President of Finance, Director of
Financial and Business Development, and Vice President and General Manager of
Customer Support.
James H. Smith, 41, joined the Company as Senior Vice President of
Sales on June 10, 1997. From 1995 until joining the Company, he was Executive
Vice President, Chief Operating Officer and a Director of Select Software Tools,
a developer of object-oriented application development tools. From 1994 to 1995,
he was Vice President of Sales at Softlab, a developer of process automation
tools. From 1992 to 1994, he was Vice President of Sales for the western region
at Knowledgeware, a developer of CASE tools. From 1988 to 1992, he was Vice
President of Sales and Marketing at Meridian, a developer of Ada development
tools.
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<PAGE> 12
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Irvine,
California in an 11,600 square foot facility occupied under a lease expiring in
2000. The Company also leases facilities and offices in Sunnyvale, California,
and in Illinois, Maryland, New Jersey, Oregon, Virginia, Germany, Japan, and the
United Kingdom. As part of its restructuring in fiscal 1998, the Company
terminated the leases on several sales and engineering offices and moved its
headquarters to Irvine, California. The Company believes that its existing
facilities will be adequate to meet its needs through at least fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS
During fiscal 1997, the Company and its insurers agreed to settle a
securities class action lawsuit filed against the Company and certain of its
officers and directors on October 11, 1995, in the U.S. District Court for the
Northern District of California. Under the terms of the settlement, a settlement
fund of $3.1 million was established, of which $2,850,000 was paid by the
Company's insurers and $250,000 was paid by the Company. The amount paid by the
Company is included in interest and other income (expense) for fiscal 1997.
Although the Company believes that it would have prevailed on the merits if the
suit had proceeded to trial, the Company determined to settle the lawsuit in
order to avoid the expense and distraction of litigation.
The Company may be subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse affect on the Company's consolidated results of operations or
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the symbol
"OBJS". The following table sets forth for the periods indicated the high and
low sale prices of the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
FISCAL 1998
First Quarter $ 1 9/16 $ 1
Second Quarter $ 1 3/8 $ 31/32
Third Quarter $ 1 5/16 $ 1/2
Fourth Quarter $ 2 15/16 $ 5/8
FISCAL 1997
First Quarter $ 14 5/8 $ 8
Second Quarter $ 9 3/8 $ 3 5/8
Third Quarter $ 4 $ 2 1/4
Fourth Quarter $ 2 1/2 $ 1 3/16
</TABLE>
The Company has not paid any dividends since its inception and does not intend
to pay any dividends in the foreseeable future.
At March 31, 1998, there were 237 stockholders of record. Due to the large
number of shares held in street name by the Company's stockholders, the Company
is unable to estimate the number of beneficial stockholders.
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<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data is derived from
the Company's audited consolidated financial statements. This data should be
read in conjunction with Item 8, Financial Statements and Supplementary Data,
and with Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended March 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
For the year:
Net revenues ............................. $ 20,240 $ 37,286 $ 49,610 $ 55,668 $ 41,723
Income (loss) from operations ............ $ (7,864) $(23,110) $(11,597) $ 4,257 $ 4,591
Net income (loss) ........................ $ (7,582) $(22,480) $(10,396) $ 4,564 $ 4,344
Net income (loss) per share:
Basic .................................. $ (0.63) $ (1.91) $ (0.98) $ 0.47 $ 0.46
Diluted ................................ $ (0.63) $ (1.91) $ (0.98) $ 0.38 $ 0.42
Shares used in computing net income (loss)
per share:
Basic .................................. 12,022 11,775 10,725 9,653 9,527
Diluted ................................ 12,022 11,775 10,725 12,104 10,281
Increase (decrease) in net revenues ...... (45.7)% (24.8)% (10.9)% 33.4% 104.2%
Net revenues per employee ................ $ 139 $ 148 $ 146 $ 176 $ 177
At year end:
Cash, cash equivalents and
marketable securities .................. $ 5,734 $ 14,456 $ 28,231 $ 33,295 $ 33,595
Working capital .......................... $ 3,420 $ 8,108 $ 27,701 $ 35,368 $ 32,648
Total assets ............................. $ 13,255 $ 23,872 $ 47,302 $ 54,119 $ 47,134
Long-term debt ........................... $ -- $ -- $ -- $ -- $ 357
Stockholders' equity ..................... $ 4,792 $ 12,272 $ 33,504 $ 37,463 $ 31,508
Number of employees ...................... 112 180 323 356 275
Key ratios:
Current ratio ............................ 1.4 1.7 3.0 4.0 4.1
Return on sales .......................... (37.5)% (60.3)% (21.0)% 8.2% 10.4%
Return on average assets ................. (40.8)% (63.2)% (20.5)% 9.0% 14.5%
Return on average stockholders' equity ... (88.9)% (98.2)% (29.3)% 13.2% 28.2%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements within the meaning of the
federal securities laws. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
various factors, including those set forth below and in Item 1b under the
caption "Business Risks", and elsewhere in this report. The Company assumes no
obligation to update the forward-looking information or the factors listed below
or Item 1b to reflect actual results or changes in the factors affecting such
forward-looking information.
OVERVIEW
ObjectShare, Inc. develops, markets, and supports object-oriented
application development tools for the client/server/web computing market. The
Company also provides customer support, training, on-site assistance, and
consulting services. Headquartered in Irvine, California, the Company maintains
offices across the United States, internationally in Germany, Japan, and the
United Kingdom, and a network of distributors worldwide. License revenues in
fiscal 1998 were generated primarily by the Company's VisualWorks, VisualWave,
Distributed Smalltalk and VisualSmalltalk Enterprise products. These products
comprise a family of object-oriented application development environments based
on the Smalltalk programming language. In addition, the Company offers Parts for
Java, a Java-based component, integrated development environment (IDE)
introduced in the second quarter of fiscal 1997 and now in it's second
generation.
A new management team was installed at the end of the first quarter of
fiscal 1998 to refocus key areas, including marketing, product development and
services, sales and operations. These actions included leveraging and
redirecting the Company's technology and consulting resources and revamping the
marketing strategy to incorporate a more solutions and services-oriented
approach. Management believes that these actions contributed to a revitalization
of the Company's sales and sales organization and improvement in customer
perceptions of the Company.
The Company returned to profitability in the fourth quarter of fiscal
1998 with net income of $327,000 on sales of $5.4 million, or $0.02 per share,
fully diluted. The profit represents a significant improvement over the same
period in fiscal 1997 when the Company lost $4.9 million ($0.42 per share) on
over $7.2 million in sales, and also a significant improvement over the third
quarter loss of $0.03 per share. The fourth quarter's results yielded a 27%
annualized return on equity, and generated the first operating profit produced
by the Company in twelve quarters.
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Fiscal 1998 losses were 66% lower at $7.6 million ($0.63 per share) on sales of
$20.2 million, compared with $22.5 million loss ($1.91 per share) on sales of
$37.3 million in fiscal 1997. Of the $7.6 million loss, approximately $7.5
million was generated in the first half of the fiscal year prior to the
installation of new management.
NET REVENUES
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
(Dollars in thousands) 1998 Change 1997 Change 1996
------- --- ------- --- -------
<S> <C> <C> <C> <C> <C>
License $ 8,172 (59)% $20,148 (36)% $31,667
Service 12,068 (30)% 17,138 (4)% 17,943
------- ------- -------
Net Revenues $20,240 (46)% $37,286 (25)% $49,610
------- ------- -------
</TABLE>
ObjectShare's fiscal 1998 worldwide net revenues decreased 46% from the
previous fiscal year with license revenues down 59%, from the previous year. The
Company believes that the decrease in sales from fiscal 1997 to fiscal 1998 was
due largely to events occurring in fiscal 1997 that affected results for fiscal
1998, including:
- Termination of the VisualSmalltalk Enterprise (VSE) product line in
fiscal 1997;
- Elimination of runtime license fees in fiscal 1997;
- Lack of new releases in the core VisualWorks product line;
- Customer concern over the viability of the Company in light of three
years of declining sales and losses, led to significant gains from
competitors entering the Smalltalk market, including IBM; and
- Growing customer perception of the Smalltalk programming language as
an academic/specialty niche tool, correlated to the emergence and
popularity of Java.
License revenues, declined during the first half of fiscal 1998, but stabilized
during the third quarter and grew significantly in the fourth quarter with the
commercial success of VisualWorks 3.0. License sales increased 31% over the
third quarter, rising to 49% of total revenues for the fourth quarter. At March
31, 1998, the Company has significant firm orders from customers including Bell
Atlantic, Unilever, Sprint, and the US Government, with no single order
exceeding $400,000.
Service revenues in fiscal 1998 and 1997 declined 30% and 4%, respectively, due
to both reduced demand for training and consulting, which is largely driven by
sales of development environments and the emergence of Smalltalk-oriented,
consultancies that specialized in custom application/solution development, in
particular industries. These factors were partially offset by increases in
international training and consulting and worldwide support revenues.
International revenues for fiscal 1998, 1997, and 1996 were $6.2 million, $11.9
million, and $15.5 million, respectively, representing 31%, 32%, and 31%,
respectively, of net revenues. International revenues consist primarily of U.S.
export sales and European training and consulting. The 48% decrease in
international revenue in fiscal 1998 was due primarily, to the sale of our
French subsidiary in mid year. The 23% decrease in international revenues in
fiscal 1997 was due to a substantial decline in revenue in Canada and relatively
flat revenue in other international territories, which the Company attributes to
the same factors affecting license and service revenues discussed above.
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<PAGE> 15
COST OF NET REVENUES
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------
(Dollars in thousands) 1998 Change 1997 Change 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost of license
revenues $ 1,626 (71)% $ 5,537 (5)% $ 5,814
Percentage of
license revenues 19.9% 27.5% 18.4%
Cost of service
revenues $7,569 (27)% $10,379 (7)% $11,111
Percentage of
service revenues 62.7% 60.6% 61.9%
Total cost of
revenues $9,195 (42)% $15,916 (6)% $16,925
Percentage of net
revenues 45.4% 42.7% 34.1%
</TABLE>
Cost of net revenues is allocated to either license revenues or service
revenues. Cost of license revenues, which is primarily comprised of the
production of the Company's products and related royalties, is substantially
lower than cost of service revenues, which consists primarily of personnel
costs.
Cost of license revenues consists principally of royalties, materials, packaging
and freight, and amortization of capitalized software costs. Cost of license
revenues decreased by 71% in fiscal 1998 and 5% in fiscal 1997 due to lower
sales of development environments. License gross profit improved as a percentage
of license revenues in fiscal 1998 to 80%, as fiscal 1997 cost of sales were
high due to write-offs of purchased capitalized software, increased royalty
accruals, write-offs of obsolete inventory, and the higher launch cost of sales
on Parts for Java.
Cost of service revenues consists principally of personnel, and related costs
for training, consulting and customer support. Overall services headcount and
contract personnel were reduced in fiscal 1998 and in fiscal 1997, although
international services headcount increased in fiscal 1997. In fiscal 1998,
service gross profit decreased as a percentage of service revenues to 37%, due
to the decrease in volume.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------
(Dollars in thousands) 1998 Change 1997 Change 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and
marketing $7,684 (61)% $19,465 (12)% $21,995
Percentage of net
revenues 38.0% 52.2% 44.3%
Research and
development $4,648 (48)% $ 8,904 (14)% $10,335
Percentage of net
revenues 23.0% 23.9% 20.8%
General and
administrative $3,956 (47)% $ 7,436 8% $ 6,860
Percentage of net
revenues 19.5% 19.9% 13.8%
Acquired research &
development -- $ 3,513 --
Percentage of net
revenues 9.4%
Restructuring &
merger related costs $2,621 (49)% $ 5,162 1% $ 5,092
Percentage of net
revenues 12.9% 13.8% 10.3%
</TABLE>
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<PAGE> 16
Operating expenses were significantly lower in fiscal 1998 than in fiscal 1997,
as the Company reduced its work force through restructuring its operations. In
response to declining revenues, the Company implemented two reductions in the
workforce in fiscal 1997, and one in fiscal 1998. Quarterly operating expenses
dropped to less than $3.0 million, by the fourth quarter, including research &
development and marketing launch expenses for both VisualWorks 3.0 and Parts for
Java. Operating expenses in fourth quarter of fiscal 1998, were 54% lower
compared to the fourth quarter of fiscal 1997, excluding restructuring accruals.
Sales and marketing expenses consist principally of salaries, commissions,
travel, facility costs, marketing programs and advertising. During fiscal 1998,
expenses decreased as a result of reducing the international sales force, the
spin-off of its sales subsidiary in France, and the de-layering of marketing
management. As a percentage of net revenues these expenses increased in fiscal
1997 as sales and marketing expenses were incurred to try to stop the downward
sales spiral during that year.
Research and development expenditures are mostly personnel related. The
reduction in fiscal 1998 and 1997, were primarily due to changes in the size of
the workforce. In fiscal 1998, 1997, and 1996 total expenditures for research
and development, including capitalized software development costs, were 23%,
24%, and 21%, respectively, of net revenues. The Company did not capitalize
software development costs in fiscal 1998 and fiscal 1997, but capitalized
$200,000 in fiscal 1996. In spite of the significant reductions in development
manpower, tightened focus on customer requirements and meeting release
deadlines, resulted in two, on-time deliveries of new-generation products, both
of which have met with critical acclaim and customer acceptance. The release of
VisualWorks 3.0 and it's commercial success resulted in renewed sales growth in
the fourth quarter of fiscal 1998 and was largely responsible for the Company's
return to profitability in that quarter.
General and administrative expenses consist of personnel costs for
administration, finance, information systems, human resources, and general
management, as well as professional service expenses. General and administrative
expenses decreased in fiscal 1998 primarily due to manpower reductions and a
decrease in bad debt allowance. General and administrative expenses increased in
fiscal 1997 primarily due to an increase of bad debt allowance, legal expenses
associated with a securities class action lawsuit, and an increase in
international spending primarily from the French subsidiary.
Acquired research and development represents charges for software that had not
yet reached technological feasibility under FAS 86. In fiscal 1997, a charge of
$646,000 was taken in connection with the October 1996 acquisition of privately
held Polymorphic Software, Inc. and a charge of $2.9 million was taken in
connection with the July 1996 acquisition of privately held ObjectShare Systems,
Inc.
BUSINESS COMBINATIONS AND RESTRUCTURINGS
In February 1996, the Company acquired all the assets of AMiGO S.A, a
French-based distributor of the Company's VisualWorks product. In September
1997, the Company decided to spin-off the entity to its management. At the time
of the acquisition, which was accounted for as a purchase, the Company made an
initial payment of $688,000. In the second quarter of fiscal 1998, the Company
paid an additional $150,000 in satisfaction of its "earnout" obligation under
the acquisition agreement, in connection with revenues in France in accordance
with the agreement for the specified period. The Company also provided an
additional $100,000 to the spin-off entity as working capital. Most of the
initial purchase price, which included transaction costs, was allocated to
intangible assets (included in other assets), a portion of which was amortized
in fiscal 1997 and the balance of which was written off in connection with the
spin-off. The results of operations of AMiGO, which have not been material in
relation to those of the Company, are included in the consolidated results of
operations for the period of ownership by the Company.
On July 31, 1996, the Company acquired ObjectShare Systems, Inc. (OSI),
a privately held corporation which developed and marketed add-on products for
Smalltalk tools. The acquisition was accounted for as a purchase in which the
Company paid $3.0 million in cash and assumed options for the purchase of
104,086 shares of the Company's common stock. In connection with the
acquisition, the Company recorded intangible assets of $363,000 and charged to
operations $2.9 million for acquired research and development. In connection
with a restructuring of operations later in fiscal 1997, the Company charged to
operations the unamortized portion of the intangible assets. The operating
results of OSI have been included in the Company's consolidated results of
operations from the date of acquisition.
On October 1, 1996, the Company acquired Polymorphic Software, Inc.
(PSI), a privately held corporation which developed and marketed Smalltalk tools
and provided related consulting services. This acquisition was accounted for as
a purchase in which the Company agreed to pay approximately $1.0 million in
cash, of which $700,000 was paid during the third quarter of fiscal 1997, in
exchange for all outstanding shares of PSI common stock. The operating results
of PSI are included in the Company's consolidated results of operations from the
date of acquisition. In connection with the acquisition, the Company recorded
intangible assets of $403,000 and charged to operations $646,000 for acquired
research and development. In connection with the restructuring of operations
later in fiscal 1997, the Company charged to operations the unamortized portion
of the intangible assets.
15
<PAGE> 17
Restructuring and merger related costs reflect charges recorded in connection
with the restructuring of operations in the second quarter of fiscal 1998, and
the third and fourth quarters of fiscal 1997, and expenses incurred as a result
of the merger with Digitalk, Inc. in the second quarter of fiscal 1996. In the
restructurings, the Company reduced its total headcount by an aggregate of
approximately 160 people, including employees and contractors, down to 112 at
March 31, 1998. These actions were taken in an effort to reduce the Company's
ongoing operating expenses. The Company recorded restructuring charges in the
second quarter of fiscal 1998 of $2.6 million and in the third and fourth
quarters of fiscal 1997 of approximately $2.2 million and $3.0 million,
respectively, to cover severance benefits, the closing of excess facilities,
write-down of acquired intangible assets related to discontinued products, and
the write-down of excess computer equipment and office furniture.
The fiscal 1998 restructuring costs and related liabilities are
summarized below:
<TABLE>
<CAPTION>
Write-downs,
payments, and Accrued
reclassifications restructuring
Restructuring through March costs at March
(Dollars in thousands) costs 31, 1998 31, 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Severance
benefits $ 550 $ 550 $ --
Closing of
excess
facilities 1,395 881 514
Intangible
assets
write-down 584 564 20
Equipment and
furniture
write-down 68 68 --
Other 24 24 --
----------- ----------- -----------
$ 2,621 $ 2,087 $ 534
=========== =========== ===========
</TABLE>
The Company expects that the remaining $534,000 accrued restructuring
costs at March 31, 1998 are adequate to cover remaining exposures and will be
spent over the next twelve months. Such payments will be financed through
current working capital. All amounts relating to the fiscal 1997 restructuring
costs have been paid out as of March 31, 1998.
YEAR 2000 COMPLIANCE
The Company does not currently believe its products will be impacted by
the Year 2000 issue. Internal Company operating systems have been evaluated for
Year 2000 compliance and have been found to be non-compliant. An internal
software selection and implementation project is expected to be completed no
later than January 1, 1999. Costs related to this transition will be expensed as
incurred and are not projected to be material to the Company's operating
results. However, Year 2000 considerations may have an effect on some of the
Company's customers and suppliers, which may indirectly affect the Company.
Although, the Company is not aware of any significant potential problems of its
customers or suppliers that it believes will have a material adverse effect on
the Company's business, it is not possible to quantify the effect of Year 2000
issues residing with the Company's customers and suppliers.
INTEREST AND OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
(Dollars in thousands) 1998 Change 1997 Change 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest and other
income, net $313 (57)% $725 (44)% $1,303
Percentage of net
revenues 1.5% 1.9% 2.6%
</TABLE>
Interest and other income (expense), net consists primarily of interest earned
on the Company's cash and cash equivalent balances and marketable securities,
offset by interest paid and other expenses. The decrease in fiscal
16
<PAGE> 18
1998 reflects lower interest income from reduced cash, cash equivalent and
marketable securities balances. The decrease in fiscal 1997 reflects lower
interest income from reduced cash and marketable securities balances and a
payment of $250,000 for the settlement of the securities class action lawsuit,
and other related legal costs.
NET LOSS PER SHARE
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
(Dollars in thousands,
except per share data) 1998 Change 1997 Change 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss $(7,582) 66% $(22,480) (116)% $(10,396)
Percentage of net
revenues (37.5)% (60.3)% (21.0)%
Basic and diluted
net loss per share $ (.63) $ (1.91) $ (0.98)
</TABLE>
LOSS PER SHARE
The Company has adopted SFAS 128, "Earnings Per Share," and applied
this pronouncement to all periods presented. This statement requires the
presentation of both basic and diluted net income (loss) per share for financial
statement purposes. Basic net income (loss) per share is computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares outstanding. Diluted net income (loss) per share includes the
effect of the potential shares outstanding, including dilutive stock options and
warrants using the treasury stock method. Because the impact of options and
warrants are antidilutive, there is no difference between the loss per share
amounts computed for basic and diluted purposes.
The following table sets forth the computation of net loss per share:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
NUMERATOR
Net loss................................................................ $(7,582) $(22,480) $(10,396)
Accretion of cumulative dividend and redemption value of
mandatorily redeemable preferred..................................... -- -- (135)
------- -------- --------
Net loss used for basic and diluted loss per share -- loss attributable
to common shareholders............................................... $(7,582) $(22,480) $(10,531)
======= ======== ========
DENOMINATOR
Denominator for basic and diluted loss per share -- weighted average
common shares outstanding............................................ 12,022 11,775 10,725
======= ======= =======
Basic and diluted net loss per common share............................. $ (0.63) $ (1.91) $ (0.98)
======= ======= =======
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee of the
AICPA issued SOP 97-2, Software Revenue Recognition which provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is intended to reduce the diversity in
accounting for software revenue recognition and changes certain of the specific
criteria for recognizing revenue related to software licensing arrangements.
Specifically, the new SOP contains more restrictive revenue recognition
provisions for software arrangements containing multiple elements (i.e.
upgrades, enhancements, implementation and other services) similar to the
arrangements entered into by the Company. SOP 97-2 is effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company is
currently evaluating the provisions of the new SOP and the impact that it will
have on the Company's revenue recognition policies and the terms under which it
provides products and services to customers.
In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by and distributions to shareholders.
Statement No. 130 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about
17
<PAGE> 19
its operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional disclosures
with respect to products and services, geographical areas of operations and
major customers. Statement No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
FOREIGN EXCHANGE CONTRACTS
The Company sells its products to its European customers in local
currencies. There may be potential risks caused by economic and political
instability; foreign exchange translation and transaction exposure; and the
burdens of complying with a wide variety of foreign laws. The Company enters
into forward foreign exchange contracts, with maturities generally approximate
ninety days in duration, primarily to hedge against the short-term impact of
foreign currency fluctuations from invoices denominated in local currencies. Net
foreign currency transaction gains and losses have not been material.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents, and
marketable securities of $5.7 million, and working capital of $3.4 million.
Due to its net losses in fiscal 1998 and 1997, the Company used $9.2
million and $9.4 million, respectively, of cash to fund its operating activities
in such years. The net cash used in operating activities in fiscal 1998 was
greater than the net loss, primarily due to the net effect of decreases in
accounts payable, accrued liabilities, accrued restructuring costs, and deferred
revenue. The net cash used in operating activities in fiscal 1997 was less than
the net loss for the year, primarily due to non cash charges for depreciation,
amortization, restructuring and acquired research and development as well as the
net effect of decreases in accounts receivable and deferred revenue. Accounts
receivable decreased as a result of reduced revenues. Days sales outstanding
were 86 days and 70 days at March 31, 1998 and 1997, respectively. Inventories
consist principally of software and related documentation and are stated at the
lower of cost on a first-in/first-out basis or market.
Proceeds from the Company's investing activities in fiscal 1998 consist
of net proceeds from maturities of marketable securities partially offset by
funds used in business divestitures and expenditures for property and equipment.
In fiscal 1997, the Company's uses of funds in investing activities consist of
net purchases of marketable securities partially offset by funds used in
business combinations and expenditures for property and equipment. The Company
has no significant capital commitments for fiscal 1999.
Financing activities provided cash of $.1 and $1.3 million for fiscal
1998 and 1997, respectively. Cash from financing activities in both fiscal years
was derived primarily from the issuance of common stock under the Company's
employee stock plans.
The Company believes it has adequate resources to sustain its present
level of operations for any particular period of time. Management believes that
its existing balances of cash, cash equivalents, and marketable securities, in
combination with its return to operating profitability, should be sufficient to
meet its cash requirements for continuing its core business.
The Company may from time to time consider the acquisition of products,
technologies, or businesses complementary to its overall business strategy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the related Notes to
Consolidated Financial Statements, the Report of Independent Auditors, and the
Quarterly Financial Information of ObjectShare, Inc. are set forth at the pages
indicated in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this
Item is incorporated by reference to the Company's Proxy Statement.
The information concerning the Company's executive officers is in
Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements
<TABLE>
<S> <C>
Consolidated Balance Sheets............................................................................ F-1
Consolidated Statements of Operations.................................................................. F-2
Consolidated Statements of Stockholders' Equity........................................................ F-3
Consolidated Statements of Cash Flows.................................................................. F-4
Notes to Consolidated Financial Statements............................................................. F-5
Quarterly Financial Information (not covered by the report
of Independent auditors).......................................................................... F-16
Report of Independent Auditors......................................................................... F-17
</TABLE>
2. Financial Statement Schedule
The following financial statement schedule should be read in
conjunction with the Consolidated Financial Statements of
ObjectShare, Inc. All other schedules are omitted because they
are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
19
<PAGE> 21
OBJECTSHARE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
-------------------------------
Balance at Charged to Charged to Balance at
beginning of costs and net end
period expenses revenues Deductions* of period
------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Description
Allowance for Doubtful Accounts:
Year Ended March 31, 1998 $958 $106 $ -- $517 $547
Year Ended March 31, 1997 498 939 -- 479 958
Year Ended March 31, 1996 533 285 -- 320 498
Allowance for Sales Returns:
Year Ended March 31, 1998 1,351 -- 82 1,358 75
Year Ended March 31, 1997 969 -- 1,964 1,582 1,351
Year Ended March 31, 1996 271 -- 1,600 902 969
</TABLE>
* Uncollectible accounts written off, net of recoveries
20
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
3. Exhibits.
---------
<S> <C> <C>
2.1(2) -- Conformed Agreement and Plan of Reorganization by
and among the Registrant, Boardwalk Merger
Subsidiary Co., a subsidiary of the Registrant
("Merger Sub"), and Digitalk, Inc.
2.2(2) -- Agreement of Merger by and between Merger Sub and
Digitalk, Inc.
3.1(1) -- Certificate of Incorporation
3.2(1) -- Bylaws
4.3(1) -- Specimen of Common Stock Certificate
10.2C*(3) -- Executive Bonus Plan for Fiscal 1997
10.2D*(4) -- Executive Bonus Plan for Fiscal 1998
10.3B*(1) -- 1989 Stock Option Plan
10.3Da*(3)-- 1993 Stock Plan
10.3E*(2) -- 1995 Director Stock Option Plan
10.3F*(3) -- Incentive and Nonstatutory Stock Option Plan
adopted by Digitalk, Inc., in 1992
10.4C*(3) -- 1993 Employee Stock Purchase Plan
10.11*(1) -- Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers
10.12*(2) -- Form of agreement between the Registrant and each
of its executive officers regarding a change of
control
10.13A*(4)-- Agreement for Services between the Registrant and
Eugene L. Goda dated June 10, 1997
10.13B*(4)-- Agreement for Services between the Registrant and
Ronald J. Clear dated June 10, 1997
10.13C*(4)-- Agreement for Services between the Registrant and
James H. Smith dated June 10, 1997
10.14 -- Lease Agreement (Irvine, CA) dated October 3, 1997
between the Registrant and Hale Property, Ltd.,
L.P.
21.1 -- List of Subsidiaries
23.1 -- Consent of Independent Auditors, Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the same-numbered exhibit to the Company's
Registration Statement on Form S-1 (No. 33-73008)
(2) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1995
(3) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1996
(4) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
* Management contract or compensatory plan
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: June 26, 1998 OBJECTSHARE, INC.
By: /s/ EUGENE L. GODA
-------------------------------------
Eugene L. Goda
President and Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below hereby appoints Eugene
L. Goda and Glenn J. Brown, and each of them acting individually, his or her
attorneys-in-fact with full power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming signatures
as they may be signed by said attorneys to any and all such amendments.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ EUGENE L. GODA President and Chief Executive Officer and June 26, 1998
- ----------------------------------------- Chairman of the Board of Directors
Eugene L. Goda Principal Executive Officer
/s/ GLENN J. BROWN Chief Financial Officer June 26, 1998
- ----------------------------------------- Principal Financial Officer and Principal
Glenn J. Brown Accounting Officer
/s/ JOHN B. CARRINGTON Director June 26, 1998
- -----------------------------------------
John B. Carrington
/s/ JOS C. HENKENS Director June 26, 1998
- -----------------------------------------
Jos C. Henkens
</TABLE>
22
<PAGE> 24
ObjectShare, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share amounts) March 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 5,134 $ 7,418
Marketable securities...................................................... 600 5,538
Accounts receivable, net of allowances of $622 in 1998 and $2,309 in
1997..................................................................... 5,166 5,586
Inventories................................................................ 164 220
Prepaid expenses and other current assets.................................. 819 946
-------- --------
Total current assets................................................ 11,883 19,708
Marketable securities........................................................ -- 1,500
Property and equipment:
Computers and other equipment.............................................. 4,696 4,630
Furniture and fixtures..................................................... 636 652
Leasehold improvements..................................................... 719 515
-------- --------
6,051 5,797
Accumulated depreciation and amortization.................................. 4,853 4,002
-------- --------
1,198 1,795
Other assets................................................................. 174 869
-------- --------
Total assets........................................................ $ 13,255 $ 23,872
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 1,134 $ 1,219
Accrued payroll and related expenses....................................... 1,088 1,421
Accrued restructuring costs................................................ 534 1,067
Other accrued liabilities.................................................. 2,492 2,827
Deferred revenue........................................................... 3,215 5,066
-------- --------
Total current liabilities........................................... 8,463 11,600
Commitments and contingencies................................................ -- --
Stockholders' equity:
Common stock, $0.001 par value: Authorized shares -- 30,000,000
Issued and outstanding shares -- 12,198,760 in 1998 and 11,929,351 in
1997.................................................................... 12 12
Additional paid-in capital................................................. 49,992 49,863
Accumulated deficit........................................................ (44,998) (37,416)
Cumulative translation adjustment.......................................... (214) (187)
-------- --------
Total stockholders' equity.......................................... 4,792 12,272
-------- --------
Total liabilities and stockholders' equity.......................... $ 13,255 $ 23,872
======== ========
</TABLE>
See accompanying notes.
F-1
<PAGE> 25
ObjectShare, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Net revenues:
License......................................................... $ 8,172 $ 20,148 $ 31,667
Service......................................................... 12,068 17,138 17,943
-------- -------- -------
Total net revenues................................................ 20,240 37,286 49,610
Cost of net revenues:
License......................................................... 1,626 5,537 5,814
Service......................................................... 7,569 10,379 11,111
-------- -------- -------
Total cost of net revenues........................................ 9,195 15,916 16,925
-------- -------- -------
Gross profit...................................................... 11,045 21,370 32,685
Operating expenses:
Sales and marketing............................................. 7,684 19,465 21,995
Research and development........................................ 4,648 8,904 10,335
General and administrative...................................... 3,956 7,436 6,860
Acquired research and development............................... -- 3,513 --
Restructuring and merger-related costs.......................... 2,621 5,162 5,092
-------- -------- -------
Total operating expenses.......................................... 18,909 44,480 44,282
-------- -------- -------
Loss from operations.............................................. (7,864) (23,110) (11,597)
Interest and other income (expense), net.......................... 313 725 1,303
-------- -------- -------
Loss before provision for income taxes............................ (7,551) (22,385) (10,294)
Provision for income taxes........................................ 31 95 102
-------- -------- -------
Net loss.......................................................... $ (7,582) $ (22,480) $(10,396)
======== ======== =======
Basic and diluted net loss per share... ........................... $ (0.63) $ (1.91) $ (0.98)
======== ======== =======
Shares used in computing basic and diluted net loss per share..... 12,022 11,775 10,725
======== ======== =======
</TABLE>
See accompanying notes.
F-2
<PAGE> 26
ObjectShare, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Total
--------------- Paid-in Accumulated Translation Stockholders'
(In thousands) Shares Amount Capital Deficit Adjustment Equity
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 9,867 $ 10 $41,824 $ (4,406) $ 35 $ 37,463
Accretion of mandatorily
redeemable preferred stock -- -- -- (135) -- (135)
Conversion of mandatorily redeemable
preferred stock to common stock 1,237 1 5,140 -- -- 5,141
Exercise of stock options 309 1 491 -- -- 492
Issuance of common stock under
Employee Stock Purchase Plan 119 -- 937 -- -- 937
Translation adjustment -- -- -- -- (64) (64)
Unrealized gain on investments -- -- -- 66 -- 66
Net loss -- -- -- (10,396) -- (10,396)
------ ---- ------- -------- ----- --------
Balance at March 31, 1996 11,532 12 48,392 (14,871) (29) 33,504
Exercise of stock options 196 699 -- -- 699
Issuance of common stock under
Employee Stock Purchase Plan 201 -- 604 -- -- 604
Stock options assumed in business
combinations -- -- 168 -- -- 168
Translation adjustment -- -- -- -- (158) (158)
Unrealized loss on investments -- -- -- (65) -- (65)
Net loss -- -- -- (22,480) -- (22,480)
------ ---- ------- -------- ----- --------
Balance at March 31, 1997 11,929 12 49,863 (37,416) (187) 12,272
Exercise of stock options 250 -- 120 -- -- 120
Issuance of common stock under
Employee Stock Purchase Plan 20 -- 9 -- 9
Translation adjustment -- -- -- -- (27) (27)
Net loss -- -- -- (7,582) -- (7,582)
------ ---- ------- -------- ----- --------
Balance at March 31, 1998 12,199 $ 12 $ 49,992 $ (44,998) $(214) $ 4,792
====== ==== ======= ======== ===== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 27
ObjectShare, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year Ended March 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,582) $(22,480) $(10,396)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 783 3,707 3,000
Restructuring costs 165 1,887 --
Acquired research and development -- 3,513 --
Changes in operating assets and liabilities:
Accounts receivable 420 6,379 928
Inventories 56 441 494
Other current assets 127 (126) 312
Accounts payable and accrued liabilities (753) (3,472) 439
Accrued restructuring costs (533) 1,067 --
Deferred revenue (1,851) (310) 1,702
-------- -------- --------
Net cash used in operating activities (9,168) (9,394) (3,521)
INVESTING ACTIVITIES
Business combinations -- (3,699) (664)
Maturities of marketable securities 6,438 23,239 30,720
Purchases of marketable securities -- (16,479) (36,282)
Purchases of property and equipment (254) (1,564) (1,789)
Decrease (increase) in other assets 598 (197) (521)
-------- -------- --------
Net cash provided by (used in) investing activities 6,782 1,300 (8,536)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of repurchase 129 1,303 1,429
-------- -------- --------
Net cash provided by financing activities 129 1,303 1,429
Effect of exchange rate changes on cash and cash equivalents ( 27) (158) (64)
-------- -------- --------
Net decrease in cash and cash equivalents (2,284) ( 6,949) (10,692)
Cash and cash equivalents at beginning of period 7,418 14,367 25,059
-------- -------- --------
Cash and cash equivalents at end of period $ 5,134 $ 7,418 $ 14,367
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES
Conversion of preferred stock to common stock $ -- $ -- $ 5,141
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for taxes $ 24 $ 82 $ 118
</TABLE>
See accompanying notes.
F-4
<PAGE> 28
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ObjectShare, Inc., formerly ParcPlace-Digitalk, Inc., the Company, a
Delaware corporation, develops, markets, and supports object-oriented
application development tools for the client/server/web computing market. The
Company also provides customer support, training, on-site assistance and
consulting.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries in France (through the period
of ownership), Germany and the United Kingdom after eliminating all significant
intercompany accounts and transactions.
The financial statements of foreign subsidiaries have been translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation." Gains and losses from translation are
recorded as cumulative translation adjustments in stockholders' equity. The
effect of foreign currency transaction gains and losses on the consolidated
statements of operations is insignificant for all years presented.
A new management team was installed at the end of the first quarter of
fiscal 1998 to refocus key areas, including marketing, product development and
services, sales and operations. These actions included leveraging and
redirecting the Company's technology and consulting resources and revamping the
marketing strategy to incorporate a more solutions and services-oriented
approach. Management believes that these actions contributed to a revitalization
of the sales and sales organization, and improvement in customer perceptions of
the Company. The Company believes it has adequate resources to sustain its
present level of operations for any particular period of time. Management
believes that its existing balances of cash, cash equivalents, and marketable
securities, in combination with its return to operating profitability, should be
sufficient to meet its cash requirements for continuing its core business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during each
period. Actual results could differ from those estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
marketable securities consist principally of debt instruments with maturities
between three and twelve months. Long-term marketable securities consist of debt
instruments with maturities exceeding twelve months.
At March 31, 1998 and 1997, all of the Company's debt securities were
classified as available-for-sale and were carried at fair market value with
unrealized gains and losses recorded in stockholders' equity. The cost of the
securities is based upon the specific identification method.
F-5
<PAGE> 29
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Such investments consist of the following:
<TABLE>
<CAPTION>
Fair Market
Value at
(Dollars in thousands) March 31,
- ---------------------------------------------------------
1998 1997
------ -------
<S> <C> <C>
Cash equivalents:
Corporate debt securities $3,074 $ 4,330
U.S. treasury securities and
obligations of U.S. government
agencies -- 1,596
Other -- 1,000
------ -------
Total $3,074 $ 6,926
====== =======
Short-term marketable securities
(maturing through March 1999):
U.S. treasury securities and
obligations of U.S. government
agencies $ 600 $ 5,538
====== =======
Long-term marketable securities
U.S. treasury securities and
obligations of U.S. government
agencies $ -- $ 1,500
====== =======
</TABLE>
Realized gains and losses from the sale of such investments were not
material in fiscal 1998, 1997 and 1996. At March 31, 1998 and 1997, the
estimated fair value of cash equivalents and marketable securities approximated
cost and the amount of unrealized gains or losses were not significant.
INVENTORIES
Inventories consist principally of finished goods, which includes
software and related documentation, which are stated at the lower of cost
(first-in/first-out) or market. Inventories include the cost of licenses for
each unit of product manufactured by a third party and distributed by the
Company.
PROPERTY AND EQUIPMENT
Equipment is stated at cost. Depreciation and amortization are computed
using the straight-line method over estimated useful lives of three to five
years. Assets under capital leases are amortized over the shorter of the asset
life or the remaining lease term. Amortization of capital leases is included in
depreciation expense.
CAPITALIZED SOFTWARE AND PURCHASED SOFTWARE
The Company presently has no capitalized software on its balance sheet
at March 31, 1998. The policy is to capitalize software development costs
incurred subsequent to the time the products reach technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. Capitalized internally developed
software and purchased software are stated at the lower of amortized cost or net
realizable value. Amortization of capitalized software development and purchased
software costs commences when the products are available for general release to
customers and are determined using the straight-line method over the expected
useful life of the respective product.
For fiscal 1997 and 1996, software amortization was $1,700,000 and
$346,000, respectively. Of the fiscal 1997 amount, $764,000 was charged to
restructuring costs for products that were discontinued, including products that
were acquired in business combinations (Note 7).
F-6
<PAGE> 30
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
STOCK-BASED COMPENSATION
In 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation," which provides an alternative to APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation to
employees. The Company has elected to account for stock-based compensation to
employees in accordance with Opinion 25 and provide pro forma disclosures as
required by Statement 123.
REVENUE RECOGNITION
License revenue is recognized on shipment of product, provided that no
significant vendor obligations remain and that collection of the resulting
receivable is deemed probable by management. Insignificant vendor obligations
are accrued upon recognition of revenue. License revenue also includes revenue
from the sale of software manufactured by a third party. Service revenue
includes training, consulting, and customer support. Revenues from training and
consulting are recognized at the time the service is performed.
Deferred revenue relates primarily to software support contracts and
training coupons sold under separate arrangements with customers. The term of
the software support contracts is generally one year, and the Company recognizes
the associated revenue on a pro rata basis over the life of the contract.
Potential sales returns are covered by the Company's allowance for
sales returns and doubtful accounts. The Company provides for the costs of
warranty when specific problems are identified. The Company has not experienced
significant warranty claims to date.
CONCENTRATION OF CREDIT RISK
The Company sells its products to various companies across several
industries. The Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential credit losses, which have been within
management's expectations. The Company generally requires no collateral from its
customers.
LOSS PER SHARE
The Company has adopted SFAS 128, "Earnings Per Share," and applied
this pronouncement to all periods presented. This statement requires the
presentation of both basic and diluted net income (loss) per share for financial
statement purposes. Basic net income (loss) per share is computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares outstanding. Diluted net income (loss) per share includes the
effect of the potential shares outstanding, including dilutive stock options and
warrants using the treasury stock method. Because the impact of options and
warrants are antidilutive, there is no difference between the loss per share
amounts computed for basic and diluted purposes.
The following table sets forth the computation of net loss per share:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NUMERATOR
Net loss..................................................................... $(7,582) $(22,480) $(10,396)
Accretion of cumulative dividend and redemption value of
mandatorily redeemable preferred......................................... -- -- (135)
------- -------- --------
Net loss used for basic and diluted loss per share -- loss attributable
to common shareholders.................................................... $(7,582) $(22,480) $(10,531)
======== ========= =========
DENOMINATOR
Denominator for basic and diluted loss per share -- weighted average
common shares outstanding................................................. 12,022 11,775 10,725
====== ====== ======
Basic and diluted net loss per common share.................................. $(0.63) $(1.91) $(0.98)
====== ====== ======
</TABLE>
F-7
<PAGE> 31
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee of the
AICPA issued SOP 97-2, Software Revenue Recognition which provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is intended to reduce the diversity in
accounting for software revenue recognition and changes certain of the specific
criteria for recognizing revenue related to software licensing arrangements.
Specifically, the new SOP contains more restrictive revenue recognition
provisions for software arrangements containing multiple elements (i.e.
upgrades, enhancements, implementation and other services) similar to the
arrangements entered into by the Company. SOP 97-2 is effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company is
currently evaluating the provisions of the new SOP and the impact that it will
have on the Company's revenue recognition policies and the terms under which it
provides products and services to customers.
In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and display
of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by and distributions to shareholders.
Statement No. 130 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and annual
periods. The statement also requires additional disclosures with respect to
products and services, geographical areas of operations and major customers.
Statement No. 131 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with
current year presentation.
2. DERIVATIVE FINANCIAL INSTRUMENTS
The Company sells its products to its European customers in local
currencies. There may be potential risks caused by economic and political
instability; foreign exchange translation and transaction exposure; and the
burdens of complying with a wide variety of foreign laws. The Company enters
into forward foreign exchange contracts primarily to hedge against the
short-term impact of foreign currency fluctuations from invoices denominated in
foreign currencies. The maturities of the forward foreign exchange contracts are
short-term in nature, generally 90 days. The contracts are recorded at fair
market value as of each balance sheet date. Gains and losses from these
contracts are recorded in interest and other income. At March 31, 1998 and 1997,
the Company had contracts to exchange various European currencies to U.S.
dollars in the amounts of $1,072,000 and $1,009,000, respectively. The fair
value (quoted market price) of these contracts was $1,072,000 and $956,000 at
March 31, 1998 and 1997, respectively. Net foreign currency transaction gains
and losses have not been material.
3. COMMITMENTS
The Company leases its facilities under noncancelable operating leases
that expire through 2001. Rental expense was $1,682,000, $1,763,000, and
$1,765,000 for fiscal 1998, 1997, and 1996, respectively. Minimum rental
commitments under all noncancelable leases with an initial term in excess of one
year are as follows: fiscal 1999 -- $441,000; 2000 -- $213,000; 2001 --
$100,000.
4. STOCK OPTION AND STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation" ("FAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options and employee stock purchase
plans. Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
F-8
<PAGE> 32
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
The Company has two current stock option plans: the 1993 Stock Plan,
which provides for the grant of stock options to the Company's employees and
consultants, and the 1995 Director Stock Option Plan, which provides for the
grant of stock options to the Company's Directors. The Company also has two
other stock option plans which have terminated but under which stock options
remain outstanding: the 1989 Stock Option Plan, the Incentive and Nonstatutory
Stock Option Plan adopted by Digitalk in 1992 (as to which the Company assumed
all outstanding options at the time of the merger in August 1995), and the 1995
Stock Option/Stock Issuance Plan of Objectshare Systems, Inc. (as to which the
Company assumed all outstanding options at the time of the acquisition in July
1996). No further options may be granted under these terminated plans. In
addition, the Company granted options in fiscal 1998 to the new executive
officers hired in June 1998. Because of the number of option shares and the
terms required in the employment agreements with such individuals, the options
were granted outside of the existing stock plans.
Under the 1993 Stock Plan, the vesting and exercise provisions of
option grants are determined by the Board of Directors. As of March 31, 1998,
the 1993 Stock Plan provides for the issuance of incentive stock options and
nonqualified stock options to purchase up to 2,800,664 shares of common stock
(including 18,550 shares already issued upon exercise of options and not
including 14,288 shares that could be added under the terms of the plan if
outstanding options covering such shares under the 1989 plan are cancelled in
the future). There were 661,533 shares available for option grants under this
plan at March 31, 1998. In April 1998, the Board of Directors approved an
additional 500,000 shares for this plan.
Under the 1995 Director Stock Option Plan, options are automatically
granted to non-employee Directors. The Director Stock Option Plan provides for
the issuance of nonqualified stock options to purchase up to 200,000 shares of
common stock. There were 115,000 shares available for option grants under this
plan at March 31, 1998.
Generally, options granted under the plans vest over a three or
four-year period and have a term of ten years from the date of grant, subject to
continued service to the Company, although certain grants under the 1995
Director Stock Option Plan vest over a longer period.
In May 1995, July 1996, and November 1997, the Board of Directors
approved stock option repricing programs pursuant to which employees of the
Company (excluding all executive officers) could elect to exchange their then
outstanding employee stock options for new employee stock options having an
exercise price per share equal to the then fair market value of the common
stock, with exercisability generally prohibited for six months after the
exchange. Under the May 1995 repricing, 417,838 options with exercise prices
ranging from $10.00 to $22.75 per share were exchanged for options with an
exercise price of $9.625 per share. Under the July 1996 repricing, 747,098
options with exercise prices ranging from $4.875 to $18.25 per share were
exchanged for options with an exercise price of $4.375 per share. Under the
November 1997 repricing, 513,868 options with exercise prices ranging from
$1.0625 to $4.6875 per share were exchanged for options with an exercise price
of $1.00 per share. The exchange of all such options is included in grants and
cancellations.
Activity under these stock option plans is as set forth below. Options
assumed in the Digitalk merger are included as historically granted, adjusted
for the exchange ratio for the merger. Options assumed in the Objectshare
acquisition are included as assumed in fiscal 1997, adjusted for the exchange
ratio for that merger.
F-9
<PAGE> 33
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Number of Weighted-
Shares Average
(In Price Price
thousands) Per Share Per Share
- -------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31,
1995 1,965 $0.17--$23.25 $ 8.39
Granted 1,781 $6.88--$13.50 $ 9.75
Canceled (959) $0.22--$23.25 $ 14.36
Exercised (319) $0.17--$10.00 $ 1.78
---------
Balance at March 31,
1996 2,468 $0.22--$22.50 $ 7.90
Granted 2,198 $1.50--$13.81 $ 3.97
Assumed
(acquisition) 104 $ 3.21 $ 3.21
Canceled (2,277) $0.22--$22.50 $ 8.10
Exercised (196) $0.22--$ 9.88 $ 3.58
---------
Balance at March 31,
1997 2,297 $0.44--$18.25 $ 4.09
Granted 3,891 $0.63--$ 3.81 $ 1.03
Canceled (2,403) $0.44--$18.25 $ 3.82
Exercised (342) $0.44--$ 1.06 $ 0.56
---------
BALANCE AT MARCH 31,
1998 3,443 $0.63--$11.50 $ 1.17
=========
</TABLE>
At March 31, 1998, an aggregate of 4,219,907 shares were reserved for
future issuance under the plans, including 3,443,374 shares subject to
outstanding options and 776,533 available for grant, and not including the
500,000 additional shares approved for the 1993 Stock Plan in April 1998. At
March 31, 1998, options to purchase 863,371 shares were exercisable.
The following table summarizes information about the Company's stock
options outstanding at March 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Price at 3/31/98 Contractual Life Exercise Price at 3/31/98 Exercise Price
- -------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.63--$ 0.78 135,800 9.71 $ 0.78 -- $ --
$0.81--$ 0.97 27,800 8.87 $ 0.87 -- $ --
$1.00 1,895,082 8.73 $ 1.00 242,647 $ 1.00
$1.06 1,257,500 4.48 $ 1.06 552,500 $ 1.06
$1.25--$ 1.81 36,100 9.40 $ 1.50 5,250 $ 1.81
$2.19--$ 2.88 20,712 8.58 $ 2.50 7,595 $ 2.50
$3.81--$ 4.88 22,380 6.98 $ 4.36 21,130 $ 4.39
$7.75--$11.50 48,000 7.62 $ 9.52 34,249 $ 9.59
--------- --------
$0.63--$11.50 3,443,374 7.19 $ 1.17 863,371 $ 1.48
========= ========
</TABLE>
Pro forma information regarding net loss and net loss per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock purchase plan and employee stock options granted subsequent
to March 31, 1995 under the fair value method of FAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model for the single option approach with the following assumptions for
fiscal 1998, 1997 and 1996: risk-free interest rates of 6%, 7% and 7%,
respectively,
F-10
<PAGE> 34
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
volatility factors of the expected market price of the Company's common stock of
1.4, 0.9 and 0.9, respectively, and, for all years, an expected life of the
options of 3 years from the grant date and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options and employee stock
purchase plan have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options and the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period. The
Company's historical and pro forma information follows (in thousands, except for
net loss per share information):
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share data) Year ended March 31,
- ----------------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Loss
Historical $ (7,582) $(22,480) $(10,396)
Pro Forma $ (8,697) $(24,496) $(12,615)
Basic and diluted
net loss per share
Historical $ (0.63) $ (1.91) $ (0.98)
Pro Forma $ (0.72) $ (2.08) $ (1.18)
</TABLE>
Because compensation expense is recognized over the vesting period of
the options and because pro forma disclosure is only required commencing with
fiscal 1996, the initial effect on pro forma net loss may not be representative
of the effect in future years.
STOCK PURCHASE PLAN
The Company's 1993 Employee Stock Purchase Plan allows eligible
employees, through payroll deductions, to purchase shares of the Company's stock
at the lower of 85% of the fair market value of the stock on the first or last
day of a six-month offering period or such other offering period determined by
the Board of Directors. The plan provides for the issuance of up to 700,000
shares of the Company's common stock. In fiscal 1998, 1997 and 1996, the Company
issued 19,944, 200,867 and 119,042 shares, respectively, under the plan. At
March 31, 1998, 419,114 cumulative shares have been issued under the plan, and
280,886 remained available for future issuance. In April 1998, the Board of
Directors approved an additional 100,000 shares for this plan.
COMMON STOCK RESERVED
At March 31, 1998, a total of 4,500,793 shares of the Company's common
stock was reserved for future issuance under the Company's stock option and
employee stock purchase plans.
5. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan covering
substantially all of its employees. Participants may elect to contribute up to
20% of their compensation to this plan (up to the statutory maximum amount). The
Company can make discretionary contributions to the plan determined solely by
the Board of Directors. The Company has made no contributions to the plan to
date.
F-11
<PAGE> 35
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
6. INCOME TAXES
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended March 31,
- ---------------------------------------------------------
1998 1997 1996
---- ---- ------
<S> <C> <C> <C>
Current:
State $ -- $ 40 $ 47
Foreign 31 55 55
---- ---- -----
Total $ 31 $ 95 $ 102
==== ==== =====
</TABLE>
A reconciliation of income tax provision at the U.S. federal statutory
rate (34%) to the income tax provision at the effective tax rate is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended March 31,
- -------------------------------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Income taxes computed at
the federal statutory
rate $(2,577) $(7,600) $(3,500)
Valuation Allowance 2,626 6,405 3,500
Acquired research and
development costs with
no tax basis -- 1,195 --
State taxes, net of
federal benefit -- 40 47
Foreign income and
withholding taxes 31 55 55
Research activity credits
utilized (49) -- --
------- ------- ------
$ 31 $ 95 $ 102
======= ======= ======
</TABLE>
As of March 31, 1998, the Company has federal and state net operating
loss carryforwards of approximately $32,700,000 and $9,500,000, respectively,
that will expire in the fiscal years 1998 through 2013. The Company also has
federal and state research and experimentation credits of approximately
$1,300,000 and $700,000, respectively, that will expire in the fiscal years 2003
through 2013. In addition, the Company has a federal foreign tax credit
carryforward of approximately $243,000 that will expire in the fiscal years 1999
through 2002. Finally, the Company also has federal alternative minimum tax
credit carry forwards of approximately $60,000 that do not expire.
Utilization of these net operating losses and credits may be subject to
an annual limitation due to ownership change constraints provided by the
Internal Revenue Code of 1986 and similar state tax provisions.
F-12
<PAGE> 36
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Significant components of the Company's deferred income taxes consist
of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31,
- --------------------------------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards $ 11,708 $ 10,887 $ 2,531
Research credit
carryforwards 1,991 1,661 1,623
Foreign tax credit 243 243 188
Allowances for sales
returns 30 388 388
Accrued vacation pay 128 270 270
Capitalized research
and development costs -- -- 45
Other individually
immaterial items 616 331 547
-------- -------- -------
Total deferred tax assets 14,716 13,780 5,592
Valuation allowance (14,716) (13,780) (5,592)
-------- -------- -------
Net deferred tax assets $ -- $ -- $ --
======== ======== =======
</TABLE>
Approximately $700,000 of the deferred tax asset described above (and a
similar amount of valuation allowance) relates to tax benefits of stock option
exercises that may be realized in future years. When realized, these benefits
will be allocated to paid-in capital.
Under Statement of Financial Accounting Standards No. 109, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company has provided a full valuation allowance against
its deferred tax assets due to uncertainties surrounding their realization
resulting from the Company's recent history of operating losses.
The income before provision for income taxes provided by foreign
operations was not material for any period presented. The undistributed earnings
of the Company's foreign subsidiaries were not material at March 31, 1998.
7. BUSINESS COMBINATIONS
In February 1996, the Company acquired all the assets of AMiGO S.A, a
French-based distributor of the Company's VisualWorks product. In September
1997, the Company decided to spin-off the entity to its management. At the time
of the acquisition, which was accounted for as a purchase, the Company made an
initial payment of $688,000. In the second quarter of fiscal 1998, the Company
paid an additional $150,000 in satisfaction of its "earnout" obligation under
the acquisition agreement, in connection with revenues in France in accordance
with the agreement for the specified time period. The Company also provided an
additional $100,000 to the spin-off entity as working capital. Most of the
initial purchase price, which included transaction costs, was allocated to
intangible assets (included in other assets), a portion of which was amortized
in fiscal 1997 and the balance of which was written off in connection with the
spin-off. The results of operations of AMiGO, which have not been material in
relation to those of the Company, are included in the consolidated results of
operations for the period of ownership by the Company.
On July 31, 1996, the Company acquired ObjectShare Systems, Inc. (OSI),
a privately held corporation that developed and marketed add-on products for
Smalltalk tools. The acquisition was accounted for as a purchase in which the
Company paid $3.0 million in cash and assumed options for the purchase of
104,086 shares of the Company's common stock. In connection with the
acquisition, the Company recorded intangible assets of $363,000 and charged to
operations $2.9 million for acquired research and development. In connection
with the restructuring of operations (Note 9), the Company charged to operations
the unamortized portion of the intangible assets. The operating results of OSI
have been included in the Company's consolidated results of operations from the
date of acquisition.
F-13
<PAGE> 37
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
On October 1, 1996, the Company acquired Polymorphic Software, Inc.
(PSI), a privately held corporation which developed and marketed Smalltalk tools
and provided related consulting services. This acquisition was accounted for as
a purchase in which the Company agreed to pay approximately $1.0 million in
cash, of which $700,000 was paid during the third quarter, in exchange for all
outstanding shares of PSI common stock. The operating results of PSI are
included in the Company's consolidated results of operations from the date of
acquisition. In connection with the acquisition, the Company recorded intangible
assets of $403,000 and charged to operations $646,000 for acquired research and
development. In connection with the restructuring of operations (Note 9), the
Company charged to operations the unamortized portion of the intangible assets.
8. LEGAL PROCEEDINGS
During the quarter ended December 31, 1996, the Company and its
insurers agreed to settle a securities class action lawsuit filed against the
Company and certain of its officers and directors on October 11, 1995, in the
U.S. District Court for the Northern District of California. Under the terms of
the settlement, a settlement fund of $3.1 million was established, of which
$2,850,000 was paid by the Company's insurers and $250,000 was paid by the
Company. The amount paid by the Company is included in interest and other income
(expense) in the consolidated statements of operations for fiscal 1997. The
settlement was approved by the court in March of 1997.
The Company may be subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these legal matters will have a
material adverse affect on the Company's consolidated results of operations or
consolidated financial position.
9. RESTRUCTURING CHARGES AND MERGER RELATED COSTS
Restructuring and merger related expenses reflect charges recorded in
connection with the restructuring of operations in the second quarter of fiscal
1998, and in the third and fourth quarters of fiscal 1997, and expenses incurred
as a result of the merger with Digitalk, Inc. in the second quarter of fiscal
1996. In the restructurings, the Company reduced its total headcount by an
aggregate of approximately 160 people, including employees and contractors, down
to 112 at March 31, 1998. These actions were taken in an effort to reduce the
Company's ongoing operating expenses. The Company recorded restructuring charges
in the second quarter of fiscal 1998 of $2.6 million and in the third and fourth
quarters of fiscal 1997 of approximately $2.2 million and $3.0 million,
respectively, to cover severance benefits, the closing of excess facilities,
write-down of acquired intangible assets related to discontinued products, and
the write-down the value of excess computer equipment and office furniture.
The fiscal 1998 restructuring costs and related liabilities are
summarized below:
<TABLE>
<CAPTION>
Write-downs,
payments, and Accrued
reclassifications restructuring
Restructuring through March costs at March
(dollars in thousands) costs 31, 1998 31, 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Severance
benefits $ 550 $ 550 $ --
Closing of
excess
facilities 1,395 881 514
Intangible
assets
write-down 584 564 20
Equipment and
furniture
write-down 68 68 --
Other 24 24 --
----------- ----------- -----------
$ 2,621 $ 2,087 $ 534
=========== =========== ===========
</TABLE>
The Company expects that the remaining $534,000 accrued restructuring
costs at March 31, 1998 are adequate to cover remaining exposures and will be
spent over the next twelve months. Such payments will be financed through
current working capital. All amounts relating to the fiscal 1997 restructuring
costs have been paid out as of March 31, 1998.
F-14
<PAGE> 38
ObjectShare, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
10. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company markets its products in the United States and in foreign
countries through its sales personnel, dealers, distributors, and its
subsidiaries.
Export sales account for a significant portion of the Company's net
revenues and are summarized as a percentage of net sales by geographic areas as
follows:
<TABLE>
<CAPTION>
Year ended March 31,
- -----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States 69% 68% 69%
Export:
Europe 25 20 16
Other international 6 12 15
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
F-15
<PAGE> 39
ObjectShare, Inc.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
1st 2nd 3rd 4th Total
(In thousands, except per share data) Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
NET REVENUES $ 5,122 $ 4,752 $ 4,935 $ 5,431 $ 20,240
GROSS PROFIT $ 2,773 $ 2,380 $ 2,645 $ 3,247 $ 11,045
INCOME (LOSS) FROM OPERATIONS(1) $ (2,615) $ (5,031) $ (533) $ 315 $ (7,864)
NET INCOME (LOSS) $ (2,515) $ (4,977) $ (417) $ 327 $ (7,582)
BASIC NET INCOME (LOSS) PER SHARE $ (0.21) $ (0.42) $ (0.03) $ 0.03 $ (0.63)
SHARES USED IN COMPUTING BASIC
NET INCOME (LOSS) PER SHARE 11,925 11,925 12,075 12,126 12,022
DILUTED NET INCOME (LOSS) PER SHARE $ (0.21) $ (0.42) $ (0.03) $ 0.02 (0.63)
SHARES USED IN COMPUTING DILUTED
NET INCOME (LOSS) PER SHARE 11,925 11,925 12,075 15,570 12,022
Fiscal 1997:
Net revenues $ 11,548 $ 10,427 $ 8,089 $ 7,222 $ 37,286
Gross profit $ 7,212 $ 5,525 $ 4,451 $ 4,182 $ 21,370
Loss from operations(2) $ (3,322) $ (7,884) $(6,789) $(5,115) $(23,110)
Net loss $ (3,050) $ (7,574) $(6,914) $(4,942) $(22,480)
Basic and diluted net loss
per share $ (0.26) $ (0.65) $ (0.59) $ (0.41) $ (1.91)
Shares used in computing basic
and diluted net loss per share 11,600 11,775 11,800 11,900 11,775
</TABLE>
(1) The second quarter of fiscal 1998 included $2,621,000 of restructuring
costs as described in Note 9 to the consolidated financial statements.
(2) The second and third quarter of fiscal 1997 included $2,867,000 and
$646,000, respectively, of charges for acquired research and development
as described in Note 7 to the consolidated financial statements.
F-16
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ObjectShare, Inc.
We have audited the accompanying consolidated balance sheets of ObjectShare,
Inc. as of March 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ObjectShare, Inc. at March 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
May 21, 1998
F-17
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits.
- ---------
<S> <C>
2.1(2) -- Conformed Agreement and Plan of Reorganization by
and among the Registrant, Boardwalk Merger
Subsidiary Co., a subsidiary of the Registrant
("Merger Sub"), and Digitalk, Inc.
2.2(2) -- Agreement of Merger by and between Merger Sub and
Digitalk, Inc.
3.1(1) -- Certificate of Incorporation
3.2(1) -- Bylaws
4.3(1) -- Specimen of Common Stock Certificate
10.2C*(3) -- Executive Bonus Plan for Fiscal 1997
10.2D*(4) -- Executive Bonus Plan for Fiscal 1998
10.3B*(1) -- 1989 Stock Option Plan
10.3Da*(3)-- 1993 Stock Plan
10.3E*(2) -- 1995 Director Stock Option Plan
10.3F*(3) -- Incentive and Nonstatutory Stock Option Plan
adopted by Digitalk, Inc., in 1992
10.4C*(3) -- 1993 Employee Stock Purchase Plan
10.11*(1) -- Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers
10.12*(2) -- Form of agreement between the Registrant and each
of its executive officers regarding a change of
control
10.13A*(4)-- Agreement for Services between the Registrant and
Eugene L. Goda dated June 10, 1997
10.13B*(4)-- Agreement for Services between the Registrant and
Ronald J. Clear dated June 10, 1997
10.13C*(4)-- Agreement for Services between the Registrant and
James H. Smith dated June 10, 1997
10.14 -- Lease Agreement (Irvine, CA) dated October 3, 1997
between the Registrant and Hale Property, Ltd.,
L.P.
21.1 -- List of Subsidiaries
23.1 -- Consent of Independent Auditors, Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the same-numbered exhibit to the Company's
Registration Statement on Form S-1 (No. 33-73008)
(2) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1995
(3) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1996
(4) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
* Management contract or compensatory plan
<PAGE> 1
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
EXHIBIT 10.14
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1. PARTIES: This Lease ("LEASE"), dated for reference purposes
only, October 3 , 1997, is made by and between Hale Property, Ltd., L.P., a
California Limited Partnership ("LESSOR") and ParcPlace Digitalk, Inc., a
California Corporation (LESSEE"), (collectively the "PARTIES," or individually a
"PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 16811 Hale Avenue, Suite A, located in
the City of Irvine County of Orange, State of California, with zip code 92614 ,
as outlined on Exhibit A attached hereto ("PREMISES"). The "BUILDING" is that
certain building containing the Premises and generally described as (describe
briefly the nature of the Building): The Premises shall consist of 11,645 square
feet of the 29,565 square foot building located as cross-hatched on Exhibit A
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas as defined
in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights
to the roof, exterior walls or utility raceways of the Building or to any other
buildings in the Industrial Center. The Premises, The Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "INDUSTRIAL
CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: 35 unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and 0 reserved vehicle parking spaces ("RESERVED PARKING
SPACES"). (Also see Paragraph 2.6.)
1.3 TERM:2 years and 11 months ("ORIGINAL TERM") commencing February
1, 1998 ("COMMENCEMENT DATE") and ending December 31, 2000 ("EXPIRATION DATE").
(Also see Paragraph 3.)
1.4 EARLY POSSESSION: Upon Lease execution ("EARLY POSSESSION DATE").
(Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $ 8,500.85 per month ("BASE RENT"), payable on the
first day of each month commencing February 1, 1998 (Also see Paragraph 4.)
[X] If this box is checked, this Lease proves for the Base Rent to be adjusted
per Addendum #49, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ 8,500.85 as Base Rent for the
period February 1998.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Thirty-nine
& 4/10ths percent (39.4%) ("LESSEE'S SHARE") as determined by [X] prorata square
footage of the Premises as compared to the total square footage of the Building
or per other prorata square footage share as shall from time to time reflect
Lessee's actual prorata use.
1.7 SECURITY DEPOSIT: $51,005.10 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Tenant will use the Premises for general office,
storage, sales and administrative offices ___________________ ("PERMITTED USE")
(Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." Also see
Paragraph 8
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] ___________________________________ represents Lessor exclusively ("LESSOR'S
BROKER");
[ ] ___________________________________ represents Lessee exclusively ("LESSEE'S
BROKER"); or
[X] CB Commercial represents both Lessor and Lessee ("DUAL AGENCY"). (Also see
Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of
$_______) for brokerage services rendered by said Broker(s) in connection with
this transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by None ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 52, and Exhibits A through _______________,
all of which constitute a part of this Lease.
<PAGE> 2
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in a good operating condition on the
Commencement Date. If a non-compliance with said warranty exists as of the
Commencement Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty with thirty (30) days after the Commencement
Date, correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or a Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non compliance, Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations, and any covenants of restrictions of record (collectively,
"APPLICABLE LAWS") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference thereto,
and assumes all responsibility therefore as the same relate to Lessee's
occupancy of the Premises and/or the terms of this Lease; and (c) that neither
Lessor, nor any of Lessor's agents, has made any oral or written representations
of warranties with respect to said matters other than as set forth in this
Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
-2-
<PAGE> 3
(a) Lessee shall not permit or allow any vehicles that
belong to or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers, contractors or invitees to be loaded, unloaded, or parked
in areas other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the Premises
that are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas to be
deemed to include the right to store any property, temporarily or permanently,
in the Common Areas. Any such storage shall be permitted only by the prior
written consent of Lessor or Lessor's designated agent, which consent may be
revoked at any time. In the event that any unauthorized storage shall occur then
Lessor shall have the right, without notice, in addition to such other rights
and remedies that it may have, to remove the property and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect thereto
in accordance with Paragraph 40. Lessee agrees to abide by and conform to all
such Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available.
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Industrial Center, or any
portion thereof; and
-3-
<PAGE> 4
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but no limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor with
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days caused by the acts, charges or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges,
as the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, in cluding, but not limited
to, the following:
(i) The operation, repair and maintenance, in
neat, clean, good order and condition, of the following:
-4-
<PAGE> 5
(aa) The Common Areas, including
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation
systems, Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler
systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management and
security services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and
repair of Common Areas.
(v) Real Property Taxes (as defined in Paragraph
10.2) to be paid by Lessor for the Building and the Common Areas under Paragraph
10 hereof.
(vi) The cost of the premiums for the insurance
policies maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of any insured loss
concerning the Building or the Common Areas.
(viii) Any other services to be provided by
Lessor that are stated elsewhere in this Lease to be a Common Area Operating
Expense.
(b) Any Common Area Operating Expenses and Real Property
Taxes that are specifically attributable to the Building or to any other
building in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other building.
However, any Common Area Operating Expenses and Real Property Taxes that are not
specifically attributable to the Building or to any other building or to the
operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide those services unless the Industrial Center already has the same, Lessor
already provides the services, or Lessor has agreed elsewhere in this Lease to
provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall
be payable by Lessee with ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
annual Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee with sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such over
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment
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of any amount due Lessor or to reimburse or compensate Lessor for any liability,
cost expense, loss or damage (including attorneys' fees) which Lessor may suffer
or incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall with ten (10) days after written request
therefore deposit monies with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. Lessor shall not be required to keep
all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor , no part of the Security Deposit shall be
considered to be held in trust, to bear interest or other increment for its use,
or to be prepayment for any monies to be paid by Lessee under this Lease. (See
Addendum, Paragraph #52)
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or
delay its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants or Lessee, its assignees
and subtenants, for a modification of said Permitted Use, so long as the same
will not impair the structural integrity of the improvements on the Premises or
in the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to the
Premises or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall with five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i ) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including but
not limited to the installation (and, at Lessor's option, removal on or before
Lease expiration or earlier termination)
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of reasonably necessary protective modifications to the Premises (such as
concrete encasements) and/or the deposit of an additional Security Deposit under
Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be located
in, on, under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, and the Premises, harmless from and against any and all damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, loss of
permits and attorneys' and consultants' fees arising out of or involving any
Hazardous Substance brought onto the Premises by or for Lessee or by anyone
under Lessee's control. Lessee's obligation under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the cost
of investigation (including consultants' and attorneys' fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner comply with all
"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections. Lessee shall not be responsible for any costs as a result of
recommendations of Lessor's engineers or consultants which would be in excess of
those required by government agencies and/or insurance underwriters and/or any
other third party which establishes Applicable Requirements.
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7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations, 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements of renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) N/A
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair; in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as proving the services
for which there is a Common Area Operating Expense pursuant to Paragraph 4.2.
Lessor shall not be obligated to paint the exterior or interior surfaces of
exterior walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives the
benefit of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS: CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make or cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
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(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require
the consent of the Lessor shall be presented to Lessor in written form with
detailed plans. All consents given by Lessor, whether by virtue of Paragraph
7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i)
Lessee's acquiring all applicable permits required by governmental authorities;
(ii) the furnishing of copies of such permits together with a copy of the plans
and specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any Alterations
or Utility Installations by Lessee during the term of this Lease shall be done
in a good workmanlike manner, with good and sufficient materials, and be in
compliance with all Applicable Requirements. Lessee shall promptly upon
completion thereof furnish Lessor with as-built plans and specifications
therefor. Lessor may, (but without obligation to do so) condition its consent to
any requested Alteration or Utility Installation that costs $2,500.00 or more
upon Lessee's providing Lessor with a lien and completion bond in an amount
equal to one and one-half times the estimated cost of such Alteration or Utility
Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount
equal to one and one-half times the amount of such contested lien claim or
demand, indemnifying Lessor against liability for the same, as required by law
for the holding of the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's reasonable attorneys fees
and costs in participating in such action if Lessor shall decide it is to its
best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time or all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations, as well as the removal of
any storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
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8. INSURANCE; INDEMNITY.
(8.1) PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or Expiration
Date.
(8.2) LIABILITY INSURANCE
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in
force during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insured) against claims for bodily
injury, personal injury and property damage based upon, involving or arising out
of the ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on a occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
Heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
(8.3) PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss
or damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any
Lenders(s), but in no event more than the commercially reasonable and available
insurable value thereof if, by reason of the unique nature or age of the
improvements involved, such latter amount is less than full replacement cost.
Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's
personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the
coverage is available and commercially appropriate, Lessor's policy or policies
shall insure against all risks of direct physical loss or damage (except the
perils of flood and/or earthquake unless required by a Lender), including
coverage for any additional costs resulting from debris removal and reasonable
amounts of coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Building required
to be demolished or removed by reason of the enforcement or any building,
zoning, safety or land use laws as the result of a covered loss, but not
including plate glass insurance. Said policy or policies shall also contain an
agreed valuation provision in lieu of any co-insurance clause, waiver of
subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and any Lender(s) insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured loss,
the period of indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to provide for one
full year's loss of rental revenues from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable,
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for the next 12 month period. Common Area Operating Expenses shall include any
deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring
Party, Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property. Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises, similar in
coverage to that carried by Lessor as the insuring Party under Paragraph 8.3(a).
Such insurance shall be full replacement cost coverage with a deductible not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property and the restoration of Trade
Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss of damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8,. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor to Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY.Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters. Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and the
Lessor shall cooperate with Lessee in such defense. Lessor need not have first
paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
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other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said injury or damage results from conditions arising upon
the Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less that fifty
percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d) of
the Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding Lessee
- -Owned Alterations and Utility Installations and Trade Fixtures) immediately
prior to such damage or destruction. In addition, damage or destruction to the
Building, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures of any lessees of the Building, the cost of which damage or
destruction is fifty percent (50%) or more of the then Replacement Cost
(excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building) off the Building shall, at the option of Lessor,
be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a) in, on,
or under the Premises.
9.2 PREMISES PARTIAL DAMAGE -- INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but no Lessee's Trade Fixtures or Lessee-Owned Alterations
and Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement costs insurance coverage was not commercially reasonable and
available. Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds of assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise
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agreed, Lessee shall in no event have any right to reimbursement from Lessor for
any funds contributed by Lessee to repair, any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to Paragraph
9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made available for
the repairs if made by either Party.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If Premises Partial Damage that
is not an insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date (60) days following the date of such notice.
In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expire. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's
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<PAGE> 14
election to terminate this Lease on a date not less than sixty (60) days
following the giving of such notice. If Lessee gives such notice to Lessor and
such Lenders and such repair or restoration is not commenced within thirty (30)
days after receipt of such notice, this Lease shall terminate as of the date
specified in said notice. If Lessor or a Lender commences the repair or
restoration of the Premises within thirty (30) days after the receipt of such
notice, this Lease shall continue in full force and effect. "COMMENCE" as used
in this Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Requirements and this Lease shall continue in full force and effect,
but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor
may at Lessor's option either (i) investigate and remediate such Hazardous
Substances Condition, if required , as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) if the estimated cost to investigate and remediate such condition exceeds
twelve (12) times the then monthly Base Rent or $100,000 whichever is greater,
give written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the excess costs of (a) investigation and
remediation of such Hazardous Substance Condition to the extend required by
Applicable Requirements, over (b) an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor
with the funds required of Lessee or satisfactory assurance thereof within
thirty (30) days following said commitment by Lessee. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
investigation and remediation as soon as reasonably possible after the required
funds are available. If Lessee does not give such notice and provide the
required funds or assurance thereof within the time period specified above, this
Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.8 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises and the Building with respect to the termination of this Lease and
hereby waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the Provisions
of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Industrial Center by any
authority having the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary, fire, street,
drainage, or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Industrial Center or any portion thereof,
Lessor's right to rent or other income therefrom, and/or Lessor's business of
leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes in Applicable Law taking effect, during the term of
this Lease, including but not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this Lease,
or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any calendar
year, the Real Property Taxes for any real estate tax year shall be included in
the calculation of Real Property Taxes for such calendar year based upon the
number of days which such calendar year and tax year have in common.
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<PAGE> 15
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall
not include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable proportion
of the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. ASSIGNMENT OF SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"assign") or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to the
terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis of
fifty percent (50%) or more of the voting control of Lessee shall constitute a
change in control for this purpose.
(c) N/A
(d) An assignment or subletting of Lessee's interest in
this Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1, or a non-curable
Breach without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either (i) terminate this Lease, or (ii) upon
thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base
Rent for the Premises to the greater of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten percent (110%)
of the Base Rent then in effect. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with an overpayment credited against the next installment(s) of
Base Rent coming due, and any underpayment for the period retroactively to the
effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
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<PAGE> 16
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1
by Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach of
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by Information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including not limited to
the intended use and/or required modification of the Premises, if any, together
with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall,
by reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in Paragraph
12.2(c) shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
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<PAGE> 17
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease, Lessor shall not, by reason of the
foregoing provision of any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such Sublease. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, and shall pay such rents and other charges to Lessor without
any obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sublessee to such sublessor or for any other prior
defaults or breaches under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $35,000 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and services of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules, applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) Without Landlord consent, which shall not be
unreasonably withheld, the vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease
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<PAGE> 18
which endangers or threatens life or property, where such failure continues for
a period of three (3) days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3 (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this lease, where such failure continues for a period
of (10) days following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof that are to be observed, complied with or performed by Lessee, other
than those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice thereof
by or on behalf of Lessor to Lessee; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee
if Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurances of security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
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(a) Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the
worth at the time of the award of unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of the award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of the
award of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1 (b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b),(c) or (d). In such case, the applicable grace period under the unlawful
detainer statue shall run concurrently after the one such statutory notice, and
the failure of Lessee to cure the Default within the greater of the two (2) such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right to
sublet or assign, subject only to reasonable limitations. Lessor and Lessee
agree that the limitations on assignment and subletting in this Lease are
reasonable. Acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or thereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cue of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of the
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
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13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee when due, then, without any
requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal
to six percent (6%) of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of late payment by Lessee. Acceptance of such late charge by
Lessor shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH OF LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced with such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, with ten (10) days after the condemning authority shall
have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are
the procuring cause of this Lease.
15.2 N/A
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 10 and of this
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Paragraph 15 to the extent of its interest in any commission arising from this
Lease and may enforce that right directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall
within ten (10) days after written notice from the other Party (the "REQUESTING
PARTY") execute, acknowledge and deliver to the Requesting Party a statement in
writing in a form similar to the then most current "TENANCY STATEMENT" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements of the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease.
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in :Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Leased, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within ten (10) days following
the date on which it was due, shall bear interest from the date due at the prime
rate charged by the largest state chartered bank in the state in which the
Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with
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respect thereto or with respect to any default or breach hereof by either Party.
Each Broker shall be an intended third party beneficiary of the provisions of
this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address for
delivery or mailing of notice purposes, except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address for
the purpose of mailing or delivering notices to Lessee. A copy of all notices
required or permitted to be given to Lessor hereunder shall be concurrently
transmitted to such party or parties at such addresses as Lessor may from time
to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation or
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any such act shall not be
deemed to render unnecessary the obtaining of Lessor's consent to, or approval
of, any subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision of provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time of
accepting rent, the acceptance of rent by Lessor shall not be a waiver of any
Default or Breach by Lessee of any provision hereof. Any payment given Lessor by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed t in writing by Lessor at
or before the time of deposit of such payment.
25. RECORDING.Either Lessor or Lessee shall, upon request of the other, execute,
acknowledge and deliver to the other a short form memorandum of this Lease for
recording purposes. The Party requesting recordation shall be responsible for
payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to one hundred fifty
percent (150%) of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination. Nothing contained herein shall
be construed as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies a
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
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29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors, and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all advances
made on the security thereof, and to all renewals, modifications,
consolidations, replacement and extensions thereof. Lessee agrees that the
Lenders holding any such Security Device shall have no duty, liability or
obligation to perform any of the obligations of Lessor under this Lease, but
that in the event of Lessor's default with respect to any such obligation,
Lessee will give any Lender whose name and address have been furnished Lessee in
writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act of omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment o more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any options
to extend the term hereof, will not be disturbed so long as Lessee is not in
Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing of refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonably attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to reasonable attorneys' fees, costs and
expenses incurred in preparation and service of notices of Default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such Default or resulting Breach.
Broker(s) shall be intended third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonably times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
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33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily, any auction upon the Premises without first having obtained
Lessor's prior written consent. Notwithstanding anything to the contrary in this
Lease, Lessor shall not be obligated to exercise any standard of reasonableness
in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Excluding initial Lessee ("tenant")
improvements Lessor's actual reasonably costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other conditions
as are then reasonable with reference to the particular mater for which consent
is being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this
Lease per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a
Default of this Lease if any such Guarantor fails or refuses, upon reasonably
request by Lessor to give: (a) evidence of the due execution of the
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guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lese that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lese or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the notice Default is cured, or (ii) during the period
of time any monetary obligation due Lessor from Lessee is unpaid (without regard
to whether notice thereof is given Lessee), or (iii) during the time Lessee is
in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee
three (3) or more notices of separate Defaults under Paragraph 13.1 during the
twelve (12) month period immediately preceding the exercise of the Option,
whether or not the Defaults are cured.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of Paragraph 39.4.
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
-25-
<PAGE> 26
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment (under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or any part
thereof, said Party shall be entitled to recover such sum or so much thereof as
it was not legally required to pay under the provisions of this Lease.
44. AUTHORITY.If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do no
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company ore pension plan Lender in
connection with the obtaining of normal financing of the property of which the
Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility fo all persons or entities named herein as such Lessor or Lessee.
-26-
<PAGE> 27
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND
STORAGE TANKS FOR HAZARDOUS SUBSTANCES, NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS
TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE, IF THE SUBJECT PROPERTY IS IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the date
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Executed at: Irvine, California
- ---------------------------------------------------- ---------------------------------------------------
On: on 12/18/97
- ---------------------------------------------------- ---------------------------------------------------
By LESSOR: By LESSEE:
Hale Property, Ltd., L.P., ParcPlace Digitalk, Inc.,
a California Limited Partnership a California Corporation
By: SKY VISTA., a California Corporation
By: /s/ ALFRED E. BALDWIN General Partner By: /s/ RONALD J. CLEAR
------------------------------------------------ ------------------------------------------------
Name Printed: Alfred E. Baldwin Name Printed: Ronald J. Clear
Title: President Title: C.F.O
- ---------------------------------------------------- --------------------------------------------------
By: By:
- ---------------------------------------------------- --------------------------------------------------
Name Printed: Name Printed:
- ---------------------------------------------------- --------------------------------------------------
Title: Title:
- ---------------------------------------------------- --------------------------------------------------
Address: Address:
- ---------------------------------------------------- --------------------------------------------------
Telephone: ( ) Telephone: ( )
- ---------------------------------------------------- --------------------------------------------------
Facsimile: ( ) Facsimile: ( )
- ---------------------------------------------------- --------------------------------------------------
</TABLE>
-27-
<PAGE> 28
<TABLE>
<S> <C>
BROKER: BROKER:
Executed at: Dave Desper Executed at: Jason Shepard
- ---------------------------------------------------- --------------------------------------------------
on: on:
- ---------------------------------------------------- --------------------------------------------------
By: By:
- ---------------------------------------------------- --------------------------------------------------
Name Printed: Name Printed:
- ---------------------------------------------------- --------------------------------------------------
Title: Title:
- ---------------------------------------------------- --------------------------------------------------
Address: Address:
- ---------------------------------------------------- --------------------------------------------------
Telephone: (714) 725-8504 Telephone: (714) 725-8539
- ---------------------------------------------------- --------------------------------------------------
Facsimile: (714) 725-8545 Facsimile: (714) 725-8545
- ---------------------------------------------------- --------------------------------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower
Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777.
-28-
<PAGE> 29
ADDENDUM TO THE STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE
MODIFIED NET DATED OCTOBER 3, 1997 BY AND BETWEEN
HALE PROPERTY LTD., L.P., AS LESSOR AND
PARCPLACE DIGITALK, INC., AS LESSEE FOR THE PROPERTY COMMONLY KNOWN AS
16811 HALE AVE., SUITE A, IRVINE, CALIFORNIA 92614
49. Base Rent Schedule:
<TABLE>
<CAPTION>
Months Rate/NNN
------ --------
<S> <C>
February 1, 1998 - February 28, 1998 $11,333.85
March 1, 1998 - December 31, 1998 $8,500.85
January 1, 1999 - December 31, 1999 $8,925.89
January 1, 2000 - December 31, 2000 $9,372.19
</TABLE>
50. Improvements to the Premises:
All improvements to the Premises desired by Lessee shall be made by
Lessee at Lessee's sole cost. Lessor Shall make no improvements to
the Premises and shall deliver possession of the Premises to Lessee
in an "as is" condition. Lessee accepts possession of the Premises in
their "as is" condition and hereby waives any right or claim against
Lessor for any cause directly or indirectly arising out of the
condition of the Premises, appurtenances thereto, or the improvements
or equipment therein, and Lessor shall not be liable for any latent
or patent defects therein. Nothing contained in this paragraph,
however, shall be deemed to limit Lessor's obligation to repair the
Premises wherever such obligation is expressly set forth in the
Lease.
All improvements to the Premises being made by Lessee shall be
considered as Alterations or Utility Installations as such terms are
defined in Paragraph 7.3 of the Lease, and Lessee shall carefully
adhere to all obligations and procedures therefore set out in said
Paragraph 7.3 and Paragraph 7.4 of the Lease, including but not
limited to the preparation of improvements plans, obtaining Lessor's
consent to such plans and obtaining governmental approvals. After
submission to it of Lessee's plans, Lessor shall have five (5)
business days to examine and approve them. If Lessor disapproves
Lessee's plans, it shall deliver a written statement to Lessee within
five (5) business day period setting forth its objections in
reasonable detail. In the event Lessor does not deliver such written
objections to Lessee with such five (5) business day period, Lessor
shall be deemed to have approved Lessee's plans.
Lessee shall only use contractors and subcontractors which have
procured, paid for and maintained public liability insurance in an
amount not less than $1,000,000,00 and which are licensed in the
State of California. Prior to commencement of such work, Lessee shall
cause each of its contractors and subcontractors to furnish Lessee
with a certificate from their respective public liability insurers
evidencing such coverage, naming Lessor as an additional insured and
providing for severability of interests or containing a
cross-liability endorsement. Lessee shall, upon final completion of
its work, furnish Lessor with all certificates, lien releases and
approvals relating to any work or installations performed by Lessee
that may be required by any governmental or insurance requirements.
51. Option to Extend:
For the purposes of this Lease, the term "Previous Period" shall mean
the Original Term of this Lease.
Provided Lessee is not and has never been in default under any of the
terms and conditions of the Lease and has not assigned or sublet the
Premises to another tenant, Lessee shall have the option to extend
the Term of this Lease for one (1) additional three (3) year period
upon the same terms and conditions except that the Base Rent at the
commencement of such option period shall be increased to the Fair
Market Rent at the time of commencement of such option period, as
determined in accordance with the following paragraphs of this
Paragraph 51. In no event shall the Base Rent at the commencement of
such option period be less than the Base Rent for the last year of
the Previous Period. Lessee's Base Rent, as established upon
commencement of such option period, shall thereafter be increased
commencing on the first day of the month next following
-29-
<PAGE> 30
the passage of the initial twelve (12) calendar months of such option
period and on the first day of the month next following the passage
of each successive twelve (12) calendar months of such option period
(each of which shall be referred to as an "Adjustment Date"). On each
Adjustment Date, the Base Rent shall be increased by an amount
calculated by comparing the CPI for the month which is four (4)
months prior to the Adjustment Date (the "Adjustment Index") with the
CPI for the calendar month which is four (4) months prior to the
month in which such option period commenced (the "Option Index") and
then adjusting the Base Rent paid during the first year of such
option period by the percentage increase of the Adjustment Index over
the Option Index. In no event shall the increase in the Base Rent for
any twelve (12) months of such option period be less than five
percent (5%) nor greater than eight percent (8%) of the Base Rent for
the preceding twelve (12) months of such option period.
If Lessee intends to exercise this option to extend the Term, then
not more than two hundred and seventy (270) days nor less than two
hundred and forty (240) days prior to the expiration of the Previous
Period, Lessee shall deliver to Lessor a notice of its intention to
exercise its option to extend ("Notice of Intention"). Within ten
(10) days of the delivery to Lessor of the Notice of Intention,
Lessor and Lessee shall meet to determine, in good faith, what they
consider to be the Fair Market Rent based upon this Lease and the
terms, covenants, and rights provided for in the Lease. In
determining the Fair Market Rent for the Premises, the primary
consideration shall be lease transactions recently executed within
the market area with appropriate adjustments being made for location,
type of tenant, building attributers, lease term and financial
condition of Lessee. In the event Lessor and Lessee are unable to
agree on the Fair Market Rent within thirty (30) days after delivery
of the Notice of Intention, the Fair Market Rent shall be determined
as follows: Lessor and Lessee shall cause an appraisal to be made of
the then-current rental value of three (3) appraisers, each of whom
shall be an MAI appraiser with at lease five (5) years experience
appraising leases in industrial building in the Orange County area.
Lessor and Lessee, each at its own cost, shall each select one (1)
appraiser who shall complete an appraisal and each shall immediately
notify the other of the appraiser so selected. Such selections shall
be made no later than the earlier of: (I) ten (10) days after the
date on which Lessor and Lessee agree that they are unable to agree
on the Fair Market Rent: or (ii) forty (40) days after delivery of
the Notice of Intention. The two appraisers so selected shall select
a third appraiser. Lessor and Lessee shall each bear one-half (1/2)
of the costs of selecting the third appraiser and of paying the third
appraiser's fee. The third appraiser, however selected, shall be a
person who is not and who has not previously been an agent or
employee of either Lessor or Lessee. In the event the two appraisers
are unable to agree upon the selection of a third appraiser, the two
appraisers shall, within five (5) days after the date on which they
agree they are unable to agree on a third appraiser, request the
Presiding Judge of the Superior Court in and for the County of
Orange, State of California, to appoint the third appraiser. Within
thirty (30) days after the selection of the third appraiser, a
majority of the appraiser's shall establish the Fair Market Rent. If
no two appraisers agree on the current Fair Market Rent, the
appraisal which is neither highest nor lowest shall control.
The option to extend shall be exercised by Lessee by delivering to
Lessor written notice ("Notice of Exercise") no less than one hundred
ten (110) days prior to the expiration of the Previous Period;
provided, however, that if the Fair Market Rent has not been
established by one hundred twenty (120) days prior to the expiration
of the Previous Period due to failure of Lessor to comply with the
time periods set forth herein, then the date by which the option to
extend must be exercised shall be extended for a period equal to
Lessor's delay. If, for any reason other than the failure of Lessor
to comply with the time periods set forth herein, Lessee has not
delivered to Lessor its Notice of Exercise by one hundred ten (110)
days prior to the expiration of the Previous Period, Lessee shall
have no option to extend the term of the Lease.
-30-
<PAGE> 31
52. Security Deposit Reduction:
If on February 2, 1999 and/or on February 2, 2000, Lessee (1) shall
have paid its Base Rent and all other charges due under this Lease on
a timely basis for all of the twelve (12) preceding months (March
1998 through February 1999 and March 1999 through February 2000) and
(2) shall have otherwise never been in default of this Lease, then on
February 2, 1999 and/or on February 2, 2000 the amount of the
Security Deposit shall be reduced by $17,001.70, and such amount
shall be credited to Lessee's account.
LESSOR: HALE PROPERTY, LTD., L.P.,
A CALIFORNIA LIMITED PARTNERSHIP
By: SKY VISTA, INC., a California corporation,
General Partner
By: /s/ Alfred Baldwin
--------------------------------------------
Name Alfred A. Baldwin
--------------------------------------------
Its: President
--------------------------------------------
LESSEE: PARCPLACE DIGITALK, INC.,
A CALIFORNIA CORPORATION
By: /s/ Ronald J. Clear
--------------------------------------------
Name: Ronald J. Clear
--------------------------------------------
Its: C.F.O.
--------------------------------------------
-31-
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF OBJECTSHARE, INC..
ObjectShare, Inc. GmbH (Germany)
ObjectShare, Inc. (UK) Limited (England)
ParcPlace Systems FSC, Inc. (Barbados)
1
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-39445, No. 333-09807, No. 333-20779, No. 33-96616,
and No. 33-78542) pertaining to the Stock Option agreements for Eugene L. Goda,
Ronald J. Clear and James H. Smith, 1995 Stock Option / Stock Issuance Plan of
Objectshare Systems, Inc., 1993 Stock Plan and 1993 Employee Stock Purchase Plan
of ParcPlace-Digitalk, Inc., 1988 Incentive Stock Option Plan, 1989 Stock Option
Plan, 1992 Incentive and Nonstatutory Stock Option Plan, and the 1995 Director
Stock Option Plan of ParcPlace-Digitalk, Inc. of our report dated May 21, 1998,
with respect to the consolidated financial statements and schedule of
ObjectShare, Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1998.
/s/ Ernst & Young LLP
Orange County, California
June 26, 1998
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDING
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 5,134
<SECURITIES> 600
<RECEIVABLES> 5,788
<ALLOWANCES> 622
<INVENTORY> 164
<CURRENT-ASSETS> 11,883
<PP&E> 6,051
<DEPRECIATION> (4,853)
<TOTAL-ASSETS> 13,255
<CURRENT-LIABILITIES> 8,463
<BONDS> 0
0
0
<COMMON> 50,004
<OTHER-SE> (45,212)
<TOTAL-LIABILITY-AND-EQUITY> 13,255
<SALES> 20,240
<TOTAL-REVENUES> 20,240
<CGS> 9,195
<TOTAL-COSTS> 18,909
<OTHER-EXPENSES> 313
<LOSS-PROVISION> (7,551)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,551)
<INCOME-TAX> 31
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,582)
<EPS-PRIMARY> (0.63)<F1>
<EPS-DILUTED> (0.63)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
