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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 0-27168
METACREATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4102687
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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6303 CARPINTERIA AVENUE, CARPINTERIA, CA 93013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(805) 566-6200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
As of March 16, 1998, there were outstanding 23,639,834 shares of the
registrant's Common Stock, $0.001 par value, which is the only outstanding class
of common or voting stock of the registrant. As of that date, the aggregate
market value of the shares of Common Stock held by non-affiliates, based upon
the last sale price of the shares as reported on the NASDAQ National Market
System on such date, was approximately $137,631,904.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement relating to its
1998 Annual Meeting of Stockholders to be held in May 1998 are incorporated by
reference into Part III.
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METACREATIONS CORPORATION
FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 20
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13. Certain Relationships and Related Transactions.............. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 59
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PART I
In addition to the other information in this Form 10-K, the following
factors should be considered carefully in evaluating the Company. The discussion
in this Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
ITEM 1. BUSINESS
MetaCreations Corporation ("MetaCreations" or the "Company") is a leading
provider of visual computing and graphics software and technologies for
professionals, consumers, and "pro-sumers" for Windows, Macintosh and other
digital editing operating systems. MetaCreations designs, develops, publishes,
markets and supports visual computing software tools and technologies for the
creation, editing, and manipulation of computer graphic images and digital art.
These tools enable desktop publishers, production artists, multimedia
developers, creative directors, film and video producers, Web site designers,
digital imagers and photographers (collectively, "Creative Professionals"),
consumers, and pro-sumers to produce and enhance still images, animations, 2D
and 3D graphics, digital video and special effects. Uses of the materials
produced include print and broadcast advertising, merchandising materials, home
photo digital imaging, digital art, business presentations, film and video
special effects, games and Internet/online graphics, such as for Web sites.
MERGER WITH FRACTAL DESIGN CORPORATION
In May 1997, the stockholders of MetaCreations and Fractal Design
Corporation ("Fractal") approved the merger of the two companies. As a result of
the merger, the Company issued approximately 9,055,000 shares of MetaCreations
common stock for all of the outstanding shares of Fractal common stock and
assumed approximately 1,653,000 options to purchase Fractal common stock. The
merger was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements were restated to include the accounts of
Fractal for all periods presented.
ACQUISITIONS
Dive Laboratories, Inc.
On August 31, 1996, the Company acquired Dive Laboratories, Inc. ("Dive"),
a privately held company based in Santa Cruz, California, that developed 3D
modeling and rendering environments for high-end applications and the
visualization of streaming online data. In connection with the acquisition,
which was accounted for under the purchase method of accounting, the Company
recorded a one-time charge to earnings of approximately $733,000 for the year
ended December 31, 1996, comprised of relocation expenses of $215,000,
acquisition costs of $155,000, and acquired in-process research and development
expenses of $363,000. The Company paid $509,000 in cash and assumed $224,000 of
net liabilities of Dive. The four Dive research and development personnel have
relocated to Santa Barbara.
Real Time Geometry Corp.
On December 31, 1996, the Company completed the acquisition of Real Time
Geometry Corp. ("RTG"), a privately held development stage company based in
Princeton, New Jersey, that developed real time 3D graphics and visualization
technologies. The acquisition was accounted for by the Company under the
purchase method of accounting. Under the terms of the Purchase Agreement, the
stockholders and
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Kai's Power Tools, KPT, Bryce, and Convolver are registered trademarks of
the Company and Art Dabbler, Detailer, Expression, Final Effects Complete,
Infini-D, Kai's Power GOO, Kai's Power Show, Kai's Photo Soap, Painter, Painter
3D, Poser, and Ray Dream Studio are trademarks of the Company. This Form 10-K
may also contain trademarks and tradenames of other companies.
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optionholders of RTG received a combination of shares of the Company's common
stock and options to purchase shares of the Company's common stock valued at
approximately $11,242,000 and $607,000, respectively, at December 31, 1996, the
closing date. In addition, the Company assumed the net liabilities of RTG, which
totaled $1,411,000 at December 31, 1996. As of December 31, 1996, neither
technological feasibility nor commercial viability had been reached with regard
to RTG's core technology, comprised of advanced geometry-based algorithms which
transform images in real-time to a series of triangles to produce
three-dimensional images. Based upon projected future cash flows, risk-adjusted
using a 40% discount rate, RTG's core in-process technology was valued in excess
of the amount written-off as acquired in-process technology of $13,260,000,
which combined with acquisition costs totaling $1,189,000, resulted in a one
time charge to earnings of $14,449,000 for the year ended December 31, 1996.
The acquisition of RTG was intended to expand MetaCreations' ability to
participate in the application areas that utilize 3D technology. The addition of
RTG's technology and development capabilities in real time 3D graphics assists
MetaCreations' strategic expansion in the emerging consumer, pro-sumer, and
professional markets for 3D tools and applications. The focus of RTG's real time
3D technology includes decreasing the time required to create, render, and
display 3D images and environments on desktop computers and across the Internet;
this includes enabling the creation of dynamic, real time resolution changes to
3D models, and the progressive transmission of 3D objects across the Internet,
as well as improving the visual resolution and navigation of 3D graphics. The
Company plans to incorporate RTG technology into the Company's existing and
planned software products. The Company also plans to pursue strategic licensing
agreements with third party hardware and software companies. In August 1997, the
Company entered a license agreement with Real 3D to manufacture and distribute a
3D scanner based on RTG proprietary designs and software, which is planned for
shipment in 1998. The RTG technologies are being developed on Windows,
Macintosh, SGI, Sun, Sega, and Sony PlayStation platforms. RTG had no revenues
prior to the acquisition. As of the date of acquisition, RTG's 21 research and
development personnel remained in Princeton, New Jersey, continuing visual
computing research and development activities.
Specular International, Ltd.
On April 15, 1997, the Company completed the acquisition of Specular
International, Ltd. ("Specular"), a privately held software development company
based in Amherst, Massachusetts, that developed and marketed 3D animation and
graphic design tools for professionals and pro-sumers. Under the terms of the
Purchase Agreement, the stockholders of Specular received approximately 547,000
shares of the Company's common stock, valued at approximately $4.1 million, and
$1.0 million in cash in exchange for all of the outstanding shares of Specular.
The Company also issued 450,000 non-qualified stock options to purchase shares
of the Company's common stock to Specular employees at an exercise price of $7
per share, the fair market value of the Company's common stock on April 16,
1997. In addition, the Company assumed the net liabilities of Specular, which
totaled $1.6 million at April 15, 1997. The Company charged approximately $6.4
million against earnings during the year ended December 31, 1997, comprised of
the write-off of acquired in-process technology of $5.6 million, transaction
costs of $300,000, and relocation and severance costs of $555,000. In addition,
the Company recognized a deferred income tax asset of $900,000 relating to
Federal net operating losses and tax credits of Specular. In accordance with
Statement of Financial Accounting Standard ("SFAS") No. 109, the tax benefits
were first applied to reduce to zero goodwill totaling $280,000, with the
remainder applied against current technology acquired from Specular. After
recognition of the deferred tax asset, acquired current technology totaled
$280,000. In connection with the acquisition, 14 of Specular's research and
development and product management personnel were relocated to the Company's RTG
facilities in Princeton, New Jersey.
INDUSTRY BACKGROUND
Computer graphic imaging and visual computing tools are standard tools for
Creative Professionals to develop and present their materials. Creative
Professionals may use digital painting, illustration, composition, page layout
and design, special effects, digitally captured images and video, animation,
text, photographs, music and other audio to produce a wide variety of end
products. Certain Creative Professionals may also use
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computer modeling tools to design 3D objects, landscapes and terrains. The
images and content generated by these Creative Professionals increasingly must
be deliverable through a wide variety of media, including print, transparencies,
CD-ROMs, video, film, the Internet, and commercial online services. Consumer and
business professionals are also increasingly using graphical and digital
creative productivity software tools in the home and at work.
Factors influencing the use of computer graphic imaging and Internet/online
design tools include:
- The Proliferation of Graphics and Multimedia Computers and
Peripherals. The increased performance, affordability and availability of
powerful personal computers and graphics accelerator chips and related
high performance peripheral devices such as digital cameras, digital
capture devices, scanners, Jazz and Zip drives, high-capacity hard drives,
and high resolution color printers, have led to a proliferation of
graphics and multimedia-capable computers in business and the home.
- The Rapid Expansion of the Internet and Commercial Online
Environments. The rapid expansion of the Internet and commercial and
online environments is driving demand for tools to create enhanced digital
graphic and multimedia content for use in Web sites, electronic catalogs,
shopping and transaction environments, electronic magazines and
newspapers, online games, educational materials and other forms of online
visual communication.
- The Enhancement of Visual Media for Communications, Entertainment and
Education. Computer graphic imaging tools are changing the way information
is communicated. Increasingly, producers of magazines, annual reports,
marketing brochures, product packaging, advertising and newsletters are
using software graphic arts tools to create sophisticated illustrations
and graphic designs for desktop published material. Similarly, computer
graphic imaging and Internet/online design tools provide developers of
videos, animations and games with the means to create special effects,
scenery, backgrounds, textures and materials to create high impact sales
presentations, product demonstrations, videos, Web sites, educational
materials and game environments.
- The Growing Availability of Digital Content. There is a growing body of
professionally produced digital images and electronically produced media.
The digital nature of this content enables Creative Professionals to
capture, enhance and manipulate this content in a variety of media,
including print, video, Internet, and commercial online services.
Information that has been digitized includes photographs, illustrations,
video, animations, voice and music.
In response to these trends, Creative Professionals are continually seeking
new tools to enhance their productivity and expand their creative capabilities.
Creative Professionals need tools that enable them to produce and manipulate
professional-quality materials quickly and efficiently. As a result, the Company
believes that there is a demand for fast, powerful and easy to use tools that go
beyond the capabilities of existing design application platforms to increase the
productivity and expand the creative capabilities of Creative Professionals.
Consumers and businesses are also looking for productivity tools to
creatively manipulate and display their digital imaging at home, at work and on
the Web. In addition, customers are looking for a visual computing experience in
the software products that they use, that is similar in quality to that of
television. Further, the Company believes that high resolution, real time, 3D
animation and video are critical for the future of visual computing at the
desktop and on the Internet.
THE METACREATIONS SOLUTION
MetaCreations currently classifies it products within three categories: (i)
2D professional, (ii) 3D professional, and (iii) home, small office/home office,
and business ("home/SOHO/business") digital imaging. The Company's products are
primarily based upon MetaCreations' proprietary technologies and employ
sophisticated mathematical image creation and processing capabilities, enabling
real time manipulation and rapid prototyping of creative alternatives.
MetaCreations' products incorporate advanced graphical user interfaces designed
to enhance creativity and facilitate ease of use. The Company's 2D professional
line includes Painter 5, Kai's Power Tools 3, Expression, and Final Effects
Complete. The 3D line includes Ray Dream Studio 5, Bryce 3D, Poser 2, Infini-D
4, and Painter 3D. For the home/SOHO/business digital imaging
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market, the Company offers Kai's Power GOO, Kai's Photo Soap, Art Dabbler, and
Kai's Power Show, which is currently scheduled for release in the Spring of
1998.
STRATEGY
The Company's objective is to be the leading supplier of visual computing
software tools and technology, enabling the creation and production of graphic
and design content for business, entertainment, education, edutainment, the
Internet, and commercial online environments. The Company's strategy includes
the following key elements:
Offer Powerful Tools for Creative Professionals. The Company's goal is to
offer powerful, creative design tools that anticipate the evolving needs of
Creative Professionals. These tools are designed to give Creative Professionals
access to powerful, mathematically-intensive real time visual computing
technology controlled through innovative, easy to use, graphical user
interfaces. The Company intends to invest substantial development resources to
maintain and expand its position as a leading provider of such tools.
Address Consumer, SOHO, and Business Digital Imaging Market. The Company is
focused on developing software productivity tools and creative home photo
digital imaging products which take advantage of the Company's visual computing
technologies. The Company launched the first of its home photo digital imaging
products, Kai's Power GOO, in the second quarter of 1996. The Company's second
home photo digital imaging product, Kai's Photo Soap, was released in the second
quarter of 1997, and its third home photo digital imaging product, Art Dabbler,
was repositioned in this market in the third quarter of 1997. The Company is
currently scheduled to release Kai's Power Show in the Spring of 1998.
License Enabling Visual Computing Technologies. The Company intends to
license certain of its proprietary enabling visual computing technologies to
strategically selected computer hardware and software companies. Specifically,
the Company is anticipating the licensing of certain core 3D technologies
obtained in the acquisition of Real Time Geometry.
Address Rapidly Emerging Commercial Online Environments. The Company is
expending substantial resources to address the increasing demand for tools to
create enhanced digital graphic and multimedia content for the Internet and
commercial online environments. The Company's current products are already being
used to create content for Web sites.
Extend MetaCreations Brand Awareness to Expand Markets. The Company
believes, based in part on the numerous awards its products have received, that
the MetaCreations' brands are associated in the market with powerful
functionality and ease of use in visual computing applications. The Company
intends to continue to develop brandname awareness through public relations
activities, such as keynote speeches and lectures at major digital design,
multimedia and online conferences throughout the world.
PRODUCTS
MetaCreations focuses its product development efforts on creating
affordable, high performance, high quality and easy to learn and use software
tools. The key features of the Company's products include the following:
- Innovative User Interface Design -- MetaCreations' products are designed
with innovative user interfaces to facilitate ease of learning and use
while providing access to advanced algorithmic-based graphics design and
special effects techniques. The Company's products are designed to allow
Creative Professionals, consumers, and pro-sumers to control the creative
process and explore new areas of graphic arts design without requiring a
detailed understanding of the enabling technology.
- Portability -- The Company develops its products in the C and C++
programming languages facilitating portability to alternative operating
systems. The Company will continue to evaluate available hardware and
software platforms and consider adapting its products for use on such
platforms as technological advancements and market demands dictate.
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- Power/Performance -- MetaCreations' products are designed to combine
comprehensive feature sets with high performance to provide efficiency
and power for Creative Professionals, consumers, and pro-sumers.
- Resolution Independent Imaging Technology -- Many of the Company's tools
create and manipulate images through the application of mathematical
algorithms, rather than by generating new bit-mapped graphics at each
stage of the design process. As a result, image manipulations can be
reordered or reversed, and the resulting output can be generated with
resolutions that are independent of the resolution of any particular
input image.
The Company's principal products fall within three classifications as
follows:
2D PROFESSIONAL
Painter. Painter is an advanced paint and image-editing platform which
empowers digital designers and graphics artists with more than one hundred
Natural-Media brushes that simulate the look of traditional art tools and
techniques, Dynamic Plug-in Floaters which perform image processing effects such
as buring and tearing to the selected item in real time, and customizable
palettes and tear-off tools which allow artists and designers the option to
optimize their environment. The latest version, Painter 5, was released in the
second quarter of 1997 and is available on the Windows and Macintosh platforms
in English, Japanese, German and French. The suggested retail price of Painter 5
is $449.
Kai's Power Tools ("KPT"). Kai's Power Tools is a set of creative and
production extensions to graphics products that support the Adobe plug-in
architecture, including Adobe's PhotoShop, Micrografx Inc.'s Picture Publisher,
Macromedia, Inc.'s X-Res, Corel Corporation's PhotoPaint and other leading
application platforms. KPT allows the creation of new graphic forms through an
advanced user interface design and, in certain cases, integration of
multiple-step image processing functions into a single step. The most recent
version, KPT 3, is available on the Windows, Macintosh and Silicon Graphics
platforms in English, Japanese, German and French. KPT 3 was released on the
Macintosh platform in the third quarter of 1995 and the Windows platform in the
fourth quarter of 1995. The suggested retail price of KPT 3 is $199.
Expression. Expression is a Natural-Media illustration program that melds
the stylistic expressiveness of paint and brushstrokes with the advantages of an
advanced vector drawing application. Expression incorporates Exclusive Skeletal
Strokes technology which creates single vector paths that draw sophisticated,
multi-element components or even complete illustrations. Expression, which also
supports pressure-sensitive tablets, is available for the Windows and Macintosh
platforms in English, Japanese, German and French. Expression for Windows was
released in the third quarter of 1996, while Expression for the Macintosh was
released in the fourth quarter of 1996. The suggested retail price of Expression
is $449.
Final Effects Complete. The Company's Video Effects product line offers
digital video Creative Professionals sophisticated, workstation-like video and
animation special effects, including particle systems and other advanced
capabilities, on their personal computers. Final Effects Complete, which
combines features from MetaCreations' previous Final Effects and Studio Effects
products, plugs into Adobe's After Effects video product, while Final Effects AP
plugs into Adobe's Premiere video product. Final Effects AP was released on the
Macintosh platform in the first quarter of 1996 and on the Windows platform in
the third quarter of 1996. The suggested retail price of Final Effects AP is
$199. Final Effects Complete was released in the fourth quarter of 1997 on both
the Windows and Macintosh platforms at a suggested retail price of $995.
3D PROFESSIONAL
Ray Dream Studio ("Studio"). Studio is an application platform that
provides Creative Professionals the ability to create lifelike 3D illustrations
and animations. Studio incorporates a Mesh Form Modeler which provides
exceptional control over individual polygons, lines, or vertex points on the
model; a Free-Form Modeler which allows the generation of models by extruding,
lathing, lofting, and sweeping; a Natural-Media renderer which allows the
creation of 3D graphics that resemble cartoons, paintings, or sketches; and a
set of volumetric and particle-based primitives, including fire, fog, clouds,
and fountains, which allow the creation
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and animation of incredible natural effects. Studio 5, the most recent version,
was released on the Windows and Macintosh platforms in the third quarter of
1997. Studio 5 is available in English, Japanese, German and French at a
suggested retail price of $499.
Bryce. Bryce, first released in the third quarter of 1994, is an
application platform that provides Creative Professionals with the ability to
generate natural and supernatural 3D landscapes and terrains. Bryce provides
Creative Professionals with powerful functions, including materials and texture
creation and editing capabilities, and provides non-graphic arts professionals
and consumers unfamiliar with 3D graphics design an entry point into the
development of photorealistic 3D worlds. Bryce enables advanced, photorealistic
creation of skies with natural cloud formations, humidity, fog and light
diffraction, as well as rivers, snowy peaks, deserts, or ocean floors,
supplemented by an array of special effects including complex textures and
reflective surfaces. The most recent version, Bryce 3D, which allows any
property such as atmospheres, terrains, or objects to be animated, was released
on both the Windows and Macintosh platforms in the fourth quarter of 1997. Bryce
3D is available in English, Japanese, German and French. The suggested retail
price of Bryce 3D is $299.
Poser. Poser, introduced in the second quarter of 1995, is a modeling
application that allows users to create images of human figures which can be
posed, rendered with surface textures and multiple lights, and easily
incorporated into artwork and designs. Model images created with Poser can be
exported for use in graphics design, illustration, multimedia and 3D software.
Poser is designed to work with 2D and 3D design application such as Painter,
Adobe's PhotoShop, Macromedia's Director, and several other products. Poser 2,
the most recent version, was released on the Macintosh platform in the fourth
quarter of 1996 and on the Windows platform in the first quarter of 1997. Poser
2 is available in English, Japanese, German, and French. The suggested retail
price of Poser 2 is $249.
Infini-D. Infini-D is an application platform that gives video
professionals and animation and multimedia artists in both the broadcast and
corporate arenas the tight integration and fast feedback needed to create
high-quality 3D animations in a production environment. Infini-D incorporates a
comprehensive list of powerful special effects, including sophisticated particle
systems, volumetric lighting effects, and deformation tools. Additionally, the
most recent version, Infini-D 4, incorporates MetaCreation's Real Time Geometry
groundbreaking multiresolution technology which allows artists to interactively
change the resolution of any 3D model and customize the number of polygons a
model uses while maintaining structural integrity. Infini-D 4 was released on
the Macintosh platform in the second quarter of 1997 and on the Windows platform
in the third quarter of 1997. The suggested retail price of Infini-D is $899.
Painter 3D. Painter 3D, formerly known as Detailer, is an application
platform that provides Creative Professionals with the ability to paint directly
onto the surface of 3D models using texture maps to add color, bump maps to add
surface relief, highlight masks to set surface gloss, reflection masks to
control reflectance, and glow maps to add diffuse color. Painter 3D incorporates
the Natural-Media brushes and effects found in Painter. Detailer, the previous
version of Painter 3D, was released on the Macintosh platform in the third
quarter of 1996 and on the Windows platform in the fourth quarter of 1996. A new
version of Painter 3D is currently scheduled for shipment in the Spring of 1998.
Painter 3D is available in English, Japanese, German and French at a suggested
retail price of $449.
HOME/SOHO/BUSINESS
Kai's Power GOO ("GOO"). GOO, the first consumer product offered by the
Company, allows users to turn pictures into images and then stretch, grow,
animate, fuse, or apply a host of other special effects to the images in real
time. Targeted to users with a wide range of computing and artistic abilities,
GOO features an interface that is designed to encourage exploration and
creativity through direct, intuitive, real-time interaction with images. A
library of images including kids, animals, politicians, world leaders and
artwork, is included, or users can import images from a variety of sources,
including images from 35 mm film transferred to CD-ROM or diskette, digital
cameras, scanners, capture devices, video cameras, or the Web. Images can be
printed out or saved for use on personalized items such as t-shirts, mugs, or
screen savers, or can be easily dropped into a real-time animation that
instantly transforms the original still image into a movie-like sequence which
can be uploaded to Quicktime and AVI movies. GOO, which is available on both the
Windows and
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Macintosh platforms in English, Japanese, German, French, Spanish, Italian,
Dutch, and Portuguese, was released in the second quarter of 1996. The suggested
retail price of GOO is $49.95.
Kai's Photo Soap ("Soap"). Soap, second in the Company's trio of home photo
digital imaging software programs, was released in the second quarter of 1997.
Soap provides consumers the ability to clean, edit, and manipulate personal
photographs and other images in real time, producing images for color printing,
presentations, the Web, or output to imaging software and hardware for further
manipulation or integration into desktop publishing applications. Incorporating
a simple, fun interface that encourages exploration, Soap allows users to wipe
out red eye, heal scars, remove blemishes, eliminate wrinkles and stray hairs,
sharpen focus, and brush in color, all in real time. Soap is available on both
the Windows and Macintosh platforms in English, Japanese, German, French,
Spanish, Italian, Dutch, and Portuguese at a suggested retail price of $49.95.
Art Dabbler ("Art"). Art, the Company's third home photo digital imaging
software program, was repositioned into this market in the third quarter of
1997. Art offers many of the Natural-Media tools and textures found in Painter
in a less sophisticated, learn-to-draw-and-paint format for beginning artists
and hobbyists of all ages. Art allows the user to experiment with a wide variety
of tools, color options, and technique and style adjustments. Art includes
tutorials licensed on an exclusive basis from Walter Foster Publishing, a
leading publisher of how-to art books. Available on both the Windows and
Macintosh platforms in English, Japanese, German, French, Spanish, Italian and
Dutch, Art has a suggested retail sales price of $49.95.
Kai's Power Show ("Show"). Show, a new home photo and business presentation
software player, is currently scheduled for release in the Spring of 1998. Show
will offer consumers a simple way to create a dynamic photo show or enhance a
business presentation by importing and organizing digital media such as digital
photos, artwork, and video clips; sequencing these elements; adding real time
TV-like transitions and animated placement of digital photos, text, artwork, and
video clips to a slide; and then sharing the completed show with family,
friends, or business associates via a computer display, projector, stand-alone
player, printer, or videotape. Show will be available on both the Windows and
Macintosh platforms at a suggested retail sales price of $49.95.
MARKETING, SALES AND DISTRIBUTION
MetaCreations develops awareness and demand for its products through public
relations activities, advertising, product reviews, tradeshows, seminars,
keynote speeches and lectures at major digital design, multimedia and online
conferences throughout the world. The Company also utilizes direct mail to
introduce, educate and sell to customers new products and upgrades in
conjunction with activities of the Company's distributors, dealers and in-house
telemarketing operations. In addition, MetaCreations sells its products by
distributing a variety of interactive multimedia demonstration materials
directly to prospective customers and then by following up through telemarketing
efforts. More generally, the Company focuses on building a global graphics
community through a number of initiatives, including producing and co-sponsoring
"Digital Media Players" events at major tradeshows, at which the press,
distributors and complementary hardware and software manufacturers can gather to
demonstrate technology, make contacts and exchange ideas regarding digital
graphic arts, multimedia and Internet/online communications.
MetaCreations sells its products worldwide through multiple distribution
channels, including traditional software distributors, hardware and software
Original Equipment Manufacturers ("OEMs"), international distributors,
educational distributors, VARs, computer superstores, retail dealers, mail order
and direct sales. The Company's primary sales channel is through large software
distributors such as Ingram Micro, Inc. and Tech Data, which in turn distribute
the Company's products through large retail chains, catalogs, and smaller retail
dealers. In 1997, 1996, and 1995, Ingram Micro, Inc., the Company's largest
distributor, accounted for approximately 17%, 20%, and 19% of net revenues,
respectively. The Company supports this channel by referring retail dealer
sales, educational distributor sales and mail order sales to these major
distributors. The Company receives inventory and sales reports from its
distributors and certain major retailers to help monitor sales through this
channel. As is typical in the personal computer software industry, the Company
grants its
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distributors limited rights under a stock balancing policy to return unsold
inventories of the Company's products in exchange for new purchases. In
addition, the Company provides price protection to its distributors in certain
instances when it reduces the price of its products.
The Company currently distributes its products through over 70
international distributors in over 50 countries worldwide, with approximately
38%, 41%, and 38% of the Company's net revenues coming from international
markets in 1997, 1996, and 1995, respectively. In some cases, the distributor
has exclusive distribution rights to certain products in its country. In 1995,
MetaCreations provided its products to the Japanese market through BulletProof
Software of Japan ("Bulletproof") in an exclusive publishing arrangement.
Effective February 1996, MetaCreations terminated its distribution agreement
with BulletProof and entered into an agreement with Marubeni Corporation, a
leading software distributor in Japan, for the exclusive distribution rights of
certain of its products in Japan. In 1997 and 1996, Marubeni Corporation
accounted for approximately 12% and 2% of net revenues, respectively. During the
fourth quarter of 1996, MetaCreations entered into a similar agreement with
Prisma Express Distributionsgesellschaft GmbH, a leading software distributor in
Germany, for the exclusive distribution rights of certain of its products in
Germany, Austria, and Switzerland. The Company believes that international
markets present a strategic opportunity and is seeking to increase its
international sales. In addition, the Company established its international
operations headquarters in Dublin, Ireland in September 1996, where the Company
localizes, manufactures and distributes international versions of its products.
The Company intends to make strategic investments in additional markets
throughout Europe, Asia and Latin America.
MetaCreations sells its products to educational institutions primarily
through Douglas Stewart, a distributor which specializes in the education
market, including campus resellers, bookstores and educational mail order
houses. The Company views the education market as a strategic opportunity to
establish product and brand preferences early in the careers of future graphic
arts and business professionals. Accordingly, the Company offers substantial
educational discounts.
MetaCreations actively maintains OEM relationships with many hardware and
software vendors that bundle MetaCreations products with their own complementary
hardware or software products and pay the Company royalties. The Company
believes that OEM sales increase the brand recognition of its products and
expand its customer and revenue base. In addition, these relationships give the
Company early access to computer graphic imaging, multimedia and Internet/online
technologies, which assist MetaCreation in quickly adapting its products for
compatibility with, or in releasing new products based on, such technologies.
Some of the Company's OEM customers include 3Com Corporation; Apple Computer,
Inc.; Bayer Corporation (AGFA division); Brother, Ltd.; Digital Equipment
Corporation; Eastman Kodak Company; Epson America, Inc.; Hewlett-Packard
Corporation; International Business Machines Corporation; Microtek Labs, Inc.;
Matrox Graphics, Inc.; Olympus Japan Co., Ltd.; Real 3D Company; UMAX
Technologies, Inc.; and Wacom Computer Systems.
The Company also offers product sales and upgrades directly to qualified
third-party resellers and end users. By selling to repeat customers in the
Company's installed base of registered customers, the Company complements its
primary distribution channels.
PRODUCT DEVELOPMENT
The Company's principal current product development efforts include: (i)
utilizing its core enabling technologies to develop additional applications for
Creative Professionals, consumers, SOHO and business markets, (ii) expanding its
market position in professional, consumer, SOHO and business design and
development tools, and (iii) creating enabling technologies for visual
computing. The Company is expending resources to address the increasing demand
for tools to create enhanced digital graphic and multimedia content for the
Internet and commercial online environments. In addition, the Company plans to
continue to develop, and from time to time acquire, basic software technologies
that it considers critical to building computer graphic imaging and
Internet/online design tools.
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The Company has supplemented its internal product development efforts by
licensing on an exclusive basis products developed by or co-developed with third
parties. MetaCreations believes that outsourcing certain of its product
development activities enables it to capitalize on the latest technological
innovations.
The Company's growth will be dependent upon the introduction of new
products and new versions of existing products. There can be no assurance that
any such new products or versions will achieve market acceptance. In addition,
the Company has in the past experienced delays in the development of new
products and the enhancement of existing products, and such delays may occur in
the future. If the Company were unable, due to resource constraints or
technological or other reasons, to develop and introduce such products in a
timely manner, this inability could have a material adverse effect on the
Company's business, operating results, financial condition, and cash flows. In
particular, the introductions of new products or enhanced versions of existing
products, are subject to the risk of development delays. Any delay in the
availability of new products could have a material adverse effect on the
Company's business, operating results, financial condition, and cash flows.
The Company's research and development expenses were approximately $14.1
million, $8.2 million, and $5.6 million for 1997, 1996, and 1995, respectively.
CUSTOMER AND TECHNICAL SUPPORT
The Company has built a customer education and technical support
organization focused on providing value to the Company's customers beyond the
purchase of the Company's products. MetaCreations provides customer and
technical support to customers via e-mail on the Internet and through online
services, fax and telephonic communication. In addition, the Company supports a
large, online community through its presence on the Web, where technical
support, tips and tricks and an entire electronic book on advanced imaging
techniques can be found. The Company also conducts seminars regularly for
prospective and current customers at leading tradeshows and conferences
throughout the world, providing education and insight into the uses of the
Company's technology.
COMPETITION
The Company faces competition from a number of sources, including other
vendors of personal computer graphic imaging and Internet/online design
application tools and other personal computer software industry participants.
Many of the Company's competitors or potential competitors have longer operating
histories and significantly greater financial, management, technology,
development, sales, marketing and other resources than the Company. As the
Company competes with larger competitors across a broader range of product
lines, the Company may face increasing competition from such companies. If these
or other competitors develop products, technologies or solutions that offer
significant performance, price or other advantages over those of the Company,
the Company's business, operating results, financial condition, and cash flows
would be materially adversely affected.
A variety of other possible actions by the Company's competitors could also
have a material adverse effect on the Company's business, operating results,
financial condition, and cash flows, including increased promotion, the bundling
of competitive products with other third-party products such as application
platforms or operating systems, and the introduction of new or enhanced
products. Moreover, in the event that price competition significantly increases,
competitive pressures could cause the Company to reduce the prices of its
products, which would result in reduced margins. Furthermore, new personal
computer platforms and operating systems, or new software distribution and
delivery systems, such as the Internet and commercial online services, may
provide new entrants with opportunities to obtain a substantial market share in
the Company's markets.
The Company may also face competition from general personal computer market
participants who decide to offer graphic arts or multimedia design products.
Such new market entrants could have a significant, disruptive effect on the
markets in which the Company participates. In particular, Microsoft Corporation
currently holds a dominant position in the personal computer software market in
general, allowing it to exert
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considerable influence throughout the market. The Company's products also
compete with graphic design and multimedia solutions based on other hardware
platforms.
MANUFACTURING AND SHIPPING
The manufacture of the Company's products consists of the duplicating of
diskettes and/or the pressing of CD-ROMs, the printing of manuals and the
packaging and assembling of final products, all of which are performed in
accordance with the Company's specifications and forecasts. While the Company's
current manufacturer, Modus Media International, maintains multiple site
facilities, there can be no assurance that their services could not become
subject to undue delays. Such delays, if they occur, may have a material adverse
effect on the Company's business, operating results, financial condition, and
cash flows. To date, the Company has not experienced any material difficulties
or delays in the manufacture or assembly of its products or material returns due
to product defects.
ADDITIONAL FACTORS AFFECTING FUTURE RESULTS
In addition to the other information in this Form 10-K, the following
additional factors should be considered carefully in evaluating the Company. The
discussion in this Report contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below.
Fluctuations in Quarterly Results
The Company has experienced in the past and expects in the future to
continue to experience significant fluctuations in quarterly operating results.
There can be no assurance that the Company's future revenues, operating results
and cash flows will not also vary substantially. The Company generally ships
products as orders are received and, therefore, has little or no backlog. As a
result, quarterly revenues, operating results and cash flows of the Company will
generally depend on a number of factors that are difficult to forecast,
including, among others, the volume and timing of and the ability to fulfill
orders received and the timing of and ability to close OEM and licensing
agreements with third parties within a quarter. Quarterly revenues, operating
results and cash flows also may fluctuate due to factors such as demand for the
Company's products; introduction, localization or enhancement of products by the
Company and its competitors; customer or distributor order deferrals in
anticipation of new versions of products; market acceptance of new products;
reviews in the industry press concerning the products of the Company or its
competitors; changes or anticipated changes in pricing by the Company or its
competitors; the mix of distribution channels through which products are sold;
the mix of products sold; returns from distributors; and general economic
conditions. Revenues, operating results and cash flows from the Company's
products also may be negatively affected by delays in the introduction or
availability of new hardware and software products from third parties. The
Company experiences some effect of seasonality in its business, as demand for
its products tends to increase during the quarter ending December 31 as a result
of timing of year-end holiday season buying.
As is common in the software industry, the Company's experience has been
that a disproportionately large percentage of shipments in each fiscal quarter
occurs in the latter half of the third month of that quarter. Because the
Company's staffing and other operating expenses are based in part on anticipated
net revenues, a substantial portion of which may not be realized until shortly
before the end of each fiscal quarter, delays in the receipt or shipment of
orders, including delays that may be occasioned by failures of third party
product fulfillment firms to produce and ship products, can cause significant
variations in revenues, operating results and cash flows from quarter to
quarter. The Company may also be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues from the Company's products in relation to expectations
could have an immediate adverse impact on business, operating results, financial
condition, and cash flows of the Company. In addition, the Company currently
intends to increase its operating expenses to fund greater levels of research
and product development, to increase its sales and marketing operations and to
expand distribution channels. To the extent that such
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expenses precede, or are not subsequently followed by, increased revenues, the
business, operating results, financial condition, and cash flows of the Company
will be materially and adversely affected.
Due to the foregoing factors, it is likely that the operating results of
the Company for some future quarters will fall below the expectations of
securities analysts and investors. In such event, the trading price of the
Company's common stock could be materially and adversely affected.
Integration of Operations; Management of Potential Growth, Integration of
Potential Acquisitions, Adverse Effect of Financial Results
In recent years, the Company has experienced expansion of its operations
that have placed significant demands on its administrative, operational and
financial resources. In addition, the Company's acquisitions of RTG in December
1996 and Specular in April 1997 and its merger with Fractal in May 1997, have
placed significant demands on these resources. The Company has completed
assimilation of its acquired operations and is currently in the process of
enhancing its financial and management controls, management processes, business
and management information systems and procedures, and expanding, training and
managing its work force. There can be no assurance that the Company will be able
to perform such actions successfully. In the future, the Company may make
additional acquisitions of complementary companies, products or technologies.
Managing acquired businesses entails numerous operational and financial risks,
including difficulties in assimilating acquired operations, diversion of
management's attention to other business concerns, amortization of acquired
intangible assets, and potential loss of key employees or customers of acquired
operations. The Company's success will depend, to a significant extent, on the
ability of its executive officers and other members of senior management to
respond to these challenges effectively. In this regard, since its merger with
Fractal in May 1997, the Company hired several new executive officers and other
members of senior management. In particular, Gary Lauer, who most recently
served as President of Silicon Graphics, Inc.'s ("SGI") World Trade Group and
Executive Vice President of SGI's Worldwide Field Operations, was brought on as
the Company's Chief Executive Officer in February 1998. There can be no
assurance that the Company will be able to effectively achieve and manage any
such growth, or that its management, personnel or systems will be adequate to
support the Company's operations. Any such inabilities or inadequacies would
have a material adverse effect on the Company's business, operating results,
financial condition, and cash flows.
The continued realization of benefits achieved from the merger of
MetaCreations with Fractal depends on the Company's ability to continue to
utilize product development capabilities, sales and marketing capabilities,
administrative organizations, and facilities better that either company could
have separately. The inability of the Company to continue to utilize resources
and to achieve synergies in a timely and coordinated fashion could result in a
material adverse effect on the Company's financial condition, results of
operations, and cash flows. There can be no assurance that these steps will
continue to result in the planned cost reductions or that these steps will not
adversely affect future revenues and results of operations.
Rapid Technological Change; Dependence on and Need for New Products and Product
Versions; Potential Delays in Product Releases
The market for visual computing graphics software products, and the
personal computer industry in general, is characterized by rapidly changing
technology, resulting in short product life cycles and strong pricing pressures.
As a result, the success of the Company depends substantially upon its ability
to continue to enhance its existing products, to develop and introduce in a
timely manner new products incorporating technological advances and to meet
increasing customer expectations. To the extent one or more competitors
introduce products that better address customer needs, the Company's business
could be adversely affected. There can be no assurance that the Company will be
successful in developing and marketing enhancements to its existing products or
new products on a timely basis or that any new or enhanced products will
adequately address the changing needs of the marketplace. Also, negative reviews
of the Company's new products or product versions in industry publications could
have a material adverse effect on the Company's financial condition, results of
operations, and cash flows.
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The Company intends to continue to significantly increase its research and
development expenditures. To the extent such increases are not accompanied by
increased revenues, the Company's business, operating results, financial
condition, and cash flows would be materially adversely affected. The Company
has supplemented its research and development efforts by exclusively licensing
products developed by or co-developed with third parties. There can be no
assurance that the Company will be able to continue to obtain such outside
product development capabilities on terms favorable to the Company or at all. If
the Company was unable to maintain existing development arrangements or to
attract new product development partners, then the Company would, at a minimum,
have to further increase its research and development expenditures, which could
have a material adverse effect on the Company's business, operating results,
financial condition, and cash flows. In addition, there can be no assurance that
such additional research and development expenditures would result in the
production of commercially acceptable products.
The Company also depends upon internal efforts for the development of new
products and product enhancements. The Company has in the past experienced
delays in the development of new products and product versions. There can be no
assurance that the Company will not experience further delays in connection with
the current product development or future development activities. Also, software
products as complex as those offered by the Company may contain undetected
errors when first introduced or as new versions are released. The Company has in
the past discovered software errors in certain of their new products and
enhancements after the introduction of these products. There can be no assurance
that errors will not be found in new products or releases after commencement of
commercial shipments, resulting in adverse product reviews and a loss of or
delay in market acceptance, which could have a material adverse effect upon the
Company's business, operating results, financial condition, and cash flows.
The market for visual computing graphics software products, and the
personal computer industry in general, is characterized by rapidly changing
technology. There can be no assurances that the further development of the
in-process research and development of the Company will result in commercially
viable products.
Highly Competitive Markets
The markets for graphics software products such as those offered by the
Company are intensely competitive, subject to rapid change and characterized by
constant demand for new product features, pressure to accelerate the release of
new products and product enhancements and pressure to reduce prices. A number of
companies currently offer products that compete directly or indirectly with one
or more the Company's products. Competitors include, among others, Adobe Systems
Incorporated, Autodesk, Inc., Corel Corporation, Macromedia, Inc., Silicon
Graphics, Inc. (through its Alias/Wavefront division), Microsoft Corporation,
and Broderbund Software, Inc. Many of the Company's competitors or potential
competitors have significantly greater financial, managerial, technical, and
marketing resources. A variety of potential actions by any of these competitors,
including a reduction of product prices, increased promotion, announcement or
accelerated introduction of new or enhanced products or features, acquisitions
of software applications or technologies from third parties, product giveaways
or product bundling could have a material adverse effect on the business,
operating results, financial condition, and cash flows of the Company. In the
event of price erosion, the Company may be unable to successfully reposition
itself to accommodate these actions.
Present or future competitors may be able to develop products comparable or
superior to those offered by the Company or adapt more quickly to new
technologies or evolving customer requirements. In addition, developers of
personal computer operating systems, including Microsoft and Apple Computer, may
incorporate functionality into their operating systems, which may be superior to
or incompatible with the products of the Company, thus adversely affecting the
Company's operating results. In particular, while the Company currently is
developing additional product enhancements that it believes address customer
requirements, there can be no assurance that the development or introduction of
these additional product enhancements will be successfully completed on a timely
basis or that these product enhancements will achieve market acceptance.
Accordingly, there can be no assurance that the Company will be able to continue
to compete effectively in its markets, that competition will not intensify or
that future competition will not have a material adverse effect on the business,
operating results, financial condition, and cash flows of the Company.
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Dependence on Distributors and on Other Third Parties
While the Company derives some revenues from direct sales, most of its
revenues are derived from the sale of products through third parties. The
Company sells its products worldwide through multiple distribution channels,
including traditional software distributors, hardware and software OEMs,
international distributors, educational distributors, VARs, hardware
superstores, retail dealers, and direct marketers. In addition, the Company's
products are manufactured by third party manufacturing and fulfillment
providers. Ingram Micro, Inc. ("Ingram"), MetaCreations' principal distributor,
accounted for approximately 17%, 20%, and 19% of net revenues for the years
ended December 31, 1997, 1996, and 1995, respectively. Marubeni Corporation, the
Company's exclusive distributor in Japan, accounted for approximately 12% and 2%
of net revenues for the years ended December 31, 1997 and 1996, respectively.
The Company did not sell to Marubeni Corporation during the year ended December
31, 1995.
The Company will be dependent on the continued viability and financial
stability of these third parties. Any termination or significant disruption of
the Company's relationship with any major distributor or retailer, or a
significant reduction in sales volume attributable to the Company's principal
resellers could materially and adversely affect the business, operating results,
financial condition, and cash flows of the Company. The distribution channels
through which the Company's software products are sold have been characterized
by rapid change, significant margin pressures, consolidation and financial
difficulties, including certain of the Company's current distributors and
retailers. In addition, new distribution channels may develop and there can be
no assurance that the Company will be able to effectively distribute its
products through such channels. The bankruptcy, deterioration in financial
condition or other business difficulties of a distributor or retailer could
render the Company's accounts receivable from such entity uncollectable, which
could have a material adverse effect on the Company's business, operating
results, financial condition, and cash flows. Retailers of the Company's
products typically have a limited amount of shelf space and promotional
resources for which there is intense competition, and the Company depends in
part upon promotional efforts of distributors in placing products with
retailers. There can be no assurance that distributors and retailers will
continue to purchase the Company's products or provide the Company's products
with adequate levels of shelf space and promotional support. Failure of
distributors or retailers to do so could have a material adverse effect on the
business, operating results, financial condition, and cash flows of the Company.
An integral element of the Company's strategy is to enhance and diversify
its channels of distribution both domestically and internationally. The Company
is currently investing, and the Company plans to continue to invest, a
significant portion of its cash and personnel resources to expand its domestic
and international direct sales and marketing force and develop distribution
relationships with additional third-party distributors and resellers. The
Company's ability to achieve significant revenue growth in the future will
depend in large part on its success in recruiting and training sufficient sales
personnel, distributors and resellers.
Product Transitions and Product Returns
From time to time, the Company and its competitors may announce new
products, product versions, capabilities, or technologies that have the
potential to replace or shorten the life cycles of the Company's existing
products. The Company has historically experienced increased returns of a
particular product version following the announcement of a planned release of a
new version of that product. Although the Company provides allowances for
anticipated returns, there can be no assurance that product returns will not
exceed such allowances in the future. The Company has from time to time offered
free upgrades to customers who purchased a product following announcement of a
new release and before shipment of the new version of that product. Such offers
can have a negative effect on revenues, operating results, and cash flows. In
addition, the Company may offer price discounts for new products and product
releases in order to facilitate market acceptance, which also negatively impacts
revenue, operating results, and cash flows. Moreover, the announcement of
currently planned or other new products may cause customers to delay their
purchasing decisions in anticipation of such products. Any of the foregoing
could have a material adverse effect on the business, operating results,
financial condition, and cash flows of the Company.
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Dependence on Key Personnel and Difficulty of Identifying and Hiring Certain
Personnel
The future performance of the Company is substantially dependent on the
performance of its executive officers and key employees. The loss of the
services of any of the executive officers or other key employees of the Company
for any reason could have a material adverse effect on the business, operating
results, financial condition, and cash flows of the Company.
The future success of the Company also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and managerial
personnel. Competition for such personnel is intense, and the Company has
experienced difficulty in identifying and hiring qualified engineering
personnel. There can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability to attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
business, operating results, financial condition, and cash flows.
Evolving Markets for Computer Graphic Imaging and Internet/Online Design Tools
The markets for computer graphic imaging and Internet/online design tools
are still emerging. There can be no assurance that the markets for the Company's
existing products will grow, that digital graphic and Internet/online content
developers will adopt the Company's products, that sufficient distribution
resources will be available to market the Company's products in a timely manner
or that such products will be successful in achieving market acceptance. The
demand for computer graphic imaging and Internet/online design tools is
dependent upon a number of variables, including the installed base of digital
graphic and multimedia capable personal computers, the widespread availability
of digital media, and the number and expertise of skilled content producers. If
the markets for such tools fail to grow or grow more slowly than the Company
currently anticipates, or if the Company's products fail to achieve market
acceptance, the Company's business, operating results, financial condition, and
cash flows would be materially adversely affected.
International Operations and Expansion
International sales represented approximately 38%, 41%, and 38% of the
Company's net revenues in 1997, 1996, and 1995, respectively. A key component of
the Company's strategy is continued expansion into international markets,
primarily Japan and Western Europe. In order to expand its international
presence, the Company will need to retain effective distributors and hire,
retain and motivate qualified personnel internationally. There can be no
assurance that the Company will be able to successfully market, sell, localize
and deliver its products in these international markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
problems and delays in collecting accounts receivable, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during summer months in Europe and
certain other parts of the world and potentially adverse tax consequences, any
of which could adversely impact the success of international operations. Sales
of products by the Company currently are denominated in U.S. dollars.
Accordingly, any increase in the value of the U.S. dollar as compared to
currencies in the Company's principal overseas markets would increase the
foreign currency-denominated cost of the Company's products, which may
negatively affect the Company's sales in those markets. To date, the Company has
not engaged in currency hedging transactions to reduce the effect of currency
exchange rate fluctuations. In addition, effective copyright and trade secret
protection may be limited or unavailable under the laws of certain foreign
jurisdictions. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Company's international operations
and, consequently, on the business, operating results, financial condition, and
cash flows of the Company.
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Proprietary Rights and Licenses
The Company relies on a combination of copyright, trademark, patent, trade
secret laws, employee and third-party nondisclosure agreements and exclusive
contracts to protect its intellectual and proprietary rights and products. The
Company distributes its software under shrinkwrap license agreements but
generally does not obtain signed license agreements from its end users. In
keeping with software industry standards, the Company does not copy-protect
their software. Accordingly, it may be possible for unauthorized third parties
to copy or reverse engineer the Company's products or otherwise obtain and use
information that the Company regards as proprietary. Furthermore, there can be
no assurance that competitors will not independently develop technologies that
are substantially equivalent or superior to the technologies of the Company.
Policing unauthorized use of the Company's products is difficult, and while the
Company is unable to determine the extent to which software piracy of their
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of certain countries in which the Company's products are or
may be distributed do not protect products and the intellectual rights to the
same extent as do laws in the United States.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software increasingly will become the subject of claims that such software
infringes the rights of others. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such assertions will not result in costly litigation or require the Company
to obtain a license to intellectual property rights of third parties. There can
be no assurance that such licenses will be available on reasonable terms or at
all. Furthermore, the Company licenses certain software products from other
companies for distribution or inclusion in their own products. There can be no
assurance that upon the expiration of these licenses, such licenses will be
available again on reasonable terms or at all, or that similar products could be
obtained to substitute for these products. The inability to license such
products could have a material adverse effect on the Company's business,
operating results, financial condition, and cash flows.
Possible Volatility of Stock Price
The price of the Company's common stock has fluctuated significantly in the
past. The management of the Company believes that such fluctuations may have
been caused by announcements of new products, quarterly fluctuations in the
results of operations and other factors. Stock markets in general have also
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market prices of securities issued by the Company and
other software companies, particularly graphics software companies, often for
reasons unrelated to the operating performance of the specific companies. The
Company anticipates that prices for the Company's common stock will continue to
be volatile in the future.
Concentration of Stock Ownership
As of March 16, 1998, the directors and executive officers of the Company
and their respective affiliates beneficially own approximately 20% of the
Company's outstanding Common Stock. As a result, these stockholders will be able
to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions.
EMPLOYEES
As of March 16, 1998, the Company had 303 full time employees, including
108 in sales and marketing, 115 in development, quality assurance and
documentation, 20 in customer service and technical support, and 60 in finance,
administration and operations. The employees and the Company are not parties to
any collective bargaining agreements, and the Company believes that its
relationships with its employees are good.
ITEM 2. PROPERTIES
The Company's corporate offices consists of approximately 42,000 square
feet of leased space in two one-story buildings in Carpinteria, Santa Barbara
County, California. This space houses substantially all of the
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Company's general and administrative personnel as well as a portion of its sales
and marketing and research and development personnel. The lease agreement
expires in September 2008, if not renewed. The Company believes that the current
facilities are adequate for current and near term needs and that additional
space is available to provide for anticipated growth.
The Company also leases approximately 30,000 square feet of office space in
Scotts Valley, California, pursuant to a lease agreement which expires in
September 2003. This space houses a significant portion of the Company's sales
and marketing and research and development personnel. The lease provides for two
options to extend the term of the lease for three years each. Additionally,
effective December 1, 1998, the lease agreement for the Scotts Valley facility
requires the Company to assume additional office space through 2003.
The facilities for RTG consists of approximately 13,000 square feet of
leased office space in Princeton and Short Hills, New Jersey, pursuant to lease
agreements which expire in December 1999 and May 2000, respectively. The Company
believes that this office space is adequate for the current needs of RTG and
that additional space is available to provide for anticipated growth.
The Company's Irish facility consists of approximately 4,000 square feet of
leased space in an office building in Dublin, Ireland, pursuant to a lease
agreement which expires in August 1998. The Company believes that this office
space is adequate for current and near term needs and that additional space is
available to provide for anticipated growth.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
believes that the ultimate outcome of these actions will not have a material
effect on the Company's consolidated financial position, results of operations,
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the Company's
current executive officers as of March 16, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Gary Lauer................. 45 Director, President and Chief Executive Officer
Kai Krause................. 40 Director and Chief Design Officer
Mark Zimmer................ 41 Director and Chief Technology Officer
Thomas Hedges.............. 47 Director and Chief Systems Architect
Alexander Migdal........... 52 Chief Scientist
Fred Brown................. 51 Senior Vice President, Sales and Marketing
Terance Kinninger.......... 42 Senior Vice President, Finance and Operations and Chief
Financial Officer
Pierre Berkaloff........... 32 Vice President, Engineering
Frank Casanova............. 40 Vice President, Product Management and Design
Sallie Olmsted............. 38 Vice President, Corporate Communications
Robert Rice................ 43 Vice President and General Manager, RTG Lab
</TABLE>
Mr. Lauer joined the Company as director, President and Chief Executive
Office in February 1998. From 1988 to 1997, Mr. Lauer served in various
capacities at Silicon Graphics, Inc. ("SGI"), including Vice President, North
American Marketing; Vice President and subsequently Senior Vice President, North
American Field Operations; and most recently as President of SGI's World Trade
Group and Executive Vice President of Worldwide Field Operations. Prior to
joining SGI, Mr. Lauer was with International Business
17
<PAGE> 19
Machines Corporation ("IBM") for eleven years where he held a variety of senior
management positions, the last of which included responsibility for field
operations for IBM's U.S. Marketing and Services Group in the Silicon Valley.
Mr. Lauer holds a B.S. from the University of Southern California Business
School.
Mr. Krause co-founded MetaTools and has been a director since 1992. For
more than eleven years prior to joining the Company on a full-time basis in
1993, Mr. Krause designed and developed advanced graphics, audio and systems
software as an independent consultant. Mr. Krause attended college in Essen,
West Germany, where he majored in foreign languages, math and philosophy. He
also attended the Music Conservatory, where he studied classical piano.
Mr. Zimmer became a director and Chief Technology Officer of the Company in
May 1997 in connection with the merger with Fractal. In addition to co-founding
Fractal in April 1991, Mr. Zimmer was its Chief Executive Officer and director
since its inception. Mr. Zimmer also served as Fractal's President from March
1993 until May 1996, and resumed the position in February 1997 until the merger
with MetaCreations in May 1997. In 1985, Mr. Zimmer founded Fractal Software, a
predecessor of Fractal, with Mr. Hedges and was a partner in Fractal Software
from 1985 to 1990. At Fractal Software, Mr. Zimmer co-developed two graphics
software programs, ImageStudio and ColorStudio, as well as the initial version
of Painter. Mr. Zimmer attended California Institute of Technology.
Mr. Hedges became a director and Chief Systems Architect of the Company in
May 1997 in connection with the merger with Fractal. Mr. Hedges was a co-founder
of Fractal and served as Vice President, Engineering and director since its
inception. Mr. Hedges also served as Chairman of the Board of Fractal from March
1993 until May 1996, and resumed the position in February 1997 until the merger
with MetaCreations in May 1997. From 1985 to 1990, Mr. Hedges was a partner in
Fractal Software with Mr. Zimmer where he co-developed ImageStudio, ColorStudio,
and the initial version of Painter. Mr. Hedges earned his B.A. degree in
Engineering at California Institute of Technology and his Masters in Electrical
Engineering at Stanford University.
Mr. Migdal joined the Company as Chief Scientist in connection with the
Company's acquisition of RTG in December 1996. Prior to co-founding RTG in
February 1996, Mr. Migdal was a joint professor of physics and applied and
computational mathematics at Princeton University from 1989 to 1996 and a
visiting professor of physics at the University of California, San Diego in
1988. Mr. Migdal holds a Doctor of Science and Ph.D. from the Landau Institute
for Theoretical Physics, a M.S. in Physics from the Moscow Physical Technical
Institute, as well as an honorary degree of professor from the Cybernetics
Council of the Soviet Academy of Sciences.
Mr. Brown joined the Company as Senior Vice President, Sales and Marketing
in November 1995. From November 1994 to November 1995, Mr. Brown was Vice
President, Retail Stores, PCs Worldwide at AT&T Corp. From February 1993 to
November 1994, Mr. Brown served as Vice President of Sales and Marketing at
Xtend Microproducts. From late 1990 to February 1993, Mr. Brown was Vice
President of Sales and Marketing at Cal Circuit Abco, Inc., a Packard Bell
Electronics, Inc. affiliated company. Mr. Brown holds a B.S. from Point Loma
College.
Mr. Kinninger joined the Company as Senior Vice President, Finance and
Operations and Chief Financial Officer in July 1995. Mr. Kinninger was employed
by Delphi Information Systems, Inc. ("Delphi") from October 1990 to June 1995,
initially as Chief Financial Officer and, from December 1993 to November 1994 as
Senior Vice President of Corporate Development. He then served as Senior Vice
President and General Manager of Delphi's SMART Division from December 1994 to
June 1995. Prior to working at Delphi, he served as Chief Financial Officer of
Integral Systems, Inc. from June 1983 to September 1990. Before his tenure at
Integral Systems, Inc., Mr. Kinninger was employed at Coopers & Lybrand. Mr.
Kinninger holds a B.S. from Miami University.
Mr. Berkaloff became Vice President, Engineering in May 1997 in connection
with the Company's merger with Fractal. Mr. Berkaloff served as Director of 3D
Product Engineering and Vice President of Engineering at Fractal following the
merger of Fractal and Ray Dream, Inc. in 1996. Mr. Berkaloff was a co-founder of
Ray Dream, Inc. where he served as Chief Technology Officer from 1990 to 1996.
During this
18
<PAGE> 20
period he assembled and managed the engineering, quality assurance, and
technical support teams. Mr. Berkaloff also co-developed Ray Dream Designer and
AddDepth. Mr. Berkaloff holds a Master of Science in computer science from Ecole
Centrale de Lille in France.
Mr. Casanova joined the Company as Vice President, Product Management and
Design in May 1997. Mr. Casanova was most recently the Director of the Advanced
Systems Group in the Advanced Technology Group at Apple Computer, where he
worked for nine years. Earlier, Mr. Casanova worked at Apollo Computer, a
manufacturer of engineering workstations, where he was Product Line Manager for
its line of desktop workstations. Mr. Casanova holds a B.S. in computer science
from Quinnipiac College.
Ms. Olmsted joined the Company as Vice President, Corporate Communications
in July 1996. From April 1994 to July 1996, Ms. Olmsted was the Vice President
of the Corporate and Consumer market division of Rogers & Cowan in Los Angeles,
where she also managed the agency's Emerging Technologies practice group. Prior
to joining Rogers & Cowan, she was the director of public affairs at EON
Corporation. Ms. Olmsted holds a B.B.A. in international business from George
Washington University.
Mr. Rice joined the Company as Vice President and General Manager, RTG Lab
in connection with the Company's acquisition of RTG in December 1996. In
addition to co-founding RTG in 1996, Mr. Rice served as its Chairman. From 1983
to 1996, Mr. Rice was a partner at the international law firm of Milbank, Tweed,
Hadley and McCloy. Mr. Rice holds a B.S. and a J.D. from Florida State
University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock, $0.001 par value, began trading over the
counter in December 1995, and is quoted on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol "MCRE." The following table sets forth,
for the periods indicated, the range of high and low closing sale prices per
share as reported on the Nasdaq National Market System:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
4th Quarter................................ $19.50 $ 8.25
3rd Quarter................................ 16.00 9.88
2nd Quarter................................ 13.38 6.50
1st Quarter................................ 19.00 10.00
1996
4th Quarter................................ $27.25 $11.50
3rd Quarter................................ 24.75 10.75
2nd Quarter................................ 41.00 18.00
1st Quarter................................ 27.25 16.25
</TABLE>
HOLDERS
As of March 16, 1998, there were approximately 663 holders of record of the
Company's common stock.
DIVIDENDS
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, for use in its business and does not anticipate paying any cash dividends
on its capital stock in the foreseeable future.
19
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following selected condensed financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and related notes
thereto appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenues..................................... $69,074 $62,936 $46,260 $28,308 $14,526
Cost of revenues................................. 11,859 11,677 10,081 6,627 3,423
------- ------- ------- ------- -------
Gross profit................................... 57,215 51,259 36,179 21,681 11,103
Operating expenses:
Sales and marketing............................ 32,043 28,936 22,331 14,378 7,723
Research and development....................... 14,122 8,224 5,639 3,559 1,904
General and administrative..................... 6,410 5,883 4,590 3,735 2,452
Costs associated with mergers and acquisitions,
including the related write-off of acquired
in-process technology....................... 16,185 17,047 -- -- --
------- ------- ------- ------- -------
Total operating expenses............... 68,760 60,090 32,560 21,672 12,079
------- ------- ------- ------- -------
Income (loss) from operations.................... (11,545) (8,831) 3,619 9 (976)
Interest and investment income (expense), net.... 3,157 3,397 634 11 (36)
------- ------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes................................... (8,388) (5,434) 4,253 20 (1,012)
Provision (benefit) for income taxes............. (210) 2,216 1,827 473 --
------- ------- ------- ------- -------
Net income (loss)................................ $(8,178) $(7,650) $ 2,426 $ (453) $(1,012)
======= ======= ======= ======= =======
Net income (loss) applicable to common
stockholders .................................. $(8,178) $(7,650) $ 2,337 $ (692) $(1,012)
======= ======= ======= ======= =======
Net income (loss) per common share (diluted)..... $ (.36) $ (.37) $ .15 $ (.06) $ (.09)
======= ======= ======= ======= =======
Weighted average number of shares outstanding
(diluted)...................................... 22,965 20,590 15,267 11,584 11,584
======= ======= ======= ======= =======
BALANCE SHEET DATA
Cash, cash equivalents and short-term
investments.................................... $50,002 $66,293 $77,721 $ 9,307 $ 3,127
Working capital.................................. 77,677 79,254 80,135 9,086 565
Total assets..................................... 97,290 97,935 95,017 18,488 6,999
Series B redeemable convertible preferred
stock.......................................... -- -- 8,359 -- --
Stockholders' equity (deficit)................... 87,242 86,112 82,916 (49) 1,158
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to the other information in this Form 10-K, the following
factors should be considered carefully in evaluating the Company. The discussion
in this Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
OVERVIEW
MetaCreations was formed in May 1997, as a result of the merger of
MetaTools, Inc. and Fractal Design Corporation, and included the acquisitions of
Real Time Geometry Corp. in December 1996 and Specular International. Ltd. in
April 1997, as well as the previous merger of Fractal and Ray Dream, Inc. in May
1996. The financial results for 1993 through 1997 include the pooled financial
statements of MetaTools, Inc., Fractal Design Corporation, and Ray Dream, Inc.
20
<PAGE> 22
Revenue growth for MetaCreations from 1993 to 1997 was substantially
achieved through the Company's continued introduction of new products and the
release of enhanced versions of its existing products, as well as significant
investment in the expansion of its sales and marketing activities to address
broader distribution channels. While the Company has significantly expanded its
product line, the Company's future revenues are substantially dependent upon the
continued market acceptance of the Company's existing leading products: Art
Dabbler, Bryce, Kai's Photo Soap, Kai's Power GOO, Kai's Power Tools, Painter,
Poser, and Ray Dream Studio. In this regard, revenue from the sale of these
products represented a substantial majority of net revenues during this period.
The Company also has a number of new product development efforts under way, and
a significant portion of future revenues is dependent upon the timely
introduction and ultimate success of these activities.
The Company develops substantially all of its products either internally or
occasionally through co-development arrangements with third parties. These
co-development arrangements generally provide the Company with certain exclusive
proprietary, copyright or marketing rights for developed products in exchange
for the payment of one-time and/or ongoing royalties. The Company expects to
continue fostering arrangements with external developers as part of its strategy
of expanding its product portfolio. There can be no assurance, however, that the
Company will be able to continue to supplement its product development efforts
in the future through such relationships.
The Company sells its products primarily to domestic and international
distributors, including mail order resellers and retail outlets. The Company
also sells its products to OEMs for bundling with their hardware or software
products and directly to end users, generally through telesales and direct mail
campaigns. Fluctuations in distributor purchases can cause significant
volatility in the Company's revenues. Distributors generally stock the Company's
products at levels which may fluctuate significantly for a variety of reasons,
including the distributors' ability to finance the purchase of products and to
devote shelf space, catalog space or attention to the products. Distributor
purchases may also be affected by the Company's introduction of a new product or
new version of a product, the Company's end user promotions programs,
anticipated product price increases, the Company's purchases of display space at
retail outlets and other factors. Further, OEM agreements, which generally
provide for minimum guaranteed non-refundable payments to the Company, typically
coincide with the planned introduction of OEM bundled products and are often
entered into at the end of the quarter. The timing of the execution of such
agreements can fluctuate substantially throughout the year, causing volatility
in the Company's revenues, operating results, and cash flows.
Since its inception, the Company has focused on building its product
portfolio and establishing brandname awareness of its products. These activities
have resulted in significant increases in all expense categories. The Company's
recent product development efforts have also entailed significant research and
development expenditures. These higher expense levels combined with costs
associated with periodic mergers and acquisitions, including the related
write-off of acquired in-process technology, and quarterly fluctuations in net
revenues have contributed to the Company's periodic annual and quarterly losses,
as well as fluctuations in its operating results. The Company intends to
continue to invest significant amounts both in expanding its product portfolio
and in maintaining and enhancing brand awareness of its products, and
accordingly may continue to experience losses and volatility of net revenues and
operating results in future periods.
21
<PAGE> 23
OPERATING RESULTS
The following table sets forth certain selected financial information
expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues............................................ 17.2 18.6 21.8
----- ----- -----
Gross margin...................................... 82.8 81.4 78.2
Operating expenses:
Sales and marketing....................................... 46.4 46.0 48.3
Research and development.................................. 20.4 13.0 12.2
General and administrative................................ 9.3 9.3 9.9
Costs associated with mergers and acquisitions, including
the related write-off of acquired in-process
technology............................................. 23.4 27.1 --
----- ----- -----
Total operating expenses.......................... 99.5 95.4 70.4
----- ----- -----
Income (loss) from operations............................... (16.7) (14.0) 7.8
Interest and investment income, net......................... 4.6 5.4 1.4
----- ----- -----
Income (loss) before provision (benefit) for income taxes... (12.1) (8.6) 9.2
Provision (benefit) for income taxes........................ (0.3) 3.5 4.0
----- ----- -----
Net income (loss)........................................... (11.8)% (12.1)% 5.2%
===== ===== =====
</TABLE>
Net Revenues
Net revenues totaled $69.1 million in 1997, compared to $62.9 million in
1996, an increase of 10%. Net revenues increased in 1997 as a result of volume
increases from the Company's release of new products and new versions of its
existing products during 1997 and the second half of 1996, along with increased
revenues from OEM and licensing agreements. New products and new versions of
existing products released during 1997 include Bryce 3D, Infini-D 4, Kai's Photo
Soap, Painter 5, Ray Dream 3D, and Studio 5. International sales comprised 38%
of net revenues in 1997, compared to 41% of net revenues in 1996. The decrease
was primarily due to flat revenues in Japan attributed to the consolidation of
the Company's Japanese distributors.
Net revenues totaled $62.9 million in 1996, a 36% increase over 1995 net
revenues of $46.3 million. The increase in net revenues was attributed to volume
increases resulting from the Company's release of new products and new versions
of its existing products during 1996 and the second half of 1995, expansion of
the domestic distribution channel, and increased international sales. New
products released during 1996 included Detailer, Expression, Final Effects AP,
and Kai's Power GOO. International sales comprised 41% of net revenues in 1996,
compared to 38% of net revenues in 1995.
The Company recognizes revenue from the sale of its products upon shipment
to the customer and satisfaction of significant Company obligations, if any. The
Company provides an allowance for estimated returns at the time of product
shipments and adjusts this allowance as needed based on actual return history.
Such reserves as a percentage of net revenues have varied over recent years,
reflecting the Company's experience in product returns as it has significantly
expanded the proportion of its sales through third-party distribution channels
and increased its product portfolio. The Company expects reserves will continue
to vary in the future. The Company's agreements with its distributors generally
provide the distributors with limited rights to return unsold inventories under
a stock balancing program. The Company monitors the activities of its
distributors in an effort to minimize excessive returns and establishes its
reserves based on its estimates of expected returns. While historically the
Company's returns have been within management's expectations, the establishment
of reserves requires judgments regarding such factors as future competitive
conditions and product life cycles, which can be difficult to predict. As a
result, there can be no assurance that established reserves will be adequate to
cover actual future returns.
22
<PAGE> 24
Cost of Revenues
Cost of revenues includes the costs of goods sold, royalties due to
external developers, inventory management costs, freight and handling costs and
reserves for inventory obsolescence. Cost of revenues totaled $11.9 million, or
17% of net revenues in 1997, compared to $11.7 million, or 19% of net revenues,
in 1996. The decrease in cost of revenues as a percentage of net revenues was
due to a higher percentage of revenues from OEM and licensing agreements and
improved management of production and inventories. Royalties represented 4% of
net revenues for both 1997 and 1996.
Cost of revenues totaled $11.7 million in 1996, up from cost of revenues of
$10.1 million in 1995. However, cost of revenues represented 19% of net revenues
in 1996, down from 22% of net revenues in 1995. The changing mix of product
sales toward lower royalty products and the improved management of inventory
levels contributed to the decrease in cost of revenues as a percentage of net
revenues. Royalties represented 4% and 6% of net revenues for 1996 and 1995,
respectively.
The Company expects that cost of revenues will increase in the future
commensurate with the increase in net revenues, but may vary as a percentage of
net revenues.
Sales and Marketing
Sales and marketing expenses include advertising, promotional materials,
mail campaigns, trade shows and the compensation costs of sales, marketing,
customer service and public relations personnel who promote the Company's
products, including related facilities costs. Sales and marketing expenses
totaled $32.0 million in 1997, compared to $28.9 million in 1996, but remained
flat at 46% of net revenues for both periods. The increase in sales and
marketing expenses reflected the Company's continued efforts to expand its sales
and marketing presence and distribution channels, both domestically and
internationally, and through the hiring of additional personnel.
Sales and marketing expenses totaled $28.9 million in 1996, up from $22.3
million in 1995. Sales and marketing expenses represented 46% and 48% of net
revenues in 1996 and 1995, respectively. The increase in sales and marketing
dollars resulted from the Company's efforts to expand its sales and marketing
presence and distribution channels through the hiring of additional personnel
and increased advertising, mail campaigns, and public relations expenditures.
The Company intends to continue such expansion and anticipates that sales
and marketing expenses will increase significantly in future periods as the
Company's product offerings expand, although such expenses may vary as a
percentage of net revenues.
Research and Development
Research and development expenses consist primarily of personnel costs,
consultant fees, and required equipment and facilities costs related to the
Company's product development efforts. The Company expenses as incurred research
and development costs necessary to establish the technological feasibility of
its internally-developed software products. To date, the establishment of
technological feasibility of the Company's products and general release have
substantially coincided. As a result, the Company has not capitalized any
internal software development costs since costs qualifying for such
capitalization have not been significant.
Research and development expenses totaled $14.1 million in 1997, up from
$8.2 million in 1996. Research and development expenses represented 20% and 13%
of net revenues in 1997 and 1996, respectively. The increase in research and
development expenses was attributed to increased personnel resulting from the
acquisitions of RTG in December 1996 and Specular in April 1997, in addition to
increased personnel associated with the expansion of the Company's product
portfolio.
Research and development expenses totaled $8.2 million, or 13% of net
revenues, in 1996, up from $5.6 million, or 12% of net revenues, in 1995. The
increased expenses resulted from increased personnel required to expand and
enhance the Company's product portfolio, migrate its existing products to the
Windows operating system, and translate the products to foreign languages.
23
<PAGE> 25
The Company expects research and development expenses will continue to
increase in future periods but may vary as a percentage of net revenues.
General and Administrative
General and administrative expenses include compensation costs related to
executive management, finance and administration personnel of the Company along
with other administrative costs including legal and accounting fees, insurance,
and bad debt expenses. General and administrative expenses totaled $6.4 million
in 1997, up from $5.9 million in 1996, but remained flat at 9% of net revenues
for both periods. The increase in general and administrative dollars is due to
increased administrative expenses related to the continued growth of the
Company.
General and administrative expenses totaled $5.9 million, or 9% of net
revenues, in 1996, compared to $4.6 million, or 10% of net revenues, in 1995.
The increase in general and administrative dollars was attributed to the
Company's expansion of its internal staffing, as well as increases in other
administrative expenses, to support its growth.
The Company expects that its general and administrative expenses will
increase in the future as the Company expands its staffing to support expanded
operations, but may vary as a percentage of net revenues.
Costs Associated with Mergers and Acquisitions, Including the Related Write-off
of Acquired In-process Technology
On April 15, 1997, the Company completed the acquisition of Specular
International, Ltd., a privately held software development company based in
Amherst, Massachusetts, that developed and marketed 3-D animation and graphic
design tools for professionals and pro-sumers. Under the terms of the Purchase
Agreement, the stockholders of Specular received approximately 547,000 shares of
the Company's common stock, valued at approximately $4.1 million, and $1.0
million in cash in exchange for all of the outstanding shares of Specular. The
Company also issued 450,000 non-qualified stock options to purchase shares of
the Company's common stock to Specular employees at an exercise price of $7 per
share, the fair market value of the Company's common stock on April 16, 1997. In
addition, the Company assumed the net liabilities of Specular, which totaled
$1.6 million at April 15, 1997. The Company charged approximately $6.4 million
against earnings during the year ended December 31, 1997, comprised of the
write-off of acquired in-process technology of $5.6 million, transaction costs
of $300,000, and relocation and severance costs of $555,000. In addition, the
Company recognized a deferred income tax asset of $900,000 relating to Federal
net operating losses and tax credits of Specular. In accordance with SFAS No.
109, the tax benefits were first applied to reduce to zero goodwill totaling
$280,000, with the remainder applied against current technology acquired from
Specular. After recognition of the deferred tax asset, acquired current
technology totaled $280,000. In connection with the acquisition, 14 of
Specular's research and development and product management personnel were
relocated to the Company's RTG facilities in Princeton, New Jersey.
On December 31, 1996, the Company completed the acquisition of Real Time
Geometry Corp., a privately held development stage company based in Princeton,
New Jersey, that developed real time 3D graphics and visualization technologies.
The acquisition was accounted for by the Company under the purchase method of
accounting. Under the terms of the Purchase Agreement, the stockholders and
optionholders of RTG received a combination of shares of the Company's common
stock and options to purchase shares of the Company's common stock valued at
approximately $11,242,000 and $607,000, respectively, at December 31, 1996, the
closing date. In addition, the Company assumed the net liabilities of RTG, which
totaled $1,411,000 at December 31, 1996. As of December 31, 1996, neither
technological feasibility nor commercial viability had been reached with regard
to RTG's core technology, comprised of advanced geometry-based algorithms which
transform images in real-time to a series of triangles to produce
three-dimensional images. Based upon projected future cash flows, risk-adjusted
using a 40% discount rate, RTG's core in-process technology was valued in excess
of the amount written-off as acquired in-process technology of $13,260,000,
which combined with acquisition costs totaling $1,189,000, resulted in a one
time charge to earnings of $14,449,000 for the year ended December 31, 1996. As
of the date of acquisition, RTG's
24
<PAGE> 26
21 research and development personnel remained in Princeton, New Jersey,
continuing visual computing research and development activities.
On August 31, 1996, the Company acquired Dive Laboratories, Inc., a
privately held company based in Santa Cruz, California, that developed 3D
modeling and rendering environments for high-end applications and the
visualization of streaming online data. In connection with the acquisition,
which was accounted for under the purchase method of accounting, the Company
recorded a one-time charge to earnings of approximately $733,000 for the year
ended December 31, 1996, comprised of relocation expenses of $215,000,
acquisition costs of $155,000, and in-process research and development expenses
of $363,000. The Company paid $509,000 in cash and assumed $224,000 of net
liabilities of Dive. The four Dive research and development personnel have
relocated to Santa Barbara.
Income (Loss) from Operations
The loss from operations for the year ended December 31, 1997 was $11.6
million and included $16.2 million in costs related to the merger of MetaTools,
Inc. and Fractal Design Corporation and the acquisition of Specular
International, Ltd. Excluding these costs, proforma operating income for 1997
was $4.6 million or 7% of net revenues. The loss from operations for the year
ended December 31, 1996, totaled $8.8 million and included $17.0 million in
costs related to the acquisitions of Real Time Geometry Corp. and Dive
Laboratories, Inc., in addition to the merger of Ray Dream, Inc. into Fractal
Design Corporation. Excluding these costs, proforma operating income for 1996
was $8.2 million, or 13% of revenues. The decline in proforma operating income
in 1997 over 1996 is primarily attributed to higher spending on research and
development as a percentage of revenues as a result of increased personnel
resulting from the acquisitions of RTG in December 1996 and Specular in April
1997, in addition to increased personnel associated with the expansion of the
Company's product portfolio.
Excluding costs related to mergers and acquisitions, proforma operating
income for the year ended December 31, 1996 was $8.2 million, or 13% of
revenues, an increase over operating income of $3.6 million, or 8% of net
revenues, for the year ended December 31, 1995. The increase in proforma
operating income is attributed to higher net revenues resulting from the
Company's expanded product line and higher interest and investment income
resulting from the investment of proceeds received from the Company's initial
public offering.
Provision for Income Taxes
The Company records income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The effective tax rates of 3% and (41)% for the
years ended December 31, 1997 and 1996, respectively, differed from the
respective United States statutory tax rates primarily due to changes in the
valuation allowance against the deferred income tax asset, the non-deductibility
of portions of the mergers and acquisitions costs, as well as the utilization of
available net operating losses and tax credits during the respective years. The
effective rate of 43% for the year ended December 31, 1995, differed from the
United States statutory rate due to state and foreign income taxes incurred
during the year.
Net Income (Loss)
Net loss totaled $(8.2) million, or $(0.36) per common share, in 1997,
compared to net loss of $(7.7) million, or $(0.37) per common share, in 1996,
and net income of $2.4 million, or $0.15 per common share, in 1995.
INTEGRATION OF OPERATIONS; MANAGEMENT OF POTENTIAL GROWTH, INTEGRATION OF
POTENTIAL ACQUISITIONS, ADVERSE EFFECT OF FINANCIAL RESULTS
In recent years, the Company has experienced expansion of its operations
that have placed significant demands on its administrative, operational and
financial resources. In addition, the Company's acquisitions of RTG in December
1996 and Specular in April 1997 and its merger with Fractal in May 1997, have
placed
25
<PAGE> 27
significant demands on these resources. The Company has completed assimilation
of its acquired operations and is currently in the process of enhancing its
financial and management controls, management processes, business and management
information systems and procedures, and expanding, training and managing its
work force. There can be no assurance that the Company will be able to perform
such actions successfully.
The continued realization of benefits achieved from the merger of
MetaCreations with Fractal depends on the Company's ability to continue to
utilize product development capabilities, sales and marketing capabilities,
administrative organizations, and facilities better that either company could
have separately. The inability of the Company to continue to utilize resources
and to achieve synergies in a timely and coordinated fashion could result in a
material adverse effect on the Company's financial condition, results of
operations, and cash flows. There can be no assurance that these steps will
continue to result in the planned cost reductions or that these steps will not
adversely affect future revenues and results of operations.
SEASONALITY; QUARTERLY FLUCTUATION IN REVENUE
The Company has experienced in the past and expects in the future to
continue to experience significant fluctuations in quarterly operating results.
There can be no assurance that the Company's future revenues, operating results
and cash flows will not also vary substantially. The Company generally ships
products as orders are received and, therefore, has little or no backlog. As a
result, quarterly revenues, operating results and cash flows of the Company will
generally depend on a number of factors that are difficult to forecast,
including, among others, the volume and timing of and the ability to fulfill
orders received and the timing of and ability to close OEM and licensing
agreements with third parties within a quarter. Quarterly revenues, operating
results and cash flows also may fluctuate due to factors such as demand for the
Company's products; introduction, localization or enhancement of products by the
Company and its competitors; customer or distributor order deferrals in
anticipation of new versions of products; market acceptance of new products;
reviews in the industry press concerning the products of the Company or its
competitors; changes or anticipated changes in pricing by the Company or its
competitors; the mix of distribution channels through which products are sold;
the mix of products sold; returns from distributors; and general economic
conditions. Revenues, operating results and cash flows from the Company's
products also may be negatively affected by delays in the introduction or
availability of new hardware and software products from third parties. The
Company experiences some effect of seasonality in its business, as demand for
its products tends to increase during the quarter ending December 31 as a result
of timing of year-end holiday season buying.
As is common in the software industry, the Company's experience has been
that a disproportionately large percentage of revenues in each fiscal quarter
occurs in the third month of that quarter. Because the Company's staffing and
other operating expenses are based in part on anticipated net revenues, a
substantial portion of which may not be realized until shortly before the end of
each fiscal quarter, delays in the receipt and shipment of orders, including
delays that may be occasioned by failures of third party product fulfillment
firms to produce and ship products, and delays or deferrals in the execution of
OEM arrangements can cause significant variations in the Company's financial
position, results of operations, and cash flows from quarter to quarter. The
Company will most likely be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues from the Company's products in relation to expectations
could have an immediate adverse impact on Company's financial position, results
of operations, and cash flows. In addition, the Company currently intends to
increase its operating expenses to fund greater levels of research and product
development, to increase its sales and marketing operations and to expand its
distribution channels. To the extent that such expenses precede, or are not
subsequently followed by, increased revenues, the Company's financial position,
results of operations, and cash flows will be materially and adversely affected.
Due to the foregoing factors, it is likely that the operating results of
the Company for some future quarters may fall below the expectations of
securities analysts and investors. In such event, the trading price of the
Company's common stock could be materially and adversely affected.
26
<PAGE> 28
YEAR 2000 COMPLIANCE
During 1997, the Company completed implementation of a year 2000 compliant
enterprise-wide information system. The Company has also initiated an assessment
project, both within the Company and with its business partners, which addresses
those other significant systems that may have year 2000 compliance issues. The
Company presently believes that with the implementation of the new system and
modification to existing software, year 2000 compliance will not pose a
significant operational challenge for the Company. However, if these
modifications are not completed on a timely basis, including implementation by
its business partners, the Company's financial position, results of operations,
and cash flows will be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments totaled $50.0 million at December 31, 1997, down from
$66.3 million at December 31, 1996, and $77.7 million at December 31, 1995. Net
cash used in operating activities of the Company totaled $12.0 million and $3.0
million for 1997 and 1996, respectively, compared to net cash provided by
operating activities of $624,000 in 1995. The increase in cash used in operating
activities in 1997 is primarily attributed to the approximately $11 million paid
in connection with the merger with Fractal and the acquisition of Specular, and
the increase in accounts receivable resulting from growth in revenues, in
particular, growth in OEM revenues which include guaranteed fixed minimum
royalties that may have extended payment terms up to 12 months from the contract
date. Net cash used in investing activities totaled $1.5 million, $25.2 million,
and 25.3 million for 1997, 1996, and 1995, respectively. The change resulted
primarily from net sales and purchases of short-term investments and purchases
of property and equipment. Net cash provided by (used in) financing activities
totaled $1.6 million, $(4.0) million, and $70.1 million for 1997, 1996, and
1995, respectively. The increase in cash provided by financing activities in
1997 resulted from proceeds from the exercise of stock options by the Company's
employees. Net cash used in financing activities in 1996 relates to the
repayment of notes payable to stockholders and the issuance of note receivable
from stockholders during the year. The significant amount of net cash provided
by financing activities in 1995 is attributed to the initial public offerings of
MetaTools, Inc. and Fractal Design Corporation.
The Company has a $3.0 million revolving line of credit with a bank which
expires during March 1999, if not renewed. Borrowings under the credit facility
are limited to a percentage of eligible accounts receivable, as defined in the
credit agreement. As of December 31, 1997, the Company had no outstanding
borrowings under the line of credit.
The Company expects that its working capital requirements will continue to
increase to the extent the Company continues to grow. The Company believes that
its current cash and investment balances, cash provided by future operations, if
any, and available borrowings under the Company's line of credit are sufficient
to meet its working capital needs and anticipated capital expenditure
requirements through at least the next twelve months.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130, which requires companies to adopt its provisions for
fiscal years beginning after December 15, 1997, establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. Management does not
believe the adoption of SFAS No. 130 will have a material effect on the
accompanying consolidated financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131, which requires
companies to adopt its provisions for fiscal years beginning after December 15,
1997, requires publicly-held companies to report financial and other information
about key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments includes profit
27
<PAGE> 29
or loss, certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial statements
would be provided. Management is currently evaluating the requirements of
adopting SFAS No. 131 and the effects, if any, on the Company's current
reporting and disclosures.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," was
issued in October 1997 and addresses software revenue recognition matters
primarily from a conceptual level and does not include specific implementation
guidance. SOP 97-2 supersedes SOP 91-1 and is effective for transactions entered
into for fiscal years beginning after December 15, 1997. Based on its reading
and interpretation of SOP 97-2, management believes it is currently in
compliance with the final standard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Index to Financial Statements
The following financial statements are filed as part of this Report:
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS PAGE NO.
---------------------------- --------
<S> <C>
Report of Independent Public Accountants.................... 29
Consolidated Balance Sheets as of December 31, 1997 and 31
1996......................................................
Consolidated Statements of Operations for each of the three 32
years in the period ended December 31, 1997...............
Consolidated Statements of Stockholders' Equity (Deficit) 33
for each of the three years in the period ended December
31, 1997..................................................
Consolidated Statements of Cash Flows for each of the three 34
years in the period ended December 31, 1997...............
Notes to Consolidated Financial Statements.................. 36
</TABLE>
2. Index to Financial Statement Schedules
The following financial statement schedule of the Company is filed as part
of this Report and should be read in conjunction with the financial statements
and noted thereto:
<TABLE>
<CAPTION>
SCHEDULES PAGE NO.
--------- --------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ 57
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
28
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
MetaCreations Corporation
We have audited the consolidated balance sheet of MetaCreations Corporation
as of December 31, 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended, and the
related financial statement schedule as listed in the index on page 28 of this
Form 10-K. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit. We previously audited and reported on the
consolidated balance sheet of MetaCreations Corporation as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the two years in the period ended December
31, 1996 prior to their restatement for the 1997 pooling of interests with
Fractal Design Corporation ("Fractal"). The contribution of Fractal to the
combined revenues and net income (loss) represented approximately 56% and (21)%;
and 64% and 121% of the respective restated totals for the years ended December
31, 1996 and 1995. The total assets of Fractal represented 42% of the respective
restated totals as of December 31, 1996. Separate financial statements of
Fractal included in the related restated consolidated balance sheet, statements
of operations, shareholders' equity, and cash flows were audited and reported on
separately by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Fractal, is based
solely on the report of the other auditors. We also audited the combination of
the accompanying consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the two years in the period ended December 31, 1996,
after restatement for the 1997 pooling of interests; in our opinion, such
consolidated statements have been properly combined on the basis described in
Note 1 of the notes to consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. These 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, based on our audits and the report of the other auditor,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of MetaCreations Corporation as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Woodland Hills, California
January 26, 1998
29
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Fractal Design Corporation
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of shareholders' equity and of cash flows of Fractal
Design Corporation and its subsidiaries (not presented separately herein)
present fairly, in all material respects, their financial position at March 31,
1997, and the results of their operations and their cash flows for each of the
two years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
April 30, 1997, except as to Note 11 of the Fractal Design Corporation
financial statements, which is as of May 29, 1997
30
<PAGE> 32
METACREATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,653 $ 21,605
Short-term investments.................................... 40,349 44,688
Accounts receivable, net of allowance for returns and
doubtful accounts of $3,250 and $4,554 in 1997 and
1996, respectively..................................... 26,604 16,619
Inventories............................................... 1,667 1,512
Income taxes receivable................................... 3,324 --
Deferred income taxes..................................... 2,634 2,827
Prepaid expenses.......................................... 3,494 3,826
-------- --------
Total current assets.............................. 87,725 91,077
Property and equipment, net................................. 7,577 5,581
Other assets................................................ 1,988 1,277
-------- --------
Total assets...................................... $ 97,290 $ 97,935
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,860 $ 4,490
Accrued expenses.......................................... 3,971 6,427
Royalties payable......................................... 1,217 756
Income taxes payable...................................... -- 150
-------- --------
Total current liabilities......................... 10,048 11,823
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized -- none issued and outstanding at December
31, 1997 and 1996...................................... -- --
Common stock, $.001 par value; 75,000,000 shares
authorized -- 23,605,645 and 22,274,398 shares issued
and outstanding at December 31, 1997 and 1996,
respectively........................................... 24 22
Paid-in capital........................................... 109,896 100,956
Cumulative translation adjustment......................... (135) (158)
Notes receivable from stockholders........................ (3,170) (3,000)
Accumulated deficit....................................... (19,373) (11,708)
-------- --------
Total stockholders' equity........................ 87,242 86,112
-------- --------
Total liabilities and stockholders' equity........ $ 97,290 $ 97,935
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 33
METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net revenues................................................ $ 69,074 $62,936 $46,260
Cost of revenues............................................ 11,859 11,677 10,081
-------- ------- -------
Gross profit.............................................. 57,215 51,259 36,179
Operating expenses:
Sales and marketing....................................... 32,043 28,936 22,331
Research and development.................................. 14,122 8,224 5,639
General and administrative................................ 6,410 5,883 4,590
Costs associated with mergers and acquisitions, including
the related write-off of acquired in-process
technology............................................. 16,185 17,047 --
-------- ------- -------
Total operating expenses.......................... 68,760 60,090 32,560
-------- ------- -------
Income (loss) from operations............................... (11,545) (8,831) 3,619
Interest and investment income, net......................... 3,157 3,397 634
-------- ------- -------
Income (loss) before provision (benefit) for income taxes... (8,388) (5,434) 4,253
Provision (benefit) for income taxes........................ (210) 2,216 1,827
-------- ------- -------
Net income (loss)........................................... $ (8,178) $(7,650) $ 2,426
======== ======= =======
Net income (loss)........................................... $ (8,178) $(7,650) $ 2,426
Amortization of costs related to the issuance of mandatory
redeemable Series B convertible preferred stock........... -- -- (89)
-------- ------- -------
Net income (loss) applicable to common stockholders......... $ (8,178) $(7,650) $ 2,337
======== ======= =======
Net income (loss) per common share:
Basic..................................................... $ (0.36) $ (0.37) $ 0.18
======== ======= =======
Diluted................................................... $ (0.36) $ (0.37) $ 0.15
======== ======= =======
Weighted average number of shares outstanding:
Basic..................................................... 22,965 20,590 12,987
======== ======= =======
Diluted................................................... 22,965 20,590 15,267
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 34
METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED NOTES
STOCK COMMON STOCK CUMULATIVE RECEIVABLE
--------------- --------------- PAID-IN TRANSLATION FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT STOCKHOLDERS
------ ------ ------ ------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994................... 841 $ 841 9,072 $ 9 $ 5,534 $ (36) $ (445)
Issuance of common stock upon the exercise of
stock options and warrants.................... -- -- 707 1 191 -- --
Repurchase of common stock...................... -- -- (6) -- -- -- --
Amortization of costs related to the issuance of
mandatory redeemable Series B preferred
stock......................................... -- -- -- -- -- -- --
Reversal of preferred stock dividend requirement
in connection with conversion of
Series B preferred stock...................... -- -- -- -- (140) -- --
Accretion to redemption value of mandatorily
redeemable convertible preferred stock........ -- -- -- -- -- -- --
Conversion of Series A preferred stock.......... (841) (841) 1,682 2 839 -- --
Conversion of Series B preferred stock.......... -- -- 3,390 3 8,445 -- --
Conversion of mandatorily redeemable convertible
preferred stock............................... -- -- 792 1 2,203 -- --
Issuance of common stock, net of offering costs
totaling $3,935............................... -- -- 4,709 5 69,931 -- --
Translation adjustment.......................... -- -- -- -- -- (14) --
Repayment of notes receivable from
stockholders.................................. -- -- -- -- -- -- 445
Adjustment to retained earnings as a result of
business combination (Note 3)................. -- -- -- -- -- -- --
Net income...................................... -- -- -- -- -- -- --
---- ----- ------ --- -------- ----- -------
Balances at December 31, 1995................... -- -- 20,346 21 87,003 (50) --
Issuance of common stock upon the exercise of
stock options and warrants.................... -- -- 561 -- 1,288 -- --
Issuance of common stock in connection with the
employee stock purchase plan and 401k plan.... -- -- 15 -- 214 -- --
Issuance of common stock........................ -- -- 20 -- 138 -- --
Issuance of common stock in connection with the
acquisition of Real Time Geometry Corp........ -- -- 1,332 1 11,241 -- --
Tax benefit related to stock options............ -- -- -- -- 1,072 -- --
Translation adjustment.......................... -- -- -- -- -- (108) --
Notes receivable from stockholders.............. -- -- -- -- -- -- (3,000)
Net loss........................................ -- -- -- -- -- -- --
---- ----- ------ --- -------- ----- -------
Balances at December 31, 1996................... -- -- 22,274 22 100,956 (158) (3,000)
Issuance of common stock upon the exercise of
stock options................................. -- -- 756 1 1,851 -- --
Issuance of common stock in connection with the
employee stock purchase plan.................. -- -- 29 -- 245 -- --
Issuance of common stock in connection with the
acquisition of Specular International,
Ltd. ......................................... -- -- 547 1 4,087 -- --
Tax benefit related to stock options............ -- -- -- -- 2,396 -- --
Conversion of accrued compensation to equity
upon exercise of certain options.............. -- -- -- -- 361 -- --
Translation adjustment.......................... -- -- -- -- -- 23 --
Interest on notes receivable from
stockholders.................................. -- -- -- -- -- -- (170)
Adjustment to retained earnings as a result of
business combination (Note 1)................. -- -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- -- --
---- ----- ------ --- -------- ----- -------
Balances at December 31, 1997................... -- $ -- 23,606 $24 $109,896 $(135) $(3,170)
==== ===== ====== === ======== ===== =======
<CAPTION>
TOTAL
STOCKHOLDERS
ACCUMULATED EQUITY
(DEFICIT) (DEFICIT)
----------- ------------
<S> <C> <C>
Balances at December 31, 1994................... $ (5,952) $ (49)
Issuance of common stock upon the exercise of
stock options and warrants.................... -- 192
Repurchase of common stock...................... -- --
Amortization of costs related to the issuance of
mandatory redeemable Series B preferred
stock......................................... (89) (89)
Reversal of preferred stock dividend requirement
in connection with conversion of
Series B preferred stock...................... 140 --
Accretion to redemption value of mandatorily
redeemable convertible preferred stock........ (64) (64)
Conversion of Series A preferred stock.......... -- --
Conversion of Series B preferred stock.......... -- 8,448
Conversion of mandatorily redeemable convertible
preferred stock............................... -- 2,204
Issuance of common stock, net of offering costs
totaling $3,935............................... -- 69,936
Translation adjustment.......................... -- (14)
Repayment of notes receivable from
stockholders.................................. -- 445
Adjustment to retained earnings as a result of
business combination (Note 3)................. (519) (519)
Net income...................................... 2,426 2,426
-------- -------
Balances at December 31, 1995................... (4,058) 82,916
Issuance of common stock upon the exercise of
stock options and warrants.................... -- 1,288
Issuance of common stock in connection with the
employee stock purchase plan and 401k plan.... -- 214
Issuance of common stock........................ -- 138
Issuance of common stock in connection with the
acquisition of Real Time Geometry Corp........ -- 11,242
Tax benefit related to stock options............ -- 1,072
Translation adjustment.......................... -- (108)
Notes receivable from stockholders.............. -- (3,000)
Net loss........................................ (7,650) (7,650)
-------- -------
Balances at December 31, 1996................... (11,708) 86,112
Issuance of common stock upon the exercise of
stock options................................. -- 1,852
Issuance of common stock in connection with the
employee stock purchase plan.................. -- 245
Issuance of common stock in connection with the
acquisition of Specular International,
Ltd. ......................................... -- 4,088
Tax benefit related to stock options............ -- 2,396
Conversion of accrued compensation to equity
upon exercise of certain options.............. -- 361
Translation adjustment.......................... -- 23
Interest on notes receivable from
stockholders.................................. -- (170)
Adjustment to retained earnings as a result of
business combination (Note 1)................. 513 513
Net loss........................................ (8,178) (8,178)
-------- -------
Balances at December 31, 1997................... $(19,373) $87,242
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35
METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ (8,178) $ (7,650) $ 2,426
Adjustment to retained earnings as a result of business
combination (Notes 1 and 3)............................. 513 -- (519)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Write-off of acquired in-process technology............. 5,575 13,623 --
Deferred income taxes................................... 1,093 (1,381) (583)
Depreciation and amortization........................... 2,666 1,574 753
Provision for losses on receivables and returns......... 5,201 6,467 5,814
Provision for losses on inventory....................... 860 724 796
Accrued interest income................................. (170) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. (15,146) (15,548) (9,436)
Inventories.......................................... (972) (104) (2,005)
Income taxes receivable.............................. (1,078) 327 (890)
Prepaid expenses and other assets.................... (30) (88) (2,144)
Accounts payable and accrued expenses................ (2,817) (922) 6,151
Royalties payable.................................... 461 (76) 261
-------- --------- --------
Net cash (used in) provided by operating
activities...................................... (12,022) (3,054) 624
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment....................... (3,944) (3,960) (1,951)
Purchases of software technology and product rights....... (693) (125) (395)
Purchases of short-term investments....................... (55,339) (104,373) (23,195)
Proceeds from maturities of short-term investments........ 59,678 83,368 --
Payment in connection with acquisition.................... (1,233) (139) --
Sale of certificate of deposit -- restricted use.......... -- -- 240
-------- --------- --------
Net cash used in investing activities.............. (1,531) (25,229) (25,301)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes receivable from stockholders............ -- (3,000) --
Repayment of notes receivable from stockholders........... -- -- 445
Proceeds from bank note payable........................... -- -- 415
Repayment of bank note payable............................ -- -- (815)
Repayment of notes payable to stockholders................ -- (1,477) --
Proceeds from issuance of notes payable................... -- -- 500
Repayment of notes payable................................ (274) (417) (523)
Proceeds from exercise of warrants and stock options...... 1,852 852 192
Net proceeds from issuance of common stock................ -- -- 69,936
-------- --------- --------
Net cash provided by (used in) financing
activities...................................... 1,578 (4,042) 70,150
Effect of exchange rates on cash.......................... 23 (108) (14)
-------- --------- --------
Net (decrease) increase in cash and cash equivalents...... (11,952) (32,433) 45,459
Cash and cash equivalents at beginning of period.......... 21,605 54,038 8,579
-------- --------- --------
Cash and cash equivalents at end of period................ $ 9,653 $ 21,605 $ 54,038
======== ========= ========
</TABLE>
(Table continued on next page)
34
<PAGE> 36
METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES
Cash paid during the year for interest...................... $ -- $ 18 $ 175
Cash paid during the year for income taxes.................. 294 2,162 3,119
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
Issuance of common stock and stock options in connection
with acquisition of Specular International, Ltd........... 4,088 -- --
Issuance of common stock and stock options in connection
with acquisition of Real Time Geometry Corp............... -- 11,849 --
Net liabilities acquired in connection with acquisition of
Specular International, Ltd.:
Accounts receivable, net............................... 40 -- --
Inventories, net....................................... 43 -- --
Property and equipment................................. 43 -- --
Deferred income taxes.................................. 900 -- --
Prepaid expenses and other assets...................... 331 -- --
Accounts payable and accrued expenses.................. 1,337 -- --
Notes payable.......................................... 274 -- --
Net liabilities acquired in connection with acquisitions of
Dive Laboratories, Inc. and Real Time Geometry Corp.:
Property and equipment................................. -- 498 --
Prepaid expenses and other assets...................... -- 33 --
Accounts payable and accrued expenses.................. -- 689 --
Notes payable to stockholder........................... -- 1,477 --
Tax benefit related to stock options........................ 2,396 1,072 --
Conversion of accrued compensation to equity upon exercise
of certain options and warrants........................... 361 524 --
Issuance of common stock in connection with employee stock
purchase plan............................................. 245 126 --
Covenant not-to-compete with an officer of the Company...... -- 600 --
Issuance of common stock in exchange for software technology
and product rights........................................ -- 138 --
Conversion of Series B redeemable convertible preferred
stock to common stock..................................... -- -- 8,448
Conversion of Series A convertible preferred stock to common
stock..................................................... -- -- 841
Conversion of mandatorily redeemable convertible preferred
stock to common stock..................................... -- -- 2,204
Reversal of preferred stock dividend requirement in
connection with conversion of Series B redeemable
convertible preferred stock............................... -- -- 140
Accretion of mandatorily redeemable convertible preferred
stock..................................................... -- -- 64
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 37
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The consolidated financial statements include the accounts of MetaCreations
Corporation ("MetaCreations" or the "Company") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
In May 1997, the stockholders of MetaTools, Inc. ("MetaTools") approved the
Amendment to Restated Articles of Incorporation, changing the name of the
Company to MetaCreations Corporation. Accordingly, the term "Company," as used
herein, refers to either MetaTools or MetaCreations, depending on the context of
the discussion.
MetaCreations is a leading developer of visual computing and graphics
software and technologies for professionals, consumers, and "pro-sumers" for
Windows, Macintosh, and other digital editing operating systems. MetaCreations
designs, develops, publishes, markets, and supports visual computing software
tools and technologies for the creation, editing, and manipulation of computer
graphic images and digital art.
The computer graphics imaging and visual computing markets, and the
personal computer industry in general, are characterized by rapidly changing
technology, resulting in short product life cycles and price declines. The
Company must continuously update its existing products to keep them current with
changing technology and must develop new products to take advantage of new
technologies that could render the Company's existing products obsolete. The
Company's future prospects are highly dependent on its ability to keep pace with
its competitors' innovations, to adapt to new operating systems, hardware
platforms, and emerging industry standards, and to provide additional
functionality to the Company's existing products. The inability of the Company
to develop and introduce such products in a timely manner would have a material
adverse effect on the Company's future business, operating results, financial
condition, and cash flows.
In May 1997, the stockholders of MetaCreations and Fractal Design
Corporation ("Fractal") approved the merger of the two companies. As a result of
the merger, the Company issued approximately 9,055,000 shares of MetaCreations
common stock for all of the outstanding shares of Fractal and assumed
approximately 1,653,000 options to purchase Fractal common stock. The merger was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements were restated to include the accounts of Fractal for all
periods presented.
The Company reports its financial results on a December 31 fiscal year-end
basis, whereas Fractal reported its financial results on a March 31 fiscal
year-end basis. For the purposes of pooling-of-interests accounting, the balance
sheet of the Company as of December 31, 1996 has been combined with that of
Fractal as of March 31, 1997. The statements of operations of the Company for
each of the two years in the period ended December 31, 1996 have been combined
with that of Fractal for each of the two years in the period ended March 31,
1997. Accordingly, Fractal's net loss of $513,000 for the three months ended
March 31, 1997 has been reflected as an adjustment to retained earnings. The
results of operations of Fractal for such three month period include net
revenues of $7,004,000.
Separate results of operations for the periods presented are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Net revenues:
MetaCreations.................................. $28,035 $16,731
Fractal........................................ 34,901 29,529
------- -------
$62,936 $46,260
======= =======
</TABLE>
36
<PAGE> 38
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Net income (loss):
MetaCreations.................................. $(9,239) $ (500)
Fractal........................................ 1,589 2,926
------- -------
$(7,650) $ 2,426
======= =======
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Product revenues are recognized upon shipment to the customer, satisfaction
of significant Company obligations, if any, and reasonable assurance regarding
the collectability of the corresponding receivable. At the time of shipment, the
Company accrues for the estimated cost of post contract support. Historically,
these costs have been insignificant. The Company provides an allowance for
estimated returns at the time of product shipment and adjusts this allowance as
needed based on actual returns history. At December 31, 1997 and 1996, the
Company had an allowance for potential returns of approximately $2,034,000 and
$3,618,000, respectively.
The Company has entered into agreements whereby it licenses products to
original equipment manufacturers ("OEM's") and foreign publishers which provide
such customers the right to produce and distribute multiple copies of its
software. Nonrefundable fixed fees are recognized as revenue at delivery of the
product master to the customer, satisfaction of significant Company obligations,
if any, and reasonable assurance regarding the collectability of the
corresponding receivable. Per copy royalties in excess of fixed amounts are
recognized as revenue when such amounts exceed fixed minimum royalties. Revenues
under OEM contracts without nonrefundable fixed fees are recognized as earned.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company monitors the activities of its distributors in an
effort to minimize excessive returns and establishes its reserves based on its
estimates of expected returns. While historically the Company's returns have
been within management's expectations, the establishing of reserves requires
judgments regarding such factors as future competitive conditions and product
life cycles, which can be difficult to predict. Actual results could differ from
those estimates.
INVENTORIES
Inventories consist of finished products and software components, primarily
instruction manuals, diskettes, CD ROMs and packaging ready for assembly. The
Company periodically evaluates the carrying value of its inventories, including
a review for potentially excess or obsolete products, and adjusts these as
necessary. At December 31, 1997 and 1996, the Company had reserves of
approximately $719,000 and $631,000, respectively, for potentially excess or
obsolete inventory items. Inventories are stated at the lower of cost or market,
with cost determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets are depreciated on the
straight-line method over their estimated useful lives, which range from 3 to 7
years. Leasehold improvements are amortized over the shorter
37
<PAGE> 39
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the life of the lease or the life of the asset. Upon sale, any gain or loss
is included in the consolidated statement of operations. Maintenance and minor
replacements are expensed as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
The Company provides for capitalization of certain software development
costs once technological feasibility is established. The costs so capitalized
are then amortized on a straight-line basis over the estimated product life
(generally eighteen months to three years), or on the ratio of current revenue
to total projected product revenues, whichever is greater. To date, the
establishment of technological feasibility of the Company's products and general
release have substantially coincided. As a result, the Company has not
capitalized any internal software development costs since costs qualifying for
such capitalization have not been significant.
ADVERTISING
The Company reports the costs of all advertising as expenses in the periods
in which those costs are incurred. The Company shares portions of certain
distributors' advertising expenses through co-op advertising arrangements.
Advertising expense, primarily consisting of co-op advertising, catalog
advertising, direct mailings, and placements in business and consumer
publications, was approximately $12,060,000, $10,315,000, and $7,080,000 for the
years ended December 31, 1997, 1996, and 1995 respectively.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The Company considers its investment portfolio available-for-sale as
defined in Statement of Financial Accounting Standard ("SFAS") No. 115. These
available-for-sale securities are accounted for at their fair value, and
unrealized gains and losses on these securities are reported as a separate
component of stockholders' equity. At December 31, 1997 and 1996, net unrealized
gains or losses on available-for-sale securities were not significant.
The Company invests its cash in accordance with a policy that seeks to
maximize returns while ensuring both liquidity and minimal risk of principal
loss. The policy limits investments to certain types of instruments issued by
institutions with investment grade credit ratings, and places restrictions on
maturities and concentration by type and issuer. The majority of the Company's
portfolio is composed of fixed income investments which are subject to the risk
of market interest rate fluctuations, and all of the Company's investments are
subject to risks associated with the ability of the issuers to perform their
obligations under the instruments.
ROYALTY EXPENSE
The Company licenses certain third-party software and code for inclusion in
its products. Royalties are payable to developers of the software or code at
various rates and amounts, generally based on net unit sales or net revenues.
These agreements may include royalty advances against future expected sales,
which advances are recorded as prepaid expenses until such royalties are earned.
Royalty expense, which is included as a
38
<PAGE> 40
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
component of cost of revenues, amounted to approximately $2,563,000, $2,487,000,
and $2,553,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
MAJOR CUSTOMERS AND CREDIT RISK
The Company sells its retail products domestically through unaffiliated
distributors and OEM's, as well as directly to end-users. International sales
are generally made through distributors in each of the foreign countries in
which the Company markets its products. Credit is extended based on an
evaluation of each customer's financial condition, and generally collateral is
not required. Estimated credit losses and returns, if any, have been provided
for in the financial statements and have generally been within management's
expectations. At December 31, 1997 and 1996, the Company has an allowance for
doubtful accounts of approximately $1,216,000 and $936,000, respectively.
Revenues from one of the Company's major domestic distributors represented
approximately 17%, 20%, and 19% of net revenues for the years ended December 31,
1997, 1996, and 1995, respectively. Revenues from one of the Company's major
international distributors accounted for approximately 12% and 2% of net
revenues for the years ended December 31, 1997 and 1996, respectively. The
Company did not sell to the international distributor during the year ended
December 31, 1995. Revenues from international customers (principally export
sales) accounted for approximately 38%, 41%, and 38% of net revenues for the
years ended December 31, 1997, 1996, and 1995.
Accounts receivable from one of the Company's major domestic distributors
represented approximately 28% and 36% of accounts receivable, net at December
31, 1997 and 1996, respectively. Accounts receivable from three of the Company's
major international distributors accounted for approximately 13%, 12%, and none
of accounts receivable, net, respectively, at December 31, 1997 and 36%, 22%,
and 13%, respectively, at December 31, 1996.
At December 31, 1997, and periodically throughout 1995 to December 31,
1997, the Company has maintained balances with various financial institutions in
excess of the federally insured limits.
FOREIGN CURRENCY TRANSLATION
The functional currency of each of the Company's foreign subsidiaries is
its local currency. Financial statements of these foreign subsidiaries are
translated to U.S. dollars for consolidation purposes using current rates of
exchange for assets and liabilities and average rates of exchange for revenues
and expenses. The effects of currency translation adjustments are included as a
component of stockholders' equity.
INCOME TAXES
The Company accounts for income taxes using the liability method as
required by SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred income taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
39
<PAGE> 41
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE
During the year ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." In accordance with SFAS No. 128, basic net income (loss)
per common share is computed using the weighted average number of shares of
common stock and diluted net income (loss) per common share is computed using
the weighted average number of shares of common stock and common equivalent
shares outstanding. Common equivalent shares related to stock options, warrants
and preferred stock are excluded from the computation when their effect is
antidilutive.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130, which requires companies to adopt its provisions for
fiscal years beginning after December 15, 1997, establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. Management does not
believe the adoption of SFAS No. 130 will have a material effect on the
accompanying consolidated financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131, which requires
companies to adopt its provisions for fiscal years beginning after December 15,
1997, requires publicly-held companies to report financial and other information
about key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements would be
provided. Management is currently evaluating the requirements of adopting SFAS
No. 131 and the effects, if any, on the Company's current reporting and
disclosures.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," was
issued in October 1997 and addresses software revenue recognition matters
primarily from a conceptual level and does not include specific implementation
guidance. SOP 97-2 supercedes SOP 91-1 and is effective for transactions entered
into for fiscal years beginning after December 15, 1997. Based on its reading
and interpretation of SOP 97-2, management believes it is currently in
compliance with the final standard.
3. MERGERS AND ACQUISITIONS
RAY DREAM, INC.
On May 24, 1996, the Company acquired Ray Dream, Inc. ("Ray Dream"), a
California corporation which designs, develops and markets graphics software
application tools emphasizing three-dimensional effects for the personal
computer market. As a result of the acquisition, Ray Dream became a wholly-owned
subsidiary of Fractal. As consideration for 100% of the outstanding shares of
Ray Dream capital stock, the Company issued an aggregate of approximately
2,371,000 shares of common stock and reserved approximately 164,000 shares of
common stock for issuance upon the exercise of outstanding options to purchase
Ray Dream common stock. The Company also assumed an outstanding warrant, held by
a third party software developer, to purchase Ray Dream common stock. This
warrant vested during the three months ended September 30, 1996 upon completion
of certain development milestones, and was fully exercised, on a net basis, for
approximately 134,000 shares of common stock. The acquisition of Ray Dream was
accounted for as a pooling-of-interests and accordingly, the Company's
consolidated financial statements have been restated for all periods prior to
the acquisition to include the financial statements of Ray Dream. Transaction
fees of approximately $1,865,000 were recorded during the three months ended
March 31, 1996.
40
<PAGE> 42
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fractal reported its financial results on a March 31 fiscal year-end basis,
whereas Ray Dream reported its financial results on a December 31 calendar
year-end basis. For the purposes of pooling-of-interests accounting, the balance
sheet of Fractal as of March 31, 1996 was combined with that of Ray Dream as of
December 31, 1995. The statements of operations of Fractal for each of the two
years in the period ended March 31, 1996 were combined with that of Ray Dream
for each of the two years in the period ended December 31, 1995. Accordingly,
Ray Dream's net loss of $519,000 for the three months ended March 31, 1996 has
been reflected as an adjustment to retained earnings for the year ended December
31, 1995. The results of operations of Ray Dream for such three month period
include net revenues of $2,980,000.
Separate results of operations for the year ended December 31, 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net revenues:
MetaCreations....................................... $38,511
Ray Dream........................................... 7,749
-------
$46,260
=======
Net income:
MetaCreations....................................... $ 2,424
Ray Dream........................................... 2
-------
$ 2,426
=======
</TABLE>
DIVE LABORATORIES
On August 31, 1996, the Company acquired Dive Laboratories, Inc. ("Dive"),
a privately held company based in Santa Cruz, California, that developed 3D
modeling and rendering environments for high-end applications and the
visualization of streaming online data. In connection with the acquisition,
which was accounted for under the purchase method of accounting, the Company
recorded a one-time charge to earnings of approximately $733,000 for the year
ended December 31, 1996, comprised of relocation expenses of $215,000,
acquisition costs of $155,000, and in-process research and development expenses
of $363,000. The Company paid $509,000 in cash and assumed $224,000 of net
liabilities of Dive. The operating results of Dive have been included in the
accompanying consolidated financial statements from the date of acquisition.
REAL TIME GEOMETRY
On December 31, 1996, the Company completed the acquisition of Real Time
Geometry Corp. ("RTG"), a privately held development stage company based in
Princeton, New Jersey, that developed real time 3D graphics and visualization
technologies. The acquisition was accounted for by the Company under the
purchase method of accounting. Under the terms of the Purchase Agreement, the
stockholders and optionholders of RTG received a combination of shares of the
Company's common stock and options to purchase shares of the Company's common
stock valued at approximately $11,242,000 and $607,000, respectively, at
December 31, 1996, the closing date. In addition, the Company assumed the net
liabilities of RTG, which totaled $1,411,000 at December 31, 1996. As of
December 31, 1996, neither technological feasibility nor commercial viability
had been reached with regard to RTG's core technology, comprised of advanced
geometry-based algorithms to accelerate the display of three-dimensional images.
Based upon projected future cash flows, risk-adjusted using a 40% discount rate,
RTG's core in-process technology was valued in excess of the amount written-off
as acquired in-process technology of $13,260,000, which combined with
acquisition costs totaling $1,189,000, resulted in a one time charge to earnings
of $14,449,000 for the year ended December 31, 1996.
41
<PAGE> 43
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The operating results of RTG have been included in the accompanying
consolidated financial statements from the date of acquisition. The following
unaudited pro forma information presents a summary of the consolidated results
of operations of the Company and RTG as if the acquisition had taken place on
February 1, 1996 (date of inception of RTG). In management's opinion, the
following unaudited pro forma consolidated information is not indicative of the
actual results that would have occurred had the acquisition been consummated on
February 1, 1996 or of future operations of the consolidated entities under the
ownership and management of the Company (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
Net revenues.......................................... $62,936
Net income............................................ 4,739
Net income per common share........................... 0.20
</TABLE>
SPECULAR INTERNATIONAL, LTD.
On April 15, 1997, the Company completed the acquisition of Specular
International, Ltd. ("Specular"), a privately held software development company
based in Amherst, Massachusetts, that developed and marketed 3-D animation and
graphic design tools for professionals and pro-sumers. Under the terms of the
Purchase Agreement, the stockholders of Specular received approximately 547,000
shares of the Company's common stock, valued at approximately $4.1 million, and
$1 million in cash in exchange for all of the outstanding shares of Specular.
The Company also issued 450,000 non-qualified stock options to purchase shares
of the Company's common stock to Specular employees at an exercise price of $7
per share, the fair market value of the Company's common stock on April 16,
1997. In addition, the Company assumed the net liabilities of Specular, which
totaled $1.6 million at April 15, 1997. The Company charged approximately $6.4
million against earnings during the year ended December 31, 1997, comprised of
the write-off of acquired in-process technology of $5.6 million, transaction
costs of $300,000, and relocation and severance costs of $555,000. In addition,
the Company recognized a deferred income tax asset of $900,000 relating to
Federal net operating losses and tax credits of Specular. In accordance with
SFAS No. 109, the tax benefits were first applied to reduce to zero goodwill
totaling $280,000, with the remainder applied against current technology
acquired from Specular. After recognition of the deferred tax asset, acquired
current technology totaled $280,000. The operating results of Specular have been
included in the accompanying consolidated financial statements from the date of
acquisition.
4. INVESTMENTS
The Company considers its investment portfolio available-for-sale as
defined in SFAS No. 115. There were no material gross realized or unrealized
gains or losses nor any material differences between the estimated fair values
and costs of securities in the investment portfolio at December 31, 1997. The
cost of the
42
<PAGE> 44
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investment portfolio by type of security, contractual maturity, and its
classification in the balance sheet, is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Type of security:
Corporate debt securities.............................. $37,393 $24,491
U.S. Treasury securities............................... 5,465 15,129
Government agencies.................................... 1,980 --
Money market funds..................................... 688 2,091
Municipal obligations.................................. -- 23,145
------- -------
$45,526 $64,856
======= =======
Contractual maturity:
Due in one year or less................................ $43,413 $47,576
Due in one to three years.............................. 2,113 17,280
------- -------
$45,526 $64,856
======= =======
Classification in balance sheet:
Cash and cash equivalents.............................. $ 9,653 $21,605
Marketable securities.................................. 40,349 44,688
------- -------
50,002 66,293
Less cash.............................................. 4,476 1,437
------- -------
$45,526 $64,856
======= =======
</TABLE>
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Finished goods........................................... $ 1,465 $ 814
Materials and supplies................................... 202 698
------- -------
$ 1,667 $ 1,512
======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Computer equipment....................................... $ 7,687 $ 5,945
Office furniture and equipment........................... 3,633 1,757
Leasehold improvements................................... 1,028 659
------- -------
12,348 8,361
Less accumulated depreciation and amortization........... (4,771) (2,780)
------- -------
$ 7,577 $ 5,581
======= =======
</TABLE>
43
<PAGE> 45
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Accrued compensation..................................... $ 2,520 $ 2,648
Accrued acquisition costs................................ -- 790
Covenant-not-to-compete.................................. 300 600
Accrued advertising...................................... 688 817
Other accrued expenses................................... 463 1,572
------- -------
$ 3,971 $ 6,427
======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS
In 1994, the Company loaned $435,000 to an officer and director of the
Company to relocate his residence, against which he had pledged his stock in the
Company. The loans, consisting of $80,000 at the prime interest rate and
$355,000 at 7% per annum, were repaid during December 1995. Further, during 1995
and 1996, the Company leased space for development activities at this officer's
residence at a rental rate of $2,500 per month.
A director of the Company rendered services to the Company for which he
received $80,000, $44,000, and $42,000 in each of 1997, 1996, and 1995. Another
director of the Company rendered services to the Company for which he received
$54,000 in 1997. Businesses owned by two stockholders have provided technical
and administrative services to the Company. Amounts paid to these two firms
totaled $306,000, $229,000, and $214,000 for the years ended December 31, 1997,
1996, and 1995, respectively. The Company believes that the terms of the
agreements for these services are no less favorable than could be obtained from
third-party suppliers.
In connection with the acquisition of RTG on December 31, 1996 (Note 3),
the Company entered into a noncompetition agreement with one of RTG's founders
who is now an officer of the Company. The agreement, which carries a term of
four years, provided for payments to the officer in the amount of $300,000 in
1997 and $150,000 in each of 1998 and 1999. In addition, the Company loaned
$2,000,000 and $1,000,000 to two founders of RTG, who are now officers of the
Company. The loans accrue interest semi-annually at 5.67% and are payable on
December 31, 1999. The loans, which are classified as a component of
stockholders' equity, are collateralized by shares of common stock of the
Company owned by the officers.
9. NOTES PAYABLE TO BANK
The Company has a credit facility (the "Facility") with its principal
lending institution (the "Bank") which provides a Line of Credit (the "Line")
under which borrowings can be made based upon eligible accounts receivable (as
defined), up to aggregate amount of $3.0 million. The Line accrues interest at
the Bank's prevailing prime interest rate. The Facility also provides for letter
of credit and foreign exchange contracts subfacilities up to the $3.0 million
credit limit. The Facility expires in March 1999, if not renewed.
Borrowings under the Facility were repaid in December 1995. There were no
borrowings against the Line during the years ended December 31, 1996 and 1997.
In addition, there were no outstanding letters of credit or foreign exchange
contracts at December 31, 1997. Interest expense for the year ended December 31,
1995 totaled $96,000. The weighted average interest rate for the year ended
December 31, 1995 was 10.8% per annum.
44
<PAGE> 46
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Amended Facility contains certain covenants which provide, among other
things, a restriction on dividend payments and the requirement for the
maintenance of certain measures of liquidity and equity.
The Company also had a $900,000 line of credit with a bank (the "Bank
Line") bearing interest at 2% per annum above the bank's prime rate. In August
1995, The Company converted the outstanding balance of $440,000 under the Bank
Line to a demand loan (the "Demand Loan") with a bank. Interest accrued on the
loan at a rate equal to the bank's reference rate plus 1.5%. The Demand Loan was
paid in full in November 1995.
In September 1995, the Company entered into a line of credit agreement (the
"Line of Credit") which provided for borrowings of up to $600,000. The Line of
Credit was renewed in August 1996 and provided for borrowings of up to $500,000
and bore interest equal to the bank's reference rate. The line of credit
agreement expired in August 1997, and was unsecured.
In September 1995, the Company borrowed $500,000 from a commercial bank.
Borrowings bore interest at the bank's prime rate plus 0.75% per annum. These
borrowings were repaid in full during the year ended December 31, 1996.
10. STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
At December 31, 1994, the Company had authorized 841,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred"), of which 841,000 shares were
issued and outstanding. The Series A Preferred was entitled to noncumulative,
quarterly dividends, if earned and declared, commencing March 1, 1994 at a rate
of $0.0125 per share. The Series A Preferred was convertible into common stock
at the rate of two shares of common stock for each share of preferred stock, had
voting rights equal to its common stock conversion, voted with the common stock
and carried a stated value of $1.00 per share and a liquidation preference of
$1.00 per share, plus any dividends declared and unpaid. During 1995, 841,000
shares of Series A Preferred were converted into 1,682,000 shares of common
stock. No shares of Series A Preferred were authorized at December 31, 1997.
MANDATORILY REDEEMABLE COMMON STOCK
On July 21, 1995, the Company and certain shareholders entered into an
agreement to sell approximately 153,000 and 92,000 shares, respectively, of
common stock to Adobe Ventures, L.P. ("Adobe"), a subsidiary of Adobe Systems,
Inc., for $8.178 per share. Aggregate net proceeds to the Company were
$1,237,000. Upon the closing of the Company's initial public offering, the
mandatory redemption rights of this stock were automatically terminated.
SERIES A AND B WARRANTS
The Company had issued 54,000 Series A and 54,000 Series B Warrants to
purchase common stock. During 1995, 54,000 Series A and 54,000 Series B Warrants
were exercised for the purchase of approximately 105,000 net shares of common
stock at $1.00 per share.
SERIES C WARRANTS
The Company had authorized and issued 510,000 Series C Warrants to purchase
common stock as follows:
- In June 1993 and January 1994, the Company issued 100,000 and 20,000
warrants, respectively, to officers and directors of the Company for
significant contributions relating to development of the Company's
products and obtaining a line of credit.
45
<PAGE> 47
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- In February 1994, the Company issued 130,000 warrants to the Series B
Preferred holders who had converted their bridge loans as discussed in
Note 8.
- In January and September 1994, the Company issued 220,000 and 40,000
warrants, respectively, to a director of the Company as consideration for
his agreement to extend his bridge loan to the Company and for the
subordination of such loan in favor of notes payable to a bank (Note 8).
During 1995, 510,000 Series C Warrants were exercised for the purchase of
approximately 482,000 net shares of common stock at $1.00 per share.
OTHER WARRANTS
In September 1994, the Company issued 30,000 warrants to a bank to purchase
shares of Series B Preferred at a purchase price of $2.50 per share. During
1995, 30,000 warrants were exercised for the purchase of approximately 26,000
net shares of common stock at $2.50 per share.
In June 1995, the Company entered into a Software Development and
Purchasing Agreement (the "Agreement") with a software development company (the
"Contractor") pursuant to which the Contractor would develop a software product
defined in the Agreement. The Company agreed to pay a total of $400,000 in
advances against product purchases of which $147,000 is included in prepaid
expenses as of December 31, 1997. The Company will pay for product purchases at
a rate of 14% of net revenues (as defined) subject to adjustments for certain
events. Such payments may be offset against advances at a rate of 50%. In
addition, The Company granted a warrant with a fair market value of $348,000 to
the Contractor to purchase approximately 328,000 shares of common stock at $9.45
per share. The exercise of the warrants was subject to the Contractor meeting
certain milestones in the Agreement and provided for reductions in the royalty
payments to the Contractor as the warrants were exercised. Of the total value of
these warrants, $185,000 and $163,000 was recognized as research and development
expense during the years ended December 31, 1996 and 1995, respectively. This
warrant was exercised during the three months ended September 30, 1996, on a net
basis, for approximately 134,000 shares of common stock (see Note 3).
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1995 Employee Stock Purchase Plan (the "1995 Purchase Plan"),
which is qualified under Section 423 of the Internal Revenue Code of 1986, as
amended, permits eligible employees of the Company, via payroll deductions, to
purchase shares of the Company's common stock semi-annually at 85 percent of the
market price, on either the purchase date or the offering date, whichever is
lower. As of December 31, 1997, approximately 32,000 shares of common stock have
been issued under the 1995 Purchase Plan. At December 31, 1997, an aggregate of
approximately 118,000 shares of common stock were reserved for future issuance
under the 1995 Purchase Plan.
401(K) PLAN
In September 1995, the Company adopted a Defined Contribution Plan (the
"401(k) Plan"). Participation in the 401(k) Plan is available to substantially
all employees. Employees can contribute up to 15% of their salary, up to the
Federal maximum allowable limit, on a before tax basis to the 401(k) Plan.
Company contributions to the 401(k) Plan are discretionary. The Company made
contributions totaling $139,000 to the 401(k) Plan during the year ended
December 31, 1997. No contributions were made during the years ended December
31, 1996 and 1995.
In March 1995, the Company adopted a Defined Contribution Plan (the
"Fractal 401(k) Plan"). Participation in the Fractal 401(k) Plan was available
to substantially all Fractal employees. Employees could
46
<PAGE> 48
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contribute up to 15% of their salary, up to the Federal maximum allowable limit,
on a before tax basis to the 401(k) Plan. Effective August 1996, the Company
began making matching contributions in the form of common stock. During the year
ended December 31, 1996, the Company contributed approximately 7,000 shares of
common stock with an aggregate fair market value of $88,000. Upon consummation
of the merger, the Fractal 401(k) Plan was merged with and into the 401(k) Plan.
STOCK OPTION PLANS (THE "PLANS")
1992 Incentive Stock Option Plan
The Company's 1992 Incentive Stock Option Plan (the "1992 Plan") provides
for the grant to employees of incentive stock options and nonstatutory stock
options and for the sale or award of restricted common stock to employees and
consultants of the Company. As of December 31, 1997, options to purchase an
aggregate of 626,000 shares of common stock were outstanding under the 1992
Plan, with vesting provisions ranging up to five years. Options granted under
the 1992 Plan are exercisable for a period of ten years. At December 31, 1997,
no shares of common stock were reserved for additional grants of options or
awards of restricted stock under the 1992 Plan.
1994 Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock
Purchase Plan
The Company's 1994 Incentive Stock Option, Non-Qualified Stock Option and
Restricted Stock Purchase Plan (the "1994 Plan") provides for the grant to
employees of incentive stock options and nonstatutory stock options and for the
sale of restricted common stock to employees and consultants of the Company,
with vesting provisions ranging up to five years. Options granted under the 1994
Plan are exercisable for a period of ten years. As of December 31, 1997, options
to purchase an aggregate of 508,000 shares of common stock were outstanding
under the 1994 Plan. At December 31, 1997, no shares of common stock were
reserved for additional grants of options or awards of restricted stock under
the 1994 Plan.
1995 Stock Plan
The Company's 1995 Stock Plan (the "1995 Plan") provides for the grant to
employees (including officers and employee directors) of incentive stock options
and for the grant to employees (including officers and employee directors) and
consultants of nonstatutory stock options and stock purchase rights. As of
December 31, 1997, options to purchase an aggregate of 1,667,000 shares of
common stock have been granted under the 1995 Plan, with vesting provisions
ranging up to four years. Options granted under the 1995 Plan are exercisable
for a period of ten years. At December 31, 1997, an aggregate of 322,000 shares
of common stock were reserved for future issuance under the 1995 Plan.
1995 Director Option Plan
The Company's 1995 Director Option Plan (the "Director Plan") provides for
an automatic grant of options to purchase shares of common stock to each
non-employee director of the Company. Options granted under the 1995 Director
Plan vest over four years and are exercisable for a period of ten years. As of
December 31, 1997, 55,000 options have been granted under the 1995 Director
Plan. At December 31, 1997, an aggregate of 95,000 shares of common stock were
reserved for future issuance under the 1995 Director Plan.
1996 Dive Option Plan
In connection with the acquisition of Dive in August 1996 (Note 3), the
Company issued options to purchase an aggregate of 211,000 shares of common
stock to the previous stockholders and employees of Dive (the "Dive Plan"). The
non-statutory stock options vest over four years and are exercisable for a
period of ten
47
<PAGE> 49
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years. At December 31, 1997, no shares of common stock were reserved for future
issuance under the Dive Plan.
1996 Nonstatutory Stock Option Plan
The Company's 1996 Nonstatutory Stock Option Plan (the "1996 Nonstatutory
Plan") provides for the grant to employees (including officers and employee
directors) and consultants of nonstatutory stock options and stock purchase
rights. As of December 31, 1997, options to purchase an aggregate of 1,850,000
shares of common stock have been granted under the 1996 Nonstatutory Plan, with
vesting provisions ranging up to four years. Options granted under the 1996
Nonstatutory Plan are exercisable for a period of ten years. At December 31,
1997, an aggregate of 47,000 shares of common stock were reserved for future
issuance under the 1996 Nonstatutory Plan.
Fractal Stock Option Plan
In connection with the Company's merger with Fractal, which became
effective on May 30, 1997, the Company assumed all of the options outstanding
under the Ray Dream 1992 Stock Option Plan, the Fractal 1993 Stock Option Plan,
the Fractal 1995 Stock Option Plan, the Fractal Director Plan and the Fractal
Outside Plan (collectively, the "Fractal Plans"). All such options were
converted into options to purchase 0.749 shares of MetaCreations common stock at
an exercise price equal to the exercise price of the converted option divided by
0.749. Options granted under the Fractal Plans generally vest over a four year
period and are exercisable for a period of ten years. At December 31, 1997, no
shares of common stock were reserved for issuance under the Fractal Plans.
48
<PAGE> 50
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options Issued Under Plans
The following summarizes activity in the Plans for the years ended December
31, 1995, 1996, and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
OPTIONS WEIGHTED
AVAILABLE AVERAGE
FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
--------- --------- --------
<S> <C> <C> <C>
Options outstanding at December 31, 1994........ 2,209 1,562 $ 0.95
Shares reserved under new plans............... 921 -- --
Reduction in shares reserved under plans...... (358) -- --
Granted -- exercise price equal to fair
value...................................... (1,526) 1,526 5.94
Granted -- exercise price greater than fair
value...................................... (29) 29 4.27
Granted -- exercise price less than fair
value...................................... (76) 76 1.68
Exercised..................................... -- (55) 0.69
Canceled...................................... 158 (158) 2.09
------ ------ ------
Options outstanding at December 31, 1995........ 1,299 2,980 3.66
Shares reserved under new plans............... 1,511 -- --
Reduction in shares reserved under plans...... (187) -- --
Granted -- exercise price equal to fair
value...................................... (1,409) 1,409 16.35
Granted -- exercise price greater than fair
value...................................... (854) 854 13.06
Exercised..................................... -- (428) 1.79
Canceled...................................... 329 (329) 11.30
------ ------ ------
Options outstanding at December 31, 1996........ 689 4,486 8.83
Shares reserved under new plans............... 2,140 -- --
Reduction in shares reserved under plans...... (592) -- --
Granted -- exercise price equal to fair
value...................................... (3,258) 3,258 9.77
Granted -- exercise price greater than fair
value...................................... (35) 35 7.16
Exercised..................................... -- (756) 2.45
Canceled...................................... 1,520 (1,520) 14.57
------ ------ ------
Options outstanding at December 31, 1997........ 464 5,503 $ 8.66
====== ====== ======
</TABLE>
The following summarizes options exercisable at December 31, 1997, 1996,
and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Options exercisable....................................... 1,642 1,036 907
</TABLE>
The following summarizes the weighted average fair value of options granted
during the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1997 1996 1995
----- ------ -----
<S> <C> <C> <C>
Exercise price equal to fair value....................... $6.40 $10.19 $3.79
Exercise price greater than fair value................... 4.13 7.71 2.35
Exercise price less than fair value...................... -- -- 5.15
</TABLE>
49
<PAGE> 51
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes information about stock options outstanding at
December 31, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE AVERAGE EXERCISE EXERCISE
PRICE RANGE SHARES LIFE(A) PRICE SHARES PRICE
----------- ------ ------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.08 - $5.00.................. 1,162 5.47 $ 1.83 917 $ 1.70
$5.03 - $9.75.................. 1,136 6.68 7.22 176 6.40
$10.25 - $10.25................ 935 9.40 10.25 -- --
$10.68 - $11.75................ 1,092 9.31 11.23 151 11.30
$12.50 - $25.13................ 1,178 8.86 13.17 398 13.47
----- ---- ------ ----- ------
Total................ 5,503 7.87 $ 8.66 1,642 $ 5.94
===== ==== ====== ===== ======
</TABLE>
- ---------------
(a) Average contractual life remaining in years.
The Company accrued compensation expense of $607,000 for the difference
between the grant price and the deemed fair value of the common stock underlying
options, which are fully vested, issued in connection with the RTG acquisition
(Note 3) in December 1996. At December 31, 1997, accrued compensation related to
the options totaled $576,000.
During the year ended December 31, 1995, the Company granted to employees
stock options for the purchase of shares of common stock at exercise prices less
than the fair market value of the Company's common stock on the grant date.
During the years ended December 31, 1996 and 1995, the Company recognized
approximately $190,000 and $159,000 of compensation expense relating to these
options, respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company has
accounted for the Plans under the fair value method of the Statement. The fair
value of options issued under the Plans was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996, and 1995: risk-free interest rate of between 5.6%
and 6.0%, no dividend yield, volatility factor of the expected market price of
the Company's common stock of between 70% and 80%, and a weighted-average
expected life of the options of between 4.3 and 4.5 years. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma net loss, net
loss applicable to
50
<PAGE> 52
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stockholders, and net loss per common share would approximate the
following (in thousands, except per share amounts):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Year Ended December 31, 1997:
Net loss................................................ $(8,178) $(10,499)
Net loss applicable to common stockholders.............. (8,178) (10,499)
Net loss per common share (diluted)..................... (0.36) (0.46)
Year Ended December 31, 1996:
Net loss................................................ $(7,650) $ (9,938)
Net loss applicable to common stockholders.............. (7,650) (9,938)
Net loss per common share (diluted)..................... (0.37) (0.48)
Year Ended December 31, 1995:
Net income.............................................. $ 2,426 $ 2,071
Net income applicable to common stockholders............ 2,337 1,982
Net income per common share (diluted)................... 0.15 0.13
</TABLE>
The effects of applying SFAS No. 123 in this proforma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995. The Company anticipates grants of additional awards in future years.
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK
At December 31, 1994, the Company had authorized 3,600,000 shares of Series
B Preferred, of which 3,390,000 shares were issued and outstanding. The Series B
Preferred accrued cumulative, quarterly dividends, whether or not earned or
declared, commencing March 1, 1994 at a rate of $0.03125 per share. The Series B
Preferred was convertible into common stock of the Company at a conversion rate
of one share of common stock for each share of preferred, had voting rights
equal to its common stock conversion, voted with the common stock and carried a
stated value of $2.50 per share and a liquidation preference of $2.50 per share
plus any accrued and unpaid dividends, whether or not declared. At the option of
the majority of the holders of the Series B Preferred, the Series B Preferred
was redeemable by the Company based on certain dates and terms. The Company
recorded an increase in the value of the Series B Preferred of $89,000 for the
year ended December 31, 1995 for the amortization of costs related to the
issuance of the Series B Preferred. In 1995, the 3,390,000 shares of Series B
Preferred were converted into 3,390,000 shares of common stock. No shares of
Series B Preferred were authorized at December 31, 1995.
In September and November 1994, the Company issued approximately 792,000
shares of mandatorily redeemable convertible preferred stock (the "Preferred
Stock") for $2.67 per share. Proceeds to the Company totaled $2,072,000, net of
issuance costs. The Preferred Stock was redeemable at the option of the holders
of at least two thirds of the outstanding Preferred Stock in three annual
installments at a price equal to the sum of $2.67 per share plus $0.16 per annum
from the date of issuance subject to adjustment for antidilution. The excess of
the redemption price over the original issuance price of the Preferred Stock was
charged to retained earnings as an accretion to redemption value with a
corresponding increase in the value of the Preferred Stock. Upon the closing of
the Company's initial public offering, the Preferred Stock was converted into
common stock and the aggregate balance of the Preferred Stock of $2,204,000 at
that date was credited to additional paid-in capital.
In connection with the issuance of Preferred Stock, the Company issued
warrants to purchase approximately 40,000 shares of common stock at an exercise
price of $2.67 per share. The warrants were exercisable for a period of five
years after the date of issuance. The warrants expired upon the consummation
51
<PAGE> 53
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the Company's initial public offering. A total of approximately 40,000 shares
of common stock were issued upon conversion of the warrants.
13. INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31, 1997, 1996, and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ (587) $ 2,593 $1,867
State................................................ (729) 984 527
Foreign.............................................. -- -- 16
------- ------- ------
Total current................................ (1,316) 3,577 2,410
Deferred:
Federal.............................................. 937 (1,233) (513)
State................................................ 169 (128) (70)
------- ------- ------
Total deferred............................... 1,106 (1,361) (583)
------- ------- ------
$ (210) $ 2,216 $1,827
======= ======= ======
</TABLE>
The differences between the Company's effective income tax rate and the
United States statutory rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Federal tax (benefit) at the statutory rate................. (35.0)% (34.0)% 34.0%
State income taxes, net of Federal income tax benefit....... 4.3 8.8 7.3
Foreign income taxes........................................ -- -- 1.2
Nondeductible acquisition costs............................. 42.0 94.3 --
Nondeductible expenses...................................... 2.2 2.7 0.1
Tax exempt interest income.................................. (0.9) -- --
Change in valuation reserve................................. (1.3) (29.0) (0.9)
Net operating loss and tax credit carryforwards............. (13.8) (2.0) 1.3
----- ----- ----
(2.5)% 40.8% 43.0%
===== ===== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, together
52
<PAGE> 54
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with net operating loss and tax credit carryforwards. Significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------ -------
<S> <C> <C>
Deferred tax assets:
Allowance for returns and doubtful accounts............... $ 460 $ 1,864
Inventory reserves........................................ 287 244
Accrued expenses.......................................... 421 863
State income taxes........................................ 196 136
Tax credit carryforwards.................................. -- 80
Net operating loss carryforwards.......................... 2,181 904
------ -------
3,545 4,091
Valuation allowance....................................... (911) (1,264)
------ -------
Net deferred tax assets........................... 2,634 2,827
Deferred tax liabilities:
Depreciation and amortization............................. (33) (20)
------ -------
Net deferred tax liabilities...................... (33) (20)
------ -------
Net deferred taxes................................ $2,601 $ 2,807
====== =======
</TABLE>
The valuation allowance for deferred taxes decreased approximately $353,000
during the year ended December 31, 1997, primarily as a result of the
recognition of a state deferred tax asset. The net change in the valuation
allowance for deferred taxes during the year ended December 31, 1996 was a
reduction of approximately $1,348,000 as a result of the recognition of a
Federal deferred tax asset. The Company's management believes a valuation
allowance is required for the net operating losses of RTG due to potential
limitations on the Company's ability to utilize the loss carryforwards in light
of RTG's earnings history and pursuant to the ownership rule changes of the
Internal Revenue Code, Section 382.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $8,458,000 for federal income tax purposes, which begin expiring
in 2011. The Company's net operating loss carryforwards relate to the Company's
acquisitions of RTG and Specular and its merger with Ray Dream (Note 3).
Additionally, the Company has net operating loss carryforwards of approximately
$86,000 for state income tax purposes, which begin expiring in 2001. The net
operating loss carryforwards, may be used to offset future taxable income from
the related subsidiaries.
14. EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." This
statement requires dual presentation of newly defined basic and diluted earnings
per share ("EPS") on the face of the income statement for all entities with
complex capital structures. The following table provides a reconciliation of the
53
<PAGE> 55
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
numerators and denominators of the basic and diluted per-share computations for
the years ended December 31, 1997, 1996, and 1995 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Year Ended December 31, 1997:
Basic EPS........................................... $ 8,178 22,965 $(.36)
Effect of dilutive securities -- stock options...... -- --
------- -------
Diluted EPS......................................... $ 8,178 22,965 $(.36)
======= =======
Year Ended December 31, 1996:
Basic EPS........................................... $(7,650) 20,590 $(.37)
Effect of dilutive securities -- stock options and
warrants......................................... -- --
------- -------
Diluted EPS......................................... $(7,650) 20,590 $(.37)
======= =======
Year Ended December 31, 1995:
Basic EPS........................................... $ 2,337 12,987 $ .18
Effect of dilutive securities -- stock options and
warrants......................................... -- 2,280
------- -------
Diluted EPS......................................... $ 2,337 15,267 $ .15
======= =======
</TABLE>
The computation for diluted number of shares excludes unexercised stock
options and warrants which are antidilutive. The number of such shares were
1,675,000 and 2,217,000 for the years ended December 31, 1997 and 1996,
respectively.
15. COMMITMENTS
The Company leases office space in Carpinteria under a lease agreement
which expires in September 2008. The lease agreement provides the Company with
three options to extend the term of the lease through September 2018 in addition
to granting the Company the first right of purchase in the event the lessor
decides to sell the related property. The Company also leases office space for
its facility in Scotts Valley, California, its research facility in Princeton,
New Jersey, its international headquarters in Dublin, Ireland, and its various
international sales offices pursuant to noncancelable lease agreements with
terms through 2003. The lease agreement for the Scotts Valley facility, which
expires in 2003, provides for two options to extend the term of the lease for
three years each. Additionally, effective December 1, 1998, the lease agreement
for the Scotts Valley facility requires the Company to assume additional office
space through 2003.
The Company also leases certain equipment and three vehicles for officers
of the Company with lease terms of three years. Rent expense for office space,
equipment, and vehicles amounted to approximately $1,480,000, $972,000, and
$765,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Future minimum lease payments under non-cancelable operating leases for
each twelve-month period subsequent to December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998............................................... $ 1,510
1999............................................... 1,785
2000............................................... 1,678
2001............................................... 1,635
2002............................................... 1,563
Thereafter......................................... 5,624
-------
$13,795
=======
</TABLE>
54
<PAGE> 56
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCIES
The Company is engaged in certain legal actions arising in the ordinary
course of business. On advice of counsel, the Company believes it has adequate
legal defenses and believes that the ultimate outcome of these actions will not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
17. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION
The Company operates in one industry segment, prepackaged software. The
Company designs, develops, publishes, markets and supports visual computing
software tools and technologies for the creation, editing, and manipulation of
computer graphic images and digital art.
The following is a summary of local operations by geographic region as of
December 31, 1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net trade revenues:
United States......................................... $ 55,614 $ 60,197 $44,169
Europe................................................ 13,460 2,739 2,091
Interarea transfers:
United States......................................... -- 131 135
Europe................................................ 6,296 2,203 --
Eliminations.......................................... (6,296) (2,334) (135)
-------- -------- -------
Total net revenues................................. $ 69,074 $ 62,936 $46,260
======== ======== =======
Operating income (loss):
United States......................................... $ (7,696) $ (8,164) $ 3,437
Europe................................................ (3,849) (667) 182
-------- -------- -------
Total operating income (loss)...................... $(11,545) $ (8,831) $ 3,619
======== ======== =======
Identifiable assets:
United States......................................... $ 87,069 $104,009 $93,936
Europe................................................ 12,822 2,582 1,772
Eliminations.......................................... (2,601) (8,656) (691)
-------- -------- -------
Total identifiable assets.......................... $ 97,290 $ 97,935 $95,017
======== ======== =======
</TABLE>
Sales between geographic areas and commissions paid to affiliates marketing
exported products are accounted for at prices that provide a profit and are in
accordance with the rules and regulations of the respective governing
authorities. Total export revenue consisting of sales from the Company's U.S.
operations to non-affiliated customers by geographic region for the years ended
December 31, 1997, 1996, and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Pacific Rim............................................... $ 9,412 $14,248 $ 9,984
Europe.................................................... 2,965 10,153 4,805
Rest of World............................................. 619 622 729
------- ------- -------
$12,996 $25,023 $15,518
======= ======= =======
</TABLE>
55
<PAGE> 57
METACREATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial information for fiscal years 1997 and 1996,
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal year 1997:
Net revenues................................... $13,252 $ 18,749 $21,008 $ 16,065
Gross profit................................... 10,584 15,186 17,985 13,460
Net income (loss).............................. (432) (12,354) 3,605 1,003
Net income (loss) per share (diluted).......... (0.02) (0.54) 0.15 0.04
Fiscal year 1996:
Net revenues................................... $13,983 $ 14,854 $18,175 $ 15,924
Gross profit................................... 11,290 12,136 14,891 12,942
Net income (loss).............................. 275 1,760 2,785 (12,470)
Net income (loss) per share (diluted).......... 0.01 0.08 0.12 (0.60)
</TABLE>
The net loss incurred for the quarter ended December 31, 1996 resulted from
costs associated with the acquisition of RTG (Note 3), including the related
write-off of acquired in-process technology. The net loss incurred for the
quarter ended June 30, 1997 resulted from cost associated with the merger with
Fractal (Note 1) and the acquisition of Specular (Note 3), including the related
write-off of acquired in-process technology.
56
<PAGE> 58
METACREATIONS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO OTHER COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSE ADDITIONS(1) DEDUCTIONS PERIOD
----------- ----------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 1997............ $ 936 $ 630 $ 6 $ 356 $1,216
Year Ended December 31, 1996............ 745 597 -- 406 936
Year Ended December 31, 1995............ 484 495 -- 234 745
ALLOWANCE FOR RETURNS:
Year Ended December 31, 1997............ $3,618 $4,571 $113 $6,268 $2,034
Year Ended December 31, 1996............ 3,060 5,870 -- 5,312 3,618
Year Ended December 31, 1995............ 1,629 5,319 -- 3,888 3,060
ALLOWANCE FOR INVENTORY OBSOLESCENCE:
Year Ended December 31, 1997............ $ 631 $ 860 $ 96 $ 868 $ 719
Year Ended December 31, 1996............ 871 724 -- 964 631
Year Ended December 31, 1995............ 315 796 -- 240 871
VALUATION ALLOWANCE FOR DEFERRED TAX
ASSETS:
Year Ended December 31, 1997............ $1,264 $ -- $ -- $ 353 $ 911
Year Ended December 31, 1996............ 2,612 -- -- 1,348 1,264
Year Ended December 31, 1995............ 2,466 146 -- -- 2,612
</TABLE>
- ---------------
(1) Reserves obtained in connection with the acquisition of Specular
International, Ltd. on April 15, 1997.
57
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report since
the Company plans to file with the Securities and Exchange Commission the
definitive proxy statement for its 1998 Annual Meeting of Stockholders (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
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 section in the Company's Proxy Statement
entitled "Election of Directors."
The information concerning the Company's executive officers required by
this item is incorporated by reference herein to Part I, Item 4, entitled
"Executive Officers of the Registrant," on page 17 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item, except for such information as need
not be incorporated herein by reference under rules promulgated by the
Securities and Exchange Commission, is incorporated by reference to the section
in the Company's Proxy Statement entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the Company's directors required by this item is
incorporated by reference to the section in the Company's Proxy Statement
entitled "Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning the Company's directors required by this item is
incorporated by reference to the section in the Company's Proxy Statement
entitled "Employment Arrangements."
58
<PAGE> 60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements and Financial Statement Schedules. See Index
to Financial Statements at Item 8 on page 28 of this Report.
2. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
2.1 Form of Agreement and Plan of Merger by and between the
Registrant and MetaTools, Inc., a California corporation(1)
2.2 Stock Purchase Agreement between the Registrant and Real
Time Geometry Corp. dated December 23, 1996 (the exhibits
listed therein have been omitted and filed separately as
Exhibits 10.22, 10.23, 10.24, and 10.26)(5)
2.3 Agreement and Plan of Reorganization, dated as of February
11, 1997, among MetaTools, Inc., a Delaware corporation,
Fractal Design Corporation, a Delaware corporation, and Rook
Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of MetaTools(8)
2.4 Agreement and Plan of Merger among Fractal Design
Corporation, a California corporation, and Rook Acquisition
Corp., a Delaware corporation, dated as of May 29, 1997(9)
3.4 Restated Certificate of Incorporation of Registrant(3)
3.5 Certificate of Amendment of Restated Certificate of
Incorporation of Registrant(9)
3.6 Bylaws of Registrant, as amended(3)
4.1 Specimen of Common Stock Certificate of Registrant(9)
10.1 Indemnification Agreement for Executive Officers and
Directors(1)
10.2 Investors' Rights Agreement, as amended(1)
10.3 1992 Incentive Stock Plan(1)
10.4 1994 Incentive Stock Option, Non-Qualified Stock Option and
Restricted Stock Purchase Plan(1)
10.5 1995 Stock Plan, as amended(2)(6)
10.6 1995 Employee Stock Purchase Plan(2)
10.7 1995 Director Option Plan(2)
10.8 Employment Agreement between the Registrant and John J.
Wilczak dated April 15, 1992, as amended(1)
10.9 Employment Agreement between the Registrant and Kai Krause
dated January 26, 1994(1)
10.10 Employment Agreement between the Registrant and Terance A.
Kinninger dated September 27, 1995(1)
10.15 Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated September 25, 1994, as amended on
December 6, 1996 and March 12, 1998(1)(3)
10.16* Distribution Agreement between the Registrant and Ingram
Micro Inc. dated October 19, 1992, as amended on November
10, 1997(1)
10.19 Form of Employee Invention, Copyright, and Secrecy
Agreement(1)
10.20 Employment Agreement between the Registrant and Fred Brown
dated November 13, 1995(1)
10.21* International Software Distribution Agreement between the
Registrant and Marubeni Corporation dated as of August 1,
1997
10.22* Turnkey/Inventory Agreement between the Registrant and Modus
Media International, Inc. dated as of June 1, 1997
10.23 Employment Agreement between the Registrant and Robert Rice
dated December 31, 1996(5)
10.24 Noncompetition Agreement between the Registrant and
Alexander Migdal dated December 31, 1996(5)
10.25 Amended and Restated Investors' Rights Agreement(5)
10.26 Employment Agreement between the Registrant and Alexander
Migdal dated December 31, 1996(5)
10.27 1996 Dive Option Plan(6)
</TABLE>
59
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
10.28 1996 Nonstatutory Stock Option Plan
10.29* Software Licensing Agreement between the Registrant and
Prisma Express Distributionsgesellschaft GmbH dated as of
December 30, 1996(7)
10.30 Letter Agreement between the Registrant and Mark Zimmer and
Thomas Hedges, dated February 11, 1997
10.31* Software Licensing Agreement between the Registrant and
Prisma Express Distributionsgesellschaft GmbH dated as of
September 10, 1997
10.32 Severance Agreement between the Registrant and Terance A.
Kinninger dated October 31, 1997
10.33 Severance Agreement between the Registrant and Fred Brown
dated October 31, 1997
10.34 Lease Agreement between the Registrant and Bluffs Group III
dated December 8, 1997
10.35 Second Lease Agreement between the Registrant and Bluffs
Group III dated December 8, 1997
10.36 Lease Agreement between the Registrant and HKH Partners
dated December 8, 1997
10.37 Consulting and Release Agreement between the Registrant and
John J. Wilczak dated February 20, 1998
10.38 Employment Agreement between the Registrant and Gary L.
Lauer dated February 20, 1998
21.1 List of Registrant's Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants
23.2 Consent of Price Waterhouse L.L.P., Independent Accountants
24.1 Power of Attorney (included on the signature pages of this
Annual Report on Form 10-K)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Confidential treatment for this exhibit has been requested pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, filed December 11, 1995, as amended (File No. 33-98628LA).
(2) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on or about April 1, 1996 (File No. 333-3070).
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(4) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1996.
(5) Incorporated by reference to the Company's Current Report on Form 8-K, filed
on or about January 15, 1997.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on or about December 3, 1996 (File No. 333-17209).
(7) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-4, filed April 28, 1997 (File No. 333-25939).
(9) Incorporated by reference to the Company's Form 8-K, filed June 13, 1997.
(b) Reports on Form 8-K
No reports have been filed with the Securities and Exchange Commission
during the fourth quarter ended December 31, 1997.
(c) Exhibits
See Item 14(a)(2) above.
(d) Financial Statement Schedules
See Item 14(a)(1) above.
60
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Carpinteria, State of California, on the 30th day of March 1998.
METACREATIONS CORPORATION
By: /s/ TERANCE A. KINNINGER
------------------------------------
Terance A. Kinninger
Sr. Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Terance A. Kinninger, his attorney-in-fact, with
the power of substitution, for him and any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneysin-fact, or his substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ GARY L. LAUER Director, President and March 30, 1998
- -------------------------------------------------------- Chief Executive Officer
Gary L. Lauer (Principal Executive
Officer)
/s/ TERANCE A. KINNINGER Vice President and Chief March 30, 1998
- -------------------------------------------------------- Financial Officer (Principal
Terance A. Kinninger Financial and Accounting
Officer)
/s/ KAI KRAUSE Director and Chief Design March 30, 1998
- -------------------------------------------------------- Officer
Kai Krause
/s/ MARK ZIMMER Director and Chief March 30, 1998
- -------------------------------------------------------- Technology Officer
Mark Zimmer
/s/ THOMAS HEDGES Director and Chief Systems March 30, 1998
- -------------------------------------------------------- Architect
Thomas Hedges
/s/ SAMUEL H. JONES, JR. Director March 30, 1998
- --------------------------------------------------------
Samuel H. Jones, Jr.
/s/ BERT KOLDE Director March 30, 1998
- --------------------------------------------------------
Bert Kolde
/s/ WILLIAM H. LANE III Director March 30, 1998
- --------------------------------------------------------
William H. Lane III
/s/ HOWARD L. MORGAN Director March 30, 1998
- --------------------------------------------------------
Howard L. Morgan
/s/ ARTHUR COLLMEYER Director March 30, 1998
- --------------------------------------------------------
Arthur Collmeyer
</TABLE>
61
<PAGE> 1
EXHIBIT 10.15
[GRAPHIC OMITTED] SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWER: METACREATIONS CORPORATION (FORMERLY, METATOOLS, INC.)
ADDRESS: 6303 CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA 93013
DATED AS OF: MARCH 12, 1998
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the above name Borrower (the "Borrower") with reference to
the following facts:
The parties desire to amend the Loan and Security Agreement dated
September 28, 1994, as amended by that certain Amendment to Loan and Security
Agreement dated December 15, 1995, as amended by that certain Amendment to Loan
and Security Agreement dated December 6, 1996, as amended by that certain
Amendment to Loan and Security Agreement dated April 4, 1997, and as amended by
that certain Amendment to Loan and Security Agreement dated August 15, 1997 (as
so amended and as otherwise amended from time to time, the "Loan Agreement") as
herein set forth, effective as of date hereof. (Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
NOW, THEREFORE, the parties hereto agree as follows:
1. MODIFICATION TO CREDIT LIMIT. The section of the Schedule to the Loan
and Security Agreement entitled "Credit Limit" (Section 1.1) is hereby amended
to read as follows:
"CREDIT LIMIT
(Section 1.1): An amount not to exceed $3,000,000 at any one
time outstanding.
LETTER OF CREDIT SUBLIMIT Silicon in its reasonable discretion, will from time
to time during the term of this Agreement issue
letters of credit for the account of the Borrower
("Letters of Credit"), in an aggregate amount at any
one time outstanding not to exceed $3,000,000, upon
the request of the Borrower, provided that, on the
date the Letters of Credit are to be issued, Borrower
has available to it Loans in an amount equal to or
greater than the face amount of the Letters of Credit
to be
-1-
<PAGE> 2
Silicon Valley Bank Amendment to Loan Agreement
- -------------------------------------------------------------------------------
issued. Prior to the issuance of the Letters of
Credit, Borrower shall execute and deliver to Silicon
Applications for Letters of Credit and such other
documentation as Silicon shall specify (the "Letter
of Credit Documentation"). Fees for the Letters of
Credit shall be as provided in the Letter of Credit
Documentation. Letters of Credit may have a maturity
date up to twelve months beyond the Maturity Date for
the Loans in effect from time to time, provided that
if on the Maturity Date, or on any earlier effective
date of termination, there are any outstanding
letters of credit issued by Silicon or issued by
another institution based upon an application,
guarantee, indemnity or similar agreement on the part
of Silicon, then on such date, Borrower shall provide
to Silicon cash collateral in an amount equal to the
face amount of all such letters of credit plus all
interest, fees and costs due or to become due in
connection therewith, to secure all of the
Obligations relating to said letters of credit,
pursuant to Silicon's then standard form cash pledge
agreement.
The Loans available under this Agreement at any time
shall be reduced by the face amount of Letters of
Credit from time to time outstanding.
FOREIGN EXCHANGE
CONTRACT SUBLIMIT Up to $3,000,000 of the Credit Limit may be
utilized for spot and future foreign exchange
contracts (the "Exchange Contracts"). The Credit
Limit available at any time shall be reduced by the
following amounts (the "Foreign Exchange Reserve") on
each day (the "Determination Date"): (i) on all
outstanding Exchange Contracts on which delivery is
to be effected or settlement allowed more than two
business days from the Determination Date, 20% of the
gross amount of the Exchange Contracts; plus (ii) on
all outstanding Exchange Contracts on which delivery
is to be effected or settlement allowed within two
business days after the Determination Date, 100% of
the gross amount of the Exchange Contracts. In lieu
of the Foreign Exchange Reserve for 100% of the gross
amount of any Exchange Contract, the Borrower may
request that Silicon debit the Borrower's bank
account with Silicon for such amount, provided
Borrower has immediately available funds in such
amount in its bank account.
Borrower may provide, by written notification to
Silicon, instructions to terminate any of the
Exchange Contracts, except that Borrower may not
terminate an Exchange Contract within two business
days of the date delivery is to
-2-
<PAGE> 3
Silicon Valley Bank Amendment to Loan Agreement
- -------------------------------------------------------------------------------
be effected or settlement allowed. Further, Silicon
may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default
occurs or (b) that there is not sufficient
availability under the Credit Limit and Borrower does
not have available funds in its bank account to
satisfy the Foreign Exchange Reserve. If either
Silicon or Borrower terminates the Exchange
Contracts, and without limitation of the FX Indemnity
Provisions (as referred to below), Borrower agrees to
reimburse Silicon for any and all fees, costs and
expenses relating thereto or arising in connection
therewith.
Borrower shall not permit the total gross amount of
all Exchange Contracts on which delivery is to be
effected and settlement allowed in any two business
day period to be more than $1,000,000, nor shall
Borrower permit the total gross amount of all
Exchange Contracts to which Borrower is a party,
outstanding at any one time, to exceed $3,000,000.
The Borrower shall execute all standard form
applications and agreements of Silicon in connection
with the Exchange Contracts, and without limiting any
of the terms of such applications and agreements, the
Borrower will pay all standard fees and charges of
Silicon in connection with the Exchange Contracts.
Without limiting any of the other terms of this Loan
Agreement or any such standard form applications and
agreements of Silicon, Borrower agrees to indemnify
Silicon and hold it harmless, from and against any
and all claims, debts, liabilities, demands,
obligations, actions, costs and expenses (including,
without limitation, attorneys' fees of counsel of
Silicon's choice), of every nature and description,
which it may sustain or incur, based upon, arising
out of, or in any way relating to any of the Exchange
Contracts or any transactions relating thereto or
contemplated thereby (collectively referred to as the
"FX Indemnity Provisions").
The Exchange Contracts shall have maturity dates no
later than the Maturity Date."
2. MODIFICATIONS OF FINANCIAL COVENANTS. The section of the Schedule to
the Loan and Security Agreement entitled "Financial Covenants" (Section 4.1) is
amended to read as follows
"FINANCIAL COVENANTS
(SECTION 4.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the
end of each quarter:
-3-
<PAGE> 4
Silicon Valley Bank Amendment to Loan Agreement
- -------------------------------------------------------------------------------
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to
current liabilities of not less than 2.0 to 1.
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not
less than $70,000,000.
PROFITABILITY Borrower shall not incur a loss (after taxes) in
excess of $1,000,000 for any fiscal quarter; except
that Borrower may incur aggregate year to date losses
(after taxes) associated with merger and acquisition
transactions not to exceed $10,000,000 in any fiscal
year.
DEFINITIONS: 'Current assets,' and 'current liabilities' shall
have the meanings ascribed to them in accordance with
generally accepted accounting principles.
'Tangible net worth' means the excess of total assets
over total liabilities, determined in accordance with
generally accepted accounting principles, excluding
however all assets which would be classified as
intangible assets under generally accepted accounting
principles, including without limitation goodwill,
licenses, patents, trademarks, trade names,
copyrights, capitalized software and organizational
costs, licences and franchises.
'Quick Assets' means cash on hand or on deposit in
banks, readily marketable securities issued by the
United States, readily marketable commercial paper
rated "A-1" by Standard & Poor's Corporation (or a
similar rating by a similar rating organization),
certificates of deposit and banker's acceptances, and
accounts receivable (net of allowance for doubtful
accounts).
Subordinated Debt: 'Liabilities' for purposes of the
foregoing covenants do not include indebtedness which
is subordinated to the indebtedness to Silicon under
a subordination agreement in form specified by
Silicon or by language in the instrument evidencing
the indebtedness which is acceptable to Silicon."
3. MATURITY DATE. The Maturity Date set forth in section 5.1 of the
Schedule to the Loan Agreement is hereby amended to be "March 5, 1999."
4. ASSUMPTION. MetaCreations Corporation, a Delaware corporation, as
successor by merger to MetaTools, Inc., a California corporation, hereby assumes
and agrees to pay and perform when due all present and future indebtedness,
liabilities and obligations arising out of the Loan Agreement and any and all
documents, instruments and agreements relating thereto.
-4-
<PAGE> 5
Silicon Valley Bank Amendment to Loan Agreement
- -------------------------------------------------------------------------------
5. MODIFICATION TO PERMITTED REPURCHASE OF SHARES. Clause (i) of
Section 4.6 of the Schedule to the Loan Agreement, Negative Covenants -
Exceptions, is hereby amended to read as follows:
"(i) purchase, redeem or retire shares of Borrower's stock pursuant to
the Borrower's employee stock option plan, provided that the total
amount paid by Borrower for such stock does not exceed $1,000,000 in
any fiscal year"
6. MODIFICATION TO PERMITTED EQUIPMENT DEBT. Paragraph 4 of Section
4.1 of the Schedule to the Loan Agreement, Other Covenants, is hereby amended
to read as follows:
"4. INDEBTEDNESS. Without limiting any of the foregoing terms or
provisions of this Agreement, Borrower shall not in the future incur
indebtedness for borrowed money, except for (i) indebtedness to
Silicon, and (ii) indebtedness incurred in the future for the purchase
price of or lease of equipment in an aggregate amount not exceeding
$1,000,000 at any time outstanding."
7. MODIFICATION TO SECTION 3.10. Section 3.10 of the Loan Agreement is
hereby amended to read as follows:
"3.10 LITIGATION. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to
best of the Borrower's knowledge) threatened by or against or affecting
the Borrower in any court or before any governmental agency (or any
basis therefor known to the Borrower) which may result, either
separately or in the aggregate, in any material adverse change in the
financial condition or business of the Borrower, or in any material
impairment in the ability of the Borrower to carry on its business in
substantially the same manner as it is now being conducted. The
Borrower will promptly inform Silicon in writing of any claim,
proceeding, litigation or investigation in the future threatened or
instituted by or against the Borrower involving amounts in excess of
$1,000,000."
8. FEE. Borrower shall pay to Silicon a fee of $3,000 in connection
with this Amendment, which shall be in addition to interest and to all other
amounts payable under the Loan Agreement, and which is not refundable. Out of
pocket expenses attributable to this Amendment payable by the Borrower shall not
exceed $3,000.
9. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
10. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms
-5-
<PAGE> 6
Silicon Valley Bank Amendment to Loan Agreement
- -------------------------------------------------------------------------------
and provisions of the Loan Agreement, and all other documents and agreements
between Silicon and the Borrower shall continue in full force and effect and the
same are hereby ratified and confirmed.
BORROWER: SILICON:
METACREATIONS CORPORATION SILICON VALLEY BANK
By /s/ Terance A. Kinninger By /s/ Karl R. Brier
----------------------------- -----------------------------
President or Vice President Title Vice President
-6-
<PAGE> 1
EXHIBIT 10.21
METACREATIONS CORPORATION
INTERNATIONAL SOFTWARE DISTRIBUTION AGREEMENT
This INTERNATIONAL SOFTWARE DISTRIBUTION AGREEMENT ("Agreement") is entered
into as of the 1st day of August , 1997 ("Effective Date") by and between
METACREATIONS INTERNATIONAL, Ltd., a Dublin corporation ("MetaCreations"),
and Marubeni Corporation, a Japanese corporation ("Distributor") with
reference to the following:
MetaCreations is engaged in the business of developing, producing
and marketing software programs. Distributor has represented to MetaCreations
that it has the facilities, personnel and technical expertise to market and
license the MetaCreations products in the Territory defined herein.
Distributor wishes to obtain, and MetaCreations is willing to grant
Distributor, a license to market the MetaCreations products in the Territory.
The parties agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings indicated below:
1.1 The term "Software" shall mean, individually and/or collectively,
the computer programs encoded on software diskettes in the form generally
released by MetaCreations listed in and more fully described in Exhibit A
attached hereto.
1.2 The term "Documentation" shall mean the user guides, reference
manuals, and other materials developed by MetaCreations for use in connection
with the Software.
1.3 The term "Products" shall mean, individually and/or collectively,
the software packages comprised of the Software and Documentation listed on
Exhibit A.
1.4 The term "Territory" shall mean Japan.
1.5 The term "Person" shall mean and include any individual,
corporation, trust, estate, partnership, joint venture, company, association,
league, governmental bureau or agency, or any other entity regardless of the
type or nature thereof.
1.6 The term "Sub-Distributor" shall mean the subdistributors listed on
Exhibit A.
1.7 The term "End User" shall mean any Person who obtains copies of the
Products solely for its own internal use from a Subdistributor or dealer
network established in the territory.
1.8 The term "MetaCreations Standard End-User License Agreement" shall
mean the written license between MetaCreations and an End User pursuant to
which the End User obtains the limited right to use the Products attached
hereto as Exhibit C.
1.9 The term "Confidential Information" shall mean all data and
information of a confidential nature, including know-how and trade secrets,
relating to the business, the affairs, the Products, the development projects
or other products or services of MetaCreations. Confidential Information may
be
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communicated in writing or in any other recorded or tangible form. Data and
information shall be considered to be Confidential Information (1) if
MetaCreations has marked them as such, (2) if MetaCreations has advised
Distributor of their confidential nature in writing, or (3) if, due to their
character or nature, a reasonable person in a like position and under like
circumstances as Distributor would treat them as secret and confidential.
"Confidential Information" shall also mean all data and information of a
confidential nature and expressly marked "Confidential" provided by
Distributor to MetaCreations.
1.10 The term "Intellectual Property Rights" shall mean and include all
patents, copyrights, trademarks, trade secrets, trade names and other
proprietary rights or applications therefor which MetaCreations may at any
time own, adopt, use, or register with respect to the Products or its
business.
1.11 The term "Technical Assistance" shall mean and include advice,
training, information and other support regarding the selection,
installation, maintenance, and application of the Products.
1.12 The term "Distributor Discount" shall mean the percentage
discounted from the Suggested Japanese List Price for the Products set forth
in Exhibit A1 attached hereto.
1.13 The term "Purchase Price" shall mean the price in US dollars at
which Distributor will buy products from MetaCreations calculated by
subtracting the Distributor Discount from the Suggested Japanese List Price.
The Purchase Prices are listed on Exhbiti A1.
2. GRANT OF LIMITED DISTRIBUTION RIGHTS
2.1 Grant. Subject to the terms and conditions set forth in this
Agreement, MetaCreations hereby grants to Distributor and Distributor hereby
accepts from MetaCreations, a non-transferable right to distribute the
Products solely to Sub Distributors. This right shall be exclusive in the
Territory for Japanese and English language Products and non-exclusive
outside of the Territory for Japanese language Products. The Distributor
agrees that it will not distribute English language Products outside the
Territory. Furthermore, Distributor will not distribute directly to dealers
or End Users but will distribute solely to Sub Distributors which will
further distribute to dealers and End Users located in the Territory.
Distributor will distribute Products to Sub Distributors on a product
specific basis as defined in Exhibit A. MetaCreations hereby further grants
Distributor the right to use the Products, the Confidential Information and
MetaCreations' trademarks and tradenames, solely in connection with andsolely
to the extent reasonably necessary for, the marketing, distribution, and
support of the Products within the Territory.
2.2 Exclusivity. The exclusive rights granted herein are subject to
Distributor meeting the exclusivity targets defined in Exhibit B.
MetaCreations retains the right to market the Products, through OEM or bundle
arrangements, in the Territory to or through any third party or entity
conjunction with the Software Publishing OEM Agreement signed between the
parties on August 1st, 1997. In such instances the parties recognize the need
for distribution to supply marketing and/or support to third party companies
and/or end users of these OEM or bundled products. Distributor agrees to
provide such services in good faith and in exchange for these marketing
and/or support activities MetaCreations agrees to pay to Distributor an
amount equal to [**]% of MetaCreations net revenues derived from the
distribution of the Products in any OEM or bundle arrangements in Japan. In
addition, MetaCreations shall be responsible for all marketing and
development related expenses incurred by Distributor in the direct
fulfillment of such OEM contracts. The payment terms of such fees shall be
determined on a case by case basis reflecting the terms in which
MetaCreations receives such funds from the respective OEM or bundle partner.
[*] Confidential treatment requested
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2.3 Relationship. The relationship of MetaCreations and Distributor
established by this Agreement is of independent contractors, and nothing in
this Agreement shall be construed: (1) to give either party the power to
direct or control the daily activities of the other party, or (2) to
constitute the parties as principal and agent, employer and employee,
partners, joint ventures, co-owners or otherwise as participants in a joint
undertaking. MetaCreations and Distributor understand and agree that, except
as specifically provided for in this Agreement, MetaCreations does not grant
Distributor the power or authority to make or give any agreement, statement,
representation, warranty or other commitment on behalf of MetaCreations, or
to enter into any contract or otherwise incur any liability or obligation,
express or implied, on behalf of MetaCreations, or to transfer, release or
waive any right, title or interest of MetaCreations.
2.4 Reserved Rights. All rights not specifically granted to Distributor
hereunder are reserved by MetaCreations. Distributor shall have no right
whatsoever to utilize, receive, review, or otherwise have access to the
source code for Products distributed by MetaCreations in object code form
only, unless MetaCreations expressly grants such right in writing, if
MetaCreations, in its sole discretion, deems such access necessary for the
proper marketing, sale , support or service of the Products.
2.5 Changes in Products and Support. MetaCreations reserves the right at
any time with sixty (60) days written notice to (i) determine what
constitutes each Product, including, but not limited to its features,
characteristics, documentation, and related materials; (ii) discontinue its
distribution of any or all Products or discontinue distribution of any
Product to the retail channel in the event that MetaCreations determines that
further manufacturing and distribution of the product would be financially
harmful; (iii) change or terminate any of the features of the English
language Product, or (iv) change or terminate the level or type or support or
service which MetaCreations makes available for the English language Product.
In the event that MetaCreations discontinues the distribution of any of the
Products in conjunction with this subsection, Distributor shall use
commercially reasonable efforts to sell out its current inventory of said
Product; provided, however that any units of the Product remaining unsold may
be returned or destroyed for full credit of the original purchase price.
3. OBLIGATIONS OF METACREATIONS
3.1 Material. MetaCreations shall provide Distributor with the following
materials:
3.1.1 Three (3) copies of each Product for internal use, sales
demonstrations and training purposes; if any new Products are in short
supply, MetaCreations shall provide such versions as soon as economically
practicable for MetaCreations. The use of such Products shall be in
accordance with MetaCreations' Standard End User License Agreement.
3.1.2 A reasonable number of marked samples and evaluation
versions, if any, of the Products for distribution to journalists for product
reviews and to major prospective customers deemed strategic to Distributor's
success. Distributor shall promptly provide MetaCreations with the names and
addresses of the recipients of such samples and evaluation versions.
3.1.3 A reasonable number of copies of all English language
marketing and promotional materials that MetaCreations, at its sole
discretion, may prepare and distribute with respect to the Products.
3.2 Technical Assistance. MetaCreations shall provide to a designated
technical liaison person of Distributor a reasonable amount of Technical
Assistance (via telephone, fax or other electronic means), including support
materials and technical information at those levels reasonably necessary for
the Distributor to meet the needs of End Users in the Territory. Such support
shall be free of charge, except Distributor shall be responsible for paying
all applicable telephone toll charges on calls made to
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MetaCreations. MetaCreations shall promptly notify Distributor upon detection
of any defects or programming errors in the Products. MetaCreations will
consult with the Distributor and then, in its sole discretion, determine if
it is necessary to revise the Product code to remedy the programming error.
3.3 New Releases. All new Japanese and English language Products
released by MetaCreations during the term of this Agreement shall be
automatically added to the Products covered by this Agreement with the
exception of new versions of Infini-D, TextureScape, LogoMotion, and Collage
which are currently covered under a separate distribution agreement. Upon
release of a new version of an existing Product, for a period of one-hundred
twenty (120) days from release of the new version, Distributor shall have the
right to return to MetaCreations the units of the previous version in
inventory and receive credit for the amount paid for such units. At
MetaCreations sole discretion, a certificate of disposal may be sent in lieu
of the actual units of the product.
4. MARKETING AND SUPPORT OBLIGATIONS OF DISTRIBUTOR
4.1 Efforts. Distributor agrees that during the term of this Agreement
it shall use its best efforts to promote vigorously and aggressively the
marketing and distribution of the Products within the Territory, including
but not limited to advertising the Products in appropriate media,
implementing MetaCreations' marketing campaigns, and participating in trade
shows, conferences, expositions, and promotional seminars, all with due
consideration for the local marketing environment in the Territory.
Distributor shall be responsible for all expenses incurred in promoting,
marketing and distributing the Products within the Territory. However
MetaCreations agrees to pay to Distributor certain Marketing Development
Funds ("MDF") as outlined on Exhibit A1. Distributor shall conduct its
marketing activities in a lawful manner with the highest standards of fair
trade, fair competition, and business ethics, and shall cause its employees
to do the same. Distributor shall use its best efforts to utilize all
promotional materials supplied by MetaCreations. MetaCreations may, but is
under no obligation to, engage in additional public relations activities
which will be coordinated with efforts of the Distributor.
4.2 Policies. Distributor shall use commercially reasonable efforts to
adhere to the policies set by MetaCreations from time to time for the
marketing of the Products; provided, however, that Distributor shall be free
in establishing the resale prices charged for the Products and, subject to
Section 4.8 of this Agreement, the terms and conditions of distribution.
Attached to this Agreement as Exhibit A is the list of MetaCreations's
Suggested Japanese List Prices for the Products within the Territory.
4.3 Stock. Distributor shall use commercially reasonable efforts to
cause Sub-Distributors to at all times maintain a stock of Products which is
reasonably sufficient to meet the anticipated demand therefor throughout the
Territory. Distributor shall not distribute any component of the Products
separately from the other Product components, apart from the routine exchange
or replacement of defective Product components. Distributor may balance its
stock up to [**] percent ([**]%) of the prior quarters purchases. All
shipping costs, duties and taxes with regards to such replacement shall be
paid by Distributor.
4.4 Offices. Distributor shall use commercially reasonable efforts to
cause each Sub-Distributor to maintain offices within the Territory adequate
to market and support the Products in the Territory. Distributor shall
further use commercially reasonable efforts to cause Sub-Distributors to
retain and have at its disposal at all times in each country within the
Territory an adequate staff of trained and qualified personnel (including at
least one (1) full-time product manager dedicated to the Products, two (2)
software sales persons, and two (2) technical support persons) to perform its
obligations under this Agreement.
[*] Confidential treatment requested
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4.5 Sub-Distributors. Distributor shall use commercially reasonable
efforts to establish an efficient network of Sub-Distributors in order to
optimize the distribution of the Products in the Territory; provided that
Distributor shall not directly employ or utilize any sub-distributor, or
should any sub distributor directly employ a dealer without first having
entered into, with such sub-distributor or dealer, a written agreement which
is as protective of MetaCreations's Intellectual Property Rights and
Confidential Information as this Agreement.
4.6 Marketing Materials. Distributor shall use commercially reasonable
cause Sub-Distributors to prepare Product descriptions, promotional and
marketing and such other materials, including translations of the English, or
other language, promotional materials supplied by MetaCreations in accordance
with Section 3.1.3 of this Agreement, as are reasonable and appropriate for
the successful marketing of the Products in the Territory; provided, however,
that Distributor shall provide MetaCreations with copies of all such
materials prior to their release and shall not distribute them without
MetaCreations's prior written approval and provided that the expenses for
such materials shall be paid for by Distributor or by the MDF funds provided
for by this Agreement unless otherwise agreed upon by the parties.
4.7 Marks. Distributor agrees to maintain and respect the trademark and
trade name of the Products in identifying, advertising and marketing the
Products. Distributor agrees to use the appropriate notation for registered
or other trademarks.
4.8 Packages. Distributor shall distribute the Products only as part of
a sealed software package including a MetaCreations Standard End-User License
Agreement.
4.9 Sales and Support. Distributor agrees to use its best efforts to
cause Sub-Distributors to set up at its offices at least one telephone
support line dedicated to the support of the Products, and Distributor will
publish the phone number of such support line on Product packaging and in
advertising, as post sales and support services for the Products distributed
by Distributor. Technical support should be commercially reasonable for the
market and made available during the standard work week.
4.10 Guarantees. Distributor agrees to purchase a minimum amount of
product from MetaCreations during each quarter throughout the term of this
Agreement. The minimum purchase amount for each quarter shall be [**]% of the
exclusivity target for that respective quarter as outlined in Exhibit B. In
the event that Distributor's orders during any calendar quarter do not equal
the minimum purchase amount for that quarter the difference between the
minimum purchase amount and the actual purchase amount shall become payable
within 30 days from the last day of such quarter.
5. ASSISTANCE TO METACREATIONS
5.1 Rules and Regulations. Distributor shall use commercially reasonable
efforts to advise MetaCreations of any legislation, rule, regulation or other
law (including but not limited to any customs, tax, trade, intellectual
property, or tariff law) which, to the Distributors best knowledge, is in
effect or which may come into effect in the Territory or parts thereof after
the date of this Agreement and which affects the importation of the Products
into, or the use and the protection of the Products and the Intellectual
Property Rights therein within, the Territory, or which has a material affect
on any provision of this Agreement.
[*] Confidential treatment requested
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5.2 Errors. Distributor shall promptly prepare and forward to
MetaCreations a list of all errors in the Products of which it becomes aware
or of which it receives notification. In the event that Distributor receives
notification of any major problem with the Products, it shall immediately
notify MetaCreations by telephone and fax. The list of errors provided to
MetaCreations shall indicate a priority of the problems to be resolved and,
as best as possible, the circumstances under which such errors occur. Where
such errors have been noted to MetaCreations, MetaCreations shall offer such
assistance as is necessary for the Distributor to provide customer service of
the Products. MetaCreations's assistance shall include bug fixing,
modification of the manuals, if required, and personnel training for the
Distributor. The ultimate determination of a bug and modification of the
manuals and a resolution shall be determined solely by MetaCreations in
consultation with the Distributor.
5.3 Customer Information. Distributor agrees to make commercially
reasonable efforts to provide MetaCreations with such additional information
pertaining to potential End Users, products and activities of competitors and
market reactions as MetaCreations may reasonably request from time to time.
6. INSPECTION, RECORDS AND REPORTING
6.1 Reports. Distributor shall provide MetaCreations with monthly
operations reports of Distributor's activities in marketing the Products in
the Territory. Each such report shall be due within thirty (30) days after
the end of the month to which it relates and shall include, among other
things:
6.1.1 A summary of all of the Distributor's marketing activities
with respect to the Products.
6.1.2 Upon MetaCreations's request, a summary of competitor's
product introductions and activities in the Territory.
6.1.3 A sell-through report which details the number of Products
shipped from Distributor's warehouse to sub-distributors and or resellers, on
a monthly basis.
6.1.4 Upon the reasonable request of MetaCreations, any
additional information concerning the distribution of Products within the
Territory.
6.2 Registered Users. MetaCreations agrees to place a user registration
card for the respective Sub-Distributor into each unit of the Product
manufactured by MetaCreations. Distributor shall use commercially reasonable
efforts to cause Sub-Distributors to collect such cards from users and
register them in a reasonable electronic format. Distributor further agrees
that these register user databases are the exclusive property of
MetaCreations and that copies of such data shall be provided to MetaCreations
upon thrity (30) days of written request.
6.3 Inventory. By the tenth (10th) day of each month during the term of
this Agreement, Distributor shall provide MetaCreations with and inventory
on-hand report for the previous month, broken down by product SKU.
6.4 Forecast. By the tenth (10th) day of each new month during the term
of this Agreement, Distributor shall provide MetaCreations with an inventory
forecast in the format approved by MetaCreations from time to time. This will
include a 90-day rolling forecast to be updated monthly.
6.5 Accounting Records. At all times during the term of this Agreement,
Distributor shall maintain at its principal place of business full, complete
and accurate books of account and records with
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regard to its activities under this Agreement. Upon reasonable notice,
Distributor shall grant MetaCreations access during normal business hours to
any premises of Distributor in order that MetaCreations, at its expense, may
inspect Distributor's books and premises and verify compliance by Distributor
with its obligations under this Agreement; provided, however, that
Distributor shall reimburse MetaCreations for the full amount of the
inspection costs if any inspection under this Section 6.3 reveals any
underpayment of license fees exceeding USD ten thousand ($10,000) due
hereunder or any material breach by Distributor of this Agreement.
7. SUGGESTED JAPANESE LIST PRICES, PAYMENT, SHIPMENT
7.1 Suggested Japanese List Price. MetaCreations's current Suggested
Japanese List Prices for the Products are set forth in Exhibit A to this
Agreement. Any changes in the Suggested Japanese List Price shall be subject
to prior consulation with Distributor. The parties agree that a change in the
Suggested Japanese List Price for any products will cause a change in the
purchase price of said products. MetaCreations agrees to credit Distributors
account the difference between the Distributors purchase price and the new
purchase price for any units held in inventory by Distributor at the time of
such price reduction. In the event of a price increase, MetaCreations agrees
that said price increase will be for only those orders which are placed after
the date of such price increase.
7.2 Price Lists. Price lists are set forth in Exhibit A. The price list
shall be updated on the first day of each new calendar month throughout the
term of this Agreement using the TTS yen/dollar conversion rate in effect as
of the close of business on the last day of the preceeding month as defined
by the Wall Street Journal; provided, however, that the price list will also
be updated in the event of a fluctuation of more than five (5) yen per dollar
during any given month. All prices are determined using the price in effect
at the time of placement of the order with MetaCreations.
7.3 Payment & Currency. Payment for Products hereunder will be
denominated and made net and in US Dollars, through wire transfers to
MetaCreations's account, within 30 days from the date of shipment, provided
credit terms are established with Distributor
7.4 Interest. Interest shall accrue on any delinquent amounts owed by
Distributor for the Products at the rate of one and one-half percent (1 1/2%)
per month, or 2% over the base rate of a significant Japanese national bank ,
whichever is less.
7.5 Taxes. Purchase Price to Distributor do not include taxes of any
nature, including but not limited to any value- added, sales, use, excise,
property or other tax, tariff, duty or assessment levied or imposed by any
governmental authority (including without limitation any country, state, city
or county) arising out of or related to the transactions contemplated under
this Agreement which MetaCreations is at any time obligated to pay or collect
(other than any tax based on MetaCreations' net income), provided that the
Distributor shall be entitled to deduct the amount of withholding tax from
amounts payable to MetaCreations pursuant to laws and regulations of the
Territory, as stated in section 7.6 of this Agreement. Distributor will pay
such taxes when invoiced by MetaCreations or will supply appropriate tax
exemption certificates in a form satisfactory to MetaCreations.
7.6 Withholding. If Distributor is required to withhold any taxes on
amounts payable to MetaCreations in accordance with this Agreement, pursuant
to the laws and regulations of the Territory, Distributor shall be entitled
to deduct and withhold such taxes, unless MetaCreations shall furnish to
Distributor duly executed forms sufficient under the laws of the Territory to
exempt sums payable to MetaCreations hereunder from such taxes. The amount
payable to MetaCreations shall not be reduced by any withholding taxes unless
Distributor furnishes MetaCreations with a certificate of deduction and
withholding and a true copy of the governmental receipt establishing the
payment thereof. Distributor
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shall obtain and furnish to MetaCreations on a timely basis official tax
receipts or such other evidence of payment as MetaCreations may be required
to submit in order to establish its right to a foreign tax credit against its
United States federal income tax liability.
If the Distributor determines that withholding is required under local tax
laws then it will provide MetaCreations with advance notice, by facsimile or
otherwise to apply for exemption from the same. The Distributor also agrees
to work with MetaCreations to minimize withholding taxes, if applicable.
MetaCreations agrees to pay for any outside accounting and legal advice
MetaCreations deems necessary to accomplish such minimization
7.7 Shipment. MetaCreations agrees to make all shipments of the Products
hereunder at the earliest available date after each individual purchase
contract is entered into between MetaCreations and Distributor pursuant to
Section 8 hereof. Shipments will be on the basis of FOB (as defined in
INCOTERMS 1990) and be made to Distributor' identified facilities or freight
carrier, unless otherwise agreed in advance by Distributor and MetaCreations
in writing; provided, however, that all title and all risk of loss or damage
for any Product, will pass to Distributor or other party or parties as may
have been designated to MetaCreations by Distributor in writing prior to the
shipment of the Products upon delivery by MetaCreations to the freight
carrier, such other designated party, or Distributor which ever first occurs.
Unless specified in Distributor's order, MetaCreations will select the mode
of shipment and the carrier. Distributor will be responsible for and shall
pay all shipping, freight and insurance charges, which charges MetaCreations
may require Distributor to pay in advance. Except as otherwise may be
provided herein, Distributor may not return any Product shipped by
MetaCreations hereunder.
7.8 Export License. MetaCreations shall make all arrangements for any
export licenses or permits which may be required in a timely manner to enable
MetaCreation to make shipments in accordance with the shipping schedule set
forth in each individual purchase contract.
7.9 Partial Delivery. MetaCreations may, upon consulation wth
Distributor, make partial shipments of Distributor's orders, to be separately
invoiced and paid for when due.
7.10 Short Shipments. In the event that Distributor receives any short
shipment of Products from MetaCreations, Distributor must notify
MetaCreations of its claim associated with such short shipment within fifteen
(15) working days of Distributor's receipt of shipment, and shall confirm
such claim in writing.
7.11 Delivery Schedule and Delays. MetaCreations shall use commercially
reasonable efforts to meet Distributor's requested delivery schedules for the
Products, but MetaCreations reserves the right to refuse, cancel or delay
shipment to Distributor when Distributor's credit is impaired, when
Distributor is delinquent in payments or fails to meet other credit or
financial requirements established by MetaCreations, or when Distributor has
failed to perform any other of its obligations under this Agreement. Should
orders for the Products exceed MetaCreations' available inventory,
MetaCreations will allocate its available inventory and make deliveries on a
basis MetaCreations deems appropriate, in its sole discretion, and without
liability to Distributor on account of the method of allocation chosen or its
implementation. In any event, MetaCreations shall not be liable for any
damages, direct, consequential, incidental, special or otherwise, to
Distributor, Dealer or to any other person for failure to deliver or for any
delay or error in delivery of the Products for any reason whatsoever.
MetaCreations agrees that should it be aware of any reason why it would not
be able to ship the ordered Product, or otherwise fulfill its obligations
under this Agreement, it will notify the Distributor as soon as possible.
8. PURCHASE CONTRACTS
8.1 Purchase. The detailed terms and conditions of each individual
purchase by the Distributor
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in conjunction with this Agreement shall be confirmed by both parties by
execution of a separate "Confirmation of Purchase Contract" for each order
placed by Distributor. A copy of the standard Confirmation of Purchase
Contract is attached hereto as Exhibit D. Each Confirmation of Purchase
Contract shall be deemed to incorporate all of the terms and conditions
hereof and the terms and conditions of this Agreement shall have precedence
over those contained in the Confirmation of Purchase Contract.
8.2 Countersignature. MetaCreations shall use commercially reasonable
efforts to return to Distributor a countersigned copy of the Confirmation of
Purchase Contract within 5 business days of its receipt of such document. In
the event that Distributor has verified receipt of the Confirmation of
Purchase Contract by MetaCreations and not received the countersigned copy of
the Confirmation of Purchase Contract or correspondence from MetaCreations
disputing its contents from within 10 days of receipt thereof by
MetaCreations, it shall be deemed accepted by MetaCreations.
9. COVENANTS OF DISTRIBUTOR
9.1 Distributor shall not:
(a) Copy. Reproduce, reverse engineer, disassemble, decompile,
customize or otherwise modify the Products without prior written consent of
MetaCreations
(b) Translate. Translate or otherwise adapt the Products in any way
whatsoever, except as may be provided for in a separate agreement, if any,
between the parties.
(c) Reproduction. Enter into agreements with other Persons which
grant such Persons the right to reproduce copies of the Products; except as
may be provided for in a Reproduction Agreement, if any, between the parties.
9.2 Distributor agrees that if Sub-Distributors license or otherwise
market any software products which compete with MetaCreations' Products
Distributor will use commercially reasonable efforts to ensure that adequate
resources and staff are set aside exclusively to sell, market and support
MetaCreations Products.
9.4 The parties agree that Products that are currently covered by the
existing Software Publishing Agreement dated August 1, 1997 between
Distributor and MetaCreations may be converted to Products of this Agreement
as soon as practical as mutually agreed by the parties. MetaCreations agrees
that existing stocks of all manufactured and unsold products will be utilized
before such conversion.
10. INTELLECTUAL PROPERTY RIGHTS
10.1 MetaCreations Rights. Distributor acknowledges MetaCreations'
exclusive right, title and interest in and to any and all Intellectual
Property Rights, and Distributor will not at any time do or cause to be done
any act or thing impairing or tending to impair any part of said right, title
and interest; provided, however, that a legal challenge of MetaCreations'
patents, if any, shall not be deemed an act impairing any part of said right,
title and interest. Distributor acknowledges and agrees that all of these
Intellectual Property Rights shall remain the exclusive property of
MetaCreations.
10.2 Notices. Distributor shall not remove MetaCreations' copyright
notices and/or trademarks from any copy of the Products or market or license
the Products under any other name, sign or logo. Distributor also agrees that
during the term of this Agreement or at any time thereafter it will not
register or use, in association with any products other than the Products,
any of MetaCreations' trademarks or trade names or any word, symbol or design
confusingly similar thereto, as part of its corporate name. At
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MetaCreations' request, Distributor will assist MetaCreations in obtaining
registration of the trade names and trademarks in MetaCreations' name or, if
necessary, Distributor's rights to make use of MetaCreations's trade names
and trademarks as part of Distributor' marketing activities. All associated
legal fees and expenses connected with advice, search, registration and other
maintenance thereof will be at the expense of MetaCreations.
10.3 Objections. Distributor shall promptly notify MetaCreations (i) of
any claims or objections that its use of the Intellectual Property Rights in
connection with the marketing, licensing, support or service of the Products
may or will infringe the copyrights, patents, trademarks or other proprietary
rights of another Person; and (ii) of any and all infringements, imitations,
illegal use, or misuse, by any Person, of the Intellectual Property Rights
which come to its attention; provided, however, that Distributor will not
take any legal action relating to the protection of any Intellectual Property
rights without the prior written approval of MetaCreations; provided further
that Distributor shall render, at the sole expense of MetaCreations, all
reasonable assistance in connection with the protection of the Intellectual
Property Rights, whether in the courts, administrative agencies, or
otherwise.
10.4 Infringement. MetaCreations shall defend, or at its option settle,
any legal action or other proceeding brought against Distributor in so far as
such legal action or other proceeding is based upon a claim that the Products
or any part thereof delivered to Distributor hereunder infringes any
copyright, trade secret, patent, or trademark right in the Territory, and
shall indemnify and hold Distributor harmless from and against any loss,
damage, cost, expense, claim or liability to the extent arising therefrom;
provided that Distributor notifies MetaCreations of such legal action or
other proceeding, provides MetaCreations with such assistance and cooperation
in the defense thereof as MetaCreations may reasonably request; and provides
MetaCreations with sole control over any such legal action or other
proceeding.
10.5 Remedy. In the event that the use of Products or any part thereof
in the Territory is enjoined by a court of competent jurisdiction,
MetaCreations shall, at its option, (i) modify the Products so that they are
non-infringing, or (ii) replace the Products with functionally equivalent
non-infringing substitute products, or (iii) authorize the return for full
credit of those units of such infringing Product that may be deemed
unsellable due to such infringement.
11. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
11.1 Restrictions. During the course of performance of this Agreement,
both parties will disclose certain Confidential Information to each other in
connection with this Agreement. Each party shall refrain from using or
exploiting any and all Confidential Information for any purposes or
activities other than those specifically authorized by MetaCreations or
Distributor in this Agreement. Both parties agree that such Confidential
Information shall be kept secret during the term of this Agreement and for 2
years after the expiration hereof.
11.2 Materials. All files, lists, records, documents, drawings,
specifications, equipment and computer programs which incorporate or refer to
all or a portion of the Confidential Information of MetaCreations shall
remain the sole property of MetaCreations. Such materials shall be promptly
returned (i) upon MetaCreations' reasonable request, or (ii) in accordance
with Section 18.2 of this Agreement upon termination of this Agreement,
whichever is earlier.
11.3 Public Domain. The provisions of this Section 11 shall not apply,
or cease to apply, to Confidential Information supplied if it (I) was already
known to the receiving party at the time of disclosure; (ii) has come into
the public domain without breach of confidence by the receiving party or an
other Person; (iii) was received by the receiving party from a third party
without restrictions on its use; (iv) is required to be disclosed pursuant to
any statutory or regulatory provision or court order; or (v) are no longer
considered confidential by MetaCreations; provided that the Distributor shall
have the burden
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of establishing any of the foregoing exceptions by conclusive evidence.
12. METACREATIONS LIMITATION OF WARRANTY
12.1 Limited Warranty. MetaCreations warrants the magnetic or optical
media, the encoding of the data and the physical documentation to be free of
defects in material and workmanship for a period of ninety (90) days from the
date of delivery of the Products to the End User. Should MetaCreations
receive a written notice of defect from Distributor within such period,
MetaCreations will replace the medium and/or the physical documentation at no
cost to Distributor.
For defective returns requiring replacement shipments, MetaCreations may, at
its sole discretion, require Distributor to return the defective products or
supply MetaCreations with a certified letter of disposal of such units.
12.2 No Further Warranty. METACREATIONS DOES NOT WARRANT THE OUTPUT OF
THE PRODUCTS TO MEET THE STANDARDS OR REQUIREMENTS WHICH MAY BE APPLICABLE TO
ANY END USER'S BUSINESS. EXCEPT AS HEREIN PROVIDED, METACREATIONS DOES NOT
MAKE OR GIVE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE USEFULNESS OR
THE EFFICIENCY OF THE PRODUCTS, IT BEING UNDERSTOOD THAT THE DEGREE OF
SUCCESS WITH WHICH EQUIPMENT, SOFTWARE PROGRAMS AND MATERIALS CAN BE APPLIED
TO DATA PROCESSING IS DEPENDENT UPON MANY FACTORS, MANY OF WHICH ARE NOT
UNDER METACRETIONS' CONTROL.
12.3 Warranty Disclaimer. TO THE FULL EXTENT PERMITTED BY LAW, APART
FROM THE FOREGOING WARRANTIES, ALL CONDITIONS, WARRANTIES, REPRESENTATIONS,
LIABILITIES AND OBLIGATIONS WHETHER EXPRESS OR IMPLIED ARISING FROM
NEGLIGENCE OR IMPOSED BY STATUTE OR OTHERWISE, IN RESPECT OF THE SUPPLY AND
OPERATION OF THE PRODUCTS AND ANY RELATED SERVICES, INCLUDING ANY WARRANTIES
AS MERCHANTABILITY, FITNESS FOR PURPOSE, OR NON-INFRINGEMENT ARE HEREBY
DISCLAIMED.
IN NO EVENT WILL METACREATIONS BE LIABLE FOR INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES UNDER THIS SECTION EVEN IF METACREATIONS HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. METACREATIONS' LIABILITY FOR
DAMAGES SHALL NOT EXCEED THE PURCHASE PRICE RECEIVED BY METACREATIONS FOR THE
USE OF THE PRODUCTS THAT ARE THE BASIS OF METACREATIONS' LIABILITY.
FURTHERMORE, ANY CAUSE OF ACTION ON ANY MATTER FOR WHICH METACREATIONS IS
LIABLE HEREUNDER MUST BE BROUGHT BY DISTRIBUTOR WITHIN TWELVE (12) MONTHS
AFTER THE DATE HEREOF, DISTRIBUTOR HEREBY WAIVING ANY OTHER STATUTE OF
LIMITATIONS WHICH MAY BE APPLICABLE.
13. INDEMNIFICATION
Each party hereby agrees to indemnify and hold the other party harmless
against any and all losses, claims, damages, liabilities, costs and expenses,
including legal expenses and reasonable counsel fees, arising out of any
breach by such party of any representation or warranty in this Agreement.
14. COMPLIANCE WITH APPLICABLE LAWS
14.1 Export Laws. In the performance of their respective obligations
under this Agreement, MetaCreations and Distributor shall, at all times,
strictly comply with all laws, regulations and orders of the United States
and the Territory. Without limiting the generality of this Section 14,
Distributor specifically acknowledges that the Products and the Confidential
Information supplied to Distributor in
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accordance with the terms of this Agreement are subject to the United States
Export Controls. At MetaCreations' request, Distributor shall agree, and
cause each End User to agree by means of packaged License Agreements, that it
will not export or re-export the Products, the Confidential Information or
any direct product thereof, directly or indirectly to, or for use in, any
country outside the Territory without the prior written authorization of
MetaCreations and the United States government.
14.2 Authorizations. Distributor shall, at its own expense, make,
obtain, and maintain in force at all times during the term of this Agreement,
all filings, registrations, reports, licenses, permits and authorizations
(collectively "Authorizations") required under applicable law, regulation or
order in the Territory in order for Distributor to perform its obligations
under this Agreement. MetaCreations shall provide Distributor with such
assistance as Distributor may reasonably request in making or obtaining any
such Authorizations. In the event that the issuance of any such Authorization
is conditioned upon an amendment or modification to this Agreement which is
unacceptable to MetaCreations, MetaCreations shall have the right to
terminate this Agreement without further obligation whatsoever to Distributor
except those obligations which may be provided for elsewhere in this
Agreement.
14.3 Filing Requirements. If it is necessary to file either this
Agreement or MetaCreations' Standard End-User License Agreement with a
governmental authority the Distributor will provide all necessary assistance
to effect such registration. MetaCreations will reimburse Distributor for all
out-of-pocket costs in support of such registration.
15. ASSIGNMENT
This Agreement and the rights and obligations hereunder shall not be
assigned in whole or in part by either party without the prior written
consent of the other and any purported assignment without such written
consent shall be void and of no effect.
16. FORCE MAJEURE
Neither party shall be liable to the other party for any delay or
omission in the performance of any obligation under this Agreement other than
an obligation to pay money where the delay or omission is due to any cause or
condition beyond the reasonable control of the party obliged to perform,
including, but not limited to, strikes or other labor difficulties, acts of
God, acts of government, including the inability to obtain a validated export
license under the United States Export Control laws or regulations, war,
riots, embargoes, communication failures or inability to obtain supplies.
17. CHOICE OF LAW AND FORUM
17.1 Governing Law. This Agreement, and any disputes arising out of or
in connection with this Agreement, shall be governed by and construed in
accordance with the laws of the State of California, excluding its rules
governing conflicts of laws. The English language text of this Agreement
shall control over any translation hereof.
17.2 Arbitration. Except as it may relate to any breach or dispute
regarding Confidential Information; MetaCreations and Distributor hereby
agree that all claims, disputes or controversies arising between the parties
out of or in relation to this Agreement or breach thereof, which cannot be
satisfactorily settled by the parties, shall be finally settled by
arbitration upon the written request of either party. The arbitration
proceedings shall be conducted in the state of California, in accordance with
the existing Rules of Arbitration of the American Arbitration Association,
with three arbitrators. The award shall be final and binding upon both
parties. Judgment upon the award may be entered in any court having
jurisdiction thereof. Disputes regarding Confidential Information
MetaCreations and Distributor hereby agree shall be addressed as outlined in
section 17.1 and 17.3.
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17.3 Courts. The Federal and state courts within the State of California
shall have exclusive jurisdiction to adjudicate any disputes arising out of
or in connection with this Agreement. Distributor hereby expressly consents
to the personal jurisdiction of the Federal and state courts within the State
of California.
17.4 Fees. The prevailing party in any legal proceeding brought by one
party against the other party and arising out of or in connection with this
Agreement shall be entitled to recover its legal expenses, including court
costs and reasonable attorneys' fees.
18. TERM AND DURATION
18.1 Term. This Agreement shall enter into full force and effect as of
the Effective Date and shall remain in force until the 31st of December of
1998. Both parties agree to negotiate in good faith an extension, before the
expiration of this Agreement. Notwithstanding other provisions of this
subparagraph 18.1, or any other provisions of this Agreement, and in addition
to any other rights to terminate set forth in this Agreement, this Agreement
may be terminated prior to the expiration of its stated term, with cause, as
set forth below.
18.2 Defaults. In the event that either party is in default or commits a
breach of this Agreement, and if such default or breach shall not be cured or
good faith attempts to cure shall not have commenced within thirty (30) days
after written notice of such default or breach is given by the non-defaulting
party and received by the defaulting party, then at any time after the
expiration of such thirty (30) days, the non-defaulting party may give
written notice to the defaulting party of its election to terminate this
Agreement. Thereupon, the Agreement shall terminate on the date specified in
such notice, which shall not be less than fifteen (15) days following the
receipt of such written notice. Such right of termination shall not be
exclusive of any other remedies or means of redress to which the
non-defaulting party may be lawfully entitled.
18.3 If either party: (a) becomes insolvent, (b) files a voluntary
petition for bankruptcy, or, (c) ceases to do business, the other party, at
its option, may terminate this Agreement upon thirty (30) days notice.
19. RIGHTS AND OBLIGATIONS UPON TERMINATION
19.1 Accrued Obligations. In the event of expiration or termination of
this Agreement, regardless of the cause thereof, the parties shall abide by
and uphold any rights or obligations accrued or existing on the date of
termination. The parties agree to continue cooperating with each other and to
carry out an orderly termination of their relations. Distributor, at its
discretion, shall retain the right to continue marketing its stock of the
Products currently in inventory of the date of termination for three (3)
months after termination of this Agreement.
19.2 Orders. Upon expiration or termination, the due date of all
outstanding invoices for the Products delivered by MetaCreations to
Distributor will automatically be accelerated so that they become due and
payable (at amounts equal to the fees on the Distributor's Purchase Order) on
the effective date of expiration or termination, even if longer terms had
been provided previously. All orders or portions thereof remaining un-shipped
as of the effective date of expiration or termination shall automatically be
canceled, unless Distributor is obligated to deliver such order to a Sub
Distributor under an existing firm written purchase order.
19.3 Return. Within thirty (30) days after the effective date of
expiration or termination of this Agreement, Distributor shall return to
MetaCreations, or any other Person designated by MetaCreations, all Products
and related materials in Distributor's possession and any and all
Confidential Information
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which is in written, recorded or other tangible form but only to the extent
that Distributors purchases of products exceed the minmum guarantees
described in Section 4.10 and represent purchases made up to 90 days prior to
the termination of the Agreement. Distributor hereby expressly waives and
agrees not to assert any right of detention whatsoever with respect to such
Products, materials, and Confidential Information. Distributor shall furnish
MetaCreations with a written declaration of an authorized corporate officer
certifying that all copies of the Products and related materials have been
returned or destroyed. MetaCreations shall pay Distributor for all returned
Products in new and resaleable condition an amount equal to the fees paid by
Distributor to MetaCreations.
19.4 Waiver. The waiver by any party of any breach or default of any
provision of this Agreement by the other party shall not constitute a waiver
by such party of any succeeding breach of the same or other provision.
19.5 Debts Survive. In the event of termination or expiration of this
Agreement, neither party shall be relived of their respective financial
obligations under this Agreement. Should there be any outstanding financial
obligations to distributor, these obligations shall be met by electronic
transfer of the outstanding amounts to a bank account specified by
Distributor.
19.6 Further Obligations. Upon expiration or termination of this
Agreement, either party shall have no further obligation to the other party
other than those set forth in this Section 19. Both parties obligations under
Section 11(for 2 years), 10, 13, 17 and 20 of this Agreement shall survive
the termination of this Agreement.
20. GENERAL PROVISIONS
20.1 Waiver and Delay. The waiver by either party of a breach or default
in any of the provisions of this Agreement by the other party shall not be
construed as a waiver of any succeeding breach of the same or other
provisions; nor shall any delay or omission on the part of either party to
exercise or avail itself of any right, power or privilege that it has or may
have hereunder operate as a waiver of any breach or default by the other
party.
20.2 Notices. All notices required or permitted by this Agreement shall
be in writing and in English and may be delivered personally, or may be sent
by cable, telex, telecopy, or air mail, return receipt requested, sent to the
following addresses, unless the parties are subsequently notified of any
change of address in accordance with this Section 20.2:
If to MetaCreations:
MetaCreations International, Ltd.
Wilson House, Fenian Steet
Dublin 2, Ireland
Attn: John Hartnett
Fax: 353-1-662-9334
with copy to:
MetaCreations, Corporation
6303 Carpinteria Ave.
Carpinteria, CA 93013
Attn: Terry Kinninger
Fax: 805-566-6284
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If to Distributor:
Marubeni Corporation
4-2 Ohtemachi 1-Chome
Chiyoda-ku, Tokyo, Japan
Attn: Ryouichi Watanabe
Fax: 03-3282-3307
Any notice shall be deemed to have been received as follows: (i) personal
delivery, upon receipt; (ii) telecopy, twenty-four (24) hours after
transmission; (iii) registered airmail, ten (10) days after delivery to the
postal authorities by the party serving notice.
20.3 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes
all prior agreements between the parties, whether written or oral, relating
to the same subject matter. No modification, amendments or supplements to
this Agreement shall be effective for any purpose unless in writing, signed
by each party. Authorizations, approvals or consents hereunder of a party
shall also be in writing.
20.4 Acceptance. This Agreement shall become effective only after it has
been signed by Distributor and has been accepted by MetaCreations at its
principal place of business, and its Effective Date shall be the date on
which it is signed by MetaCreations.
20.5 Severability. In the event that any of the terms of this Agreement
are held by a court of competent jurisdiction to be contrary to any laws, the
invalidity or illegality of such provision shall not invalidate the whole of
this Agreement or any other provisions and this Agreement shall be construed
as if it did not contain the invalid provision.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first shown above.
<TABLE>
<CAPTION>
METACREATIONS INTERNATIONAL, LTD. MARUBENI CORPORATION
<S> <C> <C> <C>
Signature /s/JOHN HARTNETT Signature /s/TETSUO UMEZAKI
-------------------------------- ---------------------------------
Print John Hartnett Print Tetsuo Umezaki
-------------------------------- ---------------------------------
Title VP and General Manager Title General Manager, Electronics Dept.
-------------------------------- ---------------------------------
Date August 1, 1997 Date August 1, 1997
-------------------------------- ---------------------------------
Signature /s/TERANCE A. KINNINGER
--------------------------------
Print Terance A. Kinninger
--------------------------------
Title Director
--------------------------------
Date August 1, 1997
--------------------------------
</TABLE>
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EXHIBIT A
PRODUCTS, SUBDISTRIBUTORS AND PRICES
Products. During the term of this Agreement the products listed below shall
be the Products covered by this Agreement.
- Painter Mac/Win English and Japanese
- Poser Mac/Win English and Japanese
- Detailer Mac/Win English and Japanese
- Expression Mac/Win English and Japanese
- Art School Dabbler Mac/Win English and Japanese
- Ray Dream Designer Mac/Win English and Japanese
- Ray Dream Studio Mac/Win English and Japanese
- Bryce 3 Mac/Win English and Japanese
Sub-Distributors. During the term of this Agreement the companies listed
below are the subdistributors covered by this Agreement. Sub-Distributors may
be added or deleted from this list by Distributor upon prior consultation
with MetaCreations
Fortune Hill, Inc.
Mediavision, Inc.
The products exclusively subdistributed by Fortune Hill are:
- Ray Dream Designer Mac/Win
- Ray Dream Studio Mac/Win
- Expression Mac/Win
The products exclusively subdistributed by Mediavision are:
- Painter Mac/Win
- Poser Mac/Win
- Detailer Mac/Win
- Art School Dabbler Mac/Win
- Bryce 3 Mac/Win
Distributor shall distribute such products only to the Sub-Distributor set
for the above, provided, however, that, Distributor may change product
allocation to Sub-Distributors upon prior consultation with MetaCreations.
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EXHIBIT A1 September
MDF
With the exception of the products listed below, MDF is equal to [**]% of
purchase price for Retail, Educational, Sidegrade and OEM units. MDF funds are
not applied to Upgrade and NFR units.
<TABLE>
<CAPTION>
RETAIL-[**]% off of JSRP SUGGESTED
JAPANESE DISTRIBUTOR
LIST PRICE DISCOUNT PURCHASE PRICE MDF
---------- ----------- -------------- ---
<S> <C> <C> <C> <C>
Painter 4J Mac [**] [**] [**] [**]%
Painter 4J Win [**] [**] [**] [**]%
Dabbler 2J Hyb [**] [**] [**] [**]%
Poser 2J Mac [**] [**] [**] [**]%
Poser 2J Win [**] [**] [**] [**]%
Detailer J Mac [**] [**] [**] [**]%
Detailer J Win [**] [**] [**] [**]%
Expressions J Mac [**] [**] [**] [**]%
Expressions J Win [**] [**] [**] [**]%
Designer 4.1 M/W [**] [**] [**] [**]%
Studio 4.1 M/W [**] [**] [**] [**]%
Jag II [**] [**] [**] [**]%
Add Depth [**] [**] [**] [**]%
Part and Props [**] [**] [**] [**]%
</TABLE>
<TABLE>
<CAPTION>
ACADEMIC-[**]% off of Academic SUGGESTED
JSRP JAPANESE DISTRIBUTOR
LIST PRICE DISCOUNT PURCHASE PRICE MDF
---------- ----------- -------------- ---
<S> <C> <C> <C> <C>
Painter 4J Mac [**] [**] [**] [**]%
Painter 4J Mac 5 User [**] [**] [**] [**]%
Painter 4J Win [**] [**] [**] [**]%
Painter 4J Win 5 User [**] [**] [**] [**]%
Poser 2J Mac [**] [**] [**] [**]%
Poser 2J Win [**] [**] [**] [**]%
Detailer J Mac [**] [**] [**] [**]%
Detailer J Win [**] [**] [**] [**]%
Expressions J Mac [**] [**] [**] [**]%
Expressions J Win [**] [**] [**] [**]%
Studio 4.1J M/W [**] [**] [**] [**]%
Dabbler 2.0 CP [**] [**] [**] [**]%
</TABLE>
[*] Confidential treatment requested
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<PAGE> 18
<TABLE>
<CAPTION>
UPGRADES-[**]% off of JSRP SUGGESTED
JAPANESE DISTRIBUTOR
LIST PRICE DISCOUNT PURCHASE PRICE MDF
---------- ----------- -------------- ---
<S> <C> <C> <C> <C>
Painter 4J Mac [**] [**] [**] [**]%
Painter 4J Win [**] [**] [**] [**]%
Dabbler 2J Hyb [**] [**] [**] [**]%
Poser 2J Mac [**] [**] [**] [**]%
Poser 2J Win [**] [**] [**] [**]%
Studio 4.1J M/W [**] [**] [**] [**]%
Painter 5J Mac [**] [**] [**] [**]%
</TABLE>
<TABLE>
<CAPTION>
SIDEGRADES-[**]% off of JSRP. SUGGESTED
White Box. JAPANESE DISTRIBUTOR
LIST PRICE DISCOUNT PURCHASE PRICE MDF
---------- ----------- -------------- ---
<S> <C> <C> <C> <C>
Painter 4J Mac [**] [**] [**] [**]%
Painter 4J Win [**] [**] [**] [**]%
Poser 2J Mac [**] [**] [**] [**]%
Poser 2J Win [**] [**] [**] [**]%
Detailer J Mac [**] [**] [**] [**]%
Detailer J Win [**] [**] [**] [**]%
Expressions J Mac [**] [**] [**] [**]%
Expressions J Win [**] [**] [**] [**]%
Designer 4.1 M/W [**] [**] [**] [**]%
Studio 4.1 M/W [**] [**] [**] [**]%
</TABLE>
<TABLE>
<CAPTION>
NFR-[**]% off of JSRP SUGGESTED
JAPANESE DISTRIBUTOR
LIST PRICE DISCOUNT PURCHASE PRICE MDF
---------- ----------- -------------- ---
<S> <C> <C> <C> <C>
Painter 4J Mac [**] [**] [**] [**]%
Painter 4J Win [**] [**] [**] [**]%
Dabbler 2J Hyb [**] [**] [**] [**]%
Poser 2J Mac [**] [**] [**] [**]%
Poser 2J Win [**] [**] [**] [**]%
Detailer J Mac [**] [**] [**] [**]%
Detailer J Win [**] [**] [**] [**]%
Expressions J Mac [**] [**] [**] [**]%
Expressions J Win [**] [**] [**] [**]%
Designer 4.1 M/W [**] [**] [**] [**]%
Studio 4.1 M/W [**] [**] [**] [**]%
</TABLE>
[*] Confidential treatment requested
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EXHIBIT B
EXCLUSIVITY TARGETS
Exclusivity Targets. The Exclusivity Targets for the first two 3-month
periods are set forth below.
July-Sept 1997: USD [**]
Oct-Dec 1997: USD [**]
The above Exclusivity Targets shall be the total target sums for purchases
under this agreement and royalties reported to MetaCreations under all other
Agreements currently effective between MetaCreations and Distributor.
In the event that Distributor fails to meet the Exclusivity Target for 2
consecutive quarters, MetaCreations shall have the right to terminate the
exclusivity of this agreement.
Such Exclusivity Targets are based on certain assumptions such as product
shipments, product launches and relative stableness in the economy and on
non-negative effect of MetaCreations' OEM arrangement in the Territory.
The July-Sept Exclusivity Target is based on the following new products being
available for sales during the quarter:
Painter 5.0J Mac/Win
Painter 5.0J Mac/Win Upgrades
Kai's Photo Soap 1.0J Mac/Win
The October-December Exclusivity Target is based on the following new
products being available for sales during the quarter:
Bryce 3.0 J Mac/Win
Bryce 3.0J Mac/Win Upgrades
RayDream Studio 5.0J Mac/Win
RayDream Studio 5.0J Mac/Win Upgrades
Ray Dream Designer 5.0J Mac/Win
Ray Dream Designer 5.0J Mac/Win Upgrades
In the event any of these products ( or funcional equivalents thereof) are
not released by MetaCreations, the parties shall renegotiate the above
Exclusivity Target in good faith, In the event the parties cannot agree on
such renegotiated Exclusivity Target, the Exclusivity Target shall be reduced
by the number of products, devided by the total number of products covered by
the Agreements.
For all quarters during the term of any of the Agreements subsequent to the
quarters listed above, Exclusivity Targets will be set by mutual agreement
before the beginning of each such quarter.
[*] Confidential treatment requested
19
<PAGE> 1
Exhibit 10.22
METACREATIONS/MODUS MEDIA
TURNKEY/INVENTORY AGREEMENT
PARTIES:
This working agreement is made and entered into between MetaCreations
Corporation. ("MetaCreations"), 6303 Carpinteria Ave., Carpinteria, CA 93013 and
Modus Media International, Inc. ("Modus Media"), 105 Rosemont Rd., Westwood, MA
02090.
TERM:
The term of this agreement is from June 1, 1997 through May 31, 1998 and will be
reviewed annually.
TERMINATION:
This agreement can be canceled by either party with 90 calendar days written
notice and agreed to disposition of inventories.
DISPUTES:
Both parties agree to negotiate disputes in good faith and to submit to
arbitration should they fail to reach agreement.
PURPOSE:
To award MetaCreations turnkey deliverable requirements to Modus Media in
accordance with the provisions and prices in this agreement.
COMPONENT AND RAW MATERIAL PROCUREMENT:
Under written authorization from MetaCreations, Modus Media will produce or
procure components and raw material and retain ownership of these components on
MetaCreations
MetaCreations agrees to take ownership or dispose of all authorized materials
following the terms and conditions set forth in this document.
PURCHASE ORDER RELEASE:
Modus Media will require a hard copy Purchase Order prior to final assembly or
final shipment of products. These purchase orders will be consistent with the
price quotation which Modus Media will develop from the most current
specifications and requested quantities provided by MetaCreations. Purchase
Orders will be delivered in hard copy, fax, or electronic mail. At a
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minimum, purchase orders will consist of purchase order number, PO line number
parts, prices, and delivery dates.
This authorization may take the form of, but is not limited to, purchase order
releases, data downloads, electronic mail messages, MetaCreations generated
forecasts (interim), demand forecasts, or MetaCreations sign-off on production
planning or MRP sheets.
PURCHASE ORDERS:
Modus Media will require a blanket Purchase Order prior to final assembly or
final shipment of products. Purchase Orders will be delivered in hard copy, fax,
or electronic mail. At a minimum, purchase orders will consist of purchase order
number, PO line number parts, prices, and delivery dates.
Once purchase orders and delivery schedules have been mutually accepted,
subsequent changes in quantities, specifications, or delivery schedules will be
subject to price adjustments and production schedule changes under the terms of
this Agreement. Modus Media will make every effort to maintain price consistency
and reduce purchase price variance for MetaCreations in these situations. Modus
Media may invoice all completed kits authorized by MetaCreations purchase order
releases.
FORECASTS:
MetaCreations requirements typically call for shipment of product in a timeframe
that is shorter than the required components can be effectively procured or
produced. MetaCreations-generated forecasts will be used for component and raw
material procurement or production authorization. MetaCreations agrees to
provide Modus Media a 90 day rolling forecast on the last Tuesday of the
preceding month. This process will include Modus Media determining an economic
order quantity, not to exceed the MRP sign off quantity. Materials (components
and raw materials) will be purchased by Modus Media on MetaCreations behalf
using a net MRP process.
The MRP sheets will display the total forecasted demand and will be forwarded to
Summary/Demand Manager for sign off approval.
Two weeks safety stock levels for all finished goods will be maintained and work
orders will be placed for finished goods replenishment one the safety stock
level has been reached. MRP sheets stating this demand and a finished goods
usage report will be forwarded to MetaCreations for sign off approval.
Safety stock levels for components are (based on procurement lead times):
Component Description Safety Stock Level
--------------------------------- --------------------
1C Black, one page printed matter On-Demand (as needed)
Disks and disk label imprinting On-Demand (as needed)
Complex Print (packaging) 11 Days
CD-ROM Media 15 Days
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DELIVERY:
All fulfillment orders will be shipped within 24 hours of receipt of electronic
file. Fulfillment orders will be shipped via the MetaCreations designated
carrier unless otherwise specified. Bulk orders will be shipped as specified on
the bulk special shipment request.
CANCELLATIONS:
Should MetaCreations decide to cancel purchase orders, forecasts, or deliveries,
discontinue work, or reduce total quantities, MetaCreations agrees to give Modus
Media written notice. This notice shall be in the form of an updated forecast,
purchase change order or electronic mail. In addition, MetaCreations agrees to
pay the material and labor at the stated selling price for work completed and in
process as of the date and time Modus Media receives notification of
cancellation. This payment may include manufacturing costs which are incurred by
Modus Media.
Modus Media agrees to work in good faith to limit the potential chargeable costs
by rescheduling piece part procurement, deliveries, manufacturing and assembly
as long as is reasonably possible and cost effective. Interrupted but completed
work and non-standard material may be invoiced in normal billing cycles once
MetaCreations has been informed. MetaCreations agrees to provide a revised
Purchase Order for the work completed at the time of cancellation.
EXCESS MATERIAL:
Excess material will be defined as the quantity of any given material
(components and customer specific raw material) which has been on-hand at Modus
Media for longer than 90 calendar days but not over 180 days. Modus Media's and
MetaCreations joint objective will be to consume or dispose of this material
prior to 180 days from its receipt in order to avoid storage charges. The
details of storage charges are described below. Modus Media may invoice for all
material on hand over 180 days.
SURPLUS MATERIAL:
Surplus material will be defined as the quantity of any given material
(components and customer specific raw material) which has been on-hand at Modus
Media for longer than 180 calendar days. Beginning on the 181st day this
inventory will be assessed a carrying and storage change equal to [**]% of the
Modus Media selling price/month or $[**] per pallet for consigned material.
Modus Media will notify MetaCreations monthly of any excess material. These
costs will be invoiced on the first day of each month. MetaCreations agrees to
provide a Purchase Order to cover these costs. Modus Media may invoice
components and customer specific raw material at the earlier of the termination
of this Agreement. MetaCreations agrees to pay carrying and storage charges
until the material is physically disposed of. All surplus material will be
dispositioned in the month in which it becomes identified as surplus.
[*] Confidential treatment requested
3
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Disposition involves:
1. The surplus material is consumed in the manufacturing process.
2. The surplus material is shipped "as is" to a destination of
MetaCreations choice.
3. The surplus material is scrapped at MetaCreations direction.
4. Upon disposition, Modus Media will invoice MetaCreations for any/all
dispositioned components at a mutually agreed price.
OBSOLETE MATERIAL:
Obsolete material will be defined as the quantity of any given material
(components and customer specific raw material) meeting any of the following
conditions:
1. All related top level SKU's are no longer being sold through normal
distribution channels.
2. It has been replaced by new or updated versions through a revision or
specification change process.
3. It has been eliminated from all applicable MetaCreations product
specifications.
As of the date material is identified as obsolete, it will be assessed storage
and carrying costs as described under "Surplus" above. MetaCreations agrees to
dispose of or consume all obsolete material also as outlined above.
In no event will Modus Media charge MetaCreations for materials Modus Media
elected to produce in excess of MetaCreations authorized component levels set
out in MetaCreations forecast. Modus Media assumes all risks of producing
material in excess of these authorized component levels. Only material which is
of a quality suitable for its original use may be classified as excess or
obsolete.
INVENTORY MANAGEMENT:
In order to assist MetaCreations in limiting obsolescence exposure and storage
charges, Modus Media agrees to utilize Inventory Management procedures as below:
Modus Media will maintain a maximum of one month supply of finished goods in
MetaCreations distribution inventory at any given time. Minimum finished levels
will be set by Modus Media in conjunction with MetaCreations management and will
be based on assembly lead-time and forecasted demand. Modus Media will be
responsible for monitoring finished goods minimum levels and replenishing to
preset maximums at appropriate times.
Modus Media will purchase component materials in economic order quantities. In
most cases these quantities will be less than 91 days forecasted demand.
Modus Media will monitor component inventory levels via Modus Media's MRP
system. Modus Media will load MetaCreations rolling 90 day forecast into the MRP
system each month. The system will net on-hand quantities against projected
demand. Modus Media purchasing will calculate economic order quantities from the
MRP net requirements, ensuring minimum inventory levels and continuity of
supply.
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<PAGE> 5
SKU specific mid-month forecasts will be required for products which are
significantly exceeding forecasted demand or for new product introductions which
were not included in previous forecasts.
PRICING:
Pricing will be based on the following:
1. Assembly, Replication
Assembly and replication pricing is based upon a tiered pricing model (see
pricing tier matrix). MetaCreations will place assembly orders by specific
line SKU's (stock keeping unit) and the quantity ordered will determine the
per touch price.
<TABLE>
TIER 1
<S> <C>
Quantity of units per order [**]
2/c CD [**]
3.5" Diskette [**]
Assembly [**]
ZIP Assembly [**]
Project Management [**]
Labels [**]
TIER 2
Quantity of units per order [**]
2/c CD [**]
3.5" Diskette [**]
Assembly [**]
ZIP Assembly [**]
Project Management [**]
Labels [**]
TIER 3
Quantity of units per order [**]
2/c CD [**]
3.5" Diskette [**]
Assembly [**]
ZIP Assembly [**]
Project Management [**]
Labels [**]
</TABLE>
[*] Confidential treatment requested
5
<PAGE> 6
<TABLE>
TIER 4
<S> <C>
Quantity of units per order [**]
2/c CD [**]
3.5" Diskette [**]
Assembly [**]
ZIP Assembly [**]
Project Management [**]
Labels [**]
</TABLE>
2. Project Management
All kits will be assessed a project management fee of $[**]which includes
the following:
Job Engineering Storage (for the first 90 days)
Interplant Freight Dedicated Resources
Inventory Management Account Management
Transaction Reporting Order Processing
3. Distribution
Standard distribution turn time will be 24 hours. All orders received prior
to 5:00pm will be shipped before 5:00pm the following day.
End User: $[**]/order
$[**]/unit
Includes order processing, pick/pack/ship, order confirmation and packing
materials (excluding shipping carton)
Retail: $[**]/unit
Includes order processing, shipping and ship confirmation.
International: $[**]/order*
Includes preparation of export documentation.
*If order is received electronically, price is then reduced to $[**]/order.
Expedite Fees (same day shipment):
Expedites received before 2:00pm: $[**]/unit expedited
Expedites received after 2:00pm: $[**]/unit expedited
Modus Media will allow MetaCreations ten "free" cancellations per month,
after which case a cancellation fee of $[**] per canceled order will be
charged.
Thus cancellation charges are as follows:
0 - 10 cancellations per month: $0.00 (no charge)
11 + cancellations per month: $[**] per canceled order
[*] Confidential treatment requested
6
<PAGE> 7
All distribution charges to be invoiced on a monthly basis, based upon
activity.
4. Procured parts
Modus Media will assess a [**]% mark-up on all outsourced raw materials
purchased on behalf of MetaCreations.
5. Re-Work Pricing
In the event MetaCreations wishes to re-work current product held in
inventory, Modus Media will use the above tiered table per touch rate to
determine the rework pricing.
6. RMA's
Bulk Returned Material:
All returned material will be assessed a charge of $[**] per order.
End User Returns:
All end user returns will be based upon the following:
Confirm receipt of product
Monthly review and sortation
Detailed report of product status
All returns shipped directly into the Modus Media Fremont,
CA division Cost: $[**]/unit
7. Physical Inventory
One (1) physical inventory will be included in the project management fees
per year at the finished good level.
8. Other Pricing
Pricing for other services including but not limited to Telemarketing
(inbound/outbound). Registration, Technical Support, RMA service and
Software Exchange (OEM direct) is available upon request.
9. Terms of Payment
Net cash 30 days from date of invoice.
FILM, DIGITAL FILES, AND PLATES
All platemaking film made by us will be used solely for MetaCreations work and
become MetaCreations property upon payment of invoices. All film or electronic
files furnished by MetaCreations will be used solely for MetaCreations work and
will remain MetaCreations property. All plates made by us will be used solely
for MetaCreations work but will remain Modus Media's property. All electronic
imposition files we make from MetaCreations furnished
[*] Confidential treatment requested
7
<PAGE> 8
digital files, all type fonts used for the production of MetaCreations work, any
storage devices, disks, etc. we use to archive MetaCreations files and any
proprietary software, systems or technology we use to process MetaCreations
files will remain Modus Media's property.
MEDIA REPLICATION
For work involving diskette replication, MetaCreations will furnish original and
identical master diskettes or electronic files for each diskette title to Modus
Media's specifications. Diskette masters and copies made from the masters or
files will be used solely for MetaCreations work. Upon MetaCreations request the
master will be returned to MetaCreations, and the copies destroyed. For work
involving CD-ROM replication, all input files, CD-R's or compact discs furnished
by MetaCreations will be used solely for MetaCreations work and remain
MetaCreations property. All tooling, including masters, stampers or any other
tooling made by Modus Media will be used solely for MetaCreations work but will
remain Modus Media's property.
EXPORT REQUIREMENTS
MetaCreations represents to Modus Media that all MetaCreations shipping
instructions to Modus Media will comply with all applicable export laws, rules,
and regulations. Modus Media will not be required to make a particular
distribution if the U.S. government would require an export license for such.
Modus Media performs this work as an agent of MetaCreations and MetaCreations
agrees to indemnify Modus Media against any claims that MetaCreations shipping
instructions violate applicable export requirements.
TERMS OF PAYMENT, INTEREST, COLLECTION COSTS, AND BILLING DISPUTES
The Terms of Payment statement immediately follows the prices. Should any
invoice issued hereunder become past due, MetaCreations agree to pay interest at
the rate of one and one-half percent (1 -1/2%) per month, or the lawful limit if
less, on all amounts past due as well as all the costs of collection, if any,
including, but not limited to, reasonable attorney's fees. Interest will be
calculated from the invoice due date to the date payment is received. Failure to
bill for interest due will not constitute a waiver of Modus Media's right to
charge interest. Should any portion of an invoice be disputed, MetaCreations
agree to pay the undisputed portion according to its terms and MetaCreations
will notify us promptly of the dispute. Both parties agree to use their best
efforts to resolve the disputed portion of the invoice within thirty (30) days
of learning of the dispute.
BANKRUPTCY
If either party shall be adjudicated a bankrupt, institute voluntary proceedings
for bankruptcy or reorganization, make an assignment for the benefit of its
creditors, apply for or consent to the appointment of a receiver for it or its
property, or admit in writing its inability to pay its debts as they become due,
the other party may terminate this Agreement by written notice. Any such
termination will not relieve either party from any accrued obligations
hereunder.
GUARANTEE AND LIMITATION OF LIABILITY
Modus Media will perform the work in a good workmanlike manner and in accordance
with the specifications and production schedule. In no event the will Modus
Media be liable for special or consequential damages, including, but not limited
to, lost profits or business.
Modus Media will however, replace all defective product due to Modus Media error
or negligence including all reasonable shipping costs.
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<PAGE> 9
RESPONSIBILITY FOR SUBJECT MATTER
In furnishing us matter to reproduce, or distribute, or to have incorporated in
the completed product, MetaCreations represent and warrant that none of such
matter infringes any copyright (either as furnished to Modus Media by
MetaCreations or as altered by us at your direction), or patent, is libelous, or
otherwise violates the rights of or will cause damage or injury to other
persons, and MetaCreations agree to indemnify and save Modus Media harmless from
all losses, damages and expenses, including attorneys' fees, which Modus Media
may suffer as the result of any claim of such violation, damage, or injury.
WORK STOPPAGES
Modus Media will not be liable for delays or non-performance of this Agreement
occasioned by strikes, fires, accidents, or by causes beyond our control
including, but not limited to, the inability to obtain necessary materials or
utilities. In the event of a stoppage or delay resulting from any such cause,
Modus Media will perform such parts of the work as Modus Media are capable of
performing, and in the event MetaCreations place any other part of the work
elsewhere, Modus Media will be entitled to resume the same as promptly as
practicable.
ASSIGNMENT
Neither party to this Agreement will assign any right(s) hereunder without the
prior written consent of the other party, except that we may assign payments due
Modus Media to any affiliated company without consent. Subject to this consent,
this Agreement will inure to the benefit of and will bind the successors and
assigns of the parties hereto.
USE OF LOGOS
Modus Media shall submit to MetaCreations all advertising, sales promotion,
press releases and other publicity relating to this Agreement or the work
performed hereunder to thereunder, wherein MetaCreations name or mark is
mentioned or language from which the connection of said name or mark, or the
name of mark of any affiliate of MetaCreations, therewith may be inferred or
implied, and Modus Media further agrees not to publish or use such advertising,
sales promotion, press releases, or other publicity with out MetaCreations prior
written approval, provided, however, that if Modus Media does not receive a
response from MetaCreations within (10) business days following such submission,
then such approval shall be presumed.
INSURANCE
Modus Media will carry at our expense fire, sprinkler leakage and extended
coverage insurance, subject to the usual exclusions, limitations, and conditions
of such policies on the actual cash value of all our materials, work in process,
and all production completed and not shipped, and on the actual cash value of
all positives, copy, artwork, paper and other materials furnished by
MetaCreations while in our care, custody and control. If MetaCreations property
is damaged as a result of an insured peril under the applicable insurance
policy, then, at Modus Media's option, Modus Media will either replace
MetaCreations damaged property or reimburse MetaCreations for the actual cash
value of the damaged property. If Modus Media elects to reimburse MetaCreations
for the damaged property's actual cash value, the amount payable to
MetaCreations shall be limited to the proceeds of such policy plus any related
deductible, if any, applied to the claim for damage to MetaCreations property.
For positives and other media Modus Media's insurance coverage and Modus Media's
liability shall be limited to the cost of blank film or other media and the cost
of duplication from an original or other copy.
9
<PAGE> 10
Modus Media currently maintains at its sole cost and expense, worker's
compensation insurance as required by applicable law, general liability
insurance with limits of not less than $1,000,000 bodily injury per occurrence
(including death) and $500,000 property damage per occurrence. In addition,
Modus Media currently maintains automobile liability insurance with a limit of
not less than $1,000,000 bodily injury (including death) per occurrence. Modus
Media currently maintains contractual liability coverage. At all times under
this Agreement Modus Media shall maintain appropriate insurance coverage or that
which is required by law for a business of like kind. MetaCreations may at it's
option require Modus Media to obtain and provide to them a certificate of
insurance.
NON-DISCLOSURE
Except as an authorized representative of each party may otherwise consent in
writing, neither party will disclose, duplicate or publish at any time any
proprietary information, knowledge or data of the other that may be obtained
during the term of the Agreement. Each party's obligation hereunder shall be
satisfied if it uses the same degree of care as it does for its own information
of a similar character. The provisions of this section will not apply to either
party's proprietary information (i) which becomes available public knowledge
without the fault of the other, (ii) which becomes available to the other
through a third party, (iii) which has independently developed by the other, or
(iv) of which the other was aware prior to the execution of this agreement.
PASSING OF TITLE
Title and possession will pass to MetaCreations upon delivery or upon date of
final invoicing, whichever is earlier, f.o.b. our final plant of manufacture.
MISCELLANEOUS
Modus Media is an independent contractor and will be free to exercise its
discretion and independent judgment as to the method and means of performance of
the work tasks. Work on this contract will be performed by employees of Modus
Media and any of their subcontractors or consultants. This agreement between
MetaCreations and Modus Media dated hereof contains the entire understanding of
the parties with respect to this matter contained herein.
LIMITATION OF WARRANTY
EXCEPT AS SET FORTH HEREIN, MODUS MEDIA MAKES NO REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
GOVERNING LAW
The Agreement will be governed by the laws of the State of California
If this proposal meets with MetaCreations approval, please sign below.
MetaCreations signature below means all the terms and conditions at the bottom
of this page and on the attached pages are incorporated herein and made a part
of this Agreement. Following your approval and upon confirmation by an officer
of Modus Media International Inc., the approved proposal will then constitute a
contract between MetaCreations and Modus Media.
Respectfully submitted,
Modus Media International Inc.
10
<PAGE> 11
APPROVED:
MetaCreations
By /s/TERANCE A. KINNINGER By /s/MARK CAMP
----------------------- ---------------------------
MetaCreations Corporation Modus Media International
Sr. VP and CFO VP Operations - Fremont CA Ops.
Date June 30, 1997
11
<PAGE> 1
EXHIBIT 10.28
METACREATIONS CORPORATION
1996 NONSTATUTORY STOCK OPTION PLAN
AS AMENDED ON FEBRUARY 20, 1998
1. Purposes of the Plan. The purposes of this Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees and Consultants,
and
- to promote the success of the Company's business.
Nonstatutory Stock Options may be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans and issuance of stock and stock options
under U.S. state corporate laws, U.S. federal and state securities laws, the
Code and the applicable laws of any foreign country or jurisdiction where
Options will be or are being granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means MetaCreations Corporation, a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a parent, subsidiary or affiliate to render services. The term
"Consultant" shall not include any person who is also an Officer or Director of
the Company.
(i) "Director" means a member of the Board.
<PAGE> 2
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person employed by the Company or any
parent, subsidiary or affiliate of the Company.
(l) "Fair Market Value" means, as of any date, the closing sales
price for the Common Stock (or the closing bid, if no sales were reported) as
listed or quoted on any established stock exchange or national market system,
including without limitation The Nasdaq National Market or The Nasdaq SmallCap
Market of The Nasdaq Stock Market, for the date of such determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable.
(m) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(n) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
(o) "Option" means a stock option granted pursuant to the Plan.
Options granted under the Plan are nonstatutory stock options.
(p) "Option Agreement" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(q) "Optioned Stock" means the Common Stock subject to an Option.
(r) "Optionee" means an Employee or Consultant who holds an
outstanding Option.
(s) "Plan" means this 1996 Nonstatutory Stock Option Plan.
(t) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 3,100,00 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated).
-2-
<PAGE> 3
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the
Board or (ii) a Committee designated by the Board, which Committee shall be
constituted to satisfy Applicable Laws. Once appointed, such Committee shall
serve in its designated capacity until otherwise directed by the Board. The
Board may increase the size of the Committee and appoint additional members,
remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(ix) to modify or amend each Option (subject to Section 14(b)
of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
-3-
<PAGE> 4
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xi) to determine the terms and restrictions applicable to
Options;
(xii) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair Market
Value equal to the amount required to be withheld; and
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Stock Options may be granted to Employees and
Consultants.
6. Limitations. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's employment or
consulting relationship with the Company, nor shall they interfere in any way
with the Optionee's right or the Company's right to terminate such employment or
consulting relationship at any time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect until terminated under Section 14 of the
Plan.
8. Term of Option. The term of each Option shall be stated in the
Notice of Grant.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In so doing, the Administrator may specify that an
Option may not be exercised until either the completion of a service period or
the achievement of performance criteria with respect to the Company or the
Optionee.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
-4-
<PAGE> 5
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a
-5-
<PAGE> 6
dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. In the
event an Optionee ceases to be an Employee or Consultant, other than upon the
Optionee's death or Disability, the Optionee may exercise his or her Option
within such period of time as is specified in the Notice of Grant to the extent
that he or she is entitled to exercise it on the date of termination (but in no
event later than the expiration of the term of such Option as set forth in the
Notice of Grant). In the absence of a specified time in the Notice of Grant, the
Option shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, the Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status.
(c) Disability of Optionee. In the event an Optionee ceases to be
an Employee or Consultant as a result of the Optionee's Disability, the Optionee
may exercise his or her Option at any time within twelve (12) months (or such
other period of time as is determined by the Administrator) from the date of
termination, but only to the extent that the Optionee is entitled to exercise it
on the date of termination (and in no event later than the expiration of the
term of the Option as set forth in the Notice of Grant). If, on the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the Shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee,
the Option shall become fully exercisable, including as to Shares for which it
would not otherwise be exercisable and may be exercised at any time within
twelve (12) months (or such other period of time as is determined by the
Administrator) following the date of death (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance. If, after death, the Optionee's estate or a
person who acquired the right to exercise the Option by bequest or inheritance
does not exercise the Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
-6-
<PAGE> 7
11. Non-Transferability of Options. Unless otherwise specified by the
Administrator in the Option Agreement, an Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of Shares covered by each
outstanding Option and the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of Shares of
stock of any class, or securities convertible into Shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for all Options to
vest and for an Optionee to have the right to exercise his or her Option until
ten (10) days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be vested
and exercisable. To the extent it has not been previously exercised, an Option
will terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation, or in the event that the successor corporation
refuses to assume or substitute for the Option, the Option shall fully vest and
the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested
and exercisable. If an Option is exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee in writing or electronically that the Option shall be fully
vested and exercisable for a period of fifteen (15) days from the date of such
notice, and the Option shall terminate upon the expiration of such period. For
the purposes of this paragraph, the Option shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of
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<PAGE> 8
Optioned Stock subject to the Option immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets was not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all Applicable Laws, and the
requirements of any stock exchange or quotation system upon which the Shares may
then be listed or quoted, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
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<PAGE> 9
(b) Investment Representations. As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Liability of Company. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
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<PAGE> 10
METACREATIONS CORPORATION
1996 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
MetaCreations Corporation, a Delaware corporation (the "Company"), has
granted to the optionee (the "Optionee") named on the Notice of Grant of Stock
Options (the "Notice of Grant") which is attached hereto a nonstatutory stock
option to purchase that number of shares of Common Stock (the "Shares") set
forth on the Notice of Grant at the price set forth on the Notice of Grant and
in all respects subject to the terms, definitions and provisions of the 1996
Nonstatutory Stock Option Plan (the "Plan") adopted by the Company which is
incorporated herein by reference. Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings herein.
18. Nature of the Option. This Option is a nonstatutory stock option and
will not qualify as an incentive stock option as defined in Section 422 of the
Code.
19. Exercise of Option. This Option shall be exercisable during its term
in accordance with the provisions of Section 10 of the Plan as follows:
(a) Right to Exercise.
(i) Subject to Sections 2(a)(ii) and (iii) below, this
Option shall vest over the period and at the rate set forth on the Notice of
Grant.
(ii) This Option may not be exercised for a fraction of a
share.
(iii) In the event of Optionee's death, disability or other
termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 of this Agreement.
(b) Method of Exercise. This Option shall be exercisable by
written notice which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange
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<PAGE> 11
upon which the Shares may then be listed. Assuming such compliance, the Shares
shall be considered transferred to the Optionee on the date on which the Option
is exercised with respect to such Shares.
20. Optionee's Representations. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company an Investment Representation Statement in the
form provided by the Company.
21. METHOD OF PAYMENT. PAYMENT OF THE EXERCISE PRICE SHALL BE BY (i)
CASH, (ii) CHECK, (iii) SURRENDER OF OTHER SHARES OF COMMON STOCK OF THE COMPANY
WHICH EITHER HAVE BEEN OWNED BY THE OPTIONEE FOR MORE THAN SIX MONTHS ON THE
DATE OF SURRENDER OR WERE NOT ACQUIRED, DIRECTLY OR INDIRECTLY, FROM THE COMPANY
AND HAVE A FAIR MARKET VALUE ON THE DATE OF SURRENDER EQUAL TO THE EXERCISE
PRICE OF THE SHARES AS TO WHICH THE OPTION IS BEING EXERCISED OR (iv) DELIVERY
OF A PROPERLY EXECUTED EXERCISE NOTICE TOGETHER WITH IRREVOCABLE INSTRUCTIONS TO
AN AGENT OF THE COMPANY TO SELL THE SHARES AND PROMPTLY DELIVER TO THE COMPANY
THAT PORTION OF THE SALE OR LOAN PROCEEDS REQUIRED TO PAY THE EXERCISE PRICE.
22. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
23. Termination of Status as an Employee. If Optionee ceases to serve as
an Employee or Consultant, he or she may, but only within three (3) months after
the date he or she ceases to be an Employee or Consultant of the Company,
exercise this Option to the extent that he or she was entitled to exercise it at
the date of such termination. To the extent that he or she was not entitled to
exercise this Option at the date of such termination, or if he or she does not
exercise this Option within the time specified herein, the Option shall
terminate.
24. Disability of Optionee. Notwithstanding the provisions of Section 6
above, if Optionee is unable to continue his or her employment or consultancy
relationship with the Company as a result of his or her total and permanent
Disability, he or she may, but only within twelve (12) months from the date of
termination of employment or consultancy, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination. To
the extent that he or she was not entitled to exercise the Option at the date of
termination, or if he or she does not exercise such Option (which he or she was
entitled to exercise) within the time specified herein, the Option shall
terminate.
25. Death of Optionee. Notwithstanding the provisions of Section 6
above, in the event of the death of Optionee during the term of this Option and
while an Employee or Consultant of the Company, the Option may be exercised, at
any time within twelve (12) months following the date of
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<PAGE> 12
death, by Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of death.
26. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
27. Term of Option. This Option may be exercised only within the term
set out on the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
28. Tax Consequences. Some of the federal and state tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
income tax and state income tax liability upon exercise of a nonstatutory stock
option (an "NSO"). The Optionee will be treated as having received compensation
income (taxable at ordinary income tax rates) equal to the excess, if any, of
the Fair Market Value of the Exercised Shares on the date of exercise over their
aggregate Exercise Price. If the Optionee is an Employee or a former Employee,
the Company will be required to withhold from his or her compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for at
least one year, any gain realized on disposition of the Shares will be treated
as long-term capital gain for federal income tax purposes.
29. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
30. NO GUARANTEE OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT
THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY
CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (AND
NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE
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<PAGE> 13
FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE
OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S
EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: METACREATIONS CORPORATION
- ------------------------------------ ---------------------------------------
Signature By
- ------------------------------------ ---------------------------------------
Print Name Title
- ------------------------------------
Residence Address
- ------------------------------------
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<PAGE> 14
METACREATIONS CORPORATION
1996 NONSTATUTORY STOCK OPTION PLAN
NOTICE OF GRANT OF STOCK OPTIONS
[Optionee's Name and Address]
You have been granted a nonstatutory stock option to purchase Common Stock
of the Company, subject to the terms and conditions of the 1996 Nonstatutory
Stock Option Plan and this Option Agreement, as follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $________________________
Term/Expiration Date: _________________________
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter.
<PAGE> 15
EXHIBIT A
METACREATIONS CORPORATION
1996 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
MetaCreations Corporation
6303 Carpinteria Avenue
Carpinteria, CA 93013
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of MetaCreations Corporation (the "Company")
under and pursuant to the 1996 Nonstatutory Stock Option Plan (the "Plan") and
the Stock Option Agreement dated ______________, 19___ (the "Option Agreement").
The purchase price for the Shares shall be $______, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date the Shares are issued, except as provided in Section
12 of the Plan.
5 Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE> 16
6 Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by California law except for that body of law pertaining to conflict of
laws.
Submitted by: Accepted by:
PURCHASER: METACREATIONS CORPORATION
Signature By
Print Name Title
Address: Address:
6303 Carpinteria Avenue
Carpinteria, CA 93013
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<PAGE> 1
Exhibit 10.30
Mark Zimmer
Tom Hedges
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, CA 95066
In connection with the proposed combination of MetaTools Inc. and
Fractal Design Corporation, this letter confirms our agreements with respect to
your employment by the combined entity following closing of the merger:
1. Mark's title will be Chief Technical Officer, and Tom's title will
be Chief Systems Architect. Mark and Tom will continue to work in
Scotts Valley.
2. For calendar 1997, Mark's annual base salary will be $240,000, and
Tom's will be $190,000. Tom and Mark will each have a bonus
opportunity of up to 50% of their base salary. The bonus will be
paid in full if the combined company achieves 100% of the consensus
analyst net earnings estimates for calendar 1997 that are issued
after the merger, the bonus will be increased or decreased
proportionately upon achievement of higher or lower net earnings,
but no bonus will be paid if the combined company achieves less than
80% of the net earnings estimate consensus amount. After 1997, these
salary and bonus amounts will be subject to the normal compensation
committee review process as for all other officers. Mark and Tom
also each will receive a car allowance of $1,000 per month.
3. You will be entitled to participate in all other employee benefits
(such as health and life insurance, vacation, and all other
benefits) on the same terms as any other officer of MetaTools to the
extent you are subject to any pre-existing condition restriction
under MetaTools plans. MetaTools will pay you the out of pocket cost
of COBRA coverage (grossed up to reflect any taxes imposed on such
payment). We also acknowledge Mark will be out of the office May 1,
1997 to May 24, 1997 for his honeymoon.
4. You acknowledge that your employment will be "at will," and
terminable at any time by either party.
If this accurately reflects our agreement, please execute this letter as set
forth below.
Sincerely,
MetaTools, Inc
/s/ JOHN WILCZAK
----------------------------------------
John Wilczak
President and CEO
Acknowledged and agreed:
By: /s/ MARK ZIMMER
------------------------------
Mark Zimmer
By: /s/ TOM HEDGES
------------------------------
Tom Hedges
<PAGE> 1
Exhibit 10.31
Prisma Express / MetaCreations International Ltd.
Software License Agreement Amendment
The Agreement between PRISMA Express and MetaTools, Inc. for the licensing of
MetaTools products, dated December 30, 1996 and amended on March 31, 1997
herewith is amended as follows:
1. MetaCreations International Ltd. (hereinafter MetaCreations), located at
Wilson House, Fenian Street, Dublin 2, Ireland, is the successor to
MetaTools, Inc. and Fractal Design Corporation. MetaTools, Inc. and/or
Fractal Design Corporation shall hereinafter be referred to as
MetaCreations.
2. MetaCreations guarantees, that in addition to all MetaCreations products
licensed previously the products licensed shall also include all existing
Fractal Design products as well as upgrades and revisions thereof.
3. MetaCreations extends the original contract until December 31, 1998.
4. The minimum guarantee license fee will increase from $[**] US dollars to
$[**]US dollars. The minimum guarantee royalties remaining to be paid under
the existing agreement and amendments shall be paid as follows:
- $[**] on September 30, 1997;
- $[**] on October 13, 1997;
- $[**] on December 15, 1997
- $[**] on January 15, 1998
- $[**] on February 28, 1998
- $[**] on March 30, 1998
- $[**] on April 30, 1998
- $[**] on May 30, 1998
- $[**] on June 30, 1998
- $[**] on July 30, 1998
- $[**] on August 30, 1998
- $[**] on September 30, 1998
Licensee reaffirms and acknowledges that the licensing payments are
guarantee nonrefundable minimum royalties payable to MetaCreations due on
the payment dates as noted above and that any change to these payments must
be agreed to in writing by the Chief Financial Officer of MetaCreations.
Through September 30,
[*] Confidential treatment requested
<PAGE> 2
1998, at the end of each quarter, the cumulative minimum quarterly licensing
payments to date will be compared to the licensing payments due based on
products shipped to date. If the licensing fees due on the products shipped
to date exceeds the minimum quarterly license fees paid, then within 45 days
after the end of the quarter Licensee will remit an additional payment to
MetaCreations equal to the amount exceeding the minimum payments. From
October 1, 1998 through the remainder of the agreement, licensing fees will
be paid on a monthly basis within 30 days of the end of the month.
4. The test of Section 4(d) of the Agreement is deleted in its entirety and
replaced as follows:
At any time up to one year after termination of this agreement, as amended,
MetaCreations, upon ten (10) days prior written notice, may cause an audit
to be made of the applicable records of Licensee relating to the Products in
order to verify statements issued by Licensee. Prompt adjustment shall be
made to compensate for any errors or omissions disclosed by such audit. Any
such audit shall be conducted by any so-called "big six" independent firm of
certified public accountants appointed by MetaCreations during regular
business hours at Licensee's offices and in such a manner as not to
interfere with the normal business activities of Licensee. In the event that
any such audit reveals a variance of more than $[**] US dollars in royalties
payable to MetaCreations, Licensee shall pay the cost of said audit in
addition to royalties due and any interest payable thereon.
6. Section 16 is hereby added to the Agreement as follows:
16. Inspection, Records and Reporting:
16.1 Reports.Licensee shall provide MetaCreations with monthly
operations reports of Licensee's activities in marketing the
Products in the Territory. Each such report shall be due within
thirty (30) days after the end of the month to which it relates
and shall include, among other things:
16.1.1 A summary of all of the Licensee's marketing activities
with respect to the Products.
16.1.2 Upon MetaCreations' request, a summary of competitor's
product introductions and activities in the Territory.
16.1.3 A sell-through report which details the number of Products
shipped from Licensee's warehouse to sub-distributors and
or resellers, on a monthly basis.
16.1.4 A forecast of expected shipments for the next 90 days by
product and a summary of the planned marketing activities.
[*] Confidential treatment requested 16.1.5
<PAGE> 3
16.1.5 Upon the reasonable request of MetaCreations, any
additional information concerning the distribution of
Products within the Territory.
16.2 Registered Users. MetaCreations and/or Licensee agree to place a
user registration card into each unit of the Product shipped.
Licensee shall use commercially reasonable efforts to collect
such cards from users and register them in a reasonable
electronic format. Licensee further agrees that these registered
user databases are the exclusive property of MetaCreations and
that any copy(ies) of such data that Licensee obtains shall be
provided to MetaCreations upon thirty (30) days of written
request.
In the event that any provision of this amendment or the whole license
Agreement is unenforceable or invalid under any applicable law or to be
held so by applicable court decision, the remaining Agreement, as amended,
stays enforceable and valid and in such event, any such provision shall be
changed and interpreted so as to best accomplish the objectives of such
unenforceable or invalid provision within the limits of applicable law or
applicable court decisions.
MetaCreations International Ltd PRISMA Express GmbH
/s/ Terance A. Kinninger /s/ Peter Wernstedt /s/Detlef Schmuck
- ------------------------------------ ---------------------------------------
Terance A. Kinninger, Director Signature
September 10, 1997 Peter Wernstedt Detlef Schmuck
- ------------------------------------ ---------------------------------------
Date Print Name
President
---------------------------------------
Title
/s/ John Hartnett September 10, 1997
- ------------------------------------ ---------------------------------------
John Hartnett, Officer Date
September 10, 1997
- ------------------------------------
Date
<PAGE> 1
Exhibit 10.32
SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into
effective as of October 31, 1997, by and between Terance A. Kinninger (the
"Executive") and MetaCreations Corporation, a Delaware corporation (the
"Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") believes that it
is in the best interests of the Company and its stockholders to provide the
Executive with certain severance benefits should Executive's employment with the
Company terminate under certain circumstances. Such benefits will provide
Executive with enhanced financial security and with sufficient incentive and
encouragement for Executive to remain with the Company.
B. To accomplish the foregoing objectives, the Board has directed the
Company, upon execution of this Agreement by the Executive, to agree to the
terms provided herein.
C. Certain capitalized terms used in the Agreement are defined in
Section 7 below.
A G R E E M E N T
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. Duties and Scope of Employment. The Company shall employ the
Executive in the position of Senior Vice President and Chief Financial Officer,
as such position has been defined in terms of responsibilities and compensation
as of the effective date of this Agreement. The Executive shall comply with and
be bound by the Company's operating policies, procedures and practices from time
to time in effect during his employment. During the term of the Executive's
employment with the Company, the Executive shall continue to devote his full
time, skill and attention to his duties and responsibilities, and shall perform
them faithfully, diligently and competently, and the Executive shall use his
best efforts to further the business of the Company and its affiliated entities.
2. Base Compensation. The Company shall pay the Executive as
compensation for his services a base salary at the annualized rate of $169,000.
Such salary shall be paid periodically in accordance with normal Company payroll
practices. The annual compensation specified in this Section 2, together with
any increases in such compensation as the Board may direct from time to time, is
referred to in this Agreement as "Base Compensation."
<PAGE> 2
3. Executive Benefits. The Executive shall be eligible to participate
in the Executive benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the sole determination of the Board or any
committee administering such plan or program.
4. At-Will Employment/Term of Agreement.
(a) At-Will Employment. The Company and the Executive acknowledge
that the Executive's employment is and shall continue to be at-will, as defined
under applicable law. If the Executive's employment terminates for any reason,
the Executive shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
(b) Term of Agreement. The terms of this Agreement shall terminate
on the date that all obligations of the parties hereunder have been satisfied. A
termination of the terms of this Agreement pursuant to this Section shall be
effective for all purposes.
5. Severance Benefits.
(a) Involuntary Termination. Subject to Section 8 below, if the
Executive's employment terminates as a result of Involuntary Termination within
one (1) year after a Change of Control, the Executive shall be entitled to
receive the following severance benefits:
(i) Severance Payments. A severance payment equal to twelve
(12) months of the Executive's Base Compensation for the Company's fiscal year
then in effect or if greater, the Executive's Base Compensation for the
Company's fiscal year immediately preceding the date of such termination. The
severance payments to which the Executive is entitled pursuant to this Section
5(a)(i) shall be paid to the Executive (or to the Executive's estate or
beneficiary in the event of the Executive's death) in accordance with the
Company's standard payroll practices.
(ii) Medical Benefits. The Executive shall receive 100%
Company-paid health insurance coverage as provided to such Executive immediately
prior to the Executive's termination or such comparable alternative insurance
coverage (including additional compensation to fund such coverage) as the
Company may, in its discretion, determine to be sufficient to satisfy its
obligations to provide continued health insurance coverage hereunder (the
"Company-Paid Coverage"). If the Executive's health insurance coverage included
the Executive's dependents immediately prior to the Executive's termination,
such dependent shall also be covered at Company expense. Company-Paid Coverage
shall continue until the earlier of (a) this Agreement terminates pursuant to
Section 4(b) or (b) the date the Executive becomes covered under another
employer's health insurance plan. For purposes
-2-
<PAGE> 3
of the continuation health coverage required under COBRA, the date of the
"qualifying event" giving rise to the Executive's COBRA election period (and
that of his "qualifying beneficiaries") shall be the last date on which the
Executive receives Company-Paid Coverage under this Agreement.
(iii) Options. Subject to Sections 8 and 9 below, fifty
percent (50%) of the unvested portion of any stock option(s) held by the
Executive under the Company's stock option plans shall vest, and the Executive
shall have the right to exercise such additional vested portion of such stock
option(s), in addition to any portion of the option vested and exercisable prior
to the application of this Section.
(b) Voluntary Resignation; Termination For Cause. If the Executive
voluntarily resigns from the Company (other than as an Involuntary Termination),
or if the Company terminates the Executive's employment for Cause, then the
Executive shall not be entitled to receive severance or other benefits pursuant
to this Agreement.
(c) Disability; Death. If the Company terminates the Executive's
employment as a result of the Executive's Disability or if the Executive's
employment terminates due to the death of the Executive, then the Executive
shall not be entitled to receive severance or other benefits pursuant to this
Agreement. However, Executive shall remain eligible for those severance and
other benefits (if any) as may then be available under the Company's then
existing severance and benefits plans and policies at the time of death.
6. Covenants Not to Compete and Not to Solicit.
(a) Until the Executive has received all Severance Payments as
provided in Section 5, upon the termination of the Executive's employment with
the Company for any reason, the Executive agrees that he shall not, on his own
behalf, or as owner, manager, advisor, principal, agent, partner, consultant,
director, officer, stockholder or employee of any business entity, or otherwise
in any territory in which the Company is actively engaged in business (1) open
or operate business which is in competition with any business of the Company,
(2) act as an employee, agent, advisor or consultant of any competitor of the
Company, (3) solicit or accept business from any of the Company's competitors,
(4) take any action to or do anything reasonably intended to divert business
from the Company or influence or attempt to influence any existing customers of
the Company to cease doing business with the Company or to alter its business
relationship with the Company, or (5) take any action or do anything reasonably
intended to influence any suppliers of the Company to cease doing business with
the Company or to alter its business relationship with the Company, Executive
further covenants and agrees that he will not for himself or on behalf of any
other person, partnership, firm, association or corporation in any territory
served by the Company, directly or indirectly solicit or accept business from
any of the Company's existing customers for the purchase or sale of products or
services of a like kind to those sold or provided the Company. The foregoing
covenant shall not be deemed to prohibit Executive from acquiring an investment
not more than one percent (1%) of the capital stock of a competing business,
whose stock is traded on a national securities exchange or through the automated
quotation system of a registered securities association.
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(b) Until eighteen (18) months after termination of Executive's
employment, upon the termination of Executive's employment with the Company for
any reason, the Executive agrees that he shall not either directly or indirectly
solicit, induce, attempt to hire, recruit, encourage, take away, hire any
employee of the Company or cause an employee to leave their employment either
for Executive or for any other entity or person.
(c) The Executive represents that he (i) is familiar with the
foregoing covenants not to compete and not to solicit, and (ii) is fully aware
of his obligations hereunder, including, without limitation, the reasonableness
of the length of time, scope and geographic coverage of these covenants.
7. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Executive in connection with his responsibilities as an Executive
and intended to result in substantial personal enrichment of the Executive, (ii)
conviction of a felony that is injurious to the Company, (iii) a willful act by
the Executive which constitutes gross misconduct and which is injurious to the
Company, and (iv) continued violations by the Executive of the Executive's
obligations under Section 1 of this Agreement that are demonstrably willful and
deliberate on the Executive's part after there has been delivered to the
Executive a written demand for performance from the Company which describes the
basis for the Company's belief that the Executive has not substantially
performed his duties.
(b) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) The acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) of the "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual not otherwise an Incumbent Director whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company);
(iii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company
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outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the approval by
the stockholders of the Company of a plan of complete liquidation of the Company
or of an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets; or
(iv) The hiring of a new chief executive officer for the
Company.
(c) Disability. "Disability" shall mean that the Executive has
been unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least
ninety (90) days after its commencement, is determined to be total and permanent
by a physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative (such Agreement as to
acceptability not to be unreasonably withheld). Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Executive's employment. In the event
that the Executive resumes the performance of substantially all of his duties
hereunder before the termination of his employment becomes effective, the notice
of intent to terminate shall automatically be deemed to have been revoked.
(d) Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(e) Involuntary Termination. "Involuntary Termination" shall mean:
(i) without the Executive's express written consent, the
significant reduction of the Executive's duties, authority or responsibilities
relative to the Executive's duties, authority and responsibilities as in effect
immediately prior to such reduction or the assignment to the Executive of such
reduced duties, authority or responsibilities; provided, however that an
Involuntary Termination shall not occur if Executive's responsibilities, duties
and authority are reduced with respect to operations, or the legal or human
resource departments;
(ii) without the Executive's express written consent, a
reduction by the Company in the Base Compensation of the Executive as in effect
immediately prior to such reduction other than a reduction which is part of, and
generally consistent with, a general reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level
of Executive benefits to which the Executive is entitled immediately prior to
such reduction with the result that the Executive's overall benefits package is
significantly reduced, other than a reduction applicable to officers of the
company generally; or
(iv) the failure of the Company to obtain the assumption of
this agreement by any successors contemplated in Section 10 below.
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8. Limitation on Payments.
(a) In the event that the severance and other benefits provided
for in this Agreement or otherwise payable to the Executive (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive's severance benefits under Section 5 shall be payable either (i) in
full, or (ii) as to such lesser amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Executive on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code.
(b) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Executive under the terms of this Agreement
is necessary to comply with the provisions of Section 8(a), the Executive shall
be entitled to select which payments or benefits will be reduced and the manner
and method of any such reduction of such payments or benefits (including but not
limited to the number of options that would vest under Sections 5(a)(iii)
subject to reasonable limitations (including, for example, express provisions
under the Company's benefit plans) (so long as the requirements of Section 8(a)
are met). Within thirty (30) days after the amount of any required reduction in
payments and benefits is finally determined in accordance with the provisions of
Section 8(c), the Executive shall notify the Company in writing regarding which
payments or benefits are to be reduced. If no notification is given by the
Executive, the Company will determine which amounts to reduce. If, as a result
of any reduction required by Section 8(a), amounts previously paid to the
Executive exceed the amount to which the Executive is entitled, the Executive
will promptly return the excess amount to the Company.
(c) Unless the Company and the Executive otherwise agree in
writing, any determination required under this Section shall be made in writing
by the Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Executive and the Company
for all purposes. For purposes of making the calculations required by this
Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
9. Certain Business Combinations. In the event it is determined by the
Board, upon receipt of a written opinion of the Company's independent public
accountants, that the enforcement of any Section or subsection of this
Agreement, including, but not limited to, Sections 5(a)(iii) hereof, which
allows for the acceleration of vesting of options to purchase shares of the
Company's common stock upon a termination in connection with a Change of
Control, would preclude accounting for any proposed
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business combination of the Company involving a Change of Control as a pooling
of interests, and the Board otherwise desires to approve such a proposed
business transaction which requires as a condition to the closing of such
transaction that it be accounted for as a pooling of interests, then any such
Section of this Agreement shall be null and void, but only if the absence of
enforcement of such Section would preserve the pooling treatment. In the event
that the acceleration of vesting of options to purchase shares of the Company's
Common Stock is null and void as a result of this Section, then the Company
shall provide the Executive with a cash payment equal to the value of the
acceleration; provided, however, that if such cash payment would prevent the
Change of Control from being accounted for as a pooling of interests, then no
such cash payment shall be made. For purposes of this Section, the Board's
determination shall require the unanimous approval of the disinterested Board
members.
10. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and assets shall assume the obligations under this Agreement and agree expressly
to perform the obligations under this Agreement in the same manner and to the
same extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and assets which
executes and delivers the assumption agreement described in this Section or
which becomes bound by the terms of this Agreement by operation of law.
(b) Executive's Successors. The terms of this Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, devisees and legatees.
11. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Executive,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for
Cause or by the Executive as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 11(a) of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 15 days after the giving of such notice). The
failure by the Executive to include in the notice any fact or circumstance which
contributes to a showing
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of Involuntary Termination shall not waive any right of the Executive hereunder
or preclude the Executive from asserting such fact or circumstance in enforcing
his rights hereunder.
12. Arbitration.
(a) The Company and Executive agree that any dispute or
controversy arising out of, relating to, or in connection with this Agreement,
the interpretation, validity, construction, performance, breach, or termination
hereof, or any of the matters herein released shall be settled by binding
arbitration to be held in Santa Barbara County, California in accordance with
the National Rules for the Resolution of Employment Disputes then in effect of
the American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of
any dispute or claim, without reference to conflicts of law rules. Executive
hereby consents to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating to
this Agreement or relating to any arbitration in which the Parties are
participants.
(c) The Company and Executive shall each pay one-half of the costs
and expenses of such arbitration, and each shall separately pay its counsel fees
and expenses, unless otherwise required by law.
(d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH
DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
EXECUTIVE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN
CONNECTION WITH THIS AGREEMENT, THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH OR TERMINATION THEREOF, OR ANY OF THE MATTERS HEREIN TO
BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF
EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES
RELATING TO ALL ASPECTS OF THIS SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS.
13. Miscellaneous Provisions.
(a) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Executive and by an authorized officer of the
Company (other than the Executive). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(b) Whole Agreement. Except for the Executive's stock option
agreements, no agreements, representations or understandings (whether oral or
written and whether express or implied) which are
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not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(d) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(e) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Section 13(e) shall be
void.
(f) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(g) Assignment by Company. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Executive.
(h) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: METACREATIONS CORPORATION
/s/WILLIAM H. LANE III
----------------------------------------
By
Director - Compensation Committee
----------------------------------------
Title
EXECUTIVE: TERANCE A. KINNINGER
/s/TERANCE A. KINNINGER
----------------------------------------
Signature
Terance A. Kinninger
----------------------------------------
Printed Name
SIGNATURE PAGE OF SEVERANCE AGREEMENT
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Exhibit 10.33
SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into
effective as of October 31, 1997, by and between Fred Brown (the "Executive")
and MetaCreations Corporation, a Delaware corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") believes that it
is in the best interests of the Company and its stockholders to provide the
Executive with certain severance benefits should Executive's employment with the
Company terminate under certain circumstances. Such benefits will provide
Executive with enhanced financial security and with sufficient incentive and
encouragement for Executive to remain with the Company.
B. To accomplish the foregoing objectives, the Board has directed the
Company, upon execution of this Agreement by the Executive, to agree to the
terms provided herein.
C. Certain capitalized terms used in the Agreement are defined in
Section 7 below.
A G R E E M E N T
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Executive by the Company, the
parties agree as follows:
1. Duties and Scope of Employment. The Company shall employ the
Executive in the position of Senior Vice President, Sales and Marketing, as such
position has been defined in terms of responsibilities and compensation as of
the effective date of this Agreement. The Executive shall comply with and be
bound by the Company's operating policies, procedures and practices from time to
time in effect during his employment. During the term of the Executive's
employment with the Company, the Executive shall continue to devote his full
time, skill and attention to his duties and responsibilities, and shall perform
them faithfully, diligently and competently, and the Executive shall use his
best efforts to further the business of the Company and its affiliated entities.
2. Base Compensation. The Company shall pay the Executive as
compensation for his services a base salary at the annualized rate of $234,000.
Such salary shall be paid periodically in accordance with normal Company payroll
practices. The annual compensation specified in this Section 2, together with
any increases in such compensation as the Board may direct from time to time, is
referred to in this Agreement as "Base Compensation."
<PAGE> 2
3. Executive Benefits. The Executive shall be eligible to participate
in the Executive benefit plans and executive compensation programs maintained by
the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations, and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the sole determination of the Board or any
committee administering such plan or program.
4. At-Will Employment/Term of Agreement.
(a) At-Will Employment. The Company and the Executive acknowledge
that the Executive's employment is and shall continue to be at-will, as defined
under applicable law. If the Executive's employment terminates for any reason,
the Executive shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
(b) Term of Agreement. The terms of this Agreement shall terminate
on the date that all obligations of the parties hereunder have been satisfied. A
termination of the terms of this Agreement pursuant to this Section shall be
effective for all purposes.
5. Severance Benefits.
(a) Involuntary Termination. Subject to Section 8 below, if the
Executive's employment terminates as a result of Involuntary Termination within
one (1) year after a Change of Control, the Executive shall be entitled to
receive the following severance benefits:
(i) Severance Payments. A severance payment equal to nine
(9) months of the Executive's Base Compensation for the Company's fiscal year
then in effect or if greater, the Executive's Base Compensation for the
Company's fiscal year immediately preceding the date of such termination. Any
severance payments to which the Executive is entitled pursuant to this Section
5(a)(i) shall be paid to the Executive (or to the Executive's estate or
beneficiary in the event of the Executive's death) in accordance with the
Company's standard payroll practices.
(ii) Medical Benefits. The Executive shall receive 100%
Company-paid health insurance coverage as provided to such Executive immediately
prior to the Executive's termination or such comparable alternative insurance
coverage (including additional compensation to fund such coverage) as the
Company may, in its discretion, determine to be sufficient to satisfy its
obligations to provide continued health insurance coverage hereunder (the
"Company-Paid Coverage"). If the Executive's health insurance coverage included
the Executive's dependents immediately prior to the Executive's termination,
such dependent shall also be covered at Company expense. Company-Paid Coverage
shall continue until the earlier of (a) this Agreement terminates pursuant to
Section 4(b) or (b) the date the Executive becomes covered under another
employer's health insurance plan. For purposes
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of the continuation health coverage required under COBRA, the date of the
"qualifying event" giving rise to the Executive's COBRA election period (and
that of his "qualifying beneficiaries") shall be the last date on which the
Executive receives Company-Paid Coverage under this Agreement.
(iii) Options. Subject to Sections 8 and 9 below, fifty
percent (50%) of the unvested portion of any stock option(s) held by the
Executive under the Company's stock option plans shall vest, and the Executive
shall have the right to exercise such additional vested portion of such stock
option(s), in addition to any portion of the option vested and exercisable prior
to the application of this Section.
(b) Voluntary Resignation; Termination For Cause. If the Executive
voluntarily resigns from the Company (other than as an Involuntary Termination),
or if the Company terminates the Executive's employment for Cause, then the
Executive shall not be entitled to receive severance or other benefits pursuant
to this Agreement.
(c) Disability; Death. If the Company terminates the Executive's
employment as a result of the Executive's Disability or if the Executive's
employment terminates due to the death of the Executive, then the Executive
shall not be entitled to receive severance or other benefits pursuant to this
Agreement. However, Executive shall remain eligible for those severance and
other benefits (if any) as may then be available under the Company's then
existing severance and benefits plans and policies at the time of death.
6. Covenants Not to Compete and Not to Solicit.
(a) Until the Executive has received all Severance Payments as
provided in Section 5, upon the termination of the Executive's employment with
the Company for any reason, the Executive agrees that he shall not, on his own
behalf, or as owner, manager, advisor, principal, agent, partner, consultant,
director, officer, stockholder or employee of any business entity, or otherwise
in any territory in which the Company is actively engaged in business (1) open
or operate business which is in competition with any business of the Company,
(2) act as an employee, agent, advisor or consultant of any competitor of the
Company, (3) solicit or accept business from any of the Company's competitors,
(4) take any action to or do anything reasonably intended to divert business
from the Company or influence or attempt to influence any existing customers of
the Company to cease doing business with the Company or to alter its business
relationship with the Company, or (5) take any action or do anything reasonably
intended to influence any suppliers of the Company to cease doing business with
the Company or to alter its business relationship with the Company, Executive
further covenants and agrees that he will not for himself or on behalf of any
other person, partnership, firm, association or corporation in any territory
served by the Company, directly or indirectly solicit or accept business from
any of the Company's existing customers for the purchase or sale of products or
services of a like kind to those sold or provided the Company. The foregoing
covenant shall not be deemed to prohibit Executive from acquiring an investment
not more than one percent (1%) of the capital stock of a competing business,
whose stock is traded on a national securities exchange or through the automated
quotation system of a registered securities association.
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(b) Until fifteen (15) months after termination of Executive's
employment, upon the termination of Executive's employment with the Company for
any reason, the Executive agrees that he shall not either directly or indirectly
solicit, induce, attempt to hire, recruit, encourage, take away, hire any
employee of the Company or cause an employee to leave their employment either
for Executive or for any other entity or person.
(c) The Executive represents that he (i) is familiar with the
foregoing covenants not to compete and not to solicit, and (ii) is fully aware
of his obligations hereunder, including, without limitation, the reasonableness
of the length of time, scope and geographic coverage of these covenants.
7. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Executive in connection with his responsibilities as an Executive
and intended to result in substantial personal enrichment of the Executive, (ii)
conviction of a felony that is injurious to the Company, (iii) a willful act by
the Executive which constitutes gross misconduct and which is injurious to the
Company, and (iv) continued violations by the Executive of the Executive's
obligations under Section 1 of this Agreement that are demonstrably willful and
deliberate on the Executive's part after there has been delivered to the
Executive a written demand for performance from the Company which describes the
basis for the Company's belief that the Executive has not substantially
performed his duties.
(b) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:
(i) The acquisition by any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) of the "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual not otherwise an Incumbent Director whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company); or
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(iii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the approval by the stockholders of the Company of a plan of
complete liquidation of the Company or of an agreement for the sale or
disposition by the Company of all or substantially all the Company's assets; or
(iv) The hiring of a new chief executive officer for the
Company.
(c) Disability. "Disability" shall mean that the Executive has
been unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least
ninety (90) days after its commencement, is determined to be total and permanent
by a physician selected by the Company or its insurers and acceptable to the
Executive or the Executive's legal representative (such Agreement as to
acceptability not to be unreasonably withheld). Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Executive's employment. In the event
that the Executive resumes the performance of substantially all of his duties
hereunder before the termination of his employment becomes effective, the notice
of intent to terminate shall automatically be deemed to have been revoked.
(d) Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(e) Involuntary Termination. "Involuntary Termination" shall mean:
(i) without the Executive's express written consent, the
significant reduction of the Executive's duties, authority or responsibilities
relative to the Executive's duties, authority and responsibilities as in effect
immediately prior to such reduction or the assignment to the Executive of such
reduced duties, authority or responsibilities;
(ii) without the Executive's express written consent, a
reduction by the Company in the Base Compensation of the Executive as in effect
immediately prior to such reduction other than a reduction which is part of, and
generally consistent with, a general reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level
of Executive benefits to which the Executive is entitled immediately prior to
such reduction with the result that the Executive's overall benefits package is
significantly reduced, other than a reduction applicable to officers of the
company generally; or
(iv) the failure of the Company to obtain the assumption of
this agreement by any successors contemplated in Section 10 below.
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8. Limitation on Payments.
(a) In the event that the severance and other benefits provided
for in this Agreement or otherwise payable to the Executive (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Executive's severance benefits under Section 5 shall be payable either (i) in
full, or (ii) as to such lesser amount which would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Executive on an after-tax basis, of the greatest amount of
severance benefits under this Agreement, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code.
(b) If a reduction in the payments and benefits that would
otherwise be paid or provided to the Executive under the terms of this Agreement
is necessary to comply with the provisions of Section 8(a), the Executive shall
be entitled to select which payments or benefits will be reduced and the manner
and method of any such reduction of such payments or benefits (including but not
limited to the number of options that would vest under Sections 5(a)(iii)
subject to reasonable limitations (including, for example, express provisions
under the Company's benefit plans) (so long as the requirements of Section 8(a)
are met). Within thirty (30) days after the amount of any required reduction in
payments and benefits is finally determined in accordance with the provisions of
Section 8(c), the Executive shall notify the Company in writing regarding which
payments or benefits are to be reduced. If no notification is given by the
Executive, the Company will determine which amounts to reduce. If, as a result
of any reduction required by Section 8(a), amounts previously paid to the
Executive exceed the amount to which the Executive is entitled, the Executive
will promptly return the excess amount to the Company.
(c) Unless the Company and the Executive otherwise agree in
writing, any determination required under this Section shall be made in writing
by the Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Executive and the Company
for all purposes. For purposes of making the calculations required by this
Section, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section.
9. Certain Business Combinations. In the event it is determined by the
Board, upon receipt of a written opinion of the Company's independent public
accountants, that the enforcement of any Section or subsection of this
Agreement, including, but not limited to, Section 5(a)(iii) hereof, which allows
for the acceleration of vesting of options to purchase shares of the Company's
common stock upon a
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termination in connection with a Change of Control, would preclude accounting
for any proposed business combination of the Company involving a Change of
Control as a pooling of interests, and the Board otherwise desires to approve
such a proposed business transaction which requires as a condition to the
closing of such transaction that it be accounted for as a pooling of interests,
then any such Section of this Agreement shall be null and void, but only if the
absence of enforcement of such Section would preserve the pooling treatment. In
the event that the acceleration of vesting of options to purchase shares of the
Company's Common Stock is null and void as a result of this Section, then the
Company shall provide the Executive with a cash payment equal to the value of
the acceleration; provided, however, that if such cash payment would prevent the
Change of Control from being accounted for as a pooling of interests, then no
such cash payment shall be made. For purposes of this Section, the Board's
determination shall require the unanimous approval of the disinterested Board
members.
10. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and assets shall assume the obligations under this Agreement and agree expressly
to perform the obligations under this Agreement in the same manner and to the
same extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and assets which
executes and delivers the assumption agreement described in this Section or
which becomes bound by the terms of this Agreement by operation of law.
(b) Executive's Successors. The terms of this Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, devisees and legatees.
11. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Executive,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for
Cause or by the Executive as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 11(a) of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 15 days after the giving of such notice). The
failure by the Executive to include in the notice any fact or circumstance which
contributes to a showing
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of Involuntary Termination shall not waive any right of the Executive hereunder
or preclude the Executive from asserting such fact or circumstance in enforcing
his rights hereunder.
12. Arbitration.
(a) The Company and Executive agree that any dispute or
controversy arising out of, relating to, or in connection with this Agreement,
the interpretation, validity, construction, performance, breach, or termination
hereof, or any of the matters herein released shall be settled by binding
arbitration to be held in Santa Barbara County, California in accordance with
the National Rules for the Resolution of Employment Disputes then in effect of
the American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of
any dispute or claim, without reference to conflicts of law rules. Executive
hereby consents to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating to
this Agreement or relating to any arbitration in which the Parties are
participants.
(c) The Company and Executive shall each pay one-half of the costs
and expenses of such arbitration, and each shall separately pay its counsel fees
and expenses, unless otherwise required by law.
(d) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH
DISCUSSES ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
EXECUTIVE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN
CONNECTION WITH THIS AGREEMENT, THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH OR TERMINATION THEREOF, OR ANY OF THE MATTERS HEREIN TO
BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF
EXECUTIVE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES
RELATING TO ALL ASPECTS OF THIS SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS.
13. Miscellaneous Provisions.
(a) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Executive and by an authorized officer of the
Company (other than the Executive). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(b) Whole Agreement. Except for the Executive's stock option
agreements, no agreements, representations or understandings (whether oral or
written and whether express or implied) which are
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<PAGE> 9
not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(d) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(e) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this Section 13 shall be
void.
(f) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(g) Assignment by Company. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Executive.
(h) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: METACREATIONS CORPORATION
/s/WILLIAM H. LANE III
----------------------------------------
By
Director - Compensation Committee
----------------------------------------
Title
EXECUTIVE: FRED BROWN
/s/FRED BROWN
----------------------------------------
Signature
Fred Brown
----------------------------------------
Printed Name
SIGNATURE PAGE OF SEVERANCE AGREEMENT
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Exhibit 10.34
STANDARD INDUSTRIAL/COMMERCIAL MULTI TENANT LEASE -- MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
December 8, 1997 is made by and between Bluffs Group III, a California limited
partnership ("Lessor") and MetaCreations, Inc. ("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 6303 Carpinteria Avenue and containing
35,084 sf, located in the City of Carpinteria ,County of Santa Barbara , State
of California , with zip code 93013 , 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): A commercial building containing approximately 88,283 square feet .
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 therein, are herein collectively referred to as the "Industrial
Center." (Also see Paragraph 2.)
1.2(b) PARKING: 95 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 10 reserved vehicle parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6.)
1.3 TERM: Ten (10) years and zero months ("Original Term") commencing
January 1, 1998 ("Commencement Date") and ending December 31, 2007. ("Expiration
Date"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: N/A ("Early Possession Date"). (Also see Paragraphs
3.2 and 3.3.)
1.5 BASE RENT: $50,871.80 per month ("Base Rent"), payable on the first day
of each month commencing January 1, 1998 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Paragraph 50 , attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ N/A As Base Rent for the period.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: forty percent
(40%) ("Lessee's Share") as determined by [ x ] prorata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum .
1.7 SECURITY DEPOSIT: $50,871.80 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Software research and development, assembly and
packaging, office and general administrative, and other related uses ("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):
[x] J.C. Martin Company represents Lessor exclusively ("Lessor's Broker");
[x] William Pintard represents Lessee exclusively ("Lessee's Broker"); or
[ ] ________________________ 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 $ N/A )
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 N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 65 and Exhibits A through N/A , all of which
constitute a part of this Lease.
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 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 within
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 at 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
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MULTI-TENANT -- MODIFIED NET ________
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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 or 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 or 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 aid
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.)
(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 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
(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 not limited to the obligations to pay
Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph
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MULTI-TENANT -- MODIFIED NET
(C)American Industrial Real Estate Association 1993 Initials:________
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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 therefor, nor shall such
failure affect the validity of this Lease, or the obligations of Lessee
hereunder, or extend the term hereof, but in such case, Lessee shall not, except
as otherwise provided herein, be obligated to pay rent or perform any other
obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. It 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 within
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 of delay caused by the acts, changes 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, including, but not limited to, the following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(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) Reasonable 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 an 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 within 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 within 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 of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request
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from Lessor, deposit additional monies with Lessor as an addition to the
Security Deposit so that the total amount of the Security Deposit shall at all
times bear the same proportion to the then current Base Rent as the initial
Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5.
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.
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 of 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 within
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) 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. It 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
obligations 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,
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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.
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 or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(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 providing 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 nor 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 cost
thereof within any calendar year during the term of this Lease as extended does
not exceed $25,000.00.
(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 concocts given by Lessor,
whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall
be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(III) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and 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
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any requested Alteration or Utility Installation that costs $25,000 or more upon
Lessee's providing Lessor with a lien and completion bond in an amount equal to
one and one-half times the estimated cost of such Alteration or Utility
Installation.
(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 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. If agreed in writing between the parties at the time Lessee
requests consent to installation of a Lessee-Owned Alterations or Utility
Installation, Lessor may require that any such 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 of 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.
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 insureds) against claims for bodily injury, personal
injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" 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 Lender(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 of 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
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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
day 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, 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 or 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 or 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 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 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 to Lessee for an amount of damages
in excess of Lessor's equity in the Industrial Center.
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 than 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)
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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) of 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 not Lessee's Trade Fixtures or lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. 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 cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (1 0)
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 or 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 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 (iii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the 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
the rent to be collected for the remainder of the Lease Term 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 . For purposes of this paragraph,
whether or not damage has occurred during the last six months of the term shall
be determined by taking into consideration only those options to extend then
actually exercised.
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.
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(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after the receipt of such notice, this Lease shall continue in
full force and effect. "Commence" as used in this Paragraph 9.6 shall mean the
beginning of the actual work on the Premises.
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 Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $1 00,000 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 (1 0) 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 extent 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.
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 AND SUBLETTING.
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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. In the event Lessee is not a company whose shares
are publicly traded on a national securities exchange, the transfer, on a
cumulative basis, of twenty five percent (25%) or more of the voting control of
Lessee shall constitute a change in control for this purpose. So long as Lessee
is a company whose shares are publicly traded on a national securities exchange,
a change in control shall only be the transfer of fifty percent (50%) or more of
the voting control of Lessee in a single transaction shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions with affiliates (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than fifty percent ( 50
%) of such Net Worth of Lessee as it was represented to Lessor at the time of
full execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Not Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, 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 any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and 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 (11 0%)
of the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
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 by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the 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 but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 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.
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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 or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against 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 of such sublessor under such sublease.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. 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 applicable grace
period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a)
(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 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 any such failure continues for a period of ten (10) days
following written notice b @half 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.
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(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:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys' fees, and that portion of 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 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 hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
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 within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to three percent (3%) 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
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or any other provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by 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 within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. It 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, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of 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 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed in
writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
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 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 1.10 and of this 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 for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchase( 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 herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within 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,
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but not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4, provided that written demand for
payment of such interest is made within thirty (30) days following such due
date.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. 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. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 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 of 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 subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any 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 to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. 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 two hundred percent
(200%) 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 at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, 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 or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one 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.
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30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of 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 reasonable attorneys' fees. Such fees may be awarded in the same
suitor 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 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 reasonable 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.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior 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. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent 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 matter 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
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and 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, lb) 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.
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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 lease that Lessee has on other property of Lessor; (b)
the fight 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 Lease 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 noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of 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(a)
(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 for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
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 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 not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named as either Lessor or Lessee, the obligations
of such multiple parties shall be the joint and several responsibility of all
persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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<PAGE> 17
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 OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION
IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR 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 dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Executed at:
on: December 19, 1997 on: December 19, 1997
-------------------------------------------- ----------------------------------------------
BY LESSOR: BY LESSEE:
Bluffs Group III, MetaCreations, Inc.
-------------------------------------------- ----------------------------------------------
A California limited partnership
-------------------------------------------- ----------------------------------------------
By: /s/JOHN E. KING By: /s/TERRY KINNINGER
-------------------------------------------- ----------------------------------------------
Name Printed: John E. King Name Printed: Terry Kinninger
--------------------------------- --------------------------------------
Title: General Partner Title: Sr. V.P. and Chief Financial Officer
--------------------------------- --------------------------------------
Address: 290 Pismo Street Address: 6303 Carpenteria Avenue
--------------------------------- --------------------------------------
San Luis Obispo, CA 93401 Carpenteria, CA 93013
--------------------------------- --------------------------------------
Telephone: (805) 544-4444 Telephone: (805)
------------------------------- ------------------------------------
Facsimile: (805) 544-5637 Facsimile: (805)
------------------------------- ------------------------------------
COPY OF NOTICES TO: COPY OF NOTICES TO:
Name: Paul G. Metchik, Esq. Name: Michael Pfau, Esq.
--------------------------------- -----------------------------------
Address: 748 Pismo Street Address: Reicker, Clough, Pfau & Pyle
--------------------------------- -----------------------------------
San Luis Obispo, CA 93401 1421 State Street
--------------------------------- -----------------------------------
Santa Barbara, CA 93105
-----------------------------------
BROKER: BROKER:
--------------------------------- -----------------------------------
Executed at: Executed at:
--------------------------------- -----------------------------------
on: on:
--------------------------------- -----------------------------------
By: By:
Name Printed: Name Printed:
--------------------------------- -----------------------------------
Title: Title:
--------------------------------- -----------------------------------
Address: Address:
--------------------------------- -----------------------------------
Telephone: ( ) Telephone: ( )
------------------------------ --------------------------------
Facsimile: ( ) Facsimile: ( )
------------------------------ --------------------------------
</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.
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<PAGE> 18
ADDENDUM TO LEASE
BETWEEN
BLUFFS GROUP III AND METACREATIONS, INC.
REGARDING
6303 CARPINTERIA AVENUE, CARPINTERIA, CALIFORNIA
49. Provisions of Addendum Control. In the event of a conflict between the terms
of the standard provisions of this Lease contained in paragraphs 1 through 48
and the terms of this Addendum, the terms of this Addendum are controlling and
supercede such standard provisions.
50. Rent Adjustment.
On January 1, 2000, and annually on the same calendar day thereafter (the
"Adjustment Date") during the remainder of the initial term and any extension of
the Lease (except as specifically provided otherwise in this Lease), the Base
Rent shall be adjusted in the following manner:
1. By the change, if any, from October 1997, in the Consumer Price Index of
the Bureau of Labor Statistics of the U.S. Department of Labor for: CPIU (All
Urban Customers), for L.A./Long Beach/Anaheim/Riverside, All Items (1982-1984 =
100), herein referred to as "CPI"
2. The monthly rent payable in accordance with this paragraph shall be
calculated as follows: the Base Rent on the Commencement Date shall be
multiplied by a fraction the numerator of which shall be the CPI of the month of
October most nearly preceding the Adjustment Date and the denominator of which
shall be the CPI of October 1997. The sum so calculated shall constitute the new
monthly rent hereunder, but in no event, shall any such new rent be more than
one hundred five percent (105%) of the rent payable for the month immediately
preceding the Adjustment Date, except for the adjustment to take place on
January 1, 2000 which shall not be more than 110% of the rent payable for the
month immediately preceding the Adjustment Date; provided, however, that no more
than a 5% change may be attributable to each of the twelve month periods being
analyzed with regard to the first rent adjustment.
3. In the event the compilation and/or publication of the CPI shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the government index most nearly the same as the CPI shall be
used to make such calculation. In the event that Lessor or Lessee cannot agree
on such alternative index within 30 days, then upon written notice by one party
to the other, the matter shall be submitted for decision to the American
Arbitration Association in accordance with the then
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rules of said association and the decision of the arbitrators shall be binding
upon the parties. The cost of said arbitrators shall be paid equally by Lessor
and Lessee.
51. Rent Adjustment for First Five Year Extension Term. Notwithstanding the
provisions of paragraph 50, the Base Rent for the first year of the first five
year option term shall be determined as follows:
a. For a period of thirty (30) days after Lessee's notice of exercise, the
parties shall negotiate in good faith to arrive at an agreed Base Rent for the
first year of the first five year option term.
b. If the parties do not agree within such thirty (30) day period:
i. Either party may notify the other (the "Appraisal Notice") in
writing that the noticing party desires to enter into an Appraisal Process to
determine the "fair market rent" for the first year of the first five year
option period and shall designate in the Appraisal Notice an MAI appraiser
experienced in appraising property in Carpinteria, California, to conduct the
appraisal.
ii. If the other party does not notify the noticing party within 10
days after the Appraisal Notice is given of his selection of a like-qualified
Appraiser, then the single chosen appraiser shall be the sole appraiser and
shall determine the "fair market rent" for the first year of the first five year
option period within forty five (45) days after expiration of such ten (10) day
period. Said appraiser's finding will be final.
iii. The appraiser(s) shall be directed to determine the "fair market
rent" on a triple net basis, reflecting the terms and conditions of the current
lease, taking into consideration the extension commencement date, the zoning of
the Premises and those improvements which are owned by Lessor.
iv. If both Lessor and Lessee designate an appraiser, the two
appraisers shall each determine the "fair market rent." After such
determination, the parties shall negotiate in good faith for a period of 15 days
based on such appraisals to determine a new base rent for the first year of the
first five year option term. If the parties cannot agree on such new base rent
within such 15 day period, the two appraisers shall jointly choose a third MAI
appraiser and notify Lessor and Lessee in writing of their choice. Within forty
five (45) days after the third appraiser is chosen, the three appraisers shall
each determine the "fair market rent". Any appraisal which is more than 10%
different from the middle appraisal shall be disregarded. The mean average of
the remaining appraisals shall be the "fair market rent" for the first year of
the first five year extension term. This determination shall be final. During
the remainder of the Lease term, including extensions, the Base Rent shall be
increased annually as provided in paragraph 50, with the denominator of the
first year of the first five year extension term.
c. Lessor and Lessee shall execute an addendum to this Lease acknowledging
the new Base Rent for the first year of the first five year extension term.
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<PAGE> 20
d. Each party shall pay the appraiser chosen by it and shall pay for
one-half (1/2) of the cost of the appraiser chosen by the two appraisers, if
any.
52. Verification of Square Footage; Temporary Rent Reduction; Audit. The initial
Base Rent is based on $1.45 psf rent for 35,084 sf. The size of the Lease
Premises shall be subject to reasonable verification by Lessee prior January 1,
1998 or it shall be deemed accurate. Until completion of the new lobby entry and
the employee lounge described in paragraph 54 below, Base Rent shall be reduced
by $1.45 multiplied by the intended square footage of those spaces. On or before
January 1, 1998, if requested by Lessee, there shall be an informal audit of the
rent actually paid by Lessee to Lessor during the calendar year 1997 to
determine whether rent at $1.30 psf was inadvertently paid with regard to the
new lobby and the new lounge area referred to in paragraph 54 prior to
completion of construction. An overage of rent paid shall be applied to the rent
due under this Lease for January, 1998.
53. Previous Tenant Improvement Credit. Lessor shall, concurrently with the
execution of this Lease, pay to Lessee the sum of $49,468.44 as reimbursement
for tenant improvements previously undertaken by Lessee.
54. Lessor's Work. Lessor agrees to complete the following work in the Premises,
at Lessor's expense:
a. a new lobby entry;
b. an employee lounge;
c. a landscape barrier (the "Landscape Barrier")to shield the Building from
the Rincon Engineering property which is adjacent to the Building; and
d. repainting of the Building.
The new lobby entry and the employee lounge shall be constructed according to
the plans and specifications of Lessor's architect previously approved by Lessee
and shall be completed on or before April 1, 1998. The landscape barrier shall
be consistent with the landscaping plan approved by the City of Carpinteria for
the new buildings which are intended to be constructed by Lessor adjacent to the
Building and shall be completed by April 1, 1998. The repainting of the existing
Building will be coordinated with the painting of the buildings to be
constructed and will be completed by December 31, 1998. In the event these
improvements are not substantially completed as outlined above, for each day
between April 1, 1998 and May 31, 1998 which Lessee cannot occupy a space due to
completed, from and after the time Lessee occupies such space and is otherwise
obligated to pay rent on such space, Lessee shall be entitled to occupy such
space for 3 days rent free. If either the lounge or the new lobby is not
substantially completed by June 1, 1998, Lessee shall be entitled to occupy rent
free from and after June 1, 1998 until such space is completed, a portion of the
existing space three (3) times the intended size of the space not so completed
and additionally the free rent to which Lessee was otherwise entitled for
Lessor's failure to complete such improvements through May 31, 1998, shall all
be applied to rent next coming due under the Lease. With regard to Lessor's
failure to timely
20
<PAGE> 21
complete the Landscape Barrier or the repainting of the Building, Lessee may,
but shall not be obligated to, undertake such improvements and offset the costs
of such improvements against the rent next coming due under the Lease. For all
purposes hereunder, "substantial completion" shall be no later than the date
Lessee occupies a space and prior to the completion of minor "punchlist" items.
Any change order to the above improvements initiated by Lessee shall be in
writing and specify the additional costs to be paid by Lessee and the additional
days added to the timeline for completion, if any.
55. Options to Extend. Lessor grants to Lessee one (1) option ("Option 1") to
extend the term of this Lease to make the term coterminous with the end of the
lease between Lessor and Lessee executed concurrently with this Lease regarding
a 20,000 sf premises on an adjacent parcel of real property also owned by Lessor
(the "Adjacent Premises Lease"). Lessor further grants to Lessee two (2)
consecutive options ("Option 2 and Option 3") to extend the term of this Lease
for five (5) years each. Each of the three options shall be upon the same terms
and conditions of the Lease, including but not limited to the terms of paragraph
50 of this Addendum, except as specifically provided otherwise in this Lease.
Lessee must exercise an option to extend, if at all, not more than 18 months and
not less than 12 months before the end of the then current term. Lessee shall
exercise Options 1, 2 and 3 consecutively; provided, however, Lessee may
exercise Option 2 during the appropriate period prior to the expiration of the
Initial Term, but Lessee shall thereafter be deemed to have waived its rights
with regard to Option 1.
56. Signage. Lessor and Lessee shall cooperate to obtain city of Carpinteria
approval for signage plan for the Building and Industrial Center. Subject to
such approval, Lessor shall construct, at its cost, a monument sign for the
Industrial Center at the front of the Building; provided, however, Lessee shall
pay for the cost of fabrication and installation of its signage on such monument
sign. Lessor shall cause to be fabricated and installed, at Lessee's cost,
Lessee's signage on the exterior of the Premises, if such signage is approved by
the City of Carpinteria. Lessor shall diligently pursue the removal of the
temporary signage on the exterior of the Digital Sound premises. Each tenant of
the Industrial Center shall have a pro rata portion of the space on monument
signage equivalent to their pro rata portion of the entire Industrial Center,
based on leaseable square footage.
57. Parking. Lessor shall use its best efforts to maximize parking for the
premises. Lessee understands and acknowledges that the City of Carpinteria has
approved 362 parking spaces for the entire completed Industrial Center of
approximately 121,083 sf of buildings. In all events, Lessor shall make
available to the premises not less than a prorata share of the parking spaces
available based on relative square footages contained within the various
premises in the Industrial Center. "Parking spaces" means paved and striped
parking spaces. The location of designated parking spaces referred to in
paragraph 1.2(b) of the Lease shall be subject to the reasonable approval of
Lessor and Lessee and shall be as close as reasonably possible to Lessee's front
entrance, subject to any existing rights of Digital Sound.
58. First Right of Purchase. Lessor hereby grants to Lessee the exclusive first
right to negotiate for the purchase of the Property of which the Premises is a
part for a twenty (20) day period following the date on which Lessor delivers to
Lessee a written notice setting forth Lessor's intention to place the Property
on the market, and the price and other material terms and conditions on which
Lessor offers to sell the Property to Lessee. If, during such twenty
21
<PAGE> 22
(20) day period, Lessor and Lessee fail to agree with respect to the terms for
the sale of the Property to Lessee, then Lessor thereafter may market and sell
the Property to any other person provided, immediately following expiration of
the twenty (20) day first-offer period under this Paragraph 58, Lessor initially
may not offer (or list) the Property for sale at a price lower than that at
which it was offered to Tenant pursuant to this Paragraph 58.
59. Estoppel Certificate. Lessee shall provide to Lessor within five (5) days
after execution of the Lease, an estoppel certificate in form reasonably
acceptable to Lessor's lender.
60. Lessee Vacation of Premises; Right of Lessor to Terminate. In the event the
Lessee vacates the Leased Premises and it remains so vacated for a period of 180
consecutive days, Lessor shall have the right to terminate the Lease, upon not
less than 30 days written notice to Lessee, after which termination all future
obligations of the parties under the Lease shall terminate.
61. Rental Overage for Assignments and Subleases. Notwithstanding any other
provisions of the Lease and particularly the provisions of paragraph 12 of the
Lease, if the amount of rent payable by any sublessee or assignee exceeds the
amount of rent then payable by Lessee under this Lease for the portion of the
Premises subleased or assigned, then the excess rent payable by the sublessee or
assignee shall be payable fifty percent (50%) to Lessor and fifty percent (50%)
to Lessee.
62. Digital Sound Premises. So long as Lessee executes the Adjacent Premises
Lease concurrently with the execution of this Lease, Lessee shall have the
following rights with regard to the space (the "Digital Premises") in the
Building currently subject to a lease with Digital Sound Corporation (the
"Digital Lease") as in effect on the date this Lease is executed:
a. Lessee shall have the option to require Lessor to terminate the Digital
Lease by giving notice to Lessor, in which event Lessor shall give notice to
Digital Sound within 30 days after receiving such notice to vacate the Digital
Premises twelve months after Lessor gives such notice to Digital Sound (but in
no event shall Digital Sound be required to vacate earlier than October 1, 2001)
and Lessee shall, effective twelve months after Lessor's giving notice to
Digital Sound (but in no event earlier than October 1, 2001), lease the Digital
Premises upon the same terms and conditions as provided in the Digital Lease
(without any allowance for tenant improvements), but in no event upon terms and
conditions less favorable to Lessee than under this Lease. Lessee shall
thereafter not have the right to cancel the Digital Lease pursuant to section
2.1.1 of that certain Letter Agreement between Digital Sound and Lessor, dated
September 4, 1996. In the event Lessee exercises its rights under this
subparagraph 62.a, Lessee shall have, in addition to the rights to extend the
term of the Digital Lease provided therein, a right to make the term of the
Digital Lease coterminous with the term of this Lease and the Adjacent Premises
Lease, in the same manner as described above in paragraph 55 with regard to
Option 1.
b. In the event the term of the Digital Lease terminates other than as
described in paragraph 62.a above, Lessee shall have the first right to lease
all or a portion of the Digital Premises upon the then same terms and conditions
as this Lease, so long as a commercially reasonable space is left for Lessor to
lease to others and Lessee bears the cost, if any, of demising the space so
leased. In the event Lessee exercises its first right under this paragraph,
Lessor shall provide to Lessee a tenant improvement allowance of $5.25 psf.
63. Exceptions to Common Area Operating Expense Reimbursements. Notwithstanding
the provisions of Paragraph 7.2 regarding reimbursement of Lessor for the cost
of maintaining structural components of the premises:
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<PAGE> 1
Exhibit 10.35
STANDARD INDUSTRIAL/COMMERCIAL MULTI TENANT LEASE -- MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
December 8, 1997 is made by and between Bluffs Group III, a California limited
partnership ("Lessor") and MetaCreations, Inc. ("Lessee"), (collectively the
"Parties," or individually a "Party").
1.2(a) PREMISES: That certain Building, including all improvements therein
or to be provided by Lessor under the terms of this Lease, commonly known by the
street address of (tbd) Carpinteria Avenue and containing 20,000 sf, located in
the City of Carpinteria, County of Santa Barbara, State of California, with zip
code 93013, 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): A commercial
building to be constructed containing approximately 20,000 square feet. 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 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
therein, are herein collectively referred to as the "Industrial Center." (Also
see Paragraph 2.)
1.2(b) PARKING: 54 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 6 reserved vehicle parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6.)
1.3 TERM: Ten (10) years and zero months ("Original Term") commencing
upon Substantial Completion of the entire Premises. See Exhibit "B" -- "Tenant
Work Letter", Section 10.a.) ("Commencement Date") and ending the last day of
the tenth (10th) year after the Commencement Date, but in no event later than
December 31, 2008 ("Expiration Date"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: See Section 11.a. of Exhibit B -- "Addendum
Regarding Construction Work Letter" ("Early Possession Date"). (Also see
Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $32,000 per month ("Base Rent"), payable on the first day
of each month commencing the Commencement Date (but see Section 10.a. of Exhibit
"B" -- "Tenant Work Letter" (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum Paragraph 50, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ 32,000 As Base Rent for the period
first month for which rent is due hereunder.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 100% percent
(100%) ("Lessee's Share") as determined by [x] prorata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum.
1.7 SECURITY DEPOSIT: $ $32,000 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: Software research and development, assembly and
packaging, office and general administrative, and other related uses ("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):
[x] J.C. Martin Company represents Lessor exclusively ("Lessor's Broker");
[x] William Pintard represents Lessee exclusively ("Lessee's Broker"); or
[ ] ______________ 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 $ N/A )
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 N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 61 and Exhibits A through B, all of which
constitute a part of this Lease.
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 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 within
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 at 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
MULTI-TENANT -- MODIFIED NET
(C)American Industrial Real Estate Association 1993 Initials:________
________
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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 or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; lb)
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 or 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 aid
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.)
(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 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
(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 not 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.
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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 therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. It 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 (1 0) 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 within
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 of delay caused by the acts, changes 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, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(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) Reasonable 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 an 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 within 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 within 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 (1 0) 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 of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. 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),
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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.
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 of 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 within
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) 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. It 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
obligations 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
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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.
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 or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(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 providing 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 nor 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 cost
thereof within any calendar year during the term of this Lease as extended does
not exceed $25,000.00.
(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 concocts given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(III) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and 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 $25,000 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(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
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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 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. If agreed in writing between the parties at the time
Lessee requests consent to installation of a Lessee-Owned Alterations or Utility
Installation, Lessor may require that any such 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 of 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.
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 insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" 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 Lender(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 of 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 day 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, 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.
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(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 or 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 or 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 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
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 to Lessee for an amount of damages
in excess of Lessor's equity in the Industrial Center.
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 than 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) of 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 not Lessee's Trade Fixtures or lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. 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
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improvements in the Premises, full replacement cost insurance coverage was not
commercially reasonable and available, Lessor shall have no obligation to pay
for the shortage in insurance proceeds or to fully restore the unique aspects of
the Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds or
adequate assurance thereof within said ten (10) day period, 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 or
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 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
(iii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the 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 the rent to be collected for the remainder of the Lease Term 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 . For purposes of this
paragraph, whether or not damage has occurred during the last six months of the
term shall be determined by taking into consideration only those options to
extend then actually exercised.
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 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 the beginning of the actual work on the Premises.
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 Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (II) if the
estimated cost to investigate and remediate such condition exceeds twelve (1 2)
times the then monthly Base Rent or $1 00,000 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 (1 0) 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
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extent 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.
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 AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "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. In the event Lessee is not a company
whose shares are publicly traded on a national securities exchange, the
transfer, on a cumulative basis, of twenty five percent (25%) or more of the
voting control of Lessee shall constitute a change in control for this purpose.
So long as Lessee is a company whose shares are publicly traded on a national
securities exchange, a change in control shall only be the transfer of fifty
percent (50%) or more of the voting control of Lessee in a single transaction
shall constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions with affiliates (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than fifty percent (50
%) of such Net Worth of Lessee as it was represented to Lessor at the time of
full execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Not Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, 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"),
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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 any overpayment credited
against the next installment(s) of Base Rent coming due, and any underpayment
for the period retroactively to the effective date of the adjustment being due
and payable immediately upon the determination thereof. Further, in the event of
such Breach and 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 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 by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the 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 but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 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.
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 or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against 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 of such sublessor under such sublease.
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(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. 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 applicable grace
period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a)
(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 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 any such failure
continues for a period of ten (10) days following written notice b @half 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:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of 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 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
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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 hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
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 within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to three percent (3%) 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 BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by 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 within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. It 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, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of 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 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed
in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined
in Paragraph 39.1) granted under this Lease or any Option subsequently granted,
or lb) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in
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possession of the Premises with the consent of Lessor after the expiration of
the term of this Lease after having failed to exercise an Option, or (d) if said
Brokers are the procuring cause of any other lease or sale entered into between
the Parties pertaining to the Premises and/or any adjacent property in which
Lessor has an interest, or (e) if Base Rent is increased, whether by agreement
or operation of an escalation clause herein, then as to any of said
transactions, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this Lease.
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
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 1.10 and of this 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 for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. 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 herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within 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, provided that written demand for payment of such interest
is made within thirty (30) days following such due date.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. 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. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 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 of
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 subsequent
or similar act by Lessee, or be construed as the basis of an estoppel to enforce
the provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any 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
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<PAGE> 14
Lessee in connection therewith, which such statements and/or conditions shall be
of no force or effect whatsoever unless specifically agreed to in writing by
Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. 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 two hundred percent
(200%) 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 at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, 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 or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of 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 reasonable attorneys' fees. Such fees may be awarded in the same
suitor 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 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 reasonable 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.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior 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.
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<PAGE> 15
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', 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 matter 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 the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and 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 lease that Lessee has on other property of
Lessor; (b) the fight 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 Lease 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 noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of 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(a)
(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 for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
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.
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MULTI-TENANT -- MODIFIED NET
(C)American Industrial Real Estate Association 1993 Initials:________
________
<PAGE> 16
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay 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 not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named as either Lessor or Lessee, the obligations
of such multiple parties shall be the joint and several responsibility of all
persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
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<PAGE> 17
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 OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR 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 dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Executed at:
--------------------------------------- -----------------------------------------
on: December 19, 1997 on: December 31, 1997
---------------------------------------------- ------------------------------------------------
BY LESSOR: BY LESSEE:
Bluffs Group III, MetaCreations, Inc.
---------------------------------------------- ------------------------------------------------
A California limited partnership
---------------------------------------------- ------------------------------------------------
By: /s/JOHN E. KING By: /s/TERRY KINNINGER
---------------------------------------------- ------------------------------------------------
Name Printed: John E. King Name Printed: Terry Kinninger
------------------------------------ --------------------------------------
Title: General Partner Title: Sr. V.P. and Chief Financial Officer
-------------------------------------------- ---------------------------------------------
Address: 290 Pismo Street Address: 6303 Carpenteria Avenue
----------------------------------------- -------------------------------------------
San Luis Obispo, CA 93401 Carpenteria, CA 93013
----------------------------------------- -------------------------------------------
Telephone: (805) 544-4444 Telephone: (805)
---------------------------------------- ------------------------------------------
Facsimile: (805) 544-5637 Facsimile: (805)
---------------------------------------- ------------------------------------------
COPY OF NOTICES TO: COPY OF NOTICES TO:
Name: Paul G. Metchik, Esq. Name: Michael Pfau, Esq.
-------------------------------------------- ----------------------------------------------
Address: 748 Pismo Street Address: Reicker, Clough, Pfau & Pyle
----------------------------------------- -------------------------------------------
San Luis Obispo, CA 93401 1421 State Street
----------------------------------------- -------------------------------------------
Santa Barbara, CA 93105
-------------------------------------------
BROKER: BROKER:
Executed at: Executed at:
-------------------------------------- ---------------------------------------
on: on:
---------------- ----------------
By: By:
---------------- ----------------
Name Printed: Name Printed:
Title: Title:
-------------------------------------------- ---------------------------------------------
Address: Address:
------------------------------------------ -------------------------------------------
Telephone: ( ) Telephone: ( )
---------------------------------------- ------------------------------------------
Facsimile: ( ) Facsimile: ( )
---------------------------------------- ------------------------------------------
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.
</TABLE>
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<PAGE> 18
ADDENDUM TO LEASE
BETWEEN
BLUFFS GROUP III AND METACREATIONS, INC.
REGARDING
BUILDING TO BE CONSTRUCTED ON CARPINTERIA AVENUE
CARPINTERIA, CALIFORNIA
49. Provisions of Addendum Control. In the event of a conflict between the
terms of the standard provisions of this Lease contained in paragraphs 1 through
48 and the terms of this Addendum, the terms of this Addendum are controlling
and supercede such standard provisions.
50. Rent Adjustment.
On the first anniversary of the first day of the first full calendar month
of the term of this Lease, and annually on the same calendar day thereafter (the
"Adjustment Date") during the remainder of the initial term and any extension of
the Lease (except as specifically provided otherwise in this Lease), the Base
Rent shall be adjusted in the following manner:
1. By the change, if any, from the month which is the third month prior
to the first day of the first full calendar month of the term of this Lease, in
the Consumer Price Index of the Bureau of Labor Statistics of the U.S.
Department of Labor for: CPIU (All Urban Customers), for L.A./Long
Beach/Anaheim/Riverside, All Items (1982- 1984 = 100), herein referred to as
"CPI"
2. The monthly rent payable in accordance with this paragraph shall be
calculated as follows: the Initial Base Rent shall be multiplied by a fraction
the numerator of which shall be the CPI of the third month prior to the
Adjustment Date and the denominator of which shall be the CPI of the third month
prior the first day of the first full calendar month of the term of this Lease.
The sum so calculated shall constitute the new monthly rent hereunder, but in no
event, shall any such new rent be more than one hundred five percent (105%) of
the rent payable for the month immediately preceding the Adjustment Date.
3. In the event the compilation and/or publication of the CPI shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the government index most nearly the same as the CPI shall be
used to make such calculation. In the event that Lessor or Lessee cannot agree
on such alternative index within 30 days, then upon written notice by one party
to the other, the matter shall be submitted for decision to the American
Arbitration Association in accordance with the then rules of said association
and the decision of the arbitrators shall be binding upon the parties. The cost
of said arbitrators shall be paid equally by Lessor and Lessee.
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<PAGE> 19
51. Rent Adjustment for First Five Year Extension Term. Notwithstanding the
provisions of paragraph 50, the Base Rent for the first year of the first five
year option term shall be determined as follows:
a. For a period of thirty (30) days after Lessee's notice of exercise,
the parties shall negotiate in good faith to arrive at an agreed Base Rent for
the first year of the first five year option term.
b. If the parties do not agree within such thirty (30) day period:
i. Either party may notify the other (the "Appraisal Notice") in
writing that the noticing party desires to enter into an Appraisal Process to
determine the "fair market rent" for the first year of the first five year
option period and shall designate in the Appraisal Notice an MAI appraiser
experienced in appraising property in Carpinteria, California, to conduct the
appraisal.
ii. If the other party does not notify the noticing party within
10 days after the Appraisal Notice is given of his selection of a like-qualified
Appraiser, then the single chosen appraiser shall be the sole appraiser and
shall determine the "fair market rent" for the first year of the first five year
option period within forty five (45) days after expiration of such ten (10) day
period. Said appraiser's finding will be final.
iii. The appraiser(s) shall be directed to determine the "fair
market rent" on a triple net basis, reflecting the terms and conditions of the
current lease, taking into consideration the extension commencement date, the
zoning of the Premises and those improvements which are owned by Lessor.
iv. If both Lessor and Lessee designate an appraiser, the two
appraisers shall each determine the "fair market rent." After such
determination, the parties shall negotiate in good faith for a period of 15 days
based on such appraisals to determine a new base rent for the first year of the
first five year option term. If the parties cannot agree on such new base rent
within such 15 day period, the two appraisers shall jointly choose a third MAI
appraiser and notify Lessor and Lessee in writing of their choice. Within forty
five (45) days after the third appraiser is chosen, the three appraisers shall
each determine the "fair market rent. Any appraisal which is more than 10%
different from the middle appraisal shall be disregarded. The mean average of
the remaining appraisals shall be the "fair market rent" for the first year of
the first five year extension term. This determination shall be final. During
the remainder of the Lease term, including extensions, the Base Rent shall be
increased annually as provided in paragraph 50, with the denominator of the
applicable fraction being the Base Rent for the first year of the first five
year extension term .
c. Lessor and Lessee shall execute an addendum to this Lease
acknowledging the new Base Rent for the first year of the first five year
extension term.
d. Each party shall pay the appraiser chosen by it and shall pay for
one-half (1/2) of the cost of the appraiser chosen by the two appraisers, if
any.
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52. Options to Extend. Lessor grants to Lessee two (2) consecutive options to
extend the term of this Lease for five (5) years each. Each of the options shall
be upon the same terms and conditions of the Lease, including but not limited to
the terms of paragraph 50 of this Addendum, except as specifically provided
otherwise in this Lease. Lessee must exercise an option to extend, if at all, by
giving written notice to Lessor not more than 18 months and not less than 12
months before the end of the then current term.
53. Signage. Lessor and Lessee shall cooperate to obtain city of Carpinteria
approval for signage plan for the Building and Industrial Center. Subject to
such approval, Lessor shall construct, at its cost, a monument sign for the
Industrial Center at the front of the Building; provided, however, Lessee shall
pay for the cost of fabrication and installation of its signage on such monument
sign. Lessor shall cause to be fabricated and installed, at Lessee's cost,
Lessee's signage on the exterior of the Premises, if such signage is approved by
the City of Carpinteria. Lessor shall diligently pursue the removal of the
temporary signage on the exterior of the Digital Sound premises. Each tenant of
the Industrial Center shall have a pro rata portion of the space on monument
signage equivalent to their pro rata portion of the entire Industrial Center,
based on leaseable square footage.
54. Parking. Lessor shall use its best efforts to maximize parking for the
premises. Lessee understands and acknowledges that the City of Carpinteria has
approved 362 parking spaces for the entire completed Industrial Center of
approximately 121,083 sf of buildings. In all events, Lessor shall make
available to the premises not less than a prorata share of the parking spaces
available based on relative square footages contained within the various
premises in the Industrial Center. "Parking spaces" means paved and striped
parking spaces. The location of designated parking spaces referred to in
paragraph 1.2(b) of the Lease shall be subject to the reasonable approval of
Lessor and Lessee and shall be as close as reasonably possible to Lessee's front
entrance, subject to any existing rights of Digital Sound.
55. First Right of Purchase. Lessor hereby grants to Lessee the exclusive
first right to negotiate for the purchase of the Property of which the Premises
is a part for a twenty (20) day period following the date on which Lessor
delivers to Lessee a written notice setting forth Lessor's intention to place
the Property on the market, and the price and other material terms and
conditions on which Lessor offers to sell the Property to Lessee. If, during
such twenty (20) day period, Lessor and Lessee fail to agree with respect to the
terms for the sale of the Property to Lessee, then Lessor thereafter may market
and sell the Property to any other person provided, immediately following
expiration of the twenty (20) day first-offer period under this Paragraph 55,
Lessor initially may not offer (or list) the Property for sale at a price lower
than that at which it was offered to Tenant pursuant to this Paragraph 55.
56. Industrial Center Common Area Expense. To the extent there are Common Area
Operating Expenses that are reasonably shared by more than one building in the
Industrial Center, a fair and reasonable allocation of such expenses shall be
attributable to the Building.
57. Subletting Without Consent. Provided Lessee complies with all other terms
of this Lease with regard to subletting and notifies Lessor of the basic terms
and conditions of such sublease within ten (10) days after entering into the
same, Lessee shall be entitled to sublet up to 75% of the
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Premises without the necessity of obtaining Lessor's consent. l offer to sell
shall make this offer null and void.
58. Lessee Vacation of Premises; Right of Lessor to Terminate. In the event
the Lessee vacates the Leased Premises and it remains so vacated for a period of
180 consecutive days, Lessor shall have the right to terminate the Lease, upon
not less than 30 days written notice to Lessee, after which termination all
future obligations of the parties under the Lease shall terminate.
59. Rental Overage for Assignments and Subleases. Notwithstanding any other
provisions of the Lease and particularly the provisions of paragraph 12 of the
Lease, if the amount of rent payable by any sublessee or assignee exceeds the
amount of rent then payable by Lessee under this Lease for the portion of the
Premises subleased or assigned, then the excess rent payable by the sublessee or
assignee shall be payable fifty percent (50%) to Lessor and fifty percent (50%)
to Lessee.
60. Exceptions to Common Area Operating Expense Reimbursements.
Notwithstanding the provisions of Paragraph 7.2 regarding reimbursement of
Lessor for the cost of maintaining structural components of the premises,
Lessor, at its sole cost and expense, shall repair and maintain (a) the
structural components of the Building, including (i) exterior and load-bearing
walls, foundations, subflooring and roof, and (b) the exterior of the Building
roof.
61. Verification of Square Footage. The rent is based on 20,000 sf at an
initial Base Rent of $1.60 psf. The size of the Premises shall be subject to
reasonable verification by either party within 30 days after completion of
construction or the size specified in the plans and specifications of Lessor's
architect shall be deemed correct.
EXECUTED at Santa Barbara, California on the date(s) set forth below.
BLUFFS GROUP III,
a California Limited Partnership
By: /s/JOHN E. KING Date: December 19, 1997
---------------------------------- ------------------------
John E. King, General Partner
"LESSOR"
MetaCreations,
a Delaware Corporation
By: /s/TERRY KINNINGER Date: December 19, 1997
------------------------------------------ ------------------------
Title
"LESSEE"
4
<PAGE> 1
Exhibit 10.36
STANDARD INDUSTRIAL/COMMERCIAL MULTI TENANT LEASE -- MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
December 8, 1997 is made by and between HKH Partners, a California general
partnership ("Lessor") and MetaCreations, Inc. ("Lessee"), (collectively the
"Parties," or individually a "Party").
1.2(a) PREMISES: That certain Building, including all improvements therein
or to be provided by Lessor under the terms of this Lease, commonly known by the
street address of 6185 Carpinteria Avenue and containing approximately 6700 sf,
located in the City of Carpinteria ,County of Santa Barbara , State of
California , with zip code 93013 , 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): A
commercial building containing approximately 6700 square feet . 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 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 therein, are herein
collectively referred to as the "Industrial Center." (Also see Paragraph 2.)
1.2(b) PARKING: 28 unreserved vehicle parking spaces ("Unreserved Parking
Spaces"); and 0 reserved vehicle parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6.)
1.3 TERM: Approximately 0 years and 9 months ("Original Term")
commencing January 1, 1998 ("Commencement Date") and ending September 30, 1998.
(See Addendum Paragraph 51) ("Expiration Date"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: See Addendum Paragraph 50 ("Early Possession
Date"). (Also see Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $7,000 per month ("Base Rent"), payable on the first day
of each month commencing January 1, 1998 (Also see Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum , attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ 7,000 As Base Rent for the period
January, 1998 _____________.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: one hundred
percent ( 100 %) ("Lessee's Share") as determined by [ x ] prorata square
footage of the Premises as compared to the total square footage of the Building
or [ ] other criteria as described in Addendum ____.
1.7 SECURITY DEPOSIT: $ $7000. ("Security Deposit"). (Also see Paragraph
5.)
1.8 PERMITTED USE: Software research and development, assembly and
packaging, office and general administrative, and other related uses ("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):
[x] J.C. Martin Company represents Lessor exclusively ("Lessor's Broker");
[x] William Pintard represents Lessee exclusively ("Lessee's Broker"); or
[ ] _____________________ 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 $ N/A )
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 N/A ("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 55 and Exhibits A through N/A , all of which
constitute a part of this Lease.
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 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 within
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 at 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
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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 or 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 or 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 aid
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.)
(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 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
(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 not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph
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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 therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. It 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 within
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 of delay caused by the acts, changes 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, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(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) Reasonable 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 an 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 within 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 within 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 of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request
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from Lessor, deposit additional monies with Lessor as an addition to the
Security Deposit so that the total amount of the Security Deposit shall at all
times bear the same proportion to the then current Base Rent as the initial
Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5.
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.
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 of 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 within
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) 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. It 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
obligations 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,
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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.
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 or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(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 providing 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 nor 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 cost
thereof within any calendar year during the term of this Lease as extended does
not exceed $25,000.00.
(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 concocts given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and 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
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any requested Alteration or Utility Installation that costs $25,000 or more upon
Lessee's providing Lessor with a lien and completion bond in an amount equal to
one and one-half times the estimated cost of such Alteration or Utility
Installation.
(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 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. If agreed in writing between the parties at the time
Lessee requests consent to installation of a Lessee-Owned Alterations or Utility
Installation, Lessor may require that any such 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 of 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.
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 insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" 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 Lender(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 of 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
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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 day 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, 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 or 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 or 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 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
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 to Lessee for an amount of damages
in excess of Lessor's equity in the Industrial Center.
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 than 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)
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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) of 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 not Lessee's Trade Fixtures or lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. 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 cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, 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 or 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 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
(iii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the 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 the rent to be collected for the remainder of the Lease Term 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 . For purposes of this
paragraph, whether or not damage has occurred during the last six months of the
term shall be determined by taking into consideration only those options to
extend then actually exercised.
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.
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(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean the beginning of the actual work on the Premises.
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 Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the 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 (1 0) 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 extent 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.
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
(1 0) 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 AND SUBLETTING.
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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. In the event Lessee is not a company
whose shares are publicly traded on a national securities exchange, the
transfer, on a cumulative basis, of twenty five percent (25%) or more of the
voting control of Lessee shall constitute a change in control for this purpose.
So long as Lessee is a company whose shares are publicly traded on a national
securities exchange, a change in control shall only be the transfer of fifty
percent (50%) or more of the voting control of Lessee in a single transaction
shall constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions with affiliates (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than fifty percent ( 50
%) of such Net Worth of Lessee as it was represented to Lessor at the time of
full execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Not Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, 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 any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and 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 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 by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the 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 but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 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.
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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 or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against 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 of such sublessor under such sublease.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. 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 applicable grace
period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a)
(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 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 any such failure
continues for a period of ten (10) days following written notice b @half 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.
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(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:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of 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 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 hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
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 within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to three percent ( 3%) 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
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or any other provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by 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 within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. It 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 (1 0) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (1 0) 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 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed
in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined
in Paragraph 39.1) granted under this Lease or any Option subsequently granted,
or (b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
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
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 1.10 and of this 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 1.1 0(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 for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchase( 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 herein above defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within 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,
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but not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4, provided that written demand for
payment of such interest is made within thirty (30) days following such due
date.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. 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. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 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 of
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 subsequent
or similar act by Lessee, or be construed as the basis of an estoppel to enforce
the provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any 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 to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. 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 two hundred percent
(200%) 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 at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, 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 or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (II) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one 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.
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30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of 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 reasonable attorneys' fees. Such fees may be awarded in the same
suitor 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 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 reasonable 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.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior 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. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent 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 matter 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 the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and 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.
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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 lease that Lessee has on other property of
Lessor; (b) the fight 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 Lease 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 noticed Default is cured, or (II) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (III) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of 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(a)
(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 for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
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 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 not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named as either Lessor or Lessee, the obligations
of such multiple parties shall be the joint and several responsibility of all
persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
-16-
MULTI-TENANT -- MODIFIED NET
(C)American Industrial Real Estate Association 1993 Initials:________
________
<PAGE> 17
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 OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR 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 dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Executed at:
--------------------------------------- -----------------------------------------
on: December 19, 1997 on: December 31, 1997
---------------------------------------------- ------------------------------------------------
BY LESSOR: BY LESSEE:
HKH Partners, MetaCreations, Inc.
---------------------------------------------- ------------------------------------------------
A California general partnership
---------------------------------------------- ------------------------------------------------
By: /s/ JOHN E. KING By: /s/TERRY KINNINGER
---------------------------------------------- ------------------------------------------------
Name Printed: John E. King Name Printed: Terry Kinninger
------------------------------------ --------------------------------------
Title: General Partner Title: Sr. V.P. and Chief Financial Officer
-------------------------------------------- ---------------------------------------------
Address: 290 Pismo Street Address: 6303 Carpenteria Avenue
----------------------------------------- -------------------------------------------
San Luis Obispo, CA 93401 Carpenteria, CA 93013
----------------------------------------- -------------------------------------------
Telephone: (805) 544-4444 Telephone: (805)
---------------------------------------- -----------------------------------------
Facsimile: (805) 544-5637 Facsimile: (805)
---------------------------------------- -----------------------------------------
COPY OF NOTICES TO: COPY OF NOTICES TO:
Name: Paul G. Metchik, Esq. Name: Michael Pfau, Esq.
-------------------------------------------- ----------------------------------------------
Address: 748 Pismo Street Address: Reicker, Clough, Pfau & Pyle
------------------------------------------ ---------------------------------
San Luis Obispo, CA 93401 1421 State Street
----------------------------------------- -------------------------------------------
Santa Barbara, CA 93105
-------------------------------------------
BROKER: BROKER:
Executed at: Executed at:
-------------------------------------- ---------------------------------------
on: on:
---------------- ----------------
By: By:
---------------- ----------------
Name Printed: Name Printed:
Title: Title:
-------------------------------------------- ---------------------------------------------
Address: Address:
------------------------------------------ -------------------------------------------
Telephone: ( ) Telephone: ( )
---------------------------------------- --------------------------------------------
Facsimile: ( ) Facsimile: ( )
---------------------------------------- --------------------------------------------
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.
</TABLE>
-17-
<PAGE> 18
ADDENDUM TO LEASE
BETWEEN
HKH PARTNERS AND METACREATIONS, INC.
REGARDING
6185 CARPINTERIA AVENUE
("TEAMSTERS BUILDING")
CARPINTERIA, CALIFORNIA
49. Provisions of Addendum Control. In the event of a conflict between the
terms of the standard provisions of this Lease contained in paragraphs 1 through
48 and the terms of this Addendum, the terms of this Addendum are controlling
and supercede such standard provisions.
50. Commencement Date; Early Possession. Notwithstanding any other provision
of this Lease:
a. the Lease shall not commence until Lessor has removed all debris
from the interior of the Premises and has had the carpets professionally
cleaned;
b. Lessee may have early possession of all of the Premises except the
main auditorium on Friday, December 12, 1997 at 5:00 P.M. and may have early
possession of the main auditorium at 5:00 P.M. on December 19, 1997. The purpose
of such early possession is to allow Lessee to paint and connect electrical
hook-ups.
51. Expiration of Term. Notwithstanding any other provision of this Lease, the
term shall expire two (2) weeks after the Commencement Date of that certain
Lease (the "New Building Lease") between Lessee and an affiliate of Lessor,
Bluffs Group III, a California limited partnership, of a new building to be
built of 20,000 sf with an address on Carpinteria Avenue, Carpinteria,
California, executed concurrently with this Lease, even if such Commencement
Date is after September 16, 1998.
52. Lessee Vacation of Premises; Right of Lessor to Terminate. In the event
the Lessee vacates the Leased Premises and it remains so vacated for a period of
30 consecutive days, Lessor shall have the right to terminate the Lease, upon
not less than 30 days written notice to Lessee, after which termination all
future obligations of the parties under the Lease shall terminate.
53. Rental Overage for Assignments and Subleases. Notwithstanding any other
provisions of the Lease and particularly the provisions of paragraph 12 of the
Lease, if the amount of rent payable by any sublessee or assignee exceeds the
amount of rent then payable by Lessee under this Lease for the portion of the
Premises subleased or assigned, then the excess rent payable by the sublessee or
assignee shall be payable fifty percent (50%) to Lessor and fifty percent (50%)
to Lessee.
54. Storage Area. Notwithstanding any other provision of this Lease, the
storage area under the Building shall not be a part of the Premises leased
hereunder.
<PAGE> 19
55. "AS IS". The parties acknowledge that (i) the Premises is being made
available Lessee to accommodate Lessee's need for additional space while Lessee
is waiting to move into a new building being constructed for Lessee's occupancy
pursuant to the New Building Lease; and (ii) Lessor intends to tear down the
Building shortly after the end of the term of this Lease. Therefore,
notwithstanding any other provision of this Lease:
a. Lessee is accepting the Premises "AS IS" and with all faults, with
the exception of the following: (i) Lessor shall remove all debris and have the
carpets professionally cleaned; (ii) all heating, plumbing and electrical shall
be in working order at the Commencement Date; and (iii) Lessor, at its cost,
shall maintain the structure and maintain the roof watertight;
b. Lessee shall only perform such maintenance as it shall deem
necessary in its own discretion for its own use;
c. Lessor shall have no obligation to rebuild any portion of the
Premises in the event of any casualty, whether or not insured.
EXECUTED at Santa Barbara, California on the date(s) set forth below.
HKH Partners,
a California Limited Partnership
By: /s/JOHN E. KING Date: December 19, 1997
------------------------------------- ------------------------
John E. King, General Partner
"LESSOR"
MetaCreations,
a Delaware Corporation
By: /s/TERRY KINNINGER Date: December 31, 1997
------------------------------------- ------------------------
Title
19
<PAGE> 1
Exhibit 10.37
CONSULTING AND RELEASE AGREEMENT
This Consulting and Release Agreement ("Agreement") is made by and between
METACREATIONS CORPORATION (the "Company"), and JOHN J. WILCZAK ("Employee").
WHEREAS, Employee is employed by the Company as its Chief Executive
Officer and serves on its Board of Directors;
WHEREAS, the Company and Employee have entered into an Employment
Agreement effective April 15, 1992, as amended in January 1994, which is
attached as Exhibit A. (the "Employment Agreement").
WHEREAS, the Company and Employee have entered into an Employee Invention
and Secrecy Agreement dated April 2, 1992, which is attached as Exhibit B (the
"Confidentiality Agreement");
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment and director relationships, to enter into a consulting arrangement,
and to release the Company from any claims arising from or related to the
employment relationship;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:
1. Employment Agreement. This Agreement supersedes and terminates the
Employment Agreement, except to the extent the Employment Agreement is expressly
incorporated into this Agreement.
2. Resignation.
(a) Employee hereby agrees to resign from his position as Chief
Executive Officer and his position on the Board of Directors of the Company,
effective February 20, 1998.
(b) The Company agrees to continue Employee's benefits, including
health and life insurance benefits, through February 20, 1998. Employee agrees
that he is not entitled to any Company benefits after February 20, 1998.
3. Consulting Agreement.
(a) The Company and the Employee agree that Employee will perform
consulting services (not to exceed ten days per quarter at mutually agreeable
times and places), as requested by the Company.
<PAGE> 2
(b) The Company agrees to pay Employee a total of $240,000,
payable in increments of $60,000 at the conclusion of each of the four quarters
in calendar year 1998 for these consulting services.
(c) During the consulting period, the Company agrees to reimburse
Employee for reasonable office expenses through December 31, 1998, except that
such expenses are not to exceed $2,500 per month.
4. Payment for Prior Stock Purchase. Within 10 days of the effective
date of this Agreement, the Company agrees to pay Employee Thirty-Five Thousand
Dollars ($35,000) in connection with his prior sale of 35,000 shares to Ben
Weiss.
5. Vesting of Stock. The Parties agree that for purposes of determining
the number of shares of the Company's common stock which Employee is entitled to
purchase from the Company, Employee will be entitled to continue vesting of
stock until February 20, 1998 so long as he remains employed by the Company
under the terms of this Agreement. No stock will vest after that date. The
exercise of any stock options, both before and after February 20, 1998, will
continue to be subject to the terms and conditions of the Company's Stock Option
Plan and the applicable Stock Option Agreement between Employee and the Company.
6. Confidential Information. Employee shall continue to maintain the
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the terms and conditions of the
Confidentiality Agreement between Employee and the Company.
7. Company Property. Employee agrees to return to the Company all
Company property and confidential and proprietary information in his possession
upon the effective date of this Agreement, except that Employee may retain the
laptop computer and computer equipment that has been provided to him, as long as
any confidential proprietary or trade secret information contained in those
items is returned to the Company.
8. Business Conduct. Section 7 of the Employment Agreement is
incorporated by reference as if fully set forth, except that Employee may enter
into or participate in a competitive business if, and only if, Employee obtains
the express written approval of the chairman of the Board of Directors of the
Company to do so.
9. Intellectual Property. Section 8 of the Employment Agreement is
incorporated by reference as if fully set forth. The Confidentiality Agreement
referenced in section 8 of the Employment Agreement and referenced above
(attached as Exhibit B to this Agreement) is also incorporated as if fully set
forth.
10. Company Policies. Section 9 of the Employment Agreement is
incorporated by reference as if fully set forth.
11. Attending Trade Shows. Employee may attend industry trade shows,
conventions and seminars as long as Employee does not hold himself out as an
officer or director of the Company or otherwise act, or represent himself as
acting or appearing, on behalf of the Company, unless Employee has express
written permission to do so.
<PAGE> 3
12. Release of Claims. Employee agrees that the foregoing consideration
represents settlement in full of all outstanding obligations owed to Employee by
the Company. Employee, on behalf of himself, and his respective heirs, family
members, executors, agents and assigns, hereby fully and forever releases the
Company and its present or former officers, directors, employees, investors,
shareholders, attorneys, administrators, affiliates, divisions, subsidiaries,
predecessor and successor corporations, and assigns, from, and agrees not to sue
concerning, any claim, duty, obligation or cause of action relating to any
matters of any kind, whether presently known or unknown, suspected or
unsuspected, that he may possess arising from any omissions, acts or facts that
have occurred up until and including the Effective Date of this Agreement
including, without limitation:
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company,
including, without limitation, any claims for fraud, misrepresentation, breach
of fiduciary duty, breach of duty under applicable state corporate law, and
securities fraud under any state or federal law;
(c) any and all claims for wrongful discharge of employment;
termination in violation of public policy; discrimination; harassment; breach of
contract, both express and implied; breach of a covenant of good faith and fair
dealing, both express and implied; promissory estoppel; negligent or intentional
infliction of emotional distress; negligent or intentional misrepresentation;
negligent or intentional interference with contract or prospective economic
advantage; unfair business practices; defamation; libel; slander; negligence;
personal injury; assault; battery; invasion of privacy; false imprisonment; and
conversion;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act, the Employee Retirement Income Security Act of 1974, The Worker
Adjustment and Retraining Notification Act, Older Workers Benefit Protection
Act; the California Fair Employment and Housing Act, and Labor Code section 201,
et seq. and section 970, et seq.;
(e) any and all claims for violation of the federal, or any state,
constitution;
(f) any and all claims arising out of any other laws and
regulations relating to employment, employment discrimination or harassment; and
(g) any and all claims for attorneys' fees and costs.
Employee agrees that the release set forth in this section shall be and remain
in effect in all respects as a complete general release as to the matters
released. This release does not extend to any obligations incurred under this
Agreement.
-3-
<PAGE> 4
13. Civil Code Section 1542. Employee represents that he is not aware of
any claim by him against the Company, other than the claims that are released by
this Agreement. Employee acknowledges that he has had the opportunity to be
advised by legal counsel and is familiar with the provisions of California Civil
Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Employee, being aware of said code section, agrees to expressly waive any
rights he may have thereunder, as well as under any other statute or common law
principles of similar effect.
14. No Pending or Future Lawsuits. Employee represents that he has no
lawsuits, claims, or actions pending in his name, or on behalf of any other
person or entity, against the Company or any other person or entity referred to
herein. Employee also represents that he does not intend to bring any claims on
his own behalf or on behalf of any other person or entity against the Company or
any other person or entity referred to herein.
15. No Cooperation. Employee agrees he will not act in any manner that
might damage the business of the Company. Employee also agrees that he will not
counsel or assist any attorneys or their clients in the presentation or
prosecution of any disputes, differences, grievances, claims, charges, or
complaints by any third party against the Company and/or any officer, director,
employee, agent, representative, shareholder or attorney of the Company, unless
under a subpoena or other court order to do so.
16. Non-Disparagement. Employee agrees to use his best efforts to
refrain from any defamation, libel or slander of the Company, or tortious
interference with the contracts and relationships of the Company. The Company
agrees to use its best efforts to prevent its employees and agents from any
defamation, libel or slander of Employee, or tortious interference with the
contracts and relationships of Employee. The Company's efforts shall include a
written communication to senior management concerning this issue.
17. LIQUIDATED DAMAGES. THE PARTIES AGREE THAT THE PRECISE AMOUNT OF
DAMAGES FLOWING FROM A VIOLATION OF THE PROVISIONS SET FORTH IN PARAGRAPHS 18 OR
19, ABOVE, WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO CALCULATE OR PROVE,
AND THEREFORE THE PARTIES AGREE THAT IF EITHER PARTY BREACHES PARAGRAPHS 18 OR
19, ABOVE, THE NON-BREACHING PARTY SHALL BE ENTITLED TO RECEIVE FROM THE
BREACHING PARTY AS LIQUIDATED DAMAGES THE SUM OF TWENTY-FIVE THOUSAND DOLLARS
($25,000.00) PER BREACH.
-4-
<PAGE> 5
18. News Release. The Company and Employee agree to issue a mutually
acceptable news release for purposes of informing the public of Employee's
future role with the Company. Employee will present the first draft.
19. Recognition of Employee's Contributions. The Company agrees to
provide Employee with positive recognition of his contributions to the Company
in the President's Letter attached to the Company's 1998 Annual Report.
20. No Admission of Liability. The Parties understand and acknowledge
that this Agreement constitutes a compromise and settlement of disputed claims.
No action taken by the Parties hereto, or either of them, either previously or
in connection with this Agreement shall be deemed or construed to be (a) an
admission of the truth or falsity of any claims heretofore made or (b) an
acknowledgment or admission by either party of any fault or liability whatsoever
to the other party or to any third party.
21. Costs. The Parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement.
22. Arbitration. The parties agree that any and all disputes arising out
of the terms of this Agreement, their interpretation, any of the matters herein
released or Employee's employment or termination from employment, including
claims of harassment, discrimination and wrongful termination, shall be subject
to binding arbitration in Santa Barbara County, California under the Arbitration
Rules set forth in California Code of Civil Procedure section 1280, et seq.,
including section 1283.05 and pursuant to California law..
23. Authority. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Employee represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
24. No Representations. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.
25. Severability. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
26. Entire Agreement. This Agreement represents the entire agreement and
understanding between the Company and Employee concerning Employee's separation
from the
-5-
<PAGE> 6
Company, and supersedes and replaces any and all prior agreements and
understandings concerning Employee's relationship with the Company and his
compensation by the Company.
27. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and the Chairman of the Board of the Company.
28. Governing Law. This Agreement shall be governed by the laws of the
State of California.
29. Effective Date. This Agreement is effective after it has been signed
by both Parties.
30. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
31. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
respective dates set forth below.
METACREATIONS, INC.
Dated: February 20, 1998 By /s/HOWARD MORGAN
--------------------------- ---------------------------------------
Howard Morgan
Chairman of the Board of Directors
Dated: February 20, 1998 /s/JOHN WILCZAK
--------------------------- ------------------------------------------
John Wilczak
-6-
<PAGE> 1
Exhibit 10.38
METACREATIONS CORPORATION
6303 Carpinteria Avenue
Carpinteria, CA 93013
February 20, 1998
Mr. Gary L. Lauer
27866 Via Corita
Los Altos Hills, CA 94022
RE: METACREATIONS CORPORATION
Dear Gary:
We are pleased to offer you a position with MetaCreations Corporation (the
"Company") as its President and Chief Executive Officer commencing on February
23, 1998. We will also propose that you be elected a director of the Company as
soon as possible. You will receive an annualized salary of $350,000, which will
be paid semi-monthly (or bi-weekly) in accordance with the Company's normal
payroll procedures. In addition, you will be eligible to receive a targeted
annual bonus in the amount of $150,000, or $125,000 for the ten months ended on
December 31, 1998, upon attainment of certain performance objectives as set
forth in the Company's Executive Bonus Plan. For the year ending December 31,
1998, 80% of your bonus will be based on the financial performance of the
Company and 20% of your bonus will be based on your personal performance. The
amount and structure of future bonuses will be determined by the Company's
Compensation Committee. As a Company employee, you are eligible to receive
standard employee benefits. The Company also agrees to provide you with term
life insurance for your life in the amount of $1 million for any designated
beneficiary(ies), assuming you meet the criteria established by the insurance
company.
We will recommend to the Board of Directors of the Company that at the
next meeting of the Board you be granted a stock option entitling you to
purchase up to 800,000 shares of the Company's Common Stock at a price equal to
the fair market value of the Company's Common Stock as of the date you commence
employment with the Company. Such option shall be subject
<PAGE> 2
Mr. Gary L. Lauer
February 20, 1998
Page 2
to the terms and conditions equivalent to the Company's Stock Option Plan and
Stock Option Agreement, including vesting requirements (which currently provide
for 30% of the option to vest at the conclusion of one year and 1/36 of the
remaining option to vest monthly thereafter).
In addition, we will recommend to the Board of Directors that at the next
meeting of the Board you be granted a stock option entitling you to purchase
200,000 additional shares of the Company's Common Stock at a price equal to the
fair market value of the Company's Common Stock as of the date you commence
employment with the Company. The option shall vest at the conclusion of your
fourth full year of employment. The option shall also be subject to the terms
and conditions equivalent to the Company's Stock Option Plan and Stock Option
Agreement, including vesting requirements, except for the accelerated vesting
provisions set forth below. We will recommend that the Board accelerate vesting
of the stock option to purchase the first 100,000 of the 200,000 shares upon the
achievement of performance goals that will be identified and agreed upon in
writing within the first 60 days of your employment (these goals may include the
preparation of a strategic plan that is accepted by the Board of Directors by
December 31, 1998). We will also recommend that the Board accelerate the vesting
of the stock option to purchase the remaining 100,000 of the 200,000 shares upon
the achievement of performance goals that will be identified and agreed upon in
writing within the first year of your employment.
With respect to your move from Los Altos Hills to the Santa Barbara area,
we are offering you the following:
(a) an allowance of $4,000 per month up to nine (9) months for temporary
housing for you in the Santa Barbara area;
(b) up to $100,000 to cover documented tax liability in connection with
the sale of your Los Altos Hills home;
(c) a secured loan of up to $500,000 to be provided only within the
first year of your employment to assist you with the purchase of a home in the
Santa Barbara area. Although the
<PAGE> 3
Mr. Gary L. Lauer
February 20, 1998
Page 3
precise terms of the loan and repayment obligations will be presented to you in
writing, the loan with be due four years from the date you commence employment
with the Company, at regular rates (zero interest if the Company is provided
with a second mortgage);
(d) reimbursement of out of pocket expenses, with no tax gross-up,
covering the costs of moving household goods from your home in Los Altos Hills
to the Santa Barbara area, including selling and closing costs in connection
with the sale of your current residence and the purchase of your new residence;
(e) reasonable temporary living expenses for items such as airfare,
hotel rooms and meals for up to sixty (60) non-consecutive days; and
(f) payment of $25,000 to cover miscellaneous expenses.
In addition, we are offering you during your employment at the Company a
car allowance up to $1,000 per month for you to lease an appropriate Company
vehicle, payment of initiation fees of up to $100,000 and base-level monthly
dues for a membership in a local country club, and up to $15,000 for financial
planning advice and other professional services per annum. Any initiation fees
paid to a local country club that are refunded to you within a period of four
(4) years will be returned to the Company.
You agree that, during the term of your employment with the Company, you
will not engage in any other employment, occupation, consulting or other
business activity directly related to the business in which the Company is now
involved or becomes involved during the term of your employment, nor will you
engage in any other activities that conflict with your obligations to the
Company. You will be allowed to serve as a trustee or member of the Board of
Directors of other companies or charitable organizations, provided that such
position is approved by the Company's Board of Directors, with such approval not
to be unreasonably withheld.
<PAGE> 4
Mr. Gary L. Lauer
February 20, 1998
Page 4
As a Company employee, you will be expected to abide by Company rules and
regulations. You will be specifically required to sign an acknowledgment that
you have read and understand the Company rules of conduct which will be included
in a handbook which the Company will soon complete and distribute. You will be
expected to sign and comply with an Employee Invention, Copyright and Secrecy
Agreement (the "Invention Agreement") which requires, among other provisions,
the assignment of patent rights to any invention made during your employment at
the Company and non-disclosure of proprietary information. To the extent that
the preceding paragraph of this agreement may conflict with paragraph 1 of the
Invention Agreement, this agreement shall govern.
You should be aware that your employment with the Company is for no
specified period and constitutes at will employment. As a result, you are free
to resign at any time, for any reason or for no reason. Similarly, the Company
is free to conclude its employment relationship with you at any time, with or
without cause, and with or without notice. If your employment terminates for any
reason, you shall not be entitled to any payments, benefits, damages, awards,
stock or compensation other than as provided by this offer letter, and as may
otherwise may be available in accordance with the Company's established employee
plans and policies at the time of termination.
Nothing in this letter alters the at will nature of your employment. In
the event of termination, the Company would like to provide you with one of the
severance benefit packages set forth below for enhanced financial security and
incentive and encouragement for you to remain with the Company.
If the Company terminates you without "cause" (as defined below), or the
Company materially changes the principal duties typically associated with being
President and CEO of a public Company, then you will be entitled to receive the
following: (i) severance payments equal
<PAGE> 5
Mr. Gary L. Lauer
February 20, 1998
Page 5
to twelve (12) months of your base compensation then in effect (excluding
bonus), payable in accordance with the Company's normal payroll practices plus
all standard employee benefits for a period of twelve (12) months; and (ii)
accelerated vesting of 50% of any then unvested portion of any stock options
held by you under the Company's stock option plans and the right to exercise
such additional vested portion of such stock options, in accordance with the
terms of the applicable plans.
If you are terminated for "cause" (as defined below), then you shall not
be entitled to receive severance or other benefits. The term "cause" is defined
as the Company's good faith belief that you have engaged in or committed any one
of the following: (i) dishonesty; (ii) conviction of a felony; (iii) fraud; (iv)
misappropriation of funds of the Company or theft; (v) breach of any provision
of this letter; (vi) material violation of any of the Company's documented
policies as established from time to time; or (vii) any other serious
misconduct.
If you voluntarily terminate your employment, you will not be entitled to
receive severance benefits, except for those, if any, as may then be established
under the Company's severance and benefits plans and policies, if any, existing
at the time of such termination.
If, within one year after your employment begins and after a "Change of
Control" (as defined below), your employment is terminated without cause, your
principal duties or authority materially change, or if you resign because of
such "Change of Control," you shall be entitled to accelerated vesting of 50% of
any then unvested portion of any stock options held by you under the Company's
stock option plans and the right to exercise such additional vested portion of
such stock options, in accordance with the terms of the applicable plans. In
addition, you will be entitled to receive severance payments equal to twelve
(12) months of your base compensation then in effect (excluding bonus), payable
in accordance with the Company's normal payroll practices plus all standard
employee benefits for a period of twelve (12) months.
<PAGE> 6
Mr. Gary L. Lauer
February 20, 1998
Page 6
If, between your first and the beginning of your fourth years after your
employment begins and after a "Change of Control" (as defined below), your
employment is terminated without cause, your principal duties or authority
materially change, or if you resign because of such "Change of Control," you
shall be entitled to accelerated vesting of 100% of any stock options held by
you under the Company's stock option plans and the right to exercise such
additional vested portion of such stock options, in accordance with the terms of
the applicable plans. In addition, you will be entitled to receive severance
payments equal to twelve (12) months of your base compensation then in effect
(excluding bonus), payable in accordance with the Company's normal payroll
practices plus all standard employee benefits for a period of twelve (12)
months.
Benefits received pursuant to termination after a "Change of Control"
cannot be combined with any other severance benefits in this letter. "Change of
Control" shall mean the occurrence of any of the following events:
(a) The acquisition by any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Company) of the "beneficial ownership" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing forty percent (40%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
(b) A change in the composition of the Board of Directors of the Company
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board of
<PAGE> 7
Mr. Gary L. Lauer
February 20, 1998
Page 6
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual not otherwise an Incumbent Director whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company); or
(c) A merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) at least forty percent (40%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the approval by
the stockholders of the Company of a plan of complete liquidation of the Company
or of an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
In the event of any dispute or claim relating to or arising out of our
employment relationship, you and the Company agree that all such disputes,
including but not limited to, claims of harassment, discrimination and wrongful
termination, shall be submitted to confidential, final and binding arbitration
conducted by Judicial Arbitration and Mediation Services/Endispute, Inc.
("JAMS") under the then-applicable JAMS rules of procedure.
To indicate your acceptance of the Company's offer, please sign and date this
letter in the space provided below and return it to me. A duplicate original is
enclosed for your records. This letter, along with the agreement relating to
proprietary rights between you and the Company and the Company's stock option
documents, set forth the terms of your employment with the Company and supersede
any prior representations or agreements, whether written, oral or
<PAGE> 8
Mr. Gary L. Lauer
February 20, 1998
Page 6
implied. The terms of this letter may not be modified or amended except by a
written agreement, signed by an officer of the Company and by you.
We look forward to working with you at MetaCreations Corporation.
Sincerely,
METACREATIONS CORPORATION
/s/HOWARD MORGAN
-----------------------------------------
Howard Morgan
Chairman of the Board
ACCEPTED AND AGREED TO this
20th day of February, 1998
/s/GARY L. LAUER
- ---------------------------------------------------
Gary L. Lauer
Enclosures
Duplicate Original Letter
Employee Invention, Copyright and Secrecy Agreement
Indemnification Agreement
<PAGE> 1
EXHIBITS 21.1
METACREATIONS CORPORATIONS
LIST OF REGISTRANT'S SUBSIDIARIES
MetaCreations Holding (Ireland), Ltd.
MetaCreations International, Ltd.
MetaCreations Europe SARL
MetaCreations (Barbados), Inc.
Real Time Geometry Corp.
Fractal Design International
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following Registration
Statements of MetaCreations Corporation on Form S-8 (Registration Nos. 333-3070,
333-17209, 333-20939, 333-26557, and 333-28403) of our report dated January 26,
1998 on our audits of the consolidated financial statements and financial
statement schedule of MetaCreations Corporation as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Woodland Hills, California
March 30, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 of MetaCreations Corporation (Registration Nos. 333-3070,
333-17209, 333-20939, 333-26557, and 333-28403) of our report dated April 30,
1997, except as to Note 11 which is as of May 29, 1997, relating to the
consolidated financial statements of Fractal Design Corporation, which appears
in this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
March 27, 1998
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