UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 0-26008
MYSOFTWARE COMPANY
2197 E. Bayshore Road, Palo Alto, California 94303
(415) 473-3600
Incorporated in I.R.S. Employer Identification No.
Delaware 77-0195362
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant: (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB. [ X ]
Based on the closing price of $2.625 on February 28, 1997, the aggregate
market value of the common stock held by non-affiliates of the registrant as
of February 28, 1997, was $6,719,921.
The number of shares outstanding of the registrant's common stock as of
December 31, 1996, was 4,233,366.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated April 14, 1997 to be
delivered to shareholders in connection with the Notice of Annual Meeting of
Shareholders to be held on May 22, 1997, are incorporated by reference into
Part III.
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TABLE OF CONTENTS
Page No.
PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 19
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation 20
Item 7. Financial Statements and Supplemental Data 22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 9. Directors and Executive Officers of the Registrant 23
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners and
Management 24
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8-K 25
Signatures 26
Financial Statements 28
Exhibits 44
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PART 1
ITEM 1. BUSINESS
MySoftware Company (the "Company" or "MySoftware"), designs, markets, and
supports a family of leading task-specific software applications for small
businesses, including home-based businesses. The Company also designs,
markets, and supports a family of tools that allow users to create and
enhance Internet web pages for both business and personal use. The Company
was founded in 1986 and completed its initial public offering in June 1995.
All of MySoftware's products are fully featured to meet the requirements of
a particular task, yet they are easy to learn and easy to use. The Company
places significant emphasis on consumer marketing techniques in developing
products and building brand awareness. The Company's products are
distributed primarily through computer software and office supply retailers
throughout the United States and Canada. The Company also sells
complementary paper products and receives commissions from the sales of such
products by third parties.
A recent report by Link Resources found that there are approximately 16.4
million small businesses and income-generating home offices in the United
States. According to a Home Office Computing (January, 1995) survey, the top
three challenges facing small businesses are: obtaining new business clients,
growing business, and promoting business. The Company's own research
indicates that small businesses are concerned about projecting a professional
image in their sales and marketing materials and in other communications with
customers. Traditionally, most small businesses have prepared brochures,
mailing labels, invoices, and other sales and marketing materials manually,
usually with mediocre results, or have relied on costly third-party providers.
Today, small businesses are rapidly adopting new office productivity
technologies. Penetration of computers in the small business market
increased from 40% in 1989 to 73% in 1996, according to IDC/Link. Moreover,
the availability of low cost, high resolution laser and ink-jet printers,
including color printers, has made it possible to produce professional-
looking materials directly from personal computers. As a result, small
businesses are increasingly using their computers to combine text, data, and
color graphics to produce high-quality marketing materials on their own
desktops.
To serve this market, a number of companies have begun to offer marketing and
communications products targeted toward small businesses. These companies
include Dun and Bradstreet Corp. and American Business Information, Inc.
("ABI"), providing targeted mailing lists; PaperDirect, Geographics, Inc.,
("Geographics"), and BeaverPrints, Inc. ("BeaverPrints"), providing pre-
printed papers; and Kinko's Copies and Alpha Graphics, Inc., providing
production services. Although various general purpose software applications,
such as word processing and desktop publishing applications, have a broad
range of features and can be used to perform many of the sales and marketing
tasks desired by small businesses, these applications are often complex and
relatively difficult to use. Accordingly, the Company believes that there is
a substantial opportunity for task-specific software designed to provide
cost-effective, easy-to-learn, and easy-to-use solutions to busy, results-
oriented small business users.
Small businesses are also increasingly recognizing the power of Internet web
pages both as marketing tools and as cost-effective alternatives to
advertising and direct mail. The Company believes that there is a
substantial opportunity to provide small businesses, as well as individuals,
with easy-to-learn and easy-to-use tools that allow the creation and
enhancement of web pages and other applications on the Internet.
COMPANY STRATEGY
MySoftware's core products address the sales and marketing needs of small
businesses: communicating with customers, attracting new business, and
maintaining customer databases. In order to address this emerging market,
the Company has focused on becoming the leading seller in its core categories,
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including brochures, mailing, labels, business cards, and invoices and
estimates. The Company also focuses on tools that allow users to take
advantage of the immediacy and efficiency of the Internet for both business
and personal communications. Key elements of the Company's strategy are
summarized below.
Provide a family of fully featured, task-specific applications. The Company's
target users are busy and results-oriented. These users often find general
purpose software programs cumbersome to learn and to use for a particular
task. By developing task-specific applications, MySoftware makes its
products easy-to-learn and easy-to-use, while incorporating all the
capabilities needed to successfully perform a focused task. Users can solve
other small business marketing problems by purchasing additional task-specific
software from MySoftware's family of interoperable products.
Build product loyalty and brand name. The Company believes that building its
brands - MySoftware, Pacifica, and Jalepeno - is important to its long-term
success. By offering families of functionally related products that
complement one another and have similar names and packaging within the brand,
the Company aims to raise brand awareness and increase sales of each of its
products. MySoftware also conducts an active brand marketing and
communications campaign, including Internet advertising, retailer promotions,
and public relations efforts. To further increase consumer exposure to its
products, the Company established cooperative marketing arrangements with
companies that offer complementary sales and marketing products. To date,
MySoftware has established such arrangements with Avery Dennison Corporation
("Avery"), BeaverPrints, iMarket Inc., and PaperDirect.
Focus on core product categories. MySoftware focuses its marketing and
development resources on seven core product categories: brochures; mailing;
labeling; business cards; invoicing and estimating; Internet web page
creation; and Internet page enhancement tools. By maintaining this focus,
the Company believes it is better able to understand customer needs, produce
easy-to-learn and easy-to-use products, build its brand names, and lead the
market in these categories.
Emphasize market-driven product development. The Company employs extensive
market research and user feedback to define, develop, and improve its
products to meet customer needs more effectively. MySoftware applies an
integrated four-step consumer marketing process to define, develop, and
improve its products. These steps include: performing consumer research to
identify user needs and behavior; incorporating the research into easy-to-
learn and easy-to-use, fully featured, task-specific applications; validating
these designs with both pre- and post-release usability testing; and
monitoring customer support and product returns feedback.
Leverage core competencies. MySoftware leverages its core competencies in
product development, and sales and marketing through strategic use of third-
party service providers. The Company has chosen to use third-party providers
to perform functions that can be better or more effectively performed by a
specialized organization. These functions include software coding, assembly,
customer technical support, and telephone customer registration. MySoftware
believes that this organizational approach allows it to achieve quality and
flexibility and to control costs, while maintaining effective control over
its business operations.
Focus on retail channel. The Company's distribution efforts are focused on
the retail channel, since most small businesses and individuals purchase
software through retail outlets. The Company actively seeks to increase its
visibility in the retail channel by conducting periodic retail promotions,
monitoring sell-through and inventory levels, locating its sales force near
major retailers, designing its packaging for self-service selling
environments, supporting retailers' advertising and promotional efforts, and
conducting independent public relations and advertising efforts.
PRODUCTS
The Company's core products are a family of leading task-specific software
applications that address the specific sales and marketing needs of small
businesses with ten or fewer employees. The Company provides users with
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powerful, easy-to-learn and easy-to-use solutions for creating customized,
professional-quality brochures, mailing lists, labels, invoices, estimates,
business cards, and other marketing communications materials. The Company
backs its products with a 30-day money-back guarantee. All of MySoftware's
core applications are available for both Microsoft Windows 3.1 and Windows 95.
The Company believes its products are the best-selling task-specific software
applications by dollar volume in the United States in the brochure, mailing,
labeling, business cards, and stand-alone invoicing categories. The Company's
development strategy has been to expand its leadership position in its core
product categories by introducing new versions of its applications to take
advantage of the Windows 95 operating environment.
In 1996, the Company expanded its product categories by creating products
that serve two new markets: Internet web page creation and Internet page
enhancement tools. Its new products in these categories share the design and
development philosophy of the Company's core products: the programs are
powerful, easy-to-learn, easy-to-use, branded, and task-specific.
MyBrochures/MyAdvancedBrochures/MyProfessionalMarketingMaterials
MyBrochures was originally introduced in April 1994. The Advanced version was
introduced in September 1994; in addition to professional-looking color
brochures, it enables users to design and produce flyers, postcards, menus,
bulletins, and invitations in a variety of formats and sizes. The Windows 95
version of the program was introduced in September of 1995. MyProfessional-
MarketingMaterials was introduced in September 1996. The latter program
provides customers with more than 600 color printable designs, as well as
allowing them to design from more than 500 pre-printed specialty papers.
MyAdvancedMailList/MyMailManager
MySoftware's initial mailing list product was introduced in September 1987.
MyAdvancedMailList, introduced in June 1989, stores and organizes mailing
list data that can be printed in a variety of forms, including rolodex cards,
envelopes, address books, and mailing labels, or used in conjunction with
other MySoftware applications, such as MyAdvancedBrochures. MyAdvancedMail-
List has a built-in database function that enables MySoftware's customers to
maintain and sort mailing lists and other customer data. MyProfessional-
MailManager, introduced in September 1994, includes the MyAddressChecker
application, a CD-ROM of every valid address in the United States, enabling
users to qualify for bulk mail discounts. Users must purchase bi-monthly
CD-ROM updates to continue to qualify for postal discounts. The program
verifies and corrects addresses and supplies the appropriate ZIP+4 data
necessary to print delivery point bar codes and to qualify for these
discounts. MyMailManager, designed for Windows 95, was introduced in December
1996; it includes new usability features and also works with MyAddress-
Checker. MyAdvancedMailList was a 1997 "Editors' Pick" in the Miscellaneous
Business Software category by Home Office Computing magazine.
MyAdvancedLabelDesigner
MySoftware's initial labeling product was introduced in March 1988.
MyAdvancedLabelDesigner, introduced in May 1992, enables the user to design
and print attractive, professional-looking, color labels in standard and
custom sizes, including mailing labels, name cards, Rolodex cards, file
folders, labels and business cards. Text, data, and graphics can be entered
directly into MyAdvancedLabelDesigner or imported from other applications
such as dBase, Paradox, and Access. Labels can be enhanced with special
design elements embedded in the application, including color, rotated text,
and clip art. In March 1996, the Company introduced the Windows 95 version
of MyAdvancedLabelDesigner, which supports ten different label brands and
more than 500 label sizes.
MyAdvancedInvoices and Estimates/EasyCustomInvoices
MySoftware's initial invoice product was introduced in December 1990. The
Advanced version, introduced in August 1993, is an invoicing, estimating, and
cash management application. The program easily produces professional-
looking invoices and estimates on plain paper or on a variety of pre-printed
forms. The application also produces a variety of sales and accounts-
receivable reports designed to assist small businesses in analyzing financial
<PAGE>
and accounting aspects of their businesses. EasyCustomInvoices,designed for
Windows 95 and introduced in September 1996, allows enhanced customization of
a customer's invoices. MySoftware also sells pre-printed invoice, estimate,
and statement forms for use with MyAdvancedInvoices and Estimates and
EasyCustomInvoices.
MyProfessionalBusinessCards
In April 1995, the Company introduced MyProfessionalBusinessCards in its new
business card product category. Following its task-specific application
strategy, MySoftware has given small business owners a tool for creating
professional-looking business cards in minutes. This program gives small
business owners the flexibility to design and print small quantities of
customized business cards for any occasion. MyProfessionalBusinessCards is
available in both Windows 3.1 and Windows 95 versions. The Windows 95 version
was named one of the Top 100 CD-ROMs of 1996 by PC/Computing magazine.
MyInternetBusinessPage
In August 1996, the Company introduced MyInternetBusinessPage, its first
Internet-related product. The product allows users to create and publish
Internet web pages on the World Wide Web. The product is created
specifically to address the needs of small businesses, and includes dozens of
easy-to-customize templates, including a pre-designed form that customers can
use to communicate via electronic mail with the page owner. Users are not
required to learn the HTML programming language to create their pages, and
are able to publish their pages on the World Wide Web using SwiftSite or
another Internet publishing site. MySoftware earns a share of fees that users
pay to SwiftSite for publishing; revenues to date from this source have not
been significant.
Jalapeno Hot Buttons
In December 1996, the Company released two products, Hot Buttons and Hot
Banners, that allow authors of web sites to create graphic images that
enhance the visual impact of their web pages. These two products are the
first products released under the Company's new Jalapeno brand. Hot Buttons
allows users to create customized professional-quality buttons, headers,
bullets, page breaks, and other web graphic elements without having to learn
complicated photo or paint manipulation programs. The elements created by
this program can be used with all of the major web page authoring tools on the
market, including MyInternetBusinessPage and Pacifica Personal WebPage
Designer. The target market of the product includes all Internet authors,
both personal and professional.
Jalapeno Hot Banners
Hot Banners was also released in December 1996. The program allows users to
create banners and other web graphics containing multiple text and image
elements. Like Hot Buttons, Hot Banners is easy to use and creates elements
that can be used by web authors, personal and professional, with all the
leading web page authoring tools.
Pacifica Personal WebPage Designer
In December 1996, the Company introduced Pacifica Personal WebPage Designer.
This product is the first product introduced under the Company's new Pacifica
Internet-Authoring Tool product line. Personal WebPage Designer is targeted
at the needs of individuals who are interested in creating web pages and
includes everything one needs to design and publish a web site without any
knowledge of the HTML programming language. The program comes with more than
a dozen templates for showcasing hobbies, resumes, and family events. The
program allows an entire web site or portions of it to be password-protected
to guard the privacy of the author. The program includes one-button instant
publishing capability at SwiftSite, or users can choose to publish at the web
site of their choice.
Other Products
The Company also sells a simple database program, MyDataBase, the American
Check Printers line of checks for personal financial programs, and other
products that are not expected to contribute materially to the Company's
future revenues.
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PRODUCT DEVELOPMENT
The software industry is undergoing rapid changes, including evolution of
industry standards, introduction of new operating systems and environments,
frequent new product introductions, introduction of new media, and changes in
customer requirements and preferences. The Company believes that its future
success will depend in large part upon its ability to keep pace with
competitive offerings, to adapt to new operating systems, hardware platforms,
media, Internet technologies, and industry standards, and to provide
additional functionality by enhancing its existing products and introducing
new products on a timely basis.
The Company focuses on developing and improving its family of core products
at the same time as it develops products in complementary software
categories. This focused strategy allows MySoftware to know its market and
to develop solutions to customer problems. In order to meet the business
development needs of small businesses, the Company works with current and
prospective users to define the functionality of the Company's new products
and make improvements to its existing products. The Company's development
process is organized around multi-functional teams composed of product
development, marketing, and testing personnel who work together in the
development of products from an earlier design stage. This team approach
ensures a high level of marketing and customer support input throughout
many stages of product development.
MySoftware conducts systematic usability testing as an integral part of the
product development process, beginning with the product specification phase,
continuing during development and beta testing phases, and concluding with
post-release customer satisfaction audits. This testing is used to identify
potential problems quickly and formulate early solutions. In addition to
monitoring customer support calls and requests, the Company has in place a
mandatory customer registration program that further enhances its ability to
monitor customer use of its products and to obtain valuable customer feedback.
MySoftware creates all product specifications for both new products and
updates of its existing products, and maintains internal control over the
creative and market-driven aspects of product development. Once a product
has been defined and a detailed specification has been designed, the Company
leverages its resources by outsourcing coding functions. The Company relies
primarily on three independent firms with which the Company has worked for
six, four, and one years, respectively, to perform the majority of the coding
for its software products, including coding for new products and maintenance
and bug-fix releases, and updates for existing products. The need to update
the Company's products, both for enhanced functionality and for ease of use
under new operating platforms, increases the Company's dependence on these
third-party coders. The Company has entered into separate software
development agreements for the development of specific pieces of software as
work-for-hire with its third-party coders. The Company compensates third-
party coders primarily through payments for software production costs and
royalty payments. Royalty expenses are at 2% of net revenues of the revelant
products, with a dollar maximum cap on total royalty payments for certain
products.The Company generally owns all intellectual property rights to products
developed by third-party coders with the exception of the base code for
MyBrochures, MyAdvancedBrochures, MyProfessionalMarketingMaterials, and
MyProfessionalBusinessCards. With respect to these products, the Company owns
the code for the user interface, while the base code is owned by the third-
party coder. The Company holds an irrevocable, non-exclusive license to copy and
distribute the executable code compiled from the base code and to make limited
modifications. Third-party coders have also agreed not to develop or market
any stand-alone desktop publishing software based on the base code that
competes with the Company's products prior to October 1998. The Company's
success depends in part on its continued ability to obtain and renew
agreements for coding by independent software developers. There can be no
assurance that the Company will be able to obtain or renew such coding
agreements on favorable terms, if at all.
The Company has made use of shared code across products. For example,
MyAdvancedMailList and MyAdvancedLabelDesigner share portions of the same
base code, and the code for MyAdvancedBrochures was used to develop
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MyProfessionalBusinessCards. The Company believes its ability to share and
reuse significant blocks of code across multiple products has enabled it to
shorten development time and reduce development costs.
In order to enhance its leadership position, the Company devoted considerable
resources in product development to expanding its Windows 95 product line in
1995 and 1996. MyAdvancedBrochures 95 was introduced in September 1995, and
two new Windows 95 products, MyProfessionalBusinessCards 95 and MyAdvanced-
LabelDesigner for Windows 95, were introduced in March 1996. EasyCustom-
Invoices was shipped in September, 1996, and MyMailManager was shipped in
December, 1996.
In January 1996, the Company acquired the intellectual property of MediaTech,
Inc. ("MediaTech"), a publisher of Internet products. This acquisition
accelerated the Company's development of MyInternetBusinessPage and
subsequent Internet products.
As of December 31, 1996, the Company had 24 full-time and 6 part-time
professional and technical employees engaged in product development. During
the years ended December 31, 1996, 1995, and 1994, product development
expenses were $1,988,881, $1,342,045, and $1,100,554, respectively, not
including capitalized software production costs of, $1,253,117, $742,419, and
$227,579, respectively.
SALES AND MARKETING
Sales
The Company's products are distributed primarily through computer software
and office supply retailers throughout the United States and Canada,
including computer superstores (Computer City Super Center; CompUSA Inc.;
Elek-tek, Inc.; Fry's Electronics, Inc.; MicroCenter), office warehouse clubs
(Office Depot Inc.; OfficeMax; Staples Inc.), software specialty stores
(Egghead Inc.; Electronics Boutique), mass merchants (Target; Wal-Mart),
consumer electronics stores (BestBuy Co., Inc.) and general warehouse clubs
(Price/Costco Inc.; Sam's Club). Of the Company's top twelve retail outlets,
MySoftware sells directly to seven and services the other five retailers
through distributors such as Ingram Micro, Inc. ("Ingram"), Merisel, Inc. and
GoodTimes. Ingram and Office Depot, Inc. accounted for net revenues of 34%
and 29% for 1996, 28% and 23% for 1995, and 23% and 14% for 1994,
respectively. The Company has nonexclusive arrangements with its distributors
and retailers that generally do not require minimum purchases of the Company's
products and may be terminated at any time.
The Company monitors product sell-through and retail inventory information.
Most of the Company's distributors and key retailers provide weekly or
monthly sell-through data as well as current inventory information. This
information is analyzed for both positive and negative trends and is used to
assist the Company's retailers in managing product inventory levels. This
information is also used to determine the effectiveness of retail promotions
and account advertising. The Company's promotional vehicles are also geared
toward increasing customer exposure to its products with additional facings
and high traffic locations.
The Company's major accounts are served through a combination of direct sales
representatives and independent manufacturers' representative firms. The
Company has two full-time detailers and six contracted representatives to
test the shelf positioning of its products and to reduce out-of-stock
situations. The Company maintains sales forces in the Boston, Dallas, Los
Angeles, and Miami metropolitan areas, and has contracted with manufacturers'
representative firms in the Dallas and Minneapolis metropolitan areas.
Revenues from sources outside of North America have not been significant to
date.
Cooperative Marketing Arrangements
MySoftware has entered into cooperative marketing relationships with
companies that sell products complementary to the Company's products,
including paper products and targeted mailing lists. In exchange for inserting
these marketing partners' catalogs and product samples inside the Company's
retail software packages, the Company receives a per-registered-user fee or
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sales commission on any sales generated by the Company's activities or other
promotional consideration. MySoftware currently has cooperative marketing
programs with BeaverPrints and PaperDirect. To date, these activities have
not produced significant revenues, but the Company believes these activities
contribute to its brand-building efforts. There can be no assurance that any
of these arrangements can be maintained or will benefit the Company.
In addition, the Company has developed custom versions of its products for
sale by some of its marketing partners. The Company has entered into a resale
contract with New England Business Systems, Inc. ("NEBS") for various
MySoftware titles. There is no assurance that any significant revenue will
result from these activities or that any of these relationships can be
maintained.
Marketing
MySoftware's marketing department is responsible for product management,
development of new market opportunities, and building brand recognition
through advertising and other promotional techniques. The Company's
marketing department has two main areas of focus: product marketing and
corporate marketing.
The Company's product marketing group is responsible for analyzing the
marketing needs of small businesses and individuals, specifying product
features, validating product ease-of-learning and ease-of-use, managing
package design, coordinating product training, developing sales of
complementary products and services, and increasing repeat purchases by
existing customers. Market research is an integral part of MySoftware's
customer-focused approach, enabling the Company to continue to improve
existing products and define new products. Product marketing personnel work
closely with product development engineers to develop overall product
development specifications based on demonstrated customer needs.
The Company's corporate marketing group focuses on building the MySoftware,
Pacifica, and Jalapeno brands. Its responsibilities include external
communications, such as advertising, promotions, and public relations.
MySoftware also conducts periodic retail promotions designed to increase
short-term sales and strengthen relationships with retailers.
CUSTOMER SUPPORT
The Company's customer support activities not only provide valuable services
to its customers and enhance customer satisfaction, but also provide valuable
customer input to the Company's product development process. MySoftware
provides customer technical support through a third party managed by the
Company's internal customer support group, thereby achieving satisfactory
customer support on a cost-effective basis. The Company receives daily
downloads of data from its customer technical support provider, allowing it to
monitor service levels and customer satisfaction. The Company's contract with
its customer technical support operator can be terminated on 30 days' notice
by either party. This third party provider also provides services to several
larger companies, and there can be no assurance that demands from such
companies or other factors will not result in termination of this
relationship. The unavailability of such a firm to perform customer technical
support for the Company would result in significant disruption to the
Company's operations, could lead to customer dissatisfaction, and could have
an adverse effect on the Company.
OPERATIONS
The Company directly performs all purchasing, finished goods inventory
management and warehousing, scheduling, order processing, and shipping. The
Company prepares master software diskettes, CD-ROMs, user manuals, and
packaging designs, and conducts independent quality control and testing at
its facilities. Diskette and CD-ROM duplication, printing of documentation,
and packaging and assembly are performed by independent contractors to the
Company's specifications. To date, the Company has not experience any material
difficulties or delays in the manufacture and assembly of its products. However,
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if such difficulties and delays were encountered and if the Company's
transition to an alternate vendor were not completed promptly, the Company
could be adversely affected.
The Company generally ships products within three days of receipt an order.
As a result, the Company has relatively little backlog at any given time, and
does not consider backlog to be a significant indicator of future performance.
COMPETITION
The market for the Company's small business and Internet products is
intensely competitive, and is characterized by pressure to increase marketing
and promotional activity, incorporate new features, release new product
versions, and reduce prices. Existing software companies may broaden or
enhance their product lines to compete with the Company's products, and other
potential new competitors, including computer hardware manufacturers,
diversified media companies, and small business service companies, may enter
or increase their focus on the small business software market, resulting in
even greater competition for the Company. The Company's software products
compete with task-specific products sold by Avery (labeling software), Intuit,
Inc. ("Intuit") (invoicing software), The Learning Company, Inc. ("The
Learning Company") (business card, mailing, and labeling software), and
several other companies of varying size and financial and marketing strength.
The Company's products also compete with general purpose programs, such as
word processing, database and desktop publishing products from major software
companies, including Adobe Systems Incorporated ("Adobe"), Lotus Development
Corp. ("Lotus"), Microsoft Corp. ("Microsoft"), and Corel Corporation
("Corel"). The Company believes it would face increased competition from such
general purpose programs if such programs were designed for greater ease-of-
use of task-specific functions. In addition, new operating systems may
incorporate features enabling users to accomplish small business marketing and
other tasks currently addressed by the Company's software products. The
Company's Internet products compete with products from Adobe, Corel,
Microsoft, Netscape Communications Corporation ("Netscape"), and other
companies of varying size and competitive strength. The Company's Internet
products may face increased competition in the future to the extent that all
or part of the functionality of the Company's Internet products are made
available to users for free over the World Wide Web.
The Company's strategy of focusing on its core and complementary products
heightens the competitive risk. Many of the companies with which the Company
currently competes, or may compete in the future, have greater financial,
technical, marketing, sales and customer support resources, as well as
greater name recognition and access to customers, than the Company. The
competition for retail shelf space and direct Internet selling is also likely
to increase due to the proliferation of software products and companies.
Failure to achieve and maintain unit sales volumes may result in loss of shelf
space which may, in turn, lead to further reductions in sales volumes.
Only a small percentage of products introduced in the market achieve any
degree of sustained market acceptance. Principal competitive factors in the
marketing of software include product features, quality, reliability,
technological sophistication, brand recognition, ease-of-learning, ease-of-
use, merchandising, access to distribution channels and retail shelf space,
marketing, advertising, public relations, price, and the availability and
quality of support services. The Company believes that it competes
effectively in these areas, particularly in the areas of quality, brand
recognition, ease-of-learning, ease-of-use, merchandising, access to
distribution channels and retail shelf space. To the extent that competitors
achieve performance, price, or other selling advantages, the Company could be
adversely affected. There can be no assurance that the Company will have the
resources required to respond to market or technological changes or to compete
successfully in the future. In addition, increasing competition in the small
business or Internet software market may cause prices to fall, which could
adversely affect the Company.
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PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of trademark, copyright, and
trade secret laws, employee and third-party nondisclosure agreements, and
other methods to protect its proprietary rights. The Company does not
include in its products any mechanism to prevent or inhibit unauthorized
copying. Unauthorized copying occurs within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company could be adversely affected. In addition, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may increasingly
become subject to infringement claims. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products. Use of third-party coders may
increase the risk of infringement of the rights of others. The third-party
coders' liability to the Company for any infringement of copyrights, trade
secrets, or patents is contractually limited to royalties received from the
Company.
Although the Company has not been the target of any actual, pending, or
threatened intellectual property litigation, there has been substantial
litigation regarding copyrights, trademark, and other intellectual property
rights involving computer software companies. Any such claims or litigation,
with or without merit, could be costly and a diversion of management's
attention, which could have a material adverse effect on the Company.
Adverse determinations in such claims or litigation could have a material
adverse effect on the Company.
EMPLOYEES
As of December 31, 1996, the Company employed 73 full-time employees and 8
part-time employees. Of the Company's full-time employees, 33 are in sales
and marketing, 24 are in development, 4 are in customer support, 7 are in
administration and finance, and 5 are in operations. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company ever experienced any work stoppage. The Company believes that it has
good employee relations.
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Form 10-KSB.
Emerging Market; Uncertainty of Market Acceptance
The Company's success is dependent on the market acceptance of its new and
existing products. Substantially all of the Company's revenues are derived
from the sale of task-specific software applications for small businesses and
Internet page authors. The market for such products is relatively
undeveloped, making it difficult to predict with any assurance the future
size of the market. The Company's focus on a small number of core products
heightens exposure to these market development and product acceptance risks.
Furthermore, because the success of a majority of the Company's current and
planned products depends upon continued widespread use by small businesses of
traditional paper media in the conduct of their businesses, increased use of
competing means, such as the Internet and other means of electronic
communications, could adversely affect the Company. The Company embraces a
strategy of building brand name recognition primarily through use of consumer
marketing techniques. This strategy is likely to require increased sales and
marketing expenditures. There can be no assurance that the Company will be
able to build brand recognition successfully, or that its marketing strategy
will be successful. There also can be no assurance that the Company's
existing products will achieve broad-based market acceptance, that sales of
such products will continue at historical rates or that the Company will
introduce new products that achieve significant market acceptance in the
future.
<PAGE>
Changes in Technology and Industry Standards; Timing and Quality of New
Product Offerings
The software industry is undergoing rapid changes, including evolution of
industry standards, introduction of new operating systems and environments,
frequent new product introductions, introduction of new media such as CD-ROM,
advancements in Internet technology, and changes in customer requirements and
preferences. The Company believes that its future success will depend in
large part upon its ability to keep pace with competitive offerings, to adapt
to new operating systems, hardware platforms, media, and industry standards,
and to provide additional functionality by enhancing its existing products and
introducing new products on a timely basis. The development cycle for
products utilizing new operating systems or formats may be significantly
longer than the Company's current development cycle for products on existing
operating systems and formats. If the Company were unable to develop such
products in a timely manner due to resource constraints or technological or
other reasons, this inability would have a material adverse effect on the
Company. Failure to develop and introduce new products and product
enhancements in a timely fashion could result in significant product returns
and inventory obsolescence and could have a material adverse effect on the
Company. In addition, introduction or anticipation of new or improved
products by others could also result in lower sales and increased product
returns.
The Company has introduced Windows 95 products in each of its core product
categories in the period from September 1995 to December 1996. The initial
adoption rate of Windows 95 applications has been slower than expected. There
can be no assurance as to the speed or breadth of adoption of the Windows 95
operating system by small businesses, or that the Company will be able to
effect a successful transition in connection with the introduction of such
products. In addition, introduction of the Windows 95 operating system may
affect customer preferences and the demand for new small business software in
ways which are not foreseen. There can be no assurance that the current
demand for the Company's Windows 95 products will continue or that the mix of
the Company's future product offerings will keep pace with technological
changes or satisfy evolving customer preferences. Moreover, given the extent
of the Company's focus on Windows 95, any increase in market acceptance of
other operating systems or technologies, including Java, at the expense of the
acceptance of Windows 95, could have a material adverse effect on the
Company. The Company's current plans do not provide for development of any
new products for Apple Macintosh computers, revenues from which represented
3% of net revenues from domestic distributors and retailers in 1996. Such
revenues are expected to continue to decrease over time, and the Company
ultimately may discontinue such products. In addition, changes in printer
technology may affect customer demand for particular types of paper products,
and may adversely affect the Company.
Fluctuations in Operating Results; Seasonality
The Company has experienced, and may continue to experience, significant
fluctuations in operating results due to a variety of factors. These factors
include: the size and rate of growth of the market for task-specific
applications for small businesses and of the software market generally;
market acceptance of the Company's products and those of its competitors;
the timing and number of product enhancements and new product introductions
by the Company and its competitors; the timing and extent of development and
promotional expenses; product returns; changes in pricing policies by the
Company and its competitors; accuracy of retailers' forecasts of consumer
demand; timing of the receipt of orders from major retailer and distributor
customers; cancellations or terminations by retail or distributor accounts;
shelf space reductions; and delays in shipments. Products generally are
shipped as orders are received, and, accordingly, the Company historically
has operated with little backlog. As a result, net revenues in any quarter
are dependent on orders booked and shipped in that quarter. A significant
portion of the Company's operating expenses are relatively fixed, and planned
expenditures are based, in part, on expectations as to future sales. As a
result, if net revenues do not meet the Company's expectations in any given
quarter, operating results may be materially adversely affected. The
Company's operating results can also be affected substantially by the timing
of new new product introductions, which may result in substantial increase in
product returns and higher selling and marketing expenses. In response to
competitive pressure, the Company may also take certain pricing or marketing
<PAGE>
actions that could have a material adverse effect on the Company. There can
be no assurance that the Company will achieve consistent profitability on a
quarterly or annual basis.
Dependence on the Internet
MyInternetBusinessPage and the products developed under the Company's two new
brands, Jalapeno and Pacifica, provide users with the ability to create and
enhance Internet web pages. The success of these products and their
contribution to the Company's overall results are dependent on the continued
expansion of the Internet and World Wide Web and on customers' interest in
creating their own web pages on the Internet. The failure of Internet usage
to grow could have an adverse impact on the Company.
Competition
The market for the Company's products is intensely competitive, and is
characterized by pressure to increase marketing and promotional activities,
incorporate new features, release new product versions, and reduce prices.
Existing software companies may broaden or enhance their product lines to
compete with the Company's products, and other potential new competitors,
including computer hardware manufactures, diversified media companies, and
small business service companies, may enter or increase their focus on the
small business software market, resulting in even greater competition for the
Company. The Company's software products compete with task-specific products
sold by Avery (labeling software), Intuit (invoicing software), NEBS (brochure
software), The Learning Company (brochure, mailing, and labeling software),
and several other companies of varying size and financial and marketing
strength. The Company's products also compete with general purpose programs,
such as word processing, database, and desktop publishing products from major
software companies, including Adobe, Corel, Lotus, and Microsoft. The Company
believes it would face increased competition from such general purpose
programs if such programs were designed for greater ease-of-use of task-
specific functions. In addition, new operating systems or technologies may
incorporate features enabling users to accomplish small business marketing and
other tasks currently addressed by the Company's software products. The
Company's Internet products compete with products from Adobe, Corel,
Microsoft, Netscape, and other companies of varying size and competitive
strength. The Company's Internet products may face increased competition in
the future to the extent that all or part of the functionality of the
Company's Internet products are made available to users for free over the
World Wide Web.
The Company's strategy of focusing on its core and complementary products
heightens the competitive risk. Many of the companies with which the Company
currently competes, or may compete in the future, have greater financial,
technical, marketing, sales and customer support resources, as well as greater
name recognition and access to customers than the Company. To the extent that
competitors achieve performance, price, or other selling advantages, the
Company could be adversely affected. There can be no assurance that the
Company will have the resources required to respond effectively to market or
technological changes or to compete successfully in the future. In addition,
increasing competition in the market for task-specific applications may cause
prices to fall, which my adversely affect the Company. The competition for
retail shelf space and direct Internet selling is also likely to increase due
to the proliferation of software products and companies. Failure to achieve
and maintain retail sales volumes may result in loss of shelf space which may,
in turn, lead to further reductions in sales volumes.
Dependence on Limited Distribution and Retail Channels
Sales to a limited number of distributors and retailers have constituted, and
are anticipated to continue to constitute, almost all of the Company's net
revenues from software. There is an increasing number of software products
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
there is intense competition for shelf space and promotional support from
retailers. Some distributors control access to shelf space of certain
retailers, and termination of the Company's relationship with a particular
distributor may prevent the Company from obtaining shelf space in some retail
outlets. As a result, retailers and distributors increasingly are in a better
position to negotiate favorable terms of sale, including price discounts and
product-return policies. Since task-specific applications for small
businesses constitute a relatively small percentage of these retailers' sales
<PAGE>
volumes, there can be no assurance that such retailers will continue to purchase
the Company's products or provide the Company's products with high quality and
adequate levels of shelf space and promotional support. The Company has
nonexclusive arrangements with its distributors and retailers, which generally
do not require minimum purchases of the Company's products and which may be
terminated at any time. In addition, other types of retail outlets and methods
of product distribution may become important in the future, such as the
Internet, online services, and other electronic distribution services. The
Company's success will depend, in part, upon its ability to maintain access
to existing channels of distribution and gain access to new channels if and
when they develop.
Customer Concentration and Credit Risk
The Company sells its products principally to a limited number of major
retailers and to distributors for resale to retailers. Such sales have
constituted and are anticipated to continue to constitute a substantial
majority of the Company's net revenues. In 1996, one distributor accounted
for 34% of net revenues, and one retailer accounted for 29% of net revenues.
None of the Company's distributors or retailers has a minimum purchase
obligation. The loss of, or significant reduction in, sales volume
attributable to any of the Company's principal distributors or retail accounts
could materially and adversely affect the Company.
The Company's sales are made on credit terms, and the Company does not hold
collateral to secure payment. Although the Company currently maintains
accounts receivable insurance that covers a portion of its accounts, there
can be no assurance that the Company will be able to increase or maintain
such insurance on acceptable terms or at all. The inability to collect any
significant receivable in a timely manner could adversely affect the Company.
Almost all of the Company's software sales are made through retailers. The
Company could be adversely affected if an alternative channel for
distribution of software, such as the Internet, were to become a major
vehicle for distributing software.
Risk of Product Returns
The Company has various stock balancing terms with distributors and retailers
that allow distributors and retailers certain rights to return products.
There can be no assurance that retailers and distributors will not seek and
obtain additional return and credit rights. The Company also provides end
users with a 30-day money-back guarantee. It is difficult for the Company to
ascertain current demand for its existing products, predict demand for newly
introduced products or verify that inventories are appropriate for actual
demand levels. Accordingly, the Company is exposed to the risk of product
returns from retailers and distributors, particularly during times of product
transition, including the ongoing transition to Windows 95. In addition,
competitors' promotional or other activities could cause returns to increase
sharply at any time. The Company establishes reserves based on estimated
future returns of products, taking into account promotional activities, the
timing of new product introductions, distributor and retailer inventories of
the Company's products and other factors. Product returns that exceed the
Company's reserves could adversely affect the Company's operating results and
financial condition.
Dependence on External Coding Contractors
The Company generally develops internally the specifications for both new
products and updates of its existing products. The Company primarily relies
on three independent firms to perform the majority of the coding for its
software products, including coding for new products and bug fixes,
maintenance and updates for existing products. While the Company generally
owns the code that is developed by these firms, the base code used in
developing the Company's brochures and business cards products is owned by
the third-party coder, subject to a non-exclusive license to the Company.
Although the agreement with that firm contains various protective terms, there
can be no assurance that such provisions will effectively protect the
Company's interests. The need to update the Company's products over time,
both for enhanced functionality and to take advantage of new operating
platforms, increases the Company's dependence on these third-party coders.
The Company may have less control over the scheduling and quality of the work
of independent coders than it does over its own employees, and there can be no
<PAGE>
assurance that such coders will complete products for the Company on a timely
basis, within acceptable guidelines, or at all. In addition, many independent
coders have limited financial resources, which exposes the Company to the risk
that such coders may go out of business prior to completing a project or
require larger pre-payments from the Company. As independent coders are in
high demand, there can be no assurance that independent coders, including
those which have developed products for the Company in the past, will be
available to provide coding services to the Company in the future. In
particular, with the industry transition to Windows 95, Windows 95 coders are
increasingly in demand. The Company compensates third-party coders primarily
through royalty payments, which are partially prepaid to cover their costs.
Even if the Company is able to secure coding services, increased demand for
these services may allow third-party coders to negotiate more advantageous
terms, including higher advanced royalties. There can be no assurance that
the Company will be able to obtain or renew such coding agreements on
favorable terms, or at all.
Capitalized Software Production Costs
The Company makes payments to third party developers for software production
costs. These payments are capitalized upon the establishment of technological
feasiblity, which is defined by the Company as the completion of a detailed
design specification of the software and are amortized to cost of revenues
during the period that the related product revenues are recognized. The on-
going assessment of the realizability of these costs requires considerable
judgment related to anticipated future product revenues, estimated economic
lives, and changes in hardware and software technology. In the event that the
future product revenues do not meet the anticipated forecasts, the unamortized
software production costs could adversely affect the Company's financial
statements.
Dependence on Third-Party Service Providers and Supplies
The Company relies on external service providers to perform most of its
customer technical support and product assembly functions. One independent
firm provides substantially all customer technical support for the Company's
software products. The Company's agreement with this firm is terminable on
30 days' notice by either party. This contractor also provides services to
several larger companies, and there can be no assurance that demands from
such companies or other factors will not result in termination by such
contractor of its relationship with the Company. The unavailability of such
firm to perform customer technical support for the Company would result in
significant disruption to the Company's operations, could lead to customer
dissatisfaction and could have a material adverse effect on the Company. The
Company relies on two printers for packaging and three assembly houses to
assemble and package its products and has only limited sources for some of its
supplies. The Company does not have contracts with such assembly houses or
suppliers. All of the Company's inventory of packaging components is
maintained at third-party facilities. The Company's ability to assemble and
package its products is dependent on continued relationships with these third
parties. The failure of such third-party vendors to continue to provide
supplies and services to the Company on a timely basis could have a material
adverse effect on the Company.
Dependence on Postal Regulations and Availability of Postal Information
The Company's MyProfessionalMailManager, MyAdvancedMailList, and MyMail-
Manager products, which together accounted for 20% of the Company's net
revenues from domestic distributors and retailers in 1996, have been
developed based on current United States Postal Service regulations ("Postal
Service regulations"). Changes in Postal Service regulations, which
historically have occurred frequently, would necessitate updating these
products or could eliminate or reduce the usefulness of these products, which
could adversely affect the Company's operating results. The Company licenses
from an independent third-party address information and certain software code
embodied in the MyAdvancedMailList, MyProfessionalMailManager, and MyMail-
Manager products that perform address corrections and supply delivery point
bar codes. There can be no assurance that the Company will be able to
maintain or renew its relationship with this third party or that the code
and information licensed to the Company will be error free or perform to the
Company's specifications or in accordance with Postal Service regulations.
Significant changes in Postal Service regulations or the inability to
maintain or renew its relations with the independent party on acceptable
terms or at all could have an adverse effect on the Company. The Company must
<PAGE>
also obtain Postal Service certification on a bi-monthly basis in order to be
able to supply MyProfessionalMailManager and MyMailManager users with CD-ROM
updates in a timely manner. There can be no assurance that the Company will
be able to continue to secure such certification on a timely basis, if at all,
and the failure to do so could have an adverse effect on the Company. Moreover,
increased adoption of facsimile, electronic mail, or other alternative
communications technologies could result in reduced use of the postal system,
thereby adversely affecting the market for the Company's mailing products.
Dependence on Key Personnel
The Company's success depends to a significant extent on the performance and
continued service of its senior management and certain key employees.
Competition for highly skilled employees with technical, management,
marketing, sales, product development and other specialized skills is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. In addition, there can be no
assurance that employees will not leave the Company or, after leaving, compete
against the Company. The Company's failure to attract additional qualified
employees or to retain the services of key personnel could have a material
adverse effect on the Company.
Management of Growth
The Company has experienced periods of growth that have placed, and could
continue to place, a significant strain on the Company's financial, management
and other resources. The Company may attemp to hire additional key personnel
in high level management positions in the future. The Company's ability to
manage its growth effectively will require it to continue to improve its
operations and financial management information systems, and to attract,
train, motivate, manage, and retain key employees. If the Company's
management were to become unable to manage growth effectively, the Company
could be adversely affected.
Limited Protection of Intellectual Property and Proprietary Rights
The Company relies primarily on a combination of trademarks, copyright and
trade secret laws, employee and third-party nondisclosure agreements and
other methods to protect its proprietary rights. The Company does not
include in its products any mechanism to prevent or inhibit unauthorized
copying. Unauthorized copying occurs within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company could be adversely affected. In addition, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers, and publishers may
increasingly become subject to infringement claims. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products. Use of third-party
coders may increase the risk of infringement. In the event that the Company's
third-party coders were to use infringing code in the Company's products, the
Company's could be required to pay damage or be subject to an injunction to
prevent the Company from shipping its products. The third-party coders'
liability to the Company for any infringement of copyrights, trade secrets,
or patents is contractually limited to amounts received from the Company.
Although the Company has not been the target of any actual, pending, or
threatened intellectual property litigation, there has been substantial
litigation regarding copyright, trademark, and other intellectual property
rights involving computer software companies. Any such claims or litigation,
with ot without merit, could be costly and a diversion of management's
attention, which could have a material adverse effect on the Company. Adverse
determinations in such claims or litigation could have a material adverse
effect on the Company.
As part of the Company's general branding strategy, it attempts to limit the
use of the "My" prefix by others in the software field. If the Company is
unsuccessful in these efforts, the value of the Company's brand could be
materially impaired.
<PAGE>
Shares Eligible for Future Sale; Possible Adverse Effect on Future Market
Prices; Concentration of Share Ownership
Sales of a substantial number of shares if the Company's Common Stock in the
public market could adversely affect the market price for the Common Stock.
The Company has outstanding 4,233,366 shares of Common Stock as of December 31,
1996, of which approximately 1,618,000 shares, or 38%, were held by officers
or directors of the Company. In addition, outstanding options to purchase
approximately 196,000 shares of Common Stock were fully vested and exercisable
on December 31, 1996. The Company registered all shares of Common Stock
reserved for issuance under its stock option plans, thus permitting the sales
of such shares by non-affiliates in the public market without restriction under
the Securities Act.
Possible Volatility of Stock Price
The Company believes factors such as quarterly fluctuations in its revenues
or results of operations, general conditions in the computer hardware and
software industries, and announcements of new products by the Company or by
its competitors may cause the market price of the Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market in
general, and the prices of the stocks of technology companies in particular,
have experienced large price fluctuations, sometimes without regard to the
fundamentals of the particular company. These broad market and industry
fluctuations may adversely affect the market price of the Company's Common
Stock.
Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
and privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. Issuance of shares of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of outstanding voting stock of the Company. In addition,
the Company is subject to anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of the Company. Certain other
provisions of the Company's Certificate of Incorporation may have the effect
of delaying or preventing changes in control or management of the Company,
which could adversely affect the market price of the Company's Stock.
<PAGE>
ITEM 2. PROPERTIES
As of December 31, 1996, MySoftware leased approximately 20,000 square feet
of office space in Palo Alto, California, which facility includes its
executive offices, marketing, sales, product development and customer
support. In addition, the Company also leased approximately 3,000 square feet
of office space in San Francisco for its marketing, product development, and
web selling group for its Internet products. The Company entered into an
agreement to lease its facilities under a certain non-cancelable operating
lease extending through 2000.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Since June 15, 1995, the Company's Common Stock was listed with, and has been
traded on the Nasdaq National Market under the symbol "MYSW." As of December
31, 1996, there were 39 record holders of the Company's Common Stock. As of
the same date, 4,233,366 shares of Common Stock were outstanding out of
20,000,000 shares of Common Stock authorized.
The following table sets forth the range of high and low sales prices per
share of Common Stock for each of the periods indicated, as reported by
Nasdaq.
<TABLE>
<CAPTION>
High Low
-------- ---------
<S> <C> <C>
1995 by quarter:
Second $14.25 $12.00
Third 14.50 10.50
Fourth 15.50 10.50
1996 by quarter:
First 13.25 4.63
Second 9.25 5.75
Third 6.50 3.50
Fourth 5.25 3.50
</TABLE>
Dividend Policy
Prior to its initial public offering, the Company made distributions as a S
corporation from undistributed earnings to its stockholders, including
amounts to fund the payments of their individual tax liabilities attributable
to their allocation of the Company's income. Such distributions totaled
$2,815,000 and $200,000 (less contributions of $200,000) in 1995 and 1994,
respectively. Upon completion of its initial public offering, the Company
terminated its S corporation status. Future earnings will be retained for use
in the Company's business, and the Company does not intend to pay any cash
dividends on its Common Stock for the foreseeable future.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
MySoftware designs, markets, and supports a family of leading task-specific
software applications for small businesses, including home-based businesses.
The Company addresses the business development needs of small businesses by
enabling them to create professional looking sales and marketing materials,
and perform other marketing communications tasks. The Company also develops
and markets tools for Internet-related tasks. The Company's products are
fully featured to meet the requirements of a particular task, yet are easy-to-
learn and easy-to-use. MySoftware places significant emphasis on consumer
marketing techniques in developing products and building brand awareness.
The Company's products are distributed primarily through computer software and
office supply retailers throughout the United States and Canada.
Fiscal 1996 was a period of continued emphasis on investment in product
development, both to convert products to the Windows 95 operating system as
well as to introduce new products in existing categories and our new Internet
tools category. MySoftware brought its entire line of core products up to
Windows 95 with the introduction of MyAdvancedLabelDesigner and
MyProfessionalBusinessCards in March, EasyCustomInvoices in September, and
MyMailManager in December.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Annual Report contain 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 might cause such a difference include, but are not
limited to, those discussed elsewhere herein.
Net Revenues
MySoftware's net revenues decreased 4% to $12.9 million in 1996, compared to
$13.4 million in 1995. The Company's net revenues increased 45% in 1995 from
$9.2 million in 1994. The Company generates revenues primarily through the
sale of software products to retailers and to distributors for resale to
retailers. Approximately 7% of software sales are made directly to end users.
Additional revenues are generated by sales of complementary products, such as
invoice forms, address-checker CD's, and checks; other supplies and related
services; and commissions on certain sales of such products by strategic
partners. Sales of software products represented 81.6%, 85.2%, and 82.0% of
net revenues in 1996, 1995, and 1994, respectively.
The decrease in net revenues in 1996 compared to 1995 was primarily the
result of sluggishness in the retail channel, which resulted in decreased
sales in the first and fourth quarters of 1996. The increase in revenues in
1995 over 1994 was attributable primarily to increased unit sales of the
Company's software products at existing retail outlets, addition of new
products at existing outlets, addition of new stores by existing customer
retail chains, and addition of new retail customers.
Gross Profit
The Company's gross profit was 69.3% in 1996, compared to 74.7% in 1995 and
75.8% in 1994. Gross margin declined in 1996 compared to 1995 primarily due
to a change in the freight arrangements with certain customers and a one-time
write-off of certain software production costs. The decline in gross profit
margin in 1995 compared to 1994 was due primarily to increased costs of
revenues related to promotions and increased amortization of payments to
contractors.
<PAGE>
Product Development Expenses
The Company's product development expenses increased to $2.0 million in 1996
from $1.3 million in 1995, and $1.1 million in 1994, representing 15.4%,
10.0%, and 11.9%, respectively, of net revenues. The increase during 1996 in
product development expenses as a percentage of net revenues was primarily
the result of lower revenues and the increased expense of developing new
products in both existing and new product categories. The decline in 1995
from 1994 was attributable primarily to the growth in net revenues.
Much of the Company's product development costs is software production costs
paid to outside contractors. These costs have been capitalized and are
amortized to cost of revenues as the corresponding products are sold. The
Company includes in sales and marketing expenses the costs of identifying and
validating product concepts and features.
Sales and Marketing Expenses
Sales and marketing expenses increased to $6.3 million in 1996 from $5.2
million in 1995, and $3.5 million in 1994, representing 48.7%, 39.0%, and
37.6%, respectively, of net revenues. Sales and marketing expenses have
increased over time to support the Company's growth and to increase its
brand name recognition. The increase in sales and marketing expenses as a
percentage of net revenues during 1996 was primarily due to the Company's
introduction of new products, and the increase in 1995 from 1994 was
attributable primarily to increased consumer advertising to build awareness
of the Company's products.
General and Administrative Expenses
General and administrative expenses increased to $1.8 million in 1996 from
$1.4 million in 1995, and $1.0 million in 1994, representing 14.2%, 10.7%,
and 11.0%, respectively, of net revenues. The increase in general and
administrative expenses in 1996 was primarily attributable to expenses
incurred to support the Company's growing infrastructure. A significant
portion of the increase in the dollar amount of these expenses in 1995
related to meeting the demands of the Company's new status as a public
company.
Acquired Technology
In January 1996, the Company expensed acquired technology in the amount of
$255,000, resulting from the Company's acquisition of technology that had not
reached technological feasibility from MediaTech, Inc., an Internet
publishing tools company.
Interest Income
Interest income increased to $398,000 in 1996 from $277,000 in 1995, and
$2,000 in 1994. The increase was attributable to the investment of the
proceeds from the Company's initial public offering in June 1995, and cash
generated from operations.
Provision for Income Taxes and Pro Forma Income Taxes
On June 15, 1995, the Company terminated its status as a Subchapter S
corporation. During the remainder of 1995 and all of 1996, the Company was
fully subject to federal and state income taxes. The pro forma income taxes
reflect provisions for income taxes as if the Company had been a C
corporation, fully subject to federal and state income taxes, during all of
1994 and 1995.
Liquidity and Capital Resources
The Company's primary sources of financing have been net cash from
operations, and in 1995, the proceeds from its initial public offering of
Common Stock. Operating activities generated cash of $1.4 million in 1996,
$1.2 million in 1995, and $932,000 in 1994. In 1996, the Company invested
$1.5 million, primarily in software production costs to contractors and
property and equipment. The Company's cash and cash equivalents were $7.7
million as of December 31, 1996.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements included herein beginning on page 28.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information with respect to Directors may be found in the section captioned
"Election of Directors" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 22, 1997. Such information is incorporated
herein by reference.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 28, 1997 are as follows:
NAME AGE POSITIONS
David P. Mans 54 Chairman of the Board
James F. Willenborg 52 Chief Executive Officer and Director
Michael H. Thoma 42 Vice President of Quality Assurance,
Secretary, and Director
Thomas C. Hoster 46 Vice President and Chief Financial Officer
A biography of the principal occupation for the past five years of each of
the executive officers is provided below.
David P. Mans has served as a member of the Company's Board of Directors
since joining the Company in January 1988 and as its Chairman of the Board
since March 1997. From January 1988 to March 1997, he was President and
Chief Executive Officer of the Company. He also served as the Company's Chief
Financial Officer from January 1988 to July 1996. Prior to that time, Mr.
Mans held the position of Vice President of Power Projects with International
Power Technologies, Inc., a co-generation company, and Vice President of
Finance at Qume Corp., a computer peripherals company. Mr. Mans has a
Bachelors in Electrical Engineering from the University of Michigan and a
Masters of Business Administration from Stanford University.
James F. Willenborg co-founded the Company and since March 1997 has served as
acting Chief Executive Officer. He served as Chairman of the Board of Directors
from its inception to March 1997. Since 1993, Mr. Willenborg has also served as
Executive Vice President of Sales and Marketing. From 1990 until 1993, Mr.
Willenborg served as the Company's Vice President of Marketing. From 1981 to
1988, Mr. Willenborg was managing general partner of Crosspoint Venture
Partners, which he co-founded. Prior to that time, Mr. Willenborg co-founded
and was a director of Inmac Corporation. Mr Willenborg has a Bachelors in
Electrical Engineering from Iowa State University and a Masters of Business
Administration from Stanford University.
<PAGE>
Michael H. Thoma co-founded the Company and has served as a member of the
Company's Board of Directors since its inception. He has served as Vice
President of Quality Assurance since March 1997. Mr. Thoma has been the
Company's Vice President of Product Development and Secretary from January 1988
to March 1997. Prior to that time, Mr. Thoma was employed by Lockheed
Corporation in various technical capacities. Mr. Thoma holds a Bachelors in
Engineering from San Jose State University.
Thomas C. Hoster has served as Vice President and Chief Financial Officer
since July 1996. Prior to that time, Mr. Hoster held a number of Finance
and Administration jobs at Octel Communications Corporation, a manufacturer
of voice mail equipment, including Treasurer, Director of Investor Relations,
General Manager of Octel Capital, and Director of Customer Administration.
Prior to that, Mr. Hoster was Executive Vice President of Mid-America Federal
in Columbus, Ohio, and Vice President of Chemical Bank in New York. Mr.
Hoster has a Bachelors in Electrical Engineering from Princeton University
and a Masters of Business Administration from Stanford University.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to this item will be set forth in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on May 22,
1997, and is incorporated herein by reference.
ITEM 11. SECURITIES OF OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information with respect to this item will be set forth in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on May 22,
1997, and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be set forth in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on May 22,
1997, and is incorporated herein by reference.
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Documents filed as part of this report
1. Financial Statements
Independent Auditors' Report 29
Balance Sheets
December 31, 1996 and 1995 30
Statements of Operations
Years Ended December 31, 1996, 1995, and 1994 31
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996, 1995, and 1994 32
Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994 33
Notes to Financial Statements 34
2. Exhibits:
See Exhibits Index on page 44. The Exhibits listed in the
accompanying Exhibits Index are filed or incorporated by reference
as part of this report.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended
December 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Palo Alto, California, on the 28th day of March, 1997.
MYSOFTWARE COMPANY
BY /s/ James F. Willenborg
James F. Willenborg
Chief Executive Officer
<PAGE>
SIGNATURES
(Continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28th day of March 1997.
Signature Title
/s/ David P. Mans Chairman of the Board of Directors
David P. Mans
/s/ James F. Willenborg Chief Executive Officer and Director
James F. Willenborg (Principal Executive Officer)
/s/ Thomas C. Hoster Vice President and Chief Financial
Thomas C. Hoster Officer (Principal Financial and
Accounting Officer)
/s/ Michael H. Thoma Vice President of Quality Assurance,
Michael H. Thoma Director, and Secretary
/s/ Kenneth A. Eldred Director
Kenneth A. Eldred
/s/ Donald F. Wood Director
Donald F. Wood
<PAGE>
FINANCIAL STATEMENTS
As required under Item 7. Financial Statements and Supplementary Data, the
financial statements of the Company are provided in this separate section.
The financial statements included in this section are as follows:
Sequentially
Numbered
Financial Statement Description Page
- ------------------------------------------------------------------------------
Independent Auditors' Report 29
Balance Sheets 30
December 31, 1996, and 1995
Statements of Operations 31
Years Ended December 31, 1996, 1995, and 1994
Statements of Stockholders' Equity (Deficit) 32
Years Ended December 31, 1996, 1995, and 1994
Statements of Cash Flows 33
Years Ended December 31, 1996, 1995, and 1994
Notes to Financial Statements 34
<PAGE>
Independent Auditors' Report
The Board of Directors
MySoftware Company:
We have audited the financial statements of MySoftware Company as listed in
the accompanying index. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MySoftware Company as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Jose, California
February 7, 1997
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
Balance Sheets
December 31, 1996 and 1995
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,718,441 $ 7,794,324
Accounts receivable, net 1,242,226 2,525,301
Inventories 596,136 448,513
Other current assets 820,588 156,900
Deferred income taxes 307,733 448,921
------------ ------------
Total current assets 10,685,124 11,373,959
Property and equipment, net 354,482 214,724
Other assets 1,369,593 676,124
------------ ------------
Total assets $ 12,409,199 $ 12,264,807
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 729,467 $ 777,391
Accrued compensation 388,394 342,071
Other accrued liabilities 2,550,781 1,405,057
------------ ------------
Total current liabilities 3,668,642 2,524,519
Deferred income taxes 25,388 17,116
Deferred officers' compensation --- 52,922
Stockholders' equity:
Preferred stock: $0.001 par value; 2,000,000
shares authorized; none outstanding --- ---
Common stock: $0.001 par value; 20,000,000
4,233,366 and 4,231,366 shares authorized;
shares issued and outstanding, respectively 4,234 4,232
Additional paid-in capital 8,561,503 8,561,503
Retained earnings 149,432 1,104,515
------------ ------------
Total stockholders' equity 8,715,169 9,670,250
------------ ------------
Total liabilities and stockholders' equity $ 12,409,199 $ 12,264,807
============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
Statements of Operations
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Net revenues $ 12,872,575 $ 13,398,955 $ 9,223,676
Cost of revenues 3,951,241 3,395,783 2,233,718
------------ ----------- -----------
Gross profit 8,921,334 10,003,172 6,989,958
------------ ----------- -----------
Operating expenses:
Product development 1,988,881 1,342,045 1,100,554
Sales and marketing 6,270,939 5,224,470 3,471,937
General and administrative 1,831,183 1,434,058 1,010,199
Write-off of acquired technology 255,000 --- ---
------------ ----------- -----------
Total operating expenses 10,346,003 8,000,573 5,582,690
------------ ----------- -----------
Operating income (loss) (1,424,669) 2,002,599 1,407,268
Interest income, net 397,586 276,726 1,976
------------ ----------- -----------
Income (loss) before taxes (1,027,083) 2,279,325 1,409,244
Income tax expense (benefit) (72,000) 304,158 3,991
------------ ----------- -----------
Net income (loss) $ (955,083) $ 1,975,167 $ 1,405,253
============ =========== ===========
Net loss per share $ (0.23)
============
Shares used in computing net loss
per share 4,233,486
============
Pro forma net income data (unaudited):
Income before taxes as reported $ 2,279,325 $ 1,409,244
Pro forma income taxes 809,160 493,056
----------- -----------
Pro forma net income $ 1,470,165 $ 916,188
=========== ===========
Pro forma net income per share $ 0.37 $ 0.26
Shares used in computing pro forma =========== ===========
net income per share 4,011,236 3,541,907
=========== ===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity (Deficit)
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1993 3,218,530 $3,219 $250,110 $(675,082) $(421,753)
Stockholder distributions --- --- --- (200,000) (200,000)
Stockholder contributions --- --- --- 200,000 200,000
Net income --- --- --- 1,405,253 1,405,253
Balances as of ---------- ------ -------- --------- ---------
December 31, 1994 3,218,530 3,219 250,110 730,171 983,500
Stockholder distributions --- --- (1,214,560)(1,600,823) (2,815,383)
Initial public offering,
net of issuance costs 1,000,000 1,000 9,439,375 --- 9,440,375
Exercise of stock options 12,836 13 22,541 --- 22,554
Tax benefit from exercise
of options --- --- 64,037 --- 64,037
Net income --- --- --- 1,975,167 1,975,167
Balances as of ---------- ------- --------- --------- ----------
December 31, 1995 4,231,366 4,232 8,561,503 1,104,515 9,670,250
Exercise of stock options 2,000 2 --- --- 2
Net loss --- --- --- (955,083) (955,083)
Balances as of ---------- ------- ---------- ---------- -----------
December 31, 1996 4,233,366 $4,234 $8,561,503 $ 149,432 $ 8,715,169
========== ====== ========== ========== ===========
<FN>
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
Cash flows from operating activities: 1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ (955,083) $ 1,975,167 $ 1,405,253
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 658,478 292,845 244,951
Provisions for returns and
doubtful accounts 1,594,777 1,235,000 936,891
Deferred income taxes 149,460 (431,805) ---
Changes in operating assets and
liabilities:
Accounts receivable 595,256 (2,489,294) (1,498,680)
Inventories (147,623) (168,232) (120,468)
Other assets (667,438) (139,833) 642
Accounts payable (47,924) 295,530 84,001
Deferred officers' compensation (52,922) (56,778) 109,700
Accrued compensation 46,323 78,978 43,265
Other accrued liabilities 238,766 593,208 (273,767)
------------ ------------- ------------
Net cash provided by operating
activities 1,412,070 1,184,786 931,788
------------ ------------- -----------
Cash flows from investing activities:
Additions to property and equipment (234,838) (219,912) (17,273)
Software production costs and other
assets (1,253,117) (742,419) (227,579)
Net cash used for investing ------------ ------------- -----------
activities (1,487,955) (962,331) (244,852)
------------ ------------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 2 22,554 ---
Stockholder distributions --- (2,815,383) (200,000)
Proceeds from IPO, net of issuance costs --- 9,440,375 ---
Stockholder contributions --- --- 200,000
Net cash provided by financing ------------ ------------- -----------
activities 2 6,647,546 ---
------------ ------------- -----------
Net increase (decrease) in cash and
cash equivalents (75,883) 6,870,001 686,936
Cash and cash equivalents at beginning
of year 7,794,324 924,323 237,387
------------ ------------ -----------
Cash and cash equivalents at end
of year $ 7,718,441 $ 7,794,324 $ 924,323
============ ============ ===========
Supplemental disclosures of cash flow
information:
Noncash financing activity:
Tax benefit from exercise of stock
options --- $ 64,037 ---
=========== ============ ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements
Years Ended December 31, 1996, 1995, and 1994
1. Summary of Significant Accounting Policies
Nature of Business
MySoftware Company (the Company) develops, manufactures, and markets
small business application programs. The Company sells its products
primarily through distributors and retail dealers.
Principles of Presentation and Preparation
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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized upon shipment. The Company
provides reserves for estimated returns of products sold to distributors
and retail dealers, and accrues for the estimated costs of providing
customer support.
Cash and Cash Equivalents
The Company considers all liquid instruments with an original maturity of
90 days or less to be cash equivalents. Cash equivalents are stated at
cost and consist primarily of money market securities. The carrying
amount of cash and cash equivalents approximates fair value.
Inventories
Inventories, comprised of finished goods and packaging materials, are
stated at the lower of first-in, first-out cost or market.
Property and Equipment
Property and equipment, comprised primarily of computer equipment and
furniture, are recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective
assets, which are generally three to five years.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, Accounting for the Cost of Capitalized Software to be Sold,
Leased, or Otherwise Marketed, the Company capitalizes its software
development costs after technological feasibility has been established.
Such amounts to date have not been significant.
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
Other Assets
The Company makes payments to third-party developers for software
production costs. These payments are capitalized upon the establishment
of technological feasibility, which is defined by the Company as the
completion of a detailed design specification of the software and are
amortized to cost of revenues during the period that the related product
revenues are recognized. The ongoing assessment of the realizability of
these costs requires considerable judgment related to anticipated future
product revenues, estimated economic life, and changes in hardware and
software technology. The capitalized amounts paid to third party
developers for the years ended December 31, 1996, 1995, aand 1994
aggregated $1,197,217, $742,419, and $227,579, respectively. Accumulated
amortization aggregated $892,597 as of December 31, 1996.
Amortization of these software production costs is provided on a
product-by-product basis. Annual amortization is the greater of the
amount computed using the ratio of current product revenue to the total
of current and anticipated future product revenue or the straight-line
method over the remaining estimated economic lives of two years.
Amortization expense for the years ended December 31, 1996, 1995, and
1994, aggregated $538,390, $241,492, and $112,716, respectively.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and
accounts receivable. The Company maintains cash and cash equivalents with
one financial institution. Management believes the financial risks
associated with such deposits are minimal. Substantially all of the
Company's accounts receivable are derived from sales to computer
software distributors and retailers. As of December 31, 1996, accounts
receivable from two customers comprised 28% and 43%, respectively, of
total accounts receivable. Historically, the Company has not incurred
material credit-related losses.
Income Taxes
Income taxes are provided under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
The Company elected to be treated as a S corporation for federal and
state income tax reporting purposes through June 1995. Federal and state
income taxes on the income of a S corporation are generally payable by
the individual stockholder rather than the corporation. Accordingly, only
the California S corporation franchise tax has been provided through the
termination of the S corporation status in June 1995.
The Company's S corporation status terminated upon the closing of the
initial public offering (IPO) of its common stock. The accompanying
statements of operations for the years ended December 31, 1995 and 1994,
include provisions for income taxes on an unaudited pro forma basis as if
the Company were a C corporation, fully subject to federal and state
income taxes.
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
Net Income (Loss) Per Share and Pro Forma Net Income Per Share
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding during each period
presented using the treasury stock method. Common stock equivalents are
not considered in the computation of net loss per share as their
inclusion would be anti-dilutive. Common stock equivalents consist of
stock options.
Pro forma net income per share is computed using pro forma net income,
which reflects the tax expense that would have been reported if the
Company had been a C corporation, and is based on the weighted average
number of shares of common stock outstanding and common equivalent shares
from stock options outstanding (using the treasury stock method). In
accordance with Securities and Exchange Commission (SEC) Staff Accounting
Bulletins, such computations include all common and common equivalent
shares issued within 12 months of the IPO date as if they were
outstanding for all periods presented using the treasury stock method.
In addition, the calculation includes shares deemed to be outstanding
representing the number of shares sufficient to fund the final S
corporation distribution.
Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as an expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No.
121 requires the Company to review the recoverability of the carrying
amount of its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset might not
be recoverable.
In the event that facts and circumstances indicate that the carrying
amount of assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down is required.
Fair value may be determined by reference to discounted future cash flows
over the remaining useful life of the related asset. Such adoption did
not have a material effect on the Company's financial position or results
of operations.
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
Fair Value of Financial Instruments
The fair value of the Company's cash, receivable, and accounts payable
approximate the carrying amount due to the relatively short maturity of
these items.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
2. Balance Sheet Components
Accounts Receivable
A summary of accounts receivable follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ -------------
<S> <C> <C>
Accounts receivable $ 2,345,361 $ 2,940,617
Allowance for returns
and doubtful accounts (1,103,135) (415,316)
------------ ------------
$ 1,242,226 $ 2,525,301
============ ============
</TABLE>
Other Current Assets
Other current assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- ------------
<S> <C> <C>
Prepaid income taxes $ 693,722 $ ---
Other 126,866 156,900
----------- -----------
$ 820,588 $ 156,900
=========== ===========
</TABLE>
Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- -----------
<S> <C> <C>
Software production costs paid
to third party contractors, net
of accumulated amortization $ 1,307,118 $ 648,290
Deposits 31,584 27,834
Software development costs,
net of accumulated
amortization of $25,009 30,891 --
----------- -----------
$ 1,369,593 $ 676,124
=========== ===========
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
Other Accrued Liabilities
A summary of other accrued liabilities follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Customer prepayments $ 1,086,115 $ 179,157
Accrued advertising 430,392 76,818
Accrued technical support 127,000 103,000
Deferred revenue 375,114 92,353
Other 532,160 753,729
------------ -----------
$ 2,550,781 $ 1,405,057
============ ===========
</TABLE>
3. Stockholders' Equity
Stockholder Distributions
As a S corporation, the Company made distributions to its stockholders
to provide them with funds to pay income taxes on corporate earnings.
Prior to the completion of the IPO in June 1995, the Company declared a
distribution payable to the current stockholders of the Company for an
amount representing a portion of the previously earned and undistributed
S corporation earnings. The distribution was paid by the Company following
the IPO after the amount of such taxes was determined.
Stock Options
In September 1994, the Company granted five key employees an aggregate
of 235,000 common stock options at $1.50 per share, the fair market
value of the Company's common stock on the date of grant. These options
vest ratably over three years and expire 10 years from the grant date.
The Company adopted the 1995 Equity Incentive Plan (the Plan) in April
1995, and reserved 600,000 shares thereunder. The Plan provides for the
grant of incentive stock options to employees of the Company and for the
grant of nonstatutory stock options to employees and consultants of the
Company. The Board of Directors administers the Plan and has the
discretion to grant stock options. Exercise prices may not be less than
100% and 85% of the fair market value at the date of grant for incentive
options and nonstatutory options, respectively. Options granted under the
Plan generally vest over five years and expire after 10 years.
The Company adopted the 1995 Nonemployee Directors' Plan in April 1995
and reserved 200,000 shares thereunder. The Nonemployee Directors' Plan
provides for the automatic grant of nonstatutory stock options to
nonemployee directors of the Company at the fair market value of the
common stock on the date of grant. The term of all options granted under
the Nonemployee Directors' Plan may not exceed 10 years or the end of
the director's status as a director. The Company has granted 25,000
options under the Nonemployee Directors' Plan.
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
The following table summarizes all stock option activities for the 1995
equity incentive plan, the 1995 Nonemployee Directors' Plan and 1994 stock
option grants:
<TABLE>
<CAPTION>
Weighted average
Stock exercise price
options per share
---------- ---------------
<S> <C> <C>
Outstanding as of December 31, 1993 100,000 $ 1.50
Granted 235,000 1.50
Expired or canceled (100,000) 1.50
---------
Outstanding as of December 31, 1994 235,000 1.50
Granted 188,500 8.96
Expired or canceled (9,826) 7.73
Exercised (12,836) 1.76
---------
Outstanding as of December 31, 1995 400,838 4.85
Granted 380,450 4.68
Expired or canceled (220,531) 7.96
Exercised (2,000) 4.00
---------
Outstanding as of December 31, 1996 558,757 3.51
=========
Exercisable at:
December 31, 1995 95,109 $ 2.27
======== ========
December 31, 1996 196,185 $ 2.41
======== ========
Available for grant at:
December 31, 1995 621,326
========
December 31, 1996 461,407
========
</TABLE>
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, issued in
October 1995. In accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion No. 25 and related interpretations in accounting for its
stock option plans and, accordingly, does not recognize compensation cost.
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No., 123,
net income (loss) and earnings per share would have been changed to the pro
forma amounts indicted in the table below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Net income (loss):
As reported (pro forma for 1995) $ (955.1) $ 1,470.2
Pro forma (1,276.7) 1,276.6
Income (loss) per share:
As reported (pro forma for 1995) (0.23) 0.37
Pro forma (0.30) 0.32
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
The effects of applying SFAS No. 123 for disclosing compensation cost may not
be representative of the effects on reported net income(loss) for future years
because pro forma net income(loss) reflects compensation costs only for stock
options granted in 1996 and 1995 and does not consider compensation cost for
stock options granted prior to January 1, 1995.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model with the following assumptions:
Expected dividend yield 0.00%
Expected stock price volatility 50.00%
Risk free interest rate 5.97-6.22%
Expected life of options 5 years
The weighted average fair value of options granted during 1996 and 1995 is
$2.44 and $4.54 per share, respectively.
The following table summaries information about stock options outstanding as
of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-Avg. Weighted-
Range of Remaining Average Weighted-
Exercise Number Contractual Exercise Number Average
Prices Outstanding Life Price Exercisable Exercise Price
----------- ----------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.50 222,714 8.75 years $ 1.50 157,067 $ 1.50
4.00 to 7.50 314,228 9.75 4.32 32,386 4.78
12.25 to 14.00 21,815 9.23 12.34 6,732 12.32
</TABLE>
4. Income Taxes
The components of income tax expense (benefit), as presented in the
accompanying statements of operations, comprise federal taxes and state
taxes. The pro forma provision for income taxes reflects the income tax
expense that would have been reported if the Company had been a C corporation
for all of 1995 and 1994. The components of income taxes for the years
ended December 31, 1996 and 1995, and unaudited pro forma income taxes for
the years ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Income taxes:
Current:
Federal $(222,259) $ 518,037
State 800 153,889
----------- ----------
Total current (221,459) 671,926
----------- ----------
Deferred:
Federal 43,482 (325,828)
State 105,977 (105,977)
----------- ----------
Total deferred 149,459 (431,805)
----------- ----------
Charge in lieu of income taxes for tax
benefit from exercise of stock options --- 64,037
----------- ----------
Total income tax expense (benefit) $ (72,000) $ 304,158
=========== ==========
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
1995 1994
--------- ----------
Unaudited pro forma income taxes:
Current:
<S> <C> <C>
Federal $ 725,987 $ 512,056
State 166,705 124,626
--------- ----------
Total current 892,692 636,682
--------- ----------
Deferred:
Federal (117,699) (119,805)
State (29,870) (23,821)
--------- ----------
Total deferred (147,569) (143,626)
--------- ----------
Charge in lieu of income taxes for tax
benefit from exercise of stock options 64,037 ----
--------- ----------
Total pro forma income taxes $ 809,160 $ 493,056
========= ==========
</TABLE>
The following tables reconcile the expected corporate federal income tax
expense (benefit) (computed by multiplying the Company's income (loss) before
income taxes by 34%) to the Company's income tax expense (benefit) for the
years ended December 31, 1996 and 1995 and the unaudited pro forma income tax
expense for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Expected income tax expense (benefit) $ (349,208) $ 774,971
State income taxes, net of federal tax effect 70,473 31,622
Change in valuation allowance 281,600 -
S corporation benefit - (182,896)
Establishment of net deferred tax assets in
connection with the termination of
S corporation status - (325,827)
Research and development tax credit (83,711) -
Other 8,846 6,288
---------- ---------
Actual income tax expense (benefit) $ (72,000) $ 304,158
========== =========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Expected pro forma income tax expense $ 774,971 $ 479,143
State income taxes, net of federal tax effect 90,311 66,531
Research and development tax credits (62,717) (57,437)
Other, net 6,595 4,819
---------- ---------
Pro forma income taxes $ 809,160 $ 493,056
========== =========
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets as of December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves $ 768,770 $ 448,921
Net operating loss carryforwards 6,314 -
Tax credit carryforwards 107,781 -
---------- ----------
Total gross deferred tax assets 882,865 448,921
Less valuation allowance 575,132 -
---------- ----------
Deferred tax assets net of valuation
allowance 307,733 448,921
Deferred tax liabilities:
Fixed assets 25,388 17,116
---------- ----------
Deferred tax liabilities 25,388 17,116
---------- ----------
Net deferred tax assets $ 282,345 $ 431,805
========== ==========
</TABLE>
A valuation allowance of $575,132 was established in 1996 against deferred
tax assets. Based on the results of the current year operations and
uncertainty of future realization of the deferred tax assets, the Company's
management does not believe it is more likely than not that sufficient future
taxable income will be generated to realize all of the net deferred tax
assets.
As of December 31, 1996, the Company has a net operating loss carryforward of
approximately $108,000 for California income tax purposes which expires in
2002. The Company also has a California research and development tax credit
carryforward of $107,781.
5. Major Customers
The following table summarizes sales to customers when sales to such
customers exceeded 10% of revenues as well as the amounts due from these
customers as a percentage of total gross accounts receivable.
<TABLE>
<CAPTION>
Years ended December 31,
Percentage of net revenues 1996 1995 1994
----- ---- -----
<S> <C> <C> <C>
Customer A 34% 28% 23%
Customer B 29% 23% 14%
</TABLE>
<TABLE>
<CAPTION>
December 31,
Percentage of total accounts receivable as of 1996 1995
---- ----
<S> <C> <C>
Customer A 28% 55%
Customer B 43% 20%
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
Notes to Financial Statements, Continued
6. Commitments
Leases
The Company entered into agreements to lease its facilities under certain
non cancelable operating leases extending through 2000. Future minimum lease
commitments under these leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $ 350,132
1998 501,023
1999 513,824
2000 164,657
----------
$1,529,636
==========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995, and 1994, was
approximately $263,000, $223,000, and $160,000, respectively.
Royalties
Royalties are accrued based on net sales pursuant to agreements with
external software developers of software products published by the Company.
Royalty costs, generally 2% of related revenues subject to certain maximum
payment amounts, are included in cost of revenues.
Profit Sharing Plan
The Company's contributions to its employee profit sharing plan are made at
the Company's discretion. Contributions amounted to $33,000, $164,000, and
$220,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
<PAGE>
EXHIBITS INDEX
Exhibit Incorporated by Reference
Number Exhibit Description Form Date Number
- ------------------------------------------------------------------------------
3.1 Certificate of Incorporation S-1 6/20/95 3.3
3.2 Bylaws S-1 6/20/95 3.4
10.1 Form of Indemnity Agreement for
officers and directors S-1 6/20/95 10.1
10.2 Form of Indemnity Agreement for
officers and directors S-1 6/20/95 10.2
10.3 1995 Equity Incentive Plan
(the "1995 Plan") S-1 6/20/95 10.3
10.4 Form of Incentive Stock Option
under the 1995 Plan S-1 6/20/95 10.4
10.5 Form of Nonstatutory Stock Option
under the 1995 Plan S-1 6/20/95 10.5
10.6 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") S-1 6/20/95 10.6
10.7 Form of Stock Option under the
Directors' Plan S-1 6/20/95 10.7
10.8 Lease Agreement by and between
MySoftware and 2197 E. Bayshore Road
Partnership dated February 25, 1993,
as amended S-1 6/20/95 10.8
10.9 Software Development Agreement by
and between MySoftware and Micro-
Burst, Inc. dated October 11, 1993
("the October 11, 1993 Agreement") S-1 6/20/95 10.9
10.10 Software Development Agreement by
and between MySoftware and Micro-
Crafts, Inc. dated September 13,
1993 ("the September 13, 1991
Agreement") S-1 6/20/95 10.10
10.11 Amendment to the September 13, 1991
Agreement between MySoftware and
MicroCrafts, Inc., dated October 10,
1994 S-1 6/20/95 10.11
<PAGE>
EXHIBITS INDEX
(Continued)
Exhibit Incorporated by Reference
Number Exhibit Description Form Date Number
- ------------------------------------------------------------------------------
10.12 Software Development Agreement by
and between MySoftware and Micro-
Crafts, Inc. dated October 18, 1992
("the October 18, 1992 Agreement") S-1 6/20/95 10.12
10.13 Amendment to the October 18, 1992
Agreement between MySoftware and
MicroCrafts, Inc., dated October 10,
1994 S-1 6/20/95 10.13
10.14 Software Development Agreement by
and between MySoftware and Micro-
Crafts, Inc. dated December 10,
1993) S-1 6/20/95 10.14
10.15 Software Purchase Agreement and
Assignment of Copyright dated
January 15, 1996 by and between
MySoftware and Mediatech, Inc. 10-K 12/31/95 44
10.16 Amendment to Lease Agreement dated
June 30, 1995 10-K 12/31/95 54
10.17 Lease Agreement by and between
MySoftware and Birmingham
Properties, Inc. dated October 8,
1996 N/A N/A N/A
10.18 Third Amendment to Lease Agreement
by and between MySoftware and
Holvick Family Trust, dated
January 31, 1997 N/A N/A N/A
11.1 Computation of Net Loss per Share
and Pro Forma Net Income Per Share N/A N/A N/A
23.1 Consent of KPMG Peat Marwick LLP N/A N/A N/A
27.1 Financial Data Schedule N/A N/A N/A
<PAGE>
EXHIBIT 10.17
STANDARD OFFICE LEASE-NET
1. Basic Lease Provisions ("Basic Lease Provisions")
1.1 Parties: This Lease, dated, for reference purposes only, September 25.
1996 is made by and between Birmingham Properties, Inc., (herein called
"Lessor") and My Software, Inc. (herein called "Lessee").
1.2 Premises:- Third floor, consisting of approximately 3,000 square feet,
more or lose, as defined in paragraph 2 and as shown on Exhibit 'A'
herein (the "Premises").
1.3 Building: Commonly described as being located at 1475 Folsom Street in
the City of San Francisco, County of Son Francisco, State of California,
as more particularly described in Exhibit A hereto, and as defined in
paragraph 2.
1.4 Use: General office and software development, subject to paragraph 6.
1.5 Term: Three years commencing November 1, 1996 (see Exhibit'Commencement
Date') and ending October 31, 1999 with one option to extend the lease
term for two additional years at 95% of Fair Market Value ('FMV'), as
defined in paragraph 3.
1.6 Base Rent: $3,750.00 per month, net of utilities and janitorial, payable
on the lst day of each month, per paragraph 4.l.
1.8 Rent Paid Upon Execution: $7,500.00, which is the first months rent and
the security deposit.
1.9 Security Deposit: $3,750.00
1.10 Lessee's Share of Operating Expenses: 31 % as defined in paragraph 4.2.
2. Premises, Parking and Common Areas.
2.1 Premises: The premises are in a portion of a building, herein sometimes
referred to as the 'Building' identified in paragraph of the Basic Lease
Provisions. 'Building' shall include adjacent parking structures used in
connection therewith. The Premises, the Buildings, the common Areas,
the land upon which the same are located, along with all other buildings
and improvements thereon or thereunder, are herein collectively referred
to as the "Office Building Project". Lessor hereby leases to Lessee and
Lessee leased from Lessor for the term, at the rental, and upon all of
the conditions sat forth herein, the real property referred to in the
Basic Lease Provisions, paragraph 1.2, as the 'Premises,' including
rights to the Common Areas as set forth herein, the real property
referred to in the Basic Lease Provisions, paragraph 1.2, as the
'Premises,' including rights to the Common Area as hereinafter specified.
2.2 Vehicle Parking: Intentionally deleted.
2.3 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 Office Building Project that are provided and designated by the
Lessor from time to time for the general nonexclusive use of Lessor,
Lessee and of other lessees of the Office Building Project and their
respective employees, supplier, shippers, customers, and invitees,
including but not limited to common entrances, lobbies, corridors,
stairways and stairwells, to the extent not otherwise prohibitedby this
Lease, trash areas, walkways, and decorative walls.
2.4 Common Areas - Rules and Regulations: Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to causes its
employees, suppliers, shippers, customers, and invitees to so abide and
conform. 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 modify, amend and enforce said rules and
regulations. Lessor shall not be responsible to Lessee for the non-
compliance with said rules and regulations by the Lessee, their agents,
employees and invites of the Office Building Project.
2.5 Common Area - Changes: Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common Areas,
including, without limitation, changes in the location, size, shape
<PAGE>
number, and appearance thereof, including but not limited to the
lobbies, windows, stairways, entrance, ingress, egress, decorative
walls, and walkways.
(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 and improvements outside the boundaries of the
Office Building Project to be a part of the Common Areas, provided that
such other land and improvements have a reasonable and functional
relationship to the Office Building Project
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaging in making additional improve-
ments, repairs or alterations to the Office Building Project, or any
portion thereof;
(f) To do and perform such other acts and make such other changes in , to or
with respect to the Common Area and Office Building Project, as Lessor
may, in the exercise of sound business judgment deem to be appropriate.
3. Term:
3.1 The term and Commencement date of this Lease shall be as specified in
paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession: Notwithstanding said Commencement Date, if any
reason Lessor cannot deliver possession of the Premises to Lessee on
said date and subject to paragraph 3.2.2, Lessor shall not be subject
to any liability therefore, nor shall such failure affect the validity of
this Lease or the obligations of Lessee hereunder or extend the term
hereof; but in such case, Lessee shall not obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease,
except as may be otherwise provide in this Lease, until possession of
the Premises is tendered to Lessee, as hereinafter defined; provided,
however, that if Lessor shall not have delivered possession of the
Premises within sixty (60) days following said Commencement Date, as the
same may be extended under the terms of a Work Letter executed by Lessor
and Lessee, Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days thereafter, cancel this Lease, in which
event the parties shall be discharged from all obligations hereunder;
provided however, that, as to Lessee' return any money previously
deposited by Lessee (less any offsets due Lessor for Non-Standard
Improvement); and provided, further, that if such written notice by
Lessee is not received by Lessor within said ten (10) day period,
Lessee's right to cancel this Lease hereunder shall terminate and be if
no further force or effect.
3.2.1 Possession Tendered-Defined. Possession of the Premises shall be
deemed tendered to Lessee ("Tender of Possession") when (1) the
Improvements to be provided by Lessor under this Lease are substantial-
ly completed, (2) the Building utilities are ready for use in the
Premises, Lessee has reasonable access to the Premises ,and (4) ten
(10) days shall have expired following advance written notice to
Lessee of the occurrence of the matters described in (1), (2) and (3)
above of this paragraph 3.2.1.
3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the
sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall
be deemed extended to the extent of any delays caused by acts or
omissions of Lessee, Its agents, employees and contractors.
3.3 Early Possession. If Lessee occupies the Promises prior to said Commen-
cement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee
shall pay rent for such occupancy.
3.4 Uncertain Commencement. In the event commencement of the Lease term is
defined as the completion of the Improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of
Possession (as defined in paragraph 3.2.1) or the actual taking of
possession by Lessee, whichever first occurs, as the Commencement Date.
<PAGE>
4. Rent
4.1 Base Rent. Subject to adjustment as hereinafter provided In paragraph
4.3. and except as may be otherwise expressly provided in this Lease,
Lessee shall pay to Lessor the Base Rent for the Premises set forth in
paragraph 1.6 of the Basic Lease Provisions. without offset or deduction.
Lessee shall pay Lessor upon execution hereof the advance Base Rent
described In paragraph 1.8 of the Basic Lease Provisions. Rent for any
period during the term hereof which is for less than one month shall be
prorated based upon the actual number of days of the calendar month
involved. Rent shall be payable in lawful money of the United States to
Lessor at the address stated herein or to such other persons or at such
other places as may designate in writing.
4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof,
in addition to the Base Rent, Lessee's Share, as hereinafter defined, of
all Operating Expenses, as hereinafter defined during each calendar year
of the term of this Lease, in accordance with the following provisions:
Base year to be 1997.
(a) "Lessee's Share is defined, for purpose of this Lease, as the percentage
set forth in paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate square foot-
age of the Premises by the total approximate square footage of the
rentable space contained in the Office Building Project. It Is under-
stood and agreed that the square footage figures set forth in the Basic
Lease Provisions are approximations which Lessor and Lessee agree are
reasonable and shall not be subject to revision except in connection
with an actual change In the size of the Premises or a change In the
space available for lease in the Office Building Project.
(b) "Operating Expenses" is defined, for purposes of this Lease, to include
all costs, if any,
incurred by Lessor In the exercise of Its reasonable discretion. for:
(i) The operation, repair, maintenance, and replacement, in neat. clean,
safe, good order and condition, of the Office Building Project,
including but not limited to, the following:
(aa) The Common Area, including their surfaces, coverings, decorative
items, carpets, drapes and window coverings, and including
parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, stairways, parkways, driveways,
landscaped areas, striping, bumpers, irrigation systems, Common
Area lighting facilities, building exteriors and roofs, fences
and gates;
(bb) All heating, air conditioning, plumbing, electrical systems, life
safety equipment, telecommunication and other equipment used in
common by, or for the benefit of, lessees or occupants of the
Office Building Project, including elevators and escalators,
tenant directories, fire detection systems including sprinkler
system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is elsewhere in this
Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property insurance
policies to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be paid by Lessor under
paragraph 10.1 hereof: except for increase due to sale or transfer of
the building;
<PAGE>
(vi) The cost of water, sewer, gas, electricity, and other publicly
mandated services to the Office Building Project;
(vii) Labor, aviaries and applicable fringe benefits and costs, materials,
supplies and tools, used in maintaining and/or cleaning the Office
Building Project and accounting and a management fee attributable to
the operation of the Office Building Project;
(ix) Replacements of equipment or improvements that have a useful life for
depreciation purposes according to Federal Income tax guidelines of
five (5) years or less, as amortized over such life.
(c) Operating Expenses shall not include the costs of replacements of equip-
ment or improvements that have a useful life for Federal Income tax
purposes in excess of five (5) years unless it is of the type described
in paragraph 4.2(b)(viii), in which case their cost shall be Included as
above provided.
(d) Operating Expenses shall not include any expenses paid by any lessee
directly to third parties, or as to which Lessor Is otherwise reimbursed
by any third party, other tenant, or by insurance proceeds.
(e) Lessee's Share of 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
Operating Expenses and the same shall be payable monthly or quarterly,
as Lessor shall designate, during each calendar year of the Lease term,
on the same day as the Base Rent is due hereunder. In the event that
Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as
a foresaid, 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 Operating Expenses incurred during
the preceding year. If Lessee's payments under this paragraph 4.2(e)
during said preceding calendar year exceed Lessee's Share as indicated
on said statement, Lessee shall be entitled to credit the amount of such
overpayment against Lessee's Share of Operating Expenses next falling
due. If Lessee's payments under this paragraph during said preceding
calendar 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.
4.3 Rent Increase.
4.3.1 At the times set forth in paragraph l.7 of the Basic Lease Provisions,
the monthly Base Rent payable under paragraph 4.l of this Lease shall be
adjusted by the increase, if any, in the Consumer Price Index of the
Bureau of Labor Statistics of the Department of Labor ( for All Urban
Consumers, (1967=100), "All Rents," for the city nearest the location
of the Building, herein referred to as "C.P.I.:' since the date of this
Lease.
4.3.2 The monthly Base Rent payable pursuant to paragraph 4.3.1 shall be
calculated as follows: the Base Rent payable for the first month of the
term of this Lease, as set forth in paragraph 4.1 of this Lease, shall
be multiplied by a fraction the numerator of which shall be the C.P.I.
of the calendar month during which the adjustment is to take effect,
and the denominator of which shall be the C.P.I. for the calendar month
in which the original Lease term commences. The sum so calculated shall
constitute hereunder, but, in no event, shall such new monthly Base
Rent be less than the Base Rent payable for the month immediately
preceding the date for the rent adjustment.
<PAGE>
4.3.3 In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculations. In the event that Lessor and
Lessee cannot agree on such alternative index, then the matter shall be
submitted for decision to the American Arbitration Association in the
county in which the Premises are located, in accordance with the then
rules 4.3.4 Lessee shall continue to pay the rent at the rate
previously in effect until the increase, if any, is determined. Within
five (5) days following the date on which the increase is determined,
Lessee shall make such payment to Lessor as will bring the increased
rental current, commencing with the effective date of such increase
through the date of any rental installments then due. Thereafter the
rental shall be paid at the increased rate.
4.3.5 At such time as the amount of any change in rental required by this
Lease is known or determined, Lessor shall execute an amendment to this
Lease setting forth such change.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the security deposit set forth in paragraph 1.9 of the Basic Lease
Provisions as security for Lessee's faithful performance of Lessee's
obligation hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this
Lease, Lessor may use, apply or retain all or any portion of said deposit
for the payment of any rent or other charge in default for the payment of
any other hereof, and after Lessee has vacated the Premises. No trust
relationship is created herein between Lessor and Lessee with respect to
said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for the purpose set
forth in paragraph 1.4 of the Basic Lease Provisions or any other use
which is reasonably comparable to that use and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in the state existing on the
date that the Lease term commences, but without regard to alterations or
improvements made by Lessee or the use for which Lessee will occupy the
Premises, does not violate any covenants or restrictions of record, or
any applicable building code, regulation or ordinance in effect on such
Lease term Commencement Date. In the event it is determined that this
warranty has been violated, then it shall be the obligation of the Lessor,
after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, ractify any such violation.
<PAGE>
(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense,
promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and require-
ments of any fire insurance underwriters or rating bureaus, now in effect or
which may hereafter come into effect, whether or not they reflect a
change in policy from that now existing, during the term or any part of
the term hereof, relating in any manner to the Premises and the
occupation and use by Lessee of the Premises. Lessee shall conduct its
business in a lawful manner and shall not use or permit the use of the
Premises or the Common Areas in any manner that will tend to create waste
or a nuisance or shall tend to disturb other occupants of the Office
Building Project.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee in a clean condition on the
Lease Commencement Date (unless Lessee is already in possession) and
Lessor warrants to Lessee that the plumbing, lighting, air conditioning,
and heating system in the Premises shall be in good operating condition.
In the event that it is determined that this warranty has been violated,
then it shall be the obligation of Lessor, after receipt of written notice
from Lessee setting forth with specificity the nature of the violation, to
promptly, at Lessor's sole cost, ractify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts the
Premises and the Office Building Project in their condition existing as of
the Lease Commencement Date or the date that Lessee takes possession of
the Premises, whichever is earlier, subject to all applicable zoning,
municipal, county and state laws, ordinances and regulations governing
and regulating the use of the Premises, and any easements, covenants or
restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that it has satisfied itself by its own independent investiga-
tion that the Premises are suitable for its intended use, and that
neither Lessor's agent or agents has made any representation or warranty
as to the present or future suitability of the Premises, Common Areas, or
Office Building Project for the conduct of Lessee's business.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Office Building Project,
including the Premises interior and exterior walls, roof, and common areas,
and the equipment whether used exclusively for the Premises or in common
with other premises, in good condition and repair; provided, however, Lessor
shall not be obligated to paint, repair or replace wall coverings, or to
repair or replace any improvements that are not ordinarily a part of the
Building or are above then Building standards. Except as provided in
paragraph 9.5, there shall be no abatement of rent or liability of Lessee
on account of any injury or interference with Lessee's business with respect
to any improvements, alterations or repairs made by Lessor to the Office
Building Project or any part thereof. Lessee expressly waives the benefits
of any statue now or hereafter in effect which would otherwise afford Lessee
the rights to make repairs at Lessor's expenses or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition
and repair.
7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the
cost thereof to Lessor as additional rent for that portion of the cost of
any maintenance and repair of the Premises, or any equipment (wherever
located) that serves only Lessee or the Premises, to the extent such cost
is attributable to causes beyond normal wear and tear Lessee shall be
responsible for the cost of painting, repairing or replacing wall
coverings, and to repair or replace any Premises improvements that are not
ordinarily a part of the Building or that are above then Building
<PAGE>
standards. Lessor may, at its option, upon reasonable notice, elect to
have Lessee perform any particular such maintenance or repairs, the cost
of which is otherwise Lessee's reposnsibility hereunder.
(b) On the last day of the term hereof, or on any sooner termination, essee
shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear
if the same could have been prevented by good maintenance practices by
Lessee. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, alterations,
furnishings and equipment. Except as otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, air conditioning, window coverings, wall coverings,
carpets, wall panelling, ceiling, and plumbing on the Premises and in good
operating condition.
7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility Installations or repairs in,
on or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window
and wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication
wiring and equipment. At the expiration of the term, Lessor may require
the removal of any or all of said alterations, improvements, additions or
Utility Installations, and the restoration of the Prmises and the Office
Building Project to their prior condition, at Lessee's expense. Should
Lessor permit Lessee to make its own alterations, improvements, additions
or Utility Installations, Lessee shall use only such contractor as has been
expressly approved by Lessor, and Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improve-
ments, to insure Lessor against any liability for mechanic's and material-
men's liens and to insure completion of the work. Should Lessee make any
alterations,improvements, addiitons or Utility Installations without the
prior approval of Lessor, or use a contractor not expressly approved by
Lessor, Lessor may, at any time during the term of this Lease, require that
Lessee remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility Installations in or
about the Premises or the Office Building Project that Lessee shall desire
to make shall be presented to Lessor in written form, with proposed
detailed plans. If Lessor shall give its consent to Lessee's making such
alteration, improvement, addition or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from
the applicable governmental agencies, furnishing a copy thereof to Lessor
prior to the commencement of the work, and compliance by Lessee with all
conditions of said permit in a prompt and expeditious manner.
(c) 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 in the
Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office
Building Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in the Premises by Lessee, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises or
the Building 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 itself and Lessor 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, the Building or
<PAGE>
the Office Building Project, upon the condition that if Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to
Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the
Premises, the Building and the Office Building Project free from the effect
of such lien or claim. In addition, Lessor may require Lessee to pay
Lessor's reasonable attorney's fees and costs in participating in such
action if Lessor shall decided it is to Lessor's best interest so to do.
(e) All alternations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of
Lessee), which may be made to the Premises by Lessee, including but not
limited to, floor covering, panelings, doors, drapes, built-ins, moldings,
sound attenuation, and lighting and telephone or communication systems,
conduit, wiring and outlets, shall be made and done in a good and
workmanlike manner and of good and sufficient quality and materials and
shall be the property of Lessor and remain upon and be surrendered with
the Premises at the expiration of the Lease term, unless Lessor requires
their removal pursuant to paragraph 7.3(a). Provided Lessee is not in
default, notwithstanding the provisions of this paragraph 7.3(e). Lessee's
personal property and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the
Premises of the Building, and other than Utility Installations, shall
remain the property of Lessee and may be removed by Lesssee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and specifications for any
alterations, improvements, additions or Utility Installations.
7.4 Utility Addition. Lessor reserves the right to install new or additional
utility facilities throughout the Office Building Project for the benefit
of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing,
electrical systems, security Systems, communication systems, and fire
protection and detection systems, so long as such installations do not
unreasonably interfere with Lessee's use of the Premises.
8. Insurance Indemnity.
8.1 Liability Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease a policy of Comprehensive
General Liability insurance utilizing an Insurance Services Office standard
form with Broad Form General Liability Endorsement (GL0404), or equivalent,
in an amount of not less than $1,000,000 per occurrence of bodily injury and
property damage combined or in a greater amount as reasonably determined
by Lessor and shall insure Lessee with Lessor as an additional insured
against liability arising out of the use, occupancy or maintenance of the
Premises. Compliance with the above reuirements shall not, however, limit
laibility of Lessee hereunder.
8.2 Liability Insurance-Lessor. Lessor shall obtain and kee in force during
the term of this Lease a policy of Combined Single Limit Bodily Injury and
Broad Form Property Damage Insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy or mainten-
ance of the Office Building Project in an amount not less than $5,000,000.00
per occurrence.
8.3 Property Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the
full replacement cost, as the same may exist from time to time, of all of
Lessee's personal property, fixtures, equipment and tenant improvements.
<PAGE>
8.4 Property Insurance-Lessor. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the
amount of the full replacement cost thereof, as the same may exist from
time to time, utilizing Insurance Services Office standard form, or
equivalent, providing protection against all perils included within the
classificatation of fire, extended coverage, vandalism, malicious mischief,
plate glass, and such other perils as Lessor deems advisable or may be
required by a lender having a lien on the Office Building Project. In
addition, Lessor shall obtain and keep in force, during the term of this
Lease, a policy of rental value insurance covering a period of one year,
with loss payable to Lessor, which insurance shall also cover all Operating
Expenses for said period. Lessee will not be named in any such policies
carried by Lessor and shall have no rights to any proceeds therefrom. The
policies required by these paragraph 8.2 and 8.4 shall contain such
deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph
9.1(f) hereof, the deductible amounts under the applicable insurance
policies shall be deemed an Operating Expenses. Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
carried by Lessor. Lessee shall pay the entirety of any increase in the
property insurance premium for the Office Building Project over what it was
immediately prior to the commencement of the term of this Lease if the
increase is specified by Lessor's insurance carrier as being caused by the
nature of Lessee's occupancy or any act or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.l or certificates evidencing
the existence and amounts of such insurance within seven(7) days after the
Commencement Date of this Lease. No such policy shall be cancelable or
subject to reduction of coverage or other 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 renewals
thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve
the other and waive their entire right of recovery against the other for
direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to
the negligence of Lessor or Lessee or their agents, employees, contractors
and/or invitees. If necessary all property insurance policies required
under this Lease shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnity and hold harmless Lessor and its agents,
Lessor's master or ground lessor, partners and lenders, from and against any
and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the
conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnity and hold harmless Lessor from and against any and
all calaims, costs and expenses arising form any breach or default in the
performance of any obligation on Lessee's part to be performed under the
term of this Lease, or arising from any act or omission of Lessee, or any
of Lessee's agents, contractors, employees or invites and from and against
all costs, attorney's fees, expenses and liabilities incurred by Lessor as
the result of any such use, conduct, activity, work, things done, permitted
or suffered, breach, default or negligence, and in dealing reasonbly
therwith, including but not limited to the defence or pursuit of any claim
or any action or proceeding involved therin; and in case any action or
proceeding be brought against Lessor by reason of any such matter, Lessee
upon notice from Lessor shall defend the same at Lessee's expense by counsel
reasonably satisfactoy to Lessor and Lessor shall cooperate with Lessee with
such defence. Lessor need not have first paid any such claim in order to be
so indemnified. Lessee, as a material part of the consideration to Lessor,
hereby assumes all risks of damage to property of Lessee or injury to
persons, in upon or about the Office Building Project arising from any
cause and Lessee hereby waives all claims in repsect thereof against Lessor.
<PAGE>
8.8 Exempt of Lessor from Liability. Lessee hereby agrees that Lessor shall not
be liable for injury to Lessee's business or any loss of income therefrom or
for loss of or damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or
about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from
theft, fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstrcution or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said damage or injury results from conditions arising
upon the Premises or upon other portions of the Office Building Project, or
from other sources or places, or from new construciton or the repair,
alteration or improvement of any part of the Office Building Project, or of
the equipment, fixture or appurtenances applicable thereto, and regardless
of whether the cause of such damage or injury or the means of repairing the
same is inaccessible, Lessor shall not be liable fro any damage arising from
any act or neglect of any other lessee, occupant or user of the Office
Building Project, nor form the failure of Lessor to enforce the provisions
of any other lessee of the Office Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no representation
that the limits or forms of coverage of insurance specified In this
paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
9. Damage of Destruction.
9.1 Definition.
(a) "Premises Damage" shall mean if the Premises are damaged or destroyed
to any extent.
(b) "Premises Building Partial Damage" shall mean if the Building of which
the Premises are a part is damaged or destroyed to the extent that the cost
to repair is less than fifty percent (50%) of the then Replacement Cost
of the Building.
(c) "Premises Building Total Destruction" shall mean if the Building of which
the Premises are a part is damaged or destroyed to the extent that the cost
to repair is fifty percent (50%) or more of the then Replacement Cost of
the Building.
(d) "Office Building Project Buildings" shall mean all of the buildings on the
Office Building Project site.
(e) "Office Building, Project Office Buildings Total Destruction" shall mean
if the Office Building Project Buildings are damaged or destroyed to the
extent that the cost of repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused by an event
required to be covered by the insurance described in paragraph 8. The fact
that an Insured Loss has a deductible amount shall not make the loss an
uninsured loss.
(g) "Replacement Cost" shall mean the amount of money necessary to be spent
in order to repair or rebuild the damaged area to the condition that existed
immediately prior to the damage occurring, excluding all improvements made
by lessees, other than those Installed by Lessor at Lessee's expense.
9.2 Premises Damage; Premises Building Partial Damage.
<PAGE>
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, it at any
time during the term of this Lease there is damage which is an Insured Loss
and which falls into the classification of either Premises Damage or
Premise Building Partial Damage, then Lessor, shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expenses, repair
such damage (but not Lessee's fixtures, equipment or tenant improvements
originally paid for by Lessee) to its condition existing at the time of the
damage, and this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraph 9.4 and 9.5, if at
any time during the term of this Lease there is damage which is not an
Insured Loss and which falls within the classification or Premises Damage
or Premises Building Partial Damage, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), which damage prevents Lessee from making any substantial use of
Premises, Lessor may at Lessor's option either (i) repair such damage as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to
Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease as of the
date of the occurrence of such damage, in which event this Lease shall
terminate as of the date of the occurrence of such damage.
9.3 Premises Building Total Destruction; Office Building Project Total
Destruction. Subject to the provisions of paragraph 9.4 and 9.5, if at any
time during the term of this Lease there is damage, whether or not it is
an Insurance Loss, which falls into the classifications of either (i)
Premises Building Total Destruction, or (ii) Office Building Project Total
Destruction, then Lessor may at Lessor's option either (i) repair such
damage or destruction as soon as reasonably possible at Lessor's expense
(to the extent the required materials are readily available through usual
commercial channels) to its condition existing at the time of the damage,
but not Lessee's fixtures, equipment or tenant improvements, and this Lease
shall continue in full force and effect, or (ii) give written notice to
Lessee within thirty (30) days after the date of occurrence of such damage
of Lessor's intention to cancel and terminate this Lease, in which case this
Lease shall terminate as of the date of the occurrence of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4(b), if at any time during the last twelve (12)
months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as
of the date of occurrence of such damage by giving written notice to Lessee
of Lessor's election to do so within 30 days after the date of occurrence
of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to
extend or renew this Lease, and the time within which said option may be
exercised has not yet expired, Lessee shall exercise such option, if it is
to be exercised at all, no later than twenty (20) days after the occurrence
of an Insured Loss failing within the classification of Premises Damage
during the last twelve (12) months of the term of this Lease. If Lessee
duly exercises such option during said twenty (20) day period, Lessor shall,
at Lessor's expense, rpair such damage, but not Lessee's fixtures, equipment
or tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Leasee fails to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option
terminate and cancel this Lease as of the expiration of said twenty (20) day
period by giving written notice to Lessee of Lessor's election to do so
within ten (10) days after the expiration of said twenty (20) day period,
notwithstanding any term or provision in the grant of option to the
contrary.
9.5 Abatement of Rent; Lessee's Remedies.
<PAGE>
(a) In the event Lessor repairs or restores the Building or Premises pursuant to
the provisions of this paragraph 9, and any part of the Premises are not
usable (including loss of use due to loss of access or essential services),
the rent payable hereunder (including Lessee's Share of Operating Expenses)
for the period during which such damage, repair or restoration continues
shall be abated, provided (1) the damage was not the result of the
negligence of Lessee, and (2) such abatement shall only be to the extent the
operation and profitability of Lessee's business as operated from the
Premises is adversely affected. Except for said abatement or rent, if any,
Lessee shall have no claim against Lessor for any damage suffered by reason
of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises or the
Building under the provisions of this Paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence,
or if Lessor shall not complete the restoration and repair within six (6)
months after such occurrence, Lessee may at Lessee's option cancel and
terminate this Lease by giving Lessor written notice of Lessee's election
to do so at any time prior to the commencement or completion, respectively,
of such repair or restoration. In such event this Lease shall terminate as
of the date of such notice.
(c) Lessee agrees to cooperate with Lessor in connection with any such
restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination-Advance Payments. Upon termination of this Lease pursuant to
this paragraph 9, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Ler's business of
10. Real Propety Taxes.
10.1 Payment of Taxes. Lessor shall pay the real property tas, as defined in
paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee's share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph
10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying any
increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the
Office Building Project by other lessees or by Lessor for the exclusive
enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the
time that Operating Expenses are payable under paragraph 4.2(c) the
entirety of any increase in real property tax if assessed solely by reson
of additional improvements placed upon the Premises by Lessee or at
Lessee's request.
10.3 Definition of "Real Property Tax." As used herein, the term "real property
tax" 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 on the Office Building Project
or any portion thereof by any authority having the direct or indirect
power to tax, including any city, county, state or federal government, or
any school, agricultural, sanitary, fire, street, drainage or other
improvement district thereof, as against any legal or equitable interest
of Lessor in the Office Building Project or in any portion thereof, as
against Lessor's right to rent or other income therefrom, and as against
Lessor's business of leasing the Office Building Project. The term "real
property tax" shall also include any tax, fee, levy, assessment or charge
(i) in substitution of, partially or toally, any tax, fee, levy, assessment
or charge hereinabove included within the definition of "real property
tax:" or (ii) the nature of which was herinbefore included within the
<PAGE>
definition of "real property tax:" or (iii) which is imposed for a service
or right not charged prior to June 1, 1978, or if previously charged, has
been increased since June 1, 1978.
10.4 Joint Assessment. If the improvements or property, the taxes for which are
to be paid separately by Lessee under paragraph 10.2 or 10.5 are not
separately assessed, Lessee's poriton of that tax shall be equitably
determined by Lessor from the respective valuation assigned in the
assessor's work sheets or such other information (which may include the
cost of construction) as may be reasonably available. Lessor's reasonable
determination therof, in good faith, shall be conclusive.
10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against and levied
upon trade fixtures, furnishings, equipment and all other personal property
of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with Lessor's
real property, Lessee shall pay to Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. Utilities.
11.1 Services Provided by Lessor. Lessor shall provide heating, ventilation, air
conditioning, as reasonably required, reasonable amounts of electricity for
normal lighting and office machines, water for reasonable and normal
dinking and lavatory use, and replacement light bulbs and/or fluorescent
and ballasts for standard overhead fixtures.
11.2 Services Exclusion to Lessee. Lessee shall pay for all water, gas, heat,
light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to
Lessee, together with any taxes thereon. If any such services are not
separtely metered to the Premises, Lessee shall pay at Lessor's option,
either Lessee's share or a reasonable proportion to be determined by Lessor
of all charges jointly metered with other premises in the Building.
11.3 Hours of Service. Said services and utilities shall be provided during
generally accepted business days and hours or such other days or hours
as may hereafter be set forth. Utilities and services required at other
times shall be subject to advance request and reimbursement by Lessee to
Lessor of the cost thereof.
Utility services provided on a 24 hour, seven days per week basis.
11.4 Excess Usage by Lessee. Lessee shall not make connection to the utilities
except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water,
lighting or power, or suffer or permit any act that causes extra burden
upon the utilities or services, including but not limited to security
services, over standard office usage for the Office Building Project.
Lessor shall require Lessee to reimburse Lessor for any excess expenses or
costs that may arise out of a breach of this subparagraph by Lessee. Lessor
may, in its sole discretion, install at Lessee's expense supplemental
equipment and/or separate metering applicable to Lessee's excess usage
or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be
laible in any respect whatsoever for the inadquacy, stoppage, interruption
or disontinuance of any utility or service due to riot, strike, labor
dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with government request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntaily or by operation of
law assign, transfer, mortgage, sublet, or otherwise transfer or encumber
all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's written consent, which Lessor shall not unreasonably
<PAGE>
withhold. Lessor shall respond to Lessee's request for consent hereunder
in a timely manner and any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void, and shall
constitute a material default and breach of this Lease without the need
for notice to Lessee under paragraph 13.1. "Transfer" within the meaning
of this paragraph 12 shall include the transfer or transfers aggregating:
(a) if Lessee is a corporation, more than twenty-five percent (25%) of the
voting stock of such corporation, or (b) if Lessee is a partnership, more
than twenty-five percent (25%) of the profit and loss participation in such
partnership.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof,
Lessee may assign or sublet the Premises, or any portion thereof, without
Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that
is being conducted on the Premises, all of which are referred to as
"Lessee Affiliate"; provided that before such assignment shall be
effective, (a) said assignee shall assume, in full, the obligation of
Lessee under this Lease and (b) Lessor shall be given written notice of
such assignment and assumption. Any such assignment shall not, in any way,
affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are
materially changed or altered without the consent of Lessee, the consent of
whom shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no asssignment or subletting shall release
Lessee of Lessee's obligation herunder or alter the primary liability of
Lessee to pay the rent and other sums due Lessor hereunder including
Lessee's share of Operating Expenses, and to preform all other obligations
to be preformed by Lessees hereunder.
(b) Lessor may accept rent from any person other than Lessee pending approval
or disapproval of such assignment.
(c) Neither a dealy in the approval or disapproval of such assignement or sub-
letting, nor the acceptance of rent, shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for the breach of any of the
terms or conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by third
parties, then an assignment or sublease, and Lessor's consent thereto,
shall not be effective unless said guarantors give their written consent to
such sublease and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not constitute
a consent to any subsequent assignment or subletting by Lessee or to any
subsquent or successive assignment or subletting by the subleases. However,
Lessor may consent to subsequent subletting and assignments of the sublease
or any amendments or modifications thereto without notifying Lessee or
anyone else liable on the Lease or sublease and without obtaining their
consent and such action shall not relieve such persons from liability under
this Lease or said sublease; provided, however such persons shall not be
responsible to the extent any such amendment or modfications enlarges or
increases the obligations of the Lessee or subleases under this Lease or
such subleases.
(f) In the event of any default under this Lease, Lessor may proceed directly
against Lessee, any guarantors or any one else reponsible for the perform-
ance of this Lease, inlcuding the subleases, without first exhausting
Lessor's remedies against any other person or entity responsible therefore
to Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the Premises by
Lessee shall not constitute an acknowledgment that no default then exists
under this Lease of the obligations to be performed by Lessee nor shall
<PAGE>
such consent be deemed a waiver of any then existing default except as may
be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied upon by
Lessor in giving its consent to an assignment or subletting was materially
false shall, at Lessors election, render Lessor's said consent null and
void.
12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of
Lessor's consent, 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 heretofore or hereafter
made by Lessee, and Lessor may collect such rent and income apply same
toward Lessee's obligations under this Lease; provided, however, that until
a default shall occur in the performance of Lessee's obligation under this
Lease, Lessee may receive, collect and enjoy the rents accuring under such
sublease. Lessor shall not, by reason of this or any other assignment of
such sublease to Lessor nor by reason of the collection of the rents from
a sublease, be deemed liable to the subleases for any failure or Lessee
to perform and comply with any of Lessee's obligations to such subleases.
Leesse hereby irrevocably authorizes and directs any such subleases, upon
receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor
the rents due and to become due under the sublease. Lessee agrees that such
subleases shall have the rights to rely upon any such statement and request
from Lessor, and that such subleases shall pay such rents to Lessor without
any obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary.
Lessee shall have no right or calim against said subleases or or Lessor
for any such rents so paid by said sublease to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and until it
has been approved in writing by Lessor. In entering into any sublease,
Lessee shall use only such form of sublease as is satisfactory to Lessor,
and once approved by Lessor, such sublease shall not be changed or modified
without Lessor's prior written consent. Any subleases shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit
of Lessor, to have assumed and agreed to conform and comply with each and
every obligation herein to be performed by Lessee other than such
obligations as are contrary to or inconsistent with provisions contained in
a sublease to which Lessor has expressly consented in writing.
(c) In the event Lessee shall default in the performance of its obligations
under this Lease, Lessor, at its option and without any obligation to do
so, may require any subleases to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time
of the exercise of said option to the termination of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such subleases to Lessee or for any other prior
defaults of Lessee under such sublease.
(d) No subleases shall further assign or sublet all or any part of the Premises
without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented, Lessor agrees
to deliver a copy of any notice of default by Lessee to the subleases. Such
subleases shall have the right to cure a default of Lessee within three (3)
days after service of said notice of default upon such subleases, and the
subleases shall have a right of reimbursement and offset from and against
Lessee for any such defaults cured by the subleases.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises
or request the consent of Lessor to any assignment or subletting or if
<PAGE>
Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or
other consultants' fees, up to a total of $500.00.
12.6 Conditions to Consent. Lessor reserves the reserve the right to condition
any approval to assign or sublet upon Lessor's determination that (a) the
proposed assignee or subleases shall conduct a business on the Premises of
a quality substantially equal to that of Lessee and consistent with the
genereal character of the other occupants of the Office Building Project
and not in violation of any exclusives or rights then held by other
tenants, and (b) the proposed assignee or subleases be at least as
financially responsible as Lessee was expected to be at the time of the
execution of this Lease or of such assignment or subletting whichever is
greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events shall
constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation of the
Premises shall include the failure to occupy for a continuous period of
sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or provisions of
paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency),
13.1(f) (false statement), 16(a) (estoppel certificate), 30(b)
(subordination), 33 (auctions), or 41.1 (easements), all of which are
hereby deemed to be material, non -curable defaults without the necessity
of any notice by Lessor to Lessee thereof.
(c) The failure by Lessee to make any payment of rent or any other payment
required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with
a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer
statutes such Notice to Pay Rent or Quit shall also constitute the notice
required by this paragraph.
(d) The failure by Lessee to make any payment of rent or any other payment
required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written
notice thereof from Lessor to Lessee. In the event that Lessor serves
Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful
Detainer statues such Notice to Pay Rent or Quit shall also constitute the
notice required by this subparagraph.
(e) (i) The making by Lessee of any general arrangement or general assignment
for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined
in 11 U.S.C. 101 or any statue thereto (unless, in the case of petition
filed against Lessee, the same is dismissed within sixty (60) days; (iii)
the appointment of a trustee or receive to take possession of substantially
all of Lessee's assets located at the Premises or 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. In the event that any provision of this paragraph 13.1(e) is
contrary to any application law, such provision shall be of no force or
effect.
(f) The discovery by Lessor that any financial statement given to Lessor by
Lessee, or its success or in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.
13.2 Remedies. In the event of any material default or breach of this Lease
by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any lawful means,
<PAGE>
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 all damages incurred
by Lessor by reason of Lessee's default 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 any real estate commission actually paid; the worth
at the time of award by the court having jurisdiction thereof of the amount
by which the unpaid rent for the balance of the term after the time of
such award exceeds the amount of such rental loss for the same period that
Lessee proves could be reasonably avoided; that portion of the leasing
commission paid by Lessor pursuant to paragraph 15 applicable to the
unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease shall
continue in effect whether or not Lessee shall have vacated or abandoned
the Premises. In such event Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(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. Unpaid
installments of rent and other unpaid monetary obligations of Lessee under
the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to
perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering
the Premises whose name and address shall have theretofore been furnished
to Lessee in writing, specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days are required for performance then
Lessor shall not be in default if Lessor commences performance within such
30-day period and thereafter diligently pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of Base Rent, Lessee's Share of Operating Expenses or 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 on Lessor by the terms of
any mortgage or trust deed covering the Office Building Project.
Accordingly, if any installment of Base Rent, Operating Expenses, or any
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 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs
Lessor will incur by reason of late payment by Lessee. Acceptance of such
late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Office
Building Project 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; provided that if so much of the Premises or the Office
Building Project are taken by such condemnation as would substantially
and adversely affect the operation and profitability of Lessee's business
conducted from the Premises, Lessee shall have the option, to be exercised
only in writing within (30) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice, within
thirty (30) days after the condemning authority shall have taken
possession), to 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 rent
and Lessee's share of Operating Expenese shall be reduced in the proportion
that the floor area of the Premises taken bears to the total floor area of
<PAGE>
the Premises. Common Areas taken shall be execluded from the Common Areas
usable by Lessee and no reduction of rent shall occur with respect thereto
or by reason thereof. Lessor shall have the option in its sole discretion
to terminate this Lease as of the taking of possession by the condemning
authority, by giving written notice to Lessee of such election within
thirty (30) days after receipt of notice of a taking by condemnation of
any part of the Premises or the Office Building Project. Any award for the
taking of all or part of the Premises or the Office Building Project under
the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or
for the taking of the fee, or as severance damages; provided, however, that
Lessee shall be entitled to any separate award for loss of or damage to
Lessee's trade fixtures, removable personal property and unamortized tenant
improvments that have been paid by Lessee. For that purpose the cost of
such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by
reason of such condemnation, Lessor shall to the extent of severance
damages received by Lessor in connection with such condemnation, repair any
damage to the Premises casusd by such condemnation except to the extent
that Lessee has been reimbursed therefore by the condemning authority.
Lessee shall pay any amount in excess of such severance damages required
to completet such repair.
15. Broker's Fee.
(a) The broker involved in this transaction are None as "listing broker" and
BT Commercial Estate as "cooperating broker," licensed real estate
broker(s). A "cooperating broker" is defined as any broker other than
the listing broker entitled to a share of any commission arising under
this Lease. Upon execution of this Leaessor shall pay to said brokers
jointly, or in such separate shares as they may mutually designate in
writing, a fee as set forth in a separate agreement between Lessor and
said broker(s), or in the event there is no separate agreement between
Lessor and said broker(s), the sum of $ by separate agreement, for
brokerage services rendered by said broker(s) to Lessor in this
transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as defined
in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to
an Option granted to Lessee under this Lease, or (ii) if Lessee acquires
any rights to the Premises or other premises described in this Lease which
are substantially similar to what Lessee would have acquired had an Option
herein granted to Lessee been exercised, or (iii) if Lessee remains in
possession of the Premises after the expiration of the term of this Lease
after having failed to exercise an Option, or (iv) if said broker(s) are
the procuring casue 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 (v) if the Base Rent is increased, whether by
agreement or operation of an escalation clause contained herein, then as to
any of said transactions or rent increases, Lessor shall pay said broker(s)
a fee in accordance with the schedule of said broker(s) in effect at the
time if execution of this Lease. Said fee shall be paid at the time such
increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having
an ownership interest in said real property or any part thereof, when such
fee is due hereunder. Any transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be
deemed to have assumed Lessor's obligation under this paragraph 15. Each
listing and cooperating broker shall be a third party beneficiary of the
provisions of this paragraph 15 to the extent of their interest in any
commission arising under this Lease and may enforce that right directly
against Lessor; provided, however, that all brokers having a right to any
part of such total commission shall be a necessary party to any suit with
respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that neither
has had any dealings with any person, firm, broker or finder (other than
the person(s), if any, whose names are set forth in paragraph 15(a), above)
in connection with the negotiation of this Lease and/or the consummation
of the transaction contemplated hereby, and no other broker or other
person, firm or entity is entitled to any commission or finder's fee in
<PAGE>
connection with said transaction and Lessee and Lessor do each hereby
indemnity and hold the other harmless from and against any costs, expenses,
attorneys' fees or 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.
16. Estoppel Certificate.
(a) Each party (as "responding party") shall at any time upon not less than
ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a
statement in writing (i) certifying that this Lease is unmodified and in
full force and effect (or, if modified. stating the nature of such
modification and certifying that this Lease, as so modified, is in full
force and effect) and the date of which the rent and other charges are
paid in advance, if any, and (ii)acknowledging that there are not, to the
responding party's knowledge, any uncured defaults on the part of the
requesting party, or specifying such defaults if any are claimed. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Office Building Project or of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such statement
within such time shall be material default of this Lease by the party who
is to respond, without any further notice to such party, or it shall be
conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party,
(ii) there are no uncured defaults in the requesting party's performance,
and (iii) if Lessor is the requesting party, not more than one month's
rent has been paid in advance.
(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender
or purchaser designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender or purchaser. Such statements
shall include the past three (3) years' financial statements of Lessee.
All such financial statements shall be received by Lessor and such lender
or purchaser in confidence and shall be used only for the purposed herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such
title or interest, Lessor herein named (and in case of any subsequent
transfers then the grantor) shall be relieved from and after the date of
such transfer of all liability as respects Lessor's obligations thereafter
to be performed, provided that any funds in the hands of Lessor or the
than grantor at the time of such transfer, in which Lessee has an interest,
shall be delivered to the grantee. The obligations contained in this Lease
to be performed by Lessor shall, subject as aforesaid, be binding on
Lessor's successors and assigns, only during their respective periods of
ownership.
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 Obligation. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum
rate than allowable by law or judgments from the date due. Payment of such
interest shall not excuse or cure any default by Lessee under this Lease;
provided, however, that interest shall not be payable on late charges
incurred by Lessee nor on any amounts upon which late charges are paid by
Lessee.
20. Time of Essence. Time is of the essence with respect to the obligations
to be performed under this Lease.
<PAGE>
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's share of
Operating Expense and any other expenses payable by Lessee hereunder shall
be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No
prior or contemporaneous agreement or understanding pertaining to any such
matter shall be effective. This Lease may be modified in writing only,
signed by the parties in interest at the time of the modification. Except
as otherwise stated in this Lease, Lessee hereby acknowledges that neither
the real estate broker listed in paragraph 15 hereof nor any cooperating
borker on this transaction nor the Lessor or any employee or agents of any
said persons has made any oral or written warranties or representations to
Lessee relative to the condition or use by Lessee of the Premises or the
Office Building Project and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use
and adaptability of the Premises and the compliance thereof with all
applicable laws and regulations in effect during the term of this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given it delivered or
addressed to Lessee or to Lessor at the address noted below or adjacent
to the signature of the respective parties, as the case may be. Mailed
notices shall be deemed given upon actual receipt at the address required,
or forty-eight hours following deposit in the mail, postage prepaid,
whichever first occurs. Either party may by 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 notice purpose. 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 notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee
of the same or any other provision. Lessor's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of
Lessor's consent to or approval of any subsequent act by Lessee. The
acceptance of rent hereunder by Lessor shall not be a waiver of any
preceding breach by Lessee of any provision hereof, other than the failure
of Lessee to pay the particular rent so accepted, regardless of Lessor's
knowledge of such preceding breach at the time of acceptance of such rent.
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.
26. Holding Over. If Lessee, with Lessor's consent. remains in possession
of the Premises or any part thereof after the expiration of the term
hereof, such occupancy shall be a tenancy from month to month upon all
the provisions of this Lease pertaining to the obligations of Lessee,
except that the rent payable shall be two hundred percent (200%) of the
rent payable immediately preceding the termination date of this Lease,
and all Options, it any, granted under the terms of this Lease shall be
deemed terminated and be of no further effect during said month to month
tenancy.
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.
26. Covenants and Conditions. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of
paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by
the laws of the State where the Office Building Project is located and any
<PAGE>
litigation concerning this Lease between the parties hereto shall be
initiated in the county in which the Office Building Project is located.
30. Subordination.
(a) This Lease, and any Option or right of first refusal granted hereby, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed
of trust, or any other hypothecation or security now or hereafter placed
upon the Office Building Project and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Lessee's right to quiet possession of the Premises shall not be disturbed
if Lessee is not in default and so long as Lessee shall pay the rent and
observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee
or ground lessor shall elect to have this Lease and any Options granted
hereby prior to the lien of its mortgage, deed of trust or ground lease,
and shall give written notice thereof to Lessee, this Lease and such
Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior to subsquent to
the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted
herein prior to the lien of any mortgage, deed of trust or ground lease,
as the case may be. Lessee's failure to execute such documents within ten
(10) days after written demand shall constitute a material default by
Lessee hereunder without further notice to Lessee or, at Lessor's option,
Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably
appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and
stead, to execute such documents in accordance with this paragraph 30(b).
31. Attorneys' Fees.
31.1 If either party or the broker(s) named herein bring an action to enforce
the terms hereof or declare rights hereunder, the prevailing party in any
such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in
the same or a separate suit, and whether or not such action is pursued to
decision or judgment. The provisions of this paragraph shall insure to the
benefit, of the broker named herein who seeks to enforce a right hereunder.
31.2 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 in good faith.
31.3 Lessor shell be entitled to reasonable attorneys' fees and all other costs
and expenses incurred in the preparation and service of notices of default
and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such default.
32. Lessor's Access
32.1 Lessor and Lessor's agents shall have the right to enter the Premises at
reasonable times for the purpose of inspecting the same, performing any
services required of Lessor, showing the same to prospective purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding
or other necessary structures, making such alterations, repairs,
improvements or additions to the Premises or to the Office Building Project
as Lessor may reasonably deem necessary or desirable and the erecting,
using and maintaining of utilities, services, pipes and conduits through
the Premises and/or other premises as long as there is no material adverse
effect to Lessee's use of the Premises. Lessor may at any time place on
or about the Premises or the Building any ordinary "For Sale" signs and
<PAGE>
Lessor may at any time during the last 120 days of the term hereof place on
or about the Premises any ordinary "For Sale" signs.
32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the
same.
32.3 Lessor shall have the right to retain keys to the Premises and to unlock
all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably
appropriate means, and any such entry shall not be deemed a forceable or
unlawful entry to detainer of the Premises or an eviction. Lessee waives
any charges of damages or injuries or interference with Lessee's property
or business in connection herewith.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common
Areas 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. The holding of any auction on the Premises
or Common Areas in violation of this paragraph shall constitute a material
default of this Lease.
34. Signs. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no
circumstances shall Lessee place a sign on any roof of the Office Building
Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. Consents. Except for paragraph 33 (auctions) and 34 (signs) hereof, wherever
in this Lease the consent of one party is required to an act of the other
party such consent shall not be unreasonably withheld or delayed.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have
quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease. The individuals executing this Lease on
behalf of Lessor represent and warrant to Lessee that they are fully
authorized and legally capable of executing this Lease on behalf of Lessor
and that such execution is binding upon all parties holding an owership
interest in the Office Building Project.
39. Options.
39.1 Definition. As used in this paragraph the word "Option" has the following
meaning: (1) the right or option 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; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other space within the Office Building Project or
other property of Lessor or the right of first offer to lease other space
within the Office Building Project or other property of Lessor; (3) the
right or option to purchase the Premises or the Office Building Project, or
the right of first refusal to purchase the Premises or the Office Building
Project or the right of first offer to purchase the Premises or the Office
Building Project, or the right or option 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.
<PAGE>
39.2 Options Personal. Each Option granted to Lessee in this Lease is personal
to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof,
and may not be exercised or be assigned, voluntarily or involuntarily, by
or to any person or entity other than Lessee; provided, however, that an
Option may be exercised by or assigned to any Lessee Affiliate as defined
in paragraph 12.2 of this Lease. The Options, if any, herein granted to
Lessee are not assignable separate and apart from this Lease, nor may any
Option be separated from this Lease in any manner, either 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 option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no rights to exercise an Option, notwithstanding any
provisions in the grant of Option to the contrary (i) during the time
commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1 (c) or 13.1 (d) and continuing until the non-
compliance alleged in said notice of default is cured, or (ii) during the
period of time commencing on the day after a monetary obligation to Lessor
is due from Lessee and unpaid (without any necessity for notice thereof to
Lessee) and continuing until the obligation is paid, or (iii) in the event
that Lessor has given Lessee three or more notices of default under
paragraph 13.1 (c), or paragraph 13.1 (d), whether or not the defaults are
cured, during 12 month period of time immediately prior to the time that
Lessee attempts to exercise the subject Option, (iv) if Lessee has
committed any non-curable breach, including without limitation those
described in paragraph 13.1 (b), or is otherwise in default of any of the
terms, covenants or conditions of this Lease.
(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) Lessee
fails to commence to cure a default specified in paragraph 13.1(d) within
thirty (30) days after the date that Lessor gives notice to Lessee of such
default and/or Lessee fails thereafter to diligently prosecute said cure to
completion, (iii) Lessor gives to Lessee three or more notices of default
under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults
are cured, or (iv) if Lessee has committed any non-curable breach,
including without limitation those described in paragraph 13.1(b), or is
otherwise in default of any of the terms, covneants and conditions of this
Lease.
40. Security Measures-Lessor's Reservations,
40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever
to provide guard service or other security measures for the benefit of the
Premises or the Office Building Project. Lessee assumes all responsibility
for the protection of Lessee, its agents, and invitees and the property of
Lessee and of Lessee's agents and invitees from acts of third parties.
Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Office Building Project or any
part thereof, in which event the cost thereof shall be included within the
definition of Operating Expenses, as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
<PAGE>
(a) To change the name, address or title of the Office Building Project or
building in which the Premises are located upon not less than 90 days prior
written notice;
(b) To, at Lessee's expense, provide and install Building standard graphics
on the door of the Premises and such portions of the Common Areas as Lessor
shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business as long
as such exclusive does not conflict with any rights expressly given herein;
(d) To place such signs, notices or displays as Lessor reasonably deems
necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;
40.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of the Building or the
Office Building Project or their name(s) in connection with Lessee's
business;
(b) Suffer or permit anyone, except in emergency, to go upon the roof of the
Building.
41. Easements.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions as long as
such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforernentioned documents upon request of Lessor and
failure to do so shall constitute a material default, of this Lease by
Lessee, without the need for further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure erected
in the vicinity of the Building, whether by Lessor or third parties, shall
in no way affect this Lease or impose any liability upon Lessor.
42. 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 adjusted 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.
43. Authority. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of
such entity, represent and warrant that such individual is duly authorized
to execute and deliver this Lease on behalf of said entity. If Lessee is
a corporation, trust, or partnership, Lessee shall, within thirty (30)
days after execution of this Lease, deliver to Lessor evidence of such
authority satisfactory to Lessor.
44. Conflict. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if
any, shall be controlled by typewritten or handwritten provisions.
45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to
lease. This Lease shall become binding upon Lessor and Lessee only when
fully executed by both parties.
46. Lender Modification. Lessee agrees to make such reasonable modifications
to this Lease as may be reasonably required by an institution lender in
connection with the obtaining of normal financing or refinancing of the
Office Building Project.
<PAGE>
47. Multiple Parties. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein,
the obligations of the Lessor or Lessee herein shall be the joined
several responsibility of all persons or entities named herein as such
Lessor or Lessee, respectively.
48. Work Letter. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee attached hereto as Exhibit C and
incorporated herein by this reference.
Attachments. Attached hereto are the following documents which constitute a
part of this Lease:
Exhibit A: Space Plan
Exhibit B: Rules
Exhibit C: Work Letter
Exhibit D: Lease Amendment
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE T1ME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
Birmingham Properties, Inc. My Software, Inc.
By Robert Birmingham Jim Willenborg
its President its Executive Vice President
Sales and Marketing
on October 8, 1996 on October 8, 1996
EXHIBIT A.
SPACE PLAN
(Layout and drawing of the space.)
<PAGE>
EXHIBIT B.
RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE
Dated: September 25, 1996
By and Between Birmingham Properties, Inc. and MySoftware, Inc.
GENERAL RULES
1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways walkways and stairways.
2. Lessor reserves the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the
Office Building Project and its occupants.
3. Lessee shall not make or permit any noise or odors that annoy or interfere
with other lessees or persons having business within the Office Building
Project.
4. Lessee shall not keep animals or birds within the Office Building Project,
and shall not bring bicycles, motorcycles or other vehicles into areas not
designated as authorized for same.
5. Lessee shall not make, suffer or permit lifter except in appropriate
receptacles for that purpose.
6. Lessee shall not alter any lock or install new or additional locks or bolts.
7. Lessee shall be responsible for the inappropriate use of any toilet rooms,
plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.
8. Lessee shall not deface the walls, partitions or other surfaces of the
Premises or Office Building Project.
9. Lessee shall not suffer or permit any thing in or around the Premises or
Building that causes excessive vibration or floor loading in any part of
the Office Building Project.
10.Furniture, significant freight and equipment shall be moved into or out of
the building only with the Lessor's knowledge and consent, and subject to
such reasonable limitations, techniques and timing, as may be designated
by Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.
11.Lessee shall not employ any service or contractor for services or work to
be performed in the Building, except as approved by Lessor.
12.Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of ___ PM.
and __ A.M. of the following day. If Lessee uses the Premises during such
periods, Lessee shall be responsible for securely locking any doors it may
have opened for entry.
13.Lessee shall return all keys at the termination of its tenancy and shall be
responsible for the cost of replacing any keys that are lost.
<PAGE>
14.No window coverings, shades or awnings shall be installed or used by Lessee.
15.No Lessee, employee or invitee shall go upon the roof of the Building.
16.Lessee shall not suffer or permit smoking or carrying of lighted cigars or
cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.
17.Lessee shall not use any method of heating or air conditioning other than
as provided by Lessor.
18.Lessee shall not install, maintain or operate any vending machines upon
the Premises without Lessor's written consent.
19.The Premises shall not be used for lodging or manufacturing, cooking or
food preparation.
20.Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.
21.Lessor reserves the right to waive any one of these rules or regulations,
and/or as to any particular Lessee, and any such waiver shall not constitute
a waiver of any other rule or regulation or any subsequent application
thereof to such Lessee.
22.Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.
23.Lessor reserves the right to make such other reasonable rules and regulations
as it may from time to time deem necessary for the appropriate operation and
safety of the Office Building Project and its occupants. Lessee agrees to
abide by these and such rules and regulations.
<PAGE>
EXHIBIT C.
WORK LETTER TO STANDARD OFFICE LEASE
Dated: September 25, 996
By and between.: Birmingham Properties, Inc. and MySoftware, Inc.
The Premises shall be constructed in accordance with Lessor's Standard
Improvements, as follows:
1. Construction of a glass-walled conference room, an office, storage area,
two restrooms, a kitchenette, per attached space plan. Executed outlets
per attached space plan. with supply sufficient to operate 30 computers.
Indirect fluorescent lighting and HVAC distributed throughout the Premises.
Building standard carpet and white paint for support beans and ceilings.
Repair/replace and clean windows and stairwells.
12. Entrance Doors
13. Completion of improvements
Lessor shall construct and complete the Premises substantially in
accordance with the plans and specification prepared by Harvey, Hecker,
Architect, and approved by September 27, 1996.
16. Completion
16.1 Lessor shall obtain a building permit to construct the improvements as
soon as possible.
16.2 Lessor shall complete the construction of the Improvements as soon as
reasonably possible after the obtaining of necessary building permits.
16.3 The term "Completion," as used in this Work Letter, is hereby defined to
mean the date the building department of the municipality having
jurisdiction of the Premises shall have made a final release of
restrictions on the use of public utilities in connection therewith and
the same are in a broom-clean condition.
16.4 Lessor shell use its bell efforts to achieve Completion of the
improvements on or before the Commencement Date set forth in paragraph
1.5 of the Basic Lease Provisions.
16.5 In the event that the Improvements or any portion thereof have not reached
Completion by Commencement Date, this Lease shall not be invalid, but
rather Lessor shall complete the same as soon as thereafter as is possible
and Lessor shall not be liable to Lessee for damages in any respect
whatsoever.
16.6 If Lessor shall be delayed at any time in the progress of the construction
of the improvements or any portion thereto by extra work, changes in
construction ordered by Lessee, or by strikes, lockouts, fire, delay in
transportation, unavoidable casualties, rain or weather conditions,
governmental procedures or delay, at by any other cause beyond Lessor's
control, then the Commencement Date established in paragraph 1.5 of the
Lease shall be extended by the period of such delay.
17. Term
Upon Completion of the improvements as defined in paragraph 16.3 above,
Lessor and Lessee shall execute an amendment to the Lease setting forth
the date of tender of possession as defined 'in paragraph 3.2.1 of the
Lease or of actual taking of possession, whichever first occurs, as the
Commencement Date of this Lease.
18 Work Done by Lessee
Any work done by Lessee shall be done only with Lessor's a prior written
consent and in conformity with a valid building permit and all applicable
rules, regulations, laws and ordinances, and be done in a good and
workmanlike manner of good and sufficient materials. All work shall be
done only with union labor and only by contractors approved by Lessor, it
being understood that all plumbing, mechanical, electrical wiring and
ceiling work are to be done only by contractors designate by Lessor.
<PAGE>
19. Taking of Possession of Premises
Lessor shall notify Lessee of the Estimated Completion Date at least ten
(10) days before said date. Lessee shall have the right to enter the
Premises to commence construction of any improvements. Lessee is to
equip and fixturize the Premises, as long as such entry does not interfere
with Lessor's work. Lessee shall take possession of the Premises upon the
tender thereof as provided in paragraph 3.2.1 of the Lease to which this
Work Letter is attached. Any entry by Lessee of the Premises under this
paragraph shall be under all of the terms and provisions of the Lease to
which this Work Letter is attached.
20. Acceptance of Premises
Lessee shell notify Lessor in writing of any items that Lessee deems
incomplete or incorrect in order for the Premises to be acceptable to
Lessee within ten (10) days following Tender of Possession as set forth
in paragraph 3.2.1 of the Lease to which this Work Letter is attached.
Lessee shall be deemed to have accepted the Premises and approved
construction if Lessee does not deliver such a list to Lessor within said
number of days.
21. Performance Bonus
Lessee agrees to pay a "Performance Bonus" of $6,000 within 30 days of
occupancy of the Premises, if the Premises is substantially complete within
34 days of lease execution, Lessor to retain the Performance Bonus. If the
Premises is not substantially complete within 34 days of lease execution,
Lessor to refund the Performance Bonus as rent credit during the last two
months of the lease term.
<PAGE>
EXHIBIT D
LEASE AMENDMENT
This amendment ("Amendment") is entered into between Birmingham Properties, Inc.
("Lessor") and MySoftware Company ("Lessee") on October 8, 1996 and supplements
and amends the STANDARD OFFICE LEASE-NET entered into between the parties on
or about October 8, 1996 for the premises located at 1475 Folsom Street, San
Francisco, California ("Lease").
1. Section 1.1 is amended by replacing "MySoftware, Inc.-" with "MySoftware
Company".
2. Section 1.6 is amended by replacing "utilities" with "electricity".
3. Section 3.2 is amended by replacing "sixty (60)" on line 6 with "thirty
(30)", by replacing "ten (10)" on line 7 with "thirty (30)". and by
replacing "ten (10)" on line 11 with "thirty (30)". Section 3.2 is also
amended by deleting "Lessee first reimburses Lessor for all costs incurred
for Non-Standard Improvements and, as to Lessor's obligations," from line 9
and by deleting "(less any offsets due Lessor for Non-Standard
Improvements)" from line 10.
4. Section 4.2 shall be amended by adding the following subsections:
"(f) The Operating Expenses payable by Lessee shall mean that percentage
set forth in 1.10 multiplied by the difference between the Operating
Expenses for the then current year and the Operating Expenses of the Base
Year. Notwithstanding anything to the contrary, in no event shall Operating
Expenses payable by Lessee exceed three percent (3%) of the Base Rent.
(g) Notwithstanding the foregoing, no Operating Expenses shall be paid or
payable by Lessee during the calendar years, or portions thereof, 1996 and
1997."
5. Section 4.2(b)(ii) shall be amended by adding "for Common Areas" to the
end of the sentence.
6. Section 4.2(b)(vi) shall be amended by replacing the section with "The cost
of water, sewer, gas, electricity for Common Areas, and other publicly
mandated services to the Office Building Project."
7. Section 4.3 is deleted from the Lease in its entirety.
8. Section 6.2(b) is amended by adding the following to the end of the first
sentence; notwithstanding the foregoing, Lessee shall have no responsibility
or bear the expenses for compliance with any statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, rules or
regulations under the American Disability Act, and requirements of fire
insurance underwriters or rating bureaus, as the same may relate to changes
to building codes or standards (including earthquake), statutes. ordinances,
rules, regulations, orders, covenants, restrictions of record, rules or
regulations under the American Disability Act, and requirements of fire
insurance underwriters or rating bureaus, structural requirements, hazardous
materials existing upon the Commencement date, or similar. Lessee shall have
no responsibility for hazardous materials except as such hazardous materials
are caused by Lessee."
9. Section 7.3 (a) is amended by adding ";such consent not to be unreasonably
withheld." after the word "Project' on line 2. This section is also amended
by adding "(Lessor shall notify Lessee in writing at the time consent is
given to make any alteration, improvement, addition, Utility Installation,
whether Lessor is requiring Lessee to remove the same at the expiration or
termination of the term. If Lessee is not notified of such obligation to
remove and/or restore, Lessee shall have no obligation, but the right, to
remove the same.)" This section is also amended by adding "(such approval
not to be unreasonably withheld)" after the "approved by Lessor" on line 7.
10.Section 7.3(e) is amended by adding the following after "7.3(a)" on line 5:
<PAGE>
";notwithstanding the foregoing, all alterations improvements, additions and
Utility Installations shall not be the property of Lessor and may be removed
by Lessee upon expiration or termination of the Lease if the same may be
removed by Lessee without damaging the Premises.
11.Section 8.7 is amended by adding the following to the end of the section:
"Notwithstanding the foregoing, Lessor shall be liable for any and all
claims or damages to persons, property or otherwise resulting from Lessor's,
and its employee's, contractor's or agent's, negligence or willful
misconduct."
12.Section 8.8 is amended by adding the following to the end of the section:
"Notwithstanding the foregoing, Lessor shall be liable for any and all
claims or damages to persons, property or otherwise resulting from Lessor's,
and its employee's, contractor's or agent's. negligence or willful
misconduct.
13.Section 13.1 (c) is amended by replacing "three (3)" with "ten (10)" on
line 2.
14.Section 13.2 is amended by replacing "at any time-thereafter, with or
without notice or demand" with ", where Lessee fails to cure such material
default or breach within fifteen (15) days after receiving written notice
of the same," on the first line.
15.Section 16(c) is amended by replacing "the past three (3) years" with
"all publicly available" on line 3.
16.Section 40.2(a) is amended by adding the Following the end of the sentence
", provided that signage of the previous address remains visible for at
least one hundred and eighty (180) days after the address change."
17.Section 14 of Exhibit B is amended by adding the following to the end of
the sentence: "without Lessor's prior written consent; such consent not to
be unreasonably withheld."
18.Section 19 of Exhibit B is amended by adding the following to the end of
the sentence: "Lessee may conduct its normal operations 24 hours a day and
7 days a week. Food and beverage preparation is limited to that incidental
with office use (microwaves, toasters, refrigerators, etc.)"
19.Section 18 of Exhibit C is amended by deleting "All work shall be......
beginning on line 2.
20.Section 20 of Exhibit C is amended by replacing "ten (10)" with "thirty
(30)" on line 2.
21.Section 21 of Exhibit C is amended by deleting "substantially" in lines 1
and 2. Section 21 of Exhibit C is also amended by adding "as defined in
Section 16.3 above" after both occurrences o the word "complete" on line 2.
Section 21 of Exhibit C is also amended by adding "or repay such amount as
appropriate."
22.The following is added as section 2 of Exhibit C: "Lessor will, at its
cost, install the appropriate plumbing necessary for a shower located in
the space designated as such per the attached space plan attached as
Exhibit A."
23.Sections 2 through 11 of Exhibit C are intentionally omitted.
All references to sections above refer to the corresponding section in the
Lease. Except as expressly stated in this Amendment, all terms and
conditions contained in the Lease shall remain in full force and effect and
all definitions in the Lease have their same meaning in this Amendment.
Birmingham Properties, Inc., MySoftware Company,
By: Robert Birmingham By: Jim Willenborg
Signature Date Signature Date
<PAGE>
EXHIBIT 10.18
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE ("Amendment") is made and entered into as of the
27th day of January, 1997 by and between 2197 East Bayshore Road Partnership
("Lessor") and MySoftware, Inc., a California Corporation ("Lessee").
RECITALS:
A. Lessor and Lessee entered into a lease dated as of February 25, 1993 (the
"Lease"), respecting approximately 20,545 square feet in that larger building
known as 2197 E. Bayshore Road, Palo Alto, (the "Building"). Capitalized
terms used and not otherwise defined herein shall have the same meanings
ascribed to them in the Lease.
B. Lease Extension: Lessor hereby agrees to extend Lessee's existing Lease Term
for an additional three (3) year period commencing May 1, 1997 and ending
April 30, 2000 (the "Extension Term").
C. Rent: The rent for the Extension Term shall be as follows:
May 1, 1997 - April 30,1998 $35,953.75
May 1, 1998 - April 30,1999 $38,008.25
May 1, 1999 - April 30,2000 $39,908.66
D. Paragraph 49 shall be modified to apply to the end of the new Extension Term
with notice 135 days before the end of such Extension Term.
E. Landlord shall contract for work to be done on Premises as outlined in
attached bid by Van Wart Construction dated January 19, 1997. Such work
shall be scheduled to the mutual satisfaction of Landlord and Tenant, not
to be completed later than March 1, 1997. Landlord shall contribute
$2,166.00, outlined in the bid. Any additional work requested or cost
added to this account shall be paid by Tenant.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
LESSOR: HOLVICK FAMILY TRUST LESSEE: MYSOFTWARE, INC.
a California Corporation
By: Debra Holvick By: David P, Mans, President
Date: Feb. 3, 1997 Date: Jan. 31, 1997
<PAGE>
MYSOFTWARE COMPANY
Exhibit 11.1
Computation of Net Loss Per Share and Pro Forma Net Income Per Share
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Net loss ......................... $ (955,0836)
============
Shares used in computing net loss
per share:
Weighted average number of shares
of common stock outstanding...... 4,233,486
============
Net loss per share $ (0.23)
============
Pro Forma net income...................... $ 1,470,165 $ 916,188
=========== =========
Shares used in computing pro forma
net income per share:
Weighted average number of shares
of common stock outstanding.............. 3,771,307 3,218,530
Number of common stock equivalents
as a result of stock option outstanding
using the treasury stock method.......... 86,641 16,802
Number of stock options granted in
accordance with SAB No. 83............... 73,288 146,575
Shares deemed outstanding to fund final S
corporation stockholder distribution..... 80,000 160,000
---------- ---------
4,011,236 3,541,907
========== =========
Pro forma net income per share $ 0.37 $ 0.26
========== =========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
MySoftware Company
We consent to incorporation by reference in the registration statement (No.
33-91898) on Form S-8 of MySoftware Company of our report dated February 7,
1997, relating to the balance sheets of MySoftware Company as of December 31,
1996, and 1995, and the related statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form
10-KSB of MySoftware Company.
KPMG Peat Marwick LLP
San Jose, California
March 28, 1997
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,718
<SECURITIES> 0
<RECEIVABLES> 1,242
<ALLOWANCES> 0
<INVENTORY> 596
<CURRENT-ASSETS> 10,685
<PP&E> 354
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,409
<CURRENT-LIABILITIES> 3,669
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 8,711
<TOTAL-LIABILITY-AND-EQUITY> 12,409
<SALES> 12,872
<TOTAL-REVENUES> 12,872
<CGS> 3,951
<TOTAL-COSTS> 3,951
<OTHER-EXPENSES> 10,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,027)
<INCOME-TAX> (72)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (955)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> 0
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