<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________ .
COMMISSION FILE NUMBER 0-26146
- --------------------------------------------------------------------------------
HNC SOFTWARE INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 33-0248788
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5935 CORNERSTONE COURT WEST
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(858) 546-8877
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [ ]
AS OF APRIL 30, 2000 THERE WERE 26,913,593 SHARES OF REGISTRANT'S COMMON STOCK,
$0.001 PAR VALUE, OUTSTANDING.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
HNC Retek
--- -----
PART I. FINANCIAL INFORMATION Page
----
ITEM 1: FINANCIAL STATEMENTS
<S> <C> <C> <C>
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999............................................ 3 23
Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 2000 and 1999............................. 4 24
Consolidated Statements of Cash Flows (unaudited) for
the three months ended March 31, 2000 and 1999................... 5 25
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income (unaudited) for the three
months ended March 31, 2000...................................... 6 26
Notes to Consolidated Financial Statements (unaudited).............. 7 27
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 13 30
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 43 --
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.................................... 44 --
Signatures ......................................................................... 45 --
Exhibit Index ...................................................................... 46 --
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HNC SOFTWARE INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 128,389 $ 136,340
Short-term investments available for sale - debt 50,212 22,368
Short-term investments available for sale - equity 5,156 6,810
Trade accounts receivable, net 58,624 64,189
Current portion of deferred income taxes 2,700 20,384
Other current assets 14,193 11,144
--------- ---------
Total current assets 259,274 261,235
--------- ---------
Long-term investments available for sale-debt 72,858 68,563
Equity investments 11,469 14,219
Property and equipment, net 27,557 22,219
Intangible assets, net 104,051 29,068
Deferred income taxes, less current portion 49,147 18,085
Other assets 2,986 3,032
--------- ---------
$ 527,342 $ 416,421
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 37,414 $ 30,049
Deferred revenue 25,430 15,274
--------- ---------
Total current liabilities 62,844 45,323
--------- ---------
Non-current liabilities 4,529 4,111
--------- ---------
Convertible Subordinated Notes 100,000 100,000
--------- ---------
Commitments and contingencies (Note 8)
Minority interest in consolidated subsidiaries 14,303 17,414
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value -- 4,000 shares authorized;
no shares issued or outstanding - -
Common stock, $0.001 par value -- 50,000 shares authorized;
27,068 and 25,704 shares issued and outstanding, respectively 27 26
Common stock in treasury, at cost -- 25 and 882 shares, respectively
(560) (19,613)
Paid-in capital 364,127 275,955
Retained earnings (deficit) (6) 12,209
Accumulated other comprehensive income 327 1,507
Unearned stock-based compensation (18,249) (20,511)
--------- ---------
Total stockholders' equity 345,666 249,573
--------- ---------
$ 527,342 $ 416,421
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HNC SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
License and maintenance $ 31,791 $ 36,471
Services and other 22,773 12,718
-------- --------
Total revenues 54,564 49,189
-------- --------
Operating expenses:
License and maintenance (excluding non-cash stock-based
compensation expense of $126 in 2000) 12,620 10,717
Services and other (excluding non-cash stock-based
compensation expense of $394 in 2000) 15,048 8,657
Research and development (excluding non-cash stock-based
compensation expense of $1,205 in 2000) 16,222 9,520
Sales and marketing (excluding non-cash stock-based
compensation expense of $581 in 2000) 16,578 9,778
General and administrative (excluding non-cash stock-based
compensation income of $390 in 2000 and acquisition-
related amortization of $3,965 in 2000 and $2,252 in 1999) 7,784 4,580
Stock-based compensation 1,917 --
Acquisition-related amortization 3,965 2,252
In-process research and development 1,422 --
-------- --------
Total operating expenses 75,556 45,504
Operating income (loss) (20,992) 3,685
Other income (expense):
Interest and other income, net 3,371 1,684
Interest expense (1,372) (1,381)
-------- --------
Income (loss) before minority interest in losses of
consolidated subsidiary and income tax provision (benefit) (18,993) 3,988
Minority interest in losses of consolidated subsidiary 2,391 --
Income tax provision (benefit) (4,387) 1,864
-------- --------
Net income (loss) $(12,215) $ 2,124
======== ========
Earnings per share:
Basic net income (loss) per common share $ (0.47) $ 0.08
======== ========
Diluted net income (loss) per common share $ (0.47) $ 0.08
======== ========
Shares used in computing basic net income (loss) per common share 26,120 25,766
======== ========
Shares used in computing diluted net income (loss) per common share 26,120 26,483
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HNC SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (12,215) $ 2,124
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for doubtful accounts 722 697
Depreciation and amortization 5,658 4,314
Acquired in-process research and development 1,422 --
(Gain) loss on disposals of property and equipment (2) 179
Stock-based compensation expense 1,917 --
Deferred income tax benefit (4,387) --
Tax benefit from stock option transactions 19,022 257
Minority interest in losses of consolidated subsidiary (2,391) --
Changes in assets and liabilities:
Trade accounts receivable 386 1,442
Deferred income taxes (19,022) 1,448
Other assets (2,228) 485
Accounts payable and accrued liabilities 5,794 (3,634)
Deferred revenue 10,332 1,472
--------- ---------
Net cash provided by operating activities 5,008 8,784
--------- ---------
Cash flows from investing activities:
Net sales (purchases) of investments available for sale (32,125) 1,410
Equity investments (1,500) (2,750)
Acquisitions of property and equipment (7,134) (5,781)
Cash acquired in business acquisitions, net of cash paid 2,263 --
--------- ---------
Net cash used in investing activities (38,496) (7,121)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of HNC common stock 20,349 2,047
Costs incurred related to issuance of Retek common stock (243) --
Repurchase of HNC common stock for treasury -- (18,779)
Net proceeds from sales of receivables 5,618 --
Repayment of capital lease obligations -- (56)
--------- ---------
Net cash provided by (used in) financing activities 25,724 (16,788)
--------- ---------
Effect of exchange rate changes on cash (187) (242)
--------- ---------
Net decrease in cash and cash equivalents (7,951) (15,367)
Cash and cash equivalents at beginning of the period 136,340 54,267
--------- ---------
Cash and cash equivalents at end of the period $ 128,389 $ 38,900
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
HNC SOFTWARE INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ................. 25,704 $ 26 882 $ (19,613) $ 275,955
Common stock options exercised ............... 791 1 (791) 17,579 1,064
Common stock issued under .................... (66) 1,474 231
Employee Stock Purchase Plan ............... 66
Tax benefit from stock option ................
transactions ............................... 19,022
Unearned stock-based
compensation expense .......................
Stock-based compensation expense ............. (259)
Retek initial public offering costs .......... (243)
Common stock issued in business .............. -
acquisitions ............................... 507 68,357
Unrealized loss on investments, net of tax ...
Foreign currency translation
adjustment, net of tax .....................
Net loss .....................................
--------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2000 .................... 27,068 $ 27 25 $ (560) $ 364,127
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER UNEARNED TOTAL
RETAINED COMPREHENSIVE STOCK-BASED STOCKHOLDERS' COMPREHENSIVE
EARNINGS INCOME (LOSS) COMPENSATION EQUITY INCOME (LOSS)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 .................. $ 12,209 $ 1,507 $ (20,511) $ 249,573
Common stock options exercised ................ 18,644
Common stock issued under ..................... 1,705
Employee Stock Purchase Plan ................
Tax benefit from stock option ................. 19,022
transactions ................................
Unearned stock-based
compensation expense ........................ 86 86
Stock-based compensation expense .............. 2,176 1,917
Retek initial public offering costs ........... (243)
Common stock issued in business ...............
acquisitions ................................ 68,357
Unrealized loss on investments, net of tax ... (987) (987) (987)
Foreign currency translation
adjustment, net of tax ...................... (193) (193) (193)
Net loss ...................................... (12,215) (12,215) (12,215)
--------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2000 ..................... $ (6) $ 327 $ (18,249) $ 345,666 $ (13,395)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1--GENERAL
HNC Software Inc.
Headquartered in San Diego, California, we develop, market, and support
predictive software solutions for leading service industries. These predictive
software solutions employ proprietary neural-network predictive decision
engines, profiles, traditional statistical modeling, business models, expert
rules and context vector technology to convert existing data and business
experiences into meaningful recommendations and actions. We provide innovative
predictive software systems in the insurance, financial services,
telecommunications, e-business, and retail markets. In this Report, HNC Software
Inc. is referred to as "we," "our," and "HNC". Our subsidiary, Retek Inc., is
referred to as "Retek".
Basis of Presentation
We have prepared the accompanying interim consolidated financial statements,
without audit, in accordance with the instructions to Form 10-Q and, therefore,
have not necessarily included all information and footnotes required for audited
financial statements.
In our opinion, the accompanying unaudited interim consolidated financial
information presented reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of our financial
position and results of operations. These consolidated financial statements and
notes thereto should be read in conjunction with our audited financial
statements and notes thereto presented in our Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1999. The interim financial information
contained in this Report is not necessarily indicative of the results to be
expected for any other interim period or for an entire fiscal year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain prior year balances
have been reclassified to conform to the current presentation.
Sales of Receivables
From time to time, we enter into agreements to sell an undivided interest in
specifically identified trade accounts receivable. We generally sell these trade
accounts receivables at a discount to a bank, based upon defined short-term
market rates. Uncollected receivables that have been sold are not included in
our trade accounts receivables balance on our consolidated balance sheet. In the
quarter ended March 31, 2000, we sold $5,618 of receivables, representing
approximately 8% of our total cash collected from customers during the quarter.
We did not sell any receivables during the first quarter of 1999. Expenses
related to receivables sold were $30 during the first quarter of 2000 and are
included in interest expense in our consolidated statement of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", or FAS 133. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" which defers the adoption requirement
to the first quarter of 2001. We have not yet determined the impact of the
adoption of this new accounting standard on our consolidated financial position,
results of operations or disclosures.
7
<PAGE> 8
HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101,
which provides additional guidance in applying generally accepted accounting
principles for the recognition and reporting of revenue for certain transactions
that existing accounting rules do not specifically address. An amendment in
March 2000 delayed SAB 101's effective date until the second quarter of 2000. We
are currently evaluating the impact, if any, that SAB 101 may have on our
consolidated financial statements.
In January 2000, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
include internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the internet industry and technology in general.
Adoption of EITF 00-2 is required for the third quarter of 2000. We have not yet
determined the impact of the adoption of this new accounting standard on our
consolidated financial position, results of operations or disclosures.
NOTE 2--INITIAL PUBLIC OFFERING OF RETEK INC.
On September 10, 1999, Retek filed a registration statement with the Securities
and Exchange Commission relating to an initial public offering of Retek's common
stock. The offering was consummated in November 1999. The number of shares sold
in the offering were 6,325 shares of Retek's common stock, all of which were
sold by Retek. Prior to the offering, we transferred to Retek all of the shares
of our wholly owned subsidiary, Retek Information Systems, Inc. We now own
approximately 86% of the outstanding shares of Retek common stock. We informed
Retek that, after the completion of Retek's initial public offering, it is our
current intention to distribute pro rata to our stockholders, as a dividend,
shares of Retek common stock, subject to the satisfaction and fulfillment of
several conditions, including but not limited to the approval of our board of
directors and receipt of a written ruling from the Internal Revenue Service that
the distribution qualifies for tax-free treatment under Section 355 of the
Internal Revenue Code. However, we have no obligation to carry out, declare, or
pay such distribution and dividend of shares of Retek stock; and, if the
distribution is carried out, we will determine the timing, structure and terms
of the distribution.
NOTE 3--ACQUISITIONS
In March 2000, we acquired all of the outstanding stock and other securities of
Onyx Technologies Inc., or Onyx, in exchange for approximately 383 shares of our
common stock, including shares subject to options we assumed, and $1,500 in
cash. We applied the purchase method of accounting for the acquisition of Onyx,
which resulted in a purchase price of $49,555, including $3,500 which represents
our initial 1999 investment in Onyx.
In March 2000, we acquired all of the outstanding stock and other securities of
the Center for Adaptive Systems Applications, Inc., or CASA, in exchange for 142
shares of our common stock, 38 of which are in escrow, including shares subject
to options and warrants we assumed. These shares are in escrow to secure
indemnification obligations of the former CASA stockholders. We applied the
purchase method of accounting for the acquisition of CASA, which resulted in a
purchase price of $23,756.
In-process research and development expense was $1,400 for the three months
ended March 31, 2000. This write-off was related to the acquisition of CASA.
CASA is an advanced analytics solutions company that provides account
optimization and precision marketing solutions through an ASP delivery platform.
The classification of the technology as complete or under development was made
in accordance with the guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards No. 2 and Financial
Accounting Standards Board Interpretation No. 4. Prior to 2000, CASA
8
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
primarily sold its Adaptive Dynamic Marketing ("ADM") ASP solution to businesses
to improve revenue and customer retention. At the time of acquisition, CASA had
a number of new technologies under development related to account management
algorithms and pricing algorithms.
In March 2000, we acquired all of the outstanding stock and other securities of
AIM Solutions, Inc., or AIM, in exchange for 9 shares of our common stock,
including shares subject to options we assumed. We applied the purchase method
of accounting for the acquisition of AIM, which resulted in a purchase price of
$1,656, including $750 which represents our initial 1999 investment in AIM.
The unaudited pro forma results of operations below present the impact on our
results of operations as if the Onyx, CASA and AIM acquisitions had occurred on
January 1, 1999, instead of on their respective later acquisition dates:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------
2000 1999
---------------------------- ----------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED HISTORICAL COMBINED
---------- --------- ---------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues $ 54,564 $ 56,298 $ 49,189 $ 51,218
Net income (loss) (12,215) (12,381) 2,124 1,965
Basic net income (loss)
per share $ (0.47) $ (0.47) $ 0.08 $ 0.08
Diluted net income (loss)
per share $ (0.47) $ (0.47) $ 0.08 $ 0.07
</TABLE>
NOTE 4--EQUITY INVESTMENTS
In March 2000, Open Solutions Inc., or OSI, completed a private placement of its
common stock. We participated in this financing by purchasing 2,146 shares of
OSI Series F preferred stock for $9.32 per share in order to maintain our
approximately 6% ownership of OSI.
NOTE 5--PER SHARE DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Net income (loss) $(12,215) $ 2,124
======== ========
Shares used in computing basic net income
(loss) per common share 26,120 25,766
Weighted average options to purchase common
stock as determined by application of the
treasury stock method -- 695
Employee Stock Purchase Plan common stock equivalents -- 22
-------- --------
Shares used in computing diluted net income
(loss) per common share 26,120 26,483
======== ========
</TABLE>
9
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The conversion of 2,230 shares of our common stock now issuable upon the
conversion of our 4.75% convertible subordinated notes were not used to
calculate diluted net income (loss) per common share for the three month periods
ended March 31, 2000 and 1999, as their effect would be anti-dilutive.
For the three month period ended March 31, 2000, weighted average options to
purchase 2,934 shares of common stock and Employee Stock Purchase Plan common
stock equivalents of 24 shares were not included in the computation of diluted
net loss per common share, as their effect in the period would be anti-dilutive.
NOTE 6--SEGMENT DATA
Our reportable segments are based upon our method of internal reporting to
management, whom view our business by functional market. Our operating segments
reflect the way our management team organizes and evaluates internal financial
information, in order to make operating decisions and assess performance. Each
segment represents a strategic business unit that offers unique products and
services to its functional market. Our segments are as follows: the Service
Industries Group, which includes our HNC Insurance Solutions segment, or IS, our
HNC Financial Solutions segment, or FS, and HNC Telecom Solutions, or TS; eHNC
Inc., or eHNC; and Retek Inc., or Retek. IS provides users with the ability to
reduce fraud losses and streamline operations in the containment of the medical
costs of workers' compensation and automobile accident insurance claims,
workers' compensation loss reserving, workers' compensation fraud, managed care
effectiveness and provider effectiveness. FS provides transaction-based,
real-time fraud detection, authorization and action decisions for applications
such as credit card charge authorization and the loan approval decision process.
TS provides our telecommunications users with the ability to reduce fraud losses
and determine customer profitability. eHNC serves e-businesses by providing
products that allow online merchants to maximize customer service capabilities
and point-of-sale transactions. Retek offers predictive software solutions that
allow retailers to build forecasting and marketing models. For presentation
purposes in this Report, our former Aptex entity's historical financial
information has been combined with eHNC's. Reflected in our "Other" category are
our TS, Advanced Technology Solutions group which primarily provides research
and development for the United States government, and any corporate activity.
The table below presents segment data for certain statement of operations line
items for the quarters ended March 31, 2000 and 1999.
Segment revenue and operating income (loss), which excludes all non-cash
expenses such as stock-based compensation expense, acquisition related
amortization, and in-process research and development expenses are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
Segment revenue:
IS $19,422 $13,649
FS 18,604 14,199
Other 1,222 2,778
------- -------
Service Industries Group 39,248 30,626
eHNC 1,352 1,917
Retek 13,964 16,646
------- -------
Total consolidated revenue $54,564 $49,189
======= =======
</TABLE>
10
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Segment operating income (loss):
IS $ 3,069 $ 705
FS 3,684 2,152
Other (1,950) (200)
-------- --------
Service Industries Group 4,803 2,657
eHNC (3,796) 204
Retek (14,695) 3,076
-------- --------
Total segment operating income (loss) (13,688) 5,937
Stock-based compensation (1,917) --
Acquisition related amortization (3,965) (2,252)
In-process research and development (1,422) --
-------- --------
Consolidated operating income (loss) (20,992) 3,685
Interest and other income, net 3,371 1,684
Interest expense (1,372) (1,381)
Minority interest in losses of consolidated subsidiary 2,391 --
-------- --------
Income (loss) before income tax provision (benefit) $(16,602) $ 3,988
======== ========
</TABLE>
Corporate assets are primarily comprised of cash, short-term and long-term
investments available for sale, deferred tax assets and inter-segment
receivables. All tax related assets and liabilities are included within the
Corporate line item. Eliminations primarily relate to intercompany payables and
investments in subsidiaries.
Total assets:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Total segment assets:
IS $ 42,980 $ 25,435
FS 101,770 36,231
Other 56,075 5,854
--------- ---------
Service Industries Group 200,825 67,520
eHNC 3,259 8,367
Retek 133,323 31,513
--------- ---------
Total segment assets 337,407 107,400
Corporate 331,708 184,562
Eliminations (141,773) (24,409)
--------- ---------
Total consolidated assets $ 527,342 $ 267,553
========= =========
</TABLE>
NOTE 7--STOCK-BASED COMPENSATION
Net compensation expense related to stock-based awards totaled $1,917 for the
first quarter of 2000. This net compensation expense included net compensation
income related to stock-based awards of $713, and stock-based compensation
expense related to Retek of $2,630.
The compensation income was related to reversals of compensation expense
recorded in the fourth quarter of 1999 due to a decrease in the estimated fair
values of the options during the quarter. The stock-based awards were granted to
non-employees, and were estimated at their fair values using the Black-Scholes
option pricing model with the following weighted average assumptions: dividend
yield of 0.0%, risk-free interest rate of 6.44%, volatility of 100.0%, and an
expected life of 7 months according to the vesting date and subsequent exercise
period of each option grant, and our stock prices on the various grant dates as
well as on March 31, 2000. The unearned stock-based compensation was related to
options granted to eHNC employees in the third quarter of 1999. The expense was
generated as the
11
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
options were granted at an exercise price less than deemed fair value. This
expense will be amortized over the option lives.
Retek recorded unearned stock-based compensation amortization expense of $2,630
in the first quarter of 2000. This expense was related to the stock options
Retek granted in connection with their initial public offering in the fourth
quarter of 1999. The expense was generated as these options were granted at an
exercise price less than the deemed fair value.
NOTE 8--CONTINGENCIES
Various claims arising in the course of business, seeking monetary damages and
other relief, are pending. The amount of the liability, if any, cannot be
determined with certainty; however, in the opinion of management, the ultimate
liability will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
In November 1998, Nestor filed a complaint against us in the United States
District Court for the District of Rhode Island (C.A. No. 98 569). In the
complaint, Nestor alleged that we violated the federal Sherman Antitrust Act and
the Rhode Island Antitrust Act and tortuously interfered with prospective
contractual business relationships of Nestor in connection with our marketing of
our Falcon credit card fraud detection product. The complaint also alleged that
we infringed United States patents Nos. 4,326,259 and 4,760,604 held by Nestor.
Nestor seeks to recover unspecified compensatory damages, treble damages and
punitive damages and to obtain injunctive relief arising from these claims. The
complaint also sought a declaratory judgment that a United States patent we hold
relating to technology used in our Falcon products is invalid and unenforceable
due to our alleged inequitable conduct in obtaining this patent, and that
Nestor's products do not infringe this patent.
In January 2000, Nestor dropped its claim of patent infringement against us. Our
counter-claim that Nestor infringes our patent is still before the court in
Rhode Island. The other Nestor claims for antitrust and unfair competition were
severed by the court in an earlier ruling and will not be considered until after
the trial on the issue of the validity of our patent. We also have claims for
patent infringement and unfair competition pending in the United States District
Court venued in San Diego against Nestor's distributors Transaction Systems
Architects, Inc., or TSAI and ACI Worldwide, Inc., or ACI. In April 2000 we
agreed with TSAI and ACI to dismiss our lawsuit against them in order to enable
us to commence discussions with them regarding a possible future business
relationship. However, no agreements have been reached to date with TSAI or ACI.
We believe that these legal proceedings will not result in a material negative
impact on our results of operations, liquidity or financial condition.
NOTE 9--SUBSEQUENT EVENTS
In April 2000, we acquired Celerity Technologies Inc., or Celerity. We acquired
all of the outstanding stock of Celerity in exchange for 220 shares of our
common stock and $2,400 in cash. We are using the purchase method of accounting
for our acquisition of Celerity, and anticipate a significant portion of the
purchase price will be allocated to goodwill and other intangible assets. We
also anticipate taking a charge related to in-process research and development
costs related to the acquisition in the quarter ended June 30, 2000.
During April 2000, we repurchased 250 shares of our outstanding common stock for
our treasury at an aggregate purchase price of $18,616.
On May 10, 2000, Retek completed its acquisition of HighTouch Technologies,
Inc., or HighTouch, a provider of real-time transaction management and customer
service solutions that support multi-channel customer interactions. HighTouch
owns certain direct consumer management technologies that Retek has incorporated
into its Retek Retail CRM, an enterprise-level customer interaction system. In
connection with the purchase of HighTouch, Retek paid $18,000 in cash and issued
approximately 389,057 shares of its common stock to the former sole shareholder
of HighTouch. This transaction will be accounted for under the purchase method
of accounting. Accordingly, the purchase price will be allocated
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HNC SOFTWARE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
to the estimated fair value of assets acquired, liabilities assumed and
purchased in-process research and development.
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report (including without limitation the following section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements regarding HNC and its business,
financial condition, results of operations and prospects. Words like "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions or variations of these words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this Report. Additionally, statements concerning
future matters, for example the development of new products, enhancements or
technologies, possible changes in legislation, and other statements regarding
matters that are not historical are forward-looking statements. In this Report,
HNC Software Inc. is referred to as "we," "our," and "HNC".
Although forward-looking statements in this Report reflect the good faith
judgment of our management, these statements can only be based on facts and
factors currently known to us and might change if future factual circumstances
change. Consequently, all forward-looking statements have inherent risks and
uncertainties and actual results and outcomes may differ materially from the
results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to differences in results and
outcomes include without limitation whether we are successful in integrating new
businesses we have recently acquired, decisions we make regarding future
strategic directions of our business units, whether we are successful in
transitioning many of our products to solutions based on the application service
provider, or ASP, business model, whether we distribute our stock holdings in
Retek to our stockholders, as well as those factors discussed in our Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1999, or 1999
Annual Report, and this Report should be read in conjunction with our 1999
Annual Report. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Report. Readers are urged to carefully review and consider the various
disclosures made in this Report, which attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, results
of operations and prospects.
OVERVIEW
We are a business-to-business software company that develops, markets, licenses
and supports predictive software solutions for various service industries,
including companies in the insurance, financial services, telecommunications,
e-commerce, and retail industries. Our predictive software solutions help
service industry companies manage and optimize their customer relationships. By
analyzing high volumes of customer transactions in real-time, our predictive
solutions help companies shift the decision-making process from a retrospective
to prospective basis. The increasing conduct of e-business over the Internet
increases the demand for analysis of large volumes of real-time information,
which our products provide. Electronic customer interaction is necessary to
manage and respond to customer activity and expectations in all markets.
Our business is currently organized as follows: the Service Industries Group,
which includes the HNC Insurance Solutions segment, or IS, the HNC Financial
Solutions segment, or FS, and the HNC Telecom Solutions, or TS; eHNC Inc., or
eHNC; and Retek Inc., or Retek.
- - SERVICE INDUSTRIES
Group Our Service Industries Group delivers predictive solutions and
services that automate key decision functions for customers in the
insurance, financial services and telecommunications markets. Most of
our predictive solutions address customer relationship management, or
CRM, issues to optimize interactions with customers over the life-cycle
of the customer relationship, including customer acquisition, account
management, customer service, marketing and risk management.
INSURANCE SOLUTIONS
IS develops software solutions for the insurance industry that are
designed to add value to its customers' businesses through cost
reduction and improved management of risks. Customers in this segment
include insurance carriers, third-party administrators, managed care
organizations, preferred provider organizations, insurance industry
trade groups, brokers, and other service organizations. Our current
product offerings are targeted to the workers' compensation and
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
automobile segments of the property and casualty insurance market, as
well as the group health segment of the insurance market.
FINANCIAL SOLUTIONS
FS provides a suite of Predictive CRM products that addresses the
customer-lifecycle management needs of banks and other financial
institutions.
TELECOM SOLUTIONS
TS provides solutions designed to help telecommunications carriers
acquire more customers and enhance relationships with existing
customers in order to retain customers for longer periods.
- - eHNC
eHNC helps online merchants and merchant service providers increase
sales and minimize risks through an Applications Service Provider, or
ASP, product delivery model. eHNC's solutions analyze electronic
interactions with consumers, and help online merchants manage risk and
understand, forecast and recommend critical next steps in each consumer
relationship. For presentation purposes in this Report, our former Aptex
subsidiary's historical financial information has been combined with
eHNC's.
- - RETEK
Retek completed its initial public offering in November of 1999 and, as
of March 31, 2000, we owned approximately 86% of Retek's outstanding
common stock. Retek provides Internet-based, business-to-business
software solutions for retailers and their trading partners, including
retail.com, an electronic commerce network that connects retailers to
members of their supply chain. Retek also provides a suite of software
solutions that address the particular needs of retailers.
Our revenues and operating results have varied significantly in the past and may
do so in the future. Factors affecting our revenues and operating results
include: the degree of market acceptance of our products; the relatively large
size and small number of customer orders that may be received during a given
period; customer cancellation of long-term contracts yielding recurring revenues
or customers' ceasing their use of our products for which our fees are based on
customer useage; the length of our products' sales cycle; our ability to
successfully develop, introduce and market new products and product
enhancements; the timing of new product announcements and introductions by us
and our competitors; changes in the mix of our distribution channels; changes in
the level of our operating expenses; our ability to achieve progress on
percentage-of-completion contracts; our success in completing pilot product
installations for contracted fees; competitive conditions in the industry;
domestic and international economic conditions; and market conditions in our
targeted markets. In addition, license agreements we enter into during a given
quarter may not meet our revenue recognition criteria, and thus may not produce
revenue in that quarter. Therefore, even if we meet or exceed our forecast of
aggregate licensing and other contracting activity, it is possible that our
revenues would not meet our expectations or those of securities analysts.
Furthermore, our operating results may be affected by other factors unique to
our product lines. For example, in the past we have, through our Retek
subsidiary, derived a substantial portion of our revenues from our retail
products, which generally have been priced as "perpetual" license transactions
in which we receive a one-time license fee, most of which is typically
recognized as revenue upon signing and delivery. Thus, failure to sign a
significant perpetual license in the quarter it was anticipated to be signed
could result in a material shortfall of revenue for that quarter.
Beginning in the fourth quarter of 1999, Retek began to enter into their
software licensing agreements with revised terms for the majority of their
software sold, and this is expected to continue going forward. Revenue from the
sale of software licenses and technical advisory services under these agreements
will be recognized as the services are performed over the contract period, which
we generally expect to be 12 to 24 months, as determined by the customers'
objectives. As Retek begins to recognize license and service revenues over a
period of time, rather than upon delivery of their products, they will recognize
significantly less revenue and their associated margins will be lower for
several quarters as compared to their prior quarters, and they will incur
operating losses during these periods. In the past, we recognized many of these
perpetual license agreements as revenue according to the revenue recognition
criteria set
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
forth in the Statement of Position 97-2 "Software Revenue Recognition", and
related pronouncements. Failure to complete a perpetual license transaction
during a fiscal quarter would preclude us from recognizing revenue from that
transaction in that quarter, and thus would harm our operating results for that
quarter.
We expect fluctuations in our operating results to continue for the foreseeable
future. Consequently, we believe that period-to-period comparisons of our
financial results should not be relied upon as an indication of our future
performance. Because our expense levels are based in part on our expectations
regarding future revenues and in the short term are fixed to a large extent, we
may be unable to adjust our spending in time to compensate for any unexpected
revenue shortfall. We may not be able to maintain profitability on a quarterly
or annual basis in the future. Due to the foregoing factors, it is possible that
in some future quarter our operating results will be below the expectations of
public market analysts and investors. In that event, the price of our Common
Stock and, in turn, the price of our 4.75% Convertible Subordinated Notes due
2003, would likely be harmed.
RESULTS OF OPERATIONS
REVENUES
Our revenues are comprised of license and maintenance revenues and services and
other revenues. Our revenues for the three months ended March 31, 2000 were
$54.6 million, an increase of 11.0% over revenues of $49.2 million for the same
period in the prior year.
LICENSE AND MAINTENANCE REVENUES. We recognize license and maintenance revenues
in several different ways, depending on the terms on which the software and
maintenance are provided. Revenue from periodic software license and maintenance
agreements is generally recognized ratably over the respective license periods.
Revenue from short-term periodic software license and maintenance agreements,
with guaranteed minimum license fees, is recognized as related services are
performed. Transaction-based fees are recognized as revenue based on system
usage or when fees based on system usage exceed the monthly minimum license
fees. Revenue from perpetual licenses of our software for which there are no
significant continuing obligations and collection of the related receivables is
probable is recognized on delivery of the software and acceptance by the
customer. Amounts received under contracts in advance of performance are
recorded as deferred revenue and are generally recognized within one year from
receipt.
License and maintenance revenues were $31.8 million for the first quarter in
2000, a decrease of 12.9% from $36.5 million for the first quarter in 1999. This
$4.7 million decrease from the prior year quarter was driven by a $5.2 million
decrease at Retek, and offset by an increase of $0.8 million at our Service
Industries Group. The decrease in our Retek segment's license and maintenance
revenues from the first quarter in 1999 to the first quarter in 2000 as Retek's
contracts generally include revised terms, resulting in revenue being recognized
over a number of quarters rather than upon delivery. For further discussion of
the decrease in Retek's license and maintenance revenues, see page 33. Our
recurring license and maintenance revenues, as a percentage of total license and
maintenance revenues, increased to 82.6% in the first quarter of 2000, up from
65.5% for the same period in 1999.
Within our Service Industries Group, our IS segment license and maintenance
revenues decreased 3.3% from the first quarter in 1999 to the first quarter in
2000, offset primarily by a 26.1% increase at our FS segment. The decrease in
the first quarter of 2000 at our IS segment resulted in part from IS's transfer
of customer contracts for the CompCompare and ProviderCompare products to a
third party under a master license agreement signed in the third quarter of
1999, under which we no longer receive license and maintenance fees from the
transferred contracts and instead receive royalty fees which are classified as
services and other. Contributing to the decrease was a decrease in PPO revenues
as a result of industry consolidations and increasing price competition. These
were offset in part by the addition of new customers. The increase at our FS
segment is primarily due to increases in sales of our Falcon and ProfitMax
products.
SERVICES AND OTHER REVENUES. Services and other revenues are comprised of
installation and implementation revenues, service bureau operations revenues and
revenues which are derived from
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
consulting contracts, new product development contracts with commercial
customers and, to a lesser extent, research and development contracts with the
United States Government. Revenue from software installation and implementation
and from contract services is generally recognized as the services are performed
using the percentage of completion method based on costs incurred to date
compared to total estimated costs at completion. Amounts received under
contracts in advance of performance are recorded as deferred revenue and are
generally recognized within one year from receipt. Contract losses are recorded
as a charge to income in the period any losses are first identified. Unbilled
accounts receivable are stated at estimated realizable value.
Service bureau fees are derived from review of and re-pricing of customers'
medical bills and are assessed to customers on the basis of volume of bills
processed. Service bureau customers typically subscribe for services under
month-to-month agreements and service bureau fees are recognized as revenue when
the processing services are performed.
Services and other revenues increased 79.5% from the first quarter in 1999 to
the first quarter in 2000, from $12.7 million to $22.8 million. This $10.1
million increase from the prior year quarter was driven primarily by a $7.8
million increase at our Service Industries Group and a $2.5 million increase at
Retek.
Within our Service Industries Group, our IS segment services and other revenues
increased $6.2 million, or 350.6%, from the first quarter in 1999 to the first
quarter in 2000. Of this increase, $4.2 million is related to the ramp-up to
full scale service bureau operations for a primary customer. The remaining
increase of $2.0 million is primarily due to growth in our service bureau
customer base at IS. Our FS segment services and other revenues increased $1.9
million, or 41.7%, from the first quarter in 1999 to the first quarter in 2000.
The increase at FS was primarily related to a higher volume of Capstone
implementations.
For discussion of the increase in Retek's services and other revenues, see page
33.
GROSS MARGIN
LICENSE AND MAINTENANCE GROSS MARGIN. License and maintenance costs primarily
represent our expenses for personnel engaged in customer support, travel to
customer sites and documentation materials. Our gross margins on license and
maintenance revenues decreased 10.3% from the first quarter in 1999 to the first
quarter in 2000, from 70.6% to 60.3%, respectively. This decrease was driven by
a 50.0% decrease at Retek, and was offset by an increase of 5.7% at our Service
Industries Group.
Within our Service Industries Group from the first quarter of 1999 to the first
quarter of 2000, license and maintenance gross margin from our IS segment
increased 10.0%, while gross margin from our FS segment remained flat. IS gross
margins increased quarter over quarter due to reductions in PPO access fees and
the re-alignment of resources.
For discussion of Retek's license and maintenance cost of revenues, see page 33.
SERVICES AND OTHER GROSS MARGIN. Services and other expenses consist of
personnel and other expenses associated with providing installation and
implementation services and performing development, consulting, and research and
development contracts, and the costs associated with service bureau operations.
Our gross margin on services and other revenues increased by 2.0%, to 33.9% for
the first quarter of 2000 from 31.9% for the first quarter of 1999. The increase
in our services and other gross margin was driven by a 15.4% increase for our
Service Industries Group, and was offset by a 17.7% decrease at Retek.
Within our Service Industries Group, services and other gross margin from our IS
segment improved 44.0% from the first quarter of 1999 to the first quarter of
2000, while gross margin from our FS segment remained flat. Our IS segment's
gross margins increased quarter over quarter primarily because of improved
efficiencies in their service bureau operations.
For discussion of Retek's services and other cost of revenues, see page 34.
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses consist primarily of salaries and other
personnel-related expenses, subcontracted development services, depreciation for
development equipment, and supplies. Research and development expenses increased
$6.7 million or 70.5%, to $16.2 million in the first quarter of 2000 from $9.5
million in the first quarter of 1999.
Research and development expenses from the Service Industries Group increased to
$6.8 million in the first quarter of 2000 from $4.9 million in the first quarter
of 1999. Research and development expenses from our Insurance Solutions segment
increased to $2.5 million in the first quarter of 2000 from $1.8 million in the
first quarter of 1999. Research and development expenses from our Financial
Solutions segment increased to $3.2 million in the first quarter of 2000 from
$2.5 million in the first quarter of 1999. The increases in absolute dollars
quarter over quarter were attributable to increases in staffing and related
costs to support new product development activities primarily for our
CompAdvisor, Capstone, Falcon, and ASP product-delivery products. We anticipate
that research and development expenses will increase in dollar amount and could
increase as a percentage of total revenues for the foreseeable future.
For a discussion of Retek's research and development expense see page 34.
SALES AND MARKETING EXPENSE
Sales and marketing expenses consist primarily of salaries and benefits,
commissions, travel, entertainment and promotional expenses. Sales and marketing
expenses increased 69.4% to $16.6 million in the first quarter of 2000, from
$9.8 million in the first quarter of 1999. This increase was primarily driven by
a 127.2% increase at Retek, and by a 10.9% increase from the Service Industries
Group.
Within our Service Industries Group, sales and marketing expense increased,
99.8% at our IS segment, and decreased by 6.4% at our FS segment. The increases
in IS sales and marketing expenses were due primarily to increases in staffing
related to the expansion of IS's direct sales and marketing staff. Contributing
to the increases were increased expenses for trade shows, advertising, corporate
marketing programs and other expenses to support recently acquired businesses.
The decrease FS experienced during the first quarter in 2000, was related to the
timing of various marketing efforts. We expect sales and marketing expenses to
continue to increase in absolute dollars for the foreseeable future. These
expenses could also increase as a percentage of total revenues as we continue to
develop a direct sales force in Europe and other international markets, expand
our domestic sales and marketing organization and increase the breadth of our
product lines.
For a discussion of Retek's sales and marketing expenses see page 34.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses consist primarily of personnel costs for
finance, contract administration, human resources and general management, as
well as acquisition, insurance and professional services expenses. General and
administrative expenses increased 69.6%, to $7.8 million in the first quarter of
2000, from $4.6 million in the first quarter of 1999. This increase was
primarily driven by Retek, and related to increased staffing and related
expenses, including recruiting costs, to support higher levels of sales and
development activity, resulting in part from our recent acquisitions and to
support Retek's status as a public company. Our Service Industries Group's
general and administrative expense remained essentially flat quarter over
quarter.
For a discussion of Retek's general and administrative expenses see page 34.
STOCK-BASED COMPENSATION EXPENSE
We recognized $1.9 million of stock-based compensation expense related to
stock-based compensation agreements, calculated at fair value. This net expense
consisted of approximately $2.6 million of stock-based compensation expense for
Retek, offset by approximately $0.7 million of stock-based
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
compensation income for our Service Industries Group and eHNC in the first
quarter of 2000. Stock-based awards issued to non-employees are accounted for
using a fair value method and are marked to fair value at each period end until
the earlier of the date the performance by the non-employee is complete or the
awards are fully vested.
See Note 7 to the financial statements in this Report for further discussion.
For a discussion of Retek's stock-based compensation expense see page 35.
ACQUISITION-RELATED AMORTIZATION EXPENSE
Acquisition-related amortization expense was $4.0 million in the first quarter
of 2000, compared to $2.3 million in the first quarter of 1999. These expenses
represent the amortization of intangible assets purchased in conjunction with
our acquisitions of AIM, CASA and Onyx in the first quarter of 2000, WebTrak in
1999, and our acquisitions of Practical Control Systems Technologies, Inc. or
PCS, FTI (now HNC Financials Solutions, Inc.) and the Advanced
Telecommunications Abuse Control System, or ATACS product line assets during
1998. The average amortization period and useful life for these intangible
assets is approximately 3.5 years.
For a discussion of Retek's acquisition related amortization expense see page
35.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE
In-process research and development expense was $1.4 million for the three
months ended March 31, 2000. This write-off was related to the acquisition of
CASA.
CASA is an advanced analytics solutions company that provides account
optimization and precision marketing solutions through an ASP delivery platform.
The classification of the technology as complete or under development was made
in accordance with the guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards No. 2 and Financial
Accounting Standards Board Interpretation No. 4. Prior to 2000, CASA primarily
sold its Adaptive Dynamic Marketing ("ADM") ASP solution to businesses to
improve revenue and customer retention. At the time of acquisition, CASA had a
number of new technologies under development related to account management
algorithms and pricing algorithms. These in-process R&D projects were estimated
to achieve technological feasibility in the second quarter of 2000.
We used an independent appraisal firm to assist us with our valuation of the
fair market value of the purchased assets of CASA. Fair market value is defined
as the estimated amount at which an asset might be expected to be exchanged
between a willing buyer and willing seller assuming the buyer continues to use
the assets in its current operations. The in-process R&D projects were valued
through the use of a discounted cash flow analysis, taking into account
projected future cash flows associated with these projects once they achieve
technological feasibility, their stage of completion as of the acquisition date,
and the expected return requirements (i.e. discount rate) for present valuing of
the projected cash flows. Stage of completion was estimated by considering time,
cost, and complexity of tasks completed prior to the acquisition as a percentage
of total time, cost and effort required for the total project up to achieving
technological feasibility.
With respect to the projected financial information provided to the appraiser,
CASA prepared a detailed set of projections forecasting revenue from the new
algorithms as well as gross profit and operating profit margins. These
projections were made based on an assessment of customer needs and the expected
pricing and cost structure.
With respect to the discount rates used in the valuation approach, the
incomplete technology represents a mix of near and mid-term prospects for the
business and imparts a level of uncertainty to its prospects. A reasonable
expectation of return on the incomplete technology would be higher than that of
completed technology due to these inherent risks. As a result, the earnings
associated with incomplete technology were discounted at a rate of 27% based
upon the following methodology:
The Capital Asset Pricing Model was used to determine the cost of equity. It
combines a risk free rate of return with an equity risk premium multiplied by a
factor, referred to as Beta, which is based on the
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HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
performance of common stock prices of similar publicly traded companies.
Employing these data, the discount rate attributable to the business was 22%,
which was used for valuing completed technology. Since incomplete technology
would require a higher return than completed technology, the valuation report
prepared by the Company's appraiser used a rate of 27% to present value cash
flows (in excess of a return on other assets of the business) attributable to
in-process research and development projects.
The CASA in-process research and development projects continue to progress, in
all material respects, consistently with our original assumptions that were
provided to the independent appraiser and used to value the in-process research
and development.
These statements regarding revenues and expenses are forward-looking statements,
which are subject to risks and uncertainties. Actual results may differ
materially from those anticipated. Our inability to complete the in-process
technologies within the expected timeframes could materially impact future
revenues and earnings, which could have a material adverse effect on our
business, financial condition and results of operations.
OPERATING INCOME (LOSS)
The above factors resulted in operating loss of $21.0 million in the first
quarter of 2000, constituting 38.5% of total revenues in the same period, and
operating income of $3.7 million in the first quarter of 1999, constituting 7.5%
of total revenues in the same period.
OTHER INCOME (EXPENSE)
Other income for the first quarter of 2000 was $2.0 million, compared to other
income of $0.3 million in the first quarter of 1999. Other income is comprised
primarily of interest income earned on cash and investment balances, net of
interest expense related to the 4.75% Convertible Subordinated Notes due 2003.
This increase in other income was attributable primarily to an increase in
interest income as a result of higher cash and investment balances. The higher
cash and investment balances are related to cash proceeds from: $18.6 million in
stock options exercised, $5.6 million from the sale of receivables, and $2.3
million of net cash acquired in conjunction with the acquisitions of AIM, CASA,
and Onyx.
INCOME TAXES
The income tax benefit was $4.4 million in the first quarter of 2000, compared
to an income tax expense of $1.9 million in the first quarter of 1999. The
income tax benefit for the first quarter of 2000 includes the effects of:
non-deductible, one-time write-offs of in-process research and development
related to the purchases of AIM, CASA and Onyx; Retek minority interest;
stock-based compensation expense; and non-deductible acquisition related
amortization expense. The income tax expense for the first quarter of 1999
includes non-deductible acquisition related amortization expense. These
provisions are based on our estimates of the effective tax rates during those
respective full fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.0 million in the first quarter
of 2000, compared to $8.8 million in the first quarter of 1999. Net cash
provided by operating activities in 2000 was primarily attributable to $9.7
million of net cash flow provided by operations, offset by $4.7 million of net
working capital requirements. The change in cash flows from operations primarily
reflects the increase in net income before non-cash items. The net working
capital requirements primarily reflect increases of $19.0 million deferred
income taxes that were primarily offset by an increase of $10.3 million deferred
revenue.
Net cash used in investing activities was $38.5 million in the first quarter of
2000, compared to $7.1 million in the first quarter of 1999. Net cash used for
purchases, sales and maturities of investments during the first quarter in 2000
was $32.1 million. Contributing to net cash used in investing activities was
$7.1 million expended for the purchase of property and equipment. We received
$4.2 million in cash, offset by $1.9 million in cash paid, as a result of our
acquisitions of AIM, CASA and ONYX.
Net cash provided by financing activities was $25.7 million in the first quarter
of 2000, compared to $16.8 million of cash used in financing activities in the
first quarter of 1999. In 2000, the net proceeds from the
20
<PAGE> 21
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
issuance of HNC and Retek common stock provided $20.1 million, and the sales of
receivables provided $5.6 million.
As of March 31, 2000, we had $256.6 million in cash, cash equivalents and
investments available for sale. We believe that our current cash, cash
equivalents and investments available for sale balances, borrowings under our
credit facility and net cash provided by operating activities, will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months. We expect to continue making significant
investments in capital assets, including computer equipment and building
improvements, during 2000. We intend to invest our cash in excess of current
operating requirements in short-term, interest-bearing, investment-grade
securities. A portion of our cash could also be used to acquire or invest in
complementary businesses or products or otherwise to obtain the right to use
complementary technologies or data. The proceeds from the Notes will continue to
be used for general corporate purposes, including working capital and possibly
to acquire complementary businesses, products or technologies. From time to
time, in the ordinary course of business, we evaluate potential acquisitions of
businesses, products, technologies or data.
During April 2000, we repurchased 250 shares of our outstanding common stock for
our treasury at an aggregate purchase price of $18,616.
During March 1998, we completed an offering of $100,000 of 4.75% Convertible
Subordinated Notes, or the Notes, due on March 1, 2003. We fully and
unconditionally guarantee the Notes. The Notes are convertible into our common
stock at any time prior to the close of business on the maturity date at a
conversion rate of 22.30 shares per $1,000 principal amount of the Notes
(equivalent to a conversion price of $44.85 per share). We have the right to
redeem the Notes, in whole or in part, on or after March 6, 2001, at redemption
prices (plus accrued interest), as follows: a premium of 101.9 after one year,
100.95 after two years, and at par as of the third year. As a result of the
Retek spin-off that we intend to complete during 2000, and pursuant to a
resolution by our Board of Directors, our Notes conversion price may be
significantly reduced based upon a formula that calculates a revised conversion
rate using the relative per common share values of HNC and Retek as of the date
of the spin. The Retek spin-off is subject to a favorable revenue ruling from
the Internal Revenue Service and other conditions, including approval of our
Board of Directors.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", or FAS 133. This statement establishes a new model for
accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
Effective Date of FASB Statement No. 133" which defers the adoption requirement
to the first quarter of 2001. We have not yet determined the impact of the
adoption of this new accounting standard on our consolidated financial position,
results of operations or disclosures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101,
which provides additional guidance in applying generally accepted accounting
principles for the recognition and reporting of revenue for certain transactions
that existing accounting rules do not specifically address. An amendment in
March 2000 delayed SAB 101's effective date until the second quarter of 2000. We
are currently evaluating the impact, if any, that SAB 101 may have on our
consolidated financial statements.
In January 200, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed
21
<PAGE> 22
HNC SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
software and Web site development costs, include internal and external costs
incurred to develop internal-use computer software during the application
development stage are capitalized. Application development stage costs generally
include software configuration, coding, installation to hardware and testing.
Costs of significant upgrades and enhancements that result in additional
functionality are also capitalized. Costs incurred for maintenance and minor
upgrades and enhancements are expensed as incurred. The estimated useful lives
are based on planned or expected significant modification or replacement of
software applications, in response to the rapid rate of change in the internet
industry and technology in general. Adoption of EITF 00-2 is required for the
third quarter of 2000. We have not yet determined the impact of the adoption of
this new accounting standard on our consolidated financial position, results of
operations or disclosures.
22
<PAGE> 23
RETEK INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,891 $ 83,680
Short-term investments available for sale - debt 2,000 --
Trade accounts receivable, net 22,505 24,383
Current portion of deferred income taxes 1,589 11,177
Other current assets 6,606 5,560
--------- ---------
Total current assets 94,591 124,800
--------- ---------
Property and equipment, net 12,133 8,291
Intangible assets, net 8,233 8,958
Deferred income taxes, less current portion 30,668 12,151
Other assets 41 33
--------- ---------
$ 145,666 $ 154,233
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,998 $ 5,946
Accrued liabilities 7,932 3,030
Deferred revenue 14,233 5,883
Payable to HNC Software Inc. 80 15,399
--------- ---------
Total current liabilities 27,243 30,258
--------- ---------
Deferred revenue, net of current portion 381 --
--------- ---------
Total liabilities 27,624 30,258
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value -- 5,000 shares
authorized; no shares issued and outstanding; -- --
Common stock, $0.01 par value -- 150,000 and 1
share authorized; 46,503 shares and 1 share issued 465
465
Paid-in capital 142,998 140,089
Unearned stock-based compensation (17,348) (19,978)
Accumulated other comprehensive loss (768)
(582)
Retained earnings (deficit) (7,305) 3,981
--------- ---------
Total stockholders' equity 118,042 123,975
--------- ---------
$ 145,666 $ 154,233
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
RETEK INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
License and maintenance $ 6,430 $ 11,658
Services and other 7,534 4,989
-------- --------
Total revenues 13,964 16,647
-------- --------
Operating expenses:
License and maintenance (net of non-cash stock-based
compensation expense of $122 in 2000) 4,168 1,404
Services and other (net of non-cash stock-based
compensation expense of $394 in 2000) 5,509 2,885
-------- --------
Total cost of revenues 9,677 4,289
-------- --------
Gross profit 4,287 12,358
Research and development (net of non-cash stock-based
compensation expense of $1,291 in 2000) 8,008 4,277
Sales and marketing (net of non-cash stock-based
compensation expense of $575 in 2000) 8,671 3,818
General and administrative (net of non-cash stock-based
compensation income of $248 in 2000 and acquisition-
related amortization of $779 in 2000 and $258 in 1999) 2,303 1,188
Amortization of stock-based compensation 2,630 --
Acquisition-related amortization of intangibles 779 258
-------- --------
Total operating expenses 22,391 9,541
Operating (loss) income (18,104) 2,817
Other income, net 1,042 16
-------- --------
Income (loss) before income tax provision (benefit) (17,062) 2,833
Income tax provision (benefit) (5,776) 1,145
-------- --------
Net income (loss) $(11,286) $ 1,688
======== ========
Earnings per share:
Basic net income (loss) per common share $ (0.24)
========
Diluted net income (loss) per common share $ (0.24)
========
Pro forma unaudited basic net income per common share $ 0.04
========
Shares used in computing basic net income (loss) per common share 46,503
========
Shares used in computing diluted net income (loss) per common share 46,503
========
Shares used in computing pro forma unaudited basic net income per
common share 40,000
========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
RETEK INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(11,286) $ 1,688
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for doubtful accounts 149 270
Depreciation and amortization expense 1,587 873
Amortization of stock-based compensation 2,630 --
Deferred income tax benefit (8,929) (43)
Tax benefit from stock option transactions 3,153 --
Changes in assets and liabilities:
Accounts receivable 1,729 (2,396)
Other assets (1,047) 2,223
Accounts payable (948) (1,124)
Accrued liabilities 4,903 (1,020)
Deferred revenue 8,732 617
-------- --------
Net cash provided by operating activities 673 1,088
-------- --------
Cash flows from investing activities:
Net purchases of investments available for sale (2,000) --
Acquisitions of property and equipment (4,714) (1,916)
-------- --------
Net cash used in investing Activities (6,714) (1,916)
-------- --------
Cash flows from financing activities:
Costs incurred related to issuance of common stock
(243) --
Borrowings from HNC Software Inc 80 14,440
Repayments to HNC Software Inc (15,399) (12,269)
-------- --------
Net cash provided by (used in) financing activities (15,562) 2,171
-------- --------
Effect of exchange rate changes on cash (186) (223)
-------- --------
Net increase (decrease) in cash and cash equivalents (21,789) 1,120
Cash and cash equivalents at beginning of period 83,680 415
-------- --------
Cash and cash equivalents at end of period $ 61,891 $ 1,535
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
RETEK INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
UNEARNED OTHER
COMMON STOCK PAID-IN STOCK-BASED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS)
--------- --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ...... 46,503 $ 465 $ 140,089 $ (19,978) $ (582)
Tax benefit from HNC Software
Inc. stock options .............. 3,152
Common stock issuance costs ....... (243)
Amortization of stock-based
compensation .................... 2,630
Foreign currency translation
Adjustment ...................... (186)
Net loss ..........................
--------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2000 ......... 46,503 $ 465 $ 142,998 $ (17,348) $ (768)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS' COMPREHENSIVE
EARNINGS EQUITY INCOME (LOSS)
--------- ------------- --------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ...... $ 3,981 $ 123,975
Tax benefit from HNC Software
Inc. stock options .............. 3,152
Common stock issuance costs ....... (243)
Amortization of stock-based
compensation .................... 2,630
Foreign currency translation
Adjustment ...................... (186) $ (186)
Net loss .......................... (11,286) (11,286) (11,286)
--------- --------- ---------
BALANCE AT MARCH 31, 2000 ......... $ (7,305) $ 118,042 $ (11,472)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION
The Company
Retek Inc. and its wholly owned subsidiaries, Retek Information Systems, Inc.
and WebTrak Limited ("Retek" or the "Company") develop Internet based
business-to-business commerce networks, warehouse management software solutions,
and market and support management decision software products for retailers and
their trading partners. The Internet based business-to-business commerce
networks provide retailers a single point of access for all members of the
retail supply chain. Additional solutions offered through the retail.com portal
provide a collaborative approach to traditional retail challenges. These
solutions are designed to increase efficiencies by sharing data among retailers
and their trading partners, effectively shortening their supply chains. The
predictive software solutions employ proprietary neural-network predictive
decision engines, profiles, traditional statistical modeling, business models,
expert rules and context vectors to convert existing data and business
experiences into meaningful recommendations and actions. The Company is
headquartered in Minneapolis, Minnesota.
Basis of Presentation
We have prepared the accompanying interim condensed consolidated financial
statements, without audit, in accordance with the instructions to Form 10-Q and,
therefore, do not necessarily include all information and footnotes necessary
for a fair presentation of our financial position, results of operations and
cash flows in accordance with generally accepted accounting principles.
In our opinion, the accompanying unaudited financial information for interim
periods presented reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. These condensed consolidated
financial statements and notes thereto should be read in conjunction with our
audited financial statements and notes thereto presented in our Annual Report on
Form 10-K for the fiscal year ended December 31, 1999. The interim financial
information contained in this Report is not necessarily indicative of the
results to be expected for any other interim period or for an entire fiscal
year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain prior year balances
have been reclassified to conform to the current presentation.
Revenue Recognition
The Company recognizes software license revenue upon meeting each of the
following criteria: execution of a license agreement or contract; delivery of
software; the license fee is fixed and determinable; collectibility of the
proceeds is assessed as being probable; and vendor specific objective evidence
exists to allocate the total fee to elements of the arrangement. Vendor-specific
objective evidence is based on the price charged when an element is sold
separately, or if not yet sold separately, is established by authorized
management. Starting in the fourth quarter of 1999, we revised the terms of the
software licensing agreements for the majority of our software products sold.
Under these terms, we will provide technical advisory services after the
delivery of our products to help our customers exploit the full value and
functionality of our products. Revenue from the sale of software licenses under
these agreements is recognized over the period that the technical advisory
services are performed. For sales made through distributors, resellers and
original equipment manufacturers, we recognize revenue at the time these
partners report to us that they have sold the software to the end user and all
revenue recognition criteria have been met. Service revenue includes maintenance
revenue, which is deferred and recognized ratably over the maintenance period,
and revenue from consulting and training services, which is recognized as
services are performed. Consulting services are customarily billed at a fixed
daily rate plus out-of-pocket expenses.
27
<PAGE> 28
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue from contract development services is generally recognized as the
services are performed using the percentage of completion method based on costs
incurred to date compared to total estimated costs at completion. Amounts
received under contracts in advance of performance are recorded as deferred
revenue and are generally recognized within one year from receipt. Contract
losses are recorded as a charge to income in the period such losses are first
identified. Unbilled accounts receivable are stated at estimated realizable
value.
Deferred revenue consists primarily of deferred maintenance revenue.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This statement establishes a new
model for accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" which defers the effective date to all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
FAS 133 is not expected to have a significant impact on our consolidated
financial position or results of operations.
In January 200, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
include internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the internet industry and technology in general.
Adoption of EITF 00-2 is required for the third quarter of 2000. We have not yet
determined the impact of the adoption of this new accounting standard on our
consolidated financial position, results of operations or disclosures.
NOTE 2 -- PER SHARE DATA
Basic net loss per share is calculated by dividing net loss by the weighted
average of common shares outstanding during the period. Net income per share,
assuming dilution is calculated by dividing net income by the weighted average
number of common and common equivalent shares outstanding during each period.
Our only common stock equivalents are those that result from dilutive common
stock options. The calculation of dilutive earnings per share for the three
months March 31, 2000 and 1999 is applicable as a net loss was realized. Share
used in the computations for the three months ended March 31, 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------ ------
(in thousands)
<S> <C> <C>
Shares used in computing basic and diluted net
loss per common share 46,503
Shares used in computing proforma unaudited
basic and diluted net income per common share 40,000
</TABLE>
28
<PAGE> 29
RETEK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 -- SUBSEQUENT EVENTS
On May 10, 2000, Retek completed its acquisition of HighTouch Technologies,
Inc., or HighTouch, a provider of real-time transaction management and customer
service solutions that support multi-channel customer interactions. HighTouch
owns certain direct consumer management technologies that Retek has incorporated
into its Retek Retail CRM, an enterprise-level customer interaction system. In
connection with the purchase of HighTouch, Retek paid $18,000 in cash and issued
approximately 389,057 shares of its common stock to the former sole shareholder
of HighTouch. This transaction will be accounted for under the purchase method
of accounting. Accordingly, the purchase price will be allocated to the
estimated fair value of assets acquired, liabilities assumed and purchased
in-process research and development.
29
<PAGE> 30
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Retek's, financial condition and results of
operations should be read in conjunction with Retek's consolidated financial
statements and the related notes, and the other financial information included
in Retek's Quarterly Report on Form 10-Q. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Retek's actual
results may differ materially from those anticipated in these forward-looking
statements as a result of specified factors, including those set forth in the
section below entitled "Factors That May Impact Future Results of Operations"
and elsewhere in this Quarterly Report on Form 10-Q. Retek is a subsidiary of
HNC Software Inc., and in this Report, HNC Software Inc. is referred to as "we,"
"our," and "HNC".
OVERVIEW
Retek completed its initial public offering on November 23, 1999. Prior to the
completion of Retek's initial public offering, they were our wholly owned
subsidiary. As of March 31, 2000, we owned approximately 86.0% of Retek's
outstanding common stock. We have informed Retek that it is our current
intention to distribute pro rata to our stockholders, as a dividend, all of the
shares of Retek's common stock that we own, subject to the satisfaction and
fulfillment of several conditions, including the receipt of a written ruling
from the Internal Revenue Service that the distribution qualifies for tax-free
treatment under Section 355 of the Internal Revenue Code. However, we have the
sole discretion to determine whether we will carry out the distribution, and if
the distribution is carried out, the timing, structure and terms of the
distribution.
Retek's business combines the business activities of Retek Information Systems,
Inc. and Retek Inc., formerly Retek Logistics, Inc. Founded in 1995, Retek
Information Systems, a developer and marketer of Internet-based,
business-to-business software solutions for retailers, was acquired by HNC in
1996. Neil Thall Associates, Inc., a developer of predictive software solutions
for retailers and a wholly owned subsidiary of HNC since 1991, was merged into
Retek Information Systems in April 1997. Financial results of Neil Thall
Associates are included in all periods presented. Founded in 1985 as Practical
Control Solutions, Inc. Retek Logistics, a developer of warehouse management
software solutions, was acquired by HNC in 1998. On September 9, 1999, Retek
Logistics was reincorporated as a Delaware corporation and renamed "Retek Inc."
Immediately prior to the completion of our initial public offering on November
23, 1999, in connection with the separation of our business from HNC, HNC
contributed all of the outstanding capital stock of Retek Information Systems to
Retek Inc. Retek Information Systems currently operates as a wholly owned
subsidiary.
Our acquisition of Retek Information Systems allowed for the integration of
HNC's patented predictive technology into Retek's software solutions for
retailers. Retek formalized a marketing relationship with Oracle in September
1998, providing Retek with an effective partnership with a world leader in
electronic commerce, an international channel to the largest retailers and the
support of Oracle's worldwide sales force.
Total revenue decreased from $16.6 million in the first quarter of 1999 to $14.0
million in the first quarter of 2000. Retek generates revenue from the sale of
software licenses, maintenance and support contracts, and professional
consulting and contract development services. Until the fourth quarter of 1999,
Retek generally licensed products to customers on a perpetual basis and
recognized revenue upon delivery of the products. Starting in the fourth quarter
of 1999, Retek revised the terms of our software licensing agreements for the
majority of our software products sold. Under the revised terms, Retek provides
technical advisory services after the delivery of its products to help customers
exploit their full value and functionality. Revenue from the sale of software
licenses under these agreements will be recognized as the technical advisory
services are performed. Retek expects the periods of technical advisory services
will generally be from 12 to 24 months, as determined by the customers'
objectives. As Retek begins to recognize license and service revenue over a
period of time, rather than upon delivery of the product, it will recognize
significantly less revenue, have lower associated margins for several quarters,
as compared to previous quarters, have higher operating expenses as a percentage
of total revenues and incur operating losses for several quarters. Deferred
revenue consists principally of the unrecognized portion of revenue received
under license and maintenance service agreements. Deferred license revenue is
recognized ratably or as a percentage of completion based on the contract terms.
Deferred maintenance revenue is recognized ratably over the term of the service
agreement.
30
<PAGE> 31
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Customers who license Retek's software generally purchase maintenance contracts,
typically covering renewable annual periods. In addition, customers may purchase
consulting services, which are customarily billed at a fixed daily rate plus
out-of-pocket expenses. Contract development services, including new product
development services, are typically performed for a fixed fee. Retek also offers
training services that are billed on a per student or per class session basis.
The growth in Retek's customer base has resulted from a combination of increased
market penetration and an expanding product offering. Retek's investment in
research and development, acquisitions and alliances have helped bring new
software solutions to market. These investments produced a suite of decision
support solutions in 1997; the re-tooling of its applications for the Web in
1998; and the delivery of Internet-based, business-to-business collaborative
planning, critical path and product design solutions in 1999; and several
additional collaborative offerings on the retail.com network through the first
quarter of 2000. To support Retek's growth during these periods, it also
continued to invest in internal infrastructure by hiring employees throughout
various departments of the organization.
Retek markets its software solutions worldwide through direct and indirect sales
channels. Revenue generated from direct sales channel accounted for
approximately 2.6% and 14.4% of its total revenue in the first quarter of 2000
and the first quarter of 1999, respectively. Indirect sales channel revenue
arises from our relationship with Oracle.
On October 29, 1999, Retek completed the purchase of all the outstanding capital
stock of WebTrak Limited. WebTrak owns the WebTrack Critical Path and Portfolio
Private Label products that Retek currently distributes. In connection with the
purchase of WebTrak, Retek issued to former WebTrak shareholders notes, which
were due on November 26, 1999, in the principal amount of $5.33 million and a
convertible note, which was due on November 26, 1999, in the principal amount of
$2.67 million. The convertible note was at the option of the holder convertible
at the time of payment into the number of shares of Retek's common stock equal
to the principal amount of the note divided by the initial offering price of
$15.00. On November 29, 1999 Retek issued 177,778 shares of its common stock to
the holder of the convertible note in full satisfaction of its obligations. The
remaining notes were paid in full on their due date.
On May 10, 2000, Retek completed its purchase of all of the outstanding capital
stock of HighTouch Technologies, Inc., or HighTouch, a provider of real-time
transaction management and customer service solutions, which support
multi-channel customer interactions. HighTouch owns certain direct consumer
management technologies that Retek has incorporated into its Retek Retail CRM,
an enterprise-level customer interaction system. In connection with the purchase
of HighTouch, Retek paid $18.0 million in cash and issued approximately 389,057
shares of its common stock to the former sole shareholder of HighTouch.
Revenue attributable to customers outside of North America accounted for
approximately 31.2% and 58.0% of Retek's total revenue in the first quarter of
2000 and the first quarter of 1999, respectively. Approximately 11.2% and 41.4%
of Retek's sales were denominated in currencies other than the U.S. dollar for
the first quarter of 2000 and the first quarter of 1999, respectively.
Retek primarily sells perpetual licenses for which it recognizes revenue in
accordance with generally accepted accounting principles, upon meeting each of
the following criteria:
- execution of a written purchase order, license agreement or
contract;
- delivery of software authorization keys;
- the license fee is fixed and determinable;
- collectibility of the proceeds is assessed as being probable; and
- vendor-specific objective evidence exists to allocate the total fee
to elements of the arrangement.
31
<PAGE> 32
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Vendor-specific objective evidence is based on the price charged when an element
is sold separately, or if not yet sold separately, is established by authorized
management. All elements of each order are valued at the time of revenue
recognition. Retek recognizes revenue:
- for sales made through our distributors, resellers and original
equipment manufacturers, at the time these partners report to us
that they have sold the software to the end-user and after all
revenue recognition criteria have been met;
- from maintenance agreements related to our software, over the
respective maintenance periods;
- from customer modifications, as the services are performed using the
percentage of completion method; and
- from services, using the percentage of completion method, based on
costs incurred to date compared to total estimated costs at
completion.
Retek records amounts received under contracts in advance of performance as
deferred revenue and generally recognize these amounts within one year from
receipt. Any amount not to be recognized within one year of receipt recorded in
non-current deferred revenue.
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
The following table presents selected financial data for the periods indicated
as a percentage of our total revenue. Our historical reporting results are not
necessarily indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF
TOTAL REVENUE
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Revenue:
License and maintenance ................................ 46.0% 70.0%
Services and other ..................................... 54.0 30.0
Total revenue .................................. 100.0 100.0
Cost of revenue:
License and maintenance ................................ 29.8 8.4
Services and other ..................................... 39.5 17.4
Total cost of revenue .......................... 69.3 25.8
Gross margin ............................................. 30.7 74.2
Operating expenses:
Research and development ............................... 57.3 25.7
Sales and marketing .................................... 62.1 22.9
General and administrative ............................. 16.5 7.2
Amortization of stock-based compensation ............... 18.8 -
Acquisition related amortization of intangibles ........ 5.6 1.5
Total operating expenses ....................... 160.3 57.3
Operating (loss) income .................................. (129.6) 16.9
Other income, net ........................................ 7.5 0.1
(Loss) income before income tax (benefit) provision ...... (122.1) 17.0
(Loss) income tax (benefit) provision .................... 41.4 6.9
Net (loss) income ........................................ (80.7) 10.1
Cost of license and maintenance revenue, as a
percentage of license and maintenance revenue ............ 64.8 12.0
Cost of services and other revenue, as a percentage of
services and other revenue ............................... 73.1 57.8
</TABLE>
REVENUES
TOTAL REVENUES. Total revenue decreased 16.1% to $14.0 million in the first
quarter of 2000 from $16.6 million in the first quarter of 1999.
LICENSE AND MAINTENANCE REVENUES. License and maintenance revenue decreased
44.8% to $6.4 million in the first quarter of 2000 from $11.7 million in the
first quarter of 1999. The decrease in license revenue in the first quarter of
2000 was primarily due to the revised terms used in writing Retek's license
contracts. As noted above in the section entitled "Overview", Retek recently
revised the terms of its software license agreements so that revenue is
recognized over a number of quarters rather than upon delivery. As a result,
year over year quarter revenue decreased in the first quarter of 2000 compared
to the first quarter of 1999. However, the average dollar contract value per
customer increased for the same time period; the decrease in revenue was due to
the revised terms of Retek's software license agreements. Maintenance revenue
increased $2.5 million in the first quarter of 2000 due to a growing base of
customers that have installed Retek's software solutions.
SERVICES AND OTHER REVENUES. Services and other revenues increased 51.0% to $7.5
million in the first quarter of 2000 from $5.0 million in the first quarter of
1999. The increase was due to $2.5 million increase in consulting services and
custom development projects. The number of billable employees increased to 81 as
of March 31, 2000 from 60 as of March 31, 1999. Services and other revenue
balances fluctuate
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
based on Retek's use of third party consultants. Third party consultants are
used on an as needed basis depending upon Retek's allocation of internal
resources.
COST OF REVENUES
COST OF LICENSE AND MAINTENANCE REVENUES. Cost of license and maintenance
revenue consists primarily of fees for third party software products that are
integrated into Retek's products; salaries and related expenses of its customer
support organization; and an allocation of its facilities and depreciation
expense. Cost of license and maintenance revenue increased 196.9% to $4.2
million in the first quarter of 2000 from $1.4 million in the first quarter of
1999. In the first quarter of 2000, start-up expenses were incurred to support
the implementation of the network for retail.com sales. In addition, as license
and maintenance revenue increases, Retek expects to experience increased costs
resulting from increased royalty fees and an increase in the number of support
personnel required to service its growing customer base. Retek expects the cost
of license and maintenance revenue to continue to increase in absolute dollars
as license and maintenance revenue increases.
COST OF SERVICES AND OTHER REVENUES. Cost of services and other revenues
includes salaries and related expenses of Retek's consulting organization; cost
of third parties contracted to provide consulting services to its customers; and
an allocation of facilities and depreciation expense. Cost of services and other
revenues increased 91.0% to $5.5 million in the first quarter of 2000 from $2.9
million in the first quarter of 1999. As a percentage of services and other
revenue, cost of services and other revenue was 73.1% in the first quarter of
2000 and 57.8% in the first quarter of 1999. The increase in costs as a
percentage of revenues in the first quarter are due to additional fixed fees
billed in the first quarter of 1999 that did not require additional costs to
complete. During the first quarter of 2000 Retek continued to expand its
consulting services business by increasing the number of personnel to 81 from 60
in the first quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense, which is expensed as incurred, consists
primarily of salaries and related costs within Retek's engineering organization;
fees paid to third-party consultants; and an allocation of facilities and
depreciation expenses. Retek has increased its investment in research and
development in absolute dollars each year since 1995. Research and development
expense increased 87.2% to $8.0 million in the first quarter of 2000 from $4.3
million in the first quarter of 1999. The absolute dollar increase in research
and development expense was due to significant increases in labor costs, which
included hired personnel and third party consultants. In the first quarter of
2000, research and development personnel increased to 265 from 120 in the first
quarter of 1999. Retek also invested heavily in the development of new
retail.com solutions during the first quarter of 2000. Retek expects the
absolute dollar increase in research and development to continue as it invests
in the development of other new solutions.
SALES AND MARKETING EXPENSE
Sales and marketing expense consists primarily of salaries and related costs of
the sales and marketing organization; sales commissions; costs of marketing
programs, including public relations, advertising, trade shows, collateral sales
materials, and the customer user reference group program; rent and facilities
costs associated with our regional and international sales offices; and an
allocation of facilities and depreciation expense. Sales and marketing expense
increased 127.1% to $8.7 million in the first quarter of 2000 from $3.8 million
in the first quarter of 1999. The increase was due to increases of $1.5 million
in personnel and related costs, $1.5 million in marketing expense and $0.07
million in travel expenses. In the first quarter of 2000 personnel and related
costs increased due to an increase in the number of sales and marketing
employees to 118 from 61 in the first quarter of 1999. The increase in personnel
and related costs was due to the continued build up of Retek's sales force and
marketing operations for the new product offering of retail.com during the first
quarter of 2000.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of costs from Retek's
finance and human resources organizations; third party legal and other
professional services fees; and an allocation of facilities costs and
depreciation expenses. General and administrative expense increased 93.9% to
$2.3 million in the
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
first quarter of 2000 from $1.2 million in the first quarter of 1999. The
increase in absolute dollars in general and administrative expense in the first
quarter of 2000 was attributable to the growth of the administrative
organization to support Retek's overall growth. The increase in the first
quarter of 2000 was also due to additional compliance expenses associated with
being an independent public company. In the first quarter of 2000 total general
and administrative employees increased to 51 from 31 in the first quarter of
1999. Retek expects general and administrative expense to increase in absolute
dollars in the foreseeable future to support infrastructure growth.
STOCK-BASED COMPENSATION EXPENSE
Deferred stock-based compensation represents the difference between the exercise
price and the fair value of Retek's common stock for accounting purposes on the
date that certain stock options were granted. This amount is included as a
component of stockholders' equity and is being amortized on an accelerated basis
by charges to operations over the vesting period of the options, consistent with
the method described in Financial Accounting Standards Board Interpretation No.
28. Retek granted stock options to its employees under the 1999 Equity Incentive
Plan and to members of its board of directors through both the 1999 Equity
Incentive Plan and the 1999 Directors Stock Option Plan. Through March 31, 2000,
Retek had stock options granted to employees to purchase 7,514,250 shares and to
members of its board of directors to purchase 100,000 shares of its common stock
at an exercise price of $10 per share. Amortization of stock-based compensation
was $2.6 million for the first quarter in 2000.
ACQUISITION-RELATED AMORTIZATION EXPENSE
Acquisition-related amortization expense increased to $0.8 million for the
quarter ended March, 31, 2000 from $0.3 million for the quarter ended March 31,
1999. In connection with the purchase of WebTrak in the fourth quarter of 1999,
the application of the purchase method for the acquisition resulted in an excess
of cost over net assets acquired of $8.1 million, of which $6.6 million was
allocated to intangibles and $1.5 million was allocated to in-process research
and development. In conjunction with the purchase, Retek recorded various
intangible assets, which are being amortized over estimated useful lives ranging
from three to five years. In connection with the purchase of Retek Logistics in
1998, the application of the purchase method for the acquisition resulted in an
excess of cost over net assets acquired of approximately $5.8 million, of which
$4.0 million was allocated to intangibles and $1.8 million was allocated to
in-process research and development. In conjunction with the purchase, Retek
recorded various intangible assets, which are being amortized over estimated
useful lives ranging from three to five years.
OTHER INCOME (EXPENSE)
Other income, net increased to $1.0 million in the first quarter of 2000 from
$0.02 million in the first quarter of 1999. The increase was due to interest
income earned on investments.
INCOME TAXES
The income tax benefit was $5.8 million in the first quarter of 2000, compared
to an income tax provision of $2.0 million in the first quarter of 1999. The
income tax benefit and provision are based on Retek's estimates of the effective
tax rates to be incurred during those respective full fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, Retek funded operations primarily through
funding from HNC in the form of intercompany advances. Since the initial public
offering, Retek has not obtained any additional funding from HNC. At March 31,
2000, our cash and cash equivalent balance was $61.9 million. In addition, we
had investments in short-term securities of $2.0 million at March 31, 2000.
Net cash provided by operating activities was $0.7 million in the first quarter
of 2000 and $1.1 million in the first quarter of 1999. Sources of cash for the
first quarter of 2000, which offset Retek's net loss and increase in certain
assets, were depreciation and amortization and amortization of stock-based
compensation, increases in accrued liabilities and deferred revenue and
decreases in accounts receivable. Uses of cash in the first quarter of 2000 were
due to increases in non-current deferred income taxes and other assets and a
decrease in accounts payable.
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Net cash used in investing activities was $6.7 million in the first quarter of
2000 and $1.9 million in the first quarter of 1999. In the first quarter of
2000, uses of cash included $4.7 million for the acquisition of capital
equipment, primarily computer equipment and software, as well as purchases of
investments.
Net cash used by financing activities was $15.6 million in the first quarter of
2000. Net cash provided by financing activities was $2.2 million in the first
quarter of 1999. Net cash used in the first quarter 2000 included $0.08 million
in borrowings from HNC and $15.4 million in payments to HNC. Beginning in 1997,
HNC implemented a cash management policy that all cash balances were transferred
daily from all of HNC's subsidiaries, including Retek, into a centralized cash
management account at HNC. The financing activities with HNC include borrowings
and payment from these cash management activities in 1999. Starting in November
1999 these daily transfers to HNC ceased.
Retek believes that the net proceeds of its initial public offering, together
with its current cash and cash equivalents and net cash provided by operating
activities, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. Retek's management
intends to invest the excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.
A portion of Retek's cash could also be used to acquire or invest in
complementary businesses or products or otherwise to obtain the right to use
complementary technologies or data. Retek regularly evaluates, in the ordinary
course of business, potential acquisitions of such businesses, products,
technologies or data.
In addition, Retek's ability to enter into any acquisition of a business or
assets may be limited if HNC completes the distribution. Specifically, pursuant
to the terms of a corporate rights agreement between HNC, and Retek until two
years, and possibly longer, after the distribution of HNC's remaining shares of
Retek's common stock, Retek's ability to issue common stock in connection with
acquisitions, offerings or otherwise will be limited.
FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS
An investment in Retek's common stock involves a high degree of risk. Investors
evaluating Retek and its business should carefully consider the factors
described below and all other information contained in this Quarterly Report on
Form 10-Q before purchasing Retek common stock. Any of the following factors
could materially harm Retek's business, operating results and financial
condition. Additional factors and uncertainties not currently known to Retek or
that it currently considers immaterial could also harm its business, operating
results and financial condition. Investors could lose all or part of their
investment as a result of these factors.
While Retek's management is optimistic about our long-term prospects, the
following factors, among others, could materially harm its business, operating
results and financial condition and should be considered in evaluating Retek.
Industry's rapid pace of change. If Retek is unable to develop new software
solutions or enhancements to its existing products on a timely and
cost-effective basis, or if new products or enhancements do not achieve market
acceptance, its sales may decline. The life cycles of its products are difficult
to predict because the business-to-business electronic commerce market for
Retek's products is new and emerging and is characterized by rapid technological
change and changing customer needs. The introduction of products employing new
technologies could render its existing products or services obsolete and
unmarketable.
In developing new products and services, Retek may:
- fail to respond to technological changes in a timely or cost-effective
manner;
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
- encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or that
shorten the life cycles of its existing products and services;
- experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services; or
- fail to achieve market acceptance of its products and services.
Fluctuations in quarterly operating results. Retek's quarterly operating results
have fluctuated in the past and are expected to continue to fluctuate in the
future. If its quarterly operating results fail to meet analysts' expectations,
the trading price of Retek common stock could decline. In addition, significant
fluctuations in its quarterly operating results may harm business operations by
making it difficult to implement its budget and business plan. Factors, many of
which are outside of Retek's control, which could cause its operating results to
fluctuate include:
- the size and timing of customer orders, which can be affected by
customer budgeting and purchasing cycles;
- the demand for and market acceptance of its software solutions;
- competitors' announcements or introductions of new software solutions,
services or technological innovations;
- its ability to develop, introduce and market new products on a timely
basis;
- customer deferral of material orders in anticipation of new releases or
new product introductions;
- its success in expanding our sales and marketing programs;
- increased sales of Oracle Retail(TM) during its second fiscal quarter
due to seasonally greater sales by Oracle near its fiscal year-end in
May;
- technological changes or problems in computer systems; and
- general economic conditions which may affect its customers' capital
investment levels.
In addition, Retek has incurred, and will continue to incur, compensation
expense in connection with its grant of options under the 1999 Equity Incentive
Plan and the 1999 Directors Stock Option Plan. This expense will be amortized
over the vesting period of these granted options, which is generally four years,
resulting in lower quarterly income.
Quarterly expense levels are relatively fixed and are based, in part, on
expectations as to future revenue. As a result, if revenue levels fall below
Retek's expectations, net income will decrease because only a small portion of
its expenses vary with revenue.
New type of license agreement. Until recently, Retek generally licensed its
products to customers on a perpetual basis, and recognized revenue upon delivery
of the products. In the fourth quarter of 1999, Retek entered into software
licensing agreements with revised terms for the majority of new sales of
software products. Under these agreements, it will provide technical advisory
services after the delivery of the product to help customers exploit the full
value and functionality of its products. Revenue from the sale of software
licenses and technical advisory services under these agreements will be
recognized as the services are performed over the contract period, which Retek
expects will generally be 12 to 24 months, as determined by its customers'
objectives. As Retek begins to recognize license and service revenues over a
period of time, rather than upon the delivery of our products, it will recognize
significantly less revenue, have lower associated margins for several quarters,
as compared to previous quarters, have
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
higher operating expenses as a percentage of total revenues and will incur
operating losses for several quarters.
Early stage of development of the retail.com network. Retek began operation of
the retail.com network on September 26, 1999. Retek incurred, and will continue
to incur, significant infrastructure costs in establishing this network. During
the first quarter of 2000 it invested approximately $10.4 million in retail.com.
Retek will continue to invest in new products and services to be offered over
the retail.com network in the foreseeable future. Broad and timely acceptance of
the retail.com network is subject to a number of significant risks. These risks
include:
- its need to provide value-enhancing software solutions and services on
the retail.com network to achieve widespread commercial acceptance of
this network;
- whether its network will be able to support large numbers of retailers
and the members of their supply chains; and
- its need to significantly expand internal resources and incur associated
expenses to support planned growth of the retail.com network.
Retek has established a subscription pricing model for the software solutions
provided on its retail.com network, whereby members pay an annual fee based on
the number of the member's employees who will have access to the network. As
additional services are added to the retail.com network, Retek will need to
establish pricing models for these new services. If the pricing models for the
retail.com network fail to be competitive and profitable or if they are not
acceptable to customers, its network will not be commercially successful, which
could harm Retek's revenue and business.
Increased operating expenses. Retek intends to significantly increase operating
expenses as it:
- increases research and development activities;
- increases services activities;
- develops and build the retail.com network;
- expands its distribution channels;
- increases sales and marketing activities, including expanding our direct
sales force;
- builds its internal information technology system; and
- operates as an independent public company.
Retek will incur expenses before it generates any revenue from this increase in
spending. If it does not significantly increase revenue from these efforts, its
business and operating results could be seriously harmed.
Competitive pressures. The market for Retek's software solutions is highly
competitive and subject to rapidly changing technology. Competition could
seriously impede its ability to sell additional products and services on terms
favorable Retek. Competitive pressures could reduce its market share or require
it to reduce prices, which would reduce its revenues and/or operating margins.
Many of Retek's competitors have substantially greater financial, marketing or
other resources, and greater name recognition. In addition, these companies may
adopt aggressive pricing policies that could compel Retek to reduce the prices
of its products and services in response. Retek's competitors may also be able
to respond more quickly than Retek can to new or emerging technologies and
changes in customer requirements. Retek's current and potential competitors may:
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
- develop and market new technologies that render its existing or future
products obsolete, unmarketable or less competitive;
- make strategic acquisitions or establish cooperative relationships among
themselves or with other solution providers, which would increase the
ability of their products to address the needs of its customers; and
- establish or strengthen cooperative relationships with its current or
future strategic partners, which would limit its ability to sell
products through these channels.
As a result, Retek may not be able to maintain a competitive position against
current or future competitors.
Loss of key personnel. Retek believes that its future success will depend upon
its ability to attract and retain highly skilled personnel, including John
Buchanan, its chairman and chief executive officer; Gordon Masson, its
president, core applications; John L. Goedert, its senior vice president,
research and development; Gregory A. Effertz, its vice president, finance and
administration and chief financial officer and Jeremy Thomas, its president,
retail.com. Retek currently does not have any key-man life insurance relating to
key personnel, who are employees at-will and are not subject to employment
contracts except for Jeremy Thomas who has a two year employment contract. The
loss of the services of any one or more of these key persons could harm Retek's
ability to grow the business.
Retek also must attract, integrate and retain skilled sales, research and
development, marketing and management personnel. Competition for these types of
employees is intense, particularly in Retek's industry. Failure to hire and
retain qualified personnel would harm its ability to grow the business.
Relationships with third parties who implement Retek's products. Retek relies,
and expects to continue to rely, on a number of third parties to implement its
software solutions at customer sites. If Retek is unable to establish and
maintain effective, long-term relationships with these implementation providers,
or if these providers do not meet the needs or expectations of its customers,
its revenue will be reduced and its customer relationships will be harmed.
Retek's current implementation partners are not contractually required to
continue to help implement its software solutions. If the number of product
implementations continues to increase, Retek will need to develop new
relationships with additional third-party implementation providers to provide
these services.
Retek may be unable to establish or maintain relationships with third parties
having sufficient qualified personnel resources to provide the necessary
implementation services to support its needs. If third-party services are
unavailable, Retek will be required to provide these services internally, which
would significantly limit our ability to meet customers' implementation needs
and would increase its operating expenses and could reduce gross margins. A
number of Retek's competitors, including IBM and SAP, have significantly more
established relationships with these third parties and, as a result, these third
parties may be more likely to recommend competitors' products and services
rather than Retek's. In addition, it cannot control the level and quality of
service provided by its current and future implementation partners.
Intellectual property of third parties. Retek must now, and may in the future
have to, license or otherwise obtain access to the intellectual property of
third parties and related parties, including HNC, Lucent, MicroStrategy and
Oracle. Retek's business would be seriously harmed if the providers from whom it
licenses such software cease to deliver and support reliable products or enhance
their current products. In addition, the third-party software may not continue
to be available to Retek on commercially reasonable terms or prices or at all.
Retek's inability to maintain or obtain this software could result in shipment
delays or reduced sales of its products. Furthermore, it might be forced to
limit the features available in its current or future product offerings. Either
alternative could seriously harm business and operating results.
Confidentiality of intellectual property. Retek depends on its ability to
develop and maintain the proprietary aspects of its technology. To protect
proprietary technology, Retek relies primarily on a combination of contractual
provisions, confidentiality procedures, trade secrets, and copyright and
trademark laws.
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Retek seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. In
addition, Retek cannot assure investors that any of its proprietary rights with
respect to the retail.com network will be viable or of value in the future
because the validity, enforceability and type of protection of proprietary
rights in Internet-related industries are uncertain and still evolving.
Despite Retek's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of its products or obtain and use information that
it regards as proprietary. Policing unauthorized use of Retek's products is
difficult and expensive, and while it is unable to determine the extent to which
piracy of its software products exists, software piracy may be a problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent, as do the laws of the United States. Retek intends to
vigorously protect intellectual property rights through litigation and other
means. However, such litigation can be costly to prosecute and it cannot be
certain that it will be able to enforce its rights or prevent other parties from
developing similar technology, duplicating its products or designing around its
intellectual property.
Potential third party claims that Retek's products infringe on their
intellectual property. There has been a substantial amount of litigation in the
software industry and the Internet industry regarding intellectual property
rights. It is possible that in the future third parties may claim that Retek's
current or potential future products infringe their intellectual property. Retek
expects that software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims as the number of
products and competitors in its industry segment grow and the functionality of
products in different industry segments overlap. Any claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require Retek to enter into royalty or licensing agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to Retek or at all, which could seriously harm its business.
International sales. Since Retek sells products worldwide, its business is
subject to risks associated with doing business internationally. To the extent
that its sales are denominated in foreign currencies, the revenue Retek receives
could be subject to fluctuations in currency exchange rates. If the effective
price of the products Retek sells to its customers were to increase due to
fluctuations in foreign currency exchange rates, demand for Retek's technology
could fall, which would, in turn, reduce its revenue. Retek has not historically
attempted to mitigate the effect that currency fluctuations may have on its
revenue through use of hedging instruments, and it does not currently intend to
do so in the future.
Retek anticipates that revenue from international operations will continue to
represent a substantial portion of its total revenue. Accordingly, its future
results could be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- greater risk of uncollectible accounts;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- international variations in technology standards;
- differing levels of protection of intellectual property; and
- unexpected changes in regulatory requirements.
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RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Acceptance of the Internet. As Retek's software solutions are Internet-based, it
depends on the acceptance of the Internet as a communications protocol. However,
this acceptance may not continue. Rapid growth of the Internet is a recent
phenomenon. The Internet may not be accepted as a viable long-term
communications protocol for businesses for a number of reasons. These reasons
include:
- potentially inadequate development of the necessary communications and
computer network technology, particularly if rapid growth of the
Internet continues;
- delayed development of enabling technologies and performance
improvements;
- increased security risks in transmitting and storing confidential
information over public networks; and
- potentially increased governmental regulation.
Errors and defects in Retek's products. Retek's products are complex and,
accordingly, may contain undetected errors or failures when it first introduces
them or as it releases new versions. This may result in loss of, or delay in,
market acceptance of its products and could cause us to incur significant costs
to correct errors or failures or to pay damages suffered by customers as a
result of such errors or failures. In the past, Retek has discovered software
errors in new releases and new products after their introduction. Retek has
incurred costs during the period required to correct these errors, although to
date such costs, including costs incurred on specific contracts, have not been
material. Retek may in the future discover errors in new releases or new
products after the commencement of commercial shipments.
New accounting standards. Statement of Position 97-2, "Software Revenue
Recognition," was issued in October 1997 by the American Institute of Certified
Public Accountants and amended by Statement of Position 98-4. Retek adopted
Statement of Position 97-2 effective January 1, 1998 and Statement of Position
98-4 effective March 31, 1998. The American Institute of Certified Public
Accountants also issued Statement of Position 98-9, which is effective for
transactions entered into beginning January 1, 2000. Full implementation
guidelines for this standard and additional standards could be issued in the
future. These guidelines and additional standards could lead to unanticipated
changes in Retek's current revenue recognition policies, which could harm our
business, financial condition and operating results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), which is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. This statement establishes a new
model for accounting for derivatives and hedging activities. Under FAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date to
all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption
of FAS 133 is not expected to have a significant impact on Retek's consolidated
financial position or results of operations.
In January 200, the Financial Accounting Standards Board's Emerging Issues Task
Force published Issue No. 00-2 "Accounting for Web Site Development Costs", or
EITF 00-2. EITF 00-2 applies the guidance given in the American Institute of
Certified Public Accountants's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use", or SOP 98-1,
to Web site development costs. Under SOP 98-1, software development costs,
consisting of internally developed software and Web site development costs,
include internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also capitalized. Costs
incurred for maintenance and minor upgrades and enhancements are expensed as
incurred. The estimated useful lives are based on planned or expected
significant modification or replacement of software applications, in response to
the rapid rate of change in the internet industry and technology in
41
<PAGE> 42
RETEK INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
general. Adoption of EITF 00-2 is required for the third quarter of 2000. We
have not yet determined the impact of the adoption of this new accounting
standard on our consolidated financial position, results of operations or
disclosures.
42
<PAGE> 43
HNC SOFTWARE INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices.
INTEREST RATE RISK
The fair value of our investments available for sale at March 31, 2000 was
$128.2 million. The objectives of our investment policy are the safety and
preservation of invested funds, and liquidity of investments that is sufficient
to meet cash flow requirements. Our policy is to place our cash, cash
equivalents, and investments available for sale with high credit quality
financial institutions, commercial companies, and government agencies in order
to limit the amount of credit exposure. Except for certain strategic equity
investments, it is also our policy to maintain concentration limits and to
invest only in "allowable securities" as determined by our management. Our
investment policy also provides that our investment portfolio must not have an
average portfolio maturity of beyond one year and that we must maintain
liquidity positions. Investments are prohibited in certain industries and
speculative activities. Investments must be denominated in U.S. dollars.
FOREIGN CURRENCY EXCHANGE RATE RISK
We mitigate our foreign currency risks principally by contracting primarily in
U.S. dollars and maintaining only nominal foreign currency cash balances.
Working funds necessary to facilitate the short term operations of our
subsidiaries are kept in the local currencies in which they do business, with
excess funds transferred to our offices in the United States for investment. For
the three months ended March 31, 2000, approximately 4.4% of our sales were
denominated in currencies other than our functional currency, which is the U.S.
dollar. These foreign currencies are primarily those of Western Europe, Canada
and Australia.
EQUITY PRICE RISK
We have several equity investments we entered into for strategic business
purposes, and therefore are exposed to direct equity price risk. We mitigate
this risk by monitoring the financial performance of our investments. However,
many of our equity investments are in the common stock of privately held,
non-public companies and thus we may be unable to sell or achieve liquidity in
those investments prior to an adverse change in their values.
IMPACT OF EUROPEAN MONETARY CONVERSION
We are aware of the issues associated with the changes in Europe resulting from
the formation of a European economic and monetary union, or EMU. One change
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the Euro, as of January 1, 1999, at
which date the Euro became a functional legal currency of these countries.
Through December 31, 2002, business in the EMU member states will be conducted
in both the existing national currencies, such as the French franc or the
Deutsche mark, and the Euro. As a result, companies operating or conducting
business in EMU member states will need to ensure that their financial and other
software systems are capable of processing transactions and properly handling
these currencies, including the Euro. We are assessing the impact that
conversion to the Euro will have on our internal systems, the sale of our
solutions and the European and global economies. We will take appropriate
corrective actions based on the results of its assessment. We have not yet
determined the cost related to addressing this issue although it does not expect
these costs to be significant.
43
<PAGE> 44
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.01 eHNC Lease Agreement
27.01 Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K filed dated March 27, 2000 reporting the
acquisition of Onyx Technologies, Inc. under Item 5.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
HNC SOFTWARE INC.
Date: May 15, 2000 By: /s/ Kenneth J. Saunders
-------------------------------------
Kenneth J. Saunders
Chief Financial Officer and Secretary
(for Registrant as duly authorized officer
and as Principal Financial Officer)
/s/ Russell C. Clark
-------------------------------------
Russell C. Clark
Vice President, Corporate Finance and
Principal Accounting Officer
(for Registrant as Principal
Accounting Officer)
45
<PAGE> 46
EXHIBIT INDEX
<TABLE>
Exhibits
--------
<S> <C>
10.01 eHNC Lease Agreement
27.01 Financial Data Schedule
</TABLE>
46
<PAGE> 1
EXHIBIT 10.01
MULTI-TENANT INDUSTRIAL LEASE
(TRIPLE NET)
LANDLORD:
LBA VF-I, LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
TENANT:
EHNC,
A DELAWARE CORPORATION
<PAGE> 2
SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS
This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby
incorporated into and made a part of the attached Multi-Tenant Industrial Lease
which pertains to the Building described in Section 1.4 below. All references in
the Lease to the "Lease" shall include this Summary. All references in the Lease
to any term defined in this Summary shall have the meaning set forth in this
Summary for such term. Any initially capitalized terms used in this Summary and
any initially capitalized terms in the Lease which are not otherwise defined in
this Summary shall have the meaning given to such terms in the Lease. If there
is any inconsistency between this Summary and the Lease, the provisions of the
Lease shall control.
1.1 LANDLORD'S ADDRESS: LBA VF-I, LLC
c/o Layton-Belling & Associates
4440 Von Karman Avenue, Suite 150
Newport Beach, California 92660
Attn: Mr. Steven R. Layton
Telephone: (949) 833-0400
Facsimile: (949) 553-1211
1.2 TENANT'S ADDRESS: Prior to Commencement Date:
eHNC, a Delaware corporation
5930 Cornerstone Court West
San Diego, California 92121
Attn: Anne O'Leary
Telephone:(858) 799-1403
Facsimile:(858) 799-3831
After Commencement Date:
eHNC, a Delaware corporation
9477 Waples Street, Suite 100
San Diego, California 92121
1.3 PROJECT: The industrial development known as Pacific Business Park in the
City of San Diego, County of San Diego, State of California, as shown on the
site plan attached hereto as Exhibit "A". The Project includes all buildings,
improvements and facilities, now or subsequently located within such development
from time to time, including, without limitation, the four (4) buildings
(including the Building) currently located within the Project, as depicted on
the site plan attached hereto as Exhibit "A". The aggregate rentable square feet
of all of the buildings (including the Building) located within the Project is
440,745 rentable square feet. Landlord may, from time to time, expand or reduce
the area comprising the Project.
1.4 BUILDING: A multi-tenant industrial building located in the Project,
containing 84,203 rentable square feet, the address of which is 9477 Waples
Street, San Diego, California 92121.
1.5 PREMISES: Those certain premises within the Building consisting of Suite 100
shown on the floor plan attached hereto as Exhibit "B", containing 38,581
rentable square feet.
1.6 TENANT'S SHARE: Tenant's Share is 8.75%, which is the ratio that the
rentable square footage of the Premises bears to the rentable square footage of
the Project. Accordingly, as more particularly set forth in Section 4 of this
Lease, Tenant shall pay to Landlord 8.75% of the Operating Expenses. Tenant's
Share is subject to adjustment in accordance with Section 1.3 of this Lease.
1.7 COMMENCEMENT DATE: The earlier to occur of (i) the date Tenant commences
business in the Premises or (ii) July 1, 2000; provided, however, subject to
Section 11.1, any delay in delivering the Premises by Landlord (which delay is
not caused by Tenant or any Tenant Parties) shall extend the July 1, 2000 date
by one (1) day for each day that the delivery is so delayed. Landlord will
deliver the Premises to Tenant within three (3) business days following the full
execution and delivery of this Lease.
1.8 TERM: Thirty-Seven (37) months.
1.9 Basic Rent:
<TABLE>
<CAPTION>
Months Basic Rent
------ ----------
<S> <C>
1-12* $48,226.25
13-24 $50,155.30
25-36 $52,161.51
37 $54,247.97
</TABLE>
(i)
<PAGE> 3
*Including any partial month at the beginning of the Term if the Commencement
Date is not the first day of the month.
1.10 PARKING: Four and one-half (4 1/2) uncovered, unreserved parking spaces per
1,000 rentable square feet of the Premises. Parking will be provided at no
additional cost to Tenant, other than Tenant's Share of Operating Expenses. At
Tenant's request, Landlord shall designate up to five (5) of Tenant's parking
spaces for the exclusive use by Tenant or Tenant's visitors in a location that
is mutually acceptable to Landlord and Tenant.
1.11 SECURITY DEPOSIT: $48,226.25.
1.12 PERMITTED USE: The Premises may be used only for general office purposes
and for research and development, warehousing, distribution and any other use
permitted under applicable laws and zoning.
1.13 BROKERS: John Burnham & Company representing Landlord and Irving Hughes
representing Tenant.
1.14 INTEREST RATE: The lesser of: (a) the prime rate announced from time to
time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to
publish such rate, then the rate announced from time to time by the largest (as
measured by deposits) chartered operating bank operating in California, as its
"prime rate" or "reference rate", plus five percent (5%) per annum; or (b) the
maximum rate permitted by law.
1.15 TENANT IMPROVEMENTS: The tenant improvements to be installed in the
Premises, if any, as described in the Tenant Work Letter attached hereto as
Exhibit "C".
1.16 GUARANTOR(s): HNC Software Inc., a Delaware corporation.
(ii)
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Premises................................................................1
2. Term....................................................................1
3. Rent....................................................................2
4. Common Area; Operating Expenses.........................................2
5. Security Deposit........................................................6
6. Use.....................................................................6
7. Payments and Notices....................................................9
8. Brokers.................................................................9
9. Surrender; Holding Over.................................................9
10. Taxes..................................................................10
11. Possession; Condition of Premises; Repairs.............................10
12. Alterations............................................................12
13. Liens..................................................................13
14. Assignment and Subletting..............................................13
15. Entry by Landlord......................................................15
16. Utilities and Services.................................................15
17. Indemnification and Exculpation........................................15
18. Damage or Destruction..................................................16
19. Eminent Domain.........................................................17
20. Tenant's Insurance.....................................................18
21. Landlord's Insurance...................................................19
22. Waivers of Subrogation.................................................19
23. Tenant's Default and Landlord's Remedies...............................19
24. Landlord's Default.....................................................22
25. Subordination..........................................................22
26. Estoppel Certificate...................................................22
27. Intentionally Deleted..................................................22
28. Modification and Cure Rights of Landlord's Mortgagees and Lessors......22
29. Quiet Enjoyment........................................................23
30. Transfer of Landlord's Interest........................................23
31. Limitation on Landlord's Liability.....................................23
32. Miscellaneous..........................................................23
33. Lease Execution........................................................25
34. Waiver of Jury Trial...................................................25
</TABLE>
EXHIBITS
EXHIBIT "A" Project Site Plan
EXHIBIT "B" Floor Plan
EXHIBIT "C" Work Letter Agreement
EXHIBIT "D" Sample Form of Notice of Lease Term Dates
EXHIBIT "E" Rules and Regulations
EXHIBIT "F" Sample Form of Tenant Estoppel Certificate
EXHIBIT "G" Guaranty of Lease
EXHIBIT "H" Tenant Environmental Questionnaire
(i)
<PAGE> 5
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Actual Statement....................................................................5
Additional Allowance........................................................Exhibit C
Applicable Requirements............................................................11
Common Area.........................................................................2
Completion Estimate................................................................16
CPI................................................................................14
Declaration.........................................................................3
Environmental Law...................................................................8
Environmental Permits...............................................................8
Estimate Statement..................................................................5
Extension Option....................................................................1
Fair Market Rental..................................................................1
Force Majeure Delays...............................................................24
Hazardous Materials.................................................................8
Indemnified Claims.................................................................15
Interest............................................................................7
Landlord............................................................................1
Landlord Indemnified Parties........................................................8
Landlord's Broker...................................................................9
Lease...............................................................................1
Operating Expenses..................................................................3
Option Period.......................................................................1
PCBs................................................................................8
Permitted Transfer.................................................................14
Permitted Transferee...............................................................14
Pre-Approved Change................................................................12
Real Property Taxes................................................................10
Reimbursement Requirements..........................................................6
Summary.............................................................................1
Systems............................................................................12
Tenant..............................................................................1
Tenant Change......................................................................12
Tenant Changes.....................................................................12
Tenant Indemnified Parties.........................................................16
Tenant Parties.....................................................................15
Tenant's Broker.....................................................................9
Tenant's Monthly Operating Expense Charge...........................................5
Tenant's Parties....................................................................8
Transfer...........................................................................13
Transfer Date......................................................................14
Transfer Notice....................................................................14
Transferee.........................................................................14
</TABLE>
(ii)
<PAGE> 6
MULTI-TENANT INDUSTRIAL LEASE
This LEASE ("LEASE"), which includes the preceding Summary of Basic Lease
Information and Definitions ("SUMMARY") attached hereto and incorporated herein
by this reference, is made as of the _____ day of April, 2000, by and between
LBA VF-I, LLC, a California limited liability company ("LANDLORD"), and eHNC, a
Delaware corporation ("TENANT").
1. PREMISES.
1.1 PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises upon and subject to the terms, covenants and conditions
contained in this Lease to be performed by each party.
1.2 LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the
Premises is not interfered with in an unreasonable manner, Landlord reserves the
right from time to time to install, use, maintain, repair, replace and relocate
pipes, ducts, conduits, wires and appurtenant meters and equipment installed by
Landlord above the ceiling surfaces, below the floor surfaces and within the
walls of the Building and the Premises.
1.3 REMEASUREMENT. If a physical change occurs with respect to the Building or
any other building(s) in the Project, Landlord's architect may, at Landlord's
option, determine and redetermine the actual rentable square footage of the
Building and other building(s) in the Project, and thereupon Tenant's Share and
any other terms which vary based on the rentable square footage of the Building
and/or other buildings in the Project, will be adjusted accordingly.
2. TERM.
2.1 TERM; NOTICE OF LEASE DATES. The Term of this Lease shall be for the period
designated in Section 1.8 of the Summary commencing on the Commencement Date,
and ending on the expiration of such period, unless the Term is sooner
terminated or extended as provided in this Lease. Notwithstanding the foregoing,
if the Commencement Date falls on any day other than the first day of a calendar
month then the term of this Lease will be measured from the first day of the
month following the month in which the Commencement Date occurs. Within ten (10)
days after Landlord's written request, Tenant shall execute a written
confirmation of the Commencement Date and expiration date of the Term in the
form of the Notice of Lease Term Dates attached hereto as Exhibit "D". The
Notice of Lease Term Dates shall be binding upon Tenant unless Tenant objects
thereto in writing within such ten (10) day period.
2.2 EARLY OCCUPANCY. If Tenant occupies the Premises prior to the Commencement
Date, such early occupancy shall be subject to all of the terms and conditions
of this Lease, including, without limitation, the provisions of Sections 17, 20
and 22 except that provided Tenant does not commence the operation of business
from the Premises, Tenant will not be obligated to pay rent during the period of
such early occupancy.
2.3 OPTION TO EXTEND. Tenant shall have one (1) option (the "EXTENSION OPTION")
to extend the Term for a period (the "OPTION PERIOD") of five (5) years, upon
the same terms and conditions previously applicable, except for the grant of any
exercised Extension Option and Basic Rent (which shall be determined as set
forth below). The Extension Option may be validly exercised only by notice in
writing received by Landlord not later than two hundred seventy (270) calendar
days prior to commencement of the Option Period; provided, however, that the
Extension Option may be validly exercised only if no Tenant default exists as of
the date of exercise and, at Landlord's option, as of the commencement of the
Option Period. If Tenant does not exercise the Extension Option during the
exercise period set forth above in strict accordance with the provisions hereof,
the Extension Option shall forever terminate and be of no further force or
effect. The Extension Option is personal to the original Tenant, may not be
exercised by any person or entity other than the original Tenant and shall
become null and void if the original Tenant assigns its interest in this Lease
or sublets more than one-half of the Premises, unless such assignment or
sublease is to Permitted Transferee.
Basic Rent during the Option Period shall be equal to Fair Market Rental as of
the commencement of the Option Period. For purposes hereof, "FAIR MARKET RENTAL"
shall mean the base rent that would be payable during the Option Period to a
willing landlord by a willing non-renewing tenant having a similar financial
responsibility, credit rating and capitalization as Tenant then has, taking into
account all other relevant factors for like and comparable space in the Sorrento
Mesa area of San Diego, improved with typical tenant improvements, and having
typical rent increases and commissions. At least eight (8) months prior to the
Option Period, Landlord shall notify Tenant of the Fair Market Rental as
determined by Landlord. Any dispute between the parties hereto with respect to
the amount so determined shall be resolved by arbitration, as set forth below;
provided, however, that there shall be deemed not to be such a dispute unless
Tenant notifies Landlord thereof in writing within one (1) month after Landlord
so notifies Tenant of the Fair Market Rental and Tenant sets forth in such
notice Tenant's determination of Fair Market Rental. If, in the event of a
dispute, the arbitrators have not determined the Fair Market Rental by the
commencement of the Option Period, Tenant shall pay as Basic Rent the amount
determined by Landlord until such time as the Fair Market Rental has been
determined by arbitration, whereupon Tenant
<PAGE> 7
shall pay any additional amount due to Landlord based upon such subsequent
determination of Fair Market Rental. If the Basic Rent so paid by Tenant is
higher than that ultimately determined by the arbitration process, then Landlord
shall reimburse such difference to Tenant.
If Tenant timely notifies Landlord in writing of Tenant's dispute regarding
Landlord's determination of the Fair Market Rental, then Fair Market Rental
shall be determined as follows. Landlord and Tenant shall each appoint one
arbitrator who shall by profession be a real estate appraiser active over the
five (5) year period ending on the date of such appointment in the appraisal of
commercial properties in the Sorrento Mesa area of San Diego and who shall not
have been employed or engaged by either party during said five (5) year period.
Each such arbitrator shall be appointed within fifteen (15) days after Tenant
notifies Landlord of Tenant's dispute of Landlord's determination of Fair Market
Rental. The two arbitrators so appointed shall, within fifteen (15) days of the
date of the appointment of the last appointed arbitrator, agree upon and appoint
a third arbitrator who shall be qualified under the same criteria set forth
above. The three arbitrators shall, within thirty (30) days of the appointment
of the third arbitrator, reach a decision as to whether the parties shall use
Landlord's or Tenant's submitted Fair Market Rental for the Premises, and shall
notify Landlord and Tenant thereof. Such decision shall be based upon the
criteria and variables set forth above. The new Basic Rent shall thereafter be
equal to the Fair Market Rental of the Premises so selected by the arbitrators.
The decision of the majority of the three arbitrators shall be binding upon
Landlord and Tenant. If either Landlord or Tenant fails to appoint an arbitrator
within the time period specified hereinabove, the arbitrator appointed by one of
them shall reach a decision, notify Landlord and Tenant thereof, and such
arbitrator's decision shall be binding upon Landlord and Tenant. If the two
arbitrators fail to agree upon and appoint a third arbitrator, both arbitrators
shall be dismissed and the matter to be decided shall be forthwith submitted to
arbitration under the provisions of the American Arbitration Association in
accordance with the method described above. The cost of arbitration shall be
paid by Landlord and Tenant equally.
3. RENT.
3.1 BASIC RENT. Tenant agrees to pay Landlord, as basic rent for the Premises,
the Basic Rent designated in Section 1.9 of the Summary. The Basic Rent shall be
paid by Tenant in advance on the first day of each and every calendar month
during the Term, except that the first full month's Basic Rent shall be paid
upon Tenant's execution and delivery of this Lease to Landlord. Basic Rent for
any partial month shall be prorated in the proportion that the number of days
this Lease is in effect during such month bears to the actual number of days in
such month.
3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under this Lease
in addition to the Basic Rent described in Section 3.1 above shall be considered
additional rent for the purposes of this Lease, and the word "rent" in this
Lease shall include such additional rent unless the context specifically or
clearly implies that only the Basic Rent is referenced. The Basic Rent and
additional rent shall be paid to Landlord as provided in Section 7, without any
prior demand therefor and without any deduction or offset, in lawful money of
the United States of America.
3.3 LATE PAYMENTS. Late payments of Basic Rent and/or any item of additional
rent will be subject to interest and a late charge as provided in Section 23.7
below.
3.4 TRIPLE-NET LEASE. All rent shall be absolutely net to Landlord so that this
Lease shall yield net to Landlord, the rent to be paid each month during the
Term of this Lease. Accordingly, except as specifically set forth herein, all
costs, expenses and obligations of every kind or nature whatsoever relating to
the Premises, and Tenant's Share of all costs, expenses and obligations of every
kind or nature whatsoever relating to the remaining portion of the Project,
which may arise or become due during the Term of this Lease shall be paid by
Tenant. Nothing herein contained shall be deemed to require Tenant to pay or
discharge any liens or mortgages of any character whatsoever which may exist or
hereafter be placed upon the Project by an affirmative act or omission of
Landlord.
4. COMMON AREA; OPERATING EXPENSES.
4.1 DEFINITION OF COMMON AREA. The term "COMMON AREA" means all areas and the
improvements thereon within the exterior boundaries of the Project now or later
made available for the general use of Landlord, Tenant and other persons
entitled to occupy floor area in the Project and their customers, including,
without limitation, the parking facilities of the Project, loading and unloading
areas, trash areas, roadways, sidewalks, walkways, parkways, driveways,
landscaped areas, and similar areas and facilities situated within the Project
which are not reserved for the exclusive use of any Project occupants. Common
Area also shall include, without limitation, the common entrances, lobbies,
restrooms on multi-tenant floors, elevators, stairways and accessways, loading
docks, ramps, drives and platforms and any passageways and serviceways thereto
to the extent not exclusively serving another tenant or contained within another
tenant's premises, and the common pipes, conduits, wires and appurtenant
equipment serving the Premises. Common Area shall not include (i) the entryway
to a tenant's premises, (ii) any improvements installed by a tenant outside of
its premises, whether with or without Landlord's knowledge or consent, or (iii)
any areas or facilities that are included in the description of premises leased
to a tenant.
4.2 MAINTENANCE AND USE OF COMMON AREA. Landlord shall maintain the Common Area
in good condition and repair. If any owner or tenant of any portion of the
Project maintains Common Area located upon its parcel or demised premises
(Landlord shall have the right in its sole discretion to allow any
-2-
<PAGE> 8
purchaser or tenant to so maintain Common Area located upon its parcel or
demised premises and to be excluded from participation in the payment of
Operating Expenses as provided below), Landlord shall not have any
responsibility for the maintenance of that portion of the Common Area and Tenant
shall have no claims against Landlord arising out of any failure of such owner
or tenant to so maintain its portion of the Common Area. The use and occupancy
by Tenant of the Premises shall include the right to use the Common Area (except
areas used in the maintenance or operation of the Project), in common with
Landlord and other tenants of the Project and their customers and invitees,
subject to (i) any covenants, conditions and restrictions now or hereafter of
record (collectively the "DECLARATION"), and (ii) such reasonable,
non-discriminatory rules and regulations concerning the Project as may be
established by Landlord from time to time including, without limitation, the
Rules and Regulations attached hereto as Exhibit "E". Tenant agrees to promptly
comply with all such rules and regulations and any reasonable,
non-discriminatory amendments thereto upon receipt of written notice from
Landlord.
4.3 CONTROL OF AND CHANGES TO COMMON AREA. Landlord shall have the sole and
exclusive control of the Common Area, as well as the right to make reasonable
changes to the Common Area. Provided Landlord does not materially interfere with
Tenant's use of and access to the Premises, Landlord's rights shall include, but
not be limited to, the right to (a) restrain the use of the Common Area by
unauthorized persons; (b) cause Tenant to remove or restrain persons from any
unauthorized use of the Common Area if they are using the Common Area by reason
of Tenant's presence in the Project; (c) utilize from time to time any portion
of the Common Area for promotional, entertainment, and related matters; (d)
temporarily close any portion of the Common Area for repairs, improvements or
alterations, to discourage non-customer use, to prevent public dedication or an
easement by prescription from arising, or for any other reason deemed
appropriate in Landlord's judgment; and (e) reasonably change the shape and size
of the Common Area, add, eliminate or change the location of improvements to the
Common Area, including, without limitation, buildings, lighting, parking areas,
landscaped areas, roadways, walkways, drive aisles and curb cuts.
4.4 OPERATING EXPENSES. Throughout the Term of this Lease, commencing on the
Commencement Date, Tenant agrees to pay Landlord as additional rent in
accordance with the terms of this Section 4, Tenant's Share of Operating
Expenses. As used in this Lease, the term "OPERATING EXPENSES" shall consist of
all costs and expenses for the ownership, operation, maintenance, repair and
replacement of the Project as determined by Landlord utilizing standard
accounting practices and calculated assuming the Project is one hundred percent
(100%) occupied. Operating Expenses shall include the following costs by way of
illustration but not limitation: (i) Real Property Taxes; (ii) any and all
assessments under any covenants, conditions and restrictions affecting the
Project; (iii) water, sewer and other utility charges; (iv) costs of insurance
obtained by Landlord pursuant to Section 21 of this Lease; (v) waste disposal
and janitorial services; (vi) security; (vii) labor; (viii) management costs
including, without limitation: (A) wages, salaries, pension payments, fringe
benefits, uniforms and dry-cleaning thereof (and payroll taxes, insurance and
similar charges ) of property management employees, and (B) management office
rental, supplies, equipment and related operating expenses and commercially
reasonable management/administrative fees; (ix) supplies, materials, equipment
and tools including rental of personal property; (x) repair and maintenance of
all portions of the buildings within the Project, including the plumbing,
heating, ventilating, air-conditioning and electrical systems installed or
furnished by Landlord; (xi) maintenance, sweeping, repairs, resurfacing, and
upkeep of all parking and other Common Areas; (xii) amortization on a straight
line basis over the useful life (together with interest at the Interest Rate on
the unamortized balance) of all capital expenditures which are: (A) reasonably
intended to produce a reduction in operating charges or energy consumption; or
(B) required under any governmental law or regulation that was not applicable to
the Project as of the date hereof; or (C) for replacement or restoration of any
Project equipment and/or improvements needed to operate and/or maintain the
Project at the same quality levels as prior to the replacement or restoration;
(xiii) gardening and landscaping; (xiv) maintenance of signs (other than signs
of tenants of the Project); (xv) personal property taxes levied on or
attributable to personal property used in connection with the Common Areas;
(xvi) reasonable accounting, audit, verification, legal and other consulting
fees; and (xvii) any other costs and expenses of repairs, maintenance, painting,
lighting, cleaning, and similar items, including appropriate reserves.
Notwithstanding the foregoing, Operating Expenses shall not include (i)
management costs in excess of four percent (4%) of all rent received by Landlord
from all tenants leasing space in the Project, (ii) repair and maintenance of
the structural walls, foundations, concrete subflooring, structural elements of
the roof or underground utilities installed by Landlord in any of the buildings
within the Project and (iii) any of the following:
(A) marketing costs, costs of leasing commissions, attorneys'
fees and other costs and expenses incurred in connection with
negotiations or disputes with prospective tenants or other occupants of
the Project;
(B) costs incurred by Landlord in connection with repairs,
capital additions, alterations or replacements made or incurred to
rectify or correct defects in design, materials or workmanship in
connection with the Building shell and other structural portions of the
Building and the other building(s) located in the Project;
(C) costs (including permit, license and inspection costs)
incurred in renovating or otherwise improving, decorating or
redecorating rentable space in the Building or Project for prospective
tenants;
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(D) cost of utilities or services sold to Tenant or others for
which Landlord is entitled to and actually receives reimbursement (other
than through any operating cost reimbursement provision identical or
substantially similar to the provisions set forth in this Lease);
(E) except as otherwise specifically provided in Section
4.4(xii) above, costs incurred by Landlord for capital repairs,
improvements, equipment and alterations to the Project which are
considered capital improvements and replacements under generally
accepted accounting principles, consistently applied;
(F) costs incurred due to the violation by Landlord of the
terms, covenants and conditions of any lease covering space in the
Project;
(G) costs of general overhead and general administrative
expenses, not including management fees specifically provided in Section
4.4(viii) above;
(H) costs of any compensation and employee benefits paid to
clerks, attendants or other persons in a commercial concession operated
by Landlord;
(I) marketing costs, legal fees, space planner's fees, and
advertising and promotional expenses and brokerage fees incurred in
connection with the original development, subsequent improvement, or
original or future leasing of the Project;
(J) costs of electrical power for which Tenant directly
contracts with and pays a local public service company
(K) any bad debt loss, rent loss, or reserves for bad debts or
rent loss;
(L) costs associated with the operation of the business of the
entity which constitutes Landlord, as the same are distinguished from
the costs of operation of the Project (which shall specifically include,
but not be limited to, accounting costs associated with the operation of
the Project, costs of accounting and legal matters, costs of defending
any lawsuits with any mortgagee (except to the extent that the actions
of Tenant may be in issue), costs of selling, syndicating, financing,
mortgaging or hypothecating any of the Landlord's interest in the
Project, and costs incurred in connection with any disputes between
Landlord and its employees, between Landlord and Project management, or
between Landlord and other tenants or occupants, and Landlord's general
corporate overhead and general and administrative expenses which are not
specifically included in Section 4.4 (viii) above);
(M) the wages and benefits of any employee who does not devote
substantially all of his or her employed time to the Project unless such
wages and benefits are prorated to reflect time spent on operating and
managing the Project vis-a-vis time spent on matters unrelated to
operating and managing the Project; provided, that in no event shall
Operating Expenses for purposes of this Lease include wages and/or
benefits attributable to personnel above the level of Project manager or
Project engineer;
(N) interest, charges and fees incurred on debt, payments on
mortgages and amounts paid as ground rental for the real property
underlying the Project by Landlord;
(O) costs for acquiring sculpture, paintings, fountains or other
objects of art;
(P) any costs expressly excluded from Operating Expenses
elsewhere in this Lease;
(Q) costs arising from Landlord's charitable or political
contributions;
(R) any gifts provided to any entity whatsoever, including, but
not limited to, Tenant, other tenants, employees, vendors, contractors,
prospective tenants and agents;
(S) any costs covered by any warranty, rebate, guarantee or
service contract which are actually collected by Landlord (which shall
not prohibit Landlord from passing through the costs of any such service
contract if otherwise includable in Operating Expenses);
(T) interest, late charges and tax penalties incurred as a
result of Landlord's gross negligence, inability or unwillingness to
make payments or file returns when due;
(U) all items and services for which Tenant reimburses Landlord;
(V) any expense resulting from the gross negligence of Landlord,
its agents, contractors or employees, or, to the extent Landlord is
entitled to reimbursement for such costs, to remedy damage caused by or
resulting from the gross negligence of any tenants in the Project,
including their agents, contractors and employees;
(W) reserves for anticipated future expenses;
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(X) costs or repairs or other work occasioned by fire, casualty
or other risk covered by insurance maintained (or obligated to be
maintained pursuant to Article 20 of this Lease) by Landlord;
(Y) reserves for depreciation, amortization and other expenses;
(Z) costs occasioned by the willful misconduct of Landlord or
penalties incurred as a result of violations of applicable law by
Landlord;
(AA) fines or penalties incurred by Landlord due to Landlord's
violations of any federal, state or local law, statute or ordinance, or
any rule, regulation, judgment or decree of any governmental rule or
authority;
(BB) any costs representing an amount paid to a person, firm,
corporation or other entity related to Landlord which is in excess of
the amount which would have been paid in the absence of such
relationship;
(CC) rentals for items (except when needed in connection with
normal repairs and maintenance of permanent systems) which if purchased,
rather than rented, would constitute a capital item which is
specifically excluded in this Lease (excluding, however, equipment not
affixed to the Building which is used in providing janitorial or similar
services);
(DD) advertising and promotional expenditures, and costs of
signs in or on the Building identifying the owner of the Building; and
(EE) costs of the initial development or construction within the
Project (including, without limitation, such development or construction
costs incurred to comply with any CC&Rs, development permit, design
permit or use permit issued for the Project).
4.5 TENANT'S MONTHLY OPERATING EXPENSE CHARGE. From and after the Commencement
Date, Tenant shall pay to Landlord, on the first day of each calendar month
during the Term of this Lease, Tenant's Share of an amount estimated by Landlord
to be the Monthly Operating Expenses for the Project for that month ("TENANT'S
MONTHLY OPERATING EXPENSE Charge").
4.6 ESTIMATE STATEMENT. Prior to the Commencement Date and on or about March 1st
of each subsequent calendar year during the Term of this Lease, Landlord will
endeavor to deliver to Tenant a statement ("ESTIMATE STATEMENT") wherein
Landlord will estimate both the Operating Expenses and Tenant's Monthly
Operating Expense Charge for the then current calendar year. Tenant agrees to
pay Landlord, as additional rent, Tenant's estimated Monthly Operating Expense
Charge each month thereafter, beginning with the next installment of rent due,
until such time as Landlord issues a revised Estimate Statement or the Estimate
Statement for the succeeding calendar year; except that, concurrently with the
regular monthly rent payment next due following the receipt of each such
Estimate Statement, Tenant agrees to pay Landlord an amount equal to one monthly
installment of Tenant's estimated Monthly Operating Expense Charge (less any
applicable Operating Expenses already paid) multiplied by the number of months
from January, in the current calendar year, to the month of such rent payment
next due, all months inclusive. If at any time during the Term of this Lease,
but not more often than quarterly, Landlord reasonably determines that Tenant's
Share of Operating Expenses for the current calendar year will be greater than
the amount set forth in the then current Estimate Statement, Landlord may issue
a revised Estimate Statement and Tenant agrees to pay Landlord, within ten (10)
days of receipt of the revised Estimate Statement, the difference between the
amount owed by Tenant under such revised Estimate Statement and the amount owed
by Tenant under the original Estimate Statement for the portion of the then
current calendar year which has expired. Thereafter, Tenant agrees to pay
Tenant's Monthly Operating Expense Charge based on such revised Estimate
Statement until Tenant receives the next calendar year's Estimate Statement or a
new revised Estimate Statement for the current calendar year.
4.7 ACTUAL STATEMENT. By March 1st of each calendar year during the Term of this
Lease, Landlord shall endeavor to deliver to Tenant a statement ("ACTUAL
STATEMENT") which states Tenant's Share of the actual Operating Expenses for the
preceding calendar year. If the Actual Statement reveals that Tenant's Share of
the actual Operating Expenses is more than the total Additional Rent paid by
Tenant for Operating Expenses on account of the preceding calendar year, Tenant
agrees to pay Landlord the difference in a lump sum within thirty (30) days of
receipt of the Actual Statement. If the Actual Statement reveals that Tenant's
Share of the actual Operating Expenses is less than the Additional Rent paid by
Tenant for Operating Expenses on account of the preceding calendar year,
Landlord will credit any overpayment toward the next monthly installment(s) of
Tenant's Share of the Operating Expenses due under this Lease. Such obligation
will be a continuing one which will survive the expiration or earlier
termination of this Lease.
4.8 MISCELLANEOUS. Any delay or failure by Landlord in delivering any Estimate
Statement or Actual Statement pursuant to this Section 4 will not constitute a
waiver of its right to require an increase in additional rent for Operating
Expenses nor will it relieve Tenant of its obligations pursuant to this Section
4, except that Tenant will not be obligated to make any payments based on such
Estimate Statement or Actual Statement until ten (10) days after receipt of such
Estimate Statement or Actual Statement. If Tenant does not object to any
Estimate Statement or Actual Statement within thirty (30) days after Tenant
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receives any such statement, such statement will be deemed final and binding on
Tenant. Even though the Term has expired and Tenant has vacated the Premises,
when the final determination is made of Tenant's Share of the actual Operating
Expenses for the year in which this Lease terminates, Tenant agrees to promptly
pay any increase due over the estimated expenses paid and, conversely, any
overpayment made in the event said expenses decrease shall promptly be rebated
by Landlord to Tenant. Such obligation will be a continuing one which will
survive the expiration or termination of this Lease. Prior to the expiration or
sooner termination of the Lease Term and Landlord's acceptance of Tenant's
surrender of the Premises, Landlord will have the right to estimate the actual
Operating Expenses for the then current Lease Year and to collect from Tenant
prior to Tenant's surrender of the Premises, Tenant's Share of any excess of
such actual Operating Expenses over the estimated Operating Expenses paid by
Tenant in such Lease Year.
5. SECURITY DEPOSIT. Concurrently with Tenant's execution and delivery of this
Lease to Landlord, Tenant shall deposit with Landlord the Security Deposit
designated in Section 1.11 of the Summary. The Security Deposit shall be held by
Landlord as security for the full and faithful performance by Tenant of all of
the terms, covenants and conditions of this Lease to be performed by Tenant
during the Term. The Security Deposit is not, and may not be construed by Tenant
to constitute, rent for the last month or any portion thereof. If Tenant
defaults with respect to any of its obligations under this Lease, Landlord may
(but shall not be required to) use, apply or retain all or any part of the
Security Deposit for the payment of any rent or any other sum in default, or for
the payment of any other amount, loss or damage which Landlord may spend, incur
or suffer by reason of Tenant's default. If any portion of the Security Deposit
is so used or applied, Tenant shall, within ten (10) days after demand therefor,
deposit cash with Landlord in an amount sufficient to restore the Security
Deposit to its original amount. Landlord shall not be required to keep the
Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on the Security Deposit. Provided Tenant is not then in
default and no event exists that with the passage of time or the giving of
notice, or both, would constitute a default under this Lease, the Security
Deposit or any balance thereof shall be returned to Tenant within two (2) weeks
following the expiration of the Lease term. If Landlord sells its interest in
the Building during the Term, Landlord shall deposit with the purchaser the
Security Deposit (or balance thereof), and, upon such sale, Landlord shall be
discharged from any further liability with respect to the Security Deposit. If
Basic Rent increases during the Term, Tenant shall, within ten (10) days
following written request from Landlord, deposit additional sums with Landlord
so that the total amount of the Security Deposit shall at all times bear the
same proportion to the increased Basic Rent as the initial Security Deposit bore
to the initial Basic Rent.
6. USE.
6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use
specified in Section 1.12 of the Summary, and shall not use or permit the
Premises to be used for any other use or purpose whatsoever. Tenant shall
observe and comply with the "Rules and Regulations" attached hereto as Exhibit
"E", and all reasonable non-discriminatory modifications thereof and additions
thereto from time to time put into effect and furnished to Tenant by Landlord.
Landlord shall endeavor to enforce the Rules and Regulations, but shall have no
liability to Tenant for the violation or non-performance by any other tenant or
occupant of the Project of any such Rules and Regulations. Tenant shall, at its
sole cost and expense except as set forth below, observe and comply with all
requirements of any board of fire underwriters or similar body relating to the
Premises, all recorded covenants, conditions and restrictions now or hereafter
affecting the Premises and all laws, statutes, codes, rules and regulations now
or hereafter in force relating to or affecting the condition, use, occupancy,
alteration or improvement of the Premises (including, without limitation, the
provisions of Title III of the Americans with Disabilities Act of 1990 as it
pertains to Tenant's use, occupancy, improvement and alteration of the
Premises), whether, except as otherwise provided herein, structural or
nonstructural, including unforeseen and/or extraordinary alterations and/or
improvements to the Premises and regardless of the period of time remaining in
the Lease Term. Tenant shall not use or allow the Premises to be used (a) in
violation of the Declaration or any other recorded covenants, conditions and
restrictions affecting the Project or of any law or governmental rule or
regulation, or of any certificate of occupancy issued for the Premises, the
Building and/or the Project, or (b) for any improper, immoral, unlawful or
reasonably objectionable purpose. Tenant shall not do or permit to be done
anything which will obstruct or interfere with the rights of other tenants or
occupants of the Project, or injure or annoy them. Tenant shall not cause,
maintain or permit any nuisance in, on or about the Premises, the Building or
the Project, nor commit or suffer to be committed any waste in, on or about the
Premises. Tenant and Tenant's employees and agents shall not solicit business in
the Common Area, nor shall Tenant distribute any handbills or other advertising
matter in the Common Area.
Notwithstanding the foregoing, if Tenant, in connection with its obligations
under this Section 6.1, is required to make any alterations or improvements to
the Premises and such alterations or improvements (i) are not required as a
result of the specific or unique use or alteration of the Premises by Tenant,
(ii) would normally be capitalized under generally accepted accounting
principles, (iii) will cost in excess of Twenty-Five Thousand Dollars
($25,000.00) and (iv) the useful life of the alteration or improvement (as such
useful life is based on the estimated actual life pursuant to generally accepted
accounting practices) will extend beyond the Term (collectively, the
"REIMBURSEMENT REQUIREMENTS"), then Landlord shall reimburse Tenant for
Landlord's pro rata share of the cost thereof within thirty (30) days following
the expiration or sooner termination of this Lease, provided, however, Landlord
shall have no such reimbursement obligation if this Lease terminates as a result
of an uncured default by Tenant. Landlord's pro rata share shall be a fraction,
the numerator of which is the number of months remaining on the useful life of
the alteration or improvement after the expiration or sooner termination of this
Lease; and the
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denominator of which is the total number of months of the useful life of the
alteration or improvement. As a condition precedent to Landlord's obligation to
reimburse Tenant for its pro rata share, Tenant shall first obtain Landlord's
prior written approval of the contractor, the plans and specifications, the cost
of any such alteration or improvement and the useful life of such alteration or
improvement, which approval shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, Landlord may elect, in its sole discretion, to
make any required alteration or improvement meeting the Reimbursement
Requirements and charge Tenant, as additional rent, Tenant's pro rata share of
the cost of such alteration or improvement plus Interest, which pro rata share
shall be a fraction, the numerator of which shall be one (1) and the denominator
of which shall be the total number of months of the useful life of the
alteration or improvement. Tenant shall pay such additional rent to Landlord on
the first day of each calendar month during the Term of this Lease (as the same
may be extended pursuant to the terms of this Lease). For purposes of this
Section 6.1, the term "INTEREST" shall mean the prime rate announced from time
to time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to
publish such rate, then the rate announced from time to time by the largest (as
measured by deposits) chartered operating bank operating in California, as its
"prime rate" or "reference rate".
6.2 PARKING.
6.2.1 TENANT'S PARKING PRIVILEGES. During the Term of this Lease, Landlord shall
lease to Tenant, and Tenant shall lease from Landlord, the number of parking
privileges specified in Section 1.10 of the Summary hereof for use by Tenant's
employees in the common parking areas for the Building within the Project, as
designated by Landlord from time to time. Landlord shall at all times have the
right to establish and modify the nature and extent of the parking areas for the
Building and Project (including whether such areas shall be surface, underground
and/or other structures) as long as Tenant is provided the number of parking
privileges designated in Section 1.10 of the Summary. In addition, Landlord may,
in its sole discretion, assign any unreserved and unassigned parking privileges
and/or make all or a portion of such privileges reserved; provided, that the
number of parking privileges that Tenant is entitled to pursuant to Section 1.10
of the Summary is not reduced.
6.2.2 PARKING RULES. The use of the parking areas shall be subject to the
Parking Rules and Regulations contained in Exhibit "E" attached hereto and any
other reasonable, non-discriminatory rules and regulations adopted by Landlord
and/or Landlord's parking operators from time to time, including any system for
controlled ingress and egress and charging visitors and invitees, with
appropriate provision for validation of such charges. Tenant shall not use more
parking privileges than its allotment and shall not use any parking spaces
specifically assigned by Landlord to other tenants of the Building or Project or
for such other uses as visitor parking. Tenant's parking privileges shall be
used only for parking by vehicles no larger than normally sized passenger
automobiles or pick-up trucks. Tenant shall not permit or allow any vehicles
that belong to or are controlled by Tenant or Tenant's employees, suppliers,
shippers, customers or invitees to be loaded, unloaded, or parked in areas other
than those designated by Landlord for such activities. If Tenant permits or
allows any of the prohibited activities described herein, then Landlord shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge the cost
thereof to Tenant, which cost shall be immediately payable by Tenant upon demand
by Landlord.
6.3 SIGNS, AWNINGS AND CANOPIES. Tenant will not place or suffer to be placed or
maintained on the roof or on any exterior door, wall or window (or within 48
inches of any window) of the Premises any sign, awning or canopy, or advertising
matter on the glass of any window or door of the Premises without Landlord's
prior written consent. Notwithstanding the foregoing, at Tenant's sole cost and
expense, Tenant shall have the right to install (i) one (1) Building top sign on
the exterior of the Building, (ii) one (1) sign adjacent to the main entrance to
the Premises and (iii) to the extent Landlord constructs a monument for the
Project or the Building, a sign on the monument sign; provided Tenant complies
with any covenants of record, obtains approval from all governmental authorities
having jurisdiction over the Premises and obtains approval from Landlord as to
the size, location, fabrication, style and content of such signage, which
approval shall not be unreasonably withheld. Tenant agrees to maintain any such
sign, awning, canopy, decoration, lettering or advertising matter as may be
approved by Landlord in good condition and repair at all times. At the
expiration or earlier termination of this Lease, Tenant shall remove all signs,
awnings, canopies, decorations, lettering and advertising and shall repair any
damage to the Building, the Premises or the Project resulting therefrom all at
Tenant's sole cost and expense. If Tenant fails to maintain any such approved
sign, awning, decoration, lettering, or advertising after ten (10) days' written
notice of such failure, Landlord may do so and Tenant shall reimburse Landlord
for such cost plus a twenty percent (20%) overhead fee. If, without Landlord's
prior written consent, Tenant installs any sign, awning, decoration, lettering
or advertising, or fails to remove any such item(s) at the expiration or earlier
termination of this Lease, Landlord may have such item(s) removed and stored and
may repair any damage to the Building, the Premises or the Project at Tenant's
expense. The removal, repair and/or storage costs shall bear interest until paid
at the Interest Rate.
6.4 HAZARDOUS MATERIALS.
6.4.1 TENANT'S OBLIGATIONS. Tenant will (i) obtain and maintain in full force
and effect all Environmental Permits (as defined below) that may be required
from time to time under any Environmental Laws (as defined below) applicable to
Tenant or the Premises and (ii) be and remain in compliance with all terms and
conditions of all such Environmental Permits and with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in all Environmental Laws applicable to
Tenant or the Premises. As used in this Lease, the
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term "ENVIRONMENTAL LAW" means any past, present or future federal, state or
local statutory or common law, or any regulation, ordinance, code, plan, order,
permit, grant, franchise, concession, restriction or agreement issued, entered,
promulgated or approved thereunder, relating to (a) the environment, human
health or safety, including, without limitation, emissions, discharges, releases
or threatened releases of Hazardous Materials (as defined below) into the
environment (including, without limitation, air, surface water, groundwater or
land), or (b) the manufacture, generation, refining, processing, distribution,
use, sale, treatment, receipt, storage, disposal, transport, arranging for
transport, or handling of Hazardous Materials. "ENVIRONMENTAL PERMITS" means,
collectively, any and all permits, consents, licenses, approvals and
registrations of any nature at any time required pursuant to, or in order to
comply with, any Environmental Law. Except for ordinary and general office
supplies, such as copier toner, liquid paper, glue, ink and common household
cleaning materials used and stored in compliance with all Environmental Laws
(some or all of which may constitute Hazardous Materials as defined below),
Tenant agrees not to cause or permit any Hazardous Materials to be brought upon,
stored, used, handled, generated, released or disposed of on, in, under or about
the Premises, the Building, the Common Areas or any other portion of the Project
by Tenant, its agents, employees, subtenants, assignees, licensees, contractors
or invitees (collectively, "TENANT'S PARTIES"), without the prior written
consent of Landlord, which consent Landlord may withhold in its sole and
absolute discretion. Concurrently with the execution of this Lease, Tenant
agrees to complete and deliver to Landlord an Environmental Questionnaire in the
form of Exhibit "H" attached hereto. Upon the expiration or earlier termination
of this Lease, Tenant agrees to promptly remove from the Premises, the Building
and the Project, at its sole cost and expense, any and all Hazardous Materials,
including any equipment or systems containing Hazardous Materials which are
installed, brought upon, stored, used, generated or released upon, in, under or
about the Premises, the Building and/or the Project or any portion thereof by
Tenant or any of Tenant's Parties. To the fullest extent permitted by law,
Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord
and Landlord's partners, officers, directors, employees, agents, successors and
assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and against any and
all claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation, clean-up,
removal, remediation and restoration costs, sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees and court costs) which arise or
result from the presence of Hazardous Materials on, in, under or about the
Premises, the Building or any other portion of the Project and which are
installed, brought upon, stored, used, generated or released upon, in, under or
about the Premises, the Building and/or the Project or any portion thereof by
Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of
any release of Hazardous Materials in the Premises, the Building or any other
portion of the Project which Tenant becomes aware of during the Term of this
Lease, whether caused by Tenant, Tenant's Parties or any other persons or
entities. In the event of any release of Hazardous Materials installed, brought
upon, stored, used, generated or released upon, in, under or about the Premises,
the Building and/or the Project or any portion thereof by Tenant or any of
Tenant's Parties, Landlord shall have the right, but not the obligation, to
cause Tenant to immediately take all steps Landlord deems necessary or
appropriate to remediate such release and prevent any similar future release to
the satisfaction of Landlord and Landlord's mortgagee(s). At all times during
the Term of this Lease, Landlord will have the right, but not the obligation, to
enter upon the Premises to inspect, investigate, sample and/or monitor the
Premises to determine if Tenant is in compliance with the terms of this Lease
regarding Hazardous Materials. Tenant will, upon the request of Landlord at any
time during which Landlord has reason to believe that Tenant is not in
compliance with this Section 6.4.1, cause to be performed an environmental audit
of the Premises at Tenant's expense by an established environmental consulting
firm reasonably acceptable to Landlord. As used in this Lease, the term
"HAZARDOUS MATERIALS" shall mean and include any hazardous or toxic materials,
substances or wastes as now or hereafter designated or regulated under any law,
statute, ordinance, rule, regulation, order or ruling of any agency of the
State, the United States Government or any local governmental authority,
including, without limitation, asbestos, petroleum, petroleum hydrocarbons and
petroleum based products, urea formaldehyde foam insulation, polychlorinated
biphenyls ("PCBS"), and freon and other chlorofluorocarbons. The provisions of
this Section 6.4 will survive the expiration or earlier termination of this
Lease.
6.4.2 LANDLORD'S TERMINATION OPTION FOR CERTAIN ENVIRONMENTAL PROBLEMS. If
Hazardous Materials are present at the Premises that are required by
Environmental Law to be remediated and Tenant is not responsible therefor
pursuant to Section 6.4.1, Landlord may, at its option, either (i) remediate
such Hazardous Materials, at its own expense, in which event this Lease shall
continue in full force and effect or (ii) if the estimated cost to remediate
such Hazardous Materials exceeds twelve (12) times the then Basic Rent or One
Hundred Thousand Dollars ($100,000.00), whichever is greater, give written
notice to Tenant, within thirty (30) days after receipt by Landlord of knowledge
of the existence of such Hazardous Materials, of Landlord's desire to terminate
this Lease as of the date sixty (60) days following the date of such notice. In
the event Landlord elects to give such a termination notice, Tenant may, within
ten (10) days thereafter, give written notice to Landlord of Tenant's commitment
to pay the amount by which the cost of the remediation of such Hazardous
Materials exceeds an amount equal to twelve (12) times the then Basic Rent or
One Hundred Thousand Dollars ($100,000.00), whichever is greater. Tenant shall
provide Landlord with such funds or satisfactory assurance thereof within thirty
(30) days following such commitment. In such event, this Lease shall continue in
full force and effect, and Landlord shall proceed to make such remediation as
soon as reasonably possible after the required funds are available. If Tenant
does not give such notice and provide the required funds or assurance thereof
within the time provided, this Lease shall terminate as the date specified in
Landlord's termination notice.
6.5 REFUSE AND SEWAGE. Tenant agrees not to keep any trash, garbage, waste or
other refuse on the Premises except in sanitary containers and agrees to
regularly and frequently remove same from the Premises. Tenant shall keep all
containers or other equipment used for storage of such materials in a
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clean and sanitary condition. Tenant shall properly dispose of all sanitary
sewage and shall not use the sewage disposal system for the disposal of anything
except sanitary sewage. Tenant shall keep the sewage disposal system free of all
obstructions and in good operating condition. If the volume of Tenant's trash
becomes excessive in Landlord's judgment, Landlord shall have the right to
charge Tenant for additional trash disposal services and/or to require that
Tenant contract directly for additional trash disposal services at Tenant's sole
cost and expense.
6.6 PEST CONTROL. Tenant shall, at its own cost, retain a licensed, bonded
professional pest and sanitation control service to perform inspections of the
Premises on an as needed basis for the purpose of eliminating infestation by and
controlling the presence of insects, rodents and vermin and shall promptly cause
any corrective or extermination work recommended by such service to be
performed. Such work shall be performed pursuant to a written contract, a copy
of which shall be delivered to Landlord by Tenant upon request.
6.7 EXTRAORDINARY SERVICES. If Landlord incurs Operating Expenses or other costs
for any increase in services provided to or for the benefit of Tenant above
those services normally provided by Landlord to the other tenants in the Project
and such increased services or costs result from any act, conduct, extraordinary
use and/or special request by Tenant, Tenant agrees to reimburse Landlord for
the costs of such extraordinary services, within thirty (30) days of delivery to
Tenant of written invoice for such extraordinary services. By way of example
only, if Tenant should request extraordinary security services, lighting,
cleaning and/or repair, such extraordinary services may be billed directly to
Tenant as provided in this Section 6.7 and shall be reimbursed by Tenant to
Landlord as provided herein.
7. PAYMENTS AND NOTICES. All rent and other sums payable by Tenant to Landlord
hereunder shall be paid to Landlord at the address designated in Section 1.1 of
the Summary, or to such other persons and/or at such other places as Landlord
may hereafter designate in writing. Any notice required or permitted to be given
hereunder must be in writing and may be given by personal delivery (including
delivery by nationally recognized overnight courier or express mailing service),
facsimile transmission sent by a machine capable of confirming transmission
receipt, with a hard copy of such notice delivered no later than one (1)
business day after facsimile transmission by another method specified in this
Section 7, or by registered or certified mail, postage prepaid, return receipt
requested, addressed to Tenant at the address(es) designated in Section 1.2 of
the Summary, or to Landlord at the address(es) designated in Section 1.1 of the
Summary. Either party may, by written notice to the other, specify a different
address for notice purposes. Notice given in the foregoing manner shall be
deemed given (i) upon confirmed transmission if sent by facsimile transmission,
provided such transmission is prior to 5:00 p.m. on a business day (if such
transmission is after 5:00 p.m. on a business day or is on a non-business day,
such notice will be deemed given on the following business day), (ii) when
actually received or refused by the party to whom sent if delivered by a carrier
or personally served or (iii) if mailed, on the day of actual delivery or
refusal as shown by the certified mail return receipt or the expiration of three
(3) business days after the day of mailing, whichever first occurs. For purposes
of this Section 7, a "business day" is Monday through Friday, excluding holidays
observed by the United States Postal Service.
8. BROKERS. Landlord has entered into an agreement with the real estate broker
specified in Section 1.13 of the Summary as representing Landlord ("LANDLORD'S
BROKER"), and Landlord shall pay any commissions or fees that are payable to
Landlord's Broker with respect to this Lease in accordance with the provisions
of a separate commission contract. Landlord shall have no further or separate
obligation for payment of commissions or fees to any other real estate broker,
finder or intermediary. Tenant represents that it has not had any dealings with
any real estate broker, finder or intermediary with respect to this Lease, other
than Landlord's Broker and the broker specified in Section 1.13 of the Summary
as representing Tenant ("TENANT'S BROKER"). Any commissions or fees payable to
Tenant's Broker with respect to this Lease shall be paid exclusively by
Landlord's Broker. Each party represents and warrants to the other, that, to its
knowledge, no other broker, agent or finder (a) negotiated or was instrumental
in negotiating or consummating this Lease on its behalf, or (b) is or might be
entitled to a commission or compensation in connection with this Lease. Tenant
shall indemnify, protect, defend (by counsel reasonably approved in writing by
Landlord) and hold Landlord harmless from and against any and all claims,
judgments, suits, causes of action, damages, losses, liabilities and expenses
(including attorneys' fees and court costs) resulting from any breach by Tenant
of the foregoing representation, including, without limitation, any claims that
may be asserted against Landlord by any broker, agent or finder undisclosed by
Tenant herein. Landlord shall indemnify, protect, defend (by counsel reasonably
approved in writing by Tenant) and hold Tenant harmless from and against any and
all claims, judgments, suits, causes of action, damages, losses, liabilities and
expenses (including attorneys' fees and court costs) resulting from any breach
by Landlord of the foregoing representation, including, without limitation, any
claims that may be asserted against Tenant by any broker, agent or finder
undisclosed by Landlord herein. The foregoing indemnities shall survive the
expiration or earlier termination of this Lease.
9. SURRENDER; HOLDING OVER.
9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of this
Lease, Tenant shall surrender all keys for the Premises to Landlord, and Tenant
shall deliver exclusive possession of the Premises to Landlord broom clean and
in good condition and repair, reasonable wear and tear excepted (and casualty
damage excepted if this Lease is terminated as a result thereof pursuant to
Section 18), with all of Tenant's personal property (and those items, if any, of
Tenant Improvements and Tenant Changes identified by Landlord pursuant to
Section 12.2 below) removed therefrom and all damage caused by such removal
repaired, as required pursuant to Sections 12.2 and 12.3 below. If, for any
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reason, Tenant fails to surrender the Premises on the expiration or earlier
termination of this Lease (including upon the expiration of any subsequent
month-to-month tenancy consented to by Landlord pursuant to Section 9.2 below),
with such removal and repair obligations completed, then, in addition to the
provisions of Section 9.3 below and Landlord's rights and remedies under Section
12.4 and the other provisions of this Lease, Tenant shall indemnify, protect,
defend (by counsel reasonably approved in writing by Landlord) and hold Landlord
harmless from and against any and all claims, judgments, suits, causes of
action, damages, losses, liabilities and expenses (including attorneys' fees and
court costs) resulting from such failure to surrender, including, without
limitation, any claim made by any succeeding tenant based thereon. The foregoing
indemnity shall survive the expiration or earlier termination of this Lease.
9.2 HOLDING OVER. If Tenant holds over after the expiration or earlier
termination of the Lease Term, Tenant shall become a tenant at sufferance only,
upon the terms and conditions set forth in this Lease so far as applicable
(including Tenant's obligation to pay all Common Area Expenses and any other
additional rent under this Lease), but at a Basic Rent equal to: (a) one hundred
fifty percent (150%) of the Basic Rent applicable to the Premises immediately
prior to the date of such expiration or earlier termination; or (b) one hundred
fifty percent (150%) of the prevailing market rate excluding any rental or other
concessions (as reasonably determined by Landlord) for the Premises in effect on
the date of such expiration or earlier termination. Acceptance by Landlord of
rent after such expiration or earlier termination shall not constitute a consent
to a hold over hereunder or result in an extension of this Lease. Tenant shall
pay an entire month's Basic Rent calculated in accordance with this Section 9.2
for any portion of a month it holds over and remains in possession of the
Premises pursuant to this Section 9.2.
9.3 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this Section 9
are in addition to, and do not affect, Landlord's right of re-entry or any other
rights of Landlord hereunder or otherwise provided at law or in equity.
10. TAXES.
10.1 REAL PROPERTY TAXES. Tenant shall pay Tenant's Share of Real Property Taxes
in accordance with the provisions of Section 4. "REAL PROPERTY TAXES" mean,
collectively, all general and special real property taxes, assessments
(including, without limitation, change in ownership taxes or assessments),
liens, bond obligations, license fees or taxes, commercial rent or gross
receipts taxes, and any similar impositions in-lieu of other impositions now or
previously within the definition of real property taxes or assessments which may
be levied or assessed by any lawful authority against the Project applicable to
the period from the Commencement Date until the expiration or sooner termination
of this Lease. Real Property Taxes are included within Operating Expenses, as
set forth in Section 4.4. Notwithstanding anything to the contrary contained in
this Section 10.1, there shall be excluded from Real Property Taxes (i) all
excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's gross or net income from
all sources, and (ii) documentary transfer taxes associated with the sale or
other transfer by Landlord of its interest in the Project.
10.2 PERSONAL PROPERTY TAXES. Tenant shall be liable for, and shall pay before
delinquency, all taxes and assessments (real and personal) levied against (a)
any personal property or trade fixtures placed by Tenant in or about the
Premises (including any increase in the assessed value of the Premises based
upon the value of any such personal property or trade fixtures), (b) any Tenant
Improvements or alterations in the Premises (whether installed and/or paid for
by Landlord or Tenant) and (c) this transaction or any document to which Tenant
is a party creating or transferring an interest in the Premises. If any such
taxes or assessments are levied against Landlord or Landlord's property,
Landlord may, after written notice to Tenant (and under proper protest if
requested by Tenant) pay such taxes and assessments, and Tenant shall reimburse
Landlord therefor within ten (10) business days after demand by Landlord;
provided, however, Tenant, at its sole cost and expense, shall have the right,
with Landlord's cooperation, to bring suit in any court of competent
jurisdiction to recover the amount of any such taxes and assessments so paid
under protest.
11. POSSESSION; CONDITION OF PREMISES; REPAIRS.
11.1 DELIVERY OF POSSESSION. Landlord will deliver possession of the Premises to
Tenant prior to completion of Landlord's Work on the date set forth in Section
1.7 of the Summary; however, if Landlord cannot deliver possession of the
Premises to Tenant by such date, this Lease will not be void or voidable, nor
will Landlord be liable to Tenant for any loss or damage resulting from such
delay. If Landlord has not delivered the Premises to Tenant within thirty (30)
days after the mutual execution of this Lease and such delay is not caused by
Tenant or any Tenant Parties, Tenant shall have the right to terminate this
Lease, in which case all amounts deposited by Tenant with Landlord shall be
refunded to Tenant. If the delay in possession is caused by Tenant (including
delays caused by Tenant's failure to supply any item referred to in the
following sentence), then the Term and Tenant's obligation to pay rent will
commence as of the date the Commencement Date would have occurred but for
Tenant's delay, even though Tenant does not yet have possession. Notwithstanding
the foregoing, Landlord will not be obligated to deliver possession of the
Premises to Tenant until Landlord has received from Tenant all of the following:
(i) a copy of this Lease fully executed by Tenant and the guaranty of Tenant's
obligations under this Lease executed by the Guarantor; (ii) the Security
Deposit and the first installment of Basic Rent; and (iii) copies of policies of
insurance or certificates thereof as required under Section 20 of this Lease.
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11.2 CONDITION OF PREMISES. Tenant acknowledges that, except as otherwise
expressly set forth in this Lease, neither Landlord nor any agent of Landlord
has made any representation or warranty with respect to the Premises, the
Building or the Project or their condition, or with respect to the suitability
thereof for the conduct of Tenant's business and Tenant shall accept the
Premises in their as-is condition. The taking of possession of the Premises by
Tenant shall conclusively establish that the Premises were at such time complete
and in good, sanitary and satisfactory condition and repair without any
obligation on Landlord's part to make any alterations, upgrades or improvements
thereto.
Notwithstanding the foregoing, Landlord warrants that the Building, the parking
areas and any existing improvements in the Premises comply with all applicable
laws, covenants or restrictions of record, building codes, regulations and
ordinances including but not limited to the Americans with Disabilities Act of
1990 ("APPLICABLE REQUIREMENTS") in effect and as interpreted on the date
Landlord delivers possession of the Premises to Tenant pursuant to Section 1.7
of the Summary. Said warranty does not apply to the use to which Tenant will put
the Premises or to any alterations made or to be made by Tenant. Tenant is
responsible for determining whether or not the zoning is appropriate for
Tenant's intended use. If the Premises do not comply with said warranty,
Landlord shall, as Tenant's sole remedy and promptly after receipt of written
notice from Tenant setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Landlord's sole cost and expense; provided,
however, if Tenant does not give Landlord written notice of a non-compliance
with this warranty within thirty (30) days following the date Landlord delivers
possession of the Premises, correction of that non-compliance shall be the
obligation of Tenant at Tenant's sole cost and expense.
In addition, Landlord warrants that the existing electrical and mechanical
systems and equipment in the Premises shall be in good operating condition on
the date Landlord delivers possession of the Premises to Tenant pursuant to
Section 1.7 of the Summary. If the Premises do not comply with said warranty,
Landlord shall, as Tenant's sole remedy and promptly after receipt of written
notice from Tenant setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Landlord's sole cost and expense; provided,
however, if Tenant does not give Landlord written notice of a non-compliance
with this warranty within thirty (30) days following the date Landlord delivers
possession of the Premises, correction of that non-compliance shall be the
obligation of Tenant at Tenant's sole cost and expense.
11.3 LANDLORD'S REPAIR OBLIGATIONS. Landlord shall, at its sole cost and
expense, repair, maintain and replace, as necessary the Building shell and other
structural portions of the Building (including the roof, exterior walls and
foundations). In addition, as part of the Operating Expenses, Landlord shall
repair, maintain and replace, as necessary (a) the basic plumbing, heating,
ventilating, air conditioning, sprinkler and electrical systems within the
Building core (but not any conduits or connections thereto or distribution
systems thereof within the Premises or any other tenant's premises or those
systems exclusively serving the Premises or any other premises), and (b) the
Common Areas of the Project. Notwithstanding the foregoing, to the extent any
maintenance, repairs or replacements required to be performed by Landlord
pursuant to this Section 11.3 are required as a result of any act, neglect,
fault or omission of Tenant or any of Tenant's agents, employees, contractors,
licensees or invitees, Tenant shall pay to Landlord, as additional rent, the
costs of such maintenance, repairs or replacements. Landlord shall not be liable
to Tenant for failure to perform any such repairs, maintenance or replacements,
unless Landlord shall fail to make such repairs, maintenance or replacements and
such failure shall continue for an unreasonable time following written notice
from Tenant to Landlord of the need therefor. Without limiting the foregoing,
Tenant waives the right to make repairs at Landlord's expense under any law,
statute or ordinance now or hereafter in effect (including the provisions of
California Civil Code Section 1942 and any successive sections or statutes of a
similar nature).
11.4 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations specifically
set forth in Sections 11.3, 18.1 and 19.2 hereof, Tenant shall at all times and
at Tenant's sole cost and expense, keep, maintain, clean, repair and preserve
and replace, as necessary, the Premises and all parts thereof including, without
limitation, all Tenant Improvements, Tenant Changes, utility meters, pipes and
conduits, all heating, ventilating and air conditioning systems located within
the Premises or exclusively serving the Premises, all fixtures, furniture and
equipment, Tenant's storefront and signs, if any, locks, closing devices,
security devices, windows, window sashes, casements and frames, floors and floor
coverings, shelving, restrooms, if any, and any alterations, additions and other
property located within the Premises in good condition and repair, reasonable
wear and tear excepted. Tenant shall replace, at its expense, any and all plate
and other glass in and about the Premises which is damaged or broken from any
cause whatsoever except due to the gross negligence or willful misconduct of
Landlord, its agents or employees. Such maintenance and repairs shall be
performed with due diligence, lien-free and in a good and workmanlike manner, by
licensed contractor(s) which are selected by Tenant and approved by Landlord,
which approval Landlord shall not unreasonably withhold or delay. In addition,
Tenant agrees to procure and maintain maintenance contracts for all heating,
ventilating and air conditioning systems with reputable contractors reasonably
approved by Landlord. Except as otherwise expressly provided in this Lease,
Landlord shall have no obligation to alter, remodel, improve, repair, renovate,
redecorate or paint all or any part of the Premises.
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12. ALTERATIONS.
12.1 TENANT CHANGES; CONDITIONS.
(a) Tenant shall not make any alterations, additions, improvements or
decorations to the Premises (collectively, "TENANT CHANGES," and
individually, a "TENANT CHANGE") unless Tenant first obtains Landlord's
prior written approval thereof, which approval Landlord shall not
unreasonably withhold. Notwithstanding the foregoing, Landlord's prior
approval shall not be required for any Tenant Change which satisfies all
of the following conditions (hereinafter a "PRE-APPROVED CHANGE"): (i)
the costs of such Tenant Change does not exceed Ten Thousand Dollars
($10,000.00) individually; (ii) the costs of such Tenant Change when
aggregated with the costs of all other Tenant Changes made by Tenant
during the Term of this Lease do not exceed Fifty Thousand Dollars
($50,000.00); (iii) Tenant delivers to Landlord final plans,
specifications and working drawings for such Tenant Change at least ten
(10) days prior to commencement of the work thereof; (iv) the Tenant
Change does not affect the mechanical, electrical, plumbing or life
safety systems of the Premises, the Building and/or the Project
(collectively, the "SYSTEMS"), the roof or structural components of the
Premises or the exterior of the Premises; and (v) Tenant and such Tenant
Change otherwise satisfy all other conditions set forth in this Section
12.1.
(b) After Landlord has approved the Tenant Changes and the plans,
specifications and working drawings therefor (or is deemed to have
approved the Pre-Approved Changes as set forth in Section 12.1(a)
above), Tenant shall: (i) enter into an agreement for the performance of
such Tenant Changes with licensed and bondable contractors and
subcontractors selected by Tenant and approved by Landlord, which
approval shall not be unreasonably withheld; (ii) before proceeding with
any Tenant Change, provide Landlord with ten (10) days' prior written
notice thereof; and (iii) pay to Landlord, within ten (10) days after
written demand, the costs of any increased insurance premiums incurred
by Landlord to include such Tenant Changes in the fire and extended
coverage insurance obtained by Landlord pursuant to Section 21 below, if
Landlord elects in writing to insure such Tenant Changes; provided,
however, that Landlord shall not be required to include the Tenant
Changes under such insurance. If such Tenant Changes are not included in
Landlord's insurance, Tenant shall insure the Tenant Changes under its
casualty insurance pursuant to Section 20.1(a) below. In addition,
before proceeding with any Tenant Change, Tenant's contractors shall
obtain, on behalf of Tenant and at Tenant's sole cost and expense: (A)
all necessary governmental permits and approvals for the commencement
and completion of such Tenant Change; and (B) at Landlord's request, a
completion and lien indemnity bond, or other surety, satisfactory to
Landlord for such Tenant Change. Landlord's approval of any
contractor(s) and subcontractor(s) of Tenant shall not release Tenant or
any such contractor(s) and/or subcontractor(s) from any liability for
any conduct or acts of such contractor(s) and/or subcontractor(s).
Further, Landlord's approval of Tenant Changes and the plans therefor
will create no liability or responsibility on Landlord's part concerning
the completeness of same or their design sufficiency or compliance with
laws.
(d) All Tenant Changes shall be performed: (i) in accordance with the
approved plans, specifications and working drawings; (ii) lien-free and
in a good and workmanlike manner; (iii) in compliance with all laws,
rules and regulations of all governmental agencies and authorities
including, without limitation, applicable building permit requirements
and the provisions of Title III of the Americans with Disabilities Act
of 1990; (iv) in such a manner so as not to unreasonably interfere with
the occupancy of any other tenant in the Building or any other building
located within the Project, nor impose any additional expense upon nor
delay Landlord in the maintenance and operation of the Building or any
other building located within the Project; and (v) at such times, in
such manner and subject to such rules and regulations as Landlord may
from time to time reasonably designate.
(e) Throughout the performance of the Tenant Changes, Tenant shall obtain,
or cause its contractors to obtain, workers compensation insurance and
commercial general liability insurance in compliance with the provisions
of Section 20 of this Lease.
12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. All Tenant Changes and
the initial Tenant Improvements in the Premises paid for by Tenant shall remain
the property of Tenant during the Term of this Lease and the initial Tenant
Improvements in the Premises paid for by Landlord shall remain the property of
Landlord during the Term of the Lease, but all Tenant Changes and Tenant
Improvements (whether installed or paid for by Landlord or Tenant) shall become
the property of Landlord and shall remain upon and be surrendered with the
Premises at the end of the Term of this Lease; provided, however, Landlord may,
by written notice delivered to Tenant in connection with its approval of the
initial Tenant Improvements pursuant to the Work Letter or any Tenant Changes
pursuant to Section 12.1, identify those items of the initial Tenant
Improvements or Tenant Changes which Landlord shall require Tenant to remove at
the end of the Lease Term. However, Landlord's failure to specify at that time
whether Tenant shall be required to remove the Tenant Improvements or any Tenant
Changes will only be deemed an election not to require such removal if Tenant
informed Landlord in its request for approval that Landlord's failure to
identify such items would result in Tenant having no obligation to remove the
same at the expiration of the Lease Term (or upon any sooner termination of this
Lease). If Landlord requires Tenant to remove any such items as described above,
Tenant shall, at its sole cost, remove the identified items on or before the
expiration or sooner termination of this Lease and repair any damage to
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the Premises caused by such removal (or, at Landlord's option, shall pay to
Landlord all of Landlord's costs of such removal and repair).
12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned by
Tenant or installed by Tenant at its expense in the Premises (including business
and trade fixtures, furniture and movable partitions) shall be, and remain, the
property of Tenant, and shall be removed by Tenant from the Premises, at
Tenant's sole cost and expense, on or before the expiration or sooner
termination of this Lease. Tenant shall repair any damage caused by such
removal.
12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration or
sooner termination of this Lease all of its personal property, or any items of
Tenant Improvements or Tenant Changes identified by Landlord for removal
pursuant to Section 12.2 above, Landlord may, (without liability to Tenant for
loss thereof), at Tenant's sole cost and in addition to Landlord's other rights
and remedies under this Lease, at law or in equity: (a) remove and store such
items in accordance with applicable law; and/or (b) upon ten (10) days' prior
notice to Tenant, sell all or any such items at private or public sale for such
price as Landlord may obtain as permitted under applicable law. Landlord shall
apply the proceeds of any such sale to any amounts due to Landlord under this
Lease from Tenant (including Landlord's attorneys' fees and other costs incurred
in the removal, storage and/or sale of such items), with any remainder to be
paid to Tenant.
13. LIENS. Tenant shall not permit any mechanic's, materialmen's or other liens
to be filed against all or any part of the Project, the Building or the
Premises, nor against Tenant's leasehold interest in the Premises, by reason of
or in connection with any repairs, alterations, improvements or other work
contracted for or undertaken by Tenant or any other act or omission of Tenant or
Tenant's agents, employees, contractors, licensees or invitees. Tenant shall, at
Landlord's request, provide Landlord with enforceable, conditional and final
lien releases (and other reasonable evidence reasonably requested by Landlord to
demonstrate protection from liens) from all persons furnishing labor and/or
materials with respect to the Premises. Landlord shall have the right at all
reasonable times to post on the Premises and record any notices of
non-responsibility which it deems necessary for protection from such liens. If
any such liens are filed, Tenant shall, at its sole cost, immediately cause such
lien to be released of record or bonded so that it no longer affects title to
the Project, the Building or the Premises. If Tenant fails to cause such lien to
be so released or bonded within twenty (20) days after filing thereof, Landlord
may, without waiving its rights and remedies based on such breach, and without
releasing Tenant from any of its obligations, cause such lien to be released by
any means it shall deem proper, including payment in satisfaction of the claim
giving rise to such lien. Tenant shall pay to Landlord within five (5) days
after receipt of invoice from Landlord, any sum paid by Landlord to remove such
liens, together with interest at the Interest Rate from the date of such payment
by Landlord. Notice is hereby given that Landlord shall not be liable for any
labor, services or materials furnished or to be furnished to Tenant, or to
anyone holding the Premises through or under Tenant, and that no mechanics' or
other liens for any such labor, services or materials shall attach to or affect
the interest of Landlord in the Premises.
14. ASSIGNMENT AND SUBLETTING.
14.1 RESTRICTION ON TRANSFER. Tenant will not assign this Lease in whole or in
part, nor sublet all or any part of the Premises (collectively and individually,
a "TRANSFER"), without the prior written consent of Landlord, which consent
Landlord will not unreasonably withhold, condition or delay. In no event may
Tenant encumber or hypothecate this Lease. The consent by Landlord to any
Transfer shall not constitute a waiver of the necessity for such consent to any
subsequent Transfer. This prohibition against Transfers shall be construed to
include a prohibition against any assignment or subletting by operation of law.
If this Lease is transferred by Tenant, or if the Premises or any part thereof
are transferred or occupied by any person or entity other than Tenant, Landlord
may collect rent from the assignee, subtenant or occupant, and apply the net
amount collected to the rent herein reserved, but no such Transfer, occupancy or
collection shall be deemed a waiver on the part of Landlord, or the acceptance
of the assignee, subtenant or occupant as Tenant, or a release of Tenant from
the further performance by Tenant of covenants on the part of Tenant herein
contained unless expressly made in writing by Landlord. Irrespective of any
Transfer, Tenant shall remain fully liable under this Lease and shall not be
released from performing any of the terms, covenants and conditions of this
Lease. Without limiting in any way Landlord's right to withhold its consent on
any reasonable grounds, it is agreed that Landlord will not be acting
unreasonably in refusing to consent to a Transfer if, in Landlord's opinion, (i)
the net worth or financial capabilities of such assignee or subtenant is less
than that of Tenant at the date hereof, (ii) the proposed assignee or subtenant
does not have the financial capability to fulfill the obligations imposed by the
Transfer, (iii) the proposed Transfer involves a change of the then-current use
of the Premises, or (iv) the proposed assignee or subtenant is not, in
Landlord's reasonable opinion, of reputable or good character or consistent with
Landlord's desired tenant mix for the Project. Subject to Section 14.5 below, if
Tenant is a corporation, or is an unincorporated association or partnership, the
transfer, assignment or hypothecation of any stock or interest in such
corporation, association or partnership in the aggregate in excess of forty-nine
percent (49%) shall be deemed an assignment within the meaning and provisions of
this Section 14.1, unless (a) at least twenty (20) days prior to such transfer,
assignment or hypothecation or if such proposed transfer, assignment or
hypothecation is not publicly known, promptly after such proposed transfer,
assignment or hypothecation is made public, Tenant delivers to Landlord the
financial statements and other financial and background information of the
person or entity acquiring such stock or interest; (b) the financial net worth
of the Tenant immediately following such transfer, assignment or hypothecation
equals or exceeds that of Tenant as of the date of execution of this Lease; (c)
the use of
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the Premises remains unchanged; and (d) such transaction is not entered into as
a subterfuge to avoid the restrictions and provisions of this Section 14.
14.2 TRANSFER NOTICE. If Tenant desires to effect a Transfer, then at least
thirty (30) days prior to the date when Tenant desires the Transfer to be
effective (the "TRANSFER DATE"), Tenant agrees to give Landlord a notice (the
"TRANSFER NOTICE"), stating the name, address and business of the proposed
assignee, sublessee or other transferee (sometimes referred to hereinafter as
"TRANSFEREE"), reasonable information (including references) concerning the
character, ownership, and financial condition of the proposed Transferee, the
Transfer Date, any ownership or commercial relationship between Tenant and the
proposed Transferee, and the consideration and all other material terms and
conditions of the proposed Transfer, all in such detail as Landlord may
reasonably require.
14.3 LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of any
Transfer Notice, and any additional information requested by Landlord concerning
the proposed Transferee's financial responsibility, Landlord will notify Tenant
of its election to do one of the following: (i) consent to the proposed Transfer
subject to such reasonable conditions as Landlord may impose in providing such
consent; (ii) refuse such consent, which refusal shall be on reasonable grounds;
or (iii) except if such Transfer Notice is delivered in connection with a
Permitted Transfer, terminate this Lease as to all or such portion of the
Premises which is proposed to be sublet or assigned and recapture all or such
portion of the Premises for reletting by Landlord.
14.4 ADDITIONAL CONDITIONS. A condition to Landlord's consent to any Transfer of
this Lease will be the delivery to Landlord of a true copy of the fully executed
instrument of assignment, sublease, transfer or hypothecation, in form and
substance reasonably satisfactory to Landlord. If the Transferee is other than a
Permitted Transferee, Tenant agrees to pay to Landlord, as additional rent,
fifty percent (50%) of all sums and other consideration payable to and for the
benefit of Tenant by the Transferee in excess of the rent payable under this
Lease for the same period and portion of the Premises. In calculating excess
rent or other consideration which may be payable to Landlord under this Section
14.4, Tenant will be entitled to deduct commercially reasonable third party
brokerage commissions and attorneys' fees and other amounts reasonably and
actually expended by Tenant in connection with such assignment or subletting if
acceptable written evidence of such expenditures is provided to Landlord. No
Transfer will release Tenant of Tenant's obligations under this Lease or alter
the primary liability of Tenant to pay the rent and to perform all other
obligations to be performed by Tenant hereunder. Landlord may require that any
Transferee remit directly to Landlord on a monthly basis, all monies due Tenant
by said Transferee, and each sublease shall provide that if Landlord gives the
sublessee written notice that Tenant is in default under this Lease, the
sublessee will thereafter make all payments due under the sublease directly to
or as directed by Landlord, which payments will be credited against any payments
due under this Lease. Tenant hereby irrevocably and unconditionally assigns to
Landlord all rents and other sums payable under any sublease of the Premises;
provided, however, that Landlord hereby grants Tenant a license to collect all
such rents and other sums so long as Tenant is not in default under this Lease.
Tenant shall, within ten (10) days after the execution and delivery of any
assignment or sublease, deliver a duplicate original copy thereof to Landlord.
Consent by Landlord to one Transfer will not be deemed consent to any subsequent
Transfer. In the event of default by any Transferee of Tenant or any successor
of Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such Transferee or successor. If Tenant effects a Transfer or requests the
consent of Landlord to any Transfer (whether or not such Transfer is
consummated), then, upon demand, and as a condition precedent to Landlord's
consideration of the proposed assignment or sublease, Tenant agrees to pay
Landlord a non-refundable administrative fee of Five Hundred Dollars ($500.00),
plus an amount not to exceed Fifteen Hundred Dollars ($1,500.00) (which amount
shall be subject to annual increases in accordance with the CPI) to cover
Landlord's reasonable attorneys' fees and other costs incurred by Landlord in
reviewing such proposed assignment or sublease (whether attributable to
Landlord's in-house attorneys or paralegals or otherwise). Acceptance of the
Five Hundred Dollar ($500.00) administrative fee and/or reimbursement of
Landlord's attorneys' and/or paralegal fees shall in no event obligate Landlord
to consent to any proposed Transfer. Notwithstanding any contrary provision of
this Lease, if Tenant or any proposed Transferee claims that Landlord has
unreasonably withheld or delayed its consent to a proposed Transfer or otherwise
has breached its obligations under this Section 14, Tenant's and such
Transferee's only remedy shall be to seek a declaratory judgment and/or
injunctive relief, and Tenant, on behalf of itself and, to the extent permitted
by law, such proposed Transferee waives all other remedies against Landlord,
including without limitation, the right to seek monetary damages or to terminate
this Lease; provided, however, that such waiver shall not apply to the extent
that Landlord has acted in bad faith. For purposes of this Section 14.4, the
term "CPI" shall mean the Consumer Price Index, All Cities, All Items, All Urban
Consumers (1982-84=100) published by the Bureau of Labor Statistics or other
governmental agency then publishing the CPI (or if such CPI is no longer
published, the index most comparable to the CPI).
14.5 PERMITTED TRANSFERS. Notwithstanding the provisions of this Section 14 to
the contrary, Tenant may assign this Lease or sublet the Premises or any portion
thereof (herein, a "PERMITTED TRANSFER"), without Landlord's consent to any
entity that controls, is controlled by or is under common control with Tenant,
or to any entity resulting from a merger or consolidation with Tenant, or to any
person or entity which acquires all the assets of Tenant's business as a going
concern (each, a "PERMITTED TRANSFEREE"), provided that: (a) at least twenty
(20) days prior to such assignment or sublease or, if such assignment or
sublease is as a result of a merger, consolidation or an acquisition of all of
Tenant's assets as a going concern, promptly after such merger, consolidation or
acquisition is made public, Tenant delivers to Landlord the financial statements
and other financial and background information of the assignee or
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sublessee as described in Section 14.2 above; (b) in the case of an assignment,
the assignee assumes, in full, the obligations of Tenant under this Lease (or if
a sublease, the sublessee of a portion of the Premises or Term assumes, in full,
the obligations of Tenant with respect to such portion) pursuant to a
commercially reasonable assumption agreement, a fully executed copy of which is
delivered to Landlord within twenty (20) days following the effective date of
such assignment or subletting; (c) the financial net worth of the assignee or
sublessee equals or exceeds that of Tenant and any guarantor hereof as of the
date of execution of this Lease; (d) Tenant remains fully liable under this
Lease; (e) the use of the Premises remains unchanged; and (f) such transaction
is not entered into as a subterfuge to avoid the restrictions and provisions of
this Section 14.
15. ENTRY BY LANDLORD. Landlord and its employees and agents shall at all
reasonable times have the right to enter the Premises to inspect the same, to
supply any service required to be provided by Landlord to Tenant under this
Lease, to exhibit the Premises to prospective lenders or purchasers (or during
the last nine (9) months of the Term, to prospective tenants), to post notices
of non-responsibility, and/or to alter, improve or repair the Premises or any
other portion of the Building, all without being deemed guilty of or liable for
any breach of Landlord's covenant of quiet enjoyment or any eviction of Tenant,
and without abatement of rent. In exercising such entry rights, Landlord shall
endeavor to minimize, to the extent reasonably practicable, the interference
with Tenant's business, and shall provide Tenant with reasonable advance written
notice of such entry (except in emergency situations and for providing scheduled
services, if any). Landlord shall have the means which Landlord may deem proper
to open Tenant's doors in an emergency in order to obtain entry to the Premises.
Any entry to the Premises obtained by Landlord by any of said means or otherwise
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises or any portion thereof, or grounds for any abatement or
reduction of rent and Landlord shall not have any liability to Tenant for any
damages or losses on account of any such entry by Landlord except, subject to
the provisions of Section 22.1, to the extent of Landlord's gross negligence or
willful misconduct.
16. UTILITIES AND SERVICES. The Premises shall be separately metered by Landlord
for electricity and gas, the charges for which Tenant shall pay directly to the
utility companies, and Landlord shall not impose any restriction on Tenant's use
thereof, except to the extent required by law. Landlord shall deliver the
Premises with separate HVAC systems for the Premises, which systems may be used
by Tenant without restriction so long as Tenant maintains and repairs the same
in accordance with this Lease. Tenant shall be solely responsible for and shall
promptly pay all charges for heat, air conditioning, water, gas, electricity or
any other utility used, consumed or provided in, furnished to or attributable to
the Premises at the rates charged by the supplying utility companies and/or
Landlord. Should Landlord elect to supply any or all of such utilities, Tenant
agrees to purchase and pay for the same as additional rent as apportioned by
Landlord. The rate to be charged to Landlord to Tenant shall not exceed the rate
charged to Landlord by any supplying utility. Tenant shall reimburse Landlord
within ten (10) days of billing for fixture charges and/or water tariffs, if
applicable, which are charged to Landlord by local utility companies. Landlord
will notify Tenant of this charge as soon as it becomes known. This charge will
increase or decrease with current charges being levied against Landlord, the
Premises or the Building by the local utility company, and will be due as
additional rent. In no event shall Landlord be liable for any interruption or
failure in the supply of any such utility services to Tenant.
17. INDEMNIFICATION AND EXCULPATION.
17.1 TENANT'S ASSUMPTION OF RISK AND WAIVER. Except to the extent such matter is
not covered by the insurance required to be maintained by Tenant under this
Lease and such matter is attributable to the gross negligence or willful
misconduct of Landlord, Landlord shall not be liable to Tenant, Tenant's
employees, agents or invitees for: (i) any damage to property of Tenant, or of
others, located in, on or about the Premises, (ii) the loss of or damage to any
property of Tenant or of others by theft or otherwise, (iii) any injury or
damage to persons or property resulting from fire, explosion, falling plaster,
steam, gas, electricity, water, rain or leaks from any part of the Premises or
from the pipes, appliance of plumbing works or from the roof, street or
subsurface or from any other places or by dampness or by any other cause of
whatsoever nature, or (iv) any such damage caused by other tenants or persons in
the Premises, occupants of adjacent property of the Project, or the public, or
caused by operations in construction of any private, public or quasi-public
work. Landlord shall in no event be liable for any consequential damages or loss
of business or profits and Tenant hereby waives any and all claims for any such
damages. All property of Tenant kept or stored on the Premises shall be so kept
or stored at the sole risk of Tenant and Tenant shall hold Landlord harmless
from any claims arising out of damage to the same, including subrogation claims
by Tenant's insurance carriers, unless such damage shall be caused by the gross
negligence or willful misconduct of Landlord. Landlord or its agents shall not
be liable for interference with the light or other intangible rights.
17.2 INDEMNIFICATIONS. Tenant shall be liable for, and shall indemnify, defend,
protect and hold Landlord and Landlord's partners, officers, directors,
employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED
PARTIES") harmless from and against, any and all claims, damages, judgments,
suits, causes of action, losses, liabilities and expenses, including attorneys'
fees and court costs (collectively, "INDEMNIFIED CLAIMS"), arising or resulting
from (a) any occurrence at the Premises following the date Landlord delivers
possession of the Premises to Tenant, unless caused by the gross negligence or
willful misconduct of Landlord or its agents, employees or contractors, (b) any
act or omission of Tenant or any of Tenant's agents, employees, contractors,
subtenants, assignees, licensees or, with respect to acts or omissions within
the Premises only, Tenant's invitees (collectively, "TENANT
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PARTIES"); (c) the use of the Premises and Common Areas and conduct of Tenant's
business by Tenant or any Tenant Parties, or any other activity, work or thing
done, or caused by Tenant or any Tenant Parties, in or about the Premises, the
Building or elsewhere on the Project; and/or (d) any default by Tenant of any
obligations on Tenant's part to be performed under the terms of this Lease or
the terms of any contract or agreement to which Tenant is a party or by which it
is bound, affecting this Lease or the Premises. In case any action or proceeding
is brought against Landlord or any Landlord Indemnified Parties by reason of any
such Indemnified Claims, Tenant, upon notice from Landlord, shall defend the
same at Tenant's expense by counsel approved in writing by Landlord, which
approval shall not be unreasonably withheld. Subject to Section 22 hereof,
Landlord will be liable for, and shall indemnify, protect, defend and hold
harmless Tenant and Tenant's partners, officers, directors, employees, agents,
successors and assigns (collectively, "TENANT INDEMNIFIED PARTIES") from and
against any and all Indemnified Claims (but excluding claims for consequential
damages or lost profits) that arise or result solely from (a) any negligent or
willful act or omission of Landlord, Landlord's agents, employees or
contractors, or (b) any occurrence in the Common Area not caused by Tenant or
the Tenant Parties, but only to the extent covered by the liability insurance
maintained or required to be maintained by Landlord pursuant to this Lease.
17.3 SURVIVAL; NO RELEASE OF INSURERS. The indemnification obligations under
Section 17.2, shall survive the expiration or earlier termination of this Lease.
The covenants, agreements and indemnification in Sections 17.1 and 17.2 above,
are not intended to and shall not relieve any insurance carrier of its
obligations under policies required to be carried pursuant to the provisions of
this Lease.
18. DAMAGE OR DESTRUCTION.
18.1 LANDLORD'S RIGHTS AND OBLIGATIONS. In the event the Premises are damaged by
fire or other casualty to an extent not exceeding twenty-five percent (25%) of
the full replacement cost thereof, and Landlord's contractor estimates in a
writing delivered to the parties that the damage thereto is such that the
Premises may be repaired, reconstructed or restored to substantially its
condition immediately prior to such damage within one hundred twenty (120) days
from the date of such casualty, and Landlord will receive insurance proceeds
sufficient to cover the costs of such repairs, reconstruction and restoration
(including proceeds from Tenant and/or Tenant's insurance which Tenant is
required to deliver to Landlord pursuant to Section 18.2 below) (or would have
received sufficient proceeds if Landlord carried the insurance required of it
hereunder), then Landlord shall commence and proceed diligently with the work of
repair, reconstruction and restoration and this Lease shall continue in full
force and effect. If, however, the Premises are damaged to an extent exceeding
twenty-five percent (25%) of the full replacement cost thereof, or Landlord's
contractor estimates that such work of repair, reconstruction and restoration
will require longer than one hundred twenty (120) days to complete, or Landlord
will not receive insurance proceeds (and/or proceeds from Tenant, as applicable)
sufficient to cover the costs of such repairs, reconstruction and restoration
(or would not have received sufficient proceeds if Landlord carried the
insurance required of it hereunder), then Landlord may elect to either:
(a) repair, reconstruct and restore the portion of the Premises damaged by
such casualty (including the Tenant Improvements, the Tenant Changes
that Landlord elects to insure pursuant to Section 12.1(b) and, to the
extent of insurance proceeds received from Tenant, the Tenant Changes
that Tenant insures pursuant to Section 12.1(b) and/or 20.1(a)), in
which case this Lease shall continue in full force and effect; or
(b) terminate this Lease effective as of the date which is thirty (30) days
after Tenant's receipt of Landlord's election to so terminate.
Under any of the conditions of this Section 18.1, Landlord shall give written
notice to Tenant of its intention to repair or terminate within the later of
sixty (60) days after the occurrence of such casualty, or fifteen (15) days
after Landlord's receipt of the estimate from Landlord's contractor.
Notwithstanding the foregoing, if the Premises are damaged by fire or other
casualty and Landlord does not elect to terminate this Lease or is not entitled
to terminate this Lease pursuant to this Article 18, then, as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Landlord is estimated to be complete (the "COMPLETION ESTIMATE").
If: (i) the time estimated to substantially complete the restoration exceeds
fifteen (15) months from and after the date the Completion Estimate is delivered
to Tenant or (ii) the fire or other casualty occurred within twelve (12) months
prior to the last day of the Lease Term and the time estimated to substantially
complete the restoration exceeds one hundred eighty (180) days from and after
the date such restoration is commenced, Tenant shall have the option to
terminate this Lease upon delivery to Landlord of a written notice of Tenant's
election to so terminate within seven (7) days after Tenant receives the
Completion Estimate.
18.2 TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or
destruction of all or any part of the Premises, Tenant shall immediately: (a)
notify Landlord thereof; and (b) deliver to Landlord all insurance proceeds
received by Tenant with respect to the Tenant Improvements and Tenant Changes to
the extent paid for by Landlord in the Premises to the extent such items are not
covered by Landlord's casualty insurance obtained by Landlord pursuant to
Section 21 below (excluding proceeds for Tenant's furniture and other personal
property), whether or not this Lease is terminated as permitted in this Section
18, and Tenant hereby assigns to Landlord all rights to receive such insurance
proceeds.
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18.3 ABATEMENT OF RENT. In the event that as a result of any such damage,
repair, reconstruction and/or restoration of the Premises, Tenant is prevented
from using, and does not use, the Premises or any portion thereof, then the rent
shall be abated or reduced, as the case may be, during the period that Tenant
continues to be so prevented from using and does not use the Premises or portion
thereof, in the proportion that the rentable square feet of the portion of the
Premises that Tenant is prevented from using, and does not use, bears to the
total rentable square feet of the Premises, but only to the extent of the
proceeds that Landlord receives from the rental loss insurance maintained by
Landlord. Notwithstanding the foregoing to the contrary, if the damage is due to
the negligence or willful misconduct of Tenant or any Tenant Parties, there
shall be no abatement of rent. Except for abatement of rent as provided
hereinabove, Tenant shall not be entitled to any compensation or damages from
Landlord for loss of, or interference with, Tenant's business or use or access
of all or any part of the Premises resulting from any such damage, repair,
reconstruction or restoration.
18.4 INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained
in this Section 18, if Landlord is obligated or elects to repair, reconstruct
and/or restore the damaged portion of the Premises pursuant to Section 18.1
above, but is delayed from completing such repair, reconstruction and/or
restoration beyond the date which is six (6) months after the date estimated by
Landlord's contractor for completion thereof pursuant to Section 18.1, by reason
of any causes beyond the reasonable control of Landlord (including, without
limitation, any delay due to Force Majeure as defined in Section 32.16, and
delays caused by Tenant or any Tenant Parties), then Landlord or Tenant (but
only if the delay is not caused by Tenant or any Tenant Parties) may elect to
terminate this Lease upon thirty (30) days' prior written notice to the other
party.
18.5 DAMAGE TO THE PROJECT. If there is a total destruction of the Project or a
partial destruction of the Project, the cost of restoration of which would
exceed one-half (1/2) of the then replacement value of the Project, by any cause
whatsoever, whether or not insured against and whether or not the Premises are
partially or totally destroyed, Landlord may within a period of one hundred
eighty (180) days after the occurrence of such destruction, notify Tenant in
writing that it elects not to so reconstruct or restore the Project, in which
event this Lease shall cease and terminate as of the date of such destruction.
18.6 DAMAGE NEAR END OF TERM. In addition to its termination rights in Sections
18.1 and 18.4 above, Landlord shall have the right to terminate this Lease if
any damage to the Building or Premises occurs during the last twelve (12) months
of the Term of this Lease and Landlord's contractor estimates in a writing
delivered to the parties that the repair, reconstruction or restoration of such
damage cannot be completed within the earlier of (a) the scheduled expiration
date of the Lease Term, or (b) sixty (60) days after the date of such casualty.
18.7 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and conditions
upon which this Lease may terminate in the event of any damage or destruction.
Accordingly, the parties hereby waive the provisions of California Civil Code
Section 1932, Subsection 2, and Section 1933, Subsection 4 (and any successor
statutes thereof permitting the parties to terminate this Lease as a result of
any damage or destruction).
19. EMINENT DOMAIN.
19.1 SUBSTANTIAL TAKING. Subject to the provisions of Section 19.4 below, in
case the whole of the Premises, or such part thereof as shall substantially
interfere with Tenant's use and occupancy of the Premises as reasonably
determined by Landlord, shall be taken for any public or quasi-public purpose by
any lawful power or authority by exercise of the right of appropriation,
condemnation or eminent domain, or sold to prevent such taking, either party
shall have the right to terminate this Lease effective as of the date possession
is required to be surrendered to said authority.
19.2 PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of
the Premises which does not substantially interfere with the conduct of Tenant's
business, then, except as otherwise provided in the immediately following
sentence, neither party shall have the right to terminate this Lease and
Landlord shall thereafter proceed to make a functional unit of the remaining
portion of the Premises (but only to the extent Landlord receives proceeds
therefor from the condemning authority), and rent shall be abated with respect
to the part of the Premises which Tenant shall be so deprived on account of such
taking. Notwithstanding the immediately preceding sentence to the contrary, if
any part of the Building or the Project shall be taken (whether or not such
taking substantially interferes with Tenant's use of the Premises), Landlord may
terminate this Lease upon thirty (30) days' prior written notice to Tenant as
long as Landlord also terminates leases of all other tenants leasing comparably
sized space within the Building for comparable lease terms.
19.3 CONDEMNATION AWARD. Subject to the provisions of Section 19.4 below, in
connection with any taking of the Premises or the Building, Landlord shall be
entitled to receive the entire amount of any award which may be made or given in
such taking or condemnation, without deduction or apportionment for any estate
or interest of Tenant, it being expressly understood and agreed by Tenant that
no portion of any such award shall be allowed or paid to Tenant for any
so-called bonus or excess value of this Lease, and such bonus or excess value
shall be the sole property of Landlord. Tenant shall not assert any claim
against Landlord or the taking authority for any compensation because of such
taking (including any claim for bonus or excess value of this Lease); provided,
however, if any portion of the Premises is taken, Tenant shall be granted the
right to recover from the condemning authority (but not from Landlord) any
compensation as may be separately awarded or recoverable by Tenant for the
taking of Tenant's
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furniture, fixtures, equipment and other personal property within the Premises,
for Tenant's relocation expenses, and for any loss of goodwill or other damage
to Tenant's business by reason of such taking.
19.4 TEMPORARY TAKING. In the event of a taking of the Premises or any part
thereof for temporary use, (a) this Lease shall be and remain unaffected thereby
and rent shall not abate, and (b) Tenant shall be entitled to receive for itself
such portion or portions of any award made for such use with respect to the
period of the taking which is within the Term, provided that if such taking
shall remain in force at the expiration or earlier termination of this Lease,
Tenant shall perform its obligations under Section 9 with respect to surrender
of the Premises and shall pay to Landlord the portion of any award which is
attributable to any period of time beyond the Term expiration date. For purpose
of this Section 19.4, a temporary taking shall be defined as a taking for a
period of two hundred seventy (270) days or less.
19.5 WAIVER OF TERMINATION RIGHT. This Lease sets forth the terms and conditions
upon which this Lease may terminate in the event of a taking. Accordingly, the
parties waive the provisions of the California Code of Civil Procedure Section
1265.130 and any successor or similar statutes permitting the parties to
terminate this Lease as a result of a taking.
20. TENANT'S INSURANCE.
20.1 TYPES OF INSURANCE. On or before the earlier of the Commencement Date or
the date Landlord delivers possession of the Premises to Tenant, and continuing
thereafter until the expiration of the Term, Tenant shall obtain and keep in
full force and effect, the following insurance:
(a) Special Form (fka All Risk) insurance, including fire and extended
coverage, sprinkler leakage (including earthquake sprinkler leakage),
vandalism and malicious mischief coverage upon property of every
description and kind owned by Tenant and located in the Premises or the
Building, or for which Tenant is legally liable or installed by or on
behalf of Tenant including, without limitation, furniture, equipment and
any other personal property, and any Tenant Changes (but excluding the
Tenant Improvements and any Tenant Changes that Landlord elects to
insure pursuant to Section 12.1(b) above) , in an amount not less then
the full replacement cost thereof. In the event that there shall be a
dispute as to the amount which comprises full replacement cost, the
decision of Landlord or the mortgagees of Landlord shall be presumptive.
(b) Commercial general liability insurance coverage, on an occurrence basis,
including personal injury, bodily injury (including wrongful death),
broad form property damage, operations hazard, owner's protective
coverage, contractual liability (including Tenant's indemnification
obligations under this Lease, including Section 17 hereof), liquor
liability (if Tenant serves alcohol on the Premises), products and
completed operations liability, and owned/non-owned auto liability, with
a general aggregate of not less than Three Million Dollars ($3,000,000)
and with "umbrella" or "excess liability" coverage of not less than Five
Million Dollars ($5,000,000). The limits of such commercial general
liability insurance shall be increased every three (3) years during the
Term of this Lease to an amount reasonably required by Landlord.
(c) Worker's compensation and employer's liability insurance, in statutory
amounts and limits, covering all persons employed in connection with any
work done in, on or about the Premises for which claims for death or
bodily injury could be asserted against Landlord, Tenant or the
Premises.
(d) Loss of income, extra expense and business interruption insurance in
such amounts as will reimburse Tenant for direct or indirect loss of
earnings attributable to all perils commonly insured against by prudent
tenants or attributable to prevention of access to the Premises,
Tenant's parking areas or to the Building as a result of such perils.
(e) Any other form or forms of insurance as Tenant or Landlord or the
mortgagees of Landlord may reasonably require from time to time, in
form, amounts and for insurance risks against which a prudent tenant
would protect itself, but only to the extent (i) such risks and amounts
are available in the insurance market at commercially reasonable costs,
and (ii) such insurance is then-customarily required of similarly
situated tenants in similarly situated markets.
20.2 REQUIREMENTS. Each policy required to be obtained by Tenant hereunder
shall: (a) be issued by insurers which are approved by Landlord and/or
Landlord's mortgagees and are authorized to do business in the state in which
the Building is located and rated not less than financial class X, and not less
than policyholder rating A in the most recent version of Best's Key Rating Guide
(provided that, in any event, the same insurance company shall provide the
coverages described in Sections 20.1(a) and 20.1(d) above); (b) be in form
reasonably satisfactory from time to time to Landlord; (c) name Tenant as named
insured thereunder and shall name Landlord and, at Landlord's request, such
other persons or entities of which Tenant has been informed in writing, as
additional insureds thereunder, all as their respective interests may appear;
(d) not have a deductible amount exceeding Five Thousand Dollars ($5,000.00),
which deductible amount shall be deemed self-insured with full waiver of
subrogation; (e) specifically provide that the insurance afforded by such policy
for the benefit of additional insureds shall be primary, and any insurance
carried by the additional insureds shall be excess and non-contributing; (f)
contain an endorsement that the insurer waives its right to subrogation as
described in Section 22 below; (g) require the insurer to notify Landlord and
the other additional insureds in writing not less than thirty (30) days prior to
any material change, reduction in coverage, cancellation or other termination
thereof;
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<PAGE> 24
(h) contain a cross liability or severability of interest endorsement; (i) be in
amounts sufficient at all times to satisfy any coinsurance requirements thereof
and (j) provide that any loss otherwise payable thereunder shall be payable
notwithstanding any act or omission of Landlord or Tenant which might, absent
such provision, result in a forfeiture of all or a part of such insurance
payment. Tenant agrees to deliver to Landlord, as soon as practicable after the
placing of the required insurance, but in no event later than the date Tenant is
required to obtain such insurance as set forth in Section 20.1 above,
certificates from the insurance company evidencing the existence of such
insurance and Tenant's compliance with the foregoing provisions of this Section
20. Tenant shall cause replacement certificates to be delivered to Landlord not
less than thirty (30) days prior to the expiration of any such policy or
policies. If any such initial or replacement certificates are not furnished
within the time(s) specified herein, Tenant shall be deemed to be in material
default under this Lease without the benefit of any additional notice or cure
period provided in Section 23.1 below, and Landlord shall have the right, but
not the obligation, to procure such policies and certificates at Tenant's
expense.
20.3 EFFECT ON INSURANCE. Tenant shall not do or permit to be done anything
which will (a) violate or invalidate any insurance policy maintained by Landlord
or Tenant hereunder, or (b) increase the costs of any insurance policy
maintained by Landlord pursuant to Section 21 or otherwise with respect to the
Building or the Project. If Tenant's occupancy or conduct of its business in or
on the Premises results in any increase in premiums for any insurance carried by
Landlord with respect to the Building or the Project, Tenant shall pay such
increase as additional rent within ten (10) days after being billed therefor by
Landlord. If any insurance coverage carried by Landlord pursuant to Section 21
or otherwise with respect to the Building or the Project shall be cancelled or
reduced (or cancellation or reduction thereof shall be threatened) by reason of
the use or occupancy of the Premises by Tenant or by anyone permitted by Tenant
to be upon the Premises, and if Tenant fails to remedy such condition within
five (5) days after notice thereof and such notice informed Tenant that such
failure would result in Tenant being in default under this Lease, Tenant shall
be deemed to be in default under this Lease, without the benefit of any
additional notice or cure period specified in Section 23.1 below, and Landlord
shall have all remedies provided in this Lease, at law or in equity, including,
without limitation, the right (but not the obligation) to enter upon the
Premises and attempt to remedy such condition at Tenant's cost.
21. LANDLORD'S INSURANCE. During the Term, Landlord shall insure the Common Area
improvements, the Building, the Premises and the Tenant Improvements (excluding,
however, Tenant's furniture, equipment and other personal property and Tenant
Changes, unless Landlord otherwise elects to insure the Tenant Changes pursuant
to Section 12.1(b) above) against damage by fire and standard extended coverage
perils and with vandalism and malicious mischief endorsements, rental loss
coverage, at Landlord's option, earthquake damage coverage, and such additional
coverage as Landlord deems appropriate. Landlord shall also carry commercial
general liability insurance, in such reasonable amounts and with such reasonable
deductibles as would be carried by a prudent owner of a similar building in the
state in which the Building is located. At Landlord's option, all such insurance
may be carried under any blanket or umbrella policies which Landlord has in
force for other buildings and projects. In addition, at Landlord's option,
Landlord may elect to self-insure all or any part of such required insurance
coverage provided that Landlord has a net worth of at least Fifty Million
Dollars ($50,000,000.00) and if Landlord so elects to self-insure, for purposes
of this Lease Landlord shall be deemed to have carried that portion of the
insurance that it has elected to self-insure. Landlord may, but shall not be
obligated to, carry any other form or forms of insurance as Landlord or the
mortgagees or ground lessors of Landlord may reasonably determine is advisable.
The cost of insurance obtained by Landlord pursuant to this Section 21
(including self-insured amounts and deductibles) shall be included in Operating
Expenses.
22. WAIVERS OF SUBROGATION.
22.1 MUTUAL WAIVER OF PARTIES. Landlord and Tenant hereby waive their rights
against each other with respect to any claims or damages or losses which are
caused by or result from (a) occurrences insured against under any insurance
policy (other than commercial general liability insurance) carried by Landlord
or Tenant (as the case may be) pursuant to the provisions of this Lease and
enforceable at the time of such damage or loss, or (b) occurrences which would
have been covered under any insurance (other than commercial general liability
insurance) required to be obtained and maintained by Landlord or Tenant (as the
case may be) under Sections 20 and 21 of this Lease (as applicable) had such
insurance been obtained and maintained as required therein. The foregoing
waivers shall be in addition to, and not a limitation of, any other waivers or
releases contained in this Lease.
22.2 WAIVER OF INSURERS. Each party shall cause each insurance policy (other
than commercial general liability insurance) required to be obtained by it
pursuant to Sections 20 and 21 to provide that the insurer waives all rights of
recovery by way of subrogation against either Landlord or Tenant, as the case
may be, in connection with any claims, losses and damages covered by such
policy. If either party fails to maintain any such insurance required hereunder,
such insurance shall be deemed to be self-insured with a deemed full waiver of
subrogation as set forth in the immediately preceding sentence.
23. TENANT'S DEFAULT AND LANDLORD'S REMEDIES.
23.1 TENANT'S DEFAULT. The occurrence of any one or more of the following events
shall constitute a default under this Lease by Tenant:
(a) intentionally omitted;
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(b) the failure by Tenant to make any payment of rent or additional rent or
any other payment required to be made by Tenant hereunder, where such
failure continues for three (3) days after written notice thereof from
Landlord that such payment was not received;
(c) the failure by Tenant to observe or perform any of the express or
implied covenants or provisions of this Lease to be observed or
performed by Tenant, other than as specified in Sections 23.1(a) or (b)
above, where such failure shall continue for a period of ten (10) days
after written notice thereof from Landlord to Tenant; provided, however,
that if the nature of Tenant's default is such that it may be cured but
more than ten (10) days are reasonably required for its cure, then
Tenant shall not be deemed to be in default if Tenant shall commence
such cure within said ten (10) day period and thereafter diligently
prosecute such cure to completion, which completion shall occur not
later than sixty (60) days from the date of such notice from Landlord;
and
(d) (i) the making by Tenant or any guarantor hereof of any general
assignment for the benefit of creditors, (ii) the filing by or against
Tenant or any guarantor hereof of a petition to have Tenant or any
guarantor hereof adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of
a petition filed against Tenant or any guarantor hereof, the same is
dismissed within sixty (60) days), (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease or of
substantially all of guarantor's assets, where possession is not
restored to Tenant or guarantor within sixty (60) days, or (iv) the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of substantially all of
guarantor's assets or of Tenant's interest in this Lease where such
seizure is not discharged within sixty (60) days.
(e) any material representation or warranty made by Tenant or guarantor in
this Lease or any other document delivered in connection with the
execution and delivery of this Lease or pursuant to this Lease proves to
be incorrect in any material respect; or
(f) Tenant or any guarantor hereof shall be liquidated or dissolved or shall
begin proceedings towards its liquidation or dissolution.
Any notice sent by Landlord to Tenant pursuant to this Section 23.1 shall be in
lieu of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161.
23.2 LANDLORD'S REMEDIES; TERMINATION. In the event of any such default by
Tenant, in addition to any other remedies available to Landlord under this
Lease, at law or in equity, Landlord shall have the immediate option to
terminate this Lease and all rights of Tenant hereunder. In the event that
Landlord shall elect to so terminate this Lease, then Landlord may recover from
Tenant:
(a) the worth at the time of award of any unpaid rent which had been earned
at the time of such termination; plus
(b) the worth at the time of the award of the amount by which the unpaid
rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus
(c) the worth at the time of award of the amount by which the unpaid rent
for the balance of the term after the time of award exceeds the amount
of such rental loss that Tenant proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under
this Lease or which, in the ordinary course of things, would be likely
to result therefrom including, but not limited to: unamortized Tenant
Improvement costs; attorneys' fees; unamortized brokers' commissions;
the costs of refurbishment, alterations, renovation and repair of the
Premises; and removal (including the repair of any damage caused by such
removal) and storage (or disposal) of Tenant's personal property,
equipment, fixtures, Tenant Changes, Tenant Improvements and any other
items which Tenant is required under this Lease to remove but does not
remove.
As used in Sections 23.2(a) and 23.2(b) above, the "worth at the time of award"
is computed by allowing interest at the Interest Rate set forth in Section 1.14
of the Summary. As used in Section 23.2(c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
23.3 LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any such default by
Tenant, in addition to any other remedies available to Landlord under this
Lease, at law or in equity, Landlord shall also have the right, with or without
terminating this Lease, to re-enter the Premises and remove all persons and
property from the Premises; such property may be removed, stored and/or disposed
of pursuant to Section 12.4 of this Lease or any other procedures permitted by
applicable law. No re-entry or taking possession of the Premises by Landlord
pursuant to this Section 23.3, and no acceptance of surrender of the Premises or
other action on Landlord's part, shall be construed as an election to terminate
this Lease unless a written notice of such intention be given to Tenant or
unless the termination thereof be decreed by a court of competent jurisdiction.
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23.4 LANDLORD'S REMEDIES; CONTINUATION OF LEASE. In the event of any such
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord shall have the right to continue this
Lease in full force and effect, whether or not Tenant shall have abandoned the
Premises. The foregoing remedy shall also be available to Landlord pursuant to
California Civil Code Section 1951.4 and any successor statute thereof in the
event Tenant has abandoned the Premises. In the event Landlord elects to
continue this Lease in full force and effect pursuant to this Section 23.4, then
Landlord shall be entitled to enforce all of its rights and remedies under this
Lease, including the right to recover rent as it becomes due. Landlord's
election not to terminate this Lease pursuant to this Section 23.4 or pursuant
to any other provision of this Lease, at law or in equity, shall not preclude
Landlord from subsequently electing to terminate this Lease or pursuing any of
its other remedies.
23.5 LANDLORD'S RIGHT TO PERFORM. Except as specifically provided otherwise in
this Lease, all covenants and agreements by Tenant under this Lease shall be
performed by Tenant at Tenant's sole cost and expense and without any abatement
or offset of rent. If Tenant shall fail to pay any sum of money (other than
Basic Rent) or perform any other act on its part to be paid or performed
hereunder and such failure shall continue for three (3) days with respect to
monetary obligations (or ten (10) days with respect to non-monetary obligations
(except in case of emergencies, in which such case, such shorter period of time
as is reasonable under the circumstances)) after Tenant's receipt of written
notice thereof from Landlord, Landlord may, without waiving or releasing Tenant
from any of Tenant's obligations, make such payment or perform such other act on
behalf of Tenant. All sums so paid by Landlord and all necessary incidental
costs incurred by Landlord in performing such other acts shall be payable by
Tenant to Landlord within five (5) days after demand therefor as additional
rent.
23.6 INTEREST. If any monthly installment of Basic Rent or Common Area Expenses,
or any other amount payable by Tenant hereunder is not received by Landlord by
the date when due, it shall bear interest at the Interest Rate set forth in
Section 1.14 of the Summary from the date due until paid. All interest, and any
late charges imposed pursuant to Section 23.7 below, shall be considered
additional rent due from Tenant to Landlord under the terms of this Lease.
23.7 LATE CHARGES. Tenant acknowledges that, in addition to interest costs, the
late payments by Tenant to Landlord of any rent or other sums due under this
Lease will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of such costs being extremely difficult and impractical to fix.
Such other costs include, without limitation, processing, administrative and
accounting charges and late charges that may be imposed on Landlord by the terms
of any mortgage, deed of trust or related loan documents encumbering the
Premises, the Building or the Project. Accordingly, if any rent or any other
amount payable by Tenant hereunder is not received by Landlord by the due date
thereof, Tenant shall pay to Landlord an additional sum of ten percent (10%) of
the overdue amount as a late charge, but in no event more than the maximum late
charge allowed by law; provided, however, for the first two (2) times in any
consecutive twelve (12) month period, such late charge shall not be payable
unless Tenant fails to make such payment within three (3) days following the
date Tenant receives written notice from Landlord that such Rent is past due.
The parties agree that such late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of any late payment as
hereinabove referred to by Tenant, and the payment of late charges and interest
are distinct and separate in that the payment of interest is to compensate
Landlord for the use of Landlord's money by Tenant, while the payment of late
charges is to compensate Landlord for Landlord's processing, administrative and
other costs incurred by Landlord as a result of Tenant's delinquent payments.
Acceptance of a late charge or interest shall not constitute a waiver of
Tenant's default with respect to the overdue amount or prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease or at law or in equity now or hereafter in effect.
23.8 INTENTIONALLY DELETED.
23.9 RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of
Landlord contained in this Section 23 and elsewhere in this Lease shall be
construed and held to be cumulative, and no one of them shall be exclusive of
the other, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law or in
equity, whether or not stated in this Lease. Nothing in this Section 23 shall be
deemed to limit or otherwise affect Tenant's indemnification of Landlord
pursuant to any provision of this Lease.
23.10 TENANT'S WAIVER OF REDEMPTION. Tenant hereby waives and surrenders for
itself and all those claiming under it, including creditors of all kinds, (i)
any right and privilege which it or any of them may have under any present or
future law to redeem any of the Premises or to have a continuance of this Lease
after termination of this Lease or of Tenant's right of occupancy or possession
pursuant to any court order or any provision hereof, and (ii) the benefits of
any present or future law which exempts property from liability for debt or for
distress for rent.
23.11 COSTS UPON DEFAULT AND LITIGATION. Tenant shall pay to Landlord and its
mortgagees as additional rent all the expenses incurred by Landlord or its
mortgagees in connection with any default by Tenant hereunder or the exercise of
any remedy by reason of any default by Tenant hereunder, including reasonable
attorneys' fees and expenses. If Landlord or its mortgagees shall be made a
party to any litigation commenced against Tenant or any litigation pertaining to
this Lease or the Premises, at the option of Landlord and/or its mortgagees,
Tenant, at its expense, shall provide Landlord and/or its mortgagees with
counsel approved by Landlord and/or its mortgagees and shall pay all reasonable
costs incurred or paid by Landlord and/or its mortgagees in connection with such
litigation.
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24. LANDLORD'S DEFAULT. Landlord shall not be in default in the performance of
any obligation required to be performed by Landlord under this Lease unless
Landlord has failed to perform such obligation within thirty (30) days after the
receipt of written notice from Tenant specifying in detail Landlord's failure to
perform; provided however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then Landlord
shall not be deemed in default if it commences such performance within such
thirty (30) day period and thereafter diligently pursues the same to completion.
Upon any such uncured default by Landlord, Tenant may exercise any of its rights
provided in law or at equity; provided, however: (a) Tenant shall have no right
to offset or abate rent in the event of any default by Landlord under this
Lease, except to the extent offset rights are specifically provided to Tenant in
this Lease; (b) Tenant shall have no right to terminate this Lease; (c) Tenant's
rights and remedies hereunder shall be limited to the extent (i) Tenant has
expressly waived in this Lease any of such rights or remedies and/or (ii) this
Lease otherwise expressly limits Tenant's rights or remedies, including the
limitation on Landlord's liability contained in Section 31 hereof and (d) in no
event shall Landlord be liable for consequential damages or loss of business
profits.
25. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee of a mortgage or a beneficiary of a deed
of trust now or hereafter encumbering all or any portion of the Building or the
Project, or any lessor of any ground or master lease now or hereafter affecting
all or any portion of the Building or the Project, this Lease shall be subject
and subordinate at all times to such ground or master leases (and such
extensions and modifications thereof), and to the lien of such mortgages and
deeds of trust (as well as to any advances made thereunder and to all renewals,
replacements, modifications and extensions thereof); provided that with regard
to any future deed of trust or ground lease, such subordination shall be
conditioned upon Tenant's possession of the Premises not being disturbed so long
as Tenant is not in default under this Lease. Notwithstanding the foregoing,
Landlord shall have the right to subordinate or cause to be subordinated any or
all ground or master leases or the lien of any or all mortgages or deeds of
trust to this Lease. In the event that any ground or master lease terminates for
any reason or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, at the election of Landlord's
successor in interest, Tenant shall attorn to and become the tenant of such
successor. Tenant hereby waives its rights under any current or future law which
gives or purports to give Tenant any right to terminate or otherwise adversely
affect this Lease and the obligations of Tenant hereunder in the event of any
such foreclosure proceeding or sale. Tenant covenants and agrees to execute and
deliver to Landlord within ten (10) days after receipt of written demand by
Landlord and in the form reasonably required by Landlord, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground or master lease or the lien of any such mortgage or deed of
trust or Tenant's agreement to attorn. Should Tenant fail to sign and return any
such documents within said ten (10) day period, Tenant shall be in default
hereunder without the benefit of any additional notice or cure periods specified
in Section 23.1 above.
26. ESTOPPEL CERTIFICATE.
26.1 TENANT'S OBLIGATIONS. Within ten (10) days following Landlord's
written request, Tenant shall execute and deliver to Landlord an
estoppel certificate, in a form substantially similar to the
form of Exhibit "F" attached hereto, certifying: (a) the
Commencement Date of this Lease; (b) that this Lease is
unmodified and in full force and effect (or, if modified, that
this Lease is in full force and effect as modified, and stating
the date and nature of such modifications); (c) the date to
which the rent and other sums payable under this Lease have been
paid; (d) that there are not, to the best of Tenant's knowledge,
any defaults under this Lease by either Landlord or Tenant,
except as specified in such certificate; and (e) such other
matters as are reasonably requested by Landlord. Any such
estoppel certificate delivered pursuant to this Section 26.1 may
be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of any portion of the Project, as well as
their assignees.
26.2 TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such estoppel
certificate within such time shall constitute a default hereunder without the
applicability of the notice and cure periods specified in Section 23.1 above and
shall be conclusive upon Tenant that: (a) this Lease is in full force and effect
without modification, except as may be represented by Landlord; (b) there are no
uncured defaults in Landlord's or Tenant's performance (other than Tenant's
failure to deliver the estoppel certificate); and (c) not more than one (1)
month's rental has been paid in advance.
27. INTENTIONALLY DELETED.
28. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
28.1 MODIFICATIONS. If, in connection with Landlord's obtaining or entering into
any financing or ground lease for any portion of the Building or the Project,
the lender or ground lessor shall request modifications to this Lease, Tenant
shall, within ten (10) days after request therefor, execute an amendment to this
Lease including such modifications, provided such modifications are reasonable,
do not increase the obligations of Tenant hereunder, or adversely affect the
leasehold estate created hereby or Tenant's rights hereunder.
28.2 CURE RIGHTS. In the event of any default on the part of Landlord, Tenant
will give notice by registered or certified mail to any beneficiary of a deed of
trust or mortgagee covering the Premises or ground lessor of Landlord whose
address shall have been furnished to Tenant, and shall offer such beneficiary,
mortgagee or ground lessor a reasonable opportunity to cure the default
(including with
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respect to any such beneficiary or mortgagee, time to obtain possession of the
Premises, subject to this Lease and Tenant's rights hereunder, if such should
prove necessary to effect a cure).
29. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that, upon Tenant
performing all of the covenants and provisions on Tenant's part to be observed
and performed under this Lease (including payment of rent hereunder), Tenant
shall and may peaceably and quietly have, hold and enjoy the Premises in
accordance with and subject to the terms and conditions of this Lease as against
all persons claiming by, through or under Landlord.
30. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this Lease,
so far as covenants or obligations on the part of the Landlord are concerned,
shall be limited to mean and include only the owner or owners, at the time in
question, of the fee title to, or a lessee's interest in a ground lease of, the
Project. In the event of any transfer or conveyance of any such title or
interest (other than a transfer for security purposes only), the transferor
shall be automatically relieved of all covenants and obligations on the part of
Landlord contained in this Lease arising after the date of such transfer or
conveyance. Landlord and Landlord's transferees and assignees shall have the
absolute right to transfer all or any portion of their respective title and
interest in the Project, the Building, the Premises and/or this Lease without
the consent of Tenant, and such transfer or subsequent transfer shall not be
deemed a violation on Landlord's part of any of the terms and conditions of this
Lease.
31. LIMITATION ON LANDLORD'S LIABILITY. Notwithstanding anything contained in
this Lease to the contrary, the obligations of Landlord under this Lease
(including any actual or alleged breach or default by Landlord) do not
constitute personal obligations of the individual partners, directors, officers
or shareholders of Landlord or Landlord's partners, and Tenant shall not seek
recourse against the individual partners, directors, officers or shareholders of
Landlord or Landlord's partners, or any of their personal assets for
satisfaction of any liability with respect to this Lease. In addition, in
consideration of the benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby covenants and
agrees for itself and all of its successors and assigns that, except for any
security deposit, insurance proceeds or condemnation proceeds actually paid to
and received by Landlord, the liability of Landlord for its obligations under
this Lease (including any liability as a result of any actual or alleged
failure, breach or default hereunder by Landlord), shall be limited solely to,
and Tenant's and its successors' and assigns' sole and exclusive remedy shall be
against, Landlord's interest in the Project, and no other assets of Landlord.
32. MISCELLANEOUS.
32.1 GOVERNING LAW. This Lease shall be governed by, and construed pursuant to,
the laws of the state in which the Premises are located.
32.2 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 30 above, and
except as otherwise provided in this Lease, all of the covenants, conditions and
provisions of this Lease shall be binding upon, and shall inure to the benefit
of, the parties hereto and their respective heirs, personal representatives and
permitted successors and assigns; provided, however, no rights shall inure to
the benefit of any Transferee of Tenant unless the Transfer to such Transferee
is made in compliance with the provisions of Section 14, and no options or other
rights which are expressly made personal to the original Tenant hereunder or in
any rider attached hereto shall be assignable to or exercisable by anyone other
than the original Tenant under this Lease.
32.3 NO MERGER. The voluntary or other surrender of this Lease by Tenant or a
mutual termination thereof shall not work as a merger and shall, at the option
of Landlord, either (a) terminate all or any existing subleases, or (b) operate
as an assignment to Landlord of Tenant's interest under any or all such
subleases.
32.4 PROFESSIONAL FEES. If either Landlord or Tenant should bring suit or
arbitration against the other with respect to this Lease, including for unlawful
detainer or any other relief against the other hereunder, then all costs and
expenses incurred by the prevailing party therein (including, without
limitation, its actual appraisers', accountants', attorneys' and other
professional fees, expenses and court costs), shall be paid by the other party.
32.5 WAIVER. The waiver by either party of any breach by the other party of any
term, covenant or condition herein contained shall not be deemed to be a waiver
of any subsequent breach of the same or any other term, covenant and condition
herein contained, nor shall any custom or practice which may become established
between the parties in the administration of the terms hereof be deemed a waiver
of, or in any way affect, the right of any party to insist upon the performance
by the other in strict accordance with said terms. No waiver of any default of
either party hereunder shall be implied from any acceptance by Landlord or
delivery by Tenant (as the case may be) of any rent or other payments due
hereunder or any omission by the non-defaulting party to take any action on
account of such default if such default persists or is repeated, and no express
waiver shall affect defaults other than as specified in said waiver. The
subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding breach by Tenant of any term, covenant or condition of
this Lease other than the failure of Tenant to pay the particular rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent.
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32.6 TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. Words used in any gender include
other genders. The Section headings of this Lease are not a part of this Lease
and shall have no effect upon the construction or interpretation of any part
hereof. Any deletion of language from this Lease prior to its execution by
Landlord and Tenant shall not be construed to raise any presumption, canon of
construction or implication, including, without limitation, any implication that
the parties intended thereby to state the converse of the deleted language.
32.7 TIME. Time is of the essence with respect to performance of every provision
of this Lease in which time or performance is a factor. All references in this
Lease to "days" shall mean calendar days unless specifically modified herein to
be "business" days.
32.8 PRIOR AGREEMENTS; AMENDMENTS. This Lease, including the Summary and all
Exhibits and Riders attached hereto contains all of the covenants, provisions,
agreements, conditions and understandings between Landlord and Tenant concerning
the Premises and any other matter covered or mentioned in this Lease, and no
prior agreement or understanding, oral or written, express or implied,
pertaining to the Premises or any such other matter shall be effective for any
purpose. No provision of this Lease may be amended or added to except by an
agreement in writing signed by the parties hereto or their respective successors
in interest. The parties acknowledge that all prior agreements, representations
and negotiations are deemed superseded by the execution of this Lease to the
extent they are not expressly incorporated herein.
32.9 SEPARABILITY. The invalidity or unenforceability of any provision of this
Lease (except for Tenant's obligation to pay Basic Rent and Operating Expenses
under Sections 3 and 4 hereof) shall in no way affect, impair or invalidate any
other provision hereof, and such other provisions shall remain valid and in full
force and effect to the fullest extent permitted by law.
32.10 RECORDING. Neither Landlord nor Tenant shall record this Lease. In
addition, neither party shall record a short form memorandum of this Lease.
32.11 EXHIBITS AND RIDERS. All Exhibits and Riders attached to this Lease are
hereby incorporated in this Lease for all purposes as though set forth at length
herein.
32.12 AUCTIONS. Tenant shall have no right to conduct any auction in, on or
about the Premises, the Building or the Project.
32.13 ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a
lesser amount than the rent payment herein stipulated shall be deemed to be
other than on account of the rent, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy provided in this Lease. Tenant agrees that each of the foregoing
covenants and agreements shall be applicable to any covenant or agreement either
expressly contained in this Lease or imposed by any statute or at common law.
32.14 FINANCIAL STATEMENTS. Upon ten (10) days prior written request from
Landlord (which Landlord may make at any time during the Term but no more often
than once in any calendar year), Tenant shall deliver to Landlord a current
financial statement of Tenant and any guarantor of this Lease. Such statements
shall be prepared in accordance with generally acceptable accounting principles
and certified as true in all material respects by Tenant (if Tenant is an
individual) or by an authorized officer of Tenant (if Tenant is a corporation or
limited liability company) or a general partner of Tenant (if Tenant is a
partnership).
32.15 NO PARTNERSHIP. Landlord does not, in any way or for any purpose, become a
partner of Tenant in the conduct of its business, or otherwise, or joint
venturer or a member of a joint enterprise with Tenant by reason of this Lease.
32.16 FORCE MAJEURE. In the event that either party hereto shall be delayed or
hindered in or prevented from the performance of any act required hereunder by
reason of strikes, lock-outs, labor troubles, inability to procure materials,
failure of power, governmental moratorium or other governmental action or
inaction (including failure, refusal or delay in issuing permits, approvals
and/or authorizations), injunction or court order, riots, insurrection, war,
fire, earthquake, flood or other natural disaster or other reason of a like
nature not the fault of the party delaying in performing work or doing acts
required under the terms of this Lease (but excluding delays due to financial
inability) (herein collectively, "FORCE MAJEURE DELAYS"), then performance of
such act shall be excused for the period of the delay and the period for the
performance of any such act shall be extended for a period equivalent to the
period of such delay. The provisions of this Section 32.16 shall not apply to
nor operate to excuse Tenant from the payment of Basic Rent, Operating Expenses,
percentage rent, if any, additional rent or any other payments strictly in
accordance with the terms of this Lease.
32.17 COUNTERPARTS. This Lease may be executed in one or more counterparts, each
of which shall constitute an original and all of which shall be one and the same
agreement.
32.18 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the
terms of this Lease are confidential and constitute proprietary information of
Landlord. Disclosure of the terms could adversely affect the ability of Landlord
to negotiate other leases and impair Landlord's relationship with
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<PAGE> 30
other tenants. Accordingly, Tenant agrees that it, and its partners, officers,
directors, employees, agents and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any newspaper or
other publication or any other tenant or apparent prospective tenant of the
Building or other portion of the Project, or real estate agent, either directly
or indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease, or if required by law or applicable legal process, including,
without limitation, any regulations of the Securities and Exchange Commission.
32.19 NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no
discrimination against, or segregation of, any person, group of persons, or
entity on the basis of race, color, creed, religion, age, sex, marital status,
national origin, or ancestry in the leasing, subleasing, transferring,
assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion
thereof.
33. LEASE EXECUTION.
33.1 TENANT'S AUTHORITY. If Tenant executes this Lease as a limited liability
company, partnership or corporation, then Tenant and the persons and/or entities
executing this Lease on behalf of Tenant represent and warrant that: (a) Tenant
is a duly organized and validly existing limited liability company, partnership
or corporation, as the case may be, and is qualified to do business in the state
in which the Premises are located; (b) such persons and/or entities executing
this Lease are duly authorized to execute and deliver this Lease on Tenant's
behalf in accordance with the Tenant's operating agreement (if Tenant is a
limited liability company), Tenant's partnership agreement (if Tenant is a
partnership), or a duly adopted resolution of Tenant's board of directors and
Tenant's by-laws (if Tenant is a corporation); and (c) this Lease is binding
upon Tenant in accordance with its terms. Concurrently with Tenant's execution
and delivery of this Lease to Landlord and/or at any time during the Lease Term
within ten (10) days of Landlord's request, Tenant shall provide to Landlord a
copy of any documents reasonably requested by Landlord evidencing such
qualification, organization, existence and authorization.
33.2 JOINT AND SEVERAL LIABILITY. If more than one person or entity executes
this Lease as Tenant: (a) each of them is and shall be jointly and severally
liable for the covenants, conditions, provisions and agreements of this Lease to
be kept, observed and performed by Tenant; and (b) the act or signature of, or
notice from or to, any one or more of them with respect to this Lease shall be
binding upon each and all of the persons and entities executing this Lease as
Tenant with the same force and effect as if each and all of them had so acted or
signed, or given or received such notice.
33.3 GUARANTY. This Lease is subject to and conditional upon Tenant's delivery
to Landlord, concurrently with Tenant's execution and delivery of this Lease, of
a Guaranty in the form of and upon the terms contained in Exhibit "G" attached
hereto and incorporated herein by this reference, which shall be fully executed
by the Guarantor specified in Section 1.16 of the Summary.
33.4 NO OPTION. The submission of this Lease for examination or execution by
Tenant does not constitute a reservation of or option for the Premises and this
Lease shall not become effective as a Lease until it has been executed by
Landlord and delivered to Tenant.
34. WAIVER OF JURY TRIAL. Each Party hereby waives any right to a trial by jury
in any action seeking specific performance of any provision of this Lease, for
damages for any breach under this Lease, or otherwise for enforcement of any
right or remedy hereunder.
[signatures on next page]
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<PAGE> 31
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year
first above written.
"TENANT" eHNC,
a Delaware corporation
*By:
----------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
*By:
----------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
"LANDLORD" LBA VF-I, LLC, a California limited
liability company
By: LBA, Inc., a California
corporation, its authorized
agent
*By:
---------------------------------
Name:
----------------------------
Title:
----------------------------
- --------
*NOTE:
IF TENANT IS A CALIFORNIA CORPORATION, then one of the following alternative
requirements must be satisfied:
(A) This Lease must be signed by two (2) officers of such corporation: one
being the chairman of the board, the president or a vice president, and
the other being the secretary, an assistant secretary, the chief
financial officer or an assistant treasurer. If one (1) individual is
signing in two (2) of the foregoing capacities, that individual must
sign twice; once as one officer and again as the other officer.
(B) If there is only one (1) individual signing in two (2) capacities, or if
the two (2) signatories do not satisfy the requirements of (A) above,
then Tenant shall deliver to Landlord a certified copy of a corporate
resolution in the form reasonably acceptable to Landlord authorizing the
signatory(ies) to execute this Lease.
IF TENANT IS A CORPORATION INCORPORATED IN A STATE OTHER THAN CALIFORNIA, then
Tenant shall deliver to Landlord a certified copy of a corporate resolution in
the form reasonably acceptable to Landlord authorizing the signatory(ies) to
execute this Lease.
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<PAGE> 32
PROJECT SITE
[MAP]
EXHIBIT "A"
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<PAGE> 33
FLOOR PLAN
[MAP]
EXHIBIT "B"
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<PAGE> 34
TENANT WORK LETTER
1. Tenant shall, at Tenant's sole cost and expense (but subject to
reimbursement by Landlord pursuant to Paragraph 6 below), improve the Premises
in accordance with plans and specifications approved in writing by Landlord and
in accordance with the requirements of all laws. It is contemplated by the
parties that the improvements to the Premises (the "TENANT IMPROVEMENTS") will
be as described or depicted on Schedule 1 attached hereto (the "PRELIMINARY
PLANS"). Within thirty (30) days following the date of the Lease, Tenant shall
provide to Landlord working drawings for the Tenant Improvements (and any
signage) based upon and conforming with the Preliminary Plans and prepared by a
licensed architect or engineer reasonably approved by Landlord. If Tenant
chooses to use Austin Veum as its architect, such architect is approved by
Landlord. Within five (5) business days of Landlord's receipt of such working
drawings, Landlord shall notify Tenant of any required changes to the working
drawings. Landlord's failure to so notify Tenant of any such required changes to
the working drawings within said fifteen (15) day period shall be deemed to
constitute Landlord's approval thereof. Tenant shall revise the working drawings
in accordance with Landlord's comments and deliver the same to Landlord within
ten (10) days of Tenant's receipt of Landlord's comments. Tenant shall, at its
sole cost and expense, be responsible for obtaining all permits and approvals
from governmental authorities necessary for the construction of such
improvements and the operation of Tenant's business. Landlord will reasonably
cooperate with Tenant (at no cost to Landlord) in Tenant's efforts to obtain all
such permits and approvals. Landlord makes no representation concerning the
availability of such permits or approvals.
2. No improvement of any kind to the Premises shall be erected or
maintained unless and until the plans, specifications and proposed location of
such improvement have been approved in writing by Landlord, which approval shall
not be unreasonably withheld or delayed. Landlord's review and approval of the
plans and specifications for the improvements shall create no liability or
responsibility on the part of Landlord for the completeness of such plans or
their design sufficiency or compliance with Laws.
3. Except for Landlord's reimbursement pursuant to Paragraph 6 below,
Landlord shall not be responsible for any costs associated with Tenant's
construction of any improvements and Tenant acknowledges that Tenant is
accepting the Premises in their "as-is" and "where-is" state, subject to
Landlord's obligations under Sections 11.2 and 11.3 of the Lease.
4. No work of any kind shall be commenced on and no building or other
material shall be delivered until at least five (5) business days after written
notice has been given by Tenant to Landlord of the commencement of such work or
the delivery of such materials.
5. The improvements shall be constructed, and all work performed on the
Premises, shall be in accordance with all laws. All work performed on the
Premises shall be done in a good, workmanlike and lien free manner and only with
new materials of good quality and high standards. All work required in the
construction of the improvements shall be performed only by competent
contractors duly licensed as such under the laws of the State of California and
reasonably approved by Landlord. Tenant will competitively bid the general
conditions and fees for the construction with contractors approved by Landlord.
Tenant shall then enter into a construction contract approved by Landlord (which
approval shall not be unreasonably withheld or delayed) with the selected
contractor to construct the Tenant Improvements, which contract will (i) name
Landlord as a third party beneficiary (ii) permit an assignment to Landlord, at
Landlord's election, upon a default by Tenant under the Lease and (iii) provide
that the contractor will guarantee that the Tenant Improvements will be free
from any defects in workmanship and materials for at lease one (1) year
following substantial completion. Tenant shall be responsible for all aspects of
coordinating the construction management, including obtaining and paying for
utilities consumed during construction.
6. Landlord agrees to contribute the sum ("ALLOWANCE") of up to Five
Hundred Thirty Thousand Dollars ($530,000.00) toward the cost of the Tenant
Improvements. Landlord shall only be obligated to make disbursements from the
Allowance to the extent costs are incurred by Tenant for the following items and
costs (collectively, the "TENANT IMPROVEMENT ALLOWANCE ITEMS"):
(a) Payment of the fees of Tenant's architect and engineers in connection
with the preparation of the plans and specifications and final working
drawings;
(b) The payment of plan check, permit and license fees relating to
construction of the Tenant Improvements; and
(c) The cost of construction of the Tenant Improvements.
Provided Tenant is not in default under the Lease (and no circumstance
exists that would, with notice or lapse of time, or both, constitute a default
under the Lease), Landlord shall make periodic disbursements (but no more often
than monthly) of the Allowance for Tenant Improvements. Landlord may, at its
election, make disbursement checks payable jointly to Tenant and the contractor
or other payee, as applicable. As to each disbursement, the appropriate portion
of the Allowance shall be disbursed to Tenant (less 10% retention) only when
Landlord has received the following ("EVIDENCE OF COMPLETION"):
EXHIBIT "C"
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<PAGE> 35
(a) Tenant has delivered to Landlord a draw request ("DRAW REQUEST") in the
form of AIA Document G702 and G703 (or other form acceptable to
Landlord) specifying that the requisite portion of Tenant Improvements
has been completed, together with invoices, receipts and bills
evidencing the costs and expenses set forth in such Draw Request. The
Draw Request shall constitute a representation by Tenant that the Tenant
Improvements identified therein have been completed in a good and
workmanlike manner and in accordance with the approved plans;
(b) The architect for the Tenant Improvements has certified to Landlord that
the Tenant Improvements have been completed to the level indicated in
the Draw Request in accordance with the approved plans;
(c) Tenant has delivered to Landlord conditional lien releases from the
contractor and all relevant subcontractors and materialmen with respect
to work covered by the current Draw Request and unconditional lien
releases from the contractor and all relevant subcontractors and
materialmen with respect to work covered by prior Draw Requests;
(d) Landlord or Landlord's architect or construction representative has
inspected the Tenant Improvements and determined that the portion of the
Tenant Improvements covered by the Draw Request has been completed in a
good and workmanlike manner, and Landlord is satisfied, in its
reasonable judgment, that the cost to complete the Tenant Improvements
does not exceed the remaining Allowance and other sums available to
Tenant for the payment of such costs.
The final disbursement of the balance of the Allowance (i.e., the
retention) shall be disbursed only when Landlord has received Evidence of
Completion as to all of the Tenant Improvements as provided hereinabove and the
following conditions have been satisfied:
(i) Sixty-five (65) days shall have elapsed following the filing of a valid
notice of completion by Tenant for the Tenant Improvements;
(ii) A final or temporary certificate of occupancy for the Premises (if a
temporary certificate, the conditions set forth therein shall be
satisfactory to Landlord in its reasonable judgment) has been issued by
the appropriate governmental body;
(iii) Tenant shall have delivered to Landlord one set of reproducible "As
Built" plans for the Tenant Improvements as prepared by Tenant's
architect;
(iv) A complete list of the names, addresses, telephone numbers and contract
amount for all contractors, subcontractors, vendors and/or suppliers
providing materials and/or labor for the Tenant Improvements;
(v) No claim of lien shall be of record respecting the Tenant Improvements;
(vi) Tenant shall have delivered to Landlord conditional or unconditional
lien releases, as applicable, in accordance with California Civil Code
Section 3262 as to all of the Tenant Improvements;
(vii) Tenant shall have delivered to Landlord copies of all building permits,
indicating inspection and approval of the Premises by the issuer of said
permits; and
(viii) Tenant is not in default under the Lease and no circumstance exists that
would, with notice or lapse of time, or both, constitute a default under
the Lease.
Landlord, at any time after completion of the Tenant Improvements and
upon at least five (5) business days prior written notice to Tenant, may cause
an audit to be made of Tenant's books and records relating to Tenant's
expenditures in connection with the construction of the Tenant Improvements.
Tenant shall maintain complete and accurate books and records in accordance with
generally accepted accounting principles of these expenditures during the term.
Tenant shall make available to Landlord's auditor within three (3) business days
following Landlord's notice requiring the audit, all books and records
maintained by Tenant pertaining to the construction and completion of the Tenant
Improvements. In addition to all other remedies which Landlord may have pursuant
to the Lease, Landlord may recover from Tenant the reasonable cost of its audit
if the audit discloses that Tenant falsely reported to Landlord expenditures
which were not in fact made or falsely reported a material amount of any
expenditure or the aggregate expenditures.
8. If the cost of the Tenant Improvement Allowance Items does not exceed
the Allowance, Tenant shall be entitled to reimbursement for the actual and
documented costs incurred by Tenant for (i) installation of signage, (ii)
network cabling and (iii) moving expenses ("ADDITIONAL WORK") so long as the
Tenant Improvements have been completed. Upon completion of the Additional Work,
Landlord shall disburse to Tenant the appropriate portion of the Allowance only
when the conditions in Section 7 above have been satisfied to the extent that
such conditions are applicable to the Additional Work. If the cost of the Tenant
Improvements Allowance Items and the Additional Work does not, in the aggregate,
exceed the Allowance, Landlord shall retain the difference.
9. In addition to the Allowance, Landlord agrees to contribute an amount
not to exceed Eighty Thousand Dollars ($80,000.00) less any costs incurred by
Landlord to date in connection with
EXHIBIT "C"
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<PAGE> 36
Landlord's current plans for the elevator (the "ADDITIONAL ALLOWANCE"), which
plans shall be made available for Tenant's use, towards the actual and
documented costs incurred by Tenant in connection with its installation of an
elevator in the Premises in a location to be mutually and reasonably acceptable
to Landlord and Tenant. All work required in connection with the installation of
the elevator shall be subject to the terms of Section 5 of this Exhibit "C" and
the Additional Allowance shall be disbursed in accordance with Sections 6, 7 and
8 of this Exhibit "C"; provided, however, that if the cost of the elevator is
less than the Additional Allowance, Tenant shall not be entitled to the
difference between the Additional Allowance and the cost of the elevator nor
shall such difference, if any, be applied toward the Rent due under the Lease.
EXHIBIT "C"
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<PAGE> 37
SCHEDULE 1
[SPACE PLAN AND CORRESPONDENCE DATED AS OF MARCH 30, 2000 FROM CHRIS VEUM TO
BOB WORRELL TO BE ATTACHED HERETO AS SCHEDULE 1]
SCHEDULE 1
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<PAGE> 38
SAMPLE FORM OF NOTICE OF LEASE TERM DATES
To:_________________________________ Date: __________________________
_________________________________
Re: Project Lease dated __________________, 19__ between ___________________,
Landlord, and __________________________________, Tenant, concerning Suite
____________ ("PREMISES") located at __________________________________.
Gentlemen:
In accordance with the above-referenced Lease, we wish to advise and/or confirm
as follows:
1. That the Premises have been accepted by Tenant as being substantially
complete in accordance with the Lease, and that there is no deficiency in
construction.
2. That Tenant has accepted and is in possession of the Premises, and
acknowledges that under the provisions of the Lease, the Term of the Lease is
for ______________ (___) years, with ______________ (___) options to renew for
______________ (___) years each, and commenced upon the Commencement Date of
________________, 19__ and is currently scheduled to expire on
________________________, subject to earlier termination as provided in the
Lease.
3 That in accordance with the Lease, rental payment has commenced (or
shall commence) on ______________.
4. If the Commencement Date of the Lease is other than the first day of
the month, the first billing will contain a pro rata adjustment. Each billing
thereafter, with the exception of the final billing, shall be for the full
amount of the monthly installment as provided for in the Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the Term of the Lease. Your rent checks should be made payable to
_________________________ at _______________________________.
6. The exact number of rentable square feet within the Premises is
____________ square feet.
7. Tenant's Monthly Operating Expense Charge is currently
$________________________.
AGREED AND ACCEPTED
TENANT: LANDLORD:
- ------------------------------------ ------------------------------------
By: By:
--------------------------------- ---------------------------------
By:
---------------------------------
SAMPLE ONLY [NOT FOR EXECUTION]
EXHIBIT "D"
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<PAGE> 39
RULES AND REGULATIONS
1. No sign, advertisement, name or notice shall be installed or
displayed on any part of the outside or inside of the Building or in any part of
the Common Area without the prior written consent of Landlord. Landlord shall
have the right to remove, at Tenant's expense and without notice, any sign
installed or displayed in violation of this rule. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or inscribed at
the expense of Tenant by a person approved by Landlord, using materials and in a
style and format approved by Landlord.
2. Tenant shall not place anything or allow anything to be placed near
the glass of any window, door, partition or wall which may appear unsightly from
outside the Premises, in Landlord's reasonable discretion. No awnings or other
projection shall be attached to the outside walls of the Building without the
prior written consent of Landlord.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits,
entrances, or loading docks of the Building. Neither Tenant nor any employee,
invitee, agent, licensee or contractor of Tenant shall go upon or be entitled to
use any portion of the roof of the Building.
4. Unless expressly set forth to the contrary in Tenant's Lease, Tenant
shall have no right or entitlement to the display of Tenant's name or logo on
any Project sign, monument sign or pylon sign.
5. All cleaning and janitorial services for the Premises shall be
provided, at Tenant's sole cost and expense, exclusively by or through Tenant or
Tenant's janitorial contractors in accordance with the provisions of Tenant's
Lease. Tenant shall not cause any unnecessary labor by carelessness or
indifference to the good order and cleanliness of the Premises.
6. Landlord will furnish Tenant, free of charge, with two keys to each
door lock in the Premises. Landlord may impose a reasonable charge for any
additional keys. Tenant, upon termination of its tenancy, shall deliver to
Landlord the keys of all doors which have been furnished to, or otherwise
procured by Tenant.
7. Tenant shall not use or keep in the Premises any kerosene, gasoline
or inflammable or combustible fluid or material other than those limited
quantities necessary for the operation or maintenance of office equipment,
subject to any express provisions of Tenant's Lease to the contrary. Tenant
shall not use or permit to be used in the Premises any foul or noxious gas or
substance, or permit or allow the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the Building by
reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or
about the Premises any birds or animals.
8. Landlord reserves the right from time to time, in Landlord's sole and
absolute discretion, exercisable without prior notice and without liability to
Tenant: (a) to name or change the name of the Building or Project; (b) to change
the address of the Building, and/or (c) to install, replace or change any signs
in, on or about the Common Areas, the Building or Project (except for Tenant's
signs, if any, which are expressly permitted by Tenant's Lease).
9. Tenant shall close and lock all doors of its Premises and entirely
shut off all water faucets or other water apparatus, unless otherwise needed for
Tenant's business and, except with regard to Tenant's computers and other
equipment, if any, which reasonably require electricity on a 24-hour basis, all
electricity, gas or air outlets before Tenant and its employees leave the
Premises. Tenant shall be responsible for any damage or injuries sustained by
other tenants or occupants of the Building or by Landlord for noncompliance with
this rule.
10. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed, and no foreign substances of any kind whatsoever shall be thrown
therein.
11. Tenant shall not make any room-to-room solicitation of business from
other tenants in the Building. Tenant shall not use the Premises for any
business or activity other than that specifically provided for in the Lease.
12. Tenant shall not install any radio or television antenna,
loudspeaker or other device on the roof or exterior walls of the Building.
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Building or elsewhere.
13. Canvassing, soliciting and distribution of handbills or any other
written material, and peddling in the Common Area and other portions of the
Project are expressly prohibited, and each tenant shall cooperate to prevent
same.
14. Landlord reserves the right to exclude or expel from the Project any
person who, in Landlord's judgment, is intoxicated or under the influence of
liquor or drugs or who is in violation of any of the Rules and Regulations of
the Project.
EXHIBIT "E"
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<PAGE> 40
15. Tenant shall store all its trash and garbage within its Premises or
in designated trash containers or enclosures within the Project. Tenant shall
not place in any trash box or receptacle any material which cannot be disposed
of in the ordinary and customary manner of trash and garbage disposal. All
garbage and refuse disposal shall be made in accordance with directions
reasonably issued from time to time by Landlord.
16. The Premises shall not be used for lodging or for manufacturing of
any kind.
17. Tenant agrees that it shall comply with all fire and security
regulations that may be issued from time to time by Landlord, and Tenant also
shall provide Landlord with the name of a designated responsible principal or
employee to represent Tenant in all matters pertaining to such fire or security
regulations. Tenant shall cooperate fully with Landlord in all matters
concerning fire and other emergency procedures.
18. Tenant assumes any and all responsibility for protecting its
Premises from theft, robbery and pilferage. Such responsibility shall include
keeping doors locked and other means of entry to the Premises closed.
19. The requirements of Tenant will be attended to only upon the
appropriate application to Landlord or Landlord's designated representative by
an authorized individual. Employees of Landlord shall not perform any work or do
anything outside of their regular duties unless under special instructions from
Landlord.
20. Landlord may waive any one or more of these Rules and Regulations
for the benefit of Tenant or any other tenant, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of Tenant
or any other such tenant, nor prevent Landlord from thereafter enforcing any
such Rules and Regulations against any and all of the tenants in the Building.
21. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the Project.
22. Landlord reserves the right to make such other and reasonable Rules
and Regulations as, in its judgment, may from time to time be needed for safety,
security, care and cleanliness of the Project and for the preservation of good
order therein. Tenant agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are adopted.
23. Tenant shall be responsible for the observance of all of the
foregoing rules by Tenant's employees, agents, clients, customers, invitees or
guests.
PARKING RULES AND REGULATIONS
In addition to the foregoing rules and regulations and the parking
provisions contained in the Lease to which this Exhibit "E" is attached, the
following rules and regulations shall apply with respect to the use of the
Project's parking areas.
1. Every parker is required to park and lock his/her own vehicle. All
responsibility for damage to or loss of vehicles is assumed by the parker and
Landlord shall not be responsible for any such damage or loss by water, fire,
defective brakes, the act or omissions of others, theft, or for any other cause.
2. Tenant and its employees shall only park in parking areas designated
by Landlord. Tenant shall not leave vehicles in the parking areas overnight nor
park any vehicles in the parking areas other than automobiles, motorcycles,
motor driven or non-motor driven bicycles or four wheeled trucks.
3. No overnight or extended term storage of vehicles shall be permitted.
4. Vehicles must be parked entirely within painted stall lines of a
single parking stall.
5. All directional signs and arrows must be observed.
6. The speed limit within all parking areas shall be five (5) miles per
hour.
7. Parking is prohibited: (a) in areas not striped for parking; (b) in
aisles; (c) where "no parking" signs are posted; (d) on ramps; (e) in
cross-hatched areas; and (f) in reserved spaces and in such other areas as may
be designated by Landlord.
8. Washing, waxing, cleaning or servicing of any vehicle in any area not
specifically reserved for such purpose is prohibited.
9. Landlord may refuse to permit any person who violates these rules to
park in the parking areas, and any violation of the rules shall subject the
vehicle to removal, at such vehicle owner's expense.
EXHIBIT "E"
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<PAGE> 41
SAMPLE FORM OF TENANT ESTOPPEL CERTIFICATE
The undersigned ("Tenant") hereby certifies to
______________________________ ("Landlord"), and ____________________________,
as follows:
1. Attached hereto is a true, correct and complete copy of that certain
Project Lease dated ________________________, 19__ between Landlord and Tenant
(the "Lease"), which demises Premises which are located at
________________________________________________. The Lease is now in full force
and effect and has not been amended, modified or supplemented, except as set
forth in Section 6 below.
2. The term of the Lease commenced on ________________, 19__.
3. The term of the Lease is currently scheduled to expire on
________________, 19__.
4. Tenant has no option to renew or extend the Term of the Lease except:
________________________________.
5. Tenant has no preferential right to purchase the Premises or any
portion of the Building or Project upon which the Premises are located, and
Tenant has no rights or options to expand into other space in the Building
except: ____________________________________________________________________.
6. The Lease has: (Initial One)
( ) not been amended, modified, supplemented, extended, renewed or
assigned.
( ) been amended, modified, supplemented, extended, renewed or assigned
by the following described agreements, copies of which are attached hereto:
__________________________________________________________________.
7. Tenant has accepted and is now in possession of the Premises and has
not sublet, assigned or encumbered the Lease, the Premises or any portion
thereof except as follows: .
8. The current Basic Rent is $______________; and current monthly
parking charges are $____________.
9. Tenant's Monthly Operating Expense Charge currently payable by Tenant
is $____________ per month.
10. The amount of security deposit (if any) is $________________. No
other security deposits have been made.
11. All rental payments payable by Tenant have been paid in full as of
the date hereof. No rent under the Lease has been paid for more than thirty (30)
days in advance of its due date.
12. All work required to be performed by Landlord under the Lease has
been completed and has been accepted by Tenant, and all tenant improvement
allowances have been paid in full.
13. As of the date hereof, there are no defaults on the part of Landlord
or Tenant under the Lease.
14. Tenant has no defense as to its obligations under the Lease and
claims no set-off or counterclaim against Landlord.
15. Tenant has no right to any concession (rental or otherwise) or
similar compensation in connection with renting the space it occupies, except as
expressly provided in the Lease.
16. All insurance required of Tenant under the Lease has been provided
by Tenant and all premiums have been paid.
17. There has not been filed by or against Tenant a petition in
bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors,
any petition seeking reorganization or arrangement under the bankruptcy laws of
the United States or any state thereof, or any other action brought pursuant to
such bankruptcy laws with respect to Tenant.
18. Tenant pays rent due Landlord under the Lease to Landlord and does
not have any knowledge of any other person who has any right to such rents by
collateral assignment or otherwise.
The foregoing certification is made with the knowledge that
________________________ is about to [FUND A LOAN TO LANDLORD OR PURCHASE THE
BUILDING FROM LANDLORD], and that
EXHIBIT "F"
-1-
<PAGE> 42
________________________ is relying upon the representations herein made in
[FUNDING SUCH LOAN OR PURCHASING THE BUILDING].
Dated: ________________, 19__.
"TENANT"
- ------------------------------------
By:
---------------------------------
By:
---------------------------------
SAMPLE ONLY (NOT FOR EXECUTION)
EXHIBIT "F"
-2-
<PAGE> 43
LEASE GUARANTY
THIS LEASE GUARANTY ("GUARANTY") is made by HNC Software Inc., a
Delaware corporation ("GUARANTOR") in favor of LBA VF-I, LLC, a California
limited liability company ("LANDLORD") in connection with that certain
Multi-Tenant Industrial Lease dated April ___, 2000 (the "LEASE") pursuant to
which Landlord is to lease to eHNC Software, a Delaware corporation ("TENANT") a
portion of those premises generally referred to as 9477 Waples Street, San
Diego, California 92121 (the "PREMISES").
A. Landlord requires this Guaranty as a condition to its execution of
the Lease and the performance of the obligations to be performed under the Lease
by Landlord.
B. Guarantor has agreed to provide this Guaranty to induce Landlord to
enter into the Lease with Tenant and perform its obligations under the Lease.
C. All capitalized terms contained herein which are not otherwise
defined herein shall have the meanings ascribed to such terms in the Lease.
In consideration of Landlord's agreement to execute the Lease and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Guarantor does hereby agree with Landlord as follows:
1. The Lease is hereby incorporated into and made a part of this
Guaranty by this reference.
2. Guarantor hereby unconditionally guarantees, as a primary obligor and
not as a surety, without deduction by reason of setoff, defense or counterclaim,
the full and punctual payment of all sums of rent and other amounts payable
under the Lease and the full and punctual performance of all terms, covenants
and conditions in the Lease to be kept, performed and/or observed by Tenant.
Guarantor's obligations under this Guaranty are continuing and unconditional.
Notwithstanding the foregoing, (a) with respect to any obligations accruing
under the Lease during the first two (2) years of the Term, Guarantor's
liability to Landlord pursuant to this Section 2 shall be limited to an amount
equal to one (1) year's worth of Basic Rent and Additional Rent; and (b) with
respect to any obligations accruing under the Lease during the remainder of the
Lease Term , Guarantor's liability to Landlord pursuant to this Section 2 shall
be limited to an amount equal to nine (9) month's worth of Basic Rent and
Additional Rent; provided, however that Guarantor shall not be entitled to any
reduction in its liability as contemplated in this subparagraph (b) if, at the
time that such reduction is to occur, either (i) a Tenant default exists under
the Lease or (ii) an event has occurred, which, with the passage of time, or the
giving of notice, or both, would become a default under the Lease. All
Additional Rent shall, for the purposes of calculating any amount due under the
provisions of this Section 2, be computed on the basis of the average monthly
amount thereof accruing during the immediately preceding twelve (12) month
period, except that, if it becomes necessary to compute such Additional Rent
before such a twelve (12) month period has occurred, then such Additional Rent
shall be computed on the basis of the average monthly amount thereof accruing
during such shorter period.
3. Guarantor hereby agrees that, without the consent of or notice to
Guarantor and without affecting any of the obligations of Guarantor hereunder:
(a) the Lease may be extended and any other term, covenant or condition of the
Lease may be amended, compromised, released or otherwise altered by Landlord and
Tenant, and Guarantor does guarantee and promise to perform all the obligations
of Tenant under the Lease as so extended, amended, compromised, released or
altered; (b) any guarantor of or party to the Lease may be released, substituted
or added; (c) any right or remedy under the Lease may be exercised, not
exercised, impaired, modified, limited, destroyed, or suspended; (d) Landlord or
any other person may deal in any manner with Tenant, any guarantor, any party to
the Lease or any other person; (e) Landlord may permit Tenant to holdover the
Premises beyond the Lease Term; and (f) all or any part of the Premises or of
Tenant's rights or liabilities under the Lease may be sublet, assigned or
assumed. Without in any way limiting the foregoing, Guarantor agrees not to
unreasonably withhold its consent to any sublease, assignment of the Lease or
other modification of the Lease which is agreed to by Landlord and Tenant.
4. Guarantor hereby waives and agrees not to assert or take advantage
of: (a) any right to require Landlord to proceed against Tenant, or any other
guarantor or person or to pursue any other security or remedy before proceeding
against Guarantor; (b) any defense based on the genuineness, validity,
regularity or enforceability of the Lease; (c) any right or defense that may
arise by reason of the incapacity, lack of authority, death or disability of
Tenant or any other person; and (d) any right or defense arising by reason of
the absence, impairment, modification, limitation, destruction or cessation (in
bankruptcy, by an election of remedies, or otherwise) of the liability of
Tenant, of the subrogation rights of Guarantor or of the right of Guarantor to
proceed against Tenant for reimbursement. Without limiting the generality of the
foregoing, Guarantor hereby waives any and all benefits of the provisions of
Sections 2809, 2810 and 2845 of the California Civil Code and any similar or
analogous statutes of California or any other jurisdiction.
5. Guarantor hereby waives and agrees not to assert or take advantage of
(a) any right or defense based on the absence of any or all presentments,
demands (including demands for performance), notices (including notices of any
adverse change in the financial status of Tenant, notices
EXHIBIT "G"
-1-
<PAGE> 44
of any other facts which increase the risk to Guarantor, notices of
non-performance and notices of acceptance of this Guaranty) and protests of each
and every kind; (b) the defense of any statute of limitations in any action
under or related to this Guaranty or the Lease; (c) any right or defense based
on a lack of diligence or failure or delay by Landlord in enforcing its rights
under this Guaranty or the Lease.
6. Guarantor hereby waives and agrees not to assert or take advantage of
any right to (a) exoneration if Landlord's actions shall impair any security or
collateral of Guarantor; (b) any security or collateral held by Landlord; (c)
require Landlord to proceed against or exhaust any security or collateral before
proceeding against Guarantor; (d) require Landlord to pursue any right or remedy
for the benefit of Guarantor. Without limiting the generality of the foregoing,
Guarantor hereby waives any and all benefits of the provisions of Sections 2819,
2849 and 2850 of the California Civil Code and any similar or analogous statutes
of California or any other jurisdiction.
7. Guarantor shall not, without the prior written consent of Landlord,
commence, or join with any other person in commencing, any bankruptcy,
reorganization or insolvency proceeding against Tenant. Guarantor's obligations
under this Guaranty shall in no way be affected by any bankruptcy,
reorganization or insolvency of Tenant or any successor or assignee of Tenant or
by any disaffirmance or abandonment of the Lease or any payment under this
Guaranty by a trustee of Tenant in any bankruptcy proceeding including, without
limitation, any impairment, limitation, or modification of the liability of
Tenant or the estate of Tenant in bankruptcy, or of any remedy for the
enforcement of Tenant's liability under the Lease resulting from the operation
of any present or future provision of any federal or state bankruptcy or
insolvency law or other statute or from the decision of any court. Guarantor
shall file in any bankruptcy or other proceeding in which the filing of claims
is required or permitted by law all claims which Guarantor may have against
Tenant relating to any indebtedness of Tenant to Guarantor and will assign to
Landlord all rights of Guarantor thereunder. Landlord shall have the sole right
to accept or reject any plan proposed in such proceeding and to take any other
action which a party filing a claim is entitled to do. In all such cases,
whether in administration, bankruptcy or otherwise, the person or persons
authorized to pay such claim shall pay to Landlord the amount payable on such
claim and, to the full extent necessary for that purpose, Guarantor hereby
assigns to Landlord all of Guarantor's rights to any such payments or
distributions to which Guarantor would otherwise be entitled; provided, however,
that Guarantor's obligations hereunder shall not be satisfied except to the
extent that Landlord receives cash by reason of any such payment or
distribution. If Landlord receives anything hereunder other than cash, the same
shall be held as collateral for amounts due under this Guaranty.
8. Until all the Tenant's obligations under the Lease are fully
performed, Guarantor: (a) shall have no right of subrogation or reimbursement
against the Tenant by reason of any payments or acts of performance by Guarantor
under this Guaranty; (b) subordinates any liability or indebtedness of the
Tenant now or hereafter held by Guarantor to the obligations of the Tenant
under, arising out of or related to the Lease or Tenant's use of the Premises;
and (c) acknowledges that the actions of Landlord may affect or eliminate any
rights of subrogation or reimbursement of Guarantor as against Tenant without
any liability or recourse against Landlord. Without limiting the generality of
the foregoing, Guarantor hereby waives any and all benefits of the provisions of
Section 2848 of the California Civil Code and any similar or analogous statutes
of California or any other jurisdiction.
9. Prior to the execution of this Guaranty and at any time during the
Term of the Lease upon ten (10) days prior written notice from Landlord,
Guarantor agrees to provide Landlord with a current financial statement for
Guarantor and financial statements for Guarantor for the two (2) years prior to
the current financial statement year to the extent not previously delivered to
Landlord. Guarantor's financial statements are to be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice of
Guarantor, audited by an independent certified public accountant. Guarantor
represents and warrants that all such financial statements shall be true and
correct statements of Guarantor's financial condition.
10. The liability of Guarantor and all rights, powers and remedies of
Landlord hereunder and under any other agreement now or at any time hereafter in
force between Landlord and Guarantor relating to the Lease shall be cumulative
and not alternative and such rights, powers and remedies shall be in addition to
all rights, powers and remedies given to Landlord by law.
11. This Guaranty applies to, inures to the benefit of and binds all
parties hereto, their heirs, devisees, legatees, executors, administrators,
representatives, successors and assigns. This Guaranty may be assigned by
Landlord voluntarily or by operation of law.
12. This Guaranty shall constitute the entire agreement between
Guarantor and the Landlord with respect to the subject matter hereof. No
provision of this Guaranty or right of Landlord hereunder may be waived nor may
any guarantor be released from any obligation hereunder except by a writing duly
executed by an authorized officer, director or trustee of Landlord. The waiver
or failure to enforce any provision of this Guaranty shall not operate as a
waiver of any other breach of such provision or any other provisions hereof. No
course of dealing between Landlord and Tenant shall alter or affect the
enforceability of this Guaranty or Guarantor's obligations hereunder.
13. Guarantor hereby agrees to indemnify, protect, defend and hold
Landlord harmless from and against, all losses, costs and expenses including,
without limitation, all interest, default interest, post-petition bankruptcy
interest and other post-petition obligations, late charges, court costs and
attorneys'
EXHIBIT "G"
-2-
<PAGE> 45
fees, which may be suffered or incurred by Landlord in enforcing or compromising
any rights under this Guaranty or in enforcing or compromising the performance
of Tenant's obligations under the Lease.
14. The term "Landlord" whenever hereinabove used refers to and means
the Landlord in the foregoing Lease specifically named and also any assignee of
said Landlord, whether by outright assignment or by assignment for security, and
also any successor to the interest of said Landlord or of any assignee of such
Lease or any part thereof, whether by assignment or otherwise. The term "Tenant"
whenever hereinabove used refers to and means the Tenant in the foregoing Lease
specifically named and also any assignee or subtenant of said Lease and also any
successor to the interests of said Tenant, assignee or sublessee of such Lease
or any part thereof, whether by assignment, sublease or otherwise including,
without limitation, any trustee in bankruptcy and any bankruptcy estate of
Tenant, Tenant's assignee or sublessee.
15. If any or all Guarantors shall become bankrupt or insolvent, or any
application shall be made to have any or all Guarantors declared bankrupt or
insolvent, or any or all Guarantors shall make an assignment for the benefit of
creditors, or any or all Guarantors shall enter into a proceeding for the
dissolution of marriage, or in the event of death of any or all Guarantors,
notice of such occurrence or event shall be promptly furnished to Landlord by
such Guarantor or such Guarantor's fiduciary. This Guarantee shall extend to and
be binding upon each Guarantor's successors and assigns, including, but not
limited to, trustees in bankruptcy and Guarantor's estate.
16. Any notice, request, demand, instruction or other communication to
be given to any party hereunder shall be in writing and sent by registered or
certified mail, return receipt requested in accordance with the notice
provisions of the Lease. The Tenant shall be deemed Guarantor's agent for
service of process and notice to Guarantor delivered to the Tenant at the
address set forth in the Lease shall constitute proper notice to Guarantor for
all purposes. Notices to Landlord shall be delivered to Landlord's address set
forth in the Lease. Landlord, at its election, may provide an additional notice
to Guarantor at the address provided under Guarantor's signature below.
17. If either party hereto participates in an action against the other
party arising out of or in connection with this Guaranty, the prevailing party
shall be entitled to have and recover from the other party reasonable attorneys'
fees, collection costs and other costs incurred in and in preparation for the
action. Guarantor hereby waives any right to trial by jury and further waives
and agrees not to assert or take advantage of any defense based on any claim
that any arbitration decision binding upon Landlord and Tenant is not binding
upon Guarantor.
18. Guarantor agrees that all questions with respect to this Guaranty
shall be governed by, and decided in accordance with, the laws of the State of
California.
19. Should any one or more provisions of this Guaranty be determined to
be illegal or unenforceable, all other provisions shall nevertheless be
effective.
20. This Guaranty shall terminate and be of no further force and effect
upon the date that is six (6) months following the date that Tenant first
achieves and continuously maintains a tangible net worth of at least Forty
Million Dollars ($40,000,000.00), as determined in accordance with generally
accepted accounting principles.
21. Time is strictly of the essence under this Guaranty and any
amendment, modification or revision hereof.
22. If more than one person signs this Guaranty, each such person shall
be deemed a guarantor and the obligation of all such guarantors shall be joint
and several. When the context and construction so requires, all words used in
the singular herein shall be deemed to have been used in the plural. The word
"PERSON" as used herein shall include an individual, company, firm, association,
partnership, corporation, trust or other legal entity of any kind whatsoever.
23. If Guarantor is a corporation, each individual executing this
Guaranty on behalf of said corporation represents and warrants that he is duly
authorized to execute and deliver this Guaranty on behalf of said corporation,
in accordance with a duly adopted resolution of the Board of Directors of said
corporation or in accordance with the by-laws of said corporation, and that this
Guaranty is binding upon said corporation in accordance with its terms. If
Guarantor is a corporation, Landlord, at its option, may require Guarantor to
concurrently, with the execution of this Guaranty, deliver to Landlord a
certified copy of a resolution of the Board of Directors of said corporation
authorizing or ratifying the execution of this Guaranty.
24. If (a) this Guaranty shall terminate pursuant to Section 20 above,
or (b) upon the expiration or sooner termination of the Lease, Tenant shall have
fully and faithfully performed every provision of the Lease to be performed by
it, Landlord shall, upon Guarantor's written request received following the
earlier to occur of (a) or (b) above, provide written notice to Guarantor that
the Guaranty is of no further force or effect.
EXHIBIT "G"
-3-
<PAGE> 46
THE UNDERSIGNED HAS READ AND UNDERSTANDS THE TERMS AND CONDITIONS
CONTAINED IN THIS GUARANTY INCLUDING, WITHOUT LIMITATION, ALL WAIVERS CONTAINED
IN THIS GUARANTY.
Executed on this _______ day of April, 2000.
HNC Software Inc.,
a Delaware corporation
* By:
------------------------------
Print Name:
-------------------------
Print Title:
------------------------
* By:
------------------------------
Print Name:
-------------------------
Print Title:
------------------------
Address of Guarantor:
5930 Cornerstone Court West
San Diego, California 92121
Telephone: (858) 546-8877
- ----------
**NOTE:
IF GUARANTOR IS A CALIFORNIA CORPORATION, then one of the following alternative
requirements must be satisfied:
(A) This Guaranty must be signed by two (2) officers of such corporation:
one being the chairman of the board, the president or a vice president,
and the other being the secretary, an assistant secretary, the chief
financial officer or an assistant treasurer. If one (1) individual is
signing in two (2) of the foregoing capacities, that individual must
sign twice; once as one officer and again as the other officer.
(B) If there is only one (1) individual signing in two (2) capacities, or if
the two (2) signatories do not satisfy the requirements of (A) above,
then Guarantor shall deliver to Landlord a certified copy of a corporate
resolution in the form reasonably acceptable to Landlord authorizing the
signatory(ies) to execute this Guaranty.
IF GUARANTOR IS A CORPORATION INCORPORATED IN A STATE OTHER THAN CALIFORNIA,
then Guarantor shall deliver to Landlord a certified copy of a corporate
resolution in the form reasonably acceptable to Landlord authorizing the
signatory(ies) to execute this Guaranty.
EXHIBIT "G"
-4-
<PAGE> 47
TENANT ENVIRONMENTAL QUESTIONNAIRE
The purpose of this form is to obtain information regarding the use or proposed
use of hazardous materials at the premises. Prospective tenants should answer
the questions in light of their proposed operations at the premises. Existing
tenants should answer the questions as they relate to ongoing operations at the
premises and should update any information previously submitted. If additional
space is needed to answer the questions, you may attach separate sheets of paper
to this form.
Your cooperation in this matter is appreciated.
1. GENERAL INFORMATION
Name of Responding Company:____________________________________________________.
Check the Applicable Status: Prospective Tenant _____ Existing Tenant _____
Mailing Address:________________________________________________________________
Contact Person and Title:_______________________________________________________
Telephone Number: (_____) ________________________
Address of Leased Premises:_____________________________________________________
Length of Lease Term:___________________________________________________________
Describe the proposed operations to take place on the premises, including
principal products manufactured or services to be conducted. Existing tenants
should describe any proposed changes to ongoing operations.
________________________________________________________________________________
________________________________________________________________________________
2. STORAGE OF HAZARDOUS MATERIALS
2.1 Will any hazardous materials be used or stored on-site?
Wastes Yes _____ No _____
Chemical Products Yes _____ No _____
2.2 Attach a list of any hazardous materials to be used or stored,
the quantities that will be on-site at any given time, and the
location and method of storage (e.g., 55-gallon drums on
concrete pad).
3. STORAGE TANKS AND SUMPS
3.1 Is any above or below ground storage of gasoline, diesel or
other hazardous substances in tanks or sumps proposed or
currently conducted at the premises?
Yes ______ No _____
If yes, describe the materials to be stored, and the type, size
and construction of the sump or tank. Attach copies of any
permits obtained for the storage of such substances.
________________________________________________________________
________________________________________________________________
3.2 Have any of the tanks or sumps been inspected or tested for
leakage?
Yes ______ No _____
If so, attach the results.
3.3 Have any spills or leaks occurred from such tanks or sumps?
Yes ______ No _____
If so, describe.
________________________________________________________________
________________________________________________________________
EXHIBIT "H"
-1-
<PAGE> 48
3.4 Were any regulatory agencies notified of the spill or leak?
Yes ______ No _____
If so, attach copies of any spill reports filed, any clearance
letters or other correspondence from regulatory agencies
relating to the spill or leak.
3.5 Have any underground storage tanks or sumps been taken out of
service or removed?
Yes ______ No _____
If yes, attach copies of any closure permits and clearance
obtained from regulatory agencies relating to closure and
removal of such tanks.
4. SPILLS
4.1 During the past year, have any spills occurred at the premises?
Yes ______ No _____
If yes, please describe the location of the spill.
________________________________________________________________
________________________________________________________________
4.2 Were any agencies notified in connection with such spills?
Yes ______ No _____
If yes, attach copies of any spill reports or other
correspondence with regulatory agencies.
4.3 Were any clean-up actions undertaken in connection with the
spills?
Yes ______ No _____
Attach copies of any clearance letters obtained from any
regulatory agencies involved and the results of any final soil
or groundwater sampling done upon completion of the clean-up
work.
5. WASTE MANAGEMENT
5.1 Has your company been issued an EPA Hazardous Waste Generator
I.D. Number?
Yes ______ No _____
5.2 Has your company filed a biennial report as a hazardous waste
generator?
Yes ______ No _____
If so, attach a copy of the most recent report filed.
5.3 Attach a list of the hazardous wastes, if any, generated or to
be generated at the premises, its hazard class and the quantity
generated on a monthly basis.
5.4 Describe the method(s) of disposal for each waste. Indicate
where and how often disposal will take place.
_____ On-site treatment or recovery __________________
_____ Discharged to sewer __________________
_____ Transported and disposed of off-site __________________
_____ Incinerator __________________
5.5 Indicate the name of the person(s) responsible for maintaining
copies of hazardous waste manifests completed for off-site
shipments of hazardous waste.
________________________________________________________________
5.6 Is any treatment of processing of hazardous wastes currently
conducted or proposed to be conducted at the premises:
Yes ______ No _____
EXHIBIT "H"
-2-
<PAGE> 49
If yes, please describe any existing or proposed treatment
methods.
________________________________________________________________
5.7 Attach copies of any hazardous waste permits or licenses issued
to your company with respect to its operations at the premises.
6. WASTEWATER TREATMENT/DISCHARGE
6.1 Do you discharge wastewater to:
_____ storm drain? _____ sewer?
_____ surface water? _____ no industrial discharge
6.2 Is your wastewater treated before discharge?
Yes ______ No _____
If yes, describe the type of treatment conducted.
________________________________________________________________
________________________________________________________________
6.3 Attach copies of any wastewater discharge permits issued to your
company with respect to its operations at the premises.
7. AIR DISCHARGES
7.1 Do you have any filtration systems or stacks that discharge into
the air?
Yes ______ No _____
7.2 Do you operate any of the following types of equipment or any
other equipment requiring an air emissions permit?
_____ Spray booth
_____ Dip tank
_____ Drying oven
_____ Incinerator
_____ Other (please describe)____________________________
_____ No equipment requiring air permits
7.3 Are air emissions from your operations monitored?
Yes ______ No _____
If so, indicate the frequency of monitoring and a description of
the monitoring results.
________________________________________________________________
7.4 Attach copies of any air emissions permits pertaining to your
operations at the premises.
8. HAZARDOUS MATERIALS DISCLOSURES
8.1 Does your company handle hazardous materials in a quantity equal
to or exceeding an aggregate of 500 pounds, 55 gallons, or 200
cubic feet per month?
Yes ______ No _____
8.2 Has your company prepared a hazardous materials management plan
pursuant to any applicable requirements of a local fire
department or governmental agency?
Yes ______ No _____
If so, attach a copy of the business plan.
8.3 Has your company adopted any voluntary environmental, health or
safety program?
EXHIBIT "H"
-3-
<PAGE> 50
Yes _____ No _____
If so, attach a copy of the program. No formal program. We
recycle paper, aluminum cans, and scrap aluminum.
9. ENFORCEMENT ACTIONS, COMPLAINTS
9.1 Has your company ever been subject to any agency enforcement
actions, administrative orders, or consent decrees?
Yes ______ No _____
If so, describe the actions and any continuing compliance
obligations imposed as a result of these actions.
________________________________________________________________
9.2 Has your company ever received requests for information, notice
or demand letters, or any other inquiries regarding its
operations?
Yes ______ No _____
9.3 Have there ever been, or are there now pending, any lawsuits
against the company regarding any environmental or health and
safety concerns?
Yes ______ No _____
9.4 Has an environmental audit ever been conducted at your company's
current facility?
Yes ______ No _____
If so, identify who conducted the audit and when it was
conducted.
________________________________________________________________
"TENANT"
eHNC,
a Delaware corporation
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
Date:
----------------------------
EXHIBIT "H"
-3-
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 128,389
<SECURITIES> 55,368
<RECEIVABLES> 64,901
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0
0
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<SALES> 54,564
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<INTEREST-EXPENSE> 1,372
<INCOME-PRETAX> (16,602)
<INCOME-TAX> (4,387)
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<NET-INCOME> (12,215)
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