-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KC6WE1+CCPci5GIqzdDOgk7Eeeqc0eC4lL09NWUFkHdDT5YeqnmoPpsLfiJMVUCe l1ik2vtOr6rDOO4tlOFjUw== 0000936392-97-000881.txt : 19970701 0000936392-97-000881.hdr.sgml : 19970701 ACCESSION NUMBER: 0000936392-97-000881 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRITEAL CORP CENTRAL INDEX KEY: 0001000925 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 330548924 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28660 FILM NUMBER: 97632681 BUSINESS ADDRESS: STREET 1: 2011 PALOMAR AIRPORT RD STREET 2: STE404 CITY: CARLSBAD STATE: CA ZIP: 92009 BUSINESS PHONE: 6199302077 MAIL ADDRESS: STREET 1: 2011 PALOMAR AIRPORT RD CITY: CARLSBAD STATE: CA ZIP: 92009 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997 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 0-28660 - ------------------------------------------------------------------------------- TRITEAL CORPORATION (Exact name of Registrant as specified in its charter) - ------------------------------------------------------------------------------- DELAWARE 33-0548924 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2011 PALOMAR AIRPORT ROAD CARLSBAD, CA 92009-1431 (Address of principal executive offices) (760) 827-5000 (Registrant's phone number, including area code) ---------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: YES [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 19, 1997, the aggregate market value of voting stock held by non-affiliates of the Registrant (based upon the closing sale price of such shares on the Nasdaq National Market on June 19, 1997) was approximately $67,624,993. Excludes shares of Common Stock held by each executive officer and director and by each entity that owns 5% or more of the outstanding Common Stock. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. As of June 19, 1997, there were 10,878,908 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 1997 Annual Meeting of Stockholders to be held on August 27, 1997 is incorporated by reference into Part III of this Report on Form 10-K to the extent stated herein. 2 PART I ITEM 1. BUSINESS The following description of the Company's business contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those set forth in these forward-looking statements as a result of a number of factors, including those set forth below under the caption "Risk Factors" at the end of this Item 1 and elsewhere in this Report on Form 10-K. TriTeal Corporation develops, markets and supports open systems-based, mission-critical desktop system software and integrated applications that enable multi-platform deployment of client/server applications throughout an enterprise. The Company's flagship product, the TriTeal Enterprise Desktop ("TED"), allows individual users, system administrators and developers to easily access applications, data and network resources from a common, intuitive operating environment across most leading platforms used in the enterprise client/server market. TED's consistency and interoperability allow the enterprise greater flexibility in deploying client/server hardware and in integrating existing legacy applications, thereby enabling increased operating efficiency and productivity. To further increase functionality in the operating environment, TriTeal has developed follow-on products that are either sold separately or bundled with the current release of TED. TriTeal recently introduced its Java-based SoftNC technology, a thin-client, platform-independent solution designed to allow simultaneous access to Java and legacy applications. The Company provides customers with a broad range of services, including needs assessment and analysis, application development, software integration and training. INDUSTRY BACKGROUND In the mid-1980s, the development of powerful and cost-effective servers, workstations and other client/server technologies increasingly led many large enterprise organizations to adopt these technologies for deployment of new mission-critical software applications. Client/server solutions were typically developed and deployed on disparate, proprietary platforms (hardware, operating system and desktop software) to solve specific business problems. For example, a Hewlett-Packard proprietary vendor configuration might include PA/RISC as the processor, HP/UX as the operating system and HP VUE as the desktop. In contrast, a Sun Microsystems, Inc. proprietary configuration might include SPARC as the processor, SunOS as the operating system and OpenLook as the desktop. As a result, large enterprises typically deployed a variety of hardware platforms, network architectures and applications that were not compatible or interoperable. The problem of multiplicity of systems within the enterprise was compounded as advanced new technologies became available that were not fully compatible with existing systems. For example, the recent introduction of Microsoft Windows NT and the increased adoption of Internet/intranet technologies have added to the fragmentation within the enterprise. According to Sentry Market Research, the average number of operating systems supported in the client/server enterprise increased from four systems in 1991 to 12 systems in 1996 to a projected 13 systems by the end of 1997. This fragmentation among computing technologies continues to present the enterprise with a number of challenges. The cost of maintaining system administration, training, development and support functions for each platform, as well as the costs associated with the delivery of applications and data across disparate platforms, can be substantial. Moreover, because the desktop and the operating system are generally dependent on a particular hardware platform, the end-user is typically restricted to that platform and cannot easily access applications or data residing on other platforms in the enterprise. In addition, with proprietary systems, the enterprise is often restricted to a limited selection of compatible hardware components. Finally, the desire to maintain both the substantial investments made by the enterprise in legacy applications for specific platforms, along with the ability to perform critical day-to-day work activities on those legacy applications, has continued to compound the fragmentation problem. Historically, enterprises have developed custom software solutions in order to achieve interoperability among disparate platforms. These solutions, however, are costly and labor intensive to develop and implement, and require substantial technical resources to support each of the various platforms within the enterprise. Adding a single new application to a custom solution can require substantial engineering efforts. Moreover, accessing applications 2 3 running on different platforms can be extremely complex, increasing the training required for users and reducing user productivity. The open systems vendor community has attempted to resolve some of these fragmentation issues through a series of initiatives, which include CDE (Common Desktop Environment), Motif and DCE (Distributed Computing Environment) technologies and standards. While these and other initiatives are supported by the hardware vendors, the Company believes that the technologies and standards are typically implemented in a proprietary manner, which is inconsistent with the fundamental purpose of these initiatives. The increasing fragmentation of the enterprise client/server environment, together with recent advances in computer networking and Internet/intranet technologies, have fueled the need for a cost-effective, easy-to-use, unified enterprise operating environment that enables effective deployment of mission-critical client/server applications on the wide range of platforms and operating systems commonly used throughout an enterprise. To address this need, the Company believes that any solution should (i) interoperate among multiple disparate platforms and operating systems; (ii) provide users with a consistent look and feel to minimize training and enhance productivity; (iii) offer sophisticated features and substantial functionality based on open systems industry standards to facilitate integration with multiple platforms and operating systems; (iv) provide systems administrators with effective management tools; (v) provide developers with a single set of application programming interfaces ("APIs") to create applications; and (vi) enable enterprise customers to adopt advanced new technologies, including Internet/intranet technologies, while protecting valuable legacy client/server software and systems. THE TRITEAL SOLUTION To address the problem of fragmentation within the enterprise, TriTeal developed its desktop system software solution, TED, and its recently introduced SoftNC technology, which provide the following benefits: - Interoperability. TED provides interoperability among disparate platforms by allowing applications from various client/server platforms to display and operate on any client platforms on which TED is supported. For example, an application that was developed for an IBM platform can, with TED, easily be accessed by a user on a Sun system. Additionally, a Windows desktop user can access UNIX applications without leaving the Windows environment. Similarly, the Company is developing products based on its SoftNC technology that are being designed to permit interoperability across any platform that includes a Java Virtual Machine ("JVM"). - Consistency. TED looks, behaves and provides the same capabilities in the same manner on every platform on which it operates. TED provides the enterprise with a common set of systems, facilities, resources, commands, APIs and a graphical user interface across disparate computing platforms. The products the Company is developing based on its SoftNC technology are being designed to allow the user and the enterprise to adopt similar look-and-feel capabilities for Java applications. - Enterprise Cost Efficiencies. TED's interoperability and consistency allow the enterprise customer to reduce systems administration and training costs, to achieve increased operating efficiency and productivity throughout the enterprise and to leverage existing hardware and software investments. The products being developed based on the Company's SoftNC technology are being designed to provide similar cost efficiencies. - Open Systems Environment. The Company implements open systems standards in its products. These standards include, among others, CDE, Motif, X11, DCE, Java, HTML (Hypertext Mark-up Language) and HTTP (Hypertext Transfer Protocol). By adhering to these standards, TriTeal provides users with access to numerous standards-based legacy applications. - Robust Features and Functions. TED provides a number of features and functions designed to enhance and simplify a multi-platform networked environment. For example, TED's integrated desktop features include file, style and help managers, electronic mail and a calendar function. In addition, TED includes a graphical workspace manager, key binding support, an integrated Web browser, a fax application and an optional security module. The 3 4 products being developed based on the Company's SoftNC technology are being designed to provide robust features and functions. THE TRITEAL STRATEGY TriTeal's objective is to establish its desktop system software as the de facto standard operating environment in the enterprise client/server market. To achieve this objective, the Company has adopted the following core strategies: Continue to Evolve Client/Server and Internet/intranet-based Solutions. TriTeal's strategy is to build products that address enterprise fragmentation issues by providing a homogeneous environment for client/server, personal productivity and network computer applications. The Company has an ongoing development program to continue to enhance the TED product and to develop follow-on products that can be sold into the TED installed base. To date, TriTeal has developed several follow-on products, which are either sold or bundled with the current release of TED, including NTED, WINTED, LOCALTED, TEDSECURE, TEDVISION and TEDFAX. In addition, the Company is developing Java-based products based on its recently introduced SoftNC technology, including SoftNC desktops for network computers, PCs and workstations. Commitment to Open Systems Technologies and Standards. The Company believes that open systems are important to enterprise customers that have made substantial investments in standards-based legacy systems applications. TriTeal intends to continue to develop and deliver products that adhere to published specifications and accepted industry standards and to create new products and technologies that can then be branded as compliant with industry standards. The Company also plans to continue its active membership with organizations that determine industry standards, such as The Open Group (formerly the Open Software Foundation) and World Wide Web Consortium. Penetrate Global Markets Vertically. The Company's strategy is to penetrate vertical markets with targeted sales teams that can respond to the particular needs of these markets. These markets include, among others, financial services, government, telecommunications and oil and gas. Where appropriate, the Company develops specialized product features and functions to address special needs of vertical markets. These features and functions can then be generalized by incorporating them into other TriTeal products for sale in other market segments. Leveraged Business Model. The Company's strategy is to use indirect channel organizations, such as original equipment manufacturers ("OEMs"), value-added resellers ("VARs") and system integrators, when appropriate, to create demand and deliver TriTeal products and services to its customers. The Company believes that established channel organizations offer the benefits of an installed base of customers and worldwide sales coverage. In addition, when appropriate, the Company intends to continue to license from third parties component technologies as the basis for new product development. TriTeal believes that this strategy enables it to gain time to market, mitigate risk associated with new technology development and lower research and development costs. Deliver Enterprise-Level Service and Support. The Company's service and support organization offers a single point of contact to facilitate resolution of issues across all supported platforms and maintains an engineering and technical support staff trained in cross-platform issues to provide enterprise technology solutions and system integrity. The Company believes that this approach to enterprise support is a key differentiating feature as compared to other desktop vendors. TriTeal intends to continue its investment in infrastructure, personnel and systems to provide support to enterprise organizations worldwide. The Company utilizes knowledge obtained through its support organization to evolve the Company's products in response to enterprise needs. The Company's strategies involve substantial risk. There can be no assurance that the Company will be successful in implementing its strategies or that its strategies, even if implemented, will lead to successful achievement of the Company's objectives. If the Company is unable to implement its strategies effectively, the Company's business, results of operations and financial condition would be materially and adversely affected. 4 5 PRODUCTS AND TECHNOLOGIES TriTeal currently offers the TED family of products, providing open systems-based, mission-critical desktop system software and integrated applications that enable multi-platform deployment of client/server applications throughout an enterprise. The Company recently introduced its Java-based SoftNC technology, a thin-client, platform-independent solution designed to allow simultaneous access to Java and legacy applications. The Company also has a number of products in development, including enhancements to TED family of products and products based on SoftNC technology. TED Family of Products TED provides a common intuitive environment across multiple hardware and operating systems. To further increase functionality in the operating environment, TriTeal has developed follow-on products that are either sold separately or bundled with TED. The following table describes TriTeal's current products:
PRODUCT (1) DESCRIPTION US LIST PRICE (2 ----------- ----------- ---------------- TED - Cross-platform CDE Consistent, easy-to-use interface for accessing - $425 per seat - Integrated browser (TEDVISION) applications, data and network services. (including - Netscape Navigator integration X/Open-designated CDE with value-added features documentation) with desktop (TEDSCAPE) including key bindings, multi-screen support, graphical - $340 per seat - Graphical Workspace workspace manager, automatic login and session save, for additional Manager Netscape Navigator integration, featuring drag-and-drop right-to-use license - Integrated fax capability, customizable options and navigational tool, - Multi-screen support license keys, a version upgrade utility and support for - Support for X Terminals, PCs alternative authentication mechanisms, including and Macs DCE/Kerberos login. Also includes tight integration - Pluggable Authentication with NTED product and complete integration with Module (PAM) TEDSECURE for core desktop applications. - Mailer Enhancements - NTED support - Integrated TEDSECURE option NTED - Easy access to Windows Provides remote access to Windows applications running in Pricing based on applications from TED native mode on a multi-user Windows NT server from a TED configuration - Run Windows applications in workstation. native mode - Single application and file management - Interoperability between UNIX and Windows NT WINTED Provides advanced desktop features, file-sharing and $199.99 per seat integrated access to UNIX and remote Windows applications and files. TEDSECURE Provides data-level security and controlled access to $200 per seat shared files on an open network with the TED desktop.
(1) Features listed are those included in the Company's most current releases of the specified products, as follows: TED 4.2, NTED 2.0, WINTED 2.0 and TEDSECURE 1.0. Not all features are included in earlier releases. (2) Based on the Company's most recent price list as of June 19, 1997. Actual price depends on quantity purchased, among other factors. 5 6 TriTeal Enterprise Desktop: TED. TED 4.0, introduced in August 1995, is a fully integrated common user environment in which features and applications work in concert. For example, drag-and-drop functionality is consistent throughout the desktop, copy and paste works throughout each application, and window management is consistent on all UNIX platforms. With its rich graphical display of intuitive icons, customizable workspaces and other user-friendly features, TED makes it easy for administrators to provide users with access to data, applications and network services without having to use operating system commands. TED has been designated CDE-compliant by X/Open Co., Ltd. Standard CDE features include a calendar manager, application manager, file manager, style manager, mail tool, terminal emulator, print tool and help system, among others. In addition to standard CDE features, TED includes (i) a graphical workspace manager, which allows the user to easily control and navigate multiple workspaces, (ii) multiple screen support, which expands the number of applications and workspaces immediately available, and (iii) key bindings to simplify routine operations. TED 4.0 integrated applications include TEDFAX and TEDVISION. TEDFAX is a powerful, easy-to-use, integrated fax software product that enables users to compose, edit, send, receive and manage inbound and outgoing faxes directly from their desktops. As with all TED features and applications, TEDFAX implements drag-and-drop between the desktop, TEDFAX and other CDE clients. TEDVISION allows the user to access the Web and other Internet/intranet services and includes standard browser features, such as hot lists and pop-up menus. Moreover, with TEDVISION, users can browse local and remote file systems, which eliminates the need to access a separate application, such as a file or application manager. The Company has developed a version of TED 4.0 localized for the Japanese market. In addition, the Company is developing German, French and Spanish localizations. TED 4.2, an upgraded version of TED, provides users with a number of enhancements, including drag-and-drop integration between Netscape Navigator and TED, DCE and Kerberos login authentication and support, enhancements to the graphical workspace manager and mailer, along with additional key bindings, license keys and a version upgrade utility. NTED. NTED 1.0 provides TED users with easy access to Windows applications directly from TED using familiar Windows icons. NTED delivers Windows applications running natively on a Windows NT server to TED users, while providing applications and file integration as well as interoperability between the two environments. Users can then cut, copy and paste between Windows and UNIX. In addition, applications and files from both environments can be organized and accessed from a single application manager and file manager. NTED 2.0, an upgraded version of NTED, makes use of the Windows NT registry to make Windows applications transparently available to all remote users without the need for action by a system administrator. NTED automatically makes any file that is located in a proper share directory on the UNIX system available to Windows applications on the Windows NT server. With the TEDFS option, NTED allows sharing of PC and UNIX files stored on UNIX and printing of PC documents and files on UNIX printers. NTED is sold separately as an optional module for TED. WINTED. WINTED 1.0 displays the TED front panel on Windows-based platforms using a PC X server, providing full access to TED's features and interoperability between TED and the Windows desktop. WINTED 2.0, an upgraded version of WINTED, is a native advanced desktop solution for Windows NT and Windows 95 PCs and provides expanded capabilities over WINTED 1.0. WINTED 2.0 provides advanced desktop management capabilities and file sharing, plus optional integrated access to remote UNIX and Windows files and applications. WinTED 2.0 also provides advanced desktop features, such as the TriTeal Front Panel and Graphical Workspace Management. TEDSECURE. TEDSECURE 1.0 is a data level desktop security product. Developed in conjunction with the National Security Agency ("NSA"), TEDSECURE provides data protection and digital signature capability that has 6 7 been approved by the NSA for federal agencies. TEDSECURE provides cryptographic facilities and digital signatures, which allow users to send unclassified but sensitive data across an open network. TEDSECURE, based on technology licensed from SPYRUS, was implemented utilizing standard United States Government security algorithms ("FORTEZZA"). TEDSECURE is sold separately as an optional module and is fully integrated with TED. Java-Based SoftNC Technology and Network-Centric Computing Architecture The Company's SoftNC technology is a thin-client, platform-independent solution designed to allow simultaneous access to Java and legacy applications. Written entirely in Java, SoftNC technology is designed to operate on any hardware device that includes a JVM. While most currently available Java-based alternatives to graphical user interfaces rely on browsers, SoftNC technology offers a graphical user interface that delivers Java applications directly from the desktop without the need for a browser. As a result, users have access not only to hyper-linked data, but also to a broad set of applications, including legacy, mainframe, UNIX and PC applications. SoftNC's infrastructure is designed to enable a user logging onto the network from any device through a URL to access the user's customized desktop. The user can then access resources throughout the network via a messaging backbone of communicating desktop servers associated with each system. SoftNC's agents are designed to provide services such as computation, personal productivity or system resource management, accessible from anywhere on the network. TriTeal recently introduced its Network-Centric Computing Architecture ("NCCA"), which combines existing distributed computing technologies and powerful agent-based applications implemented in Java. NCCA is designed to deliver advanced functionality to any device capable of running a JVM, allowing computing resources to be administered consistently across virtually any system that includes a JVM without regard to application or operating system compatibility. NCCA provides the framework for the Company's Java-based SoftNC technology The Company is currently developing the following products based on its SoftNC technology: SoftNC Desktop for Network Computers. SoftNC Desktop for Network Computers is being developed to operate on any hardware device that includes a JVM. In addition, it is being designed to provide full-featured desktop functionality, including overlapping windows, menus, drag-and-drop and full desktop scalability, while offering the benefits associated with thin-client architecture, including legacy application integration and centralized administration. Developers will be able to write an application once and, without re-porting, deploy that application across multiple platforms. SoftNC Desktop for PCs and Workstations. TriTeal is developing SoftNC Desktop for PCs and Workstations to provide enterprise users of PCs and workstations with the same features and functionality as SoftNC for Network Computers. SoftNC Desktop Server. SoftNC Desktop Server is a standards-based server-side framework and messaging system that delivers data, applications and resources to the user, regardless of their underlying computer platform. The statements made in this Report on Form 10-K regarding scheduled release dates and anticipated features of the Company's products under development and proposed enhancements are forward-looking statements, and the actual release dates and features of such products or enhancements could differ materially from those projected as a result of a variety of factors, including the ability of the Company's engineers to solve technical problems and to test products, as well as business priorities in light of the availability of development and other resources and other factors, including factors that may be outside the control of the Company and factors discussed under the caption "Risk Factors" and elsewhere in this Report on Form 10-K. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products, or that new products and product enhancements will satisfy the requirements of the marketplace or achieve market acceptance. 7 8 To date, substantially all of the Company's revenues have been attributable to sales of licenses of the TED family of products and related services. The Company has not introduced for commercial sale any products based on, or recognized any revenues from licenses of, its SoftNC technology. The Company currently expects the TED family of products and related services to account for substantially all of its revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for TED products, such as competition or technological change, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's future financial performance will depend, in significant part, on the successful development, introduction and customer acceptance of new and enhanced versions of the TED family of products and related services and on the Company's ability to develop and commercialize products based on its SoftNC technology. There can be no assurance that the Company will continue to be successful in developing and marketing the TED family of products and related services, or that the Company will be successful in developing and marketing products based on the Company's SoftNC technology. CUSTOMERS AND MARKETS The Company's target market consists of Global 1000 customers that use multiple client/server platforms for mission-critical applications. TriTeal has targeted specific vertical markets, including financial services, government, telecommunications, oil and gas, manufacturing and other industries. The Company has licensed in excess of 100,000 seats of the TED family of products (including predecessor products) to date. The Company has also licensed certain of its desktop and Internet technologies through licensing agreements and joint development and marketing agreements to a number of companies, including AT&T, Corel Corporation, Hewlett-Packard, IBM, Network Computing Devices ("NCD"), Novell Inc. ("Novell"), The Santa Cruz Operation ("SCO"), Siemens Nixdorf Informationssystemse AG ("SNI"), Tektronix, Inc. ("Tektronix") and Wyse Technology, Inc., among others. A relatively small number of customers (primarily government resellers) account for a significant percentage of the Company's revenues. In fiscal 1997, two of the Company's government resellers, Sylvest Management and IBM, accounted for 37% and 36% of revenues, respectively. In fiscal 1996, sales to Logicon and AT&T accounted for 18% and 12% of revenues, respectively, and sales to the Company's top four customers accounted for approximately 45% of revenues. In fiscal 1995, sales to AT&T, IBM and British Columbia Telephone accounted for 29%, 12% and 11% of revenues, respectively. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of revenue for the foreseeable future. More than 30% of the Company's revenues during fiscal 1996 and more than 80% of its revenues during fiscal 1997 were derived indirectly through distributors from sales to departments and agencies of the U.S. Government. The Company believes that the success and further development of the Company's business will continue to be dependent, in significant part, upon its ability to continue such indirect sales. A significant reduction in the federal funds available for agencies and departments the Company is supplying, either through agency budget cuts by Congress or the imposition of budgetary constraints, or a determination by the Government that funding of such agencies and departments should be reduced or discontinued, would have a material adverse effect on the Company's results of operations. The future success of the Company will depend on its ability to obtain orders from new customers and successfully market its products in diverse industries. The loss of a major customer, failure to close a major order or any reduction, cancellation or delay in orders by such customers, or the failure of the Company to successfully market its products in existing targeted industry segments or new industry segments, would have a material adverse effect on the Company's business, results of operations and financial condition. For example, during the fourth quarter of fiscal 1997, the Company's revenues fell substantially short of anticipated levels due primarily to a failure to close an order from a government reseller, and there can be no assurance that delays, cancellations or failures to close orders will not occur in the future. Similarly, changes in government procurement practices have resulted in the past, and may result in the future, in losses or delays in orders. In addition, orders from government resellers and agencies of the U.S. government may subject the Company to other risks that are not typically present in commercial contracts, such as retroactive price adjustments and potential penalties, as well as the risk of termination at the convenience of the government. The occurrence of any one of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. 8 9 The Company generally does not offer payment terms beyond 60 days; however, the Company's sales to government resellers and agencies of the U.S. government typically have longer payment cycles. Because the Company derives a substantial portion of its revenues from government resellers and agencies of the U.S. Government, the Company's largest receivables tend to have lengthy collection cycles. At March 31, 1997, approximately 87% of the Company's outstanding trade receivables were from government resellers and agencies of the U.S. Government. See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of such lengthy collection cycles has not been material to the Company's working capital requirements; however, there can be no assurance that future delays in payment will not adversely affect the Company's ability to meet its anticipated liquidity needs. All of the Company's business is in the desktop system, client/server and Internet/intranet application software markets, which are still emerging markets that are intensely competitive, highly fragmented and subject to rapid change. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting client/server computing environments, the continued use by these organizations of a variety of incompatible computing technologies and commercial acceptance of the Company's products as a desktop system software solution to address these problems of fragmentation. There can be no assurance that the desktop system software, client/server or Internet/intranet markets will maintain their current level of growth, or that they will continue to be heterogeneous or that the Company's principal product, TED, will be widely adopted. If the desktop system software, client/server or Internet/intranet markets fail to grow or grow more slowly or if the enterprise becomes more homogeneous than the Company currently anticipates, or if the Company's products are not widely adopted, the Company's business, results of operations and financial condition would be materially and adversely affected. The Company has spent, and intends to continue to spend, significant resources educating potential customers about the benefits of its products. However, there can be no assurance that such expenditures will enable the Company's products to achieve any additional degree of market acceptance. Certain of the Company's products and products in development are intended for use with the Internet/intranet. The success of the Company's products and products in development, if commercially released, may depend, in part, on their compatibility with the Internet. The commercial market for products and services designed for use with the Internet/intranet has only recently began to experience rapid growth, and there can be no assurance that this growth pattern will continue. To the extent that the Internet continues to experience rapid growth in the level of use and the number of users, there can be no assurance that the Internet infrastructure will be able to support the demands of such growth or will not otherwise lose its utility due to delays in the development and adoption of new standards and protocols required to handle increased levels of activity or due to increased government regulation. There can be no assurance that the Company will be able to successfully compete in the market for Internet-related products and services without substantial modification or customization of the Company's products or services or the introduction of new products and services. Because a large portion of the Company's revenues are currently derived from enterprises that support UNIX operating systems, a significant decline in the UNIX operating systems market would have a material adverse effect on the Company's business, results of operations and financial condition. Similarly, widespread adoption of other desktop system software and operating environments, such as Windows NT, Web-based operating environments or other technologies, could create a more homogeneous environment throughout an enterprise, which would have a material adverse effect on the Company's business, results of operations and financial condition. MARKETING AND SALES The Company markets and sells its products in the United States, Canada, Europe and Pacific Rim countries through its direct sales force, OEMs, system integrators and VARs. As of March 31, 1997, the Company employed 42 individuals in its sales and marketing organization. The Company's direct sales staff is based at the Company's corporate headquarters in Carlsbad, California, and at field sales offices in the metropolitan areas of San Diego, Dallas, Boston, New York, Chapel Hill, North Carolina, Washington, D.C. and London. To support its sales force, the Company conducts comprehensive marketing programs, which include seminars, trade shows, other industry 9 10 events, direct mail, public relations and advertising. The Company's direct sales force is responsible for creating demand for the Company's products. Sales leads are generated through direct calls to known prospects, direct mail, seminars, advertising, telemarketing and requests for proposals from prospects. The Company's field sales force conducts presentations and demonstrations of the Company's products to management and users at the prospect site as part of the Company's direct sales effort. Fully functional evaluation units are provided to prospects as requested. The Company's field engineers assist prospects in technical matters pertaining to the evaluation software. The Company plans to expand its direct sales force. There can be no assurance that such internal expansion will be successfully completed, that the cost of such expansion will not exceed the revenues generated or that the Company's sales and marketing organization will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of the Company's current or potential competitors. The Company's inability to effectively manage the expansion of its direct sales force could have a material adverse effect on the Company's business, results of operations and financial condition. The licensing of the Company's products by its customers typically involves a significant technical evaluation and commitment of capital and other resources, and is often subject to the delays frequently associated with customers' internal procedures to approve large capital expenditures and to test and accept new technologies that affect key operations, particularly with respect to government sales. For these and other reasons, the sales cycle associated with the licensing of the Company's products is typically lengthy and subject to a number of significant risks that are beyond the Company's control. There can be no assurance that the Company will not experience these and additional future delays in sales of the Company's products because of the lengthy sales cycle and the large size of many customers' orders. If revenues forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company's operating results for that quarter could be materially and adversely affected. The Company's strategy is to leverage sales and marketing through its indirect channel relationships, which include OEMs, VARs and system integrators, that distribute or resell the Company's products in their respective markets. The Company has entered into several OEM reseller agreements pursuant to which the reseller provides either TED or a modified version of TED to its customers. The Company has established OEM relationships with AT&T, Hummingbird, IBM, NCD, SCO, Silicon Graphics, Inc., SNI and Tektronix in connection with the TED family of products. These relationships have been established to help create and fulfill demand and support end-user sites. The Company is currently pursuing strategic OEM relationships in connection with its SoftNC technology. The Company typically selects channel entities on the basis of their industry expertise, supported customer base and system integration capabilities. The Company has entered into agreements with VARs and system integrators in connection with the TED family of products, including Logicon, Shell Services Corporation, Stornet and Worldwide Technologies. Certain of these entities have received advanced training and certification through the Company to ensure appropriate skills and knowledge with respect to the Company's products. The Company's sales representatives work with these channel entities in activities such as educational and sales seminars, local or regional user conferences and industry trade shows. The Company may, in the future, seek to establish strategic VAR and system integrator relationships in connection with its SoftNC technology. There can be no assurance that the Company will be able to continue to successfully manage its relationships with indirect channel entities or that any OEM, VAR or system integrator will continue to market or to purchase the TED family of products or that the Company will be successful in establishing strategic relationships in connection with its SoftNC technology or products. The failure by the Company to maintain these relationships or the failure to establish new relationships in the future could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that these events will not occur in the future. To the extent that average selling prices through indirect channel relationships decline relative to the Company's direct sales in the future, the Company's average selling prices and gross margins may be materially and adversely affected. In addition, the Company's agreements with indirect channel entities typically do not restrict such entities from distributing competing products and, in many cases, may be terminated by either party without cause. Furthermore, in some cases the Company has granted exclusive distribution rights that are limited by territory and in duration, 10 11 and such agreements typically do not require any minimum purchase volumes; therefore, there can be no assurance that these relationships will produce significant revenues in the future. Consequently, the Company may be adversely affected should any indirect channel entity fail to adequately penetrate its market segment. Failure to recruit, manage or retain important indirect channel entities, or to manage conflict within the channel, could materially and adversely affect the business, results of operations and financial condition of the Company. Although, to date, the Company has not made a significant percentage of its sales internationally, a significant portion of the Company's customer base are large multinational companies. To meet the needs of such companies, both domestically and internationally, the Company must directly or indirectly provide worldwide sales and product support services. In April 1997, the Company relocated the European headquarters of its European subsidiary, TriTeal B.V., from the Netherlands to the United Kingdom and closed the Netherlands facility. The European operations are responsible for generating and fulfilling customer demand and supporting indirect channel activities. In addition, the Company's marketing department supports European activities from the Company's headquarters in Carlsbad, California. The Company intends to enter additional markets and to continue to expand its international operations and direct and indirect sales and marketing activities worldwide, which will require significant management and financial resources, and could adversely affect the Company's business, results of operations and financial condition. The Company has committed and intends to continue to commit significant time and financial resources to developing international sales and support channels. Total export sales for the years ended March 31, 1997, 1996 and 1995 were approximately $510,000, $1.3 million, and $50,000, respectively. See Note 6 of Notes to Consolidated Financial Statements. To the extent that the Company is unable to expand its international sales organization in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, results of operations and financial condition could be materially and adversely affected. The Company has a Master Distribution Agreement with Ryoyo Electro Corporation ("Ryoyo") under which Ryoyo distributes the localized version of TED throughout Japan and functions as the Company's sole representative for Japan. The Company has an agreement with Pacific Advantage, Ltd. under which Pacific Advantage, Ltd. will serve as the Company's manufacturer's representative to service the markets of the Pacific Rim outside of Japan. There can be no assurance that the Company will be able to maintain or increase international market demand for its products. Risks inherent in the Company's international business activities generally include currency fluctuations, unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of and the Company's limited experience in localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially weaker protection for intellectual property in certain foreign countries, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws and practices. To date, substantially all of the Company's international revenues have been denominated in U.S. dollars. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in future currency exchange rates will not have a material adverse effect on revenues from international sales and thus the Company's business, results of operations and financial condition. There can be no assurance that such factors will not have a material adverse effect on the Company's future international operations and, consequently, the Company's business, results of operations and financial condition. SERVICES AND SUPPORT The Company has established a services and support organization to provide enterprise technology solutions and system integration. The Company assigns a support representative to each of its customers as a point of contact for resolving issues. TriTeal's professional services engineers and customer support representatives are trained in cross-platform issues in order to diagnose and solve technical problems related not only to the Company's products, but also to the software and hardware technologies with which the Company's products interact. The Company believes that its single contact system for enterprise support is a key differentiating feature as compared to other vendors. 11 12 TriTeal's support structure involves phone support and channel support through the Company's engineering and field organizations. The Company's services and support organization offers support both domestically and internationally. This support is purchased separately from the product. The Company tracks all support requests through a customer database that maintains current status reports as well as historical logs of customer interactions. When appropriate, these support representatives provide the customer with direct access to the Company's development engineers. In addition, the Company maintains a technical support area on its Web site which contains enhancements and corrections to software defects that may be accessed through a file transfer protocol, thereby enabling TED users to install that code on their platforms automatically. In addition, the Company offers pre- and post-sales support from its field systems engineers and professional services engineers, who are based in all of the Company's sites worldwide. For those enterprise customers that require custom features, the Company can deploy its professional services engineering resources to assist the customer on its development efforts. The Company also encourages application integration by assisting other software companies or MIS organizations in the integration process. The Company has created the UniTED Partners Program, which trains selected resellers in providing enterprise support. UniTED Partners are awarded TriTeal Certification after five days of support training for field engineers. The Company recommends certified UniTED Partners to its enterprise customers to address their training needs at three levels: end-user, developer and system administration. RESEARCH AND DEVELOPMENT As of March 31, 1997, the Company employed 48 persons in its research and development organization. The Company believes that its future success depends in large part upon its ability to continue to enhance its existing products and to develop new products that maintain cross-platform technological competitiveness. The Company relies on extensive input concerning product development from the Company's customers communicated through the Company's sales and marketing organizations, as well as market research data. TriTeal's research and development efforts are directed at increasing product functionality, improving product performance, expanding the capabilities of its products to interoperate with other acquired technologies and developing new products. The Company's research and development organization consists of three groups: engineering, quality assurance and advanced research. These groups are dedicated to maintaining the Company's core products, engineering corrections to system defects, implementing performance enhancements and building complementary desktop services and applications. The Company seeks to support open systems standard software, while providing additional features and functionality that complement and enhance standardized software. Each of the client/server, desktop system software and Internet/intranet markets is characterized by rapid technological advances, evolving industry standards, changes in consumer expectations, and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products as well as products currently under development obsolete and unmarketable. Accordingly, the life cycles of the Company's products are difficult to estimate. The Company's future success will depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments, respond to evolving consumer requirements and achieve market acceptance. The Company's future success will also depend in part upon its ability to maintain and enhance its technology relationships in order to provide customers with integrated product solutions. The Company's ability to develop and introduce new products and enhancements on a timely basis may be adversely affected by a number of factors, including the ability of the Company's engineers to solve technical problems and to test products as well as business priorities in light of the availability of development and other resources and other factors, including factors that may be outside the control of the Company and factors discussed under the caption "Risk Factors" and elsewhere in this Report on Form 10-K. If the Company is unable to develop on a timely basis new software products or enhancements to existing products, if such new products or enhancements do not achieve market acceptance, or if the Company is unable to maintain its technology relationships, the Company's business, results of operations and financial condition will be materially and adversely affected. 12 13 The Company's current products are designed to adhere to certain open systems standards, and current and future sales of the Company's products will be dependent, in part, on market acceptance of such standards. Emergence of new industry standards could require the Company to modify its products to adhere to such standards. There can be no assurance that the Company would be successful in incorporating new standards effectively or on a timely basis or that any resulting products would achieve commercial acceptance. Failure by the Company to effectively incorporate into its products new industry standards that are widely adopted in the markets served by the Company would have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION The market in which the Company competes is characterized by rapidly changing technology and evolving standards. The Company's competitors and potential competitors, which include Microsoft Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape") and the original CDE developers (Hewlett-Packard Company ("Hewlett-Packard"), IBM, Novell and Sunsoft, a subsidiary of Sun Microsystems, Inc.), have or may have a more established and larger marketing and sales organization, significantly greater financial and technical resources and a larger installed base of customers, as well as greater name recognition than the Company. Accordingly, such competitors or potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products than the Company or may be better positioned to achieve market acceptance of new technology or products. The Company also expects that competition will increase as a result of software industry consolidation. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of enterprise customers in the Company's markets. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, or that competitive factors faced by the Company will not have a material adverse effect on the Company's business, results of operations and financial condition. The Company's products are based in part on a non-exclusive license of the CDE industry standard. Each of the original CDE developers has developed or is developing unique implementations of CDE specific to its own UNIX platforms. Because CDE was developed as an open systems industry standard, any of the original CDE developers, or their assignees, other competitors or third-party licensees, may develop similar products or sell competing products in the Company's markets. In addition, the Company has developed its TED product based in part on a non-exclusive license of the CDE technology from Hewlett-Packard. Under the terms of the Company's license agreement with Hewlett-Packard, all modifications to the CDE developed by the Company are owned by the Company and are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no assurance that one or more of these competitors and potential competitors will not develop or market products that would directly compete with the Company's products or license a third party to do so. The Company believes that the principal competitive factors affecting its market include adherence to open systems standards, product features and functionality, ability to integrate with third-party products, ease of use, quality, performance, price, customer service and support, effectiveness of sales and marketing efforts and company reputation. Although the Company believes that it currently competes favorably with respect to such factors, there can be no assurance that the Company can maintain its competitive position against current and potential customers, especially those with greater financial, marketing, service, support, technical and other resources than the Company. LICENSE AGREEMENTS AND INTELLECTUAL PROPERTY The Company relies on certain technology that it licenses from third parties, including software which is integrated with internally developed software and used in the Company's products to perform key functions. There 13 14 can be no assurance that these third-party technology licenses will continue to be available to the Company on commercially reasonable terms, if at all. The loss of or inability to maintain any of these technology licenses could result in delays or reductions in product shipments until equivalent technology, if any, could be identified, licensed and integrated. Any such delays or reductions in product shipments could materially and adversely affect the Company's business, results of operations and financial condition. The Company's principal product, TED, is based in part on X11, Motif and CDE standards specified and administered by X/Open Company, Ltd. Certain of the Company's third-party technology licensing agreements for implementation of these standards are summarized below: The Company has developed its TED product based in part on a non-exclusive license of CDE technology from Hewlett-Packard. Under the terms of the license agreement with Hewlett-Packard, all modifications to CDE developed by the Company are owned by the Company, and the Company granted to Hewlett-Packard a paid-up, non-exclusive, worldwide license to use, reproduce, distribute and prepare derivative works of such modifications in both source code and object code form. The Hewlett-Packard license agreement terminates in July 1997, subject to unlimited one-year extensions at the Company's option. The Hewlett-Packard license agreement is also terminable on breach, bankruptcy or cessation of business by either party. In addition, if an infringement action is brought against Hewlett-Packard relating to the CDE technology licensed by Hewlett-Packard to TriTeal and Hewlett-Packard is not able to procure for TriTeal the use of CDE, replace CDE with a non-infringing product or modify CDE to be non-infringing, then Hewlett-Packard may terminate TriTeal's rights to its CDE to the extent necessary to avoid infringement. In the event the Hewlett-Packard license agreement is terminated, the Company believes that it could successfully license comparable CDE technology from another source. In May 1996, the Company entered into a software license agreement with SCO, pursuant to which the Company granted to SCO a non-exclusive, royalty-free license to certain TriTeal desktop technology in exchange for the grant to the Company of a non-exclusive, royalty-free license to CDE, effective if SCO obtains the right to sublicense CDE. The SCO license agreement terminates in May 1999, subject to one-year extensions upon mutual agreement of the parties. Pursuant to a license agreement with The Open Group, the Company has licensed Motif applications from The Open Group on a non-exclusive basis. The license agreement is terminable by OSF in the event of default by the Company in its payment obligations or upon the Company's bankruptcy. In May 1995, TriTeal entered into a software license agreement with SPYRUS, pursuant to which SPYRUS granted to the Company a worldwide, non-exclusive, royalty-bearing license for SPYRUS' network security technology, which is the basis for the Company's TEDSECURE product. The SPYRUS license agreement terminates in May 2000, but may be extended for one-year terms at the Company's option, subject to the written consent of SPYRUS. Pursuant to an OEM source license agreement between the Company and Spyglass, Inc. ("Spyglass"), the Company licensed certain Internet/intranet component technologies from Spyglass, on a non-exclusive, royalty-bearing basis. The Spyglass license agreement terminates in September 1998, subject to one-year extensions at the Company's option. The Company has incorporated this technology from Spyglass into its TEDVISION product. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company's products or to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms, if at all. The Company's success and ability to compete is dependent in part upon its proprietary technology. While the Company relies on trademark, trade secret, copyright law, confidentiality procedures and contractual provisions to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. To date, the Company has had no patents issued; however, it has three patent applications pending. There can be no assurance 14 15 that any patents will issue from such applications or that others will not develop technologies that are similar or superior to the Company's technology. The Company believes the source code for the Company's proprietary software is protected both as a trade secret and copyright work. However, effective trademark, copyright and trade secret protection may not be available in every foreign country in which the Company's products are distributed. The Company's policy is to enter into confidentiality agreements with its employees, consultants and vendors, and the Company generally controls access to, and distribution of, its software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization. There can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties, or that third parties will not be able to develop similar technology independently. The Company may receive notices from third parties claiming that the Company's products infringe third-party proprietary or intellectual property rights. The Company expects that, as the number of software products in the industry increases and the functionality of these products or their implementation further overlaps, software products will increasingly be subject to such claims. Any such claim, with or without merit, could result in costly litigation and require the Company to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all. Consequently, any such litigation could have a material adverse effect on the Company's business, results of operations and financial condition. EMPLOYEES As of March 31, 1997, the Company had no part-time employees and 130 full-time employees, including 42 in sales and marketing, 61 in product development and support services and 27 in finance and administration. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. The loss of certain key employees or the Company's inability to attract and retain other qualified employees could have a material adverse effect on the Company's business and operations. EXECUTIVE OFFICERS The executive officers of TriTeal Corporation and their ages as of June 27, 1997 are as follows:
NAME AGE POSITION ------------------------------------ --------- ---------------------------------------------------- Jeffrey D. Witous................... 36 President, Chief Executive Officer and Chairman of the Board Arthur S. Budman.................... 35 Chief Financial Officer and Director Ronald B. Hegli..................... 36 Vice President, Engineering Robert D. Ruhe...................... 39 Executive Vice President, Worldwide Field Operations Rand R. Schulman.................... 44 Executive Vice President Garrett M. Thomas................... 52 Vice President, Corporate General Counsel Oran M. Thomas...................... 34 Chief Technology Officer Gregory J. White.................... 39 Chief Operating Officer and Secretary
JEFFREY D. WITOUS co-founded the Company and has served as Chief Executive Officer since April 1995, Chairman of the Board since March 1994 and President since June 1996. From March 1994 to April 1995, Mr. Witous served as Executive Vice President of Business Development. Prior to joining the Company, Mr. Witous served as National Business Development Manager for Sun Microsystems Computer Corporation ("SMCC"), a subsidiary of Sun Microsystems, Inc. ("Sun"), a computer hardware, software and services company, from April 1991 to January 1994. ARTHUR S. BUDMAN joined the Company in November 1994, was appointed Chief Financial Officer in February 1995 and was elected to the Board of Directors in January 1996. From January 1985 to November 1994, he was employed by Ernst & Young LLP, a public accounting firm, serving most recently as Senior Manager. Mr. 15 16 Budman is co-founder of the San Diego Software Industry Council, a trade association for software companies. Mr. Budman is a certified public accountant. RONALD B. HEGLI has served as Vice President of Engineering since December 1996. From March 1994 to December 1996, Mr. Hegli held various engineering positions, including Manager of Development and Director of Engineering. From May 1988 to March 1994, Mr. Hegli was a Senior Engineer at Digital Equipment Corporation, where he was lead engineer for desktop environments, including the initial port of the CDE to the Alpha platform. From August 1983 to May 1988, Mr. Hegli was a senior engineer at General Electric Company, developing computer systems for nuclear power plant monitoring. ROBERT D. RUHE has served as Executive Vice President, Worldwide Field Operations, since September 1996. Mr. Ruhe served as Vice President of Federal Business from May 1995 to September 1996. From July 1992 to May 1995, he served as Manager of National Civilian Federal Sales for Sun Microsystems Federal Inc. From February 1981 to July 1992, he was employed by Digital Equipment Corporation, a computer manufacturer, where he served most recently as Strategic Federal Account Manager. RAND R. SCHULMAN has served as Executive Vice President since February 1996. From July 1994 to February 1996, he was Vice President of Marketing for the Company. From January 1992 to June 1994, Mr. Schulman served as Vice President of Sales and Marketing at Pages Software, a computer software company. Mr. Schulman was employed in various capacities from December 1983 to January 1992 by Island Graphics/Dainippon Screen Mfg. Co., a computer software company, serving most recently as General Manager and Senior Vice President. GARRETT L. THOMAS joined the Company in January 1997 as Vice President, Corporate General Counsel. For the past 13 years, he has held various legal positions with Sun, most recently as General Counsel of Sun's government operations. Prior to joining Sun, Mr. Thomas held various legal positions at software and telecommunications companies. ORAN M. THOMAS co-founded the Company and has served as Chief Technical Officer since April 1995. From January 1993 to November 1993, Mr. Thomas served as President and Secretary of the Company. From January 1993 to February 1995, he served as the Company's Chief Financial Officer. Mr. Thomas served as a director of the Company from January 1993 to January 1996. From January 1988 to September 1993, he served as Senior Software Engineer at Science Applications International Corporation, a software company, where he managed the multi-platform, commercial systems software development group. GREGORY J. WHITE co-founded the Company, has served as Chief Operating Officer since April 1995 and as Secretary since November 1993. From November 1993 to March 1994 and from April 1995 to June 1996, he served as President of the Company. From March 1994 to January 1995, Mr. White served as Chief Executive Officer for the Company. From July 1990 to September 1993, he held the position of Sales Executive for SMCC. Each officer serves at the discretion of the Board of Directors. The Company's By-laws permit the Board of Directors to establish by resolution the authorized number of directors, and the Company currently has four directors authorized. There are no family relationships among any of the directors or officers of the Company. RISK FACTORS Limited Operating History The Company was founded in January 1993 and commenced shipment of its initial software products in May 1993 and its current flagship product, TED, in August 1995. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based, making prediction of future operating results difficult, if not impossible. The Company's prospects must be considered in light of the risks and uncertainties frequently encountered by companies in their early stages of development, particularly those companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, 16 17 respond to competitive developments, continue to attract, retain and motivate qualified persons and continue to upgrade its software products and services. There can be no assurance that the Company will be successful in addressing such risks. Although the Company has experienced revenue growth in recent periods, such growth rates should not be relied upon as indicative of future operating results, and there can be no assurance that the Company will be able to sustain revenue growth. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." History of Operating Losses; Uncertainty of Future Operating Results Since its inception, the Company has incurred substantial costs to research, develop and enhance its technology and products, to recruit and train a marketing and sales group and to establish an administrative organization. As a result, the Company incurred net losses in its fiscal years ended March 31, 1997 and 1996. Through March 31, 1997 the Company had an accumulated deficit of $6.6 million. The Company anticipates that its operating expenses will increase substantially in the foreseeable future as it increases its sales and marketing activities, expands its operations and management and continues the development of its products and technologies. Accordingly, there can be no assurance that the Company will achieve or sustain profitability. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Fluctuations in Quarterly Results The Company has experienced significant fluctuations in its revenues and operating results from quarter to quarter and anticipates that it will continue to experience such quarterly fluctuations. The Company's revenues and operating results have generally been higher in the fourth fiscal quarter than in any preceding quarter of each fiscal year, due largely, the Company believes, to the positive effect of the Company's incentive sales compensation plans. In addition, as a result of the Company's incentive sales compensation plans, first fiscal quarter revenues in any year are typically lower than revenues in the immediately preceding fourth fiscal quarter. In fiscal 1997, however, revenues for the fourth quarter were approximately equal to third quarter revenues, and there can be no assurance that the historical patterns of operating results will be repeated in the future. In addition, the Company's sales are made predominantly in the third month of each fiscal quarter and tend to be concentrated in the latter half of that third month. Accordingly, the Company's quarterly results of operations are difficult to predict, and delays in product delivery or in closings of sales near the end of a quarter could cause quarterly revenues to fall substantially short of anticipated levels and, to a greater degree, adversely affect profitability. Factors that may contribute to such fluctuations, in addition to incentive compensation, include seasonal factors, such as the fiscal year ends of the government and other customers and reduction in European business during summer months; the number of new orders and product shipments; the size and timing of individual orders; the timing of introduction of products or product enhancements by the Company, the Company's competitors or other providers of hardware, software and components for the Company's market; competition and pricing in the software industry; market acceptance of new products; new product introductions by competitors; product quality problems; customer order deferrals in anticipation of new products; changes in customer budgets or procurement practices; changes in operating expenses; changes in Company or customer strategies; personnel changes; changes in foreign currency exchange rates; changes in mix of products sold; and changes in general economic conditions. The Company's sales generally comprise a small number of orders with a large dollar amount per order. The loss or delay in receipt of individual orders, therefore, could have a more significant impact on the revenues and quarterly results of the Company than on those of companies with higher sales volumes or lower revenues per order. For example, during the fourth quarter of fiscal 1997, the Company's revenues fell substantially short of anticipated levels due primarily to a failure to close an order from a government reseller. The Company's software products generally are shipped as orders are received and revenues are recognized upon delivery of the products, provided no significant vendor obligations exist and collection of the related receivable is deemed probable. As a result, software license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. The timing of license fee revenue is difficult to predict because of the length of the Company's sales cycle, which is typically three to nine months from the initial contact. Because the Company's operating expenses are based on anticipated revenue trends and because a high percentage of the Company's expenses are relatively fixed, a delay in the recognition of revenue from a limited number of license transactions could cause significant 17 18 variations in operating results from quarter to quarter and could result in losses substantially in excess of anticipated amounts. To the extent such expenses precede, or are not subsequently followed by, increased revenues, the Company's operating results would be materially and adversely affected. In addition, the achievement of anticipated revenues is substantially dependent on the ability of the Company to attract, on a timely basis, and retain skilled personnel, especially sales and support personnel. As a result of the foregoing factors, among others, revenues for any quarter are subject to significant variation, and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Fluctuations in operating results may also result in volatility in the price of the Company's Common Stock in the public market. Due to all of the foregoing factors, among others, it is likely that, from time to time in the future, the Company's results of operations would be below the expectations of public market analysts and investors. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Customer and Market Concentration A relatively small number of customers (primarily government resellers) account for a significant percentage of the Company's revenues. In fiscal 1997, two of the Company's government resellers, Sylvest Management and IBM, accounted for 37% and 36% of revenues, respectively. In fiscal 1996, sales to Logicon and AT&T accounted for 18% and 12% of revenues, respectively, and sales to the Company's top four customers accounted for approximately 45% of revenues. In fiscal 1995, sales to AT&T, IBM and British Columbia Telephone accounted for 29%, 12% and 11% of revenues, respectively. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of revenue for the foreseeable future. More than 30% of the Company's revenues during fiscal 1996 and more than 80% of its revenues during fiscal 1997 were derived indirectly through distributors from sales to departments and agencies of the U.S. Government. The Company believes that the success and further development of the Company's business will continue to be dependent, in significant part, upon its ability to continue such indirect sales. A significant reduction in the federal funds available for agencies and departments the Company is supplying, either through agency budget cuts by Congress or the imposition of budgetary constraints, or a determination by the Government that funding of such agencies and departments should be reduced or discontinued, would have a material adverse effect on the Company's results of operations. The future success of the Company will depend on its ability to obtain orders from new customers and successfully market its products in diverse industries. The loss of a major customer, failure to close a major order or any reduction, cancellation or delay in orders by such customers, or the failure of the Company to successfully market its products in existing targeted industry segments or new industry segments, would have a material adverse effect on the Company's business, results of operations and financial condition. For example, during the fourth quarter of fiscal 1997, the Company's revenues fell substantially short of anticipated levels due primarily to a failure to close an order from a government reseller, and there can be no assurance that delays, cancellations or failures to close orders will not occur in the future. Similarly, changes in government procurement practices have resulted in the past, and may result in the future, in losses or delays in orders. In addition, orders from government resellers and agencies of the U.S. government may subject the Company to other risks that are not typically present in commercial contracts, such as retroactive price adjustments and potential penalties, as well as the risk of termination at the convenience of the government. The occurrence of any one of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. The Company generally does not offer payment terms beyond 60 days; however, the Company's sales to government resellers and agencies of the U.S. government typically have longer payment cycles. Because the Company derives a substantial portion of its revenues from government resellers and agencies of the U.S. Government, the Company's largest receivables tend to have lengthy collection cycles. At March 31, 1997, approximately 87% of the Company's outstanding trade receivables were from government resellers and agencies of the U.S. Government. See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of such lengthy collection cycles has not been material to the Company's working capital requirements; however, there can be no assurance that future delays in payment will not adversely affect the Company's ability to meet its anticipated liquidity needs. 18 19 Because a large portion of the Company's revenues are currently derived from enterprises that support UNIX operating systems, a significant decline in the UNIX operating systems market would have a material adverse effect on the Company's business, results of operations and financial condition. Similarly, widespread adoption of other desktop system software and operating environments, such as Windows NT, Java-based operating environments or other technologies, could create a more homogeneous environment throughout an enterprise, which would have a material adverse effect on the Company's business, results of operations and financial condition. See " - Customers and Markets." Dependence on Growth of Desktop System and Client/Server Market All of the Company's business is in the desktop system and client/server application software markets, which are still emerging markets that are intensely competitive, highly fragmented and subject to rapid change. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting client/server computing environments, the continued use by these organizations of a variety of incompatible computing technologies and commercial acceptance of the Company's products as a desktop systems software solution to address these problems of fragmentation. There can be no assurance that the desktop system and client/server application software markets will maintain their current level of growth or that they will continue to be heterogeneous or that the Company's principal product, TED, will be widely adopted. If the desktop system and client/server application software markets fail to grow or grow more slowly or if the enterprise environment becomes more homogeneous than the Company currently anticipates, or if the Company's products are not widely adopted, the Company's business, results of operations and financial condition would be materially adversely affected. The Company has spent, and intends to continue to spend, significant resources educating potential customers about the benefits of its products. However, there can be no assurance that such expenditures will enable the Company's products to achieve any additional degree of market acceptance. See " Customers and Markets." Certain of the Company's products and products in development are intended for use with the Internet/intranet. The success of the Company's products and products in development, if commercially released, may depend, in part, on their compatibility with the Internet. The commercial market for products and services designed for use with the Internet/intranet has only recently began to experience rapid growth, and there can be no assurance that this growth pattern will continue. To the extent that the Internet continues to experience rapid growth in the level of use and the number of users, there can be no assurance that the Internet infrastructure will be able to support the demands of such growth or will not otherwise lose its utility due to delays in the development and adoption of new standards and protocols required to handle increased levels of activity or due to increased government regulation. It is difficult to predict with any assurance whether the demand for Internet-related products and services will increase or decrease in the future. There can be no assurance that the Company will be able to successfully compete in the market for Internet-related products and services without substantial modification or customization of the Company's products or services or the introduction of new products and services. Reliance on Certain Relationships In connection with the Company's TED family of products, the Company has established strategic relationships with a number of organizations that it believes are important to its ability to enhance its worldwide sales, marketing and support activities as well as to develop and market enhancements and new applications for its products. The Company's indirect channel relationships provide marketing and sales opportunities for the Company's direct sales force and expand distribution of its products. These relationships also assist the Company in keeping pace with technological and marketing developments and the needs of major customers and vendors. There can be no assurance that the Company will be able to continue to successfully manage its strategic relationships or that any customer, system integrator or distributor will continue to market or to purchase the TED family of products or that the Company will be successful in establishing strategic relationships in connection with its SoftNC technology or products. The failure by the Company to maintain these relationships or the failure to establish new relationships in the future could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that these events will not occur in the future. See " - Marketing and Sales." 19 20 The Company licenses technology from OEMs and other third parties to enable the Company to develop new applications for its products. Such licenses are terminable on the occurrence of certain events. This software is then integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that these third-party technology licenses will continue to be available to the Company on commercially reasonable terms, if at all. The loss of or inability to maintain any of these technology licenses could result in delays or reductions in product shipments until equivalent technology, if any, could be identified, licensed and integrated. Any such delays or reductions in product shipments could materially and adversely affect the Company's business, results of operations and financial condition. Industry Conditions, New Product Development and Technological Change The client/server and desktop system software market is characterized by rapid technological advancements, evolving industry standards, changes in consumer expectations and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products and products currently under development obsolete and unmarketable. Accordingly, the life cycles of the Company's products are difficult to estimate. The Company's future success will depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments, respond to evolving consumer requirements and achieve market acceptance. The Company's future success will also depend in part upon its ability to maintain and enhance its technology relationships in order to provide customers with integrated product solutions. The Company's ability to develop and introduce new products and enhancements on a timely basis may be adversely affected by a number of factors, including the ability of the Company's engineers to solve technical problems and to test products, as well as business priorities in light of the availability of development and other resources and other factors, including factors that may be outside the control of the Company. If the Company is unable to develop on a timely basis new software products or enhancements to existing products, if such new products or enhancements do not achieve market acceptance, or if the Company is unable to maintain its technology relationships, the Company's business, results of operations and financial condition will be materially and adversely affected. See " - Products and Technologies" and " - Research and Development." The Company's current products are designed to adhere to certain open systems standards, and current and future sales of the Company's products will be dependent, in part, on market acceptance of such standards. Emergence of new industry standards could require the Company to modify its products to adhere to such standards. There can be no assurance that the Company would be successful in incorporating new standards effectively or on a timely basis or that any resulting products would achieve commercial acceptance. Failure by the Company to effectively incorporate into its products new industry standards that are widely adopted in the markets served by the Company would have a material adverse effect on the Company's business, results of operations and financial condition. Product Concentration To date, substantially all of the Company's revenues have been attributable to sales of licenses of the TED family of products and related services. The Company has not introduced for commercial sale any products based on, or recognized any revenues from licenses of, its SoftNC technology. The Company currently expects the TED family of products and related services to account for substantially all of its revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for the TED products, such as competition or technological change, could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's future financial performance will depend, in significant part, on the successful development, introduction and customer acceptance of new and enhanced versions of the TED family of products and related services and on the Company's ability to develop and commercialize products based on the Company's SoftNC technology. There can be no assurance that the Company will continue to be successful in developing and marketing the TED family of products and related services, or that the Company will be successful in developing and marketing products based on the Company's SoftNC technology. See " - Products and Technologies." 20 21 Competition The market in which the Company competes is characterized by rapidly changing technology and evolving standards. The Company's competitors and potential competitors, which include Microsoft, Netscape, and the original CDE developers (Hewlett-Packard, IBM, Novell, and Sunsoft, a subsidiary of Sun), have or may have more established and larger marketing and sales organizations, significantly greater financial and technical resources and a larger installed base of customers, as well as greater name recognition than the Company. Accordingly, such competitors or potential competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sales of their products than the Company or may be better positioned to achieve market acceptance of new technology or products. The Company also expects that competition will increase as a result of software industry consolidation. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of the enterprise customers in the Company's markets. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, or that competitive factors faced by the Company will not have a material adverse effect on the Company's business, results of operations and financial condition. See " - Competition." The Company's products are based in part on a non-exclusive license of the CDE industry standard. Each of the original CDE developers has developed or is developing unique implementations of CDE specific to its own UNIX platforms. Because CDE was developed as an open systems industry standard, any of the original CDE developers or their assignees, other competitors or third-party licensees, may develop similar products or sell competing products in the Company's markets. In addition, the Company has developed its TED product based in part on a non-exclusive license of the CDE technology from Hewlett-Packard. Under the terms of the Company's license agreement with Hewlett-Packard, all modifications to the CDE developed by the Company are owned by the Company and are licensed back to Hewlett-Packard on a non-exclusive basis. There can be no assurance that one or more of these competitors and potential competitors will not develop or market products that would directly compete with the Company's products or license a third party to do so. Management of Growth The Company has recently experienced a period of significant growth in total revenues that has placed and is expected to continue to place a significant strain upon its managerial, financial and operational resources. To manage its expansion, the Company must improve these resources on a timely basis and continue to expand, train and manage its employee base. In addition, the Company will be required to manage multiple relationships with various customers, distribution channels, technology licensors and licensees and other third parties. There can be no assurance that the Company's systems, procedures or controls will be adequate to support the Company's operations or that the Company's management will be able to achieve the rapid execution necessary to fully exploit any future market opportunity for the Company's products and services or successfully manage relationships with its customers, distribution channels, technology licensors and licensees or other third parties. The Company's future operating results will also depend on its ability to expand its sales and marketing organizations, implement and manage new distribution channels to penetrate different and broader markets and expand its support organization. If the Company is unable to manage expansion effectively, the Company's business, results of operations and financial condition will be materially and adversely affected. There can be no assurance, however, that such expansion or growth will occur. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 21 22 Lengthy Sales and Implementation Cycle The licensing of the Company's products by its customers typically involves a significant technical evaluation and commitment of capital and other resources, with delays frequently associated with customers' internal procedures to approve large capital expenditures and to test and accept new technologies that affect key operations, particularly with respect to government sales. For these and other reasons, the sales cycle associated with the licensing of the Company's products is typically lengthy and subject to a number of significant risks. For example, during the fourth quarter of fiscal 1997, the Company's revenues fell substantially short of anticipated levels due primarily to a failure to close an order from a government reseller. There can be no assurance that the Company will not experience these and additional cancellations, delays or failures to close orders in the future. Because of the lengthy sales cycle and the large size of many customers' orders, if revenues forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company's operating results for that quarter could be materially and adversely affected. Evolving Distribution Channels The Company's strategy is to leverage its sales and marketing through its indirect channel relationships, which include OEMs, VARs and system integrators, that distribute or resell the Company's products in their respective markets. To the extent that average selling prices through indirect channel relationships decline relative to the Company's direct sales in the future, the Company's average selling prices and gross margins may be materially and adversely affected. In addition, the Company's agreements with indirect channel entities typically do not restrict such entities from distributing competing products and, in many cases, may be terminated by either party without cause. Furthermore, in some cases the Company has granted exclusive distribution rights that are limited by territory and in duration, and such agreements typically do not require any minimum purchase volumes; therefore, there can be no assurance that these relationships will produce significant revenues in the future. Consequently, the Company may be adversely affected should any indirect channel entity fail to adequately penetrate its market segment. Failure to recruit, manage or retain important indirect channel entities, or to manage conflict within the channel, could materially and adversely affect the business, results of operations and financial condition of the Company. The Company plans to expand its direct sales force. There can be no assurance that such internal expansion will be successfully completed, that the cost of such expansion will not exceed the revenues generated or that the Company's sales and marketing organization will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of the Company's current or potential competitors. The Company's inability to effectively manage the expansion of its direct sales force could have a material adverse effect on the Company's business, results of operations and financial condition. See " Marketing and Sales." Dependence on Key Personnel The Company's performance and prospects are substantially dependent on the continued service of its executive officers and key technical and sales and marketing personnel, most of whom have worked together for only a short period of time. Given the Company's early stage of development, the Company is dependent on its ability to retain and motivate highly qualified personnel, especially its management and technical and sales personnel. The Company has "key person" life insurance policies on certain of its executive officers. Even so, the loss of the services of any of its executive officers or other key employees could have a material adverse effect on the business, results of operations and financial condition of the Company. The Company's future success also depends on its continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to identify, attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to identify, attract and retain the necessary technical and managerial personnel could have a material adverse effect upon the Company's business, results of operations and 22 23 financial condition. Dependence on Proprietary Technology; Risks of Infringement The Company's success and ability to compete is dependent in part upon its proprietary technology. While the Company relies on trademark, trade secret, copyright law, confidentiality procedures and contractual provisions to protect its technology, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. To date, the Company has had no patents issued; however, it has three patent applications pending. There can be no assurance that any patents will be issued from such applications or that others will not develop technologies that are similar or superior to the Company's technology. The Company believes the source code for the Company's proprietary software is protected both as a trade secret and copyright work. However, effective trademark, copyright and trade secret protection may not be available in every foreign country in which the Company's products are distributed. The Company's policy is to enter into confidentiality agreements with its employees, consultants and vendors, and the Company generally controls access to and distribution of its software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization. There can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties or that third parties will not be able to develop similar technology independently. The Company may receive notices from third parties claiming that the Company's products infringe third-party proprietary or intellectual property rights. The Company expects that, as the number of software products in the industry increases and the functionality of these products or their implementation further overlaps, software products will increasingly be subject to such claims. Any such claim, with or without merit, could result in costly litigation and may require the Company to enter into royalty or licensing arrangements. However, such royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all. Consequently, any such litigation could have a material adverse effect on the Company's business, results of operations and financial condition. See " - License Agreements and Intellectual Property." International Operations Although, to date, the Company has not made a significant percentage of its sales internationally, a significant portion of the Company's customer base are large multinational companies. To meet the needs of such companies, both domestically and internationally, the Company must directly or indirectly provide worldwide sales and product support services. In April 1997, the Company relocated the European headquarters of its European subsidiary, TriTeal B.V., from the Netherlands to the United Kingdom and closed the Netherlands facility. The European operations are responsible for generating and fulfilling customer demand and supporting indirect channel activities. In addition, the Company's marketing department supports European activities from the Company's headquarters in Carlsbad, California. The Company intends to enter additional international markets and to continue to expand its international operations and direct and indirect sales and marketing activities worldwide, which will require significant management and financial resources and could adversely affect the Company's business, results of operations and financial condition. The Company has committed and intends to continue to commit significant time and financial resources to developing international sales and support channels. To the extent that the Company is unable to expand its international sales organization in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, results of operations and financial condition could be materially and adversely affected. There can be no assurance that the Company will be able to maintain or increase international market demand for its products. Risks inherent in the Company's international business activities generally include currency fluctuations, unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of and the Company's limited experience in localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially weaker protection for intellectual property in certain foreign countries, potentially adverse tax 23 24 consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws and practices. To date, substantially all of the Company's international revenues have been denominated in U.S. dollars. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in future currency exchange rates will not have a material adverse effect on revenues from international sales and thus the Company's business, results of operations and financial condition. There can be no assurance that any of such factors will not have a material adverse effect on the Company's future international operations and, consequently, the Company's business, results of operations and financial condition. See " - Marketing and Sales" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Risk of Product Defects Software products as complex as those offered by the Company frequently contain errors or may fail, especially when first introduced or when new versions are released. Although the Company conducts extensive product testing, the Company may discover software errors in its new products or enhancements after their release, possibly resulting in a loss or delay of recognition of revenues. The Company's products are typically intended for use in applications that may be critical to a customer's business. As a result, the Company expects that its customers and potential customers have a greater sensitivity to product defects than the market for software products generally. Although the Company's business has not been adversely affected by any such errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in products or releases after commencement of commercial shipments, resulting in loss of revenue or delay in market acceptance, diversion of development resources, damage to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect upon the Company's business, results of operations and financial condition. See " - Research and Development." Product Liability The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. However, it is possible that the limitation of liability provisions contained in the Company's license agreements may not be effective under the laws of certain jurisdictions. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, results of operations and financial condition. Potential Volatility of Stock Price The market price of the Company's Common Stock has been, and may continue to be, highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new software or services by the Company or its competitors, changes in or failure of the Company to meet financial estimates by securities analysts, general market conditions or other events or factors, many of which are beyond the Company's control. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many high technology companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In the past, following periods of volatility in the market price for a company's securities, securities class action litigation has often been initiated. Such litigation could result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on the Company's business, results of operations and financial condition. Future Capital Needs; Uncertainty of Additional Financing The Company's operations to date have required substantial amounts of capital. The Company expects to spend substantial funds to support the growth of its products, to develop new products, to add enhancements and 24 25 additional applications to its products and to expand internationally. The Company anticipates that its existing capital resources and credit facilities should enable it to maintain its current and planned operations for at least the next 12 months. The Company's capital requirements will depend on numerous factors, including the progress of the Company's research and development programs, the commercial acceptance of its products, the resources the Company devotes to advanced technologies and the demand for its products. To the extent that funds generated from operations and available credit facilities are insufficient, the Company will have to raise additional funds to meet its capital requirements. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution, and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. No assurance can be given that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may have to, among other things, reduce substantially or eliminate expenditures for the development and marketing of its products. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Antitakeover Provisions Certain provisions of the Company's Certificate of Incorporation and By-laws, as well as provisions of Delaware law, could discourage potential acquisition proposals and delay or prevent a change in control of the Company. For example, the Company's Certificate of Incorporation authorizes the Board of Directors to issue up to 5,000,000 shares of Preferred Stock and to determine the designations, price, rights, powers, preferences, privileges and limitations, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the Rights of the holders of any Preferred Stock that may be issued in the future. The Certificate of Incorporation and By-laws, among other things, provide for a classified Board of Directors, require that stockholder actions occur at duly called meetings of the stockholders, provide that special meetings of stockholders may be called only by the Chairman of the Board of Directors, the Chief Executive Officer or a majority of the Board of Directors, do not permit cumulative voting in the election of directors and require advance notice of stockholder proposals and director nominations. These provisions, as well as certain applicable provisions of Delaware law, could serve to depress the Company's stock price or discourage a hostile bid in which stockholders could receive a premium for their shares. In addition, these provisions could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, or delay, prevent or deter a merger, acquisition or tender offer in which the Company's stockholders could receive a premium for their shares, or a proxy contest for control of the Company or other change in the Company's management. ITEM 2. PROPERTIES At March 31, 1997, the Company leased approximately 32,000 square feet of office space for its corporate headquarters in Carlsbad, California, under operating leases expiring at various dates through 1999. At the same date, the Company also occupied approximately 8,500 square feet of office space under lease and rental agreements in various locations across the United States in support of its regional activities and approximately 3,000 square feet of office space in the Netherlands and the United Kingdom. In April 1997, the Company signed a 10-year lease agreement for approximately 51,000 square feet of office space intended for use as the new corporate headquarters in Carlsbad, California. Under the terms of the lease, which is scheduled to commence in April 1998, the Company is committed to future lease payments aggregating approximately $11.2 million through fiscal 2008. In April 1997, the Company elected to close its 2,600 square-foot facility in the Netherlands and relocate its European headquarters to the United Kingdom. In May 1997, the Company terminated its current lease for a 400-square foot office building in the United Kingdom and signed a new lease in the United Kingdom for a 1,400 square- foot facility. Under the terms of the lease, the Company is committed to future lease payments aggregating approximately $116,000 through fiscal 2001. 25 26 ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock commenced trading on the Nasdaq National Market on August 7, 1996 under the symbol "TEAL." The following table sets forth, for the periods indicated, the high and low sale prices per share of the Common Stock, as reported by the Nasdaq National Market.
YEAR ENDED MARCH 31, 1997 HIGH LOW -------------------------------------------------------------- ------------- ------------- Second Quarter (commencing August 7, 1996) ................... $ 15.75 $ 8.00 Third Quarter ................................................ 21.75 12.25 Fourth Quarter................................................ 23.25 5.50
The last reported sale price of the Common Stock on the Nasdaq National Market on June 19, 1997 was $9.62 per share. As of June 19, 1997, there were approximately 178 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any future earnings to finance growth and development of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's line of credit agreement currently prohibits the payment of cash dividends on its capital stock without the consent of the lender. RECENT SALES AND ISSUANCES OF UNREGISTERED SECURITIES From April 1, 1996 to March 31, 1997, the Registrant has sold and issued (without payment of any selling commission to any person) the following unregistered securities: 1. During the period, the Registrant granted incentive stock options to employees, officers and, directors of the Company under its 1995 Stock Option Plan (the "1995 Plan") covering an aggregate of 513,797 shares of the Company's Common Stock. Certain of these options vest over a period of time following their respective dates of grant. 2. During the period, 21,696 unregistered shares of Common Stock were issued upon exercise of stock options by employees for an aggregate exercise price of $5,424. 3. In February 1997, 32,277 shares of Common Stock were issued to Imperial Bank upon exercise of a warrant for an aggregate exercise price of $68,750. 4. In June 1996, pursuant to the terms of an equity financing of the Company, the Registrant issued 566,164 shares of the Company's Series C Preferred stock to a group of investors, including a director of the Company, for $3,963,148 in cash. 26 27 The sales and issuances of securities in the transactions described in paragraphs (1) and (2) above were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation, as provided by Rule 701. With respect to the grant of stock options described in paragraph (1) above, exemption from registration under the Securities Act was unnecessary in that none of such transactions involved a "sale" of securities as such term is used in Section 2(3) of the Securities Act. The sales and issuances of securities in the transactions described in paragraphs (3) and (4) above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated thereunder. The recipients represented their intention to acquire the securities for investment purposes only and not with a view to the distribution thereof. Appropriate legends are affixed to the stock certificates issued in such transactions. All recipients either received adequate information about the Registrant or had access, through employment or other relationships, to such information. 27 28 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data are derived from the audited Consolidated Financial Statements of the Company and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and related notes thereto included elsewhere in this Report on Form 10-K.
YEARS ENDED MARCH 31, -------------------------------------------- 1997 1996 1995 1994 -------- -------- -------- -------- (In thousands, except per share data) Revenues: License fees ...................... $ 13,704 $ 6,750 $ 2,575 $ 148 Maintenance and services .......... 2,121 1,471 1,535 285 -------- -------- -------- -------- Total revenues ............ 15,825 8,221 4,110 433 Costs of revenues: Cost of license fees .............. 2,719 1,751 785 3 Cost of maintenance and services .. 676 421 384 192 -------- -------- -------- -------- Total costs of revenues ... 3,395 2,172 1,169 195 -------- -------- -------- -------- Gross profit .............. 12,430 6,049 2,941 238 Operating expenses: Research and development .......... 2,499 2,391 485 8 Selling, general and administrative 12,742 8,569 2,290 99 -------- -------- -------- -------- Total operating expenses .. 15,241 10,960 2,775 107 -------- -------- -------- -------- Operating income (loss) ............. (2,811) (4,911) 166 131 Interest income (expense), net ...... 901 (26) (2) -- -------- -------- -------- -------- Income (loss) before provision for (benefit from) income taxes ....... (1,910) (4,937) 164 131 Provision for (benefit from) income taxes ...................... -- (95) 48 56 -------- -------- -------- -------- Net income (loss) ................... $ (1,910) $ (4,842) $ 116 $ 75 ======== ======== ======== ======== Net income (loss) per share (2) ..... $ (0.23) $ (0.72) $ 0.02 $ 0.01 ======== ======== ======== ======== Shares used in computing net income (loss) per share (2) ............. 8,428 6,712 6,503 6,463 ======== ======== ======== ========
MARCH 31, -------------------------------------------- 1997 1996 1995 1994 -------- -------- -------- -------- (In thousands) Cash, cash equivalents and short-term investments ...................... $ 42,864 $ 301 $ 1,225 $ 22 Working capital ..................... 46,223 428 1,541 95 Total assets ........................ 55,701 6,636 3,155 238 Long-term debt, less current portion -- 243 120 79 Total stockholders' equity .......... 48,116 1,269 1,740 85
(1) The Company was incorporated on January 14, 1993, but did not commence operations until after March 31, 1993. Accordingly, there were no results of operations for the period from January 14, 1993 (inception) through March 31, 1993, and no balance sheet data at March 31, 1993. (2) See Note 1 of Notes to Consolidated Financial Statements. 28 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors, including those set forth below and as well as those discussed under the caption "Risk Factors" in Item 1 of this Report on Form 10-K. The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Report on Form 10-K. OVERVIEW TriTeal develops, markets and supports open systems-based, mission-critical desktop system software and integrated applications that enable multi-platform deployment of client/server applications throughout an enterprise. The Company was founded in January 1993, commenced operations in April 1993 and released its first product in May 1993. In August 1995, the Company introduced its current flagship product, TED. The Company's current products are based, in part, on certain technologies licensed from Hewlett-Packard, Spyglass, SPYRUS and other technology vendors. The Company's revenues historically have been derived from two principal sources: (i) license fees for the use of the Company's software products, and (ii) maintenance agreements and software development contract revenues. To date, substantially all of the Company's revenues have been attributable to sales of licenses of the TED family of products and related services. The Company does not anticipate receiving a significant amount of revenues from software development contracts in the future. TriTeal recently introduced its Java-based SoftNC technology, a thin-client, platform-independent solution designed to allow simultaneous access to Java and legacy applications. The Company has not introduced for commercial sale any products based on, or recognized any revenues from licenses of, its SoftNC technology. Revenues from software licenses are generally recognized upon shipment of software. Revenues from maintenance agreements are recognized over the contract terms, which generally is one year. Software development contract revenues are recognized using the percentage-of-completion method. See Note 1 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net revenues represented by each item reflected on the Company's Statements of Operations.
YEARS ENDED MARCH 31, -------------------------- 1997 1996 1995 ---- ---- ---- Revenues: License fees ...................... 87% 82% 63% Maintenance and services .......... 13 18 37 ---- ---- ---- Total revenues ............ 100 100 100 Costs of revenues: Cost of license fees .............. 17 21 19 Cost of maintenance and services .. 4 5 9 ---- ---- ---- Total cost of revenues .... 21 26 28 ---- ---- ---- Gross profit .............. 79 74 72 Operating expenses: Research and development .......... 16 29 12 Selling, general and administrative 81 104 56 ---- ---- ---- Total operating expenses .. 97 133 68 ---- ---- ---- Operating income (loss) ... (18) (59) 4 Interest income, net ................ 6 -- -- ---- ---- ---- Income (loss) before provision for income taxes ..................... (12) (59) 4 Provision for income taxes ......... -- -- 1 ---- ---- ---- Net income (loss) ................... (12)% (59)% 3% ==== ==== ====
29 30 YEARS ENDED MARCH 31, 1997, 1996 AND 1995 Revenues The Company's total revenues increased to $15.8 million in fiscal 1997 from $8.2 million in fiscal 1996 and $4.1 million in fiscal 1995. During fiscal 1997, two of the Company's government resellers, Sylvest Management and IBM, accounted for 37% and 36% of revenues, respectively. License fees increased to $13.7 million in fiscal 1997 from $6.8 million in fiscal 1996 and $2.6 million in fiscal 1995. During the years ended March 31, 1997, 1996 and 1995, license fees aggregated 87%, 82% and 63% of total revenues, respectively. These increases in license fees were due primarily to increased market acceptance of the Company's existing products, introduction of enhanced and new products and expansion of the Company's direct sales force. Maintenance and services revenues, which also include revenues derived from software development contracts, increased to $2.1 million in fiscal 1997 from $1.5 million in each of fiscal 1996 and fiscal 1995. Maintenance, which consists primarily of technical support, increased to $1.7 million in fiscal 1997 from $752,000 in fiscal 1996 and $267,000 in fiscal 1995. The increase in maintenance revenues was due primarily to additional maintenance agreements associated with a larger installed base of customers. The Company does not anticipate receiving a significant amount of revenues from software development contracts in the future; however, it may enter into such contracts in special situations where such software development may be necessary or where the technology may allow the Company to introduce new products, penetrate new markets or establish strategic relationships. Cost of Revenues The Company's total cost of revenues increased to $3.4 million in fiscal 1997 from $2.2 million in fiscal 1996 and $1.2 million in fiscal 1995. As a percentage of revenues, gross margin increased to 79% in fiscal 1997 from 74% in fiscal 1996 and 72% in fiscal 1995. The annual increases in gross margin were a result of the shift in revenue mix to software license revenues, which typically have higher gross margins, as well as lower average third-party royalty rates. There can be no assurance that gross margins will remain at this level in the future. The cost of license fees, which consists primarily of third-party royalties for licensed technology, related maintenance charges, and media and documentation, increased to $2.7 million in fiscal 1997 from $1.8 million in fiscal 1996 and $785,000 in fiscal 1995. These increases in the cost of license fees were due principally to a higher volume of sales of licenses. The cost of maintenance and services, which consists primarily of labor and services, increased to $676,000 in fiscal 1997 from $421,000 in fiscal 1996 and $384,000 in fiscal 1995. These increases in the cost of maintenance and services were due primarily to an increase in the number of customer support and development personnel and related overhead costs necessary to support a larger installed customer base, product upgrades and development activities. Research and Development Research and development expenses include expenses associated with the development of new products, enhancements of existing products and quality assurance activities. These expenses consist primarily of personnel costs, overhead costs relating to occupancy, equipment depreciation and supplies. In accordance with Statement of Financial Accounting Standards No. 86, development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. To date, the Company's software development has been completed concurrent with the establishment of technological feasibility and, accordingly, no costs have been capitalized. Research and development expenses increased to $2.5 million in fiscal 1997 from $2.4 million in fiscal 1996 and $485,000 in fiscal 1995. The increases in research and development expenses were attributable primarily to the development of the Company's research and development organization and reflect the increased costs associated with both additional headcount as well as expanded research and development efforts. The increase from fiscal 1996 to fiscal 1997 was offset in large part by an $800,000 non-recurring charge in fiscal 1996 related to license fees for certain Internet/intranet technologies. Research and development expenses represented 16%, 29% and 12% of total revenues in fiscal 1997, 1996 and 1995, respectively. The Company believes that a significant level of investment 30 31 for product development is required and, accordingly, the Company anticipates that, for the foreseeable future, these expenses will continue to increase in absolute dollars. Selling, General and Administrative Selling, general and administrative expenses consist primarily of salaries, commissions and bonuses, promotional expenses and occupancy costs. Selling, general and administrative expenses increased to $12.7 million in fiscal 1997 from $8.6 million in fiscal 1996 and $2.3 million in fiscal 1995. The increases in selling, general and administrative expenses were due primarily to the hiring of additional sales and marketing personnel, sales commissions and bonuses associated with increased sales volume, increased travel associated with additional headcount and increased sales volumes, additional promotional activities and, to a lesser degree, increased administrative personnel and occupancy costs. The Company believes that selling, general and administrative expenses will increase in absolute dollars as the Company expands its sales and administrative staff, adds infrastructure and incurs additional costs related to being a publicly-held company. Interest Income (Expense), Net Interest income (expense), net represents interest earned on the Company's cash, cash equivalents and short-term investments, offset in part by interest expense on the Company's borrowings, principally its equipment loan and line of credit. Net interest income was $901,000 during fiscal 1997 compared to net interest expense of $26,000 and $2,000 during fiscal 1996 and 1995, respectively. This increase was attributable to earnings on the proceeds from the Company's initial public offering in August 1996 and follow-on public offering in February 1997, which together generated approximately $44.7 million in cash proceeds. Income Taxes At March 31, 1997, the Company had net operating loss carryforwards for federal and state tax reporting purposes of approximately $6.7 million and $3.7 million, respectively. The Company also had research and development credit carryforwards for federal and state tax reporting purposes of approximately $229,000 and $127,000, respectively. Utilization of the carryforwards may be subject to annual limitations due to changes in the Company's ownership resulting from the Company's initial public offering and follow-on public offering. See Note 8 of Notes to Consolidated Financial Statements. The net operating loss carryforwards expire, if not utilized, at various dates through 2010 and 2000 for federal and state tax reporting purposes, respectively. A valuation allowance has been recorded for the entire net deferred tax asset as a result of uncertainties regarding the realization of the asset due to the limited operating history of the Company. See Note 8 of Notes to Consolidated Financial Statements. The Company had an effective tax rate of approximately 29% in fiscal 1995. This rate differs from the federal statutory rate primarily due to state income taxes and permanent differences. FACTORS AFFECTING OPERATING RESULTS The Company has experienced significant fluctuations in its revenues and operating results from quarter to quarter and anticipates that it will continue to experience such quarterly fluctuations. The Company's revenues and operating results have generally been higher in the fourth fiscal quarter than in any preceding quarter of each fiscal year, due largely, the Company believes, to the positive effect of the Company's incentive sales compensation plans. In addition, as a result of the Company's incentive sales compensation plans, first fiscal quarter revenues in any year are typically lower than revenues in the immediately preceding fourth fiscal quarter. In fiscal 1997, however, revenues for the fourth quarter were approximately equal to third quarter revenues, and there can be no assurance that the historical patterns of operating results will be repeated in the future. In addition, the Company's sales are made predominantly in the third month of each fiscal quarter and tend to be concentrated in the latter half of that third month. Accordingly, the Company's quarterly results of operations are difficult to predict, and delays in product delivery or in closings of sales near the end of a quarter could cause quarterly revenues to fall substantially short of anticipated levels and, to a greater degree, adversely affect profitability. Factors that may contribute to such 31 32 fluctuations, in addition to incentive compensation, include seasonal factors, such as the fiscal year ends of the government and other customers and reduction in European business during summer months; the number of new orders and product shipments; the size and timing of individual orders; the timing of introduction of products or product enhancements by the Company, the Company's competitors or other providers of hardware, software and components for the Company's market; competition and pricing in the software industry; market acceptance of new products; reduction in demand for existing products and shortening of product life cycles as a result of new product introductions by competitors; product quality problems; customer order deferrals in anticipation of new products; changes in customer budgets or procurement procedures; changes in operating expenses; changes in Company or customer strategy; personnel changes; changes in foreign currency exchange rates; changes in mix of products sold; and changes in general economic conditions. The Company's sales generally comprise a small number of orders with a large dollar amount per order. The loss or delay in receipt of individual orders, therefore, could have a more significant impact on the revenues and quarterly results of the Company than on those of companies with higher sales volumes or lower revenues per order. For example, during the fourth quarter of fiscal 1997, the Company's revenues fell substantially short of anticipated levels due primarily to a failure to close an order from a government reseller, and there can be no assurance that delays, cancellations or failures to close orders will not occur in the future. The Company's software products generally are shipped as orders are received, and revenues are recognized upon delivery of the products, provided no significant vendor obligations exist and collection of the related receivable is deemed probable. As a result, software license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. The timing of license fee revenue is difficult to predict because of the length of the Company's sales cycle, which is typically three to nine months from the initial contact. Because the Company's operating expenses are based on anticipated revenue trends and because a high percentage of the Company's expenses are relatively fixed, a delay in the recognition of revenue from a limited number of license transactions could cause significant variations in operating results from quarter to quarter and could result in losses substantially in excess of anticipated amounts. To the extent such expenses precede, or are not subsequently followed by, increased revenues, the Company's operating results would be materially and adversely affected. In addition, the achievement of anticipated revenues is substantially dependent on the ability of the Company to attract, on a timely basis, and retain skilled personnel, especially sales and support personnel. As a result of the foregoing factors, among others, revenues for any quarter are subject to significant variation, and the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Fluctuations in operating results may also result in volatility in the price of the Company's Common Stock in the public market. Due to all of the foregoing factors, among others, it is likely that, from time to time in the future, the Company's results of operations would be below the expectations of public market analysts and investors. The Company has recently experienced a period of significant growth in total revenues that has placed and is expected to continue to place a significant strain upon its managerial, financial and operational resources. To manage its expansion, the Company must improve these resources on a timely basis and continue to expand, train and manage its employee base. In addition, the Company will be required to manage multiple relationships with various customers, distribution channels, technology licensors and licensees and other third parties. There can be no assurance that the Company's systems, procedures or controls will be adequate to support the Company's operations or that the Company's management will be able to achieve the rapid execution necessary to fully exploit any future market opportunity for the Company's software products and services or successfully manage relationships with its customers, distribution channels, technology licensors and licensees or other third parties. The Company's future operating results will also depend on its ability to expand its sales and marketing organizations, implement and manage new distribution channels to penetrate different and broader markets and expand its support organization. If the Company is unable to manage expansion effectively, the Company's business, results of operations and financial condition will be materially and adversely affected. There can be no assurance, however, that such expansion or growth will occur. 32 33 LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations and met its capital expenditure requirements primarily from proceeds of the Company's initial and follow-on public offerings of Common Stock and private sales of Preferred Stock, sales of its software products and services, as well as borrowings under its bank credit facility. In August 1996, the Company completed the initial public offering of 2,875,000 shares of its Common Stock (including exercise of the underwriters' over-allotment option), generating net proceeds of approximately $20.4 million. In February 1997, the Company completed a follow-on public offering of its Common Stock, generating net proceeds of approximately $24.3 million. Net cash used for operating activities was $4.2 million, $4.6 million and $23,000 in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. The net cash used during fiscal 1997 and fiscal 1996 reflects primarily net losses incurred and increases in accounts receivable and prepaid expenses and other current assets, which were partially offset by increases in accrued compensation and related benefits and deferred revenues. Net cash used during fiscal 1995 reflects primarily an increase in accounts receivable, which was partially offset by net income generated as well as an increase in accrued compensation and related benefits and deferred revenue. The Company generally does not offer payment terms beyond 60 days; however, the Company's sales to government resellers and agencies of the U.S. government typically have longer payment cycles. Because the Company derives a substantial portion of its revenues from government resellers and agencies of the U.S. Government, the Company's largest receivables tend to have lengthy collection cycles. At March 31,1997, approximately 87% of the Company's outstanding trade receivables were from government resellers and agencies of the U.S. Government. See Note 6 of Notes to Consolidated Financial Statements. To date, the impact of such lengthy collection cycles has not been material to the Company's working capital requirements; however, there can be no assurance that future delays in payment will not adversely affect the Company's ability to meet its anticipated liquidity needs. Investing activities used net cash of $32.7 million in fiscal 1997, and consisted primarily of the purchase of short-term investments and, to a lesser extent, the purchase of property and equipment. Investing activities used $1.0 million and $407,000 in fiscal 1996 and 1995, respectively, and consisted primarily of the purchase of property and equipment. Capital expenditures have generally consisted of computer workstations, networking equipment, office furniture and equipment and leasehold improvements. The Company had no material firm commitments for capital expenditures at March 31, 1997, but expects to purchase additional computer equipment and to enhance its management information systems throughout fiscal 1998. Financing activities generated $48.2 million during fiscal 1997 from the issuance of Preferred Stock and Common Stock, offset in part by repayments of long-term debt. Since inception, the Company had raised $9.4 million from the sale of Preferred Stock and $44.7 million from the sale of Common Stock in the Company's initial and follow-on offerings. Financing activities generated cash of $4.7 million and $1.6 million in fiscal 1996 and 1995, respectively, from the issuance of Preferred Stock and from the net proceeds of long-term debt. At March 31, 1997, the Company had $42.9 million in cash, cash equivalents and short-term investments and $46.2 million of working capital. The Company has a $3.0 million revolving bank credit facility which expires on October 30, 1997. Borrowings are secured by substantially all Company assets. At March 31, 1997, there were no amounts outstanding under the facility. As of March 31, 1997, the Company's principal commitments consisted of obligations under operating leases, aggregating $1.4 million. In April 1997, the Company signed a 10-year lease agreement for approximately 51,000 square feet of office space intended for use as a new corporate headquarters in Carlsbad, California. Under the terms of the lease, which is scheduled to commence in April 1998, the Company is committed to future minimum lease payments aggregating approximately $11.2 million through fiscal 2008. The Company's operations to date have required substantial amounts of capital. The Company expects to spend substantial funds to support the growth of its products, to add enhancements and additional applications to its products and to expand internationally. The Company believes that its current cash, cash equivalents and short-term investments, along with its available credit facility, will be sufficient to meet its anticipated cash needs for working 33 34 capital, capital expenditures and business expansion for at least the next 12 months. The estimate of the period for which the Company expects its available cash balances and credit facilities to be sufficient to meet its capital requirements is a forward-looking statement that involves risks and uncertainties as set forth herein and in Item 1 under the caption "Business - Risk Factors" and elsewhere in this Report on Form 10-K. The Company's capital requirements will depend on numerous factors, including the progress of the Company's research and development programs, the commercial acceptance of its products, the resources the Company devotes to advanced technologies and the demand for its products. To the extent that funds generated from operations are insufficient, the Company will have to raise additional funds to meet its capital requirements. If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders of the Company will be reduced, stockholders may experience additional dilution, and such equity securities may have rights, preferences or privileges senior to those of the holders of the Company's Common Stock. No assurance can be given that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may have to, among other things, reduce substantially or eliminate expenditures for the development and marketing of its products. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and Notes thereto, together with the independent auditor's report thereon, appear at pages F-1 through F-14 of this Report on Form 10-K and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY IDENTIFICATION OF DIRECTORS The information required by this item is incorporated by reference to the information set forth in the section captioned "Election of Directors - Nominees" contained in the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year ended March 31, 1997 (the "Proxy Statement"). IDENTIFICATION OF EXECUTIVE OFFICERS The information required by this item is incorporated by reference to the information set forth in the section captioned "Executive Officers" at the end of Part I, Item 1 of this Report on Form 10-K. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by this item is incorporated by reference to the information set forth in the section captioned "Compliance with the Reporting Requirements of Section 16(a) of the Securities Exchange Act of 1934" contained in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth in the section captioned "Executive Compensation" contained in the Proxy Statement. 34 35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information set forth in the section captioned "Security Ownership of Certain Beneficial Owners and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information set forth in the section captioned "Certain Transactions" contained in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this Report on Form 10-K.
Consolidated Financial Statements of TriTeal Corporation -------------------------------------------------------- Report of Ernst & Young LLP, Independent Auditors.....................................................F-1 Consolidated Balance Sheets as of March 31, 1997 and 1996.............................................F-2 Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995...............F-3 Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995.....F-4 Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995...............F-5 Notes to Consolidated Financial Statements............................................................F-6
2. FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because they are not required, are not applicable, or the information is included in the Consolidated Financial Statements or notes thereto. 3. INDEX TO EXHIBITS
EXHIBIT REFERENCE EXHIBIT DESCRIPTION --------- ------------------------------------------------------------------------------------------- 3.1 Registrant's Certificate of Incorporation (2) 3.2 Registrant's By-laws (3) 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Specimen stock certificate (1) *10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers. (1) *10.2 1995 Stock Option Plan (1) *10.3 Form of Incentive Stock Option Agreement under the 1995 Stock Option Plan (1) *10.4 Form of Nonstatutory Stock Option Agreement under the 1995 Stock Option Plan (1) *10.5 Form of Nonstatutory Stock Option Agreement outside the 1995 Option Plan (1) *10.6 Form of NonQualified Stock Option Agreement outside the 1995 Stock Option Plan (1) *10.7 1996 Employee Stock Purchase Plan (1) *10.8 Form of Employee Stock Purchase Plan Offering (1) *10.9 Form of Restricted Stock Purchase Agreement (1) 10.10 Series A Preferred Stock Purchase Agreement, dated January 10, 1995, between the Registrant and certain investors (1) 10.11 Series B Preferred Stock Purchase Agreement, dated September 30, 1995, between the Registrant and certain investors (1) 10.12 Series C Preferred Stock Purchase Agreement, dated June 7, 1996, between the Registrant
35 36 and certain investors (1) 10.13 Investors' Rights Agreement, dated June 7, 1996, between the Registrant and certain investors (1) 10.14 Imperial Bank Credit Terms and Conditions, dated April 4, 1995 as amended (1) 10.15 Warrant to Purchase Common Stock, dated May 5, 1995, between the Registrant and PT Carlsbad Associates (1) 10.16 Full Service Office Lease, dated January 19, 1995, between the Registrant and PT Carlsbad Associates (1) 10.17 Full Service Office Lease, dated August 19, 1994, between the Registrant and PT Carlsbad Associates (1) 10.18 CDE and TED Core Software License Agreement, dated May 20, 1996, between the Registrant and The Santa Cruz Operation, Inc (1) 10.19 Common Desktop Environment Software License Agreement, dated April 19, 1996, between the Registrant and Hewlett-Packard Company, as amended (1) 10.20 OEM Source License Agreement, dated January 24, 1996, between the Registrant and Spyglass, Inc (1) 10.21 Independent Software License Agreement, dated May 18, 1995, between the Registrant and SPYRUS (1) 10.22 OEM Source License Agreement, dated April 26, 1995, between the Registrant and Spyglass, Inc (1) 10.23 Master Software License and Support Agreement, dated October 31, 1994, between the Registrant and Spyglass, Inc (1) 10.24 Master Software License and Support Agreement, dated October 31, 1994, between the Registrant and Open Software Foundation, Inc (1) 10.25 Sublease, dated June 7, 1995, between Scripps Memorial Hospitals and the Registrant (1) 10.26 Imperial Bank Revolving Line of Credit, dated November 18, 1996 (4) 10.27 Office Lease, dated April 17, 1997, between the Registrant and Marco Plaza Enterprises 10.28 Underwriting Agreement between the Registrant and PaineWebber Incorporated and Piper Jaffray, Inc., as representatives of the underwriters, dated August 6, 1996 (2) 10.29 Underwriting Agreement between the Registrant and PaineWebber Incorporated, Hambrecht and Quist and Piper Jaffray, Inc., as representatives of the underwriters, dated February 19, 1997 *10.30 Description of Fiscal Year 1997 Executive Bonus Arrangement (3) *10.31 Form of Fiscal Year 1998 Performance Incentive Plan 11.1 Statement regarding the calculation of net income (loss) per share 21.1 Subsidiaries of Registrant (1) 23.1 Consent of Ernst & Young LLP, independent auditors 24.1 Power of Attorney. Reference is made to the signature page of this Report on Form 10-K 27.1 Financial Data Schedule
- ---------- * Indicates management compensatory plan, contract or arrangement (1) Filed as an exhibit to the Registrant's Statement on Form SB-2 (No. 333-5052-LA) or amendments thereto and incorporated by reference. (2) Filed as an exhibit to the Registrant's Form 10-Q for the six months ended September 30, 1996 and incorporated by reference. (3) Filed as an exhibit to the Registrant's Statement on Form S-1 (No. 333-20579) or amendments thereto and incorporated by reference. (4) Filed as Exhibit 10.1 to the Registrant's Form 10-Q for the nine months ended December 31, 1996 and incorporated by reference. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fiscal quarter ended March 31, 1997. 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the city of San Diego, County of San Diego, State of California on the 27th day of June, 1997. TRITEAL CORPORATION By: /s/ Jeffrey D. Witous ---------------------------------------- JEFFREY D. WITOUS President, Chief Executive Officer, and Chairman of the Board of Directors POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey D. Witous and Arthur S. Budman and each of them, jointly and severally, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and attorney to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or his substitute or substitutes, may lawfully do so or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE - ------------------------------ ---------------------------------------- ------------- /S/ JEFFREY D. WITOUS President, Chief Executive Officer, - ------------------------------ and Chairman of the Board of Directors Jeffrey D. Witous (principal executive officer) June 27, 1997 /S/ ARTHUR S. BUDMAN Chief Financial Officer and Director - ------------------------------ (principal financial and accounting Arthur S. Budman officer) June 27, 1997 /S/ TERRY A. STRAETER Director June 27, 1997 - ------------------------------ Dr. Terry A. Straeter /S/ GARY A. WETSEL Director June 27, 1997 - ------------------------------ Gary A. Wetsel
37 38 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders TriTeal Corporation We have audited the accompanying consolidated balance sheets of TriTeal Corporation as of March 31, 1997 and 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TriTeal Corporation at March 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Diego, California April 30, 1997 F-1 39 TRITEAL CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, -------------------------------- 1997 1996 ------------- ------------- Current assets: Cash and cash equivalents ........................... $ 11,614,707 $ 301,251 Short-term investments .............................. 31,248,987 -- Accounts receivable, net of allowance for doubtful accounts of $300,000 at March 31, 1997 and $80,000 at March 31, 1996 ................................ 8,748,817 4,872,054 Prepaid expenses and other current assets ........... 2,196,112 378,485 ------------- ------------- Total current assets ........................ 53,808,623 5,551,790 Property and equipment, net ........................... 1,561,609 1,024,040 Other assets, net ..................................... 330,622 60,140 ------------- ------------- Total assets ................................ $ 55,700,854 $ 6,635,970 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit ...................................... $ -- $ 113,542 Accounts payable .................................... 1,507,250 784,575 Accrued liabilities ................................. 5,064,570 3,181,761 Deferred revenues ................................... 1,013,414 922,732 Current portion of long-term debt ................... -- 121,388 ------------- ------------- Total current liabilities ................... 7,585,234 5,123,998 Long-term debt ........................................ -- 242,776 Stockholders' equity: Preferred Stock, $.001 par value Authorized shares -- 5,000,000 Issued and outstanding shares -- no shares and 1,527,247 shares at March 31,1997 and 1996, .... -- 1,527 respectively Common Stock, $.001 par value Authorized shares -- 30,000,000 Issued and outstanding shares --10,768,493 shares and 4,186,902 shares at March 31,1997 and 1996, respectively ..................................... 10,768 4,187 Additional paid-in capital .......................... 54,861,984 5,869,825 Preferred stock subscriptions ....................... -- 363,129 Notes receivable from stockholders .................. (96,667) (167,250) Deferred compensation ............................... (100,300) (151,900) Retained earnings (deficit) ......................... (6,560,165) (4,650,322) ------------- ------------- Total stockholders' equity .................. 48,115,620 1,269,196 ------------- ------------- Total liabilities and stockholders' equity .. $ 55,700,854 $ 6,635,970 ============= =============
See accompanying notes. F-2 40 TRITEAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, ------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ Revenues: License fees ............................ $ 13,704,577 $ 6,750,281 $ 2,575,294 Maintenance and services ................ 2,121,148 1,470,883 1,534,572 ------------ ------------ ------------ Total revenues .................. 15,825,725 8,221,164 4,109,866 Costs of revenues: Cost of license fees .................... 2,719,452 1,751,442 785,550 Cost of maintenance and services ........ 675,871 420,969 383,754 ------------ ------------ ------------ Total costs of revenues ......... 3,395,323 2,172,411 1,169,304 ------------ ------------ ------------ Gross profit .................... 12,430,402 6,048,753 2,940,562 Operating expenses: Research and development ................ 2,498,873 2,390,627 484,499 Selling, general and administrative ..... 12,742,656 8,569,275 2,290,064 ------------ ------------ ------------ Total operating expenses ........ 15,241,529 10,959,902 2,774,563 ------------ ------------ ------------ Operating income (loss) ................... (2,811,127) (4,911,149) 165,999 Interest income (expense), net ............ 901,284 (25,943) (2,317) ------------ ------------ ------------ Income (loss) before provision for (benefit from) income taxes ............. (1,909,843) (4,937,092) 163,682 Provision for (benefit from) income taxes ............................ -- (95,500) 47,800 ------------ ------------ ------------ Net income (loss) ......................... $ (1,909,843) $ (4,841,592) $ 115,882 ============ ============ ============ Net income (loss) per share ............... $ (0.23) $ (0.72) $ 0.02 ============ ============ ============ Shares used in computing net income (loss) per share ....................... 8,428,152 6,712,321 6,503,134 ============ ============ ============
See accompanying notes. F-3 41 TRITEAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK COMMON STOCK ------------------------------ ----------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ Balance at March 31, 1994 ............. -- $ -- 3,492,902 $ 3,493 Issuance of Series A convertible preferred stock, net ........................ 727,247 727 -- -- Net income ........................... -- -- -- -- ------------ ------------ ------------ ------------ Balance at March 31, 1995 ............. 727,247 727 3,492,902 3,493 Issuance of Series B convertible preferred stock, net ............... 800,000 800 -- -- Preferred stock subscriptions .......... -- -- -- -- Issuance of common stock in exchange for notes receivable and service rendered.......................... -- -- 694,000 694 Deferred compensation ................ -- -- -- -- Amortization of deferred compensation........................ -- -- -- -- Net loss ............................. -- -- -- -- ------------ ------------ ------------ ------------ Balance at March 31, 1996 ............. 1,527,247 1,527 4,186,902 4,187 Issuance of Series C convertible preferred stock, net ............... 566,164 566 -- -- Conversion of preferred stock into common stock upon initial public offering, net ............... (2,093,411) (2,093) 2,093,411 2,093 Issuance of common stock upon initial public offering, net........ -- -- 2,875,000 2,875 Issuance of common stock upon follow-on public offering, net....... -- -- 1,365,000 1,365 Issuance of common stock upon exercise of options and warrants ........................... -- -- 211,552 212 Issuance of common stock under Employee Stock Purchase Plan ....... -- -- 36,628 36 Repayments of notes receivable from stockholders .................. -- -- -- -- Amortization of deferred compensation ............ -- -- -- -- Net loss ............................. -- -- -- -- ------------ ------------ ------------ ------------ Balance at March 31, 1997 ............. -- $ -- 10,768,493 $ 10,768 ============ ============ ============ ============
NOTES ADDITIONAL PREFERRED RECEIVABLE RETAINED PAID-IN STOCK FROM DEFERRED EARNINGS CAPITAL SUBSCRIPTIONS STOCKHOLDERS COMPENSATION (DEFICIT) TOTAL ------------ ------------- ------------- ------------- ------------ ------------ Balance at March 31, 1994 ............. $ 6,507 $ -- $ -- $ -- $ 75,388 $ 85,388 Issuance of Series A convertible preferred stock, net ........................ 1,538,312 -- -- -- -- 1,539,039 Net income ........................... -- -- -- -- 115,882 115,882 ------------ ------------- ------------- ------------- ------------ ------------ Balance at March 31, 1995 ............. 1,544,819 -- -- -- 191,270 1,740,309 Issuance of Series B convertible preferred stock, net................ 3,964,200 -- -- -- -- 3,965,000 Preferred stock subscriptions .......... -- 363,129 -- -- -- 363,129 Issuance of common stock in exchange for notes receivable and service rendered ........................... 172,806 -- (167,250) -- -- 6,250 Deferred compensation ................ 188,000 -- -- (188,000) -- -- Amortization of deferred compensation ....................... -- -- -- 36,100 -- 36,100 Net loss ............................. -- -- -- -- (4,841,592) (4,841,592) ------------ ------------- ------------- ------------- ------------ ------------ Balance at March 31, 1996 ............. 5,869,825 363,129 (167,250) (151,900) (4,650,322) 1,269,196 Issuance of Series C convertible preferred stock, net ............... 3,928,727 (363,129) -- -- -- 3,566,164 Conversion of preferred stock into common stock upon initial public offering, net ............... -- -- -- -- -- -- Issuance of common stock upon initial public offering, net ....... 20,379,119 -- -- -- -- 20,381,994 Issuance of common stock upon follow-on public offering, net ..... 24,317,477 -- -- -- -- 24,318,842 Issuance of common stock upon ......... -- exercise of options and warrants ........................... 117,801 -- -- -- -- 118,013 Issuance of common stock under Employee Stock Purchase Plan ....... 249,035 -- -- -- -- 249,071 Repayments of notes receivable from stockholders .................. -- -- 70,583 -- -- 70,583 Amortization of deferred compensation ............ -- -- -- 51,600 -- 51,600 Net loss ............................. -- -- -- -- (1,909,843) (1,909,843) ------------ ------------- ------------- ------------- ------------ ------------ Balance at March 31, 1997 ............. $ 54,861,984 $ -- $(96,667)) $ (100,300) $ (6,560,165) $ 48,115,620 ============ ============= ============= ============= ============ ============
See accompanying notes. F-4 42 TRITEAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, ---------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) .......................................... $ (1,909,843) $ (4,841,592) $ 115,882 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization .......................... 625,885 332,445 60,863 Provision for doubtful accounts ........................ 220,000 20,000 60,000 Amortization of deferred compensation .................. 51,600 36,100 -- Issuance of common stock for services .................. -- 6,250 -- Deferred income taxes .................................. -- (95,500) 44,947 Changes in operating assets and liabilities: Accounts receivable .................................. (4,096,763) (3,412,783) (1,392,464) Prepaid expenses and other current assets ............ (1,817,627) (342,408) (36,077) Accounts payable ..................................... 722,675 601,564 163,011 Accrued liabilities .................................. 1,882,809 2,560,000 606,737 Deferred revenue ..................................... 90,682 549,377 353,955 ------------ ------------ ------------ Net cash used in operating activities ...................... (4,230,582) (4,586,547) (23,146) Cash flows from investing activities: Purchases of short-term investments ...................... (80,415,565) -- -- Sales and maturities of short-term investments ........... 49,166,578 -- -- Purchases of property and equipment ...................... (1,163,454) (964,341) (396,655) Other assets ............................................. (270,482) (36,807) (10,352) ------------ ------------ ------------ Net cash used in investing activities ...................... (32,682,923) (1,001,148) (407,007) Cash flows from financing activities: Net proceeds from (repayments of) line of credit ................................................ (113,542) 113,542 -- Proceeds from long-term debt ............................. -- 364,164 125,123 Repayments of long-term debt ............................. (364,164) (141,525) (31,730) Proceeds from repayments of notes receivable from stockholders ...................................... 70,583 -- -- Proceeds from issuance of common stock, net .............. 45,067,920 -- -- Proceeds from stock subscriptions, net ................... -- 363,129 -- Proceeds from issuance of preferred stock, net ........... 3,566,164 3,965,000 1,539,039 ------------ ------------ ------------ Net cash provided by financing activities .................. 48,226,961 4,664,310 1,632,432 ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents .............................................. 11,313,456 (923,385) 1,202,279 Cash and cash equivalents at beginning of year ..................................................... 301,251 1,224,636 22,357 ============ ============ ============ Cash and cash equivalents at end of year ................... $ 11,614,707 $ 301,251 $ 1,224,636 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest ................................................. $ 28,418 $ 42,243 $ 7,904 ============ ============ ============ Income taxes ............................................. $ -- $ -- $ 7,407 ============ ============ ============ Supplemental disclosure of noncash financing activities: Issuance of common stock in exchange for notes receivable ............................................... $ -- $ 167,250 $ -- ============ ============ ============
See accompanying notes. F-5 43 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business TriTeal Corporation (the "Company"), develops, markets and supports open systems-based, mission-critical desktop system software and integrated applications that enable multi-platform deployment of client/server applications throughout an enterprise. The Company recently introduced its Java-based SoftNC technology, a thin-client, platform-independent solution designed to allow simultaneous access to Java and legacy applications. Reincorporation In August 1996, the Company reincorporated in the State of Delaware, providing for 30,000,000 authorized shares of Common Stock with a $.001 par value per share and for 5,000,000 authorized shares of Preferred Stock with a $.001 par value per share. Pursuant to the reincorporation, each share of Common Stock and each share of Preferred Stock of the predecessor California corporation was exchanged for one share of Common Stock and one share of Preferred Stock, respectively, of the Delaware corporation. The accompanying financial statements have been retroactively restated to give effect to the reincorporation. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary in The Netherlands. To date, substantially all of the Company's international operations have been denominated in U.S. dollars. Foreign currency transaction gains and losses were insignificant for the years ended March 31, 1997, 1996 and 1995. All intercompany accounts and transactions have been eliminated in consolidation. Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (principally three to five years). Leasehold improvements are amortized over the lesser of the estimated economic life of the asset or the remaining term of the lease. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less when purchased. Short-term investments are recorded at amortized cost plus accrued interest which approximates market value. The Company generally invests its excess cash in certificates of deposit, commercial paper, corporate debt instruments and U.S. government securities. The Company has established guidelines relative to diversification and maturities that are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any losses on its cash equivalents or short-term investments. The Company applies Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," to value its investments. Under the statement, the Company classifies its short-term investments as "Available-for-Sale" and records such assets at estimated fair value in the balance sheet. As of March 31, 1997 and 1996, the fair market value of cash equivalents and short-term investments approximated cost. F-6 44 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Credit is extended based on an evaluation of the customer's financial condition and collateral is generally not required. Credit losses have been minimal and such losses have been within management's expectations. Revenue Recognition Revenue from sales of software licenses is recognized upon product shipment provided that no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Maintenance revenue is recognized ratably over the term of the maintenance agreement, which in most cases is one year. Revenue from software development contracts is recognized under the percentage-of-completion method. Capitalized Software In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, the Company's software development has been completed concurrent with the establishment of technological feasibility and, accordingly, no costs have been capitalized. Income Taxes The Company accounts for income taxes following the provisions of SFAS No.109, "Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Computation of Net Income (Loss) Per Share Net income (loss) per share is computed using the weighted average number of common shares and common stock equivalents outstanding. Common equivalent shares from stock options and warrants are excluded from the computation when their effect is antidilutive except that, pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, common shares and common equivalent shares issued during the 12 months prior to the Company's August 1996 initial public offering (the "IPO") have been included in the calculation as outstanding for all periods prior to the IPO (using the treasury stock method). The calculation also gives effect to the conversion of all convertible preferred shares (using the if-converted method), which automatically converted into common shares upon completion of the IPO. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ from those estimates. Accounting Standard on Impairment of Long-Lived Assets Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." The adoption had no effect on the consolidated financial statements. F-7 45 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accounting Standard on Earnings per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which will be effective for the Company's fiscal 1998 financial statements. The Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The new requirements for calculating primary earnings per share exclude the dilutive effect of stock options and warrants. The adoption of this statement is not expected to have a material impact, since the Company is currently in a net loss position and the impact of stock options and warrants is not included in the net loss per share calculations as their effect is antidilutive. Stock Options In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by the Statement, the Company has elected to continue accounting for its stock-based compensation in accordance with the provisions of APB No. 25. As such, the new provisions of SFAS No. 123 had no impact on the financial position or results of operations of the Company. 2. BALANCE SHEET COMPONENTS Short-term Investments The Company has classified all of its marketable securities as available-for- sale securities. The fair market value of these investments approximates cost. The following table summarizes available-for-sale securities at March 31, 1997: Certificates of deposit.................. $ 6,000,693 Commercial paper.......................... 15,186,401 Corporate debt securities................. 7,065,565 U.S. government agency obligations........ 2,996,328 -------------- $ 31,248,987 ==============
At March 31, 1997, all short-term investments are due within one year of the date of purchase. Property and Equipment Property and equipment consists of the following:
MARCH 31, ---------------------------------- 1997 1996 --------------- --------------- Computer equipment..................$ 1,948,477 $ 988,356 Furniture and fixtures.............. 537,077 384,416 Leasehold improvements.............. 109,335 58,663 --------------- --------------- 2,594,889 1,431,435 Less accumulated depreciation and amortization................ (1,033,280) (407,395) --------------- --------------- $ 1,561,609 $ 1,024,040 =============== ===============
F-8 46 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accrued Liabilities Accrued liabilities consist of the following:
MARCH 31, --------------- ------------- 1997 1996 --------------- ------------- Royalties payable.................. $ 1,593,280 $ 1,534,014 Accrued compensation and related benefits............ 1,452,661 877,222 Allowance for sales returns ....... 1,061,706 511,332 Other accrued liabilities.......... 956,923 259,193 --------------- ------------- $ 5,064,570 $ 3,181,761 =============== =============
3. LINE OF CREDIT FACILITY AND LONG-TERM DEBT Effective March 31, 1995, the Company entered into a revolving bank credit facility (the "Facility"). Borrowings are secured by substantially all Company assets and are limited to the lesser of $1.1 million or 80% of eligible accounts receivable At March 31, 1996, $113,542 was outstanding under the Facility. A portion of the proceeds from the Company's IPO during fiscal 1997 was used to repay the amount due under the Facility. On August 4, 1996, the Facility expired. On November 18, 1996, the Company entered into a $3 million revolving bank credit facility (the "revolving Facility") which expires on October 30, 1997. Borrowings are secured by substantially all Company assets and bear interest at the bank's prime rate (8.50% at March 31, 1997). At March 31, 1997, no amounts were outstanding under the revolving Facility. 4. LONG-TERM DEBT During fiscal 1996, the Company refinanced and converted $364,164 due under the Facility into a three-year term loan. This note was repaid in full during fiscal 1997. 5. LEASE COMMITMENTS The Company leases its offices under operating lease agreements which expire at various dates through February 2002. In April 1997, the Company signed a 10-year lease agreement commencing in fiscal 1998 for approximately 51,000 square feet of office space intended for use as a new corporate headquarters in Carlsbad, California. Future annual minimum lease payments under noncancellable operating leases having initial terms in excess of one year, including the 10-year lease signed in April 1997, are as follows:
YEARS ENDING MARCH 31, AMOUNT ------------------------------------------- ------------ 1998....................................... $ 741,021 1999....................................... 1,278,388 2000....................................... 1,144,109 2001....................................... 1,125,528 2002....................................... 1,207,174 Thereafter................................. 7,074,720 ------------ $ 12,570,940 ============
Rent expense for the years ended March 31, 1997, 1996 and 1995 was $620,596, $413,185 and $65,000, respectively. F-9 47 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION The Company conducts its business within one industry segment. Total export sales for the years ended March 31, 1997, 1996 and 1995 were $509,540, $1,256,790 and $49,110, respectively. During fiscal 1997, 1996 and 1995, sales to government resellers and agencies of the U.S. Government approximated 81%, 34% and 12%, of revenues, respectively; related accounts receivable were $7,692,087 and $2,495,475 at March 31, 1997 and 1996, respectively. Sales to individual customers (primarily government resellers) exceeding 10% or more of revenues in each year ended March 31 were as follows: during 1997, two customers accounted for 37% and 36% of revenues, respectively; during 1996, two customers accounted for 18% and 12% of revenues, respectively; and during 1995, three customers accounted for 29%, 12% and 11% of revenues, respectively. 7. STOCKHOLDERS' EQUITY Common Stock During fiscal 1997, the Company raised net proceeds of approximately $20,400,000 and $24,300,000 through the completion of its IPO and follow-on public offering, respectively. Stock Option Plans From March 1, 1993 to May 31, 1995, the Company granted an aggregate of 669,000 non-qualified stock options to certain executive officers and key employees of the Company. The exercise price of such options was $0.25 per share, the fair value of the common stock on the date of grant as determined by the Board of Directors. Such options vest over a three-year period in accordance with the original vesting schedule of the options. In July 1995, the Company canceled such options and issued 669,000 shares of common stock to certain officers and key employees under restricted stock purchase agreements (the "Agreements"). Pursuant to the Agreements, the Company has the option to repurchase, at the original option issue price of $0.25 per share, the unvested shares in the event of termination of employment. At March 31, 1997 and 1996, 144,667 and 307,667 shares were subject to repurchase by the Company, respectively. During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan"), under which 1,350,000 shares of the Company's Common Stock were reserved for issuance upon exercise of options granted by the Company. The Plan provides for the grant of both incentive and nonstatutory stock options to officers, directors, employees and consultants of the Company. Options granted by the Company generally vest over a three-to-four year period and are exercisable for a period of 10 years from the date of grant. Options generally are granted at the fair market value of the shares at the date of grant as determined by the Board of Directors. The Company recorded $188,000 of deferred compensation for options granted during the year ended March 31, 1996, representing the difference between the option exercise price and the deemed fair market value for financial statement presentation purposes. The Company is amortizing such compensation ratably over the vesting period of the options. During the years ended March 31, 1997 and 1996, the Company charged to operations $51,600 and $36,100, respectively, for amortization of such deferred compensation. F-10 48 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of stock option transactions, including 899,350 non-qualified stock options granted outside of the Plan, is as follows:
WEIGHTED AVERAGE OPTION PRICE PRICE SHARES PER SHARE PER SHARE ------------- -------------- ------------- Outstanding at March 31, 1994............ 555,000 $ 0.001 -0.25 $ 0.03 Granted................................ 787,900 $ 0.25 $ 0.25 --------- -------------- Outstanding at March 31, 1995............ 1,342,900 $ 0.001 -0.25 $ 0.16 Granted................................ 731,550 $ 0.25 -5.00 $ 0.82 Canceled............................... (706,750) $ 0.001 -0.50 $ 0.19 --------- -------------- Outstanding at March 31, 1996............ 1,367,700 $ 0.001 -5.00 $ 0.72 Granted................................ 513,797 $ 6.00 -22.50 $ 14.60 Exercised.............................. (179,275) $ 0.001 -3.50 $ 0.27 Canceled............................... (21,191) $ 0.25 -18.375 $ 2.54 ========= =============== Outstanding at March 31, 1997............ 1,681,031 $ 0.001-22.50 $ 4.98 ========= ===============
A detail of the options outstanding at March 31, 1997 is as follows:
WEIGHTED AVERAGE REMAINING WEIGHTED RANGE OF OPTIONS CONTRACTUAL LIFE AVERAGE PRICE OPTIONS EXERCISE PRICES OUTSTANDING IN YEARS PER SHARE EXERCISABLE ----------------- ---------------- ----------------- -------------- -------------- $ 0.001 - 5.00 1,174,274 7.57 $ 2.62 631,793 $ 5.01 - 10.00 87,475 9.14 $ 6.29 -- $ 10.01 - 15.00 147,150 9.58 $ 13.00 -- $ 15.01 - 20.00 261,632 9.75 $ 18.31 -- $ 20.01 - 22.50 10,500 9.77 $ 21.11 -- --------- ---- ------- ------- 1,681,031 8.29 $ 12.20 631,793 ========= ==== ======= =======
At March 31, 1997, options to purchase 631,793 common shares, were exercisable and options to purchase 389,044 common shares were available for future grant. The Company has elected to follow APB No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee and director stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Adjusted pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. For options granted in the year ended March 31, 1996 and the period prior to the Company's IPO, the fair value for options was estimated at the date of grant using the "minimum value" method for option pricing with the following weighted-average assumptions: risk-free interest rate of 6%; dividend yield of 0%; and a weighted average expected life of the option of eight years. For options granted from August 6, 1996 to March 31, 1997, the fair value of the options were estimated at the date of grant using the "Black-Scholes" method F-11 49 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for option pricing with the following weighted average assumptions: risk-free interest rate of 6%; dividend yield of 0%; expected volatility of 65%; and weighted-average expected life of the option of eight years. For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effect of applying SFAS No. 123 for purposes of providing pro forma disclosures is not likely to be representative of the effects on reported net income (loss) for future years. The Company's pro forma information is as follows:
YEARS ENDED MARCH 31, ------------------------------- 1997 1996 ------------- ------------- Net loss: As reported ........................ $ (1,909,843) $ (4,841,592) ============= ============= Pro forma .......................... $ (2,779,233) $ (4,904,296) ============= ============= Net loss per share: As reported ........................ $ (0.23) $ (0.72) ============= ============= Pro forma .......................... $ (0.33) $ (0.73) ============= =============
Warrant In connection with the Line of Credit Facility (Notes 3 and 4), the Company issued a warrant for the purchase of 32,277 shares of common stock at $2.13 per share. This warrant was exercised during fiscal 1997. Employee Stock Purchase Plan On June 11, 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 250,000 shares for issuance thereunder. The Purchase Plan became effective upon the completion of the Company's IPO. The Purchase Plan permits eligible employees to purchase common stock, through payroll deductions of up to 15% of the employee's compensation, at a price equal to 85% of the fair market value of the common stock at either the beginning or the end of the offering period, whichever is lower. During fiscal 1997, the Company issued 36,368 shares of common stock under the Purchase Plan. Common Stock Reserved At March 31, 1997, a total of 2,283,707 shares of the Company's Common Stock have been reserved for the issuance pursuant to the exercise of options and the purchase of stock under the 1996 Employee Stock Purchase Plan. F-12 50 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES The provision for (benefit from) income taxes consists of the following:
YEARS ENDED MARCH 31, --------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ CURRENT Federal ..................................... $ -- $ -- $ -- State ....................................... -- -- 800 ------------ ------------ ------------ Total current ............................... -- -- 800 DEFERRED Federal ..................................... -- (85,900) 46,900 State ....................................... -- (9,600) 100 ------------ ------------ ------------ Total deferred .............................. -- (95,500) 47,000 ============ ============ ============ Total provision for (benefit from) income taxes $ -- $ (95,500) $ 47,800 ============ ============ ============
The reconciliation of the Company's income tax provision (benefit) computed at the Federal statutory rate in effect for each of the three years presented below to the recorded provision for (benefit from) income taxes is as follows:
YEARS ENDED MARCH 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Provision (benefit) at Federal statutory rate .... $ (661,500) $(1,694,600) $ 57,300 State income tax provision, net of federal benefit -- -- 600 Net operating loss not benefited ................. 661,500 1,599,100 -- Permanent differences and other .................. -- -- (10,100) =========== =========== =========== Provision (benefit) at effective rate ............ $ -- $ (95,500) $ 47,800 =========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liabilities are as follows:
MARCH 31, ----------------------------- 1997 1996 ----------- ----------- Deferred tax liabilities: Accrual to cash adjustments .............. $ -- $ (187,400) Section 481 adjustment ................... (376,400) -- ----------- ----------- Total deferred tax liabilities ........ (376,400) (187,400) Deferred tax assets: Capitalized research expense ............. 201,700 76,400 Accruals and reserves .................... 787,300 -- Net operating loss carryforwards ......... 2,549,300 1,835,400 Research tax credit carryforwards ........ 311,200 43,900 Depreciation ............................. 64,500 38,600 Other .................................... 36,300 ----------- ----------- Total deferred tax assets ............. 3,950,300 1,994,300 Depreciation .............................. (3,573,900) 1,806,900 ----------- ----------- Net deferred tax assets ............... 376,400 187,400 ----------- ----------- $ -- $ -- =========== ===========
F-13 51 TRITEAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A valuation allowance of $3,573,900 has been recognized to offset the entire amount of deferred tax assets as realization of such assets is uncertain. Approximately $ 701,000 of the valuation allowance for deferred tax assets relates to benefits of stock option deductions which, when recognized, will be allocated directly to additional paid-in capital. As of March 31, 1997, the Company has approximately $6,656,000 and $3,662,000 of Federal and state net operating loss carryforwards, respectively. The difference between the Federal and state tax loss carryforwards is primarily attributable to the capitalization of research expenses for California purposes and the 50% limitation on the California tax loss carryforwards. These Federal and state carryforwards will begin expiring in 2010 and 2000, respectively, unless previously utilized. The Company also has Federal and state research tax credit carryforwards of approximately $228,800 and $126,800, respectively, which will begin expiring in 2009, unless previously utilized. Federal and California tax laws limit the utilization of net operating loss and tax credit carryforwards that arise prior to certain cumulative changes in a corporation's ownership resulting in a change of control of the Company. However, the Company believes that such limitations will not have a material impact on the utilization of the carryforwards. 9. EMPLOYEE RETIREMENT PLAN The Company has established a 401(k) defined contribution retirement plan (the "Plan") covering all employees. The Plan provides for voluntary employee contributions from 1% to 15% of annual compensation (as defined). The Company may contribute such amounts as determined by the Board of Directors. There were no employer contributions to the Plan during the years ended March 31, 1997, 1996 and 1995. F-14 EX-10.27 2 EXHIBIT 10.27 1 EXHIBIT 10.27 LEASE AGREEMENT LANDLORD MARCO PLAZA ENTERPRISES, a California general partnership TENANT TRITEAL CORPORATION, a Delaware corporation 2 TABLE OF CONTENTS
Page ---- SUMMARY OF BASIC LEASE INFORMATION................................................................................i ARTICLE 1 -- DEFINITIONS..........................................................................................1 1.1 Acceleration Estimate...........................................................................1 1.2 Additional Rent.................................................................................1 1.3 Base Annual Rent................................................................................1 1.4 Base Monthly Rent...............................................................................1 1.5 Basic Terms.....................................................................................1 1.6 Business Days...................................................................................1 1.7 Commencement of Construction....................................................................1 1.8 Common Area.....................................................................................1 1.9 Common Area Maintenance Charges.................................................................1 1.10 CPI.............................................................................................1 1.11 Declarations....................................................................................1 1.12 Fair Market Rent................................................................................2 1.13 Excess Operating Costs Rent.....................................................................2 1.14 Hazardous Materials.............................................................................2 1.15 Insurance Charges...............................................................................2 1.16 Hazardous Materials Laws........................................................................2 1.17 Landlord's Indemnitees..........................................................................2 1.18 Lease Term......................................................................................2 1.19 Lease Year......................................................................................2 1.20 Operating Costs.................................................................................2 1.21 Premises........................................................................................3 1.22 Profit..........................................................................................3 1.23 Project.........................................................................................3 1.24 Property Taxes..................................................................................3 1.25 Rentable........................................................................................3 1.26 Rent............................................................................................3 1.27 Rules and Regulations...........................................................................3 1.28 Site Amenities..................................................................................3 1.29 Site Plan.......................................................................................3 1.30 Target Commencement Date........................................................................3 1.31 Tenant's Indemnitees............................................................................3 1.32 Tenant Improvements.............................................................................3 1.33 Tenant's Proportional Share.....................................................................3 1.34 Usable..........................................................................................4 1.35 Work Letter.....................................................................................4 ARTICLE 2 -- PREMISES.............................................................................................4 2.1 Lease...........................................................................................4 2.1.1 Premises...............................................................................4 2.1.2 Site Plan..............................................................................5 2.2 Lease of the Premises...........................................................................5 2.3 Suitability of Premises.........................................................................5 2.4 Landlord's Work in the Premises and Project.....................................................5 ARTICLE 3 -- LEASE TERM...........................................................................................5 3.1 Lease Term......................................................................................5 3.2 Commencement Date...............................................................................5
I-(i) 3 3.3 Delay in Commencement...........................................................................5 3.3.1 Acceptance Letter......................................................................5 3.3.2 Acceleration Estimate..................................................................6 3.3.3 LIQUIDATED DAMAGES.....................................................................6 3.3.4 Early Completion.......................................................................6 3.4 Early Occupancy.................................................................................6 3.5 Option(s) to Extend Term........................................................................7 3.5.1 Extension Notice.......................................................................7 3.5.2 Base Monthly Rent During Extension.....................................................7 ARTICLE 4 -- RENTAL AND OTHER PAYMENTS............................................................................8 4.1 Base Monthly Rent...............................................................................8 4.2 Interest on Past Due Obligations................................................................8 4.3 Late Charges....................................................................................8 4.4 Security Deposit; Additional Security and Loans.................................................8 4.4.1 Deposit of Funds.......................................................................8 4.4.2 Return of Security Deposit.............................................................8 4.4.3 Additional Security and Loans..........................................................9 4.4.4 Transfer of Security Deposit and Additional Security...................................9 ARTICLE 5 -- OTHER CHARGES PAYABLE BY TENANT......................................................................9 5.1 Rent............................................................................................9 5.2 Common Area Maintenance Charges.................................................................9 5.2.1 Tenant to Bear Proportional Share of Common Area Maintenance Charges...................9 5.2.2 Landlord's Common Area Maintenance Charges.............................................9 5.2.3 Exclusions from Common Area Maintenance Charges.......................................10 5.2.4 Repairs Due to Misuse.................................................................10 5.3 Payment of Excess Operating Costs Rent.........................................................10 5.3.1 Previous Charges......................................................................10 5.3.2 Year-End Adjustments..................................................................11 5.3.3 Audit.................................................................................11 5.4 Personal Property Taxes........................................................................11 ARTICLE 6 -- USE OF PROPERTY.....................................................................................11 6.1 Permitted Uses.................................................................................11 6.2 Manner of Use..................................................................................11 6.2.1 Interference with Use/Nuisance........................................................11 6.2.2 Violation of Law/Insurance Provisions.................................................12 6.2.3 Permits...............................................................................12 6.3 Rules and Regulations..........................................................................12 6.4 Landlord's Access..............................................................................12 6.5 Quiet Possession...............................................................................12 ARTICLE 7 -- HAZARDOUS MATERIALS.................................................................................13 7.1 Prohibition....................................................................................13 7.1.1 Use...................................................................................13 7.1.2 Normal Usage..........................................................................13 7.2 Disclosure and Warning Obligations.............................................................13 7.3 Notice of Actions..............................................................................13 7.4 Hazardous Materials Indemnity..................................................................14 7.5 Assignment and Subletting......................................................................14 7.6 Environmental Tests and Audits.................................................................14 7.7 Lease "As Is"..................................................................................14 7.8 Survival.......................................................................................14
I-(ii) 4 ARTICLE 8 -- UTILITIES...........................................................................................15 8.1 Payment and Arrangement........................................................................15 8.2 Interruption of Services and Utilities.........................................................15 8.3 Operating Hours................................................................................15 ARTICLE 9 -- PARKING AND CONTROL OF COMMON AREAS.................................................................15 9.1 Control of Common Areas by Landlord............................................................15 9.2 License........................................................................................16 ARTICLE 10 -- ALTERATIONS, IMPROVEMENTS AND SIGNAGE..............................................................16 10.1 Changes/Alterations............................................................................16 10.2 Manner of Construction.........................................................................16 10.2.1 Conditions to Consent..................................................................16 10.2.2 Cost...................................................................................16 10.2.3 Good and Workmanlike Manner............................................................16 10.3 Construction Insurance.........................................................................17 10.4 Liens..........................................................................................17 10.5 Signage........................................................................................17 ARTICLE 11 -- INSURANCE AND INDEMNITY............................................................................17 11.1 Insurance to be Obtained by Landlord...........................................................17 11.1.1 Fire and Casualty Insurance............................................................17 11.1.2 Liability Insurance....................................................................17 11.2 Insurance to be Obtained by Tenant.............................................................18 11.2.1 Liability Insurance....................................................................18 11.2.2 Insurance of Personal Property.........................................................18 11.2.3 Additional Insurance Obligations.......................................................18 11.3 Waiver of Subrogation..........................................................................18 11.4 Form of Policies...............................................................................18 11.5 Indemnification................................................................................19 11.5.1 Indemnification of Landlord............................................................19 11.5.2 Landlord's Nonliability................................................................19 11.5.3 Indemnification of Tenant..............................................................19 ARTICLE 12 -- ASSIGNMENT AND SUBLETTING..........................................................................19 12.1 Landlord's Consent Required....................................................................19 12.1.1 Transfer...............................................................................19 12.1.2 Procedure..............................................................................20 12.1.3 Affiliates.............................................................................20 12.2 Recapture Right................................................................................20 12.3 Transfer Without Consent.......................................................................20 12.4 No Release of Tenant...........................................................................20 12.5 Effect of a Transfer...........................................................................20 12.6 Event of Bankruptcy............................................................................21 12.7 No Merger......................................................................................21 12.8 Assignment Fees and Procedures.................................................................21 ARTICLE 13 -- DAMAGE OR DESTRUCTION..............................................................................21 13.1 Repair of Damage by Landlord...................................................................21 13.2 Rent Abatement Due to Casualty.................................................................22 13.3 Landlord's Option to Repair....................................................................22 13.4 Damage Near End of Term........................................................................22 13.5 Waiver of Statutory Provisions.................................................................22
I-(iii) 5 ARTICLE 14 -- CONDEMNATION.......................................................................................22 14.1 Total Condemnation.............................................................................22 14.2 Partial Condemnation...........................................................................22 14.3 Condemnation of Parking Area...................................................................23 14.4 Distribution of Condemnation Award.............................................................23 14.5 Waiver.........................................................................................23 ARTICLE 15 -- DEFAULTS; REMEDIES.................................................................................23 15.1 Covenants and Conditions.......................................................................23 15.2 Defaults by Tenant.............................................................................23 15.3 Remedies.......................................................................................24 15.4 The Right to Relet the Premises................................................................25 15.5 Waiver of Rights of Redemption.................................................................25 15.6 Cumulative Remedies............................................................................25 15.7 Additional Remedies Upon Default...............................................................25 15.7.1 Assumption or Rejection of Lease.......................................................25 15.7.2 Assignment.............................................................................26 15.7.3 Other Matters..........................................................................26 15.8 Default by Landlord............................................................................26 15.9 Landlord's Cure................................................................................26 ARTICLE 16 -- PROTECTION OF CREDITORS............................................................................27 16.1 Subordination..................................................................................27 16.2 Attornment.....................................................................................27 16.3 Signing of Documents...........................................................................27 16.4 Estoppel Certificates..........................................................................27 16.4.1 Request................................................................................27 16.4.2 Failure to Respond.....................................................................27 16.5 Tenant's Financial Condition...................................................................27 16.6 Mortgagee Protection Clause....................................................................28 ARTICLE 17 -- TERMINATION OF LEASE...............................................................................28 17.1 Condition Upon Termination.....................................................................28 17.2 Non-Removal by Tenant..........................................................................28 17.3 Abandoned Property.............................................................................28 17.4 Landlord's Actions on Premises.................................................................29 17.5 Holding Over...................................................................................29 ARTICLE 18 -- MISCELLANEOUS PROVISIONS...........................................................................29 18.1 Right of First Refusal.........................................................................29 18.2 Successors; No Third Party Beneficiaries.......................................................29 18.3 Severability...................................................................................30 18.4 Interpretation.................................................................................30 18.5 Other Tenancies................................................................................30 18.6 Entire Agreement...............................................................................30 18.7 Landlord's Liability...........................................................................30 18.8 Notices........................................................................................30 18.9 Waivers........................................................................................30 18.10 No Recordation.................................................................................31 18.11 Choice of Law..................................................................................31 18.12 Corporate Authority; Partnership Authority.....................................................31 18.13 No Partnership.................................................................................31 18.14 Joint and Several Liability....................................................................31
I-(iv) 6 18.15 Attorneys' Fees................................................................................31 18.16 Lender Modification............................................................................31 18.17 Brokers........................................................................................31 18.18 Force Majeure..................................................................................32 18.19 Tenant Obligations Survive Termination.........................................................32 18.20 Tenant's Waiver................................................................................32 18.21 Submission of Lease............................................................................33 || EXHIBITS Exhibit "A"......................................................................................Site Plan Exhibit "B"..........................................................................Rules and Regulations Exhibit "C"....................................................................................Work Letter Exhibit "D"....................................................................................Definitions Exhibit "E" .............................................................................Acceptance Letter
I-(v) 7 LEASE AGREEMENT SUMMARY OF BASIC LEASE INFORMATION 1. Lease Date: April ___, 1997 2. Landlord: Marco Plaza Enterprises, a California general partnership 3. Address of Landlord: c/o Newport National Corporation 5050 Avenida Encinas, Suite 350 Carlsbad, CA 92008 Attn: Mr. Jeffry Brusseau 4. Tenant: Triteal Corporation, a Delaware corporation 5. Address of Tenant: 2011 Palomar Airport Road, Suite 200 Carlsbad, CA 92009-1431 Attn: General Counsel 6. Premises (Section Project Rentable Area: Approximately 51,000 square feet 2.1 of Lease): (as of Lease Date) Building Rentable Area: Approximately 51,000 square feet Premises Rentable Area: Approximately 51,000 square feet 7. Project: Cornerstone Corporate Centre Building: Building D 8. Lease Term (Article 3 of Lease): Lease Term: Ten (10) years Target Commencement Date: Subject to Section 1.30, April 15, 1998 Target Expiration Date: Subject to Section 1.30, April 14, 2008 Liquidated Damages for Substantial Completion of Premises after Target Commencement Date: Tenant's actual hold-over rents, not to exceed $1,000/day. Incentive Fee for Substantial Completion of Premises prior to Target Commencement Date: Subject to provisions of Section 3.3.4, cash equal to the Acceleration Estimate Options to Extend: Two (2) for five (5) years each
4/15/97 II-(i) Landlord Initials: _______ Tenant Initials: _______ 8 9. Rent Base Monthly Rent: (Article 4 of Lease) $1.64 per Rentable square foot of the Premises per month, which shall increase as follows:
Base Monthly Rent Lease Years (Per Rentable Sq. Ft. of Premises) ------------------------------------------------------------ 1-3 $1.64 ------------------------------------------------------------ 4-6 1.79 ------------------------------------------------------------ 7-9 1.95 ------------------------------------------------------------ 10 2.12 ------------------------------------------------------------
Initial Base Monthly Rent: $83,640 (assumes Premises = 51,000) Initial Base Annual Rent: $1,003,680 (assumes Premises = 51,000) Base Monthly Rent During Extensions: At commencement of each Extension Term, Fair Market Rent to be increased by 9% (nine percent) after three (3) years of such Extension Term. First Month's Base Monthly Rent due upon execution of Lease: $83,640 Late Charge: Ten percent (10%) of the overdue amount Lease Interest Rate: Twelve percent (12%) 10. Operating Costs Allowance Operating Costs during first (1st) Lease Year (Article 5 of Lease): 11. Use (Article 6 of Lease): General office and other uses consistent with a computer software development company, in conformance with the Declarations and all laws, ordinances, and regulations. 12. Security Deposit $83,640 (Article 4 of Lease): 13. Brokers (Section Landlord's Broker: Business Real Estate 19.17 of Lease): Tenant's Broker: The Irving Hughes Group, Inc. 14. Lease Guarantors: None 15. Tenant Improvement Allowance Up to Thirty Dollars ($30) per Usable (See Work Letter - Exhibit "C") square foot of the Premises 16. Tenant Contingency Allowance: Up to Two Dollars ($2) per Usable square foot of the Premises. (See Work Letter -- Exhibit "C") 17. Right of First Refusal to Lease: All or any portion of Building C in the Project, within five (5) Business Days after notice.
4/15/97 Landlord Initials: _______ II-(ii) Tenant Initials: _______ 9 18. The following exhibits are attached hereto and incorporated into this Lease: Exhibit "A"......................................................................................Site Plan Exhibit "B"..........................................................................Rules and Regulations Exhibit "C"....................................................................................Work Letter Exhibit "D"....................................................................................Definitions Exhibit "E" .............................................................................Acceptance Letter
The foregoing Summary of Basic Lease Information is hereby incorporated into and made a part of this Lease. Each reference in this Lease to the Summary of Basic Lease Information shall mean the information set forth above and shall be construed to incorporate all of the terms provided under the particular lease paragraph pertaining to such information. In the event of a conflict between the Summary of Basic Lease Information and the Lease, the terms of the Lease shall prevail. LANDLORD: MARCO PLAZA ENTERPRISES, a California general partnership By: /s/ Robert Kronick ------------------------------------------------------ Name: Robert Kronick ---------------------------------------------------- Title: Partner --------------------------------------------------- TENANT: TRITEAL CORPORATION, a Delaware corporation By: /s/ Gregory Jay White ------------------------------------------------------ Name: Gregory Jay White ---------------------------------------------------- Title: TriTeal Corporation --------------------------------------------------- 4/15/97 Landlord Initials: _______ II-(iii) Tenant Initials: _______ 10 LEASE AGREEMENT This Lease Agreement, which includes the Basic Terms (as hereinafter defined) ("Lease"), is made as of the date shown in the Basic Terms, by and between the Landlord shown in the Basic Terms and the Tenant shown in the Basic Terms. ARTICLE 1 -- DEFINITIONS In addition to the defined terms set forth in the Basic Terms or elsewhere in this Lease, unless the context otherwise requires, the following terms shall have the meanings set forth below. 1.1 ACCELERATION ESTIMATE. "Acceleration Estimate" means an estimate Landlord shall obtain promptly after Commencement of Construction (i) if Commencement of Construction occurs after August 1, 1997, and (ii) of the additional costs of construction (both hard costs such as materials and soft costs such as engineering and architectural fees) which Landlord reasonably anticipates incurring in order to achieve Substantial Completion of the Improvements by the Target Commencement Date. 1.2 ADDITIONAL RENT. "Additional Rent" refers collectively to Excess Operating Costs Rent and any other charges due and payable by Tenant under this Lease other than Base Monthly Rent. 1.3 BASE ANNUAL RENT. "Base Annual Rent" shall mean the sum of the twelve (12) Base Monthly Rent amounts due in any Lease Year. 1.4 BASE MONTHLY RENT. "Base Monthly Rent" means the rental specified in Article 4 of this Lease. 1.5 BASIC TERMS. "Basic Terms" means the Summary of Basic Lease Information set forth at the beginning hereof. 1.6 BUSINESS DAYS. "Business Days" means any day on which business is conducted by federal savings banks in San Diego County, California. 1.7 COMMENCEMENT OF CONSTRUCTION. "Commencement of Construction" means the date on which Landlord's Contractor (as defined in the Work Letter) commences the foundation for the Building. 1.8 COMMON AREA. "Common Area" means all areas, space, equipment and special services in the Building and in the Project which are from time-to-time provided by Landlord for the common or joint use and benefit of the occupants of the Project and Building, their employees, agents, servants, customers and other invitees, including without limitation, parking areas, access roads, driveways, retaining walls, landscaped areas, truck service-ways, stairs, ramps, sidewalks, pools, patios, hardscapes, electrical rooms, mailrooms, common area restrooms and locker rooms and hallways. 1.9 COMMON AREA MAINTENANCE CHARGES. "Common Area Maintenance Charges" means the costs and expenses described in Section 5.4.2 of this Lease. 1.10 CPI. "CPI" shall mean the Consumer Price Index published by the United States Bureau of Labor Statistics, Los Angeles-Anaheim-Riverside, All Urban Consumers (1982 - 84 = 100), or a successor or similar statistic selected by Landlord in the event the present index is no longer published. 1.11 DECLARATIONS. "Declarations" means any Declaration or Declarations of Covenants, Conditions and Restrictions which have been or may be recorded against the Building or all or a portion of the Project, including, but not limited to, (i) that certain Declaration of Covenants, Conditions, and Restrictions, Carlsbad Airport Centre, dated September 4, 1986, recorded September 12, 1986, in the San Diego County Recorder's Office, Document No. 4/17/97 Landlord Initials: _______ 1 Tenant Initials: _______ 11 86-401456, as amended by a First Amendment dated January 15, 1987, recorded January 28, 1987, as Document No. 87-048040, and (ii) that certain Mutual Easement Agreement between Carlsbad Airport Centre and Opus Southwest Corporation dated January 27, 1987, recorded in the San Diego County Recorder's Office on January 28, 1987, as Document No. 87-048043. 1.12 FAIR MARKET RENT. "Fair Market Rent" shall mean the price that a ready and willing single tenant would pay, as of the commencement of the Extension Term, as annual rent to a ready and willing landlord for property comparable to the Premises on the terms of this Lease, if such property were exposed for lease on the open market for a reasonable period of time. As used herein, "comparable property" shall mean an office building similar to the Building in a project similar to the Project located in the Carlsbad, California area, with improvements similar in age and character to the Premises, which has been improved with tenant improvements comparable to those constructed in the Building; provided, however, that the value of the equipment which Tenant is entitled to remove at the expiration or termination of the Term of this Lease shall be disregarded. All relevant factors shall be considered, including, without limitation, the fact that this Lease is a full service, modified gross lease, net of concessions and tenant improvement allowances generally being offered by landlords of comparable properties, the age of the improvements, the condition of the Premises, the rental market conditions then in existence, whether Landlord will or will not be required to pay a real estate brokerage commission. 1.13 EXCESS OPERATING COSTS RENT. "Excess Operating Costs Rent" means Tenant's Proportional Share of the amount by which the Operating Costs for each calendar year exceeds the Operating Costs Allowance (as set forth in the Basic Terms). 1.14 HAZARDOUS MATERIALS. The term "Hazardous Material(s)" shall mean any toxic or hazardous substance, material or waste or any pollutant or contaminant or infectious or radioactive material which are, or in the future become, regulated under applicable local, state or federal law for the protection of health or the environment, or which are classified as hazardous or toxic substances, materials or wastes, pollutants or contaminants, as defined, listed or regulated by any federal, state or local law, regulation or order or by common law decision, including, without limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and other chlorinated solvents, (ii)any petroleum products or fractions thereof, (iii)asbestos, (iv)polychlorinated biphenyls, (v) flammable explosives, (vi) urea formaldehyde and (vii) radioactive materials and waste. 1.15 INSURANCE CHARGES. "Insurance Charges" shall mean any and all premiums and other costs for insurance policies insuring the Premises, Building, Project and Common Area, required by this Lease and paid by Landlord. 1.16 HAZARDOUS MATERIALS LAWS. The term "Hazardous Materials Law(s)" shall mean any federal, state or local laws, ordinances, codes, statutes, regulations, administrative rules, policies and orders, and other authority, existing now or in the future, which classify, regulate, list or define hazardous substances, materials, wastes contaminants, pollutants and/or the Hazardous Materials. 1.17 LANDLORD'S INDEMNITEES. "Landlord's Indemnitees" shall refer collectively to Landlord's agents, partners, members, managers, shareholders, officers, directors, employees, successors and/or assigns. 1.18 LEASE TERM. "Lease Term" means the entire period commencing with the Commencement Date and continuing for the period specified in Item 8 of the Basic Terms, plus any extensions, renewals or holding over periods. 1.19 LEASE YEAR. "Lease Year" or "lease year" shall mean a consecutive twelve (12) month period during the Lease Term commencing on the Commencement Date; provided that the Lease Year may be adjusted by Landlord to commence on the first day of a calendar month after the Commencement Date. 1.20 OPERATING COSTS. "Operating Costs" means all of the Common Area Maintenance Charges, Property Taxes, and Insurance Charges. 4/15/97 Landlord Initials: _______ 2 Tenant Initials: _______ 12 1.21 PREMISES. "Premises" means the space described in Section 2.1 and delineated on the Site Plan. 1.22 PROFIT. "Profit" shall mean rent and all other amounts paid or payable by a transferee to Tenant pursuant to a Transfer (as defined in Article 11 herein) which is in excess of the scheduled Base Monthly Rent and all other Rent due hereunder. 1.23 PROJECT. "Project" means the project at the address set forth in the Basic Terms, and more particularly described in the Site Plan, together with all fixtures, equipment and personal property owned by Landlord, now or hereafter situated or located therein or thereupon and used in connection with the operation and maintenance thereof. 1.24 PROPERTY TAXES. "Property Taxes" means: (i) general real property and improvements taxes, any form of assessment, special assessment or reassessment, any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or other tax imposed by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agriculture, lighting, drainage or other improvement district thereof, as against any legal or equitable interest of Landlord in the Project; (ii) any tax on the Landlord's right to receive, or the receipt of, rent or income from the Project or against Landlord's business of leasing the Project; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Project by any governmental agency; (iv) any tax imposed upon this transaction or based upon a reassessment of the Project due to a change in ownership or transfer of all or part of Landlord's interest in the Project; and (v) any charge or fee replacing any tax previously included within the definition of Property Taxes. "Property Taxes" does not, however, include Landlord's Federal or State income, franchise, inheritance or estate taxes. 1.25 RENTABLE. "Rentable" area or "Rentable" square feet shall mean the square footage determined according to the definitions set forth on Exhibit "D" attached hereto. 1.26 RENT. "Rent" and/or "rent" shall mean the Base Monthly Rent, Additional Rent and any other amounts Tenant is required to pay under this Lease. 1.27 RULES AND REGULATIONS. "Rules and Regulations" mean the rules and regulations set forth in Exhibit "B" attached to this Lease. 1.28 SITE AMENITIES. "Site Amenities" shall mean the sand volleyball court, barbeque area, lap pool, spa/jacuzzi, lunch patio, jogging trail, and one-half court for basketball (over portions of the Project parking lot) to be constructed by Landlord at its sole cost in a location selected by Landlord in the Common Area, for the non-exclusive use of Tenant and other occupants of the Project, in accordance with this Lease. 1.29 SITE PLAN. "Site Plan" refers to the Site Plan attached as Exhibit "A." 1.30 TARGET COMMENCEMENT DATE. "Target Commencement Date" means April 15, 1998; provided, however, that if the Commencement of Construction occurs after August 1, 1997 and Tenant disapproves the Acceleration Estimate pursuant to Section 3.3.2, then the Target Commencement Date shall be April 15, 1998 plus the number of days after August 1, 1997, that the Commencement of Construction occurred. 1.31 TENANT'S INDEMNITEES. "Tenant's Indemnitees" shall refer collectively to Tenant's agents, partners, members, managers, shareholders, officers, directors, employees, successors and/or assigns. 1.32 TENANT IMPROVEMENTS. "Tenant Improvements" shall refer to the Tenant Improvements as defined in the Work Letter attached hereto as Exhibit "C." 1.33 TENANT'S PROPORTIONAL SHARE. "Tenant's Proportional Share" shall mean all of Tenant's Building Proportional Share, Tenant's Project Proportional Share and Tenant's Site Amenities Proportional Share. 4/15/97 Landlord Initials: _______ 3 Tenant Initials: _______ 13 Tenant's Building Proportional Share shall be calculated from time to time as determined by Landlord and shall be the percentage obtained by dividing the rentable square footage of the Premises by the total rentable square footage of the Building. Tenant's Project Proportional Share shall be calculated from time to time as determined by Landlord and shall be the percentage obtained by dividing the rentable square footage of the Premises by the total rentable square footage of the Project as then constructed. Tenant's Site Amenities Proportional Share shall be an amount rather than a fraction, shall be calculated from time to time as determined by Landlord, and shall be calculated pursuant to the following: If A = Total Common Area Maintenance Charges allocable to the Site Amenities in excess of the Operating Costs Allowance allocable to the Site Amenities; and B = Total Rentable square footage of the Project leased and occupied by tenants with rights to use the Site Amenities; and C = Total Rentable square footage of the Premises within the Building; D = Total Rentable square footage of the Project planned; and X = Tenant's share of Common Area Maintenance Charges for the Site Amenities; B - C - ----- D - C Tenant's Building Proportional Share, Tenant's Project Proportional Share and Tenant's Site Amenities Proportional Share shall initially be calculated using the numbers set forth in Item 6 of the Basic Terms. 1.34 USABLE. "Usable" square feet shall mean the square footage determined according to the definitions set forth on Exhibit "D." 1.35 WORK LETTER. "Work Letter" means the Work Letter which is attached to this Lease as Exhibit"C." ARTICLE 2 - PREMISES 2.1 LEASE. Upon and subject to the terms, covenants and conditions hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises. By execution of this Lease, the parties acknowledge that the Option to Lease entered into as of January 29, 1997, by and between Landlord and Tenant ("Option to Lease"), has been exercised by Tenant and the Option to Lease shall be deemed terminated and superseded in its entirety by the terms and provisions of this Lease. Notwithstanding the foregoing, concurrently with the execution of this Lease, Tenant shall pay to Landlord all amounts of the Option Consideration (as defined in the Option to Lease) which have not been paid as of such date of execution. Landlord's concurrent receipt of such amounts is a condition precedent to the effectiveness of this Lease, which condition is to Landlord's benefit only. 2.1.1 PREMISES. The Premises will be the Building. The Building will be, in turn, located in and constitute a portion of the Project. Landlord reserves the right to change the shape, size, location, number and extent of the improvements shown on the Site Plan and eliminate or add any improvements to any portion of the Project as provided in Article 5, provided there is no change to the Site Amenities (except in accordance with this Lease) and no material adverse impact on access to the Premises. Upon Substantial Completion (as defined in the Work Letter) of the Building, the Rentable area of the Premises shall be determined in accordance with the Work Letter and Exhibit "D." In the event that Landlord determines that the Rentable area of any of the Premises, Building or the Project differ from the amount set forth in the Basic Terms, all amounts, percentages and figures appearing or referred to in this Lease, including, without limitation, Tenant's Proportional Share, based upon such amount shall be revised accordingly and such revised figures shall be deemed to be the Rentable area of the Premises, Building or Project, respectively. In such case, the Base Monthly Rent and any other payments due hereunder which are based on a Rentable square footage basis shall be increased or decreased accordingly. 4/15/97 Landlord Initials: _______ 4 Tenant Initials: _______ 14 2.1.2 SITE PLAN. The purpose of the Site Plan is to show the approximate location of the Premises. Notwithstanding any other provision contained in this Lease, Landlord reserves the right at any time to vary and adjust the size of the various buildings (other than the Building), the location of any other tenant automobile parking areas, the Site Amenities (except in accordance with this Lease), and other common areas as shown on said Site Plan, provided, however, that said parking area (including landscaped common areas) shall at all times provide for not less than the minimum parking required by the local jurisdiction in which the Project is located. 2.2 LEASE OF THE PREMISES. Tenant acknowledges that this Lease is subordinate and subject to the Declarations, all liens, encumbrances, deeds of trust, reservations, restrictions and other matters affecting the Project or the Premises and any law, regulation, rule, order or ordinance of any governmental entity applicable to the Project or the Premises or the use or occupancy thereof, in effect on the execution of this Lease or thereafter promulgated. Landlord grants Tenant during the Lease Term the concurrent right to use the Common Area and the Site Amenities on a nonexclusive basis and subject to the provisions of this Lease; provided, however, that so long as Tenant is the only occupant or tenant of the Building, Tenant shall have the exclusive right to use the Common Area within the Building on an exclusive basis. Easements for light and air are not included in the leasing of these Premises to Tenant. Landlord further reserves the exclusive right of access to the roof, except for any rights of access specifically granted to Tenant under the terms of this Lease or any rights of access approved by Landlord, in its sole discretion, in writing. 2.3 SUITABILITY OF PREMISES. Tenant acknowledges that, except as expressly set forth herein, Landlord has made no representation or warranty regarding the condition of the Premises or the Project or the suitability of such Premises or the Project for the operation or conduct of Tenant's business thereon or for any other purpose. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Project were acceptable to Tenant and in satisfactory condition to conduct business at such time. 2.4 LANDLORD'S WORK IN THE PREMISES AND PROJECT. The Premises shall be completed as set forth in the Work Letter. Except as specifically set forth in this Lease and the Work Letter, Landlord shall not provide or pay for any interior improvement work or services related to the improvement of the Premises or the construction of the Project. Tenant specifically acknowledges that Landlord is under no obligation to construct all or any portion of the Project except as set forth in this Lease, and Tenant will have no claim against Landlord should Landlord decide for any reason or no reason to not build any improvements or the Project except as set forth herein. ARTICLE 3 - LEASE TERM 3.1 LEASE TERM. The term of this Lease ("Lease Term") shall be for the period of time specified in the Basic Terms, but shall be extended to include any fraction of a calendar month between the commencement of the Lease Term and the first day of the first full calendar month thereafter. Notwithstanding the Lease Term, this Lease is a binding contract between Landlord and Tenant from and after the date of full execution and delivery hereof by both parties, enforceable in accordance with its terms. 3.2 COMMENCEMENT DATE. The commencement date of the Lease Term ("Commencement Date") shall be the earlier of the date of the Substantial Completion of the Premises or the date Tenant occupies the Premises in accordance with the Work Letter. 3.3 DELAY IN COMMENCEMENT. Landlord will use its diligent, good faith efforts to Substantially Complete the Premises by the Target Commencement Date (as such date may be extended due to a Tenant Delay [as defined in the Work Letter]) or as set forth anywhere in this Lease or the Work Letter. If Landlord cannot Substantially Complete the Premises by the Target Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom except as specifically set forth in Section 3.3.3 below. 3.3.1 ACCEPTANCE LETTER. Upon Substantial Completion of the Premises, Tenant shall, within five (5) days of request therefor by Landlord, execute an acceptance letter ("Acceptance Letter") in substantially the form 4/15/97 Landlord Initials: _______ 5 Tenant Initials: _______ 15 of the Acceptance Letter attached hereto as Exhibit "E"; provided, however, that the failure of Tenant to execute such Acceptance Letter shall not affect any obligation of Tenant hereunder or Landlord's determination of the Commencement Date. If the Tenant fails to execute and deliver such Acceptance Letter in the form proposed by Landlord, then Landlord and any prospective purchaser or encumbrancer may conclusively presume and rely upon the following facts: (i) that the Premises were in an acceptable condition and were delivered in compliance with all requirements of the Work Letter and (ii) the Commencement Date is the date specified in the Acceptance Letter proposed by Landlord. 3.3.2 ACCELERATION ESTIMATE. If the Commencement of Construction occurs after August 1, 1997, Landlord shall deliver the Acceleration Estimate to Tenant within thirty (30) days after the Commencement of Construction. Tenant shall have ten (10) days to either approve or disapprove the Acceleration Estimate by written notice to Landlord. Failure of Tenant to timely deliver such written notice to Landlord shall be deemed Tenant's disapproval of the Acceleration Estimate. 3.3.3 LIQUIDATED DAMAGES. IF LANDLORD DOES NOT SUBSTANTIALLY COMPLETE THE PREMISES BY THE TARGET COMMENCEMENT DATE, THEN TENANT, AS ITS SOLE AND EXCLUSIVE REMEDY, WILL BE ENTITLED TO RECEIVE LIQUIDATED DAMAGES IN AN AMOUNT EQUAL TO THE AMOUNT SET FORTH IN ITEM 8 OF THE BASIC TERMS FOR EACH DAY OF DELAY BETWEEN THE TARGET COMMENCEMENT DATE AND THE DATE LANDLORD SUBSTANTIALLY COMPLETES THE PREMISES. IN THE EVENT OF SUCH A DELAY, TENANT WILL BE DAMAGED AND WILL BE ENTITLED TO COMPENSATION FOR THOSE DAMAGES. SUCH DAMAGES WILL, HOWEVER, BE EXTREMELY DIFFICULT AND IMPRACTICAL TO ASCERTAIN BECAUSE THE PROOF OF THE AMOUNT OF SUCH DAMAGES WILL BE BASED ON OPINIONS OF SUCH DAMAGES, WHICH CAN VARY IN SIGNIFICANT AMOUNTS, AND IT IS IMPOSSIBLE TO PREDICT AS OF THE DATE ON WHICH THIS LEASE IS MADE THE AMOUNT OF SUCH DAMAGES. LANDLORD DESIRES TO LIMIT THE AMOUNT OF DAMAGES FOR WHICH LANDLORD MIGHT BE LIABLE SHOULD LANDLORD FAIL TO SUBSTANTIALLY COMPLETE THE PREMISES AS AFORESAID. LANDLORD AND TENANT WISH TO AVOID THE COST AND LENGTHY DELAYS WHICH WOULD RESULT IF TENANT FILED A LAWSUIT TO COLLECT ITS DAMAGES FOR SUCH FAILURE TO TIMELY DELIVER. THEREFORE, IF LANDLORD FAILS TO TIMELY SUBSTANTIALLY COMPLETE THE PREMISES AS DESCRIBED ABOVE, THE FOREGOING AMOUNT OF LIQUIDATED DAMAGES SHALL BE DEEMED TO CONSTITUTE A REASONABLE ESTIMATE OF TENANT'S DAMAGES UNDER THE PROVISIONS OF SECTION 1671 OF THE CALIFORNIA CIVIL CODE, AND TENANT'S SOLE AND EXCLUSIVE REMEDY IN THE EVENT OF A DELAY IN THE SUBSTANTIAL COMPLETION OF THE PREMISES. IN CONSIDERATION OF THE PAYMENT OF SUCH LIQUIDATED DAMAGES, TENANT WILL BE DEEMED TO HAVE WAIVED ALL OTHER CLAIMS FOR DAMAGES OR RELIEF AT LAW OR IN EQUITY INCLUDING ANY RIGHTS TENANT MAY HAVE PURSUANT TO SECTION 1680 OR SECTION 3389 OF THE CALIFORNIA CIVIL CODE. LANDLORD SHALL PAY SUCH LIQUIDATED DAMAGES TO TENANT WITHIN TEN (10) DAYS AFTER LANDLORD SUBSTANTIALLY COMPLETES THE PREMISES IN ACCORDANCE WITH THE WORK LETTER. -------- ------ LANDLORD TENANT 3.3.4 EARLY COMPLETION. If (i) Commencement of Construction occurs after August 1, 1997, and (ii) Tenant approves the Acceleration Estimate pursuant to Section 3.3.2 above, and (iii) Landlord Substantially Completes the Premises prior to the Target Commencement Date, Tenant has agreed to pay to Landlord an incentive fee in an amount equal to the amount set forth in Item 8 of the Basic Terms ("Incentive Fee"). Tenant shall pay the Incentive Fee to Landlord within ten (10) days after the Substantial Completion of the Premises. 3.4 EARLY OCCUPANCY. If Tenant enters or occupies the Premises prior to the Commencement Date 4/17/97 Landlord Initials: _______ 6 Tenant Initials: _______ 16 solely for the purpose of preparing the Premises for the conduct of business thereon and not for the purposes of conducting business thereon, Tenant's entry and/or occupancy of the Premises shall be subject to all of the provisions of this Lease and the Work Letter with the exception of the payment of Base Monthly Rent and Additional Rent, which obligations shall commence as of the Commencement Date. If requested by Landlord, Tenant shall execute a hold harmless agreement in a form prepared by Landlord. Early occupancy of the Premises shall not advance the expiration date of this Lease. Landlord shall have the right to charge Tenant for any utility or other costs incurred by Tenant during such early occupancy period. 3.5 OPTION(S) TO EXTEND TERM. Tenant shall have the options to extend ("Extension Option") the Term as set forth in the Basic Terms (as exercised, each is an "Extension Term"), on the following terms and conditions: 3.5.1 EXTENSION NOTICE. Tenant's option to extend the Term shall be subject to satisfaction of each of the following conditions precedent, which are solely for the benefit of Landlord: 3.5.1.1 Each Extension Option shall be exercised by written notice ("Extension Notice") delivered by Tenant to Landlord not sooner than eighteen (18) months and not later than fifteen (15) months prior to the then scheduled end of the Term ("Extension Deadline"); and 3.5.1.2 The Lease shall be in effect and Tenant shall not be in default under any of Sections 15.2.1, 15.2.2, 15.2.3, 15.2.4, or 15.2.6, or any material default under Section 15.2.5 (beyond any applicable period of cure) both on the day of the Extension Notice and on the last day of the Term. 3.5.2 BASE MONTHLY RENT DURING EXTENSION. In the event the Term is extended following exercise by Tenant of an Extension Option, then all of the terms, covenants and conditions of the Lease shall remain in full force and effect, except that Base Monthly Rent to be applicable during the Extension Term shall be adjusted to the Base Monthly Rent During Extensions as described in Item 9 of the Basic Terms and as further described below. 3.5.2.1 As part of the Extension Notice, Tenant shall notify Landlord of Tenant's proposed Base Monthly Rent During Extension for the first Lease Year of such Extension Term, which proposal shall be based on Tenant's good faith estimate of the Fair Market Rent. Landlord shall have fifteen (15) days after receipt of Tenant's Extension Notice to either accept Tenant's proposed Base Monthly Rent During Extension for the first Lease Year of such Extension Term or deliver written notice to Tenant of Landlord's proposed Base Monthly Rent During Extension for the first Lease Year of such Extension Term. Landlord's failure to respond within such 15-day period shall be deemed acceptance of Tenant's proposal. 3.5.2.2 If Landlord does not initially accept Tenant's proposal and timely delivers to Tenant written notice of Landlord's proposed Base Monthly Rent During Extension for the first Lease Year of such Extension Term, Tenant shall have ten (10) days after receipt thereof to either accept or reject Landlord's proposal. Tenant's failure to respond within such 10-day period shall be deemed Tenant's acceptance of Landlord's proposal. 3.5.2.3 If Tenant timely rejects Landlord's proposal, the parties shall meet within fifteen (15) days to negotiate and attempt to agree in good faith on an appropriate Base Monthly Rent During Extension. If the parties do not agree on a Base Monthly Rent During Extension within ten (10) days of such meeting, Tenant shall have the right to either rescind Tenant's Extension Notice (without any further right or obligation to extend the Term of this Lease) or elect to send the matter of the Base Monthly Rent During Extension for the first Lease Year of such Extension Term to arbitration. If Tenant fails to deliver written notice to Landlord of Tenant's election within such ten (10) day period, Tenant shall be deemed to have elected to send the matter of the Base Monthly Rent During Extension for the first Lease Year of such Extension Term to arbitration. Such arbitration shall be conducted in San Diego, California, within thirty (30) days after Tenant makes such election (or is deemed to have made such election) pursuant to the then applicable Commercial Arbitration Rules of the American Arbitration Association; provided, however, that the decision of any such arbitration shall be expressly limited to selecting either Landlord's proposal or Tenant's proposal to be submitted to the arbitration at the commencement of such arbitration of the Base Monthly Rent During Extension for the first Lease Year of such Extension Term as most nearly satisfying the requirement of 4/15/97 Landlord Initials: _______ 7 Tenant Initials: _______ 17 this Lease. Tenant's election to send the matter to arbitration shall be Tenant's binding commitment to occupy the Premises during said Extension Term and pay Base Monthly Rent during Extension as determined by the arbitration. The cost of the arbitration, which costs shall include fees charged by the arbitrators, attorneys' fees and expert or consultant fees, shall be paid by the party whose proposal was not selected. ARTICLE 4 - RENTAL AND OTHER PAYMENTS 4.1 BASE MONTHLY RENT. From and after the Commencement Date, Tenant shall pay to Landlord, in advance, on the first day of each and every calendar month during the Lease Term, the Base Monthly Rent. The Base Monthly Rent for any fraction of a month at the beginning of the Lease Term will be prorated. Payment of the Base Monthly Rent, Additional Rent and all other charges deemed to be Rent under this Lease shall be without prior notice, deduction, offset or demand, shall be in lawful money of the United States of America and shall be made at the address set forth for Landlord in the Basic Terms or at such other place as Landlord may direct. Base Monthly Rent payable for any period of less than one (1) month shall be prorated based upon a thirty (30) day month. Tenant shall pay to Landlord as prepaid Base Monthly Rent, immediately upon execution of this Lease (in addition to the security deposit required), the amount specified in the Basic Terms, which sum shall be applied to the first calendar month of the Lease Term for which payment of Base Monthly Rent is due; provided, however, that the Option Consideration shall be credited against Tenant's obligation to deliver such prepaid Base Monthly Rent. 4.2 INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest from the date which is five (5) days after the due date at the Lease Interest Rate but if such Lease Interest Rate exceeds the maximum interest rate permitted by law, such Lease Interest Rate shall be reduced to the highest rate allowed by law under the circumstances. Interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease and the parties agree that such amounts are a reasonable estimate of the costs Landlord will incur as a result of its loss of the use of its money due to such late payment by Tenant. 4.3 LATE CHARGES. Tenant's failure to pay any Rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord under any mortgage or trust deed encumbering the Premises. Therefore, if Landlord does not receive any Rent payment within five (5) days after it becomes due, Tenant shall pay Landlord a late charge in the amount specified in the Basic Terms. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Acceptance of such late charge by Landlord shall, in no event, constitute a waiver of Tenant's default with respect to such overdue amount. The late charge shall be deemed Rent and the rights to require it shall be in addition to all of Landlord's rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. 4.4 SECURITY DEPOSIT; ADDITIONAL SECURITY AND LOANS 4.4.1 DEPOSIT OF FUNDS. Upon the execution of this Lease, Tenant shall deposit with Landlord a cash security deposit ("Security Deposit") in the amount set forth in the Basic Terms. Landlord may, but shall not be obligated to, apply all or part of the Security Deposit to any unpaid Rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a default under this Lease. Interest shall accrue on the Security Deposit in Tenant's favor at a rate equal to the then average rate given by San Diego, California banks for three-month certificates of deposit, and shall become part of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. 4.4.2 RETURN OF SECURITY DEPOSIT. Provided that Tenant has not been in default of its obligations under this Lease more than three (3) times, Landlord shall return the Security Deposit to Tenant on the date which is the later of three (3) Lease Years after the Commencement Date, or the date when Tenant is not then in default under 4/15/97 Landlord Initials: _______ 8 Tenant Initials: _______ 18 this Lease. If Tenant has had more than three (3) defaults under this Lease, whether or not such defaults have been cured, then Landlord shall retain the Security Deposit for the Term. 4.4.3 ADDITIONAL SECURITY AND LOANS. Tenant shall deliver to Landlord or, at Landlord's request, to Landlord's construction and/or permanent lender, additional security in an amount up to the first (1st) Lease Year's Base Annual Rent ("Additional Security"). The Additional Security shall be held and used by Landlord in the same manner and for the same purposes as the Security Deposit. The Additional Security may be cash or a letter of credit (at Tenant's election) or other financial instrument reasonably acceptable to Landlord. If the Additional Security is a letter of credit, it shall be issued in favor of Landlord. 4.4.3.1 Landlord will determine the amount of such Additional Security as soon as reasonably possible. Any expense incurred by Tenant in the obtaining and maintaining of such Additional Security shall be the sole cost and expense of Tenant; provided, however, that Tenant shall not be required to incur any such expense in excess of Seventy-Five Thousand Dollars ($75,000) during the Term of the Lease. If such costs or expenses exceed Seventy-Five Thousand Dollars ($75,000), Tenant shall still be required to deliver the Additional Security as long as Landlord pays any excess costs or expenses (which shall not exceed reasonable and competitive costs and expense for such services). 4.4.3.2 Tenant may, but shall not be obligated to, submit to Landlord concepts, ideas or opportunities for Landlord's permanent financing of the Building. Landlord may, but shall not be obligated to, utilize any or all of such concepts, ideas or opportunities. In the event that Landlord does utilize a concept, idea or opportunity proposed or arranged by Tenant for Landlord's permanent financing of the Building and such event results in lower costs to Landlord of such financing than what Landlord had otherwise arranged, Landlord will reduce the Base Monthly Rent by amortizing the amount of such lower costs over the remaining initial Lease Term. 4.4.4 TRANSFER OF SECURITY DEPOSIT AND ADDITIONAL SECURITY. Landlord may deliver the funds deposited hereunder by Tenant to a purchaser of Landlord's interest in the Premises, in the event that such interest be sold; and thereupon Landlord shall be discharged from any further liability with respect to such Security Deposit and Additional Security. ARTICLE 5 - OTHER CHARGES PAYABLE BY TENANT 5.1 RENT. All Rent under this Lease shall, unless this Lease expressly provides otherwise, be paid with the next installment of Base Monthly Rent falling due. 5.2 COMMON AREA MAINTENANCE CHARGES. Landlord shall operate, maintain, manage and repair the Building, Project and Common Area in a neat, orderly condition, reasonably equivalent to that found in projects in San Diego County similar to the Building. 5.2.1 TENANT TO BEAR PROPORTIONAL SHARE OF COMMON AREA MAINTENANCE CHARGES. Tenant agrees to pay to Landlord, as part of Excess Operating Costs Rent, Tenant's Proportional Share of the Common Area Maintenance Charges and certain charges for the Site Amenities as set forth below which are allocable to the Lease Term. 5.2.2 LANDLORD'S COMMON AREA MAINTENANCE CHARGES. For the purpose of this Lease, the term "Common Area Maintenance Charges" means the total cost and expense incurred by Landlord in operating, maintaining, managing and repairing the Building, Project and the Common Area, including, without limitation, costs and expenses for the following: servicing, maintenance, replacement and repair of heating/ventilation and air-conditioning systems (amortized over an appropriate industry standard useful life); gardening and landscaping; maintenance and repair of roof; pest extermination services; janitorial services for the Premises; utilities, water and sewer charges (other than with respect to utilities separately metered and paid directly by Tenant); maintenance of parking areas; fees, charges and other costs (including, without limitation, consulting, accounting and legal fees, but excluding legal and accounting fees directly attributable to other tenants) reasonably necessary to manage the Building 4/15/97 Landlord Initials: _______ 9 Tenant Initials: _______ 19 and the Project (including a fee to Landlord for management of the Project; costs of compliance with any and all governmental laws, ordinances, and regulations applicable to the Building or Project which were not imposed as of the Commencement Date; installation, maintenance and replacement of signs identifying the Building and Project (other than Tenant's signs whose maintenance is paid for by Tenant); charges under any Declarations; Property Taxes for the Building and Project; Insurance Charges for the Building and Project; all personal property taxes levied on or attributable to personal property used in connection with the Common Area; rental or lease payments paid by Landlord for rented or leased personal property used in the operation or maintenance of the Building Common Area; fees for required licenses and permits (except as set forth in Work Letter); repairing, resurfacing, repaving, maintaining, painting, lighting, cleaning, refuse removal, security (if any), and similar items; reasonable and customary operating reserves; and the amortized costs (as reasonably determined by Landlord over an appropriate industry standard useful life) to repair, maintain or install capital improvements. Notwithstanding the foregoing, Tenant's Proportional Share of Common Area Maintenance Charges due to Landlord's management fee shall not exceed four percent (4%) of the first (1st) Lease Year's Base Annual Rent throughout the Lease Term. Project Operating Expenses would include the operating expenses for the Site Amenities; provided, however, that unless and until the Project includes buildings and occupants with rights to use the Site Amenities in addition to the Building and Tenant (at which time Tenant's obligation shall be determined by Tenant's Site Amenities Proportional Share), Tenant shall be liable to Landlord for all of the costs and expenses of operating, maintaining, managing and repairing the Site Amenities, except twenty-seven and one-half percent (27.5%) of such costs and expenses shall be deemed included within the Operating Costs Allowance. Landlord may cause any or all of such services to be provided by an independent contractor. 5.2.3 EXCLUSIONS FROM COMMON AREA MAINTENANCE CHARGES. Notwithstanding anything in this Lease to the contrary, the term "Common Area Maintenance Charges" (and hence Operating Costs) shall in no event include any of the following: (i)any ground lease rental; (ii)costs incurred by Landlord for the repair of damage to the Building or the Common Area, to the extent that Landlord is reimbursed by insurance proceeds; (iii)advertising and promotional expenditures for the Building or the Common Area, and marketing costs, including, without limitation, leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters of intent, leases, subleases and/or assignments with present or prospective tenants or other occupants in the Building; (iv)electric power costs for which any tenant directly contracts at the local public service company or for which any tenant is separately metered or submetered and pays Landlord directly; or (v)the cost of any utility services obtained by Tenant. 5.2.4 REPAIRS DUE TO MISUSE. Notwithstanding any provision of this Lease to the contrary, Tenant shall be responsible for all of Landlord's costs and expenses due to repairs to the Premises, Site Amenities or Project which are made necessary by any misuse or neglect by (a) Tenant or any of its agents, employees, contractors, or subtenants or (b) any visitors, patrons, guests or invitees of Tenant while in or upon the Premises. 5.3 PAYMENT OF EXCESS OPERATING COSTS RENT. The parties acknowledge that Tenant is leasing the Premises on a modified gross (net of electricity) basis. Tenant shall pay Excess Operating Costs Rent, in advance, in monthly installments on the first day of each month during the Lease Term (prorated for any fractional month). Landlord shall provide to Tenant a written notice of Landlord's budget showing a reasonable estimate of the Excess Operating Costs Rent, approximately thirty (30) days prior to the commencement of each calendar year or portion thereof after the expiration of the first (1st) Lease Year (which amount may be re-estimated from time to time by Landlord during the calendar year) and an estimate of Tenant's share thereof for the ensuing year or portion thereof. Tenant shall pay to Landlord, monthly in advance, one-twelfth (1/12th) of the estimate of Excess Operating Costs Rent (or, if less than a full calendar year has been estimated, then the monthly pro rata share). 5.3.1 PREVIOUS CHARGES. If, for any reason, Landlord is unable to provide to Tenant the estimate of the Excess Operating Costs Rent at least thirty (30) days prior to the commencement of any calendar year during the Lease Term, then Tenant shall continue to pay monthly the same amount of Excess Operating Costs Rent as was applicable for the most recent previous month ("Previous Charges") until thirty (30) days after receipt of such estimate at which time Tenant shall commence paying as of the first day of the first calendar month after delivery of such new estimate, the new estimated Excess Operating Costs Rent. Subject to the foregoing, Tenant shall also pay, together 4/15/97 Landlord Initials: _______ 10 Tenant Initials: _______ 20 with its next installment, the difference between the Previous Charges and the amount of the new estimated Excess Operating Costs Rent for such preceding months. Any delay by Landlord in delivering the new estimated Excess Operating Costs Rent shall not be deemed a waiver of any such Excess Operating Costs Rent. 5.3.2 YEAR-END ADJUSTMENTS. Within one hundred twenty (120) days after the end of each calendar year during the Lease Term, Landlord shall provide Tenant with a written statement showing in reasonable detail the actual Excess Operating Costs Rent for such year. Landlord and Tenant shall, within thirty (30) days thereafter, make any payment or credit necessary to bring Tenant's previously estimated Excess Operating Costs Rent into conformance with the actual Excess Operating Costs Rent as determined by Landlord. Any amount due Tenant as a credit shall be credited against installments next coming due from Tenant under the Lease and any amounts owed to Landlord shall be paid with the next installment of Base Monthly Rent; provided, however, that if the Lease Term has terminated and no other amounts are then owing to Landlord from Tenant pursuant to this Lease, any such amount due Tenant or Landlord shall be remitted to the party owed such amount within thirty (30) days of the date Landlord calculates and notifies Tenant of the amount of such adjustment. 5.3.3 AUDIT. Landlord shall retain its records regarding Common Area Maintenance Charges for a period of at least one (1) year following the final billing for the calendar year in question. At any time during such one (1) year period, upon reasonable advance written notice to Landlord, but not more frequently than once in any calendar year, Tenant shall have the right to audit all of Landlord's or Landlord's agent's records pertaining to Common Area Maintenance Charges by a representative of Tenant's choice. If such audit reveals that Landlord's annual statement was incorrect, any over-billing discovered in the course of such audit shall be refunded to Tenant within thirty (30) days of Landlord's receipt of a copy of the audit, unless Landlord disputes the audit, and any underbilling shall be paid by Tenant to Landlord within thirty (30) days of the audit. In the event that any overbilling exceeds the amount actually due from Tenant for the year by three percent (3%) or more, then Landlord shall reimburse Tenant for the reasonable costs of the audit. If Landlord disputes the results of Tenant's audit, Landlord and Tenant shall attempt to resolve such dispute in good faith. If Landlord and Tenant are unable to do so within thirty (30) days, then Landlord shall commission a second audit by an independent accounting firm selected by Landlord. The results of such second audit shall be deemed conclusive as to any such dispute. Landlord shall pay the cost of such second audit and Tenant's audit unless such second audit reveals amounts actually due from Tenant for the year are within the three percent (3%) noted above, in which event Tenant shall pay for the second audit as well as Tenant's audit. In any event, Tenant shall continue to pay all Rent and Excess Operating Costs Rent as otherwise provided by this Lease until the dispute is resolved or the results of the second audit are available. 5.4 PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall use its best efforts to have such personal property taxed separately from the Premises. If any of Tenant's personal property is taxed with the Premises or Project, Tenant shall pay Landlord the taxes for the personal property within fifteen (15) days after Tenant receives a written statement from Landlord for such personal property taxes. ARTICLE 6 - USE OF PROPERTY 6.1 PERMITTED USES. Tenant shall use the Premises only for the Permitted Uses set forth in the Basic Terms and for no other use or purpose without the prior written consent of Landlord, which consent may be withheld in the sole, absolute and/or arbitrary discretion of Landlord. 6.2 MANNER OF USE. 6.2.1 INTERFERENCE WITH USE/NUISANCE. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with or infringe on the rights of other occupants or customers of the Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, or objectionable purposes; nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or commit or suffer to be committed any waste in, on or about the Premises. Tenant shall keep the interior of the Premises (except for Landlord's obligation to maintain the Common Areas), and every part thereof, in a clean 4/15/97 Landlord Initials: _______ 11 Tenant Initials: _______ 21 condition, free from any noises, vibrations, music volumes, lighting (including, without limitation, strobe lighting), speakers, videos, odors or nuisances deemed objectionable by Landlord, and shall comply with all health and police regulations in all respects. Tenant shall not display or sell merchandise, or place carts, portable signs, devices or any other objects, outside the defined exterior walls or roof and permanent doorways of the Premises or in corridors, without the prior written consent of Landlord. 6.2.2 VIOLATION OF LAW/INSURANCE PROVISIONS. Tenant shall not use or occupy the Premises in violation of any law, ordinance, regulation or requirement or other directive of any federal, state or local governmental or quasi-governmental authority having or exercising jurisdiction over the Project. Tenant shall, at its sole cost and expense, fully comply with all laws, ordinances, regulations, requirements and other directives of any federal, local, governmental or quasi-governmental authority having jurisdiction over the Premises and the Project, including, without limitation, operational and other requirements imposed upon either owners or operators of any public accommodation under the Americans with Disabilities Act 42 U.S.C. 12101 et. seq., and shall immediately discontinue any use of the Premises which is declared by any governmental authority having or exercising jurisdiction thereover to be a violation of any law, ordinance, regulation or directive. If requested by Landlord, Tenant shall provide evidence satisfactory to Landlord of Tenant's compliance. Tenant shall not do or permit to be done anything which will (i)increase the premium of any insurance policy covering the Premises or the Project and/or the property located therein; (ii)cause a cancellation of or be in conflict with any such insurance policies; or (iii)result in a refusal by insurance companies in good standing to issue or continue any such insurance in amounts satisfactory to Landlord. Tenant shall, at Tenant's expense, comply with all rules, orders, regulations and requirements of insurers and of the American Insurance Association or any other organization performing a similar function. Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charges for such policy or policies caused by reason of Tenant's failure to comply with the provisions of this Section. Additionally, after Substantial Completion of the Premises pursuant to the Work Letter, Tenant agrees at its sole cost to install any improvements, changes or alterations in the Premises authorized in writing by Landlord and required by any governmental authority as a result of Tenant's proposed use of the Premises or its manner of operation thereunder, and Tenant's failure to perform same shall constitute a default by Tenant hereunder. 6.2.3 PERMITS. Except as set forth in the Work Letter, Tenant shall obtain and pay for all permits required for Tenant's occupancy of the Premises and shall promptly take all substantial and non-substantial actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Premises, including the Occupational Health and Safety Act. 6.3 RULES AND REGULATIONS. Tenant shall comply with the Rules and Regulations and any amendments, modifications and/or additions thereto as may hereafter be adopted and published by Landlord. Landlord shall not be liable to Tenant for any violation of such Rules and Regulations or the breach in any provision in any lease by any other tenant or other party. In the event of any inconsistency between the Rules and Regulations and this Lease, this Lease shall prevail. 6.4 LANDLORD'S ACCESS. Landlord and its agents, independent contractors and designated representatives, may enter the Premises at all reasonable times to post notices of non-responsibility, to make repairs and/or to show the Premises to holders of any encumbrances, potential buyers, mortgagees, investors or tenants or other parties, or for any other purpose Landlord deems reasonably necessary. Landlord shall give Tenant prior notice of such entry, except in the case of an emergency, in which case no prior notice need be given. Any entry to the Premises by Landlord in the event of an emergency shall not, under any circumstances, be construed or deemed to be a forcible or unlawful entry onto the Premises or to be an eviction of Tenant from the Premises or any part thereof. Landlord may place customary "For Lease" signs on the Premises during the last one hundred eighty (180) days of the Lease Term. 6.5 QUIET POSSESSION. If Tenant pays the Rent and complies with all other terms of this Lease, Landlord assures Tenant that it may occupy and enjoy the Premises for the full Lease Term, subject to the provisions of this Lease and to any mortgages or deeds of trust encumbering the Project. 4/15/97 Landlord Initials: _______ 12 Tenant Initials: _______ 22 ARTICLE 7 - HAZARDOUS MATERIALS 7.1 PROHIBITION. Tenant shall not cause or permit any Hazardous Materials to be brought upon, kept, or used in connection with the Premises or Project by Tenant, its agents, employees, contractors or invitees, in a manner or for a purpose prohibited by or which could result in liability under any applicable law, regulation, rule or ordinance, including without limitation, the Hazardous Materials Laws. Tenant shall, at its own expense, at all times and in all respects comply with all Hazardous Materials Laws, including, without limitation, any Hazardous Materials Laws relating to industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, disposal or transportation of any Hazardous Materials. 7.1.1 USE. Tenant shall, at its own expense, procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals relating to the presence of Hazardous Materials within, on, under or about the Premises or required for Tenant's use of any Hazardous Materials in or about the Premises in conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding management of such Hazardous Materials. Upon termination or expiration of the Lease, Tenant shall, at its own expense, cause all Hazardous Materials placed in or about the Premises or Project by Tenant or at Tenant's direction to be removed from the Premises and Project and transported for use, storage or disposal in accordance and compliance with all applicable Hazardous Materials Laws. 7.1.2 NORMAL USAGE. Landlord recognizes and agrees that Tenant may use materials in normal quantities that are applicable to general office use and that such use by Tenant shall not be deemed a violation of this Section, so long as the levels are not in violation of any Hazardous Materials Laws. Landlord acknowledges that it is not the intent of this Article 7 to prohibit Tenant from operating its business as described in this Lease. Tenant may operate its business according to the custom of the industry so long as the use or presence of Hazardous Materials is strictly and properly monitored according to all applicable governmental requirements. 7.2 DISCLOSURE AND WARNING OBLIGATIONS. Tenant shall comply with all laws, ordinances and regulations in the State where the Premises is located regarding the disclosure of the presence or danger of Hazardous Materials. Tenant acknowledges and agrees that all reporting and warning obligations required under the Hazardous Materials Laws are the sole responsibility of Tenant, whether or not such Hazardous Materials Laws permit or require Landlord to provide such reporting or warnings, and Tenant shall be solely responsible for complying with Hazardous Materials Laws regarding the disclosure of, the presence or danger of Hazardous Materials, including, without limitation, all notices or other requirements under California Health and Safety Code Section 25915 et. seq., and 25249.5 et. seq. and California Code of Regulations Section 12000 et. seq. 7.3 NOTICE OF ACTIONS; HAZARDOUS MATERIALS LIST. Tenant shall immediately notify Landlord in writing of (a) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (b)any claim made or threatened by any person against Landlord, or the Premises or the Project, relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; (c)any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or about the Premises or with respect to any Hazardous Materials removed from the Premises, including, any complaints, notices, warnings, reports or asserted violations in connection therewith; and (d)any release of a Hazardous Material that Tenant knows or has reason to believe has or will come to be released or located within, on, under or about the Premises or the Project. Tenant shall also provide to Landlord, as promptly as possible, and in any event within five (5) Business Days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to the Premises or Tenant's use thereof. Upon written request of Landlord (to enable Landlord to defend itself from any claim or charge related to any Hazardous Materials Law), Tenant shall promptly deliver to Landlord notices of hazardous waste manifests reflecting the legal and proper disposal of all such Hazardous Materials removed or to be removed from the Premises. All such manifests shall list the Tenant or its agent as a responsible party and in no way shall attribute responsibility for any such Hazardous Materials to Landlord. As a material inducement to Landlord to allow Tenant to use Hazardous Materials in connection with its business, Tenant agrees to deliver to Landlord prior to the Commencement Date, a list identifying each type of Hazardous Material to be present on the 4/15/97 Landlord Initials: _______ 13 Tenant Initials: _______ 23 Premises and setting forth any and all governmental approvals or permits required in connection with the presence of Hazardous materials on the Premises ("Hazardous Materials List"). Tenant shall deliver to Landlord an updated Hazardous Materials List at least once a year and shall also deliver an updated list before any new Hazardous Materials are brought onto the Premises or on or before the date Tenant obtains any additional permits or approvals. 7.4 HAZARDOUS MATERIALS INDEMNITY. Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect, and hold Landlord and each of Landlord's Indemnitees free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses and/or expenses, attorneys' fees, consultant fees and expert fees, judgments, administrative rulings or orders, fines, costs for death of or injury to any person or damage to any property whatsoever (including, without limitation, water tables, sewer systems and atmosphere), arising from, or caused or resulting, in whole or in part, directly or indirectly, by the release, presence or discharge in, on, under or about the Premises or Project of any Hazardous Materials caused by or arising from the activities of Tenant, Tenant's agents, employees, licensees, or invitees, or from the transportation or disposal of any Hazardous Materials to or from the Premises or Project by Tenant, Tenant's agents, employees, licensees or invitees or at Tenant's direction, or by Tenant's failure to comply with any Hazardous Materials Laws, or from Tenant's failure to provide adequate disclosures or warnings required by the Hazardous Materials Laws, or from any breach by Tenant of the obligations in this Article7. Tenant's indemnification obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary Hazardous Materials management plan, investigation, repairs, cleanup or detoxification or decontamination of the Premises or Project, and the presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the Lease Term. 7.5 ASSIGNMENT AND SUBLETTING. If (i) any anticipated use of the Premises by any proposed assignee or sublessee involves the generation, storage, use, treatment or disposal of Hazardous Materials in a manner or for a purpose prohibited by any governmental agency or authority, (ii) the proposed assignee or sublessee has been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such party's action or use of the property in question or (iii) the proposed assignee or sublessee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material, it shall not be unreasonable for Landlord to withhold its consent to an assignment or subletting to such proposed assignee or sublessee. Landlord may require a written statement from the proposed assignee or sublessee attesting to such matters. 7.6 ENVIRONMENTAL TESTS AND AUDITS. Tenant shall not perform or cause to be performed any Hazardous Materials surveys, studies, reports or inspections, relating to the Premises or Project, without obtaining Landlord's prior written consent. At any time prior to the expiration of the Lease Term, if Landlord has a reasonable basis to believe that Hazardous Materials are present in, on or about the Premises in violation of any Hazardous Materials Laws, Landlord shall have the right to enter upon the Premises in order to conduct appropriate tests and to deliver to Tenant the results of such tests to demonstrate that levels of any Hazardous Materials in excess of permissible levels has occurred as a result of Tenant's use of the Premises. Such testing shall be at Tenant's expense if Landlord has a reasonable basis for suspecting and confirms the presence of Hazardous Materials in the soil or surface or ground water in, on, under, or about the Premises, or the Project which has been caused by or resulted from the activities of Tenant, its agents, employees, contractors or invitees. 7.7 LEASE "AS IS". Subject to the express provisions of this Lease (including the Work Letter), Tenant, in entering into this Lease, is leasing the Premises "As Is" and is relying solely upon its own inspections, investigations and analyses of the Premises relating to Hazardous Materials. Tenant further acknowledges Tenant is not relying in any way upon any representations, statements, warranties, studies, reports, or other information of Landlord or its representatives, whether oral or written, of any nature whatsoever regarding any Hazardous Materials. 7.8 SURVIVAL. The respective rights and obligations of Landlord and Tenant under this Article 7 shall survive the expiration or termination of this Lease. During any period of time employed by Tenant after the termination of this Lease to complete the removal from the Premises or Project or remediation of any such Hazardous Materials, Tenant shall continue to pay the full rental in accordance with this Lease, which rental shall be prorated 4/15/97 Landlord Initials: _______ 14 Tenant Initials: _______ 24 daily. ARTICLE 8 - UTILITIES 8.1 PAYMENT AND ARRANGEMENT. Tenant shall arrange for and pay, directly to the appropriate supplier, the cost of all electric power and telephone supplied to the Premises. In the event the Premises are less than the entire Building, and if any utilities to the Premises are jointly metered and such utilities are not otherwise included as a Common Area Maintenance Charge, Landlord shall determine, and Tenant shall pay, Tenant's share of the monthly costs of such utilities. Tenant's share shall be determined by the ratio of the rentable square footage of the Premises as compared to the rentable square footage of all the leased and occupied property within the Project subject to the common metering. Landlord shall have the right to bill Tenant for such amounts on an estimated basis, in which case, such estimated statements shall be delivered to Tenant and Tenant shall pay such amounts to Landlord concurrently with its payment of Base Monthly Rent. The Tenant shall pay such charges, as Rent, within five (5) days of notification of the amount by the Landlord. Landlord reserves the right to require Tenant to install and maintain, at Tenant's sole expense, separate meters for any public utility servicing the Premises for which a separate meter is not presently installed. 8.2 INTERRUPTION OF SERVICES AND UTILITIES. Landlord shall not be liable for, and Tenant shall not be entitled to any reduction of, the Base Monthly Rent, Additional Rent or any other Rent payable hereunder by reason of Landlord's failure to make available any of the services or utilities described in this Lease, when such failure or interruption is caused by acts of God, accident, breakage, repairs, strikes, lockouts or other labor disturbances or disputes, necessary repairs, installations, construction and expansion, non-payment of utility charges due from Tenant, or by reason of governmental regulation, statute, ordinance, restriction or decree or any other similar cause. Notwithstanding the foregoing, Landlord shall be responsible for the consequences of Landlord's own negligence or intentional misconduct. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the foregoing services or utilities. Tenant, as a material part of the consideration to be rendered to Landlord, hereby waives all claims against Landlord for the foregoing damages from any cause arising at any time. 8.3 OPERATING HOURS. Normal operating hours for the Building and included within the Operating Costs Allowance are 7:00 a.m. to 6:00 p.m. weekdays and Saturday from 8:00 a.m. to 1:00 p.m. Tenant shall be permitted heating/ventilation/air conditioning ("HVAC") service at other hours for which Tenant shall pay at a rate equal to Seven Dollars ($7.00) per hour of usage (subject to a reasonable adjustment based on actual design of the HVAC system pursuant to the Work Letter), increased in proportion to the increase of the CPI on each annual anniversary of the Lease Date. Landlord shall meter and Tenant shall pay for such operation of the HVAC systems beyond the normal sixty hours weekly usage on a quarterly basis. ARTICLE 9 - PARKING AND CONTROL OF COMMON AREAS 9.1 CONTROL OF COMMON AREAS BY LANDLORD. All Common Areas, the Site Amenities, and all automobile parking areas, driveways, entrances and exits thereto, and other facilities furnished by Landlord in or near the Project, shall at all times be subject to the exclusive control and management of Landlord or Landlord's designated agent. Landlord shall have the right to construct, maintain and operate lighting facilities on all said areas and improvements; to police the same; from time to time to change the area, level, location and arrangement of parking areas and other facilities hereinabove referred to; to restrict parking by tenants, their officers, agents and employees to employee parking areas; to close all or any portion of said areas or facilities to such extent as may, in the opinion of Landlord, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or the public therein; to close temporarily all or any portion of the parking areas or facilities; to discourage non-customer parking; to convert such areas into leasable areas; to construct additional parking facilities and to do and perform such other acts in and to said areas and improvements as, in the use of good business judgment, the Landlord shall determine to be advisable with a view to the improvement of the convenience and use thereof by tenants, their officers, agents, employees and customers, provided that such changes shall not reduce the number of parking spaces below the 4/15/97 Landlord Initials: _______ 15 Tenant Initials: _______ 25 number required as stated below. No such change shall entitle Tenant to an abatement of Rent. Tenant will have the nonexclusive use of not less than four (4) parking spaces per one thousand (1,000) usable square feet of the Premises; provided, however, that Tenant shall have the right to designate up to twelve (12) of the foregoing parking spaces immediately adjacent to the Building as reserved for the Tenant, with the remainder of the parking spaces pursuant to the foregoing calculation to be on a nonexclusive basis. 9.2 LICENSE. All Common Areas are to be used and occupied under a license which may be revoked by Landlord in the event of a default by Tenant and termination of the Lease, and if any such license be revoked, or if the amount of such areas be diminished, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of Rent, or shall such revocation or diminution of such areas be deemed constructive or actual eviction. ARTICLE 10 - ALTERATIONS, IMPROVEMENTS AND SIGNAGE 10.1 CHANGES/ALTERATIONS. Tenant shall not make any alterations, additions, or changes, including, without limitation, installation of any permanently attached trade fixtures, exterior signs, exterior machinery, floor coverings, interior or exterior lighting, plumbing fixtures, shades or awnings (collectively "Alterations") in and to the Premises or any part thereof without the prior written consent of Landlord which consent may be withheld in Landlord's sole and absolute discretion; provided, however, that Tenant may make nonstructural Alterations that do not affect the electrical, plumbing, heating, ventilation, air conditioning or other systems of the Premises and that cost less than $10,000 in any Lease Year without Landlord's consent. Any construction undertaken in or to the Premises shall be performed in accordance with this Article and the other obligations of this Lease. 10.2 MANNER OF CONSTRUCTION. 10.2.1 CONDITIONS TO CONSENT. Landlord may impose, as a condition of its consent to any Alterations or repairs on or about the Premises, such requirements as Landlord in its reasonable discretion may deem desirable, including, but not limited to, the requirements that Tenant obtain bonds and that Tenant utilize for such purposes only contractors, materials, mechanics and materialmen approved by Landlord, in its sole discretion. Tenant shall construct such Alterations or repairs in strict conformance with any and all applicable rules and regulations of Landlord and any federal, state, county or municipal code or ordinance and pursuant to a valid building permit, issued by the local governing entity, and obtained at Tenant's sole cost and expense. All fixtures installed by Tenant shall be new. 10.2.2 COST. In any event, a licensed contractor approved by Landlord shall perform all mechanical, electrical, plumbing, air conditioning, permanent partition and ceiling tile work, and such work shall be performed at Tenant's cost. If Landlord's consent is required, Landlord reserves the right to approve, in Landlord's reasonable discretion, the contractor selected by Tenant for the completion of any Alterations. In the event Tenant orders any construction, alteration, decorating or repair work and fails to pay amounts when due to the contractor or contractors in connection with such items, Landlord, without any obligation to do so, may pay any such amounts directly to such contractor or contractors (with a notice to Tenant of such payment) and the amounts paid by Landlord shall be deemed Rent under this Lease, payable upon billing therefor. 10.2.3 GOOD AND WORKMANLIKE MANNER. All work with respect to any Alterations or repairs must be done in a good and workmanlike manner and diligently prosecuted to completion to the end that the Premises shall at all times be a complete unit except during the period of work. Upon completion of any Alterations, Tenant agrees to deliver to the Landlord's management office a copy of the "as built" drawings of the Alterations and record any necessary notices to evidence completion. In performing the work of any such Alterations, Tenant shall have the work performed in such manner as not interfere with or to obstruct the access to the Common Area and to any other tenant of the Project. 10.3 CONSTRUCTION INSURANCE. Whether or not Landlord's consent is required, Tenant agrees to obtain, carry and deliver to Landlord prior to the commencement of any Alterations and maintain in effect until completion of 4/15/97 Landlord Initials: _______ 16 Tenant Initials: _______ 26 all Alterations "Builder's All Risk" insurance in an appropriate amount covering the construction of such Alterations, and such other insurance as Landlord may require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Section11.2.2 of this Lease immediately upon completion thereof. 10.4 LIENS. Tenant shall keep the Premises and the Project free from any mechanics', materialmen's, designer's or other liens arising out of any work performed, materials furnished or obligations incurred by or for Tenant or any person or entity claiming by, through or under Tenant. If any such liens are filed and are not released of record by payment or posting of a proper bond within ten (10) days after such filing, Landlord may, without waiving its rights and remedies based on such breach by Tenant and without releasing Tenant from any obligations hereunder, cause such liens to be released by any means it shall deem proper, including payment of the claim giving rise to such lien, in which event all amounts paid by Landlord shall immediately be due and payable by Tenant as Rent. Tenant hereby indemnifies, protects, defends (with legal counsel acceptable to Landlord) and holds Landlord and Landlord's Indemnitees, the Premises and the Project harmless from any liability, cost, obligation, expense (including, without limitation, reasonable attorneys' fees and expenses), or claim of any mechanics', materialmen's, design professional's or other liens in any manner relating to any work performed, materials furnished or obligations incurred by or for Tenant or any person or entity claiming by, through or under Tenant. Whether or not Landlord's consent is required, Tenant shall notify Landlord in writing within fifteen (15) days prior to commencing any Alterations so that Landlord shall have the right to record and post notices of non-responsibility or any other notices deemed necessary by Landlord on the Premises. 10.5 SIGNAGE. As an Alteration, Tenant shall have the right to have its name displayed on the Building at a location mutually chosen by Landlord and Tenant. Any such signage shall also be subject to the requirements of all government agencies with jurisdiction over the Project, and the Declarations. Landlord shall use a signage company selected by Tenant and reasonably acceptable to Landlord. Tenant shall pay all costs of Landlord associated with installing such signage within ten (10) days of receiving an invoice from Landlord setting forth such costs. All such signage shall be subject to Landlord's specifications and approval as to size, graphics and style, which approval may be withheld in Landlord's reasonable discretion. ARTICLE 11 - INSURANCE AND INDEMNITY 11.1 INSURANCE TO BE OBTAINED BY LANDLORD. 11.1.1 FIRE AND CASUALTY INSURANCE. Landlord shall maintain during the Lease Term a policy or policies of insurance insuring the Premises and the Common Area and, at Landlord's election, other portions of the Project, against all direct physical loss or damage, whether due to fire or other casualties covered within the classification of fire and extended coverage, vandalism coverage and malicious mischief, sprinkler leakage, water damage and special extended coverage. Such coverage shall be for full replacement value, and may include, at the option of Landlord, the risks of earthquakes and/or flood damage and additional hazards, a rental loss endorsement and one or more loss payee endorsements in favor of the holders of any mortgages or deeds of trust encumbering the interest of Landlord in all or any portion of the Project or the interest of any ground or underlying lessors in the Project. The costs of such insurance shall be included as a component of the Common Area Maintenance Charges. 11.1.2 LIABILITY INSURANCE. Landlord shall maintain a commercial general liability insurance policy, or an equivalent, written on an occurrence form that includes personal injury coverage, bodily injury, death, property damage, and advertising injury coverage, insuring against liability arising out of the ownership, use, or maintenance of the Common Area or the Project. The initial amount of such insurance shall be Two Million Dollars ($2,000,000) each occurrence/Three Million Dollars ($3,000,000) general aggregate on a per location basis and Two Million Dollars ($2,000,000) for personal injury and advertising injury coverage. Landlord may also obtain umbrella coverage up to Ten Million Dollars ($10,000,000). The costs of all such insurance shall be included as part of the Common Area Maintenance Charges. 11.2 INSURANCE TO BE OBTAINED BY TENANT. 4/15/97 Landlord Initials: _______ 17 Tenant Initials: _______ 27 11.2.1 LIABILITY INSURANCE. During the Lease Term, Tenant shall, at Tenant's expense, maintain a commercial general liability insurance policy, or an equivalent, written on an occurrence form that includes personal injury coverage, bodily injury, death, property damage, advertising injury coverage and contractual liability coverage including Tenant's indemnity obligations under this Lease, insuring against liability arising out of the ownership, use, occupancy or maintenance of the Premises, and the business operated by Tenant and any subtenants or licensees of Tenant in the Premises. The initial amount of such insurance shall be Three Million Dollars ($3,000,000.00) each occurrence/Five Million Dollars ($5,000,000.00) general aggregate on a per location basis and Three Million Dollars ($3,000,000.00) for personal injury and advertising injury coverage. If alcohol will be served from or in the Premises, such coverage shall contain endorsements deleting any liquor liability exclusion and adding a liquor liability endorsement. 11.2.2 INSURANCE OF PERSONAL PROPERTY. Tenant shall at all times during the Lease Term, and at its own expense, maintain a policy or policies of standard fire, extended coverage and special extended coverage insurance ("All Risks") with extended coverage in the name of the Tenant, and naming Landlord as an additional insured, in an amount adequate to cover the cost of replacement of all trade fixtures, alterations, decorations, inventory additions or improvements, and all plate and tempered glass within the Premises, made to the Premises by Tenant or by Landlord on Tenant's behalf in the event of fire or extended coverage loss in an amount equal to the full replacement value. Notwithstanding such insurance coverage by Tenant for plate glass, Landlord may replace, at the expense of Tenant, any and all plate and other glass, frames or glazing damaged or broken from any cause whatsoever in and about the Premises. 11.2.3 ADDITIONAL INSURANCE OBLIGATIONS. Landlord may reasonably require Tenant to increase the amounts of coverage and/or to maintain additional coverage based on insurance coverages and amounts maintained by lessees of similar space in San Diego County. 11.3 WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive any and all rights of recovery against the other or against the officers, employees, agents and representatives of the other, on account of loss or damage occasioned to such waiving party or its property or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of such loss or damage or under the insurance policies required to be maintained under this Article. Landlord and Tenant shall, if required, for each of the policies of insurance required under this Lease, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 11.4 FORM OF POLICIES. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall: (i)be an occurrence policy (or policies); (ii)name Landlord, the Project or Building manager or managers, and any other party having an interest in the Project as an additional insured; (iii)be issued by an insurance company having a General Policyholders Rating of B+ or better and a financial size of "VI" or better, as set forth in the most current issue of Best's Rating Guide, or which is otherwise acceptable to Landlord and licensed to do business in California; (iv)be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and noncontributing with any insurance required of Tenant; (v)provide that said insurance shall not be canceled or coverage changed unless thirty (30) days prior written notice shall have been given to Landlord and any mortgagee of Landlord's; and (vi)with respect to the liability insurance described in Section 11.2.1, contain a cross-liability endorsement or severability of interest clause acceptable to Landlord. Any insurance policies required hereunder may be part of a blanket policy with a "per project, per location" endorsement so long as such blanket policy contains all provisions required hereby and does not reduce the coverage, impair the rights of either party or negate the requirements of this Lease. Tenant shall deliver said policy or policies or certificates thereof (at Tenant's election), together with any endorsements reflecting the changes to the policy required to comply with the requirements of this Lease, to Landlord on or before the Commencement Date and at least ten (10) days before the expiration date of such policies. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates (at Tenant's election) and appropriate endorsements, Landlord may, at its option, procure such policies for the account of Tenant, and the cost thereof plus a ten percent (10%) handling charge shall be paid by Tenant to Landlord as Additional Rent within five (5) days after delivery to Tenant of bills therefor. 4/15/97 Landlord Initials: _______ 18 Tenant Initials: _______ 28 11.5 INDEMNIFICATION. 11.5.1 INDEMNIFICATION OF LANDLORD. To the fullest extent permitted by law, Tenant shall indemnify, protect, defend (with legal counsel acceptable to Landlord) and save Landlord and Landlord's Indemnitees harmless from and against any and all claims, actions, damages, liabilities and expenses, including attorneys' fees, in connection with loss of life, personal injury, bodily injury and/or damage to property arising from or out of any occurrence in, upon or about the Premises, or the occupancy or use by Tenant of the Premises and/or Project or any part thereof, or occasioned wholly or in part by any act or omission of Tenant, its agents, contractors, employees, servants, tenants or concessionaires, except to the extent caused by Landlord's gross negligence or willful misconduct. Tenant shall further indemnify, defend, protect and hold Landlord and Landlord's Indemnitees harmless from and against any and all claims arising from any breach or default in performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act, neglect, fault or omission of Tenant or its agents, contractors, employees, servants, tenants or concessionaires, and from and against all costs, attorneys' fees, expenses and liabilities incurred in connection with such claim or any action or proceeding brought thereon. In case any action or proceeding shall be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel approved in writing by Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever except Landlord's gross negligence or intentional misconduct. Tenant hereby waives all its claims in respect thereof against Landlord. 11.5.2 LANDLORD'S NONLIABILITY. Landlord shall not be liable for injury or damage which may be sustained by a person, goods, wares, merchandise, or other property of Tenant, or Tenant's employees, invitees, customers, or of any other person in or about the Premises caused by or resulting from any peril which may affect the Premises, including, without limitation, fire, steam, electricity, gas, water, or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction, or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, or lighting fixtures of the Premises, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Project or from other sources. Landlord shall not be liable for any damages arising from any act or neglect of: (a) any other tenant or occupant of the Project; or (b) any officer, employee, agent, representative, customer, business visitor, or invitee of any such tenant. Notwithstanding the foregoing, nothing contained in this Lease shall operate to relieve Landlord of the consequences of its own gross negligence or willful misconduct or the gross negligence or willful misconduct of its agents or employees. 11.5.3 INDEMNIFICATION OF TENANT. To the fullest extent permitted by law, Landlord shall indemnify, protect, defend (with legal counsel acceptable to Tenant) and save Tenant and Tenant's Indemnitees harmless from and against any and all claims, actions, damages, liabilities and expenses, including attorneys' fees, in connection with loss of life, personal injury, bodily injury and/or damage to property arising from or out of any occurrence in, upon or about the Premises and due to the gross negligence or willful misconduct of Landlord. Except as otherwise set forth in this Lease, and subject to Section 11.5.2 above, Landlord shall further indemnify, defend, protect and hold Tenant and Tenant's Indemnitees harmless from and against any and all losses, expenses and damages arising from any breach or default in performance of any obligation on Landlord's part to be performed under the terms of this Lease. ARTICLE 12 - ASSIGNMENT AND SUBLETTING 12.1 LANDLORD'S CONSENT REQUIRED. 12.1.1 TRANSFER. Tenant shall not either voluntarily or by operation of law, assign, mortgage, pledge, hypothecate or encumber this Lease or the leasehold interest created hereby or any interest herein, or sublet the Premises or any portion thereof, or license the use of all or any portion of the Premises or permit any other person to occupy or use the Premises or any portion thereof (collectively referred to herein as a "Transfer"), without the prior written consent of Landlord, which consent is subject to the following conditions: (i)the proposed transferee's use of 4/15/97 Landlord Initials: _______ 19 Tenant Initials: _______ 29 the Premises must be consistent with Article 6 hereof; (ii)the transferee is of a character and engaged in a business which is in keeping with the Landlord's standards for the Project; (iii)the proposed Transfer must not breach any financing agreement or any other agreement relating to the Project; (iv)the net worth of the proposed transferee must be sufficient to discharge the obligation under this Lease (in Landlord's reasonable judgment); and (v)subject to Landlord not having available space in the Project for such proposed transferee, the proposed transferee must not be an existing tenant in the Project. 12.1.2 PROCEDURE. Prior to a Transfer, Tenant shall request Landlord's consent in writing, and shall include with such request a copy of all proposed contracts, agreements, subleases, or other documents describing the Transfer between Tenant and the proposed transferee. Landlord shall respond to Tenant's request for consent to a proposed Transfer within thirty (30) days after receipt of all information described above and reasonably necessary to allow Landlord to evaluate all the conditions set forth in Section 12.1.1 above. If Tenant hereunder is a corporation or is an unincorporated association or partnership, then the transfer, assignment, or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of twenty-five percent (25%) shall be deemed a Transfer under the meaning of this Article 12 (other than normal bulk transactions of publicly held stock). 12.1.3 AFFILIATES. Notwithstanding the foregoing, Landlord's prior written consent shall not be required for a Transfer to a wholly owned subsidiary or a parent of Tenant ("Affiliate"). Promptly upon a transfer to an Affiliate, Tenant shall deliver written notice to Landlord thereof. 12.2 RECAPTURE RIGHT. In lieu of giving or withholding consent pursuant to Section 12.1, Landlord may, at its option, terminate this Lease (or in the case of a proposed subletting or assignment of a portion of the Premises, elect to terminate this Lease as respects that portion) upon thirty (30) days' prior notice. Thereafter Landlord may enter into a lease agreement with such proposed transferee and shall be entitled to all of the Profit related thereto. In consideration for Landlord's right and election to terminate this Lease as set forth above, Landlord will release Tenant from liability under this Lease for Base Monthly Rent and Additional Rent with respect to the Premises (or the portion of the Premises subject to the proposed Transfer) accruing after termination of this Lease resulting from Landlord's exercise of such right. Landlord and Tenant agree and acknowledge that Landlord's right to recapture as set forth above is intended to permit Landlord to maintain control over the leasing of space in the Project to protect its interest in the Project and the interest of any lenders and to prevent such interest from being impaired. Tenant understands the nature of this right and has approved the recapture provisions in consideration for Landlord's agreement to release Tenant from liability for future Rent due with respect to the recaptured portion of the Premises pursuant to the provisions of this Section. 12.3 TRANSFER WITHOUT CONSENT. Any Transfer without Landlord's prior written consent shall, at the option of the Landlord, constitute a non-curable breach of this Lease. 12.4 NO RELEASE OF TENANT. No Transfer shall release Tenant or any guarantor or change Tenant's primary liability to pay the Rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of Rent from any other person is not a waiver of any provision of this Article 12. Consent to one Transfer is not a consent to any subsequent Transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee and without releasing such transferee from its obligations under this Lease. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. 12.5 EFFECT OF A TRANSFER. Whether or not Landlord's consent is required, the transferee shall agree to comply with and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease to the extent of the space transferred, assigned or sublet; and Tenant shall deliver to Landlord promptly after execution an executed copy of each such Transfer document between Tenant and the transferee. In addition, any sublease shall provide that it shall be subject and subordinate to this Lease and to all mortgages; that Landlord may enforce the provisions of the sublease, including collection of rents; and that in the event of termination of this Lease for any reason, including without limitation a voluntary surrender by Tenant, or in the event of any reentry or repossession of 4/15/97 Landlord Initials: _______ 20 Tenant Initials: _______ 30 the Premises by Landlord, Landlord may, at its option, either (i)terminate the sublease, or (ii)take over all of the right, title and interest of Tenant, as sublessor, under such sublease, in which case such sublessee shall attorn to Landlord but in such event Landlord shall not (a)be liable for any previous act or omission of Tenant under such sublease, (b)be subject to any defense or offset previously accrued in favor of the sublessee against Tenant, or (c)be bound by any previous modification of any sublease made without Landlord's written consent, or by any previous prepayment by sublessee of more than one month's rent. 12.6 EVENT OF BANKRUPTCY. If this Lease is assigned to any person or entity pursuant to the provisions of the United States Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord, and shall not constitute the property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under this Section not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. 12.7 NO MERGER. No merger shall result from Tenant's sublease of the Premises under this Article 12, Tenant's surrender of this Lease or the termination of this Lease in any other manner. 12.8 ASSIGNMENT FEES AND PROCEDURES. In the event Landlord shall be requested to consent to a Transfer, Tenant shall pay Landlord a reasonable fee to reimburse Landlord for costs and expenses, including attorneys' fees, incurred in connection with reviewing Tenant's request for consent. ARTICLE 13 - DAMAGE OR DESTRUCTION 13.1 REPAIR OF DAMAGE BY LANDLORD. Tenant agrees to promptly notify Landlord in writing of any damage to the Premises resulting from fire, earthquake or any other casualty (such events referred to collectively as "Casualty"). If the Premises, or any common areas of the Building providing access to the Premises (such that Tenant does not have reasonable access to the Premises) shall be damaged by a Casualty, Landlord shall, within sixty (60) days after the date of the Casualty, provide written notice to Tenant indicating the anticipated time period for repairing the Casualty (the "Repair Period Notice"). In the event the Repair Period Notice indicates that the time period for repairing the Casualty is estimated to exceed two hundred seventy (270) days from the date of the Repair Period Notice, Landlord (pursuant to the provisions of Section 13.3 below) or Tenant may elect to terminate this Lease ("Tenant's Termination Election"). Such election must be made by Tenant within thirty (30) days after the receipt of the Repair Period Notice or will be deemed waived by Tenant. If Tenant elects to terminate the Lease, the termination shall be effective thirty (30) days after Landlord's receipt of Tenant's Termination Election. If the Repair Period Notice indicates that the time period for repairing the Casualty is estimated to not exceed two hundred seventy (270) days from the date of the Repair Period Notice, or if Tenant does not exercise Tenant's Termination Election as provided above, then subject to the other provisions of this Article, Landlord will repair the damage pursuant to the provisions hereof. If Landlord is obligated to or elects to repair the Casualty as provided herein, Landlord agrees to promptly and diligently, subject to reasonable delays for insurance adjustment and other matters beyond Landlord's reasonable control, and subject to the other provisions of this Article, restore the Premises and the Tenant Improvements originally constructed by Landlord to substantially the same condition as existed prior to the Casualty, except for modifications required by building codes and other laws, and any other modifications to the common areas deemed desirable by Landlord provided that access to the Premises shall not thereby be materially impaired. If Tenant requests that Landlord make any modifications to the Tenant Improvements in connection with the rebuilding, Landlord may condition its consent to such modifications on (i) Tenant's payment to Landlord prior to commencement of construction of any sums necessary to complete the Tenant Improvements in excess of the amount of insurance proceeds received by Landlord and (ii)confirmation by Landlord's architect that the modifications will not increase the scope of work or time period necessary to complete the Tenant Improvements. 13.2 RENT ABATEMENT DUE TO CASUALTY. Landlord and Tenant agree and acknowledge that Tenant shall 4/15/97 Landlord Initials: _______ 21 Tenant Initials: _______ 31 be provided with full abatement of Rent during the time period commencing on the last to occur of (i) the date of the Casualty or (ii) the date Tenant ceases to enjoy the substantial benefit of the Premises, and continuing until Substantial Completion of Landlord's restoration obligations as provided herein ("Abatement Period"), provided that if Tenant is only able to occupy a portion of the Premises and receive the substantial benefit of such portion for Tenant's uses of the Premises, Rent shall be abated during the Abatement Period for the portion of the Premises not occupied by Tenant. Landlord and Tenant acknowledge and agree that the Rent abatement as provided in this Section is Tenant's sole remedy due to the occurrence of the Casualty and that Landlord shall not be liable to Tenant or any other person for any direct, indirect or consequential damage (including, but not limited to, lost profits of Tenant or loss of or interference with Tenant's business, or otherwise), whether or not caused by the negligence of Landlord or Landlord's employees, contractors, licensees, or invitees, due to or arising out of or as a result of the Casualty (including but not limited to the termination of the Lease in connection therewith). Tenant acknowledges and agrees that Tenant shall maintain adequate business interruption insurance to provide coverage as to such matters. 13.3 LANDLORD'S OPTION TO REPAIR. Notwithstanding the terms of Section13.1 of this Lease, Landlord may elect not to rebuild and/or restore the Premises and/or Building and to instead terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after the date of the Casualty in the event the Building shall be damaged by Casualty (whether or not the Premises are affected) and one or more of the following conditions exists: (i)Landlord determines that the time period for repair will exceed two hundred seventy (270) days as provided in Section 13.1 above; (ii)the damage is not fully covered, except for deductible amounts, by insurance required to be carried by Landlord under the terms of this Lease; (iii)the holder of the mortgage on the Building or ground lessor with respect to the Project requires that the insurance proceeds or a portion thereof be used to retire the mortgage debt, or terminates the ground Lease, as the case may be; or (iv)Landlord elects not to rebuild the Building for any reason, provided that in connection with such election Landlord also terminates all other leases in the Building. 13.4 DAMAGE NEAR END OF TERM. In the event that the Premises or the Building is destroyed or damaged by a Casualty during the last two (2) years of the Lease Term, notwithstanding anything else contained in this Article, Landlord shall have the option to terminate this Lease by giving written notice to Tenant of the exercise of such option within thirty (30) days after such damage or destruction, in which event this Lease shall cease and terminate as of the date of the notice. In such event or in the event of a termination pursuant to the other provisions of this Article, Tenant shall pay Rent, properly apportioned up to the date of the Casualty, and both parties shall thereafter be freed and discharged of all future obligations hereunder, except for any provisions of this Lease which by their terms survive the expiration or earlier termination of the Lease Term. 13.5 WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease, including this Article13, constitute an express agreement between Landlord and Tenant with respect to the occurrence of any Casualty to the Premises and/or Building or any other portion of the Project and Tenant therefore fully waives the provisions of any statute or regulation, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning a Casualty. ARTICLE 14 - CONDEMNATION 14.1 TOTAL CONDEMNATION. If the whole of the Premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the Lease Term shall cease and terminate as of the date of title vesting in such proceeding and all rentals shall be paid up to that date. 14.2 PARTIAL CONDEMNATION. If any part of the Premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, and if such partial taking or condemnation renders the Premises reasonably unsuitable for the business of the Tenant, then Tenant shall have the right to terminate the Lease Term as of the date of title vesting in such proceeding by delivering written notice thereof to Landlord within thirty (30) days after Tenant becomes aware of the proposed condemnation. In the event of a partial taking or condemnation which is not extensive enough to render the Premises unsuitable for the business of the Tenant then this Lease shall continue in full force and effect. 4/15/97 Landlord Initials: _______ 22 Tenant Initials: _______ 32 14.3 CONDEMNATION OF PARKING AREA. If the whole or any part of the parking area in the Project shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose and if, as the result of such partial taking, the ratio of the number of parking stalls does not conform to the parking requirements of this Lease ("Parking Restrictions"), in effect at the time that title to such parking area is acquired through such condemnation process, then the Lease Term shall cease and terminate from the date of title vesting in such proceeding unless Landlord provides substantially equal parking facilities in the vicinity of the Project within sixty (60) days after the date of acquisition and such alternative parking satisfies the requirements of the Parking Restrictions. 14.4 DISTRIBUTION OF CONDEMNATION AWARD. Any condemnation award or payment shall be distributed in the following order: (a)first, to any ground lessor, mortgagee or beneficiary under a deed of trust encumbering the Premises, the amount of its interest in the Premises; (b)second, to Tenant, only the amount, if any, of any award specifically designated for loss of or damage to Tenant's movable trade fixtures or removable personal property, and the Tenant hereby assigns any other rights which the Tenant may have now or in the future to any other award to the Landlord; and (c)third, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. In no event shall Tenant have any claim against Landlord for the value of any unexpired term of this Lease. If this Lease is not terminated, Landlord shall repair any damage to the Premises caused by the condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. 14.5 WAIVER. Tenant hereby waives any statutory rights of termination which may arise by reason of any taking of the Premises under the power of eminent domain, including, without limitation, the provisions of Section 1265.130 of the California Code of Civil Procedure. ARTICLE 15 - DEFAULTS; REMEDIES 15.1 COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Premises is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. 15.2 DEFAULTS BY TENANT. Tenant shall be in default under this Lease if Tenant breaches its obligations hereunder and fails to cure such breach within the period set forth herein, except that there shall be no cure period for breaches of Sections 15.2.3 and 15.2.4, and the cure period for breaches of Section 15.2.2 shall be the minimum mandated by California statute. Tenant shall be in breach of its obligations under this Lease: 15.2.1 If Tenant abandons or vacates the Premises; 15.2.2 If Tenant fails to pay Base Monthly Rent, Additional Rent or any Rent required to be paid by Tenant, as and when due; 15.2.3 If Tenant fails or refuses to occupy and operate the Premises in accordance with Article 6; 15.2.4 If (i) Tenant's use of the Premises involves the generation or storage, use, treatment or disposal of Hazardous Material in a manner or for a purpose prohibited by any Hazardous Materials Law; (ii) Tenant has been required by any lender or governmental authority to take remedial action in connection with Hazardous Material contaminating the Premises if the contamination resulted from Tenant's action or use of the Premises; or (iii) Tenant is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material on the Premises. 15.2.5 If Tenant fails to perform any of Tenant's nonmonetary obligations under this Lease (other than Tenant's obligations under Sections 15.2.3, 15.2.4 and 15.2.6 for which there will be no additional cure periods) for a period of twenty (20) days after written notice from Landlord; provided that if such cure is not reasonably susceptible of being cured within such twenty (20) day period, Tenant shall not be in default if Tenant commences such performance within the twenty (20) day period and uses its best efforts and due diligence to promptly cure the 4/15/97 Landlord Initials: _______ 23 Tenant Initials: _______ 33 default. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Section is intended to satisfy any and all notice requirements imposed by law on Landlord prior to the commencement of an unlawful detainer action and is not in addition to any such requirement; 15.2.6 If (i)Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii)Tenant files a petition for adjudication of bankruptcy or for reorganization or rearrangement or any similar proceeding; (iii)a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed against Tenant and is not dismissed within forty-five (45) days; (iv)a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease and possession is not restored to Tenant within forty-five (45) days; or (v)substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within forty-five (45) days. If a court of competent jurisdiction determines that any of the acts described in this subsection is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the difference between the Rent (or any other consideration) paid in connection with such assignment or sublease and the Rent payable by Tenant hereunder. 15.3 REMEDIES. On the occurrence of any default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: 15.3.1 Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall have the immediate right to re-enter the Premises and remove all persons and property and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass, or becoming liable for any loss or damage which may be occasioned thereby; and Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i)the worth at the time of the award of all Base Monthly Rent, Additional Rent and other charges which were earned or were payable at the time of the termination; (ii)the worth at the time of the award of the amount by which the unpaid Base Monthly Rent, Additional Rent and other charges which would have been earned or were payable after termination until the time of the award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii)the worth at the time of the award of the amount by which the unpaid Base Monthly Rent, Additional Rent and other charges which would have been payable for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv)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, any costs or expenses incurred by Landlord in maintaining or preserving the Premises after such default, the cost of recovering possession of the Premises, expenses of reletting, including, without limitation, necessary renovation or alteration of the Premises, Landlord's reasonable attorneys' fees, and any real estate commissions or other such fees paid or payable. Any such sums which are based on percentages of income, increased costs or other data shall be reasonable estimates or projections computed by Landlord on the basis of the amounts thereof accruing during the twenty-four (24) month period immediately prior to the default, except that if it becomes necessary to compute such sums before a twenty-four (24) month period has expired, then the computation shall be made on the basis of the amounts accruing during such shorter period. As used in subsections (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, but if such rate exceeds the maximum interest rate permitted by law, such rate shall be reduced to the highest rate allowed by law under the circumstances. As used in subsection (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). If Tenant shall have abandoned the Premises, Landlord shall have the option of (a)retaking possession of the Premises and recovering from Tenant the amount specified in this Section 15.3.1, or (b)proceeding under Section 15.3.2 below; 4/15/97 Landlord Initials: _______ 24 Tenant Initials: _______ 34 15.3.2 Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. This remedy is intended to be that remedy described in California Code of Civil Procedure Section 1951.4. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Rent as it becomes due hereunder; and/or 15.3.3 Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, Landlord shall have all rights and remedies at law or in equity including, but not limited to, the right to re-enter the Premises, and Landlord shall have the right to terminate any and all subleases, licenses, concessions or other arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the Rent or other consideration receivable thereunder. 15.4 THE RIGHT TO RELET THE PREMISES. Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time without terminating this Lease, make such alterations and repairs as may be necessary in order to relet the Premises, and relet said Premises or any part thereof for such term or terms (which may be for a term extending beyond the Lease Term) and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable; upon each such reletting all rentals received by the Landlord from such reletting shall be applied, first, to the repayment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorneys' fees and of costs of such alterations and repairs; third, to the payment of Rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future Rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month are less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said Premises by Landlord shall be construed as an election on its part 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. 15.5 WAIVER OF RIGHTS OF REDEMPTION. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Premises, by reason of the violation by Tenant of any of the covenants or conditions of this Lease, or otherwise. 15.6 CUMULATIVE REMEDIES. Landlord's exercise of any right or remedy stated or set forth anywhere in this Lease shall not prevent Landlord from exercising any other right or remedy which may be provided by law, in equity or this Lease, whether or not stated in this Lease. The termination of this Lease under this Article 15 shall not release Tenant from obligations arising as a result of any acts or omissions occurring prior to such expiration or termination, including, without limitation, any indemnity obligations of Tenant and any obligations of Tenant under Article 7 of this Lease and all such obligations shall survive such termination. 15.7 ADDITIONAL REMEDIES UPON DEFAULT. In addition to any rights or remedies hereinbefore or hereinafter conferred upon Landlord under the terms of this Lease, the following remedies and provisions shall specifically apply in the event Tenant engages in any one or more of the acts contemplated by the provisions of Section15.2.6 of this Lease: 15.7.1 ASSUMPTION OR REJECTION OF LEASE. In all events, any receiver or trustee in bankruptcy shall either expressly assume or reject this Lease within sixty (60) days following the entry of an "Order for Relief" or within such earlier time as may be provided by applicable law. In the event of an assumption of this Lease by a debtor or by a trustee, such debtor or trustee shall within fifteen (15) days after such assumption (i) cure any default or 4/15/97 Landlord Initials: _______ 25 Tenant Initials: _______ 35 provide adequate assurance that defaults will be promptly cured; (ii) compensate Landlord for actual monetary loss or provide adequate assurance that compensation will be made for actual monetary loss, including, but not limited to, all attorneys' fees and costs incurred by Landlord resulting from any such proceedings; and (iii) provide adequate assurance of future performance. Where a default exists under this Lease, the trustee or debtor assuming this Lease may not require Landlord to provide services or supplies incidental to this Lease before its assumption by such trustee or debtor, unless Landlord is compensated under the terms of this Lease for such services and supplies provided before the assumption of such Lease; 15.7.2 ASSIGNMENT. The debtor or trustee may only assign this Lease if (i) it is assumed and assignee agrees to be bound by this Lease, (ii) adequate assurance of future performance by the assignee is provided, whether or not there has been a default under this Lease, and (iii) the debtor or trustee has received Landlord's prior written consent pursuant to the provisions of Section 12.1 of this Lease. Any consideration paid by any assignee in excess of the rental reserved in this Lease shall be the sole property of, and paid to, Landlord. Landlord shall be entitled to the fair market value for the Premises and the services provided by Landlord (but in no event less than the Rent reserved in this Lease) subsequent to the commencement of a bankruptcy event; 15.7.3 OTHER MATTERS. Any Security Deposit and the Additional Security given by Tenant to Landlord or Landlord's construction lender to secure the future performance by Tenant of all or any of the terms and conditions of this Lease shall be automatically transferred to Landlord upon the entry of an "Order of Relief." The parties agree that Landlord is entitled to adequate assurance of future performance of the terms and provisions of this Lease in the event of an assignment under the provisions of the Bankruptcy Code. For purposes of any such assumption or assignment of this Lease, the parties agree that the term "adequate assurance" shall include, without limitation, at least the following: (a)any proposed assignee must have, as demonstrated to Landlord's satisfaction, a net worth (as defined in accordance with generally accepted accounting principles consistently applied) in an amount sufficient to assure that the proposed assignee will have the resources to meet the financial responsibilities under this Lease, including the payment of all Rent. The financial condition and resources of Tenant are material inducements to Landlord entering into this Lease; (b)any proposed assignee must not be engaged in any business or activity which it will conduct on the Premises and which will subject the Premises to contamination by any Hazardous Materials; (c)any proposed assignee must agree in writing to be bound by all the terms and provisions of this Lease. 15.8 DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 15.9 LANDLORD'S CURE. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction or abatement of Base Monthly Rent, Additional Rent or any other Rent payable under the Lease except for any abatement specifically permitted under Article 13 of this Lease. If Tenant shall default in the performance of its obligations under this Lease, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant's part without waiving its right based upon any default of Tenant and without releasing Tenant from any obligations hereunder and Tenant shall, within fifteen (15) days after delivery by Landlord to Tenant of statements therefor reimburse Landlord for all such expenditures, losses, costs, liabilities, damages and expenses. All sums so paid by Landlord and all necessary incidental costs, and interest thereon at the Lease Interest Rate accruing from the date paid or incurred by Landlord until reimbursed to Landlord by Tenant, shall be payable to Landlord by Tenant as Rent on demand and Tenant covenants to pay all such sums. Tenant's obligations under this Sections hall survive the expiration or sooner termination of the Lease Term. ARTICLE 16 - PROTECTION OF CREDITORS 16.1 SUBORDINATION. Landlord shall have the right to require Tenant to subordinate this Lease to any 4/15/97 Landlord Initials: _______ 26 Tenant Initials: _______ 36 ground lease, deed of trust, mortgage or the Declarations encumbering the Premises, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. Landlord may, by written notice to Tenant, subordinate this Lease to any new Declarations. If any beneficiary under a deed of trust or mortgagee under a mortgage elects to have this Lease prior to the lien of its deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said deed of trust or mortgage or the date of recording thereof. As a condition to any such subordination, Landlord's lender shall provide to Tenant a commercially reasonable nondisturbance agreement (which may be part of a subordination and attornment agreement) recognizing Tenant's right to possession of the Premises so long as Tenant is not in default under this Lease beyond any applicable cure period. 16.2 ATTORNMENT. If Landlord's interest in the Premises is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, or by any other person or entity, as a result of any other transfer by Landlord, Tenant shall attorn to the transferee of or successor to Landlord's interest in the Premises and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Premises upon the transfer of Landlord's interest. 16.3 SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to effectuate or evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within ten (10) days after written request,such failure shall constitute a default under this Lease entitling Landlord to terminate this Lease. 16.4 ESTOPPEL CERTIFICATES. 16.4.1 REQUEST. Upon either party's written request ("Requesting Party"), the other party ("Responding Party") shall execute, acknowledge and deliver to the Requesting Party a written statement certifying: (i)that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii)that this Lease has not been canceled or terminated and is in full force and effect; (iii)the last date of payment of the Base Monthly Rent, and other charges and the time period covered by such payment; (iv)that the Requesting Party is not in default under this Lease (or, if the Requesting Party is claimed to be in default, stating why) and (v)such other statements as required by the Requesting Party, or any lender or prospective lender, investor or purchaser. The Responding Party shall deliver such statement to the Requesting Party within ten (10) days after the Requesting Party's request. Any such statement by the Responding Party may be given by the Requesting Party to any prospective purchaser or encumbrancer of the Premises. Such purchaser or encumbrancer may rely conclusively upon such statement as true and correct. 16.4.2 FAILURE TO RESPOND. If the Responding Party does not deliver such statement to the Requesting Party within such ten (10) day period, such failure shall constitute a default under this Lease. Further, the Requesting Party and any prospective purchaser or encumbrancer, may conclusively presume and rely upon the following facts: (i)that the terms and provisions of this Lease have not been changed except as otherwise represented by the Requesting Party; (ii)that this Lease has not been canceled or terminated except as otherwise represented by the Requesting Party; (iii)that not more than one month's Base Monthly Rent or other charges have been paid in advance; and (iv)that Landlord is not in default under this Lease. In such event, the Requesting Party shall be estopped from denying the truth of such facts. 16.5 TENANT'S FINANCIAL CONDITION. Within ten (10) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as are reasonably required by Landlord and are available to the public to verify the net worth of Tenant, or any assignee, subtenant, or guarantor of Tenant. Tenant covenants that during the term of this Lease Tenant shall maintain a minimum net worth of Ten Million Dollars ($10,000,000.00). In addition, Tenant shall deliver to any lender or proposed purchaser of the Premises or any portion of the Project designated by Landlord any financial statements required by such lender or purchaser (which are available to the public) to facilitate the sale, financing or refinancing of the Premises or any portion of the Project. Tenant represents 4/15/97 Landlord Initials: _______ 27 Tenant Initials: _______ 37 and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth herein. Each such financial statement shall be executed by Tenant and shall be certified by Tenant to be true and correct. 16.6 MORTGAGEE PROTECTION CLAUSE. Tenant agrees to give any mortgagees and/or trust deed holders, by registered mail, a copy of any notice of default served upon the Landlord, provided that prior to such notice Tenant has been notified in writing of the addresses of such mortgagees and/or trust deed holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such thirty (30) days any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. ARTICLE 17 - TERMINATION OF LEASE 17.1 CONDITION UPON TERMINATION. Upon the termination of this Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article 14 of this Lease. No act done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing and signed by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord and, notwithstanding such delivery, Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and, at the option of Landlord, shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises. 17.2 NON-REMOVAL BY TENANT. All Alterations, including signs and sign cases, made by Tenant, or made by the Landlord on the Tenant's behalf and for which Tenant has paid Landlord in accordance with this Lease, shall remain the property of the Tenant for the Lease Term. Such Alterations shall not be removed from the Premises. At the expiration or termination of this Lease Term, all such Alterations become the property of the Landlord; provided, however, Landlord may require that Tenant, at Tenant's sole cost, remove any such Alterations or utility installations at the expiration of the Lease Term and to restore the Premises to their prior condition. In removing any such Alterations as may be required by the Landlord, the Tenant shall remove any of its personal property and shall repair any damage to the Premises caused by such removal and, prior to such removal, Tenant shall post a bond or other security as may be required by the Landlord in order to insure the Landlord that the Premises will be repaired in a prompt and workmanlike manner. If Tenant fails promptly to commence and diligently pursue to completion such removal and restoration required by the provisions of this Article 17, Tenant shall pay to Landlord the cost of such removal and restoration, such cost to include a reasonable charge for Landlord's overhead. Tenant shall continue to pay Rent for the portion of the Premises not completely vacated during such time together with all costs and expenses incurred by Landlord in removing, storing and disposing of such property together with all costs and expenses of repair to and clean up of the Premises. Thereafter, Landlord may retain or dispose of in any manner the personal property not so removed, without liability to Tenant. 17.3 ABANDONED PROPERTY. Any property of Tenant not removed by Tenant upon the expiration of the Lease Term (or within two (2) days after a termination by reason of Tenant's default) shall be considered abandoned, and Landlord may remove any or all such items and dispose of the same in any manner or store the same in a public warehouse or elsewhere for the account of and at the expense and risk of Tenant. If Tenant shall fail to pay the cost of storing any such property after it has been stored for a period of thirty (30) days or more, Landlord may sell any or all of such property at public or private sale, in such manner and at such times and places as Landlord, in its sole discretion, may deem proper, without notice to or demand upon Tenant. Landlord shall apply the proceeds of such 4/15/97 Landlord Initials: _______ 28 Tenant Initials: _______ 38 sale (a)first, to the costs and expenses of such sale, including reasonable attorneys' fees actually incurred; (b) second, to the payment of the expense of or charges for removing and storing any such property; and (c) the balance to Landlord. 17.4 LANDLORD'S ACTIONS ON PREMISES. Tenant hereby waives all claims for damages or other liability in connection with Landlord's re-entering and taking possession of the Premises or removing, retaining, storing or selling the property of Tenant as herein provided, and Tenant hereby indemnifies and holds Landlord and Landlord's Indemnitees harmless from any such damages or other liability, and no such re-entry shall be considered or construed to be a forcible entry. 17.5 HOLDING OVER. Tenant shall vacate the Premises upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord and Landlord's Indemnitees against all damages incurred by Landlord from any delay by Tenant in vacating the Premises. If Tenant remains in possession of all or any part of the Premises after the expiration of the Lease Term with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only and not a renewal hereof or an extension for any further term, and in such case, Base Monthly Rent then in effect shall be increased by fifty percent (50%) and other monetary sums due hereunder shall be payable in the amount and at the time specified in this Lease, and such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein, except that the month-to-month tenancy will be terminable on thirty (30) days notice given at any time by either party. ARTICLE 18 - MISCELLANEOUS PROVISIONS 18.1 RIGHT OF FIRST REFUSAL. Commencing with the Lease Date and continuing until the Lease Term expires or is terminated, Tenant shall have the right to lease all or any portion of the office building in the Project identified as "Building C" on the site plan on the same terms and conditions that Landlord has received a bona fide offer for such a lease ("Right of First Refusal") if Landlord, in its sole and absolute discretion, elects to construct Building C. Promptly upon Landlord's receipt of a written offer to lease all or any portion of Building C, Landlord shall deliver to Tenant a copy of such offer. Landlord shall also use its reasonable, good faith efforts to inform Tenant of serious inquiries from a bona fide purchaser of the Building or, if Tenant is then an occupant of any portion of Building C, Building C. Tenant shall have five (5) Business Days after receipt of an offer in which to exercise its Right of First Refusal. If Tenant elects to exercise its Right of First Refusal, Tenant must deliver written notice to Landlord within such five (5) Business Day period stating unconditionally that Tenant will enter into a lease on the same terms and conditions as contained in the offer. If Tenant fails to exercise its Right of First Refusal or fails to timely notify Landlord within such five (5) Business Day period, then Tenant shall be deemed to have declined to exercise its right and Landlord shall be free to enter into a lease of that portion of Building C specified in the offer. In the event that Landlord does not enter into a lease which is substantially similar to the offer delivered to Tenant within six (6) months thereafter, Tenant's Right of First Refusal shall be deemed to be applicable again to any and all future bona fide offers to lease Building C received by Landlord during the Term of the Lease. Notwithstanding any other provision of this Lease, the Right of First Refusal is personal to Triteal Corporation and Triteal Corporation may not assign or otherwise transfer the Right of First Refusal to any other person or entity except in conjunction with a Transfer to an Affiliate. If a Transfer to an Affiliate is made, any and all such Affiliates (or other Affiliates pursuant to future Transfers) shall also be prohibited from assigning the Right of First Refusal to any other person or entity except in conjunction with a Transfer to another Affiliate. 18.2 SUCCESSORS; NO THIRD PARTY BENEFICIARIES. Subject to limitations expressed elsewhere in this Lease, all rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the several respective heirs, executors, administrators, successors, and assigns of the said parties; and if there shall be more than one Tenant, they shall all be bound jointly and severally by the terms, covenants and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as provided in Article 12 hereof. This Lease grants certain rights and imposes certain obligations by and between Landlord and Tenant only, and there are no third party beneficiaries of the agreement contained herein. 4/15/97 Landlord Initials: _______ 29 Tenant Initials: _______ 39 18.3 SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. 18.4 INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Premises with Tenant's expressed or implied permission. 18.5 OTHER TENANCIES. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord, in the exercise of its sole business judgment, shall determine to best promote the interest of the Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the term of this Lease, either (i)enter into a lease for any space in the Project or (ii)continue to lease any space in the Project under any lease which is in effect as of the date of this Lease, or that any tenant under any lease in effect as of the date of this Lease will not assign or transfer its interest under its lease or change the use of the premises under such lease. By executing this Lease, Tenant acknowledges that Landlord has not made any representations, warranties or statements as to any of the foregoing and agrees that the occurrence of any of the foregoing or any similar event shall not affect Tenant's obligations under this Lease. 18.6 ENTIRE AGREEMENT. Any Exhibits attached hereto shall be incorporated herein as though fully set forth herein. This Lease and the Exhibits, if any, attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions and understandings, either oral or written, between Landlord and Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or understandings, either oral, or written, between them other than are herein set forth, including the Option to Lease. Except as herein otherwise provided, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by the party to be charged with their performance. 18.7 LANDLORD'S LIABILITY. As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Premises or the leasehold estate under a ground lease of the Premises at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds previously paid by Tenant if such funds have not yet been applied under the terms of this Lease. The obligations of Landlord under this Lease do not constitute personal obligations of Landlord, or its partners, directors, employees, officers, members, managers or shareholders and Tenant shall look solely to the Project and to no other assets of Landlord for satisfaction of any liability with respect to this Lease and will not seek recourse against the partners, directors, officers, members, managers or shareholders of Landlord herein, nor against any of their personal assets for such satisfaction. 18.8 NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid or by overnight courier marked for delivery next Business Day. Notices to Tenant shall be delivered to the address specified in Item 5 of the Basic Terms, except that upon Tenant's taking possession of the Premises, the Premises shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Item 3 of the Basic Terms or such other address as may be instructed by Landlord. All notices shall be effective upon personal delivery or three (3) Business Days after deposit in the U.S. Mail or one (1) Business Day after deposit with an overnight courier. 18.9 WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of Rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without 4/15/97 Landlord Initials: _______ 30 Tenant Initials: _______ 40 notice to Tenant, negotiate such check without being bound to the conditions of such statement. 18.10 NO RECORDATION. Tenant shall not record this Lease or a memorandum hereof without prior written consent from Landlord. However, Landlord may require that a "Short Form" memorandum of this Lease be executed by both parties and recorded. 18.11 CHOICE OF LAW. The internal laws without regard to choice of law rules of the State of California shall govern this Lease. 18.12 CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he or she has full authority to do so and that this Lease binds the corporation. Concurrently with execution of this Lease, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person signing this Lease for Tenant represents and warrants that he or she is a general partner of the partnership, that he or she has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner's withdrawal or addition. Concurrently with execution of this Lease, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership. 18.13 NO PARTNERSHIP. Landlord shall not by virtue of this Lease, in any way or for any purpose, be deemed to have become a partner of Tenant in the conduct of its business, or otherwise, or joint venturer or a merger of a joint enterprise with Tenant, nor is Tenant an agent of Landlord for any reason whatsoever. 18.14 JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. 18.15 ATTORNEYS' FEES. If either party commences litigation against the other for the specific performance of this Lease, the interpretation of this Lease, for damages for the breach hereof or otherwise for enforcement of any remedy hereunder, the parties hereto agree to and hereby do waive any right to a trial by jury and, in the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the other party such costs and reasonable attorneys' fees as may have been incurred. Further, if Landlord is named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall be obligated to pay to Landlord, in addition to all other amounts for which Tenant is obligated hereunder, all of Landlord's reasonable costs and expenses incurred in connection with any such acts, including reasonable attorneys' fees. Any attorneys' fees incurred in enforcing any right of indemnity set forth in this Lease shall be recoverable and deemed to be within the scope of such indemnity and/or this attorneys' fees provision. 18.16 LENDER MODIFICATION. If, in connection with obtaining any loans including but not limited to a construction loan, permanent financing or refinancing for the Project, a lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder. 18.17 BROKERS. Except as specifically set forth herein, nothing contained herein shall impose upon Landlord any obligation to pay any commission or payment to Tenant's Broker specified in Item 12 of the Basic Terms. Landlord shall pay Landlord's Broker pursuant to a separate agreement. Landlord shall be responsible for paying a commission to Tenant's Broker in an amount equal to four percent (4%) of Base Monthly Rent due for Lease Years one through five, plus two percent (2%) of Base Monthly Rent due for Lease Years six through ten; provided, however, that such commission payable to Tenant's Broker shall be deemed earned only at the rate of fifty percent (50%) upon the mutual execution of the Lease and fifty percent (50%) upon the Commencement Date. If and to the extent Landlord owes a commission to Tenant's Broker as aforesaid, Landlord shall pay such commission fifty percent (50%) upon Landlord's obtaining a construction loan for construction of the Building, and fifty percent (50%) upon 4/15/97 Landlord Initials: _______ 31 Tenant Initials: _______ 41 the Commencement Date. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Item 12 of the Basic Terms, and that they know of no other real estate broker or agent who may be entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including, without limitation, reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of the indemnifying party's dealings with any real estate broker or agent other than that specified herein. 18.18 FORCE MAJEURE. If Landlord or Tenant cannot perform any of their obligations due to events beyond their reasonable control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Notwithstanding any provision in this Lease to the contrary, Tenant shall be required to make each and every payment of Rent in a timely fashion, and the due date for such payment shall not be extended for events of force majeure or otherwise. 18.19 TENANT OBLIGATIONS SURVIVE TERMINATION. All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the Lease Term shall, survive the expiration or earlier termination of the Lease Term, including, without limitation, all payment obligations and all obligations concerning the condition of the Premises. 18.20 TENANT'S WAIVER. Any claim which Tenant may have against Landlord for default in performance of any of the obligations herein contained to be kept and performed by Landlord shall be deemed waived unless such claim is asserted by written notice thereof to Lessor within forty-five (45) days of Tenant's knowledge of the alleged default or of accrual of the cause of action and unless suit be brought thereon within six (6) months subsequent to the accrual of such cause of action. 18.21 SUBMISSION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. LANDLORD: Dated:_____________________ MARCO PLAZA ENTERPRISES, a California general partnership By: /s/ Robert Kronick ---------------------------------------------- Name: Robert Kronick -------------------------------------------- Title: Partner ------------------------------------------- TENANT: Dated:____________________ TRITEAL CORPORATION, a Delaware corporation By: /s/ Gregory Jay White ---------------------------------------------- Name: Gregory Jay White -------------------------------------------- Title: Chief Operating Officer ------------------------------------------- By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- 4/15/97 Landlord Initials: _______ 32 Tenant Initials: _______ 42 EXHIBIT "A" Site Plan [Site Plan Graphics] 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "A" 43 EXHIBIT "B" RULES AND REGULATIONS 1. WALKWAYS. The sidewalks, roadways, and other public portions in the Project shall be used by the Tenant for the purpose solely of ingress and egress to and from the Premises of the Tenant. Tenant, its employees and agents, shall not loiter in the entrances or corridors, nor in any way obstruct the sidewalks, halls, stairways or elevators, and shall use the same only as a means of ingress and egress for the Premises. 2. CONDITIONS OF PREMISES. The Tenant shall keep the interior portion of the Premises, to include all windows, doors, and all other glass, plate fixtures, and trim in a clean condition. No improvements, additions, or materials of any kind are permitted to be placed on the outside of any of the Premises by Tenant. 3. STORAGE OF REFUSE. All waste paper, garbage and refuse shall be kept in the kind of container specified by Landlord, and shall be placed outside of the Premises in specified trash containers prepared for collection in the manner and at the times and places specified by Landlord. Landlord may implement a recycling program and in such case, Tenant shall deposit refuse in accordance with any requirements of such recycling program. If Landlord shall provide or designate a service for picking up refuse and garbage, Tenant shall use same at Tenant's cost whether billed directly or as part of Common Area Maintenance Charges. 4. AERIALS. No aerial shall be erected on the roof or exterior walls of the Premises, or within the Project, without in each instance, the written consent of the Landlord, which may be withheld in Landlord's sole discretion. Any aerial so installed without such written consent shall be subject to removal without notice at any time. 5. CONDUCT. Tenant shall conduct its business in an orderly manner in the best interests of the Project. No loudspeakers, televisions, phonographs, radios, or other devices shall be used in a manner so as to be heard or seen outside of the Premises without the prior written consent of the Landlord, which may be withheld in Landlord's sole discretion. 6. OUTSIDE AREAS. Tenant shall not place or permit any dirt or rubbish in any Common Area or any obstruction or materials in such areas, including, without limitation, inventory, costs or signage of any type or kind. No exterior storage shall be allowed without permission in writing from Landlord. 7. PARKING. Subject to the terms of the Lease, Tenant and Tenant's employees shall park only in those portions of the parking area designated for that purpose by Landlord. Landlord has the right to make changes in the parking procedures and guidelines from time-to-time, to benefit the Project, in Landlord's sole opinion. 8. PLUMBING. The plumbing facilities shall not be used for any purpose other than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant, who shall, or whose employees, agents or invitees shall have caused it. 9. FLAMMABLE MATERIALS. The Tenant shall not keep or permit to be kept on the Premises any flammable or combustible fluid, chemical, or explosive material of any kind. Tenant shall not burn any trash or garbage of any kind in or about the Premises, or the Project. 10. AUCTIONS. Tenant shall not hold any auction, fire, or bankruptcy sale in the Premises. 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "B" Page 1 of 2 44 11. NO ANIMALS. Tenant shall not bring into the Premises at the Project any animals of any type or kind, except animals necessary to assist persons with disabilities. 12. SAFES. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Project and also the times and manner of moving the same in and out of the Project. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property in any case. All damage done to any part of the Project, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility of Tenant and any expense of said damage or injury shall be borne by Tenant. 13. SAFETY PROCEDURES. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 14. PROTECTION FROM THEFT. Tenant acknowledges that Landlord may not provide any guard service or other security measures. In any event, Tenant shall assume any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 15. WAIVER BY LANDLORD. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall (i)be effective unless in writing, or (ii)be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, or (iii)prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all tenants of the Project. 16. CHANGES TO RULES. Landlord reserves the right from time to time to amend or supplement the foregoing rules and regulations, and to adopt and promulgate additional rules and regulations applicable to the Premises. Notice of such rules and regulations and amendments and supplements thereto, if any, shall be given to the Tenant and Tenant agrees to comply with all such rules and regulations upon receipt of notice. Landlord shall not be liable in any way to Tenant for any damage or inconvenience caused by any other tenant's non-compliance with these rules and regulations. 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "B" Page 2 of 2 45 EXHIBIT "C" WORK LETTER AGREEMENT MARCO PLAZA ENTERPRISES, a California general partnership ("Landlord") and TRITEAL CORPORATION, a Delaware corporation ("Tenant") as of this ______ day of _________________, 199____, are executing simultaneously with this Work Letter Agreement ("Work Letter"), a written lease (the "Lease") covering the Premises described in the Lease. This Work Letter defines the scope of Improvements (as defined below) which Landlord shall be obligated to construct or install. If there is a conflict between the terms and provisions of this Work Letter and the Lease, this Work Letter shall control. Terms which have initial capital letters and are not otherwise defined in this Work Letter shall have the meaning set forth in the Lease. This Work Letter is a part of the Lease and shall be subject to all of its terms and conditions, including all definitions contained therein. In consideration of the mutual covenants hereinafter contained, Landlord and Tenant mutually agree as set forth below. SECTION 1 - IMPROVEMENTS; PLANNING AND DOCUMENTS 1.1 CONSTRUCTION. Landlord agrees to furnish all of the material, labor and equipment as may be reasonably necessary for the construction of the Improvements (as defined below) in a good and workmanlike manner in substantial conformance with the Shell Plans and Specifications (as defined below) and the T.I. Plans and Specifications (as defined below) and in compliance with all covenants, conditions and restrictions to which the Land is subject and all applicable building laws, ordinances, orders, rules, regulations and requirements of any governmental agency having jurisdiction over the development of the Land. Landlord shall use its reasonable efforts to achieve Substantial Completion of the Improvements by the Target Commencement Date. 1.1.1 IMPROVEMENTS. "Improvements" shall mean the Building and all improvements, machinery, equipment, fixtures and other property, real, personal or mixed (excepting Tenant's trade fixtures, machinery and equipment) installed or constructed on the Land or in the Building by Landlord (including, without limitation, Common Area, Site Amenities, and other site improvements and landscaping), together with all additions, alterations and replacements thereof. Improvements shall include the Shell Improvements (as defined below) and Tenant Improvements (as defined below) constructed by Landlord. 1.1.2 LAND. "Land" shall mean that portion of the Project upon which Landlord shall construct the Building and the portions of the Common Area as required pursuant to this Lease. 1.2 SHELL IMPROVEMENTS. 1.2.1 SHELL DEFINITIONS. 1.2.1.1 EXTERIOR BUILDING FINISHES. "Exterior Building Finishes" shall mean the exterior building finish materials to be incorporated into the Building, a list of which is attached hereto as Schedule 3 and which Landlord and Tenant have reviewed and mutually believe will fall within the Twenty-Two Dollars ($22.00) per square foot of exterior Building skin area as contemplated by the approved Preliminary Plans and Specifications. 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 1 of 14 46 1.2.1.2 PRELIMINARY PLANS AND SPECIFICATIONS. "Preliminary Plans and Specifications" shall mean those preliminary plans and specifications for the Shell Improvements, prepared by Brian Paul and Associates, Architects and Planners ("Building Architect"), which describe and depict the site plan and Common Area within the Building and certain preliminary exterior elevation improvements, and which are referenced and/or described on Schedule 2 attached hereto. 1.2.1.3 SHELL CONSTRUCTION DRAWINGS. "Shell Construction Drawings" shall mean 1/4 or 1/8 scale construction drawings for the Shell Improvements containing all information reasonably necessary to construct the Shell Improvements, which drawings shall be reasonably consistent with the Preliminary Plans and Specifications and shall incorporate the selected Exterior Building Finishes. 1.2.1.4 SHELL IMPROVEMENTS. "Shell Improvements" shall mean a three-story office building of steel frame construction with finishes as may be required by the City of Carlsbad for a building shell final inspection and mutually acceptable to Landlord and Tenant pursuant to the terms hereof, including two finished elevators and an elevator lobby on each floor, fire sprinkler systems (distributed with heads required for building shell final inspection by the City of Carlsbad), emergency stairway exits, central plant for HVAC system and an HVAC water loop for each floor, finished restrooms on each floor, finished Common Area for fire exiting on the ground floor and finished lobby of the ground floor from the front of the Building entrance to the Building core and finished Common Area corridors on each floor, all such improvements to be reasonably comparable to "Class A" standards of a suburban office building, and substantially in conformance with the Office Building-Outline Specifications dated January 17, 1997, attached hereto as Schedule 1. Shell Improvements shall include the Site Amenities and those components of the Premises which are identified in the Preliminary Plans and Specifications as elements of the basic Building shell, or more specifically as "Shell Improvements," land, land preparation, landscaping and all necessary utilities stubbed to the Building, or as otherwise mutually identified by Landlord and Tenant, in writing. 1.2.1.5 SHELL PLANS AND SPECIFICATIONS. "Shell Plans and Specifications" shall mean collectively the Preliminary Plans and Specifications, the Exterior Building Finishes Plans, the Shell Construction Drawings, and all related plans, drawings, specifications and notes developed or prepared in connection therewith. 1.2.2 PREPARATION OF SHELL IMPROVEMENT DOCUMENTS. Landlord and Tenant have approved the Preliminary Plans and Specifications, including the size, location and design of the Site Amenities. Any material changes to the size, location or design of the Size Amenities shall be subject to Tenant's prior written approval, which approval shall not be unreasonably withheld or delayed. 1.2.2.1 EXTERIOR FINISHES. The Building will have a mutually agreed upon Exterior Building Finish materials such as limestone, metal paneling, brick veneer, glass, or granite near the entryway to conform to or be compatible with the overall architectural theme for the Project as determined by Landlord. Tenant acknowledges that Landlord has negotiated and agreed upon the Base Monthly Rent and other economic terms and conditions of this Lease based upon the assumption that the cost of the Exterior Building Finishes to be incorporated into the Building are estimated to be Twenty-Two Dollars ($22.00) per square foot of Building exterior skin area as set forth on Schedule3. Within ten (10) days after the Lease Date, two (2) or more of the Exterior Building Finishes shall be selected by Landlord and reviewed by Tenant for inclusion in the Shell Improvements. Should either Landlord or Tenant select Exterior Building Finishes from Schedule 3 attached hereto whose estimated composite costs exceed Twenty-Two Dollars ($22.00) per square foot of exterior Building skin area, such excess cost shall be at the selecting parties' expense based on such estimated costs, without regard to whether or not the actual cost of construction of such selected materials is less than or greater than the estimated cost set forth on Schedule 3. 1.2.2.2 INPUT. Tenant will have input into the colors, materials and quality of all 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 2 of 14 47 Common Area finishing. Landlord will reasonably consider such input in making its final determination of such colors, materials and quality of Common Area finishing. Tenant will provide any such input within five (5) days of Landlord's notice of an opportunity to do so. 1.2.2.3 PROCESS. The approval of the Exterior Building Finishes to be included in the Shell Improvements shall be subject to Tenant's review and approval, which approval shall not unreasonably withheld or delayed. Tenant shall respond in writing to Landlord within five (5) days of receipt of any selection of Exterior Building Finishes, specifying its approval or reasonable changes to the materials selected, if any. Failure of Tenant to respond within said five (5) day period shall be deemed Tenant's approval of Landlord's selection of Exterior Building Finishes so submitted. If Tenant requests revisions to the Exterior Building Finishes selected in conformance with the terms of this Work Letter, Landlord shall incorporate such reasonable revisions subject to Tenant's agreement to pay any excess estimated composite costs as set forth above. 1.2.2.4 SHELL CONSTRUCTION DRAWINGS. As soon as is reasonably practicable following the designation of the Exterior Building Finishes, Landlord shall prepare the Shell Construction Drawings in substantial conformance with the Preliminary Plans and Specifications and incorporating the approved Exterior Building Finishes. 1.3 TENANT IMPROVEMENTS. 1.3.1 TENANT DEFINITIONS. 1.3.1.1 DESIGN DEVELOPMENT DRAWINGS. "Design Development Drawings" shall mean reasonably detailed preliminary construction drawings for the Tenant Improvements, which drawings shall be reasonably consistent with the approved Schematic Design Drawings. 1.3.1.2 SCHEMATIC DESIGN DRAWINGS. "Schematic Design Drawings" shall mean reasonably detailed and dimensioned 1/8 scale preliminary schematic design drawings for the Tenant Improvements, which drawings are reasonably consistent with the approved Space Plan. 1.3.1.3 SPACE PLAN. "Space Plan" shall mean a floor by floor layout designation of all counters, fixtures, demising walls and partitions, and other equipment to be included in the Building as the Tenant Improvements. The Space Plan shall be prepared by the Futas Design Group or as otherwise selected by Tenant in its reasonable discretion. 1.3.1.4 TENANT IMPROVEMENTS. "Tenant Improvements" shall mean all those portions of the Premises which are identified in the Space Plan and which are the responsibility of Landlord's Contractor, or as otherwise mutually identified by Landlord and Tenant, in writing. The Tenant Improvements shall be based on the approved Space Plan. 1.3.1.5 T.I. CONSTRUCTION DRAWINGS. "T.I. Construction Drawings" shall mean 1/4 or 1/8 scale construction drawings for the Tenant Improvements containing all information reasonably necessary to construct the Tenant Improvements, which drawings shall be reasonably consistent with the approved Design Development Drawings. 1.3.1.6 T.I. PLANS AND SPECIFICATIONS. "T.I. Plans and Specifications" shall mean collectively the Space Plan, Schematic Design Drawings, Design Development Drawings, and T.I. Construction Drawings, and all related plans, drawings, specifications and notes developed or prepared in connection therewith. 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 3 of 14 48 1.3.2 PLANNING; PREPARATION OF TENANT IMPROVEMENT DOCUMENTS. 1.3.2.1 SPACE PLAN. Concurrently with the execution of this Work Letter, Tenant shall cause the Space Plan to be prepared in accordance with this Work Letter. Landlord will have the right to reasonably review and approve the draft Space Plan. Tenant shall submit the proposed Space Plan to Landlord for Landlord's review and approval, which approval shall not be unreasonably withheld or delayed. Landlord shall respond in writing to Tenant within ten (10) days of receipt of any portion of the Space Plan specifying its approval or reasonable changes to the plans submitted, if any. Failure of Landlord to respond within said ten (10) day period shall be deemed Landlord's approval of the Space Plan so submitted. If Landlord requests reasonable revisions to the Space Plan in conformance with the terms of this Lease, Tenant shall revise said documents and resubmit them to Landlord for its review and approval. Failure of Landlord to respond within ten (10) days shall be deemed Landlord's approval on the revised Space Plan so submitted. The foregoing process shall continue until the Space Plan is approved. Notwithstanding any provision in this Work Letter to the contrary, Tenant shall be responsible for producing a final Space Plan approved by Landlord no later than May 23, 1997. Tenant acknowledges that Landlord is relying on Tenant's timely delivery of the final approved Space Plan in order to allow Landlord to Substantially Complete the Premises by the Target Commencement Date. Accordingly, for each day which passes after the foregoing date and before an approved Space Plan is delivered to Landlord, the Target Commencement Date shall be delayed the same number of days. 1.3.2.2 SCHEMATIC DESIGN DRAWINGS. As soon as is reasonably practicable following Landlord's approval of the Space Plan, Tenant shall submit to Landlord proposed Schematic Design Drawings. The Schematic Design Drawings shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld or delayed. Landlord shall respond in writing to Tenant within ten (10) days of receipt of any portion of the Schematic Design Drawings specifying its approval or disapproval thereof. Landlord may only disapprove proposed Schematic Design Drawings if they do not substantially conform to the approved Space Plan. If Landlord disapproves any portion of the Schematic Design Drawings, then Landlord shall, timely and specifically and in writing, (a) approve those portions which are acceptable to Landlord, and (b)disapprove those portions which are not acceptable to Landlord, specifying the reasons for such disapproval and describing in detail the change Landlord requests for each item disapproved. Failure of Landlord to respond within said ten (10) day period shall be deemed Landlord's approval of the Schematic Design Drawings so submitted. In the event the Schematic Design Drawings have been disapproved by Landlord, and Tenant and Landlord are unable to resolve Landlord's disapproval after good faith efforts to do so over a period of ten (10) Business Days after delivery of Landlord's notice disapproving Schematic Design Drawings, Landlord and Tenant shall submit their disagreement to the dispute resolution procedure described in Section 1.3.2.5 below. 1.3.2.3 DESIGN DEVELOPMENT DRAWINGS. As soon as is reasonably practicable following approval of the Schematic Design Drawings, Tenant shall submit to Landlord proposed Design Development Drawings. The Design Development Drawings shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld or delayed. Landlord shall respond in writing to Tenant within ten (10) days of receipt of any portion of the Design Development Drawings. Landlord may only disapprove proposed Design Development Drawings if they do not substantially conform to the approved Schematic Design Drawings. If Landlord disapproves any portion of the Design Development Drawings, then Landlord shall, timely and specifically and in writing, (a) approve those portions which are acceptable to Landlord, and (b) disapprove those portions which are not acceptable to Landlord, specifying the reasons for such disapproval and describing in detail the change Landlord requests for each item disapproved. Failure of Landlord to respond within said ten (10) day period shall be deemed Landlord's approval of the Design Development Drawings so submitted. In the event the Design Development Drawings have been disapproved by Landlord, and Tenant and Landlord are unable to resolve Landlord's disapproval after good faith 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 4 of 14 49 efforts to do so over a period of ten (10) Business Days after delivery of Landlord's notice disapproving the Design Development Drawings, Landlord and Tenant shall submit their disagreement to the dispute resolution procedure described in Section 1.3.2.5 below. 1.3.2.4 T.I. CONSTRUCTION DRAWINGS. As soon as is reasonably practicable following approval of the Design Development Drawings, Tenant shall submit to Landlord proposed T.I. Construction Drawings. The T.I. Construction Drawings shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld or delayed. Landlord shall respond in writing to Tenant within ten (10) days of receipt of any portion of the T.I. Construction Drawings. Landlord may only disapprove the T.I. Construction Drawings if they do not substantially conform to the approved Design Development Drawings. If Landlord disapproves any portion of the T.I. Construction Drawings, then Landlord shall, timely and specifically and in writing, (a) approve those portions which are acceptable to Landlord, and (b) disapprove those portions which are not acceptable to Landlord, specifying the reasons for such disapproval and describing in detail the change Landlord requests for each item disapproved. The failure of Landlord to respond within said ten (10) day period shall be deemed Landlord's approval of the T.I. Construction Drawings so submitted. In the event the T.I. Construction Drawings have been disapproved by Landlord, and Tenant and Landlord are unable to resolve Landlord's disapproval after good faith efforts to do so over a period of ten (10) Business Days after delivery of Landlord's notice disapproving the T.I. Construction Drawings, Landlord and Tenant shall submit their disagreement to the dispute resolution procedure described in Section 1.3.2.5 below. Notwithstanding any provision of this Work Letter to the contrary, Tenant shall be responsible for delivering final T.I. Construction Drawings approved by Landlord no later than August 1, 1997. Tenant acknowledges that Landlord is relying on Tenant's timely delivery of the final approved T.I. Construction Drawings in order to allow Landlord to timely deliver the Premises on the Target Commencement Date. Accordingly, for each day which passes after the foregoing date and before approved T.I. Construction Drawings are delivered to Landlord, the Target Commencement Date shall be delayed the same number of days. 1.3.2.5 DESIGN DISPUTES. In the event Landlord and Tenant are unable to resolve Landlord's disapproval of a phase of the development of the T.I. Plans and Specifications as described in Sections 1.3.2.2, 1.3.2.3, and 1.3.2.4 above (a "Design Dispute"), they shall resolve those differences through the binding arbitration of a neutral third-party in accordance with this provision. In the event of a Design Dispute, Landlord and Tenant shall meet within three (3) days to make a good faith attempt to mutually appoint a single party who shall be a licensed architect ("Arbitrating Architect"), with not less than ten (10) years experience in commercial and industrial architecture and who is not then employed or otherwise previously affiliated with either party, to arbitrate their differences and resolve the Design Dispute. If Landlord and Tenant are unable to agree upon a single Arbitrating Architect, then each shall, within two (2) Business Days after the meeting, select an architect that meets the foregoing qualifications. The two (2) architects so appointed shall, within two (2) Business Days after their appointment, appoint a third architect meeting the foregoing qualifications who shall serve as the Arbitrating Architect. If the two (2) architects so selected cannot agree on the selection of the Arbitrating Architect within the time above specified, then either party, on behalf of both parties, may request appointment of the Arbitrating Architect by the Presiding Judge of the San Diego Superior Court. The procedures for arbitrating and resolving the Design Dispute shall be established by the Arbitrating Architect in a manner designed to promptly resolve the Design Dispute. The determination of the Arbitrating Architect shall be limited solely to the issue of the Design Dispute and shall be made within ten (10) Business Days of its submission by the parties for arbitration. The decision of the Arbitrating Architect shall be binding on both parties. The cost of the arbitration, including, without limitation, attorneys' fees and costs, witness fees, expert witness fees, and costs of the arbitration proceeding, may be awarded by the Arbitrating Architect to the prevailing party. The non-prevailing party shall be charged with any time delays caused by the Design Dispute. In the event of any judicial enforcement or confirmation proceeding relating to an arbitration award for a Design Dispute, the prevailing party shall be entitled to recover from the other party all related costs, including reasonable attorneys' fees and costs. 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 5 of 14 50 1.3.2.6 OWNERSHIP. Notwithstanding the fact that Tenant is responsible for developing all phases of the approved T.I. Plans and Specifications, the parties have agreed that, by execution hereof, Tenant is assigning to Landlord all of Tenant's right, title and interest in and to the ownership of the T.I. Plans and Specifications. 1.4 BUILDING PERMITS. Landlord shall be responsible for obtaining from any relevant and jurisdictional governmental authority all governmental approvals necessary for the construction of the Shell Improvements, including a building permit. Tenant shall be responsible for obtaining from any relevant and jurisdictional governmental authority all governmental approvals necessary for the construction of the Tenant Improvements, including a building permit. Landlord shall be responsible for the payment of the building permit fees for the Shell Improvements and, pursuant to the Tenant Improvement Allowance and/or the Tenant Contingency Allowance, Landlord shall also be responsible for the payment of the building permit fees for the Tenant Improvements. If a change to the approved Shell Plans and Specifications or T.I. Plans and Specifications is required by any governmental authority as a condition to obtaining a building permit, such change shall be made to the Shell Plans and Specifications and/or T.I. Plans and Specifications and deemed to have been approved by Landlord and/or Tenant, as appropriate. Any change to the approved Shell Plans and Specifications which is not mandated by a governmental authority shall be subject to Tenant's reasonable review and approval. Tenant shall negotiate in good faith for the allocation of any increase in construction costs due to such a change. The costs associated with any such changes related to the Shell Improvements shall be Landlord's responsibility and related to the Tenant Improvements shall be Tenant's responsibility. The parties shall cooperate with each other as may be reasonably necessary to obtain the building permit and any and all other permits, as appropriate. Notwithstanding any provision of this Work Letter or the Lease to the contrary, Tenant shall obtain the necessary building permits for the approved T.I. Plans and Specifications no later than November 7, 1997. Tenant acknowledges that Landlord is relying upon Tenant's timely acquisition of the Tenant Improvements building permits so that Landlord may Substantially Complete the Premises by the Target Commencement Date. Accordingly, for each day which passes after the foregoing date and before all building permits for the Tenant Improvements are obtained and delivered to Landlord, the Target Commencement Date shall be delayed the same number of days. 1.5 CONDITION OF PREMISES: LIMITATION. Except as specifically provided in this section, Landlord makes no warranties or representations with regard to the Premises or the Improvements, or any portion thereof, and Tenant shall accept the Premises in the condition in which they are delivered on the Commencement Date; provided, however, that the Premises shall be constructed in substantial conformance with the approved T.I. Plans and Specifications and in accordance with all applicable laws then in effect. Landlord makes no warranty to Tenant regarding any other aspect of the Improvements or the Premises, including but not limited to, any patent or latent defects, which Tenant expressly waives any rights to make claims therefore; provided, however, that Landlord hereby assigns to Tenant on a nonexclusive basis all guarantees and warranties from any contractors, subcontractors, materialmen and suppliers which provide construction, labor or materials to the Premises. 1.6 APPROVALS. After Landlord's approval of any of the T.I. Plans and Specifications and/or Tenant's approval of the Exterior Building Finishes, no significant changes, modifications or alterations may be made without the prior written consent of both Landlord and Tenant; provided, however, if any changes are required (i) by any governmental agency with jurisdiction over the Project, (ii) as a result of field conditions, or (iii) to substitute reasonably equivalent materials to avoid unanticipated delays, strikes or shortages, then Landlord shall be authorized to make such changes. The costs of any such changes to the T.I. Plans and Specifications are to be included within the Total Cost (as hereinafter defined). Any changes to the T.I. Plans and Specifications and/or the Exterior Building Finishes Plans after approval thereof, other than any changes required under Subsections (i), (ii) and (iii) above, shall constitute a Change Order (as hereinafter defined). 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 6 of 14 51 1.7 COSTS. All costs and fees associated with the preparation of the Shell Plans and Specifications, including, without limitation, all consultant or subcontractor design fees, and all costs of constructing the Shell Improvements shall be borne solely by Landlord, except as expressly set forth herein. Notwithstanding the foregoing, in the event Tenant selects Exterior Building Finishes pursuant to Section 1.3.1 above whose estimated composite costs as set forth on Schedule 3 exceed Twenty-Two Dollars ($22.00) per square foot of Building exterior skin area, such excess costs may be paid in a lump cash sum by Tenant or, up to the amount set forth herein, be subject to the Tenant Contingency Allowance set forth in Section 3.2 below. Shell Plans and Specifications shall be prepared by the Building Architect and other consultants selected by Landlord in its sole discretion. T.I. Plans and Specifications shall be prepared by Futas Design Group and other consultants selected by Tenant and reasonably approved by Landlord. SECTION 2 - TENANT IMPROVEMENTS 2.1 TENANT IMPROVEMENTS. The Tenant Improvements are and shall remain Landlord's property and shall be surrendered to Landlord upon expiration or earlier termination of the Lease in accordance with the provisions of the Lease. 2.2 PREMISES FURNISHINGS. It is expressly understood that Landlord's obligation to construct Tenant Improvements in the Premises is limited to construction of the Tenant Improvements specifically contemplated by the T.I. Plans and Specifications. Tenant shall be solely responsible for the performance and expense of the design, layout, provision, delivery and installation of any furniture, furnishings, equipment, and any other personal property Tenant will use at the Premises. In arranging for the performance of any of the work referred to in the preceding sentence, Tenant shall be permitted to enter the Premises only upon the prior consent of Landlord and shall adopt a schedule in conformance with the schedule(s) of Landlord's Contractor (as hereinafter defined) and conduct its work in such a manner as to maintain harmonious labor relations so as not to interfere unreasonably with or delay the work of Landlord's contractors in substantially completing the Tenant Improvements. SECTION 3 - TENANT IMPROVEMENT ALLOWANCE 3.1 TENANT IMPROVEMENT ALLOWANCE. Landlord has agreed to contribute a one-time tenant improvement allowance for the cost of preparing the T.I. Plans and Specifications related to Tenant Improvements and toward the cost of constructing the Tenant Improvements, including any necessary permits and demolition work in an amount up to the amount specified in Item 15 of the Basic Terms of the Lease ("Tenant Improvement Allowance"). The Tenant Improvement Allowance is based on the Usable square feet of the Premises, and the calculation of usable square feet for the Premises shall be mutually agreed to by the Building Architect and Futas Design Group. Tenant shall be solely responsible for any and all costs of constructing the Tenant Improvements in excess of the Tenant Improvement Allowance pursuant to the provisions of Section 3.2 and Section 3.3 below. The total of all costs incurred by Landlord in connection with the design and construction of the Tenant Improvements shall be referred to as the "Total Costs." 3.1.1 ALLOCATION. Notwithstanding Section 3.1 above, the parties have agreed that certain portions of Tenant Improvement Allowance may only be used for certain portions of the Tenant Improvements. Such allocations are as follows: (a) a minimum of Twenty-Two Dollars ($22.00) per usable square foot of the Tenant Improvement Allowance shall be used for building standard tenant improvements as described on Schedule 4 attached hereto and incorporated herein; (b) a maximum of Two Dollars Fifty Cents ($2.50) per Usable square foot of the Tenant Improvement Allowance shall be used for architecture and engineering fees; (c) a maximum of One Dollar ($1.00) per Usable square foot of the Tenant Improvement Allowance shall be used for fees and permits related to the Tenant Improvements; and (d)the remainder of the Tenant Improvement Allowance shall be used for Tenant Improvements which are more expensive than building standard and for other upgrades to the Shell Improvements, or, 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 7 of 14 52 a combination thereof, as Tenant requests in its sole discretion. Portions of the Tenant Improvement Allowance may be utilized for nonbuilding standard Tenant Improvements and other upgrades to the Shell Improvements if and only if Tenant incorporates such requests into the Exterior Building Finishes or the Space Plan, as appropriate, prior to their initial approval. 3.1.2 COMMON AREA. Notwithstanding Sections 3.1 and 3.1.1 above, Tenant has agreed to apply Fifty Thousand Dollars ($50,000) of the Tenant Improvement Allowance to reimburse Landlord for constructing and finishing the Common Area corridors in the Building, the lobby on the ground floor of the Building, and the fire exit corridors on each floor of the Building to Class "A" suburban office building standards (as reasonably determined by the Building Architect and reflected in the approved Shell Plans and Specifications). 3.2 TENANT CONTINGENCY ALLOWANCE. In the event Tenant selects Exterior Building Finishes which are in excess of the assumed costs as set forth in Section 1.2.2.1 above, and Tenant elects to not pay such excess in a cash lump sum to Landlord upon Substantial Completion of the Premises, and/or the actual cost of the Tenant Improvements exceeds either the total Tenant Improvement Allowance or the specific allocations set forth in Section 3.1.1 above (collectively, the "Excess Costs"), Landlord has agreed to advance payment towards the Excess Costs in an amount up to the amount of the Tenant Contingency Allowance specified in Item 16 of the Basic Terms of the Lease. In such event, Tenant shall repay to Landlord as Additional Rent the amount of the Tenant Contingency Allowance paid by Landlord. Such repayment of the Tenant Contingency Allowance shall be at the rate of One and Forty-Three Hundredths Cents ($0.0143) per Rentable square foot per month in the Premises for each One Dollar ($1.00) per Rentable square foot in the Premises of Excess Cost paid by Landlord, and adding the resulting monthly amount to the Base Monthly Rent due hereunder. For example, and not by way of limitation, if Tenant selected Exterior Building Finishes the cost of which exceeded the Twenty-Two Dollars ($22.00) per square foot of Building skin area budget by Fifty-One Thousand Dollars ($51,000.00), which Fifty-One Thousand Dollars ($51,000.00) were the total Excess Cost, then the Base Monthly Rent due hereunder would be increased by One and Forty-Three Hundredths Cents ($0.0143) per Rentable square foot per month (because such Excess Cost is equal to One Dollar ($1.00) per Rentable square foot of Premises). 3.3 COST OF TENANT IMPROVEMENT WORK. 3.3.1 OBTAINING COST QUOTATION. Landlord shall retain a contractor, acceptable to Landlord in its sole discretion ("Contractor"), as contractor for the Tenant Improvements. The Contractor may be an affiliate of Landlord or any of its partners. Within ten (10) days after Landlord's approval of the T.I. Construction Documents, Landlord shall provide to Tenant the cost of the Tenant Improvements ("Cost Quotation") based upon the approved T.I. Construction Documents. Landlord will require the Contractor to competitively bid all major subtrades for the Tenant Improvements construction. Landlord will provide copies of such bids and make a recommendation to select a particular bidder for review by Tenant. Landlord and Tenant will mutually agree on the selection of each subtrade vendor based on such competitive bids; provided, however, Landlord or Contractor shall not be required to include the lowest bid for any particular trade in the Cost Quotation if, in Landlord's or Contractor's reasonable judgment, a higher bid is more desirable for the quality of, or the timeliness in completing, the Tenant Improvements or other qualitative considerations such as the subtrade vendor's prior experience and availability. If Landlord and Tenant are not able to mutually agree on each major subtrade vendor, Landlord's selection shall be binding for all such subtrades except finish trades such as millwork, wall coverings, and carpet, for which Tenant's selection shall be final. Notwithstanding the foregoing, neither Landlord nor Tenant shall be permitted to select any major subtrade vendor whose costs exceed the lowest subtrade vendor by more than five percent (5%) unless and until the other party mutually agrees. 3.3.2 APPROVAL OF COST QUOTATION BY TENANT. Tenant shall, within five (5) Business Days of 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 8 of 14 53 receipt thereof, either: (i) agree in writing to pay the cost by which the Cost Quotation exceeds the sum of the Tenant Improvement Allowance and the Tenant Contingency Allowance ("Additional Cost"), or (ii) revise the T.I. Construction Documents or Space Plan so that the Cost Quotation is either (a) no more than the Tenant Improvement Allowance plus Tenant Contingency Allowance, or (b) in excess of the Tenant Improvement Allowance plus Tenant Contingency Allowance by the amount of Additional Cost which Tenant agrees to pay. If Tenant elects to revise the T.I. Construction Documents in order to reduce the Cost Quotation, the period of time between Tenant's election to revise the T.I. Construction Documents and the approval of the revised T.I. Construction Documents by Tenant shall constitute a Tenant Delay (as defined below). If the sum of the Cost Quotation plus the amounts described in Section 3.1.1(b) and 3.1.1(c) is less than the maximum Tenant Improvement Allowance set forth in the Basic Terms, the Tenant Improvement Allowance shall be deemed to be an amount equal to such sum. The failure of Tenant to respond within the five (5) Business Day period shall be a Tenant Delay. Upon approval by Tenant, Landlord shall be authorized to proceed with the Improvements in accordance with the approved T.I. Construction Documents. All costs of revising the T.I. Construction Documents, including, without limitation, re-engineering, estimating, printing of drawings, costs of any space planner, architect, engineering consultants and other consultants and any other incidental expenses, shall be chargeable against the Tenant Improvement Allowance and includable in the Total Cost. 3.4 LANDLORD COSTS FOR TENANT IMPROVEMENTS. All costs incurred by Landlord in connection with (a) the design, construction and installation of the Tenant Improvements, (b) any demolition or modification of any existing improvements as may be necessary to accomplish construction of the Tenant Improvements in conformance with the T.I. Construction Documents, or (c) any other measures taken by Landlord which may be reasonably required to accomplish Landlord's construction of the Tenant Improvements, including but not limited to Landlord's procurement of bonds, insurance policies and governmental permits, and shall be charged against the Tenant Improvement Allowance and included within the Total Cost; provided, however, that the cost of such construction insurance policy shall be fixed at one percent (1%) of the Total Cost for the Tenant Improvements. 3.5 TENANT COSTS FOR TENANT IMPROVEMENTS. Tenant shall deliver to Landlord at least twenty (20) days prior to the commencement of construction of the Tenant Improvements cash equal to one hundred percent (100%) of the amount of the Additional Costs. Tenant shall be solely responsible for all Additional Costs. SECTION 4 - CONSTRUCTION OF TENANT IMPROVEMENTS 4.1 COMMENCEMENT OF CONSTRUCTION. Landlord intends to arrange for the Commencement of Construction to occur on or before November 1, 1997. If Commencement of Construction does not occur on or before November 1, 1997, Landlord shall not in any event be liable to Tenant for damages as a result thereof but Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by delivering written notice thereof to Landlord by on or before November 5, 1997. If Tenant fails to deliver such notice of termination by on or before November 5, 1997, such right to terminate shall be deemed waived and the Lease shall continue in full force and effect. 4.2 CONSTRUCTION OF TENANT IMPROVEMENTS. After approval of the T.I. Construction Documents, Landlord's Contractor shall use its diligent efforts to Substantially Complete (as defined below) the Tenant Improvements on or before the Target Commencement Date set forth in the Lease. Landlord shall enter into a construction contract with Contractor which contains a guaranteed delivery date for the Tenant Improvements, including a \liquidated damage penalty provision, such date of delivery to be established after approval of the final T.I. Construction Drawings and subject to events of force majeure. Such construction contract with the Contractor shall specify that the cost of the general conditions for the Improvements shall be four percent (4%) of the cost of construction, and shall specify a profit for the Tenant Improvements of four percent (4%) of the sum of the cost of construction and general conditions. 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 9 of 14 54 4.3 COMPLETION OF TENANT IMPROVEMENTS. Landlord shall be responsible for the construction of the Tenant Improvements in substantial conformance with the approved T.I. Construction Documents. Upon Substantial Completion (as defined below) of the Tenant Improvements, Landlord shall provide a "punchlist" identifying the corrective work of the type commonly found on an architectural punchlist with respect to the Tenant Improvements, which list shall be in Landlord's reasonable discretion based on whether such items were required by the approved T.I. Construction Documents. Within ten (10) Business Days after delivery of the punchlist, Landlord shall commence the correction of punchlist items and diligently pursue such work to completion within thirty (30) days after Substantial Completion. The punchlist procedure to be followed by Landlord and Tenant shall in no way limit Tenant's obligation to occupy the Premises under the Lease nor shall it in any way excuse Tenant's obligation to pay Rent as provided under the Lease, unless such punchlist items reasonably precludes Tenant from occupying the Premises, as reasonably determined by Landlord and Tenant. 4.4 MONTHLY REPORTS; SITE MEETINGS. Landlord shall provide to Tenant monthly progress reports describing the condition and estimated schedule for completing the Tenant Improvements ("Monthly Reports"). Landlord shall include in the Monthly Report a comparison of then-known actual costs of the Tenant Improvements compared to the estimated cost as reflected in the approved Cost Quotation. In no event shall the Monthly Reports be deemed to be a representation, warranty or an assurance by Landlord of the date of Substantial Completion or the Total Cost of the Tenant Improvements and Tenant specifically acknowledges that the Monthly Report is only an estimate by Landlord based on information provided to Landlord. Landlord shall have no liability or responsibility for any errors or inaccuracies in a Monthly Report. In addition, Landlord and Tenant shall coordinate on-site meetings of construction personnel as reasonably appropriate in order to implement the construction described in this Work Letter. 4.5 SUBSTANTIAL COMPLETION. "Substantial Completion" or "Substantially Completed" as used herein shall mean both (a) delivery of written notice to Tenant of the completion of construction of the Tenant Improvements in the Premises pursuant to the approved T.I. Construction Documents with the exception of minor details of construction installation, decoration, or mechanical adjustments and punchlist items as certified to by Landlord, and (b) the issuance by the City of Carlsbad of a final inspection approval, certificate of occupancy, a temporary certificate of occupancy or some other authorization or Tenant has occupied and obtained the beneficial use of the Premises. Substantial Completion shall be deemed to have occurred notwithstanding the requirement to complete "punchlist" items or similar corrective work. Tenant agrees that if Landlord shall be delayed in causing such work to be Substantially Completed as a result of any of the events as defined below (referred to herein as a "Tenant Delay"), then such delay shall be the responsibility of Tenant, and will result in the Commencement Date of the Term being the earlier of: (i) Tenant's opening of the Premises for business; (ii) the date of Substantial Completion or (iii) the date when Substantial Completion would have occurred if there had been no Tenant Delay, providing that Landlord shall not be required to work on an overtime basis in order to bring the Premises to Substantial Completion. For the purposes of this Work Letter, a Tenant Delay is defined as follows: (a) Tenant's failure to comply with any time frames set forth herein or in the Lease, (b) any changes in any stage of the T.I. Plans and Specifications requested by Tenant after Landlord's and Tenant's final approval of such stage, including, without limitation, any changes made to reduce the Cost Quotation pursuant to this Work Letter, (c) Tenant's failure to furnish any documents required herein or approve any item or any cost estimates as required herein, (d) Tenant's request for materials, finishes, or installations other than Landlord's Building Standard items, (e) Tenant's failure to perform any act or obligation imposed on Tenant by the Lease or this Work Letter as and when requested thereunder or hereunder, or (f) any other delay otherwise caused by Tenant, its agents, employees or contractors which operates to delay Landlord's Substantial Completion of the Tenant Improvements, as reasonably determined by Landlord. SECTION 5 - TENANT WORK 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 10 of 14 55 5.1 FINISH WORK. All finish work and decoration and other work desired by Tenant and not included within the Improvements as set forth in the approved Shell Construction Documents or T.I. Construction Documents, including specifically, without limitation, all computer systems, cabling, telephone systems, telecommunications systems and other items (the "Tenant Work") shall be furnished and installed by Tenant at Tenant's sole expense and shall not be chargeable against the Tenant Improvement Allowance. If any Tenant Work is not set forth on the approved T.I. Construction Documents, Tenant shall secure Landlord's prior consent for such Tenant Work in the same manner and following the same procedures provided for in the Lease. Tenant shall not commence the construction or installation of any improvements on the Premises, including, specifically, the Tenant Work, without Landlord's prior written approval (which shall not be unreasonably withheld) of: (i) Tenant's contractor, (ii) detailed plans and specifications for the Tenant Work, and (iii) a certificate(s) of insurance accurately showing that Tenant's contractor maintains insurance coverage in amounts, types, form and with companies reasonably acceptable to Landlord. All such certificates or policies shall be endorsed to show Landlord as an additional insured and insurance shall be maintained by Tenant or Tenant's contractor at all times during the performance of the Tenant Work. 5.2 LANDLORD'S OBLIGATIONS. Landlord is under no obligation to construct or supervise construction of any of the Tenant Work and any inspection by Landlord shall not be construed as a representation that the Tenant Work is in compliance with the final plans and specifications therefor or that the construction will be free from faulty material or workmanship or that the Tenant Work is in conformance with any building codes or other applicable regulations. All of the Tenant Work shall be undertaken and performed in strict accordance with the provisions of the Lease and this Work Letter. SECTION 6 - CHANGE ORDERS Tenant may request changes in the Tenant Improvements during construction only by written instructions to Landlord, or its designated representative, on a form approved by Landlord. All such changes will be subject to Landlord's prior written approval, which shall be approved or disapproved by Landlord in its reasonable discretion, within three (3) Business Days of receipt. Prior to commencing any change, Landlord will prepare and deliver to Tenant, for Tenant's approval, a change order (the "Change Order") setting forth the additional time, if any, needed for such change and the total costs of such change which will include associated architectural, engineering and construction contractor's fees. If a Change Order requires additional time to construct, the Target Commencement Date shall be extended by a similar number of days. Within two (2) Business Days after delivery to Tenant of the total costs of the Change Order, Tenant shall deliver notice of approval, together with a cash payment equal to one hundred percent (100%) of the cost of the Change Order if and to the extent such cost exceeds the sum of the Tenant Improvement Allowance and the Tenant Contingency Allowance ("Payment"). If Tenant fails to approve such Change Order and deliver the Payment within five (5) days after delivery by Landlord, Tenant will be deemed to have withdrawn the proposed Change Order and Landlord will not proceed to perform the change. Upon Landlord's receipt of Tenant's approval and Payment, Contractor will proceed to perform the change. SECTION 7 - RESPONSIBILITY FOR FUNCTION Tenant will be responsible for the function of all Tenant Improvements whether or not approved by Landlord or installed by Landlord at Tenant's request. Landlord's preparation and/or approval of any design or construction documents will not constitute any representation or warranty as to the adequacy, efficiency, performance or desirability of the Improvements. SECTION 8 - TENANT AND LANDLORD OBLIGATIONS 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 11 of 14 56 8.1 ACCESS AND ENTRY. During Landlord's construction of the Premises, Landlord agrees to provide reasonable access as described herein to the Premises to Tenant and its agents, for the purpose of installing Tenant's fixtures, Tenant Work and furniture, so long as such access does not interfere with the conduct of Landlord's construction activities or affect Landlord's ability to diligently bring the Premises to Substantial Completion by the Target Commencement Date. Landlord acknowledges that access during the construction of the Tenant Improvements for purpose of performing Tenant Work is important to Tenant. If Landlord, in its reasonable discretion, determines that the providing of such access may affect its ability to bring the Premises to Substantial Completion on the Estimated Lease Term Commencement Date as set forth in this Lease, Landlord shall have the right to deny or otherwise restrict such access to Tenant and its agents until Substantial Completion of the Tenant Improvements. The terms of such access may require that Tenant and Tenant's agents perform work at times and in the manner designated by Landlord, including nights, weekends, and holidays. Also, Tenant and its agents may be required to utilize only certain access areas at certain times, designated by Landlord. With respect to any approved Tenant Work, Tenant shall adopt a schedule in conformance with the schedule of Landlord's Contractor and conduct its work in such a manner as to maintain harmonious labor relations so as not to interfere unreasonably with or delay the work of Landlord's Contractor. Tenant's contractors and agents shall be subject to the supervision of Landlord's construction supervisor. 8.2 RISK OF LOSS. All materials, work, installations and decorations of any nature brought upon or installed in the Premises before the Commencement Date shall be at the risk of the party who brought such materials or items onto the Premises. Neither Landlord nor any party acting on Landlord's behalf shall be responsible for any damage or loss or destruction of such items brought to or installed in the Premises by Tenant prior to such date, except in the event of Landlord's gross negligence or willful misconduct. As a condition to such early entry, Landlord may require Tenant to execute a hold harmless agreement, in a form acceptable to Landlord. Such early occupancy shall be subject to the terms and provisions of the Lease. 8.3 CONFORMANCE WITH LAWS. All Tenant Work shall be done in conformity with applicable codes and regulations of governmental authorities having jurisdiction over the Project and the Premises and valid building permits and other necessary authorizations from appropriate governmental agencies when required, shall be obtained by Tenant for the Tenant Work at Tenant's expense. Any Tenant Work not acceptable to the applicable governmental authority or not reasonably satisfactory to Landlord in accordance with the standard in the preceding sentence (unless previously approved by Landlord), shall be promptly corrected, replaced, or brought into compliance with such applicable codes and regulations at Tenant's expense. Notwithstanding any failure by Landlord to object to any such Tenant Work, Landlord shall have no responsibility therefor. 8.4 LIENS. Tenant shall keep the Premises and Project free from any mechanics', materialmen's or other liens arising out of any work performed upon or materials or furniture, fixtures or improvements delivered to the Premises including but not limited to any Tenant Work performed, materials furnished or obligations incurred by or for Tenant or any person or entity claiming by, through or under Tenant. Landlord shall have the right at all times to post and keep posted on the Premises any notices which it deems necessary for its protection from such liens. If any such liens are filed and are not released of record by payment or posting of a proper bond within ten (10) days after such filing, Landlord, may, without waiving its rights and remedies based on such breach by Tenant and without releasing Tenant from any obligations hereunder or under the Lease, cause such liens to be released by any means it shall deem proper, including payment of the claim giving rise to such lien in which event all amounts paid by Landlord shall immediately be due and payable by Tenant. SECTION 9 - TENANT'S REPRESENTATIVE Tenant has designated ___________________ as its sole representative with respect to the matters set forth in this Work 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 12 of 14 57 Letter, who shall have full authority and responsibility to act on behalf of Tenant as required in this Work Letter. Tenant may change its representative under this Work Letter at any time by providing five (5) days prior written notice to Landlord. All inquiries, requests, instructions, authorizations and other communications with respect to matters covered by this Work Letter from Landlord will be made to Tenant's Representative. SECTION 10 - LANDLORD'S REPRESENTATIVE Landlord has designated James McCann as its sole representative with respect to the matters set forth in this Work Letter, who shall have full authority and responsibility to act on behalf of Landlord as required in this Work Letter. Landlord may change its representative under this Work Letter at any time by providing five (5) days prior written notice to Tenant. All inquiries, requests, instructions, authorizations and other communications with respect to the matters covered by this Work Letter from Landlord will be made to Tenant's representative. Tenant will communicate solely with Landlord's Representative and will not make any inquiries of or requests to, and will not give any instructions or authorizations to, any other employee or agent of Landlord, including Landlord's architect, engineers, and contractors or any of their agents or employees, with regard to matters covered by this Work Letter. SECTION 11 - MISCELLANEOUS 11.1 SOLE OBLIGATIONS. Except as herein expressly set forth with respect to the Improvements or in the Lease, Landlord has no agreement with Tenant and has no obligation to do any work with respect to the Premises. Any other work in the Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease, including any alterations or improvements as contemplated in the Lease, shall be done at Tenant's sole cost and expense and in accordance with the terms and conditions of the Lease. 11.2 APPLICABILITY. This Work Letter shall not be deemed applicable to: (a) any additional space added to the original Premises at any time, whether by the exercise of the Right of First Refusal or any options under the Lease or otherwise, or (b) any portion of the original Premises or any additions thereto in the event of a renewal or extension of the original Lease Term, whether by the exercise of any options under the Lease or any amendment or supplement thereto. The construction of any additions or improvements to the Premises not contemplated by this Work Letter shall be effected pursuant to a separate work letter agreement, in the form then being used by Landlord and specifically addressed to the allocation of costs relating to such construction. 11.3 AUTHORITY; COUNTERPARTS. Any person signing this Work Letter on behalf of Tenant warrants and represents that such person has authority to do so. This Work Letter may be executed in counterparts, each of which shall be deemed an original, but all of which together constitute one instrument. 11.4 BINDING ON SUCCESSORS. Subject to the limitations on assignment and subletting contained in the Lease, this Work Letter shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. 11.5 LANDLORD'S APPROVAL RIGHTS. Landlord may withhold its approval of the Space Plan, including any revisions requested by Tenant, the T.I. Construction Documents, Change Orders or other work requested by Tenant which require work which: (i)exceeds or affects the structural integrity of the Project, or any part of the heating, ventilating, air conditioning, plumbing, mechanical, electrical, communication or other systems of the Project; (ii)is not approved by the holder of any mortgage or deed of trust encumbering the Project at the time the work is proposed; (iii)would not be approved by a prudent owner of property similar to the Project; (iv)violates any agreement which affects the Project or binds Landlord; (v)Landlord reasonably believes will increase the cost of operation or maintenance of the common areas within or any of the systems of the Project; (vi)Landlord reasonably believes will reduce the market value of the Premises or Project at the end of the Lease Term; (vii)does not conform 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 13 of 14 58 to applicable building codes or is not approved by any governmental authority with jurisdiction over the Premises; (viii)is not a Building Standard item or an item of equal or higher quality; (ix)in Landlord's determination detrimentally affects the uniform exterior appearance of the Project; or (x)is reasonably disapproved by Landlord for any other reason not set forth herein. 11.6 TIME OF THE ESSENCE. Time is of the essence as to each and every term and provision of this Work Letter. In all instances where Tenant is required to approve an item, if no written notice of disapproval is given within the stated time period at the end of said period the item shall automatically be deemed approved and the next succeeding time period shall commence. Except as otherwise provided, all references herein to a "number of days" shall mean and refer to calendar days. 11.7 FORCE MAJEURE. If either party cannot perform any of its obligations due to events beyond such party's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events; provided, however, that in no event shall the due date for the payment of any money be extended. 11.8 ATTORNEYS' FEES. In any action to enforce or interpret the terms of this Work Letter, the party prevailing in that action shall be entitled to recover its reasonable attorneys' fees and costs of suit, both at trial and on appeal. 11.9 INCORPORATION. This Work Letter is and shall be incorporated by reference in the Lease and all of the terms and provisions of the Lease are incorporated herein for all purposes. Any default by Tenant hereunder also constitutes a default under the Lease. IN WITNESS WHEREOF, the Work Letter has been made and executed as of the date set forth below. LANDLORD: Dated:___________________ MARCO PLAZA ENTERPRISES, a California general partnership By: /s/ Robert Kronick ------------------------------------------------- Name: Robert Kronick ------------------------------------------------- Title: Partner ------------------------------------------------- TENANT: Dated: 4/17/97 TRITEAL CORPORATION, a Delaware corporation By: /s/ Gregory Jay White ------------------------------------------------- Name: Gregory Jay White ------------------------------------------------- Title: Chief Operating Officer ------------------------------------------------- 4/15/97 Landlord Initials: _______ Tenant Initials: _______ EXHIBIT "C" Page 14 of 14 EX-10.29 3 EXHIBIT 10.29 1 EXHIBIT 10.29 Primary and Secondary Common Stock Offering 2,200,000 Shares TRITEAL CORPORATION Common Stock UNDERWRITING AGREEMENT February 19, 1997 PAINEWEBBER INCORPORATED HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. As Representatives of the several Underwriters c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Ladies and Gentlemen: TriTeal Corporation, a Delaware corporation (the "Company"), and the persons named in Schedule I (the "Selling Stockholders") propose to sell an aggregate of 2,200,000 shares (the "Firm Shares") of the Company's Common Stock, $0.001 par value per share (the "Common Stock"), of which 1,365,000 shares are to be issued and sold by the Company and an aggregate of 835,000 shares are to be sold by the Selling Stockholders in the respective amounts set forth opposite their respective names in Schedule I, in each case to you and to the other underwriters named in Schedule II (collectively, the "Underwriters"), for whom you are acting as representatives (the "Representatives"). The Company has also agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 330,000 shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b). The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The public offering price per share for the Shares and the purchase price per share for the Shares to be paid by the several Underwriters shall be agreed upon by the Company, the Selling Stockholders and the Representatives, acting on behalf of the several Underwriters, and such agreement shall be set forth in a separate written instrument substantially in the form of Exhibit A hereto (the "Price Determination Agreement"). The Price Determination Agreement may take the form of an exchange of any standard form of written telecommunication among the Company, the Selling Stockholders and the Representatives and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Shares will be governed by this Agreement, as supplemented by the Price Determination Agreement. From and after the date of the execution and delivery of the Price Determination Agreement, this Agreement shall be deemed to incorporate, and, unless the context otherwise indicates, all references contained herein to "this Agreement" and to the phrase "herein" shall be deemed to include the Price Determination Agreement. -1- 2 Each Selling Stockholder has executed and delivered a Custody Agreement and a Power of Attorney in the form attached hereto as Exhibit B (collectively, the "Agreement and Power of Attorney") pursuant to which each Selling Stockholder has placed his Firm Shares in custody and appointed the persons designated therein as a committee (the "Committee") with authority to execute and deliver this Agreement on behalf of such Selling Stockholder and to take certain other actions with respect thereto and hereto. The Company and the Selling Stockholders confirm as follows their respective agreements with the Representatives and the several other Underwriters. 1. Agreement to Sell and Purchase. (a) On the basis of the respective representations, warranties and agreements of the Company and the Selling Stockholders herein contained and subject to all the terms and conditions of this Agreement, (i) the Company and each of the Selling Stockholders, severally and not jointly, agree to sell to the several Underwriters and (ii) each of the Underwriters, severally and not jointly, agrees to purchase from the Company and the Selling Stockholders, at the purchase price per share for the Firm Shares to be agreed upon by the Representatives, the Company and the Selling Stockholders in accordance with Section 1(c) and set forth in the Price Determination Agreement, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 9 hereof. Schedule II may be attached to the Price Determination Agreement. (b) Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, up to 330,000 Option Shares from the Company at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of this Agreement (or, if the Company has elected to rely on Rule 430A, on or before the 30th day after the date of the Price Determination Agreement), upon written or telegraphic notice (the "Option Shares Notice") by the Representatives to the Company no later than 12:00 noon, New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. (c) The public offering price per share for the Firm Shares and the purchase price per share for the Firm Shares to be paid by the several Underwriters shall be agreed upon and set forth in the Price Determination Agreement. In the event such price has not been agreed upon and the Price Determination Agreement has not been executed by the close of business on the fourteenth business day following the date on which the Registration Statement becomes effective, this Agreement shall terminate forthwith, without liability of any party to any other party except that Section 7 shall remain in effect. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to the Representatives for the accounts of the Underwriters at the office of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019, credit to the account of the Company with the Depository Trust Company, against payment of the purchase price by wire transfer of Federal Funds or similar same day funds to an account designated in writing by the -2- 3 Company to PaineWebber Incorporated at least one business day prior to the Closing Date (as hereinafter defined). Such payment shall be made at 10:00 a.m., New York City time, on the third business day (or fourth business day, if the Price Determination Agreement is executed after 4:30 p.m.) after the date on which the first bona fide offering of the Shares to the public is made by the Underwriters or at such time on such other date, not later than ten business days after such date, as may be agreed upon by the Company and the Representatives (such date is hereinafter referred to as the "Closing Date"). To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above at the time and date (which may be the Closing Date) specified in the Option Shares Notice. The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Firm Shares and Option Shares by the Company to the respective Underwriters shall be borne by the Company. The cost of tax stamps, if any, in connection with the sale of the Firm Shares by the Selling Stockholders shall be borne by the Selling Stockholders. The Company and the Selling Stockholders will pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or delay in paying Federal and state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to such Underwriter of the Firm Shares and Option Shares. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: (a) A registration statement (Registration No. 333-20579) on Form S-1 relating to the Shares, including a preliminary prospectus and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The term "preliminary prospectus" as used herein means a preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations included at any time as part of the registration statement. Copies of such registration statement and amendments and of each related preliminary prospectus have been delivered to the Representatives. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including financial statements and all exhibits and any information deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations. If the Company files a registration statement to register a portion of the Shares and relies on Rule 462(b) of the Rules and Regulations for such registration statement to become effective upon filing with the Commission (the "Rule 462 Registration Statement"), then any reference to the "Registration Statement" shall be deemed to include the Rule 462 Registration Statement, as amended from time to time. The term "Prospectus" means the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date. (b) On the Effective Date, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or -3- 4 supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives specifically for inclusion in the preliminary prospectus, the Registration Statement or the Prospectus. The Company has not distributed any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the preliminary prospectus, the Prospectus or any other materials, if any, permitted by the Act. (c) The only subsidiaries (as defined in the Rules and Regulations) of the Company is the subsidiary listed on Exhibit 21 to the Registration Statement (the "Subsidiary"). Each of the Company and the Subsidiary is, and at the Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Each of the Company and the Subsidiary has, and at the Closing Date will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. Each of the Company and the Subsidiary is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except where failure to be so qualified would not have a material adverse effect on the Company and the Subsidiary, considered as a whole. All of the outstanding shares of capital stock of the Subsidiary have been duly authorized and validly issued, and are fully paid and non-assessable and are owned by the Company free and clear of all liens, encumbrances and claims whatsoever. Except for the stock of the Subsidiary and as disclosed in the Registration Statement, the Company does not own, and at the Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the certificate of incorporation and of the bylaws of each of the Company and the Subsidiary and all amendments thereto have been delivered to the Representatives, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date, except as contemplated by the Registration Statement. (d) The outstanding shares of Common Stock have been, and the Shares to be issued and sold by the Company upon such issuance will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The description of the Common Stock in the Registration Statement and the Prospectus is, and at the Closing Date will be, complete and accurate in all respects. Except as set forth in the Prospectus, the Company does not have outstanding, and at the Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible -4- 5 into, or any contracts or commitments to issue or sell, any shares of Common Stock, any shares of capital stock of the Subsidiary or any such warrants, convertible securities or obligations. (e) The financial statements and schedules included in the Registration Statement or the Prospectus present fairly the consolidated financial condition of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. No other financial statements or schedules of the Company are required by the Act or the Rules and Regulations to be included in the Registration Statement or the Prospectus. Ernst & Young LLP (the "Accountants") who have reported on such financial statements and schedules, are independent accountants with respect to the Company as required by the Act and the Rules and Regulations. (f) The Company maintains a system of internal accounting control sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (g) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (i) there has not been and will not have been any change in the capitalization of the Company and the Subsidiary, (ii) neither the Company nor the Subsidiary has incurred nor will it incur any material liabilities or obligations, direct or contingent, nor has it entered into nor will it enter into any material transactions other than pursuant to this Agreement and the transactions referred to herein and (iii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock. (h) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (i) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or, to the best knowledge of each of the Company and the Subsidiary, threatened against or affecting the Company or the Subsidiary or any of their respective officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding might materially and adversely affect the Company and the Subsidiary or their businesses, properties, business prospects, condition (financial or otherwise) or results of operations, considered as a whole. (j) Each of the Company and the Subsidiary has, and at the Closing Date will have, (i) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus, except for those which would not materially and adversely affect the Company or the Subsidiary or the business or results of operations of the Company or the Subsidiary, (ii) complied in all respects with all laws, regulations and orders applicable to it or its business and (iii) performed all its obligations required to be performed by it, and is not, and at the Closing Date will not be, in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, -5- 6 note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected in each case where any such failure to perform might adversely affect the Company and the Subsidiary or their businesses, properties, business prospects condition (financial or otherwise) or results of operations. To the best knowledge of the Company and the Subsidiary, no other party under any contract or other agreement to which it is a party is in default in any respect thereunder. Neither the Company nor the Subsidiary is, nor at the Closing Date will either of them be, in violation of any provision of its certificate of incorporation or bylaws. (k) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of this Agreement by the Company or in connection with the taking by the Company of any action contemplated hereby, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. (l) The Company has full corporate power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof, except as may be limited by the effect of any applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally. The performance of this Agreement and the consummation of the transactions contemplated hereby and the application of the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds" will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company or the Subsidiary pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the certificate of incorporation or bylaws of the Company or the Subsidiary, any contract or other agreement to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary or any of its properties is bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or the Subsidiary. (m) The Company and the Subsidiary has good and valid title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company or the Subsidiary, constituted as a whole. Each of the Company and the Subsidiary has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it, with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such properties by the Company and such Subsidiary. (n) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All such contracts to which the Company or the Subsidiary is a party have been duly authorized, executed and delivered by the Company or the Subsidiary, constitute valid and binding agreements of the Company or the Subsidiary and are enforceable against the Company or the Subsidiary in accordance with the terms thereof, except as may be limited by the effect of any applicable bankruptcy, insolvency, moratorium or -6- 7 similar laws affecting creditors' rights generally. (o) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Representatives was or will be, when made, inaccurate, untrue or incorrect in any material respect. (p) Neither the Company nor any of its directors, officers or controlling persons has taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (q) No holder of securities of the Company has rights to the registration of any securities of the Company because of the filing of the Registration Statement. (r) Prior to the Closing Date, the Shares will be duly authorized for quotation on the Nasdaq National Market upon official notice of issuance. (s) Neither the Company nor the Subsidiary is involved in any material labor dispute nor, to the knowledge of the Company and the Subsidiary, is any such dispute threatened. (t) Each of the Company and the Subsidiary own, or have licensed or otherwise possess adequate rights to use, all material trademarks and trade names which are used in or necessary for the conduct its business as described in the Prospectus. No claims have been asserted by any person to the use of any such trademarks or trade names or challenging or questioning the validity or effectiveness of any such trademark or trade name. The use, in connection with the business and operations of the Company and the Subsidiary of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. (u) Neither the Company nor the Subsidiary nor, to the Company's knowledge, any employee or agent of the Company or the Subsidiary has made any payment of funds of the Company or the Subsidiary or received or retained any funds in violation of any law, rule or regulation or of a character required to be disclosed in the Prospectus. (v) The Company has complied, and until the completion of the distribution of the Shares will comply in all material respects with the provisions of (including, without limitation, filing all forms required by) Section 517.075 of the Florida Securities and Investor Protection Act and regulation 3E-900.001 issued thereunder with respect to the offering and sale of the Shares. (w) The Company and its Subsidiary (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or imposing liability or standards of conduct concerning any Hazardous Material (as hereinafter defined) ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, individually or in the aggregate, result in a material adverse effect on the financial condition or on the earnings, business, properties, business prospects or operations of the Company and its Subsidiary, taken as a whole. The term "Hazardous Material" means (A) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as -7- 8 amended, (B) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (C) any petroleum or petroleum product, (D) any polychlorinated biphenyl and (E) any pollutant or contaminant or hazardous, dangerous, or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. 4. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder, severally and not jointly, represents, warrants and covenants to each Underwriter that: (a) Such Selling Stockholder has full power and authority to enter into this Agreement and the Agreement and Power of Attorney. All authorizations and consents necessary for the execution and delivery by such Selling Stockholder of the Agreement and Power of Attorney, and for the execution of this Agreement on behalf of such Selling Stockholder, have been given. Each of the Agreement and Power of Attorney and this Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and constitutes a valid and binding agreement of such Selling Stockholder and is enforceable against such Selling Stockholder in accordance with the terms thereof and hereof, except as may be limited by the effect of any applicable bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally. (b) Such Selling Stockholder now has, and at the time of delivery thereof hereunder will have, (i) good and valid title to the Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens, encumbrances and claims whatsoever (other than pursuant to the Agreement and Power of Attorney), and (ii) full legal right and power, and all authorizations and approvals required by law, to sell, transfer and deliver such Shares to the Underwriters hereunder and to make the representations, warranties and agreements made by such Selling Stockholder herein. Upon the delivery of and payment for such Shares hereunder, such Selling Stockholder will deliver good and valid title thereto, free and clear of all liens, encumbrances and claims whatsoever. (c) The performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of such Selling Stockholder pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the acceleration of any obligation under, if such Selling Stockholder is a corporation or partnership, the organizational documents of such Selling Stockholder, or, as to all such Selling Stockholders, any contract or other agreement to which such Selling Stockholder is a party or by which such Selling Stockholder or any of its property is bound or affected, or under any ruling, decree, judgment, order, statute, rule or regulation of any court or other governmental agency or body having jurisdiction over such Selling Stockholder or the property of such Selling Stockholder, except where such breach, violation or default would not have a material adverse effect on the properties, assets, operations, business or financial condition of each such Selling Stockholder. (d) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions on its part contemplated herein and in the Agreement and Power of Attorney, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by such Selling Stockholder. (e) Such Selling Stockholder has no actual knowledge of any material fact or condition not set forth in the Registration Statement or the Prospectus which has adversely affected, or may adversely affect, the business, properties, business prospects, condition (financial or -8- 9 otherwise) or results of operations of the Company, and the sale of the Shares proposed to be sold by such Selling Stockholder is not prompted by any such knowledge. (f) All information with respect to such Selling Stockholder contained in the Registration Statement and the Prospectus (as amended or supplemented, if the Company shall have filed with the Commission any amendment or supplement thereto) does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. (g) Other than as permitted by the Act and the Rules and Regulations, such Selling Stockholder has not distributed and will not distribute any preliminary prospectus, the Prospectus or any other offering material in connection with the offering and sale of the Shares. Such Selling Stockholder has not taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result in, under the Act or otherwise, or which has caused or resulted in, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (h) Certificates in negotiable form for the Firm Shares to be sold hereunder by such Selling Stockholder have been placed in custody, for the purpose of making delivery of such Firm Shares under this Agreement, under the Agreement and Power of Attorney which appoints American Stock Transfer & Trust Company as custodian (the "Custodian") for each Selling Stockholder. Such Selling Stockholder agrees that the Shares represented by the certificates held in custody for him or it under the Agreement and Power of Attorney are for the benefit of and coupled with and subject to the interest hereunder of the Custodian, the Committee, the Underwriters, each other Selling Stockholder and the Company, that the arrangements made by such Selling Stockholder for such custody and the appointment of the Custodian and the Committee by such Selling Stockholder are irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated by operation of law, whether by the death, disability, incapacity or liquidation of any Selling Stockholder or the occurrence of any other event. If any Selling Stockholder should die, become disabled or incapacitated or be liquidated or if any other such event should occur before the delivery of the Shares hereunder, certificates for the Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement and actions taken by the Committee and the Custodian pursuant to the Agreement and Power of Attorney shall be as valid as if such death, liquidation, incapacity or other event had not occurred, regardless of whether or not the Custodian or the Committee, or either of them, shall have received notice thereof. 5. Agreements of the Company and the Selling Stockholders. The Company and the Selling Stockholders (as to Sections 5(i), (j), (o), (p), (q) and (r)) agree, severally and not jointly, with the several Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representatives within a reasonable period of time prior to the filing thereof and the Representatives shall not have objected thereto in good faith. (b) The Company will use its best efforts to cause the Registration Statement to become effective, and will notify the Representatives promptly, and will confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the -9- 10 Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (iv) of the happening of any event during the period mentioned in the second sentence of Section 5(e) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading and (v) of receipt by the Company or any representative of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. The Company will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and to notify the Representatives promptly of all such filings. (c) The Company will furnish to the Representatives, without charge, three signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representatives, without charge, for transmittal to each of the other Underwriters, a copy of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits. (d) The Company will comply with all the provisions of any undertakings contained in the Registration Statement. (e) On the Effective Date, and thereafter from time to time, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of the Underwriters, without charge, such number of copies thereof as the Representatives may reasonably request. (f) Prior to any public offering of the Shares by the Underwriters, the Company will cooperate with the Representatives and counsel to the Underwriters in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) During the period of five years commencing on the Effective Date, the Company will furnish to the Representatives and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Representatives and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission. (h) The Company will make generally available to holders of its securities as soon as -10- 11 may be practicable but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (i) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Representatives, all costs and expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement, including but not limited to costs and expenses of or relating to (i) the preparation, printing and filing of the Registration Statement and exhibits to it, each preliminary prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (ii) the preparation and delivery of certificates representing the Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters, any Dealer Agreements, any Underwriters' Questionnaire and the Agreement and Power of Attorney, (iv) furnishing (including costs of shipping, mailing and courier) such copies of the Registration Statement, the Prospectus and any preliminary prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the listing of the Shares on the Nasdaq National Market, (vi) any filings required to be made by the Underwriters with the NASD, and the fees, disbursements and other charges of counsel for the Underwriters in connection therewith, (vii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 5(f), including the reasonable fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (viii) counsel to the Company and counsel to the Selling Stockholders where Cooley Godward LLP is acting as counsel to a Selling Stockholder, (ix) the transfer agent for the Shares and (x) the Accountants. To the extent that any Selling Stockholder engages special legal counsel to represent him in connection with this offering, the fees and expenses of such counsel shall be borne by such Selling Stockholder. (j) If this Agreement shall be terminated by the Company or the Selling Stockholders pursuant to any of the provisions hereof (otherwise than pursuant to Section 9) or if for any reason the Company or any Selling Stockholder shall be unable to perform its obligations hereunder, the Company or such Selling Stockholders, as applicable, will reimburse the several Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of counsel to the Underwriters) reasonably incurred by them in connection herewith as a result of such termination by the Company or such Selling Stockholder, as applicable. (k) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares in violation of the Exchange Act or any applicable NASD National Market rules. (l) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds." (m) During the period of ninety (90) days commencing at the Closing Date, the Company will not, without the prior written consent of PaineWebber Incorporated, grant options to purchase shares of Common Stock at a price less than the public offering price, other than grants made pursuant to the Company's 1995 Stock Option Plan or rights granted pursuant to the Company's Employee Stock Purchase Plan. (n) The Company will not, for a period of ninety (90) days after the commencement of -11- 12 the public offering of the Shares, without the prior written consent of PaineWebber Incorporated, sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to acquire such shares (other than pursuant to (i) agreements with corporate partners, research institutions or leasing entities or (ii) employee, director or consultant stock option plans, the Company's Employee Stock Purchase Plan or in connection with other employee, director or consultant incentive compensation arrangements). (o) The Selling Stockholders will not, and the Company will (i) cause each of its executive officers and directors to and (ii) request that each beneficial owner of more than five percent (5%) of the outstanding shares of Common Stock enter into agreements with the Representatives in the form set forth in Exhibit C to the effect that they will not, for a period of ninety (90) days after the commencement of the public offering of the Shares, without the prior written consent of PaineWebber Incorporated, sell, contract to sell or otherwise dispose of any shares of Common Stock, other than pursuant to bona fide gifts to or, if the stockholder is a partnership, any distribution to partners so long as such transferees and donees agree in writing with PaineWebber Incorporated to be bound by the provisions of this Section 5(o). (p) The Selling Stockholders will not, without the prior written consent of PaineWebber Incorporated, make any bid for or purchase any shares of Common Stock during the one hundred twenty (120) day period following the date hereof. (q) As soon as any Selling Stockholder is advised thereof, such Selling Stockholder will advise the Representatives and confirm such advice in writing, (i) of receipt by such Selling Stockholder, or by any representative of such Selling Stockholder, of any communication from the Commission relating to the Registration Statement, the Prospectus or any preliminary prospectus, or any notice or order of the Commission relating to the Company or any of the Selling Stockholders in connection with the transactions contemplated by this Agreement and (ii) of the happening of any event during the period from and after the Effective Date that in the judgment of such Selling Stockholder makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they were made, not materially misleading. (r) The Selling Stockholders will deliver to the Representatives prior to or on the Effective Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). 6. Conditions of the Obligations of the Underwriters. In addition to the execution and delivery of the Price Determination Agreement, the obligations of each Underwriter hereunder are subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by the Representatives not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representatives and all filings required by Rule 424 of the Rules and Regulations and Rule 430A shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, -12- 13 (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities, and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representatives and the Representatives did not object thereto in good faith, and the Representatives shall have received certificates, dated the Closing Date and the Option Closing Date and signed by the Chief Executive Officer or the Chairman of the Board of Directors of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company and the Subsidiary, taken as a whole, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and the Prospectus and (ii) neither the Company nor the Subsidiary shall have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Representatives any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or the Subsidiary or any of their respective officers or directors in their capacities as such, before or by any federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and the Subsidiary taken as a whole. (e) Each of the representations and warranties of the Company and the Selling Stockholders contained herein shall be true and correct in all material respects at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, and all covenants and agreements herein contained to be performed on the part of the Company and the Selling Stockholders and all conditions herein contained to be fulfilled or complied with by the Company and the Selling Stockholders at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been duly performed, fulfilled or complied with. (f) The Representatives shall have received opinions, each dated the Closing Date and, with respect to the Option Shares, the Option Closing Date, and satisfactory in form and substance to counsel for the Underwriters, from Cooley Godward LLP, counsel to the Company, to the effect set forth in Exhibit D and from legal counsel on behalf of each of the Selling Stockholders (in each instance, with such counsel to be reasonably acceptable to counsel for the Underwriters), to the effect set forth in Exhibit E. (g) The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from Pillsbury Madison & Sutro LLP, counsel to the Underwriters, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be -13- 14 reasonably satisfactory to the Representatives. (h) On the date of the Prospectus, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, addressed to the Representatives and in form and substance satisfactory to the Representatives, confirming that they are independent accountants with respect to the Company as required by the Act and the Rules and Regulations and with respect to the financial and other statistical and numerical information contained in the Registration Statement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter from the Accountants, that nothing has come to their attention during the period from the date of the letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date and the Option Closing Date which would require any change in their letter dated the date of the Prospectus, if it were required to be dated and delivered at the Closing Date and the Option Closing Date. (i) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Representatives, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, such documents are true and correct in all material respects and do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not untrue or misleading and (B) since the Effective Date, no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect; (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects; (iii) Each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with; (j) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall have been furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by the Committee on behalf of each of the Selling Stockholders, in form and substance satisfactory to the Representatives, to the effect that the representations and warranties of each of the Selling Stockholders contained herein are true and correct in all material respects on and as of the date of such certificate as if made on and as of the date of such certificate, and each of the covenants and conditions required herein to be performed or complied with by the Selling Stockholders on or prior to the date of such certificate has been duly, timely and fully performed or complied with. (k) On or prior to the Closing Date, the Representatives shall have received the executed agreements referred to in Section 5(n). (l) The Shares shall be qualified for sale in such states as the Representatives may reasonably request, and each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date. -14- 15 (m) Prior to the Closing Date, the Shares shall have been duly authorized for quotation on the Nasdaq National Market upon official notice of issuance. (n) The NASD shall have approved the underwriting terms and arrangements and such approval shall not have been withdrawn or limited. (o) The Company and the Selling Stockholders shall have furnished to the Representatives such certificates, in addition to those specifically mentioned herein, as the Representatives may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company and the Selling Stockholders herein, as to the performance by the Company and the Selling Stockholders of its and their respective obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Representatives. 7. Indemnification. (a) The Company and Jeffrey D. Witous, Rand R. Schulman, Oran M. Thomas, Armando Viteri, Gregory J. White, Arthur S. Budman, Victoria Z. Farrell, Ronald B. Hegli and Robert D. Ruhe (the "Principal Selling Stockholders") will, jointly and severally, indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted), to which any Underwriter, or any such person, may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or (ii) the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any act or failure to act or any alleged act or failure to act by an underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that neither the Company nor the Principal Selling Stockholders shall be liable under this clause (iii) to the extent it is finally judicially determined by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such underwriter through its negligence or willful misconduct); provided that neither the Company nor the Principal Selling Stockholders will be liable to the extent that such loss, claim, liability, expense or damage (A) arises from the sale of the Shares in the public offering to any person by an Underwriter and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of any Underwriter expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus or (B) results from an untrue statement of a material fact contained in, or the omission of a material fact from, such preliminary prospectus, which untrue statement or omission was corrected in the Prospectus (as then amended or supplemented) if the Underwriters -15- 16 sold Shares to the person alleging such loss, claim, liability, expense or damage without sending or giving, at or prior to the written confirmation of such sale, a copy of the Prospectus (as then amended or supplemented) if the Company had previously furnished copies thereof to the Underwriters within a reasonable amount of time prior to such sale or such confirmation, and the Underwriters failed to deliver the corrected Prospectus, if required by law to have so delivered it. Notwithstanding anything to the contrary contained in this Section 7, the liability of each Principal Selling Stockholder to the Underwriters or any other person shall be limited to an amount equal to the net proceeds received (after deducting underwriters' discounts and commissions) by such Principal Selling Stockholder from the sale of the Shares in this Offering. No Principal Selling Stockholder shall be required to provide indemnification hereunder until the Underwriters or control person seeking indemnification shall have first made a demand for payment on the Company with respect to any such losses, claims, liabilities, expenses or damages, and the Company shall have either rejected such demand or failed to make such requested payment within 45 days after receipt of such demand. This indemnity agreement will be in addition to any liability that the Company or any Principal Selling Stockholder may otherwise have; provided, however, that in no case shall any Principal Selling Stockholder be liable or responsible for any amount in excess of the net proceeds received (after deducting underwriters' discounts and commissions) by such Principal Selling Stockholder from the sale of the Shares in this Offering. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless the Company, each Underwriter, the directors, officers, employees and agents of the Company and each Underwriter, and each person, if any, who controls the Company and each Underwriter within the meaning of the Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only insofar as losses, claims, damages, liabilities or expenses arise out of or are based on (i) a breach of such Selling Stockholder's representations and warranties contained in Section 4 above or (ii) any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to such Selling Stockholder furnished to the Company by or on behalf of such Selling Stockholder specifically for use in the preparation of the documents referred to in the foregoing indemnity; provided that such Selling Stockholder will not be liable to the extent that such loss, claims, damage, liability or expense results solely from an untrue statement of a material fact contained in, or the omission of a material fact from, such preliminary prospectus, which untrue statement or omission was corrected in the Prospectus (as then amended or supplemented) if the Underwriters sold Shares to the person alleging such loss, claim, liability, expense or damage without sending or giving, at or prior to the written confirmation of such sale, a copy of the Prospectus (as then amended or supplemented) if the Company had previously furnished copies thereof to the Underwriters within a reasonable amount of time prior to such sale or such confirmation, and the Underwriters failed to deliver the corrected Prospectus, if required by law to have so delivered it. Notwithstanding anything to the contrary contained in this Section 7, the liability of each Selling Stockholder to the Underwriters or any other person shall be limited to an amount equal to the net proceeds received (after deducting underwriters' discounts and commissions) by such Selling Stockholder from the sale of the Shares in this offering. The Company and the Selling Stockholders may otherwise agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. This indemnity agreement will be in addition to any liability that each Selling Stockholder may otherwise have; provided, however, that in no case shall any Selling Stockholder be liable or responsible for any amount in excess of the net proceeds received (after deducting underwriters' discounts and commissions) by such Selling Stockholder from the sale of the Shares in this Offering. This Section 7(b) shall not be construed to limit in any manner the liability of the Principal Selling Stockholders as set forth in Section 7(a) above. (c) Each Underwriter will indemnify and hold harmless the Company, the Selling Stock- -16- 17 holders, each person, if any, who controls the Company or any of the Selling Stockholders within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company and the Selling Stockholders to each Underwriter, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of such Underwriter expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity will be in addition to any liability that each Underwriter might otherwise have; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discounts and commissions received by such Underwriter. (d) Any party that proposes to assert the right to be indemnified under this Section 7 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 7, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 7 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (iv) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 7 (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising or that may -17- 18 arise out of such claim, action or proceeding. (e) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 7 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company, the Selling Stockholders or the Underwriters, the Company, the Selling Stockholders and the Underwriters will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company or the Selling Stockholders from persons other than the Underwriters, such as persons who control the Company or the Selling Stockholders within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) to which the Company or the Selling Stockholders and any one or more of the Underwriters may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters. The relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders, respectively, bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company, the Selling Stockholders and the Underwriters with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Representatives on behalf of the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 7(e) shall be deemed to include, for purpose of this Section 7(e), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(e), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions received by it, and (ii) no Selling Stockholder shall be required to contribute any amount in excess of the net proceeds received by such Selling Stockholder from the sale of the Shares hereunder (after deducting underwriter discounts and commissions), and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 7(e) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 7(e), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 7(e), will notify any such party -18- 19 or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 7(e). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). (f) The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and payment therefor or (iii) any termination of this Agreement. 8. Termination. The obligations of the several Underwriters under this Agreement may be terminated at any time prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from the Representatives, without liability on the part of any Underwriter to the Company or any Selling Stockholder, if, prior to delivery and payment for the Shares (or the Option Shares, as the case may be), in the sole judgment of the Representatives, (i) trading in any of the equity securities of the Company shall have been suspended by the Commission, by an exchange that lists the Shares or by the Nasdaq National Market, (ii) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange or over-the-counter market, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or the NASD or any court or other governmental authority, (iii) a general banking moratorium shall have been declared by either federal or New York State authorities or (iv) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred, the effect of any of which is such as to make it, in the sole judgment of the Representatives, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. 9. Substitution of Underwriters. If any one or more of the Underwriters shall fail or refuse to purchase any of the Firm Shares which it or they have agreed to purchase hereunder, and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Firm Shares, the other Underwriters shall be obligated, severally, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase, in the proportions which the number of Firm Shares which they have respectively agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares which all such non-defaulting Underwriters have so agreed to purchase, or in such other proportions as the Representatives may specify; provided that in no event shall the maximum number of Firm Shares which any Underwriter has become obligated to purchase pursuant to Section 1 be increased pursuant to this Section 9 by more than one-ninth of the number of Firm Shares agreed to be purchased by such Underwriter without the prior written consent of such Underwriter. If any Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares and arrangements satisfactory to the Representatives, the Company and the Committee for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, or the Company or any Selling Stockholder for the purchase or sale of any Shares under this Agreement. In any such case either the Representatives or the Company and the Committee -19- 20 shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Miscellaneous. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 2011 Palomar Airport Road, Carlsbad, California 92009, Attention: Jeffrey D. Witous, (b) if to any Selling Stockholder, __________________, or (c) if to the Underwriters, to PaineWebber Incorporated at the offices of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019, Attention: Corporate Finance Department. Any such notice shall be effective only upon receipt. Any notice under Section 8 or 9 may be made by telex or telephone, but if so made shall be subsequently confirmed in writing. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company and the Selling Stockholders and of the controlling persons, directors and officers referred to in Section 7, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" as used in this Agreement shall not include a purchaser, as such purchaser, of Shares from any of the several Underwriters. With respect to any obligation of the Company and the Selling Stockholders hereunder to make any payment, to indemnify for any liability or to reimburse for any expense, notwithstanding the fact that such obligation is a joint and several obligation of the Company and the Selling Stockholders, the Underwriters (or any other person to whom such payment, indemnification or reimbursement is owed) may pursue the Company with respect thereto prior to pursuing any Selling Stockholder. All representations, warranties and agreements of the Company and the Selling Stockholders contained herein or in certificates or other instruments delivered pursuant hereto, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any of their controlling persons and shall survive delivery of and payment for the Shares hereunder. Any action required or permitted to be taken by the Representatives under this Agreement may be taken by them jointly or by PaineWebber Incorporated. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. The Company, the Selling Stockholders and the Underwriters each hereby irrevocably waive any right they may have to a trial by jury in respect of any claim based upon or arising out of this Agreement or the transactions contemplated hereby. -20- 21 This Agreement may not be amended or otherwise modified or any provision hereof waived except by an instrument in writing signed by the Representatives and the Company. -21- 22 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, TRITEAL CORPORATION By /s/ Jeffrey D. Witous --------------------------------------- Jeffrey D. Witous, President, Chairman and Chief Executive Officer THE SELLING STOCKHOLDERS NAMED IN SCHEDULE I ATTACHED HERETO By: The Committee By /s/ Art Budman --------------------------------------- Confirmed as of the date first above mentioned: PAINEWEBBER INCORPORATED HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule II hereof. By: PAINEWEBBER INCORPORATED By /s/ Jim Arnett ------------------------------- Title ---------------------------- HAMBRECHT & QUIST LLC By /s/ Cristina Morgan ------------------------------- Title Managing Director ---------------------------- 23 PIPER JAFFRAY INC. By /s/ William Benjamin ------------------------------- Title Vice President ----------------------------- 24 SCHEDULE I ---------- SELLING STOCKHOLDERS --------------------
Total Number of Firm Shares Name of Selling Stockholder to be Sold - --------------------------- --------------- Steven K. Beal 15,000 John C. Beer 1,800 Peter Bell 7,142 Mark Bonsak 11,500 Sophie and Arthur Brody Foundation 20,000 Arthur S. Budman 15,000 Konstantinos P. Caldis 15,000 Benjamin Casado 21,000 Gregory Cohn 1,000 Martin Cohn 2,500 Cooperative Holding Corporation 6,000 Robert L. Davis 6,000 Manual Dupkin II Education and Charitable Trust 28,571 Vickie Farrell 300 FFA General Partnership 2,428 Arthur J. and Elizabeth Foxe Franke 18,020 Bruce Friedman 1,250 Robert Gagnard 25,000 A.W. Greif T/U/D FBO David L. Greif 3,500 Ronald B. Hegli 10,000 Bruce H. Heimann, Trustee, FBO B. Heimann Family Trust U/A/D 12/18/90 13,320 David L. and Barbara J. Heimann, Co-Trustees, David L. Heimann Family Trust U/A/D 10/12/88 12,000 Charles S. Hilliard 10,000 Imperial Bancorp 32,277 James Jimmerson 6,650 David H. Koch 52,488 David Korkosz 20,000 Timothy T. Kraft 10,000 W. Kevin Kreitz 5,500 James P. Lampert 2,142 Lloyd Software Ltd. 50,000 Richard S. Mertz 7,000
25
Total Number of Firm Shares Name of Selling Stockholder to be Sold - --------------------------- --------------- William C. and Joelene Mertz 7,000 J.J. Miller II, Trustee, UD Joshua W. Miller Trust 7,142 Geraldine F. Morrow Family Irrevocable Trust 10,000 Robert O'Rourke 25,000 Noble Ouye 1,800 Edmund A. and Susan R. Restivo, Jr. 1,500 Van Duyn Ridgway, Trustee, FBO Thayer Ridgway II and Marianne Ayers Trust UDT 8/13/92 2,347 Van Duyn Ridgway, Trustee, FBO Ridgway 1992 Family Trust UDT 8/14/92 5,000 Robert Rinaldi 8,000 Rothschild Charitable Foundation, Inc. 7,142 Robert D. Ruhe 20,000 S. Kann Sons Co. 7,000 Donald E. and Eileen Sanshu 10,000 Rand R. Schulman 28,881 Richard Serbin 5,000 Slade, Inc. 12,500 John Solaro 8,000 Robert Stein 8,300 Oran M. Thomas 95,000 Armando Viteri 20,000 Gregory J. White 50,000 Jeffrey D. Witous 50,000 Wright & Roy Investments LLC 13,000 ---------- Total 835,000
26 SCHEDULE II ----------- UNDERWRITERS ------------
Total Number of Firm Shares Name of Underwriters to be Purchased - -------------------- --------------- PaineWebber Incorporated 440,000 Hambrecht & Quist LLC 440,000 Piper Jaffray Inc. 440,000 Alex. Brown & Sons Incorporated 80,000 Donaldson, Lufkin & Jenrette Securities Corporation 80,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated 80,000 Morgan Stanley & Co. Incorporated 80,000 Prudential Securities Incorporated 80,000 Smith Barney Inc. 80,000 Fahnestock & Co. Inc. 50,000 GS2 Securities, Inc. 50,000 Ladenburg, Thalmann & Co., Inc. 50,000 Pennsylvania Merchant Group Ltd. 50,000 Torrey Pines Securities, Inc. 50,000 Tucker Anthony Incorporated 50,000 Unterberg Harris 50,000 Wessels, Arnold & Henderson, L.P. 50,000 ------------- Total 2,200,000
27 EXHIBIT A TRITEAL CORPORATION --------------------- PRICE DETERMINATION AGREEMENT February 19, 1997 PAINEWEBBER INCORPORATED HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. As Representatives of the several Underwriters c/o PaineWebber Incorporated 1285 Avenue of the Americas New York, New York 10019 Ladies and Gentlemen: Reference is made to the Underwriting Agreement, dated February 19, 1997 (the Underwriting Agreement"), among TriTeal Corporation, a Delaware corporation (the "Company"), the Selling Stockholders named in Schedule I thereto or hereto (the "Selling Stockholders"), and the several Underwriters named in Schedule II thereto or hereto (the "Underwriters"), for whom PaineWebber Incorporated, Hambrecht & Quist LLC and Piper Jaffray Inc. are acting as representatives (the "Representatives"). The Underwriting Agreement provides for the purchase by the Underwriters from the Company and the Selling Stockholders, subject to the terms and conditions set forth therein, of an aggregate of 2,200,000 shares (the "Firm Shares") of the Company's common stock, par value $.001 per share. This Agreement is the Price Determination Agreement referred to in the Underwriting Agreement. Pursuant to Section 1 of the Underwriting Agreement, the undersigned agree with the Representatives as follows: The public offering price per share for the Firm Shares shall be $19.25. A-1 28 The purchase price per share for the Firm Shares to be paid by the several Underwriters shall be $18.19 representing an amount equal to the public offering price set forth above, less $1.06 per share. The Company represents and warrants to each of the Underwriters that the representations and warranties of the Company set forth in Section 3 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. The Selling Stockholders represent and warrant to each of the Underwriters that the representations and warranties of the Selling Stockholders set forth in Section 4 of the Underwriting Agreement are accurate as though expressly made at and as of the date hereof. As contemplated by the Underwriting Agreement, attached as Schedule II is a completed list of the several Underwriters, which shall be a part of this Agreement and the Underwriting Agreement. This Agreement shall be governed by the law of the State of New York without regard to the conflict of laws principles of such State. If the foregoing is in accordance with your understanding of the agreement among the Underwriters, the Company and the Selling Stockholders, please sign and return to the Company a counterpart hereof, whereupon this instrument along with all counterparts and together with the Underwriting Agreement shall be a binding agreement among the Underwriters, the Company and the Selling Stockholders in accordance with its terms and the terms of the Underwriting Agreement. Very truly yours, TRITEAL CORPORATION By ------------------------------------ Jeffrey D. Witous, President, Chairman and Chief Executive Officer A-2 29 THE SELLING STOCKHOLDERS NAMED IN SCHEDULE I TO THE UNDERWRITING AGREEMENT By: The Committee By ------------------------------------ Confirmed as of the date first above mentioned: PAINEWEBBER INCORPORATED HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule II hereof. By: PAINEWEBBER INCORPORATED By ------------------------------- Title ---------------------------- HAMBRECHT & QUIST LLC By ------------------------------- Title ----------------------------- PIPER JAFFRAY INC. By ------------------------------- Title ----------------------------- A-3 30 EXHIBIT B POWER OF ATTORNEY TRITEAL CORPORATION Common Stock [Names and Addresses of Committee] Ladies and Gentlemen: The undersigned understands that TriTeal Corporation, a Delaware corporation (the "Company"), has filed a registration statement (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), in connection with the proposed public offering and sale by the Company, the undersigned (the "Selling Stockholder") and certain other Selling Stockholders of the Company's Common Stock, par value $.001 per share (the "Common Stock"). The Selling Stockholder desires to sell certain shares of Common Stock and to include such shares among the shares covered by the Registration Statement. The number of shares of Common Stock which the undersigned desires to sell (the "Shares") are set forth beneath the signature of the Selling Stockholder below. Concurrently with the execution and delivery of this Power of Attorney, the undersigned is delivering to you, or requesting the Company to deliver to you, certificates for the Shares, which you are authorized to deposit with American Stock Transfer & Trust Company, as custodian (the "Custodian"), pursuant to a custody agreement in the form attached as Attachment A hereto (the "Custody Agreement"). 1. In connection with the foregoing, the Selling Stockholder hereby makes, constitutes and appoints you collectively, and each of you, individually (a "Member") and each of your respective substitutes under Section 3, the true and lawful attorneys-in-fact of the undersigned (the Members or any of them or their respective substitutes, being herein referred to collectively as the "Committee"), with full power and authority, in the name and on behalf of the B-1 31 Selling Stockholder: (a) To enter into the Custody Agreement and deposit with the Custodian pursuant thereto the certificates for the Shares delivered to the Committee concurrently herewith; (b) For the purpose of effecting the sale of the Shares, to execute and deliver (i) an Underwriting Agreement (the "Underwriting Agreement"), by and among the Company, the other Selling Stockholders and the representatives (the "Representatives"), selected by the Company, of the several Underwriters (the "Underwriters") and (ii) a Price Determination Agreement (as defined in the Underwriting Agreement), by and among the Company, the other Selling Stockholders and the Representatives of the several Underwriters; (c) To endorse, transfer and deliver certificates for the Shares to or on the order of the Representatives or to their nominee or nominees, and to give such orders and instructions to the Custodian as the Committee may in its sole discretion determine with respect to (i) the transfer on the books of the Company of the Shares in order to effect such sale (including the names in which new certificates for such Shares are to be issued and the denominations thereof); (ii) the delivery to or for the account of the Representatives of the certificates for the Shares against receipt by the Custodian of the full purchase price to be paid therefor; (iii) the remittance to the Selling Stockholder of the Selling Stockholder's share of the proceeds, after payment of expenses described in the Underwriting Agreement, from any sale of Shares; and (iv) the return to the Selling Stockholder of certificates representing the number of Shares (if any) deposited with the Custodian but not sold by the Selling Stockholder under the Registration Statement for any reason; (d) To retain Cooley Godward LLP (who are also counsel to the Company) as legal counsel for the Selling Stockholders in connection with any and all matters referred to herein; (e) To take for the Selling Stockholder all steps deemed necessary or advisable by the Committee in connection with the registration of the Shares under the Act, including without limitation filing amendments to the Registration Statement, requesting acceleration of effectiveness of the Registration Statement, advising the Securities and Exchange Commission that the reason the Selling Stockholder is offering the Shares for sale is to diversify the Selling Stockholder's investments and to assist the Company in enlarging the public market for the Common Stock, informing said Commission that the Selling Stockholder has no knowledge of any material adverse information with regard to the current and prospective operations of the Company which is not stated in the Registration Statement, and such other steps as the Committee may in its absolute discretion deem necessary or advisable; (f) To make, acknowledge, verify and file on behalf of the Selling Stockholder applications, consents to service of process and such other B-2 32 undertakings or reports as may be required by law with state commissioners or officers administering state securities or Blue Sky laws and to take any other action required to facilitate the qualification of the Shares under the securities or Blue Sky laws of the jurisdictions in which the Shares are to be offered; (g) If necessary, to endorse (in blank or otherwise) on behalf of the Selling Stockholder the certificate or certificates representing the Shares, or a stock power or powers attached to such certificate or certificates; and (h) To make, execute, acknowledge and deliver all such other contracts, orders, receipts, notices, requests, instructions, certificates, letters and other writings and, in general, to do all things and to take all action which the Committee in its sole discretion may consider necessary or proper in connection with or to carry out the aforesaid sale of Shares, as fully as could the Selling Stockholder if personally present and acting. 2. This Power of Attorney and all authority conferred hereby is granted and conferred subject to and in consideration of the interests of the Company, the Representatives, the Underwriters and the other Selling Stockholders and, for the purpose of completing the transactions contemplated by this Power of Attorney, this Power of Attorney and all authority conferred hereby shall be irrevocable and shall not be terminated by any act of the Selling Stockholder or by operation of law, whether by the death, disability, incapacity or liquidation of the Selling Stockholder or by the occurrence of any other event or events (including without limitation the termination of any trust or estate for which the Selling Stockholder is acting as a fiduciary or fiduciaries), and if, after the execution hereof, the Selling Stockholder shall die or become disabled or incapacitated or is liquidated, or if any other such event or events shall occur before the completion of the transactions contemplated by this Power of Attorney, the Committee shall nevertheless be authorized and directed to complete all such transactions as if such death, disability, incapacity, liquidation or other event or events had not occurred and regardless of notice thereof. 3. Each Member shall have full power to make and substitute any person in the place and stead of such Member, and the Selling Stockholder hereby ratifies and confirms all that each Member or substitute or substitutes shall do by virtue of these presents. All actions hereunder may be taken by any one Member or his substitute. In the event of the death, disability or incapacity of any Member, the remaining Member or Members shall appoint a substitute therefor. 4. The Selling Stockholder hereby represents, warrants and covenants that: (a) All information furnished to the Company by or on behalf of the Selling Stockholder for use in connection with the preparation of the Registration Statement is and will be true and correct in all material respects B-3 33 and does not and will not omit any material fact necessary to make such information not misleading; (b) The Selling Stockholder, having full right, power and authority to do so, has duly executed and delivered this Power of Attorney; (c) The Selling Stockholder has carefully reviewed the Registration Statement and will carefully review each amendment thereto immediately upon receipt thereof from the Company and will promptly advise the Company in writing if: (i) The name and address of the Selling Stockholder is not properly set forth in each preliminary prospectus (collectively, the "Preliminary Prospectus") contained in the Registration Statement and the prospectuses (collectively, the "Prospectus") contained in the Registration Statement at the time it becomes effective; (ii) The Selling Stockholder has reason to believe that (A) any information furnished to the Company by or on behalf of the Selling Stockholder for use in connection with the Registration Statement or the Prospectus or any Preliminary Prospectus is not true and complete; and (B) any Preliminary Prospectus, the Prospectus and any supplements thereto contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iii) The Selling Stockholder knows of any material adverse information with regard to the current or prospective operations of the Company or any of its subsidiaries which is not disclosed in any Preliminary Prospectus, the Prospectus or the Registration Statement; or (iv) Except as indicated in the Prospectus, the Selling Stockholder knows of any arrangements made or to be made by any person, or of any transaction already effected, (A) to limit or restrict the sale of shares of the Common Stock during the period of the public distribution, (B) to stabilize the market for the Common Stock or (C) for withholding commissions, or otherwise to hold any other person responsible for the distribution of the Selling Stockholder's participation; (d) In connection with the offering of the Shares, the Selling Stockholder has not taken and will not take, directly or indirectly, any action intended to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Shares to facilitate the sale or resale of the Shares; B-4 34 (e) The Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than a Preliminary Prospectus, a Prospectus or other material permitted by the Act; (f) The Selling Stockholder will notify the Company in writing immediately of any changes in the foregoing information which should be made as a result of developments occurring after the date hereof and prior to the Closing Date under the Underwriting Agreement, and the Committee may consider that there has not been any such development unless advised to the contrary; (g) The Selling Stockholder has, and at the time of delivery of the Shares to the Representatives and the Manager[s] it will have, full power and authority to enter into this Power of Attorney, to carry out the terms and provisions hereof and to make all the representations, warranties and covenants contained herein; and (h) This Power of Attorney is the valid and binding agreement of the Selling Stockholder and is enforceable against the Selling Stockholder in accordance with its terms. 5. The representations, warranties and covenants of the Selling Stockholder in this Power of Attorney are made for the benefit of, and may be relied upon by, the other Selling Stockholders, the Committee, the Company and its counsel, and their representatives, agents and counsel, the Custodian, the Underwriters and the Representatives. 6. The Committee shall be entitled to act and rely upon any statement, request, notice or instructions respecting this Power of Attorney given to it by the Selling Stockholder, not only as to the authorization, validity and effectiveness thereof, but also as to the truth and acceptability of any information therein contained. It is understood that the Committee assumes no responsibility or liability to any person other than to deal with the Shares deposited with it and the proceeds from the sale of the Shares in accordance with the provisions hereof. The Committee makes no representations with respect to and shall have no responsibility for the Registration Statement, the Prospectus or any Preliminary Prospectus nor, except as herein expressly provided, for any aspect of the offering of Common Stock, and it shall not be liable for any error of judgment or for any act done or omitted or for any mistake of fact or law except for its own negligence or bad faith. The Selling Stockholder agrees to indemnify the Committee for and to hold the Committee harmless against any loss, claim, damage or liability incurred on its part arising out of or in connection with it acting as the Committee under this Power of Attorney, as well as the cost and expense of investigating and defending against any such B-5 35 loss, claim, damage or liability, except to the extent such loss, claim, damage or liability is due to the negligence or bad faith of the Member seeking indemnification. The Selling Stockholder agrees that the Committee may consult with counsel of its own choice (who may be counsel for the Company) and it shall have full and complete authorization and protection for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. It is understood that the Committee may, without breaching any express or implied obligation to the Selling Stockholder hereunder, release, amend or modify any other Power of Attorney granted by any other Selling Stockholder. [7. It is understood that the Committee shall serve entirely without compensation.] 8. This Power of Attorney shall be governed by the laws of the State of New York without regard to the conflict of laws principles of such State. This Power of Attorney may be signed in two or more counterparts with the same effect as if the signature thereto and hereto were upon the same instrument. In case any provision in this Power of Attorney shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This Power of Attorney shall be binding upon the Committee and the Selling Stockholder and the heirs, legal representatives, distributees, successors and assigns of the Selling Stockholder. Dated: __________, 19__ Very truly yours, ----------------------------------(1) ----------------------------------(1) Signature(s) of Selling Stockholder(s) - -------------------------- (1) To be signed in exactly the same manner as the shares are registered. B-6 36 ---------------------------------- Address: -------------------------- -------------------------- -------------------------- SHARES TO BE SOLD: shares of Common Stock ---------- ACKNOWLEDGED AND ACCEPTED: THE COMMITTEE: - ------------------------------------- - ------------------------------------- - ------------------------------------- - ------------------------------------- B-7 37 ATTACHMENT A CUSTODY AGREEMENT CUSTODY AGREEMENT, dated ________, 1997, among ______________________, as Custodian (the "Custodian"), and the persons listed on Annex I hereto (each a "Selling Stockholder" and collectively the "Selling Stockholders"). TriTeal Corporation, a Delaware corporation (the "Company"), intends to file a Registration Statement (the "Registration Statement") with the Securities and Exchange Commission to register for sale to the public under the Securities Act of 1933, as amended (the "Act"), shares of the Company's common stock, $.001 par value per share (the "Common Stock"). The shares to be covered by the Registration Statement shall consist of (a) up to _________ shares of Common Stock to be sold by the Company and (b) up to ________ shares of Common Stock (the "Shares") to be sold by the Selling Stockholders. Each of the Selling Stockholders has executed and delivered a Power of Attorney (the "Power of Attorney") naming _____________, ____________ and _______________, and each of them, as his attorney-in-fact (the "Committee"), for certain purposes, including the execution, delivery and performance of this Agreement in his name, place and stead, in connection with the proposed sale by each Selling Stockholder of the number of Shares set forth opposite such Selling Stockholder's name in Annex I. 1. A custody arrangement is hereby established by the Selling Stockholders with the Custodian with respect to the Shares, and the Custodian is hereby instructed to act in accordance with this Agreement and any amendments or supplements hereto authorized by the Committee. 2. There are herewith delivered to the Custodian, and the Custodian hereby acknowledges receipt of, certificates representing the Shares, which certificates have been endorsed in blank or are accompanied by duly executed stock powers, in each case with all signatures guaranteed by a commercial bank or trust company or by a member firm of the New York Stock Exchange, Inc., the American Stock Exchange, Inc. or a member of the National Association of Securities Dealers, Inc. Such certificates are to be held by the Custodian for the account of the Selling Stockholders and are to be disposed of by the Custodian in accordance with this Agreement. 3. The Custodian is authorized and directed by the Selling Stockholders: (a) To hold the certificates representing the Shares delivered by the -1- 38 Selling Stockholders in its custody; (b) On or immediately prior to the settlement date for any Shares sold pursuant to the Registration Statement (the "Closing Date"), to cause such Shares to be transferred on the books of the Company into such names as the Custodian shall have been instructed by the representatives (the "Representatives") of the several Underwriters (the "Underwriters"); to cause to be issued, against surrender of the certificates for the Shares, a new certificate or certificates for such Shares, free of any restrictive legend, registered in such name or names; to deliver such new certificates representing such Shares to the Representatives, as instructed by the Representatives on the Closing Date for their account or accounts against full payment therefor; and to give receipt for such payment; (c) To disburse such payments in the following manner: (i) to itself, as agent for the Selling Stockholders, a reserve amount to be designated in writing by the Committee from which amount the Custodian shall pay, as soon as reasonably practicable, (A) the Selling Stockholders' proportionate share of all expenses of the offering and sale of the Shares as provided in the Underwriting Agreement by and among the Company, the Selling Stockholders and the Representatives, (B) its reasonable charges and disbursements for acting hereunder with respect to the sale of the Shares and (C) any applicable stock transfer taxes; and (ii) to each Selling Stockholder, pursuant to the written instructions of the Committee, (A) on the Closing Date, a sum equal to the share of the proceeds to which such Selling Stockholder is entitled, as determined by the Committee, less the reserve amount designated by the Committee, and (B) promptly after all proper charges, disbursements, costs and expenses shall have been paid, any remaining balance of the amount reserved under clause (i) above. Before making any payment from the amount reserved under clause (i) above, except payments made pursuant to subclause (B) of clause (ii) above, the Custodian shall request and receive the written approval of the Committee. To the extent the expenses referred to in subclause (A) of clause (i) above exceed the amount reserved, the Selling Stockholders shall remain liable for their proportionate share of such expenses. Subject in each case to the indemnification obligations set forth in Section 7, in the event Shares of any Selling Stockholder are not sold [prior to ____________, 19__], the Custodian shall deliver to such Selling Stockholder as soon as practicable after such date termination of the offering of the Shares, certificates representing such Shares deposited by such Selling Stockholder. Certificates returned to any Selling Stockholder shall be returned with any related stock powers, and any new certificates issued to the Selling Stockholders with respect to such Shares shall bear any appropriate legend reflecting the unregistered status thereof under the Act. This Agreement is for the express benefit of the Company and the Selling Stockholders, the Underwriters and the Representatives. The obligations an -2- 39 authorizations of the Selling Stockholders hereunder are irrevocable and shall not be terminated by any act of any Selling Stockholder or by operation of law, whether by the death, disability, incapacity or liquidation of any Selling Stockholder or by the occurrence of any other event or events (including without limitation the termination of any trust or estate for which any Selling Stockholder is acting as a fiduciary or fiduciaries), and if after the execution hereof any Selling Stockholder shall die or become disabled or incapacitated or is liquidated, or if any other event or events shall occur before the delivery of such Selling Stockholder's Shares hereunder to the Representatives, such Shares shall be delivered to the Representatives in accordance with the terms and conditions of this Agreement, as if such event had not occurred, regardless of whether or not the Custodian shall have received notice of such event. Until payment of the purchase price for the Shares has been made to the Selling Stockholders or to the Custodian, the Selling Stockholders shall remain the owner of (and shall retain the right to receive dividends and distributions on, and to vote) the number of Shares delivered by each of them to the Custodian hereunder. Until such payment in full has been made or until the offering of Shares has been terminated, each Selling Stockholder agrees that it will not give, sell, pledge, hypothecate, grant any lien on, transfer, deal with or contract with respect to the Shares and any interests therein. The Custodian shall assume no responsibility to any person other than to deal with the certificates for the Shares and the proceeds from the sale of the Shares represented thereby in accordance with the provisions hereof, and the Selling Stockholders, severally and not jointly, hereby agree to indemnify the Custodian for and to hold the Custodian harmless against any and all losses, claims, damages or liabilities incurred on its part arising out of or in connection with it acting as the Custodian pursuant hereto, as well as the cost and expenses of investigating and defending any such losses, claims, damages or liabilities, except to the extent such losses, claims, damages or liabilities are due to the negligence or bad faith of the Custodian. The Selling Stockholders agree that the Custodian may consult with counsel of its own choice (who may be counsel for the Company), and the Custodian shall have full and complete authorization and protection for any action taken or suffered by the Custodian hereunder in good faith and in accordance with the opinion of such counsel. Each of the Selling Stockholders, jointly and not severally, hereby represents and warrants that: (a) it has, and at the time of delivery of its Shares to the Representatives it will have, full power and authority to enter into this Agreement and the Power of Attorney, to carry out the terms and provisions hereof and thereof and to make all of the representations, warranties and agreements contained herein and therein; and (b) this Agreement and the Power of Attorney are the valid and binding agreements of such Selling Stockholder and are enforceable against such Selling Stockholder in accordance with their respective terms. The Custodian's acceptance of this Agreement by the execution hereof -3- 40 shall constitute an acknowledgment by the Custodian of the authorization herein conferred and shall evidence the Custodian's agreement to carry out and perform this Agreement in accordance with its terms. The Custodian shall be entitled to act and rely upon any statement, request, notice or instruction with respect to this Agreement given to it on behalf of each of the Selling Stockholders if the same shall be made or given to the Custodian by the Committee, not only as to the authorization, validity and effectiveness thereof, but also as to the truth and acceptability of any information therein contained. This Agreement may be executed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. Execution by the Custodian of one counterpart hereof and its delivery thereof to the Committee shall constitute the valid execution of this Agreement by the Custodian. This Agreement shall be binding upon the Custodian, each of the Selling Stockholders and the respective heirs, legal representatives, distributees, successors and assigns of the Selling Stockholders. This Agreement shall be governed by the laws of the State of New York without regard to the conflict of laws principles of such State. Any notice given pursuant to this Agreement shall be deemed given if in writing and delivered in person, or if given by telephone or telegraph if subsequently confirmed by letter: (i) if to a Selling Stockholder, to his address set forth in Annex I; and (ii) if to the Custodian, to it at ___________________________. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ---------------------------------- __________, as Custodian THE SELLING STOCKHOLDERS LISTED IN ANNEX I HERETO: By: The Committee By -------------------------------- -4- 41 ANNEX I
Names and Addresses of Shares to be Sold Selling Stockholders -------- Total..................................... ========
42 EXHIBIT C _____ 1997 PAINEWEBBER INCORPORATED HAMBRECHT & QUIST LLC PIPER JAFFRAY INC. As Representatives of the several Underwriters c/o PaineWebber Incorporated 285 Avenue of the Americas New York, New York 10019 Dear Sirs: In consideration of the agreement of the several Underwriters, for which PaineWebber Incorporated, Hambrecht & Quist LLC and Piper Jaffray Inc. (the "Representatives") intend to act as Representatives, to underwrite a proposed public offering (the "Offering") of the Common Stock, par value $.001 per share (the "Common Stock") of TriTeal Corporation, a Delaware corporation (the "Company"), the undersigned hereby agrees that the undersigned will not, from the date hereof through ninety (90) days from the commencement of the public offering of such shares, without the prior written consent of PaineWebber Incorporated, offer to sell, sell, contract to sell, grant any option to sell, or otherwise dispose of, or require the Company to file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 to register, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to acquire shares of Common Stock of which the undersigned is now, or may in the future become, the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) (other than pursuant to employee stock option plans or in connection with other employee incentive compensation arrangements) provided, however, that the foregoing shall not prohibit (i) a bona fide gift or gifts so long as such donee or donees thereof agree to be bound by the terms of this Lock-Up Agreement, or (ii) any distribution by a partnership to its partners so long as such partners agree in writing to be bound by the terms of this Lock-Up Agreement. Very truly yours, By [SIGNATURE] ---------------------------- Name -------------------------- C-1 43 EXHIBIT D FORM OF OPINION OF COUNSEL TO THE COMPANY The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has full corporate power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. All of the outstanding shares of Common Stock have been, and the Shares, when paid for by the Underwriters in accordance with the terms of the Agreement, will be, duly and validly authorized, validly issued, fully paid and nonassessable are not subject to any preemptive or similar right under (i) the general corporation law of the State of Delaware, (ii) the Company's certificate of incorporation or bylaws, or (iii) any instrument, document, contract or other agreement filed as an exhibit to the Registration Statement. Except as described in the Registration Statement or the Prospectus, to the best of our knowledge, there is no commitment or arrangement to issue, and there are no outstanding options, warrants or other rights calling for the issuance of, any share of capital stock of the Company or any Subsidiary to any person or any security or other instrument that by its terms is convertible into, exercisable for or exchangeable for capital stock of the Company. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by the Company, in connection with the execution, delivery and performance of the Agreement(2) by the Company or in connection with the taking by the Company of any action contemplated thereby, except such as have been obtained under the Act and the Rules and Regulations and such as may be required under state securities or "Blue Sky" laws or by the bylaws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. The authorized, issued and outstanding capital stock of the Company was as set forth in the Registration Statement and the Prospectus under the caption "Capitalization" as of the date stated therein. For outstanding Common Stock, counsel may rely solely on a certificate from the Transfer Agent. The description of the Common Stock contained under the caption "Description of Capital Stock" in the Prospectus is accurate in all material - ------------------------- (2) All references in this opinion to the Agreement shall include the Underwriting Agreement and the Price Determination Agreement. D-1 44 respects and is a fair summary to the extent required by the Act and the Rules and Regulations. The form of stock certificate filed as an exhibit to the Registration Statement is in due and proper form and complies with all applicable statutory requirements. The Registration Statement and the Prospectus comply in all material respects as to form with the requirements of the Act and the Rules and Regulations (except that we express no opinion as to financial statements, schedules and other financial and statistical data contained in the Registration Statement or the Prospectus). To the best of our knowledge, any instrument, document, lease, license, contract or other agreement (collectively, "Documents") required to be described or referred to in the Registration Statement or the Prospectus has been properly described or referred to therein to the extent required by the Act and the Rules and Regulations and any Document required to be filed as an exhibit to the Registration Statement has been filed as an exhibit thereto. To the best of our knowledge, except as disclosed in the Registration Statement or the Prospectus, no person or entity has the right to require the registration under the Act of shares of Common Stock or other securities of the Company by reason of the filing or effectiveness of the Registration Statement or the offering contemplated thereby. To the best of our knowledge, there are no legal or governmental proceedings to which the Company is a party or to which any of the properties of the Company is subject which are required to be shown in the Prospectus under the Act and the Rules and Regulations. The Company has full corporate power and authority to enter into the Agreement, and the Agreement has been duly authorized, executed and delivered by the Company, is a valid and binding agreement of the Company and, except for the indemnification and contribution provisions thereof, as to which we express no opinion, is enforceable against the Company in accordance with the terms thereof. The execution and delivery by the Company of, and the performance by the Company of its agreements in, the Agreement do not and will not _.(i) violate the certificate of incorporation or bylaws of the Company, (ii) breach or result in a default under, cause the time for performance of any obligation to be accelerated under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of the Company or the Subsidiary pursuant to the terms of any Document filed as an exhibit to the Registration Statement (iii) breach or otherwise violate any existing obligation of the Company under any court or administrative order, judgment or decree of which we have knowledge or (iv) violate applicable provisions of any statute or regulation of the State of California, of the United States or the Delaware General Corporation Law. D-2 45 The Shares have been duly authorized for quotation on the Nasdaq National Market. We have been advised by the staff of the Commission that the Registration Statement has become effective under the Act and that no order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is threatened or pending. To our knowledge, there are no actions, suits, proceedings or investigations pending or, to our knowledge, overtly threatened in writing against the Company, before or by any court, governmental agency or arbitrator which _.(i) seek to challenge the legality or enforceability of the Agreement, (ii) seek to challenge the legality or enforceability of any of the Documents filed, or required to be filed, as exhibits to the Registration Statement, (iii) seek damages or other remedies with respect to any of the Documents filed, or required to be filed, as exhibits to the Registration Statement, (iv) except as set forth in or contemplated by the Registration Statement and the Prospectus, seek money damages in excess of $1,000,000 or seek to impose criminal penalties upon the Company or the Subsidiary of which we have knowledge or (v) seek to enjoin any of the business activities of the Company or the Subsidiary or the transactions described in the Prospectus and of which we have knowledge. In connection with the preparation of the Registration Statement and the Prospectus, we have participated in conferences with officers and representatives of the Company and with its certified public accountants (as you and your counsel have done). As such conferences we have made inquires of such officers, representatives and accountants, and discussed the contents of the Registration Statement and the Prospectus. Except with respect to matters expressly covered by paragraph 4 of this opinion, we have not ourselves independently verified, and, accordingly, do not render any opinion upon, the accuracy, completeness or fairness of the Registration Statement or the Prospectus. Based on the foregoing, nothing has come to our attention that causes us to believe that, as of the Effective Date, the Registration Statement contained any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus at the time such Prospectus was issued, or at the Closing Date [and the Option Closing Date,] contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading (except that we express no opinion as to financial statements, schedules and other financial or statistical data contained in the Registration Statement or the Prospectus). The foregoing opinion is subject to the qualification that the D-3 46 enforceability of the Agreement may be: _.(i) subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and (ii) subject to general principles of equity and limitations on the availability of equitable remedies (regardless of whether such enforceability is considered in a proceeding at law or in equity), including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. This letter is furnished by us solely for your benefit in connection with the transactions referred to in the Agreement and may not be circulated to, or relied upon by, any other person, except that this letter may be relied upon by your counsel in connection with the opinion letter to be delivered to you pursuant to Section 6(g) of the Agreement. In rendering the foregoing opinion, counsel may rely, to the extent they deem such reliance proper, on the opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to Underwriters' counsel as to matters governed by the laws of jurisdictions other than the United States, the State of California and the State of Delaware, and as to matters of fact, upon certificates of officers of the Company and of government officials; provided that such counsel shall state that the opinion of any other counsel is in form satisfactory to such counsel. Copies of all such opinions and certificates shall be furnished to counsel to the Underwriters on the Closing Date. D-4 47 EXHIBIT E FORM OF OPINION --------------- OF COUNSEL TO THE ----------------- SELLING STOCKHOLDERS -------------------- [Each of the Selling Stockholders who is a trustee has full power and authority under his or her respective trust agreement to enter into the Agreement and the Agreement and Power of Attorney and to sell, transfer and deliver the Shares pursuant to the Agreement. All authorizations and consents necessary under the respective trust agreements for the execution and delivery of the Agreement and the Agreement and Power of Attorney on behalf of each of the Selling Stockholders who is a trustee has been given.] Assuming each of the Underwriters has purchased the Shares in good faith and without notice of any adverse claim within the meaning of the applicable Uniform Commercial Code, the delivery of the Shares on behalf of the Selling Stockholders pursuant to the terms of the Agreement and payment therefor by the Underwriters will transfer good and marketable title to the Shares to the several Underwriters purchasing the Shares, free and clear of any adverse claims. Each of the Agreement and the Agreement and Power of Attorney has been duly authorized, executed and delivered by or on behalf of each of the Selling Stockholders, is a valid and binding agreement of each Selling Stockholder and, except for the indemnification and contribution provisions of the Agreement and the Agreement and Power of Attorney are enforceable against the Selling Stockholders in accordance with the terms thereof. No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by or on behalf of the Selling Stockholders, in connection with the execution, delivery and performance of the Agreement and the Agreement and Power of Attorney by or on behalf of the Selling Stockholders or in connection with the taking by or on behalf of the Selling Stockholders of any action contemplated thereby [or, if so required, all such consents, approvals, authorizations and orders [specifying the same] have been obtained and are in full force and effect], except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or "Blue Sky" laws or by the bylaws and rules of the NASD in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Selling Stockholders. The execution and delivery by the Selling Stockholders of, and the performance by the Selling Stockholders of their agreements in, the Agreement E-1 48 and the Agreement and Power of Attorney, do not and will not (i) violate the certificate of incorporation or bylaws of any corporate Selling Stockholder, (ii) breach or result in a default under, cause the time for performance of any obligation to be accelerated under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of any Selling Stockholder pursuant to the terms of (A) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement, capital lease or other evidence of indebtedness of which we have knowledge, or (B) any voting trust arrangement to which any Selling Stockholder is a party that restricts the ability of any such Selling Stockholder to issue or sell securities and of which we have knowledge, (iii) breach or otherwise violate any existing obligation of any Selling Stockholder under any court or administrative order, judgment or decree of which we have knowledge or (iv) violate applicable provisions of any statute or regulation in the States of Delaware, California or of the United States. There are no transfer or similar taxes payable in connection with the sale and delivery of the Shares by the Selling Stockholders to the several Underwriters, except as specified in such opinion. The foregoing opinion is subject to the qualification that the enforceability of the Agreement and the Agreement and Power of Attorney may be: _.(i) subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally; and (ii) subject to general principles of equity and limitations on the availability of equitable remedies (regardless of whether such enforceability is considered in a proceeding at law or in equity), including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. This letter is furnished by us solely for your benefit in connection with the transactions referred to in the Agreement and may not be circulated to, or relied upon by, any other person, [except that this letter may be relied upon by your counsel in connection with the opinion letter to be delivered to you pursuant to Section 6(g) of the Agreement]. In rendering the foregoing opinion, counsel may rely, to the extent they deem such reliance proper, on the opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to Underwriters' counsel as to matters governed by the laws of jurisdictions other than the United States and the State of Delaware, and as to matters of fact, upon certificates of the Selling Stockholders and of government officials; provided that such counsel shall state that the opinion of any other counsel is in form satisfactory to such counsel. Copies of all such opinions and certificates shall be furnished to counsel to the Underwriters on the Closing Date. E-2 EX-10.31 4 EXHIBIT 10.31 1 - ------------------------------------------------------------------------------- EXHIBIT 10.31 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- TRITEAL =============================================================================== PERFORMANCE INCENTIVE PLAN Fiscal Year 1998 =============================================================================== June 2, 1997 - ----------------------------------------------------TRITEAL-------------------- 1 2 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- A. PURPOSE The purpose of the Performance Incentive Plan ("Plan") is to encourage the achievement of Company performance objectives through teamwork at the Company, unit and individual level. - ------------------------------------------------------------------------------- B. ELIGIBILITY TO PARTICIPATE o Group A Participants: CEO Officers Other selected senior level employees* * Employees covered by other incentive arrangements may be transitioned into the Plan by FY 1999 Provisions pertaining to Group A participants: - Identified at the start of the fiscal year - New hires are eligible on a pro-rated basis - Employees promoted into a participating position are eligible on a pro-rated basis - Participants terminating prior to the end of the Plan period are not eligible for that period, unless termination is due to death, disability, or normal retirement, in which event a prorated incentive may be paid - No incentive is payable to the participant for the Plan period if the participant is on a written Performance Plan o Group B Participants: All employees not in Group A or participating in any of the Company's sales incentive plans will be eligible to participate in a discretionary bonus pool. Actual recipients will be determined according to the process outlined in Section H below. - ------------------------------------------------------------------------------- C. TARGET and MAXIMUM INCENTIVES: GROUP A PARTICIPANTS o Incentives expressed as percentage of base salary earned during each Plan period. o Target incentive guidelines by participant level:* CEO 50% Officers 25% - 35% Vice Presidents/Directors 20% - 30% Senior Individual Contributors 10% - 15% * Variations may be made on an approved basis - ----------------------------------------------------TRITEAL-------------------- 2 3 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- o No maximum individual incentive, subject to limitation on "over Plan" incentives specified in Section F below. - -----------------------------------------------------TRITEAL-------------------- 3 4 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- D. PLAN PERIODS o Group A Participants: Incentives will be determined and paid on a quarterly basis; incentives for performance over Plan, if any, will be determined and paid on an annual basis. o Group B Participants: Discretionary bonuses will be determined and paid generally on an annual basis, although bonuses may be paid during the year, as appropriate. - ------------------------------------------------------------------------------- E. COMPANY PERFORMANCE OBJECTIVES and THRESHOLDS: GROUP A PARTICIPANTS o At the start of the Plan year, Company performance objectives will be established by quarter for revenue ($) and operating income ($, excluding, as an expense, the accrual for target incentives under the Plan). o At the end of each Plan period, the Company performance level will be determined, based upon the weighted average of the % achievement of the revenue objective and the % achievement of the operating income objective, with revenue performance weighted 2:1 compared to operating income performance. o Example: If 100% of the revenue objective is achieved and 97% of the operating income objective is achieved, the Company performance level is calculated as 100% x 2 = 200% + 97% = 297% + 3 = 99%. o For Group A participants, company performance will be measured on a cumulative basis, as follows: Q1 incentive: Q1 performance vs. Q1 objectives Q2 incentive: Q1 + Q2 performance vs. Q1 + Q2 objectives Q3 incentive: Q1 + Q2 + Q3 performance vs. Q1 + Q2 + Q3 objectives Q4 incentive: Q1 + Q2 + Q3 +Q4 performance vs. Q1 + Q2 + Q3 + Q4 objectives o Thresholds: For any incentives to be paid to Group A participants for a given quarter, each of the following minimum Company performance levels must be achieved: Revenue At least 80% of objectives Operating income At least 70% of objectives In addition, the weighted average of revenue performance and operating income performance must be at least 80% achievement of objectives. - ----------------------------------------------------TRITEAL-------------------- 4 5 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- F. INCENTIVE DETERMINATION PROCESS: GROUP A PARTICIPANTS o Incentives for Group A participants will be determined based 100% upon Company performance. However, regardless of Company performance, no incentive will be paid to a Group A participant for a given Plan period if the participant is on a written Performance Plan at the end of the Plan period. o At the end of each of the first three Plan quarters, each Group A participant's incentive will be determined based upon multiplying the participant's target incentive by an adjustment factor, using the scale below: Quarterly Quarterly Company Performance Level Target Incentive (Weighted Average % Achievement of Objectives) Adjustment Factor Over 100% 1.00 100% 1.00 95% 0.90 90% 0.80 85% 0.70 80% 0.60 Under 80% 0.00 o At the end of the 4th Plan quarter, each Group A participant's incentive will be determined by multiplying the participant's target incentive by an adjustment factor, according to the following process: - The participant's Q4 target incentive will be based upon a % of full year base salary earned, rather than base salary for the quarter. - The Q4 incentive may exceed 100% of the target incentive, if cumulative Company performance is greater than 100% achievement of objectives. However, the total "over Plan" incentives for all Group A participants may not exceed 30% of the amount of actual annual operating income that is greater than targeted operating income. - Since the Q4 incentive is based upon full year Company performance and the participant's full year base salary, the actual incentive paid (if any) to the Group A participant will be the full year incentive minus incentive payments made for Q1, Q2 and Q3 (provided, however, that incentives previously paid will not be repaid to the Company if the full year incentive is less than the total of the Q1 + Q2 + Q3 incentive payments). - ----------------------------------------------------TRITEAL-------------------- 5 6 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- F. INCENTIVE DETERMINATION PROCESS: GROUP A PARTICIPANTS (continued) - The following adjustment factor scale will be used for the Q4 incentive: Q1 + Q2 + Q3 + Q4 Q4 Company Performance Level Target Incentive (Weighted Average % Achievement of Objectives) Adjustment Factor Over 150% * 150% 2.00 140% 1.80 130% 1.60 120% 1.40 110% 1.20 100% 1.00 90% 0.80 80% 0.60 Under 80% 0.00 * Slope continues at 2:1 (e.g., at 160% Company performance level, the target incentive adjustment factor would be 2.20) - ------------------------------------------------------------------------------- G. SAMPLE CALCULATION: GROUP A PARTICIPANTS o Participant A = annual base salary of 160,000, target incentive of 35% base o Assume the following hypothetical Company performance targets and actual performance levels:
QUARTERLY Weighted YEAR TO DATE Weighted Operating Average Operating Average Revenue (M) Income (M) Performance Revenue (M) Income (M) Performance Q1 Target 5.0 0.5 5.0 0.5 Actual 5.2 0.5 5.2 0.5 % Target 104.0% 100.0% 102.7% 104.0% 100.0% 102.7% - ----------------------------------------------------------------------------------------------------------- Q2 Target 7.0 1.0 12.0 1.5 Actual 5.8 0.7 11.0 1.2 % Target 82.9% 70.0% 78.6% 91.7% 80.0% 87.8% - ----------------------------------------------------------------------------------------------------------- Q3 Target 8.0 1.5 20.0 3.0 Actual 9.0 1.7 20.0 2.9 % Target 112.5% 113.3% 112.8% 100.0% 96.7% 98.9% - ----------------------------------------------------------------------------------------------------------- Q4 Target 10.0 2.2 30.0 5.2
- ----------------------------------------------------TRITEAL-------------------- 6 7 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - -------------------------------------------------------------------------------
Actual 11.8 3.1 31.8 6.0 % Target 118.0% 140.9% 125.6% 106.0% 115.4% 109.1%
- ----------------------------------------------------TRITEAL-------------------- 7 8 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- G. SAMPLE CALCULATION: GROUP A PARTICIPANTS (continued) o Q1, Q2, Q3 Incentive Calculation:
Q1 Q2 Q3 Quarterly Base Salary 40,000 40,000 40,000 Target Incentive % 35% 35% 35% Target Incentive 14,000 14,000 14,000 Company Performance YTD 102.7% 87.8% 98.9% Incentive Adjustment Factor *1.000 0.756 0.978 Incentive 14,000 10,584 13,692
* Capped at 100% o Q4 Incentive Calculation: Full year base salary 160,000 Target incentive % 35% Target incentive 56,000 Company Performance YTD 109.1% Incentive Adjustment Factor 1.182 Incentive 66,192 Minus Q1, Q2, Q3 Payments (38,276) Final Q4 incentive *27,916
* Subject to cap of 30% of incremental operating income over Plan that can be applied to total of Group A participants' actual incentives over target - ----------------------------------------------------TRITEAL-------------------- 8 9 - ------------------------------------------------------------------------------- PERFORMANCE INCENTIVE PLAN FY 1998 - ------------------------------------------------------------------------------- H. BONUS DETERMINATION PROCESS: GROUP B PARTICIPANTS o Target discretionary bonus pool determined at start of Plan year based upon base payroll of eligible participants, targeted participation percentage and projected typical discretionary bonus size. o Example (hypothetical): - Total base payroll for eligible Group B participants = $5,000,000 - Targeted participation percentage = 20% - Targeted participating payroll = $5,000,000 x .20 = $1,000,000 - Typical discretionary bonus = 5% base salary - Discretionary bonus pool = $1,000,000 x .05 = $50,000 o The discretionary bonus pool will be budgeted for the Plan year, rather than accrued based upon company performance. o Discretionary bonuses should generally not be less than $500 nor more than $2,500 per recipient. o Discretionary bonus award process: - Participation based upon outstanding individual performance - Candidates for award recommended by immediate supervisor, detailing performance basis for award - Candidates reviewed and approved by appropriate Officer - Final awards subject to review and approval of CEO - ----------------------------------------------------TRITEAL-------------------- 9 EX-11.1 5 EXHIBIT 11.1 1 EXHIBIT 11.1 TRITEAL CORPORATION STATEMENT REGARDING CALCULATION OF NET INCOME (LOSS) PER SHARE (In thousands, except per share amounts)
Years Ended March 31, -------------------------------- 1997 1996 1995 ------ ------- ------- Net income (loss) ........................ $(1,910) $(4,842) $ 116 ======= ======= ======= Average common shares outstanding ........ 7,520 3,493 4,011 Adjustments to reflect requirements of the Securities and Exchange Commission (Effect of SAB 83) ....................... 908 2,492 2,492 Effect of assumed conversion of Series A convertible preferred shares from date of issuance ................................. - 727 - ------- ------- ------- Adjusted shares outstanding .............. 8,428 6,712 6,503 ======= ======= ======= Net income (loss) per share(1) ........... $ (.23) $ (.72) $ 0.02 ======= ======= =======
(1) Common equivalent shares are excluded from the computation for loss periods, as their effect is antidulitive, except that, pursuant to SAB 83, common shares and common equivalent shares issued during the 12 months prior to the Company's June 1996 initial public offering have been included in the calculation as outstanding for all periods prior to the initial public offering. EX-23.1 6 EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No.333-13957) pertaining to the 1995 Stock Option Plan, 1996 Employee Stock Purchase Plan and the Non-Plan Stock Options of TriTeal Corporation of our report dated April 30, 1997, with respect to the consolidated financial statements of TriTeal Corporation included in this Annual Report (Form 10-K) for the year ended March 31, 1997. /s/ ERNST & YOUNG LLP San Diego, California June 24, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 11,614,707 31,248,987 9,048,817 (300,000) 0 53,808,623 2,594,889 (1,033,280) 55,700,854 7,585,234 0 0 0 10,768 48,104,852 55,700,854 15,825,725 15,825,725 3,395,323 15,241,529 0 220,000 0 (1,909,843) 0 (1,909,843) 0 0 0 (1,909,843) (.23) 0
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