-----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, GpO8V46Dq+I8HDKDHIgK9eFV3SihzeFGuuvNvJC4r0wunE79UORxWWBaWhepkPJs CoevwNzZYg+DURc+zRHkeA== 0000891618-99-001663.txt : 19990421 0000891618-99-001663.hdr.sgml : 19990421 ACCESSION NUMBER: 0000891618-99-001663 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARIMBA INC CENTRAL INDEX KEY: 0001078295 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770422318 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-72353 FILM NUMBER: 99597492 BUSINESS ADDRESS: STREET 1: 440 CLYDE AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 6509305282 MAIL ADDRESS: STREET 1: 440 CLYDE AVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 S-1/A 1 AMENDMENT #4 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1999. REGISTRATION NO. 333-72353 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MARIMBA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 7372 77-0422318 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
440 CLYDE AVENUE MOUNTAIN VIEW, CALIFORNIA 94043 (650) 930-5282 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ KIM K. POLESE PRESIDENT AND CHIEF EXECUTIVE OFFICER MARIMBA, INC. 440 CLYDE AVENUE MOUNTAIN VIEW, CALIFORNIA 94043 (650) 930-5282 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: SCOTT C. DETTMER, ESQ. GORDON K. DAVIDSON, ESQ. BENNETT L. YEE, ESQ. DAVID K. MICHAELS, ESQ. BRANDI L. GALVIN, ESQ. CYNTHIA E. GARABEDIAN, ESQ. AMY S. COHEN, ESQ. FENWICK & WEST LLP GUNDERSON DETTMER STOUGH TWO PALO ALTO SQUARE VILLENEUVE FRANKLIN & HACHIGIAN, LLP PALO ALTO, CALIFORNIA 94306 155 CONSTITUTION DRIVE (650) 494-0600 MENLO PARK, CALIFORNIA 94025 (650) 321-2400
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued April 20, 1999 4,000,000 Shares LOGO COMMON STOCK MARIMBA, INC. IS OFFERING 3,548,000 SHARES OF ITS COMMON STOCK AND THE SELLING STOCKHOLDERS LISTED ON PAGES 63 - 64 ARE OFFERING 452,000 SHARES. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $13 AND $15 PER SHARE. ------------------------- WE HAVE FILED AN APPLICATION FOR THE COMMON STOCK TO BE QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "MRBA." ------------------------- INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------- PRICE $ A SHARE -------------------------
UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING PUBLIC COMMISSIONS MARIMBA, INC. STOCKHOLDERS -------- ------------- ------------- ------------ Per Share................. $ $ $ $ Total..................... $ $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Marimba and the selling stockholders have granted the underwriters the right to purchase up to an additional 600,000 shares of common stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 1999. ------------------------- MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON BT ALEX. BROWN HAMBRECHT & QUIST , 1999 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 5 Special Note Regarding Forward-Looking Statements........ 16 Use of Proceeds..................... 17 Dividend Policy..................... 17 Capitalization...................... 18 Dilution............................ 19 Selected Consolidated Financial Data.............................. 20 Management's Discussion And Analysis of Financial Condition and Results of Operations..................... 21
PAGE ---- Business............................ 32 Management.......................... 49 Certain Transactions................ 60 Principal And Selling Stockholders...................... 62 Description Of Capital Stock........ 64 Shares Eligible For Future Sale..... 67 Underwriters........................ 69 Legal Matters....................... 71 Experts............................. 71 Where You Can Find More Information....................... 72 Index To Consolidated Financial Statements........................ F-1
------------------------ We were incorporated in Delaware in February 1996. Our principal executive offices are located at 440 Clyde Avenue, Mountain View, California 94043, and our telephone number is (650) 930-5282. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the common stock. Unless otherwise indicated, all information in this prospectus (1) gives effect to the conversion of all outstanding shares of preferred stock into shares of common stock effective upon the closing of the offering, (2) assumes no exercise of the underwriters' over-allotment option and (3) assumes no exercise of an outstanding warrant to purchase 16,865 shares of our common stock. ------------------------ Marimba(R) and Castanet(R) are our trademarks. This prospectus also contains trademarks of other companies. 2 4 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Marimba and the common stock being sold in this offering and our financial statements and notes appearing elsewhere in this prospectus. MARIMBA, INC. Marimba is a leading provider of Internet-based software management solutions that enable companies to expand their market reach, streamline business processes and strengthen relationships with customers, business partners and employees. Our Castanet product family provides an efficient and reliable way for enterprises to distribute, update and manage applications and related data over corporate intranets, extranets and the Internet. Companies are increasingly relying on the Internet to deliver business critical applications and services to users inside and outside the enterprise. As the Internet has evolved as a business tool, demands on its infrastructure have grown and the enterprise computing environment is becoming more complex. Furthermore, as business applications are increasingly being advertised and delivered as services, companies and their customers are demanding the same high levels of availability, ease of use and quality of service that they expect from common utilities, including electricity and telephone systems. This has created significant software management challenges. As a result, there is a need for a new management solution designed specifically for the Internet. Marimba develops Internet services management solutions that enable companies to deploy and manage e-business applications and services, which encompass business-to-business, business-to-employee and business-to-consumer communications and transactions over corporate intranets, extranets and the Internet. Castanet centralizes and automates the ongoing distribution and management of applications and services. We believe that by using Castanet, organizations can leverage the Internet to reduce software management costs, deliver greater functionality and improve customer loyalty. We intend to extend the Castanet foundation to manage the array of infrastructure, systems and components upon which business applications and services depend. The key elements of our strategy are to extend our technological leadership position, target companies and service providers conducting e-business, expand our worldwide distribution channels and expand our professional service capabilities. Our global customer base spans multiple industry segments including financial services, insurance, retail, manufacturing and telecommunications. Castanet customers include various industry leaders, including Bear Stearns, Charles Schwab, EarthLink, The Home Depot, Intuit, Ingram Micro, Seagate Technology and Sun Microsystems. We market our Castanet product worldwide through a combination of a direct sales force, resellers and distributors. 3 5 THE OFFERING Common stock offered by us...................... 3,548,000 shares Common stock offered by the selling stockholders.................................. 452,000 shares Common stock to be outstanding after the offering...................................... 22,745,775 shares(1) Over-allotment option........................... 600,000 shares Use of proceeds................................. Working capital and general corporate purposes. See "Use of Proceeds." Dividend policy................................. We do not anticipate paying cash dividends in the immediate future. Proposed Nasdaq National Market symbol.......... MRBA
- ------------------------- (1) Based on the number of shares outstanding as of March 31, 1999. Excludes 1,959,930 shares of common stock issuable upon exercise of outstanding options and warrants as of March 31, 1999 at a weighted average exercise price of $4.099. Between March 31, 1999 and April 19, 1999, we granted options to purchase 1,040,000 shares of our common stock at an exercise price of $15.00 per share. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM YEAR ENDED FEBRUARY 21, 1996 DECEMBER 31, (INCEPTION) TO ------------------ DECEMBER 31, 1996 1997 1998 ----------------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ -- $ 5,563 $17,085 Loss from operations........................................ (1,310) (7,902) (6,128) Net loss.................................................... (1,245) (7,718) (5,681) Basic and diluted net loss per share........................ $ (.81) $ (1.57) $ (.59) Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share............ 1,528 4,912 9,606 Pro forma basic and diluted net loss per share (unaudited)............................................... $ (.37) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)......................... 15,359
DECEMBER 31, 1998 -------------------------- ACTUAL AS ADJUSTED(1) -------- -------------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 7,825 $ 52,109 Working capital............................................. 2,912 47,355 Total assets................................................ 14,862 59,146 Long-term portion of capital lease obligations and equipment advances, and other long-term liabilities................. 747 95 Redeemable convertible preferred stock...................... 18,953 -- Stockholders' equity (net capital deficiency)............... (13,743) 50,305
- ------------------------- (1) Adjusted to reflect our sale of 3,548,000 shares of common stock in this offering, at an assumed initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by us and the application of our net proceeds from this offering. RECENT DEVELOPMENTS For the three months ended March 31, 1999, we had total revenues of $6.1 million. Total revenues were comprised of $4.5 million from license revenues and $1.6 million from service revenues. Net loss for the three months ended March 31, 1999 was $1.6 million. Revenues increased due to sales from new and existing customers that closed during the quarter. We also increased operating expenses during the quarter as we continued to expand our organization in all operating areas. 4 6 RISK FACTORS This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the following risk factors and the other information in this prospectus before investing in our common stock. Our business and results of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS OUR LIMITED OPERATING HISTORY MAY PREVENT US FROM ACHIEVING SUCCESS IN OUR BUSINESS We were founded in February 1996 and have a limited operating history. We began offering our Castanet product in January 1997 and released Castanet 4.0 in March 1999. As a result, we have a limited operating history that may prevent us from achieving success in our business. The revenues and income potential of our business and market are unproven. We will encounter challenges and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets. We may not successfully address any of these challenges and the failure to do so would seriously harm our business and operating results. In addition, because of our limited operating history, we have limited insight into trends that may emerge and affect our business. WE HAVE INCURRED LOSSES AND WE EXPECT FUTURE LOSSES Our failure to significantly increase our revenues would seriously harm our business and operating results. We have experienced operating losses in each quarterly and annual period since inception and we expect to incur significant losses in the future. We incurred net losses of $1.2 million for the period ended December 31, 1996, $7.7 million for the year ended December 31, 1997 and $5.7 million for the year ended December 31, 1998. As of December 31, 1998, we had an accumulated deficit of $14.6 million. We expect to significantly increase our research and development, sales and marketing and general and administrative expenses. As a result, we will need to significantly increase our quarterly revenues to achieve and maintain profitability. We may not be able to sustain our recent revenue growth rates. In fact, we may not have any revenue growth, and our revenues could decline. For a more detailed description of our operating results, please see "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND FUTURE OPERATING RESULTS REMAIN UNCERTAIN Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. As a result, we believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicators of our future performance. In the future, our operating results will likely be below the expectations of securities analysts and investors. Our failure to meet these expectations would likely seriously harm the market price of our common stock. Operating results vary depending on a number of factors, many of which are outside our control. These factors include: - The number and timing of large orders, a small number of which can significantly affect our revenue and potential seasonality in our sales; - The level of market acceptance for our products, particularly our newly-introduced Castanet 4.0; - The effectiveness of our reseller, systems integrator and original equipment manufacturing partners, particularly Tivoli Systems, Inc., in selling our Castanet products; - Changes in our customers' budgets; and - The cost of our litigation with Novadigm, Inc. In addition, we anticipate that the size of customer orders may increase as we focus on larger business accounts. As a result, a delay in recognizing revenue, even from just one account, could have a 5 7 significant negative impact on our operating results. In the past, a significant portion of our sales have been realized near the end of a quarter. As a result, a delay in an anticipated sale past the end of a particular quarter could negatively impact our operating results. We expect that revenues in the first quarter of each year will be lower than revenues in the fourth quarter of the preceding year. We believe this trend will be primarily due to the annual nature of budgetary, purchasing and sales cycles. Our expense levels are relatively fixed and are based, in part, on expectations as to future revenues. As a result, if revenue levels fall below our expectations, our net loss will increase because only a small portion of our expenses vary with our revenues. For a more detailed description of our quarterly results, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE EXPECT SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES We intend to substantially increase our operating expenses as we: - Increase our sales and marketing activities, including expanding our direct sales force; - Increase our research and development activities; - Expand our customer support and professional services organizations; and - Expand our distribution channels. With these additional expenses, we must significantly increase our revenues in order to become profitable. These expenses will be incurred before we generate any revenues by this increased spending. If we do not significantly increase revenues from these efforts, our business and operating results would be seriously harmed. OUR SUCCESS DEPENDS ON OUR CASTANET PRODUCT FAMILY AND NEW PRODUCT DEVELOPMENT We expect to continue to derive substantially all of our revenues from our Castanet software product family and related services. As a result, our success depends on our Castanet product family and new product development. A decline in the price of Castanet or our inability to increase sales of Castanet would seriously harm our business and operating results. We cannot predict Castanet's success for several reasons, including: - The recent emergence of the market for Internet services management solutions; - The level of acceptance of our new products and product enhancements; - The risk of technological changes; and - Future competition. Our strategy requires Castanet to be highly scalable -- in other words, able to rapidly increase deployment size from a limited number of end-users to a very large number of end-users. If we are unable to achieve this level of scalability, the attractiveness of our products and services would be diminished. In addition, to provide a comprehensive Internet services management solution, we will need to develop and introduce new technologies and product suites and offer functionality that we do not currently provide. We may not be able to expand our product offerings or develop a comprehensive Internet services management solution. In March 1999 we introduced Castanet 4.0, which is designed to provide customers with additional functionality. Castanet 4.0 may not provide the benefits we expect, and Castanet 4.0 could fail to meet customers' requirements or achieve widespread market acceptance. In the past, we have experienced delays in new product releases, and we may experience similar delays in the future. If we fail to deploy new product releases on a timely basis, our business and operating results could be seriously harmed. 6 8 WE DEPEND ON THE GROWTH OF OUR CUSTOMER BASE Our success is substantially dependent on the continued growth of our customer base and the retention of our current customers. If we fail to increase our customer base, our business and operating results would be seriously harmed. Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability and cost-effectiveness of our products and services as well as our ability to effectively market our products and services. In the past, we have lost potential customers to competitors for various reasons, including lower prices. WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS We depend on increased business from our current customers. If we fail to generate repeat and expanded business from our customers, our business and operating results would be seriously harmed. Most of our current customers initially purchase a license for a small portion of our products and services for pilot programs. Customers may not purchase additional licenses to expand their use of Castanet. In addition, as we deploy new versions of Castanet or introduce new product suites, our current customers may not require the functionality of our new products and may not ultimately license these products. The terms of our standard license arrangements provide for a one-time license fee and a prepayment of one year of software maintenance and support fees. The maintenance agreement is renewable at the option of the customer. Because the total amount of maintenance and support fees we receive in any period depends in large part on the size and number of licenses that we have previously sold, any downturn in our software license revenues would negatively impact our future service revenues. In addition, if customers elect not to renew their maintenance agreements, our service revenues could be significantly adversely affected. WE HAVE A LONG SALES CYCLE THAT DEPENDS UPON FACTORS OUTSIDE OUR CONTROL A customer's decision to purchase Castanet typically involves a significant commitment of resources and is influenced by the customer's budget cycles. In addition, selling Castanet requires us to educate potential customers on its use and benefits. As a result, our products have a long sales cycle which can take over six months. We face difficulty predicting the quarter in which sales to expected customers may occur. The sale of our products is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to testing our products before they decide whether or not to purchase a license for deployment. Customers may also defer orders as a result of anticipated releases of new products or enhancements by us or our competitors. WE DEPEND ON OUR RELATIONSHIP WITH TIVOLI Tivoli, a subsidiary of International Business Machines Corporation, has been a reseller of our products since 1997. Any disruption of our relationship with Tivoli would seriously harm our business and operating results. Tivoli accounted for $3.1 million, or approximately 18% of our revenues in 1998. This includes $1.9 million, or approximately 40% of our revenues, in the third quarter of 1998 and $1.1 million, or approximately 19% of our revenues, in the fourth quarter of 1998. Because a significant amount of our revenues has been and is expected to be derived from Tivoli, we are dependent on our relationship with Tivoli. In March 1998, we entered into an original equipment manufacturer agreement with Tivoli under which Tivoli is building upon the Castanet infrastructure to develop a product called Cross-Site. We expect Tivoli to release Cross-Site in 1999. As a result, we expect to generate revenues from royalties on sales of Cross-Site beginning in 1999 and expect that revenues from Tivoli's resale of Castanet will rapidly decrease and become insignificant as Tivoli transitions its efforts to the sale of Cross-Site. The per seat payment under our original equipment manufacturer agreement will be less than the per seat 7 9 payment under our reseller agreement with Tivoli. In addition, the change in our relationship with Tivoli from a reseller relationship to an original equipment manufacturer relationship will require significantly increased ongoing technological assistance to, and collaboration with Tivoli to support the integration of Castanet into Cross-Site. This collaboration may be unsuccessful. Tivoli might be unable to introduce Cross-Site by its expected release date. Furthermore, because Cross-Site is a new product, Tivoli might fail to successfully market and sell Cross-Site. Any failure of Cross-Site to achieve widespread market acceptance could significantly harm our business and operating results. Our reseller agreement with Tivoli expires upon the earlier of May 1, 1999 or written notice provided to us by Tivoli. If the release of Cross-Site is delayed beyond May 1, 1999, Tivoli would no longer resell our Castanet products unless we and Tivoli extended the term of the reseller agreement. Furthermore, it is possible for Tivoli to terminate the reseller agreement before the release of Cross-Site. Because Cross-Site is built upon the Castanet infrastructure, we expect Cross-Site to compete with our Castanet products. For a more detailed description of our relationship with Tivoli, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business -- Sales, Marketing and Distribution." NOVADIGM HAS CLAIMED THAT WE INFRINGE ITS INTELLECTUAL PROPERTY On March 3, 1997, Novadigm filed a complaint against us in the United States District Court for the Northern District of California, alleging infringement by us of a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm Patent"). Novadigm alleges that our infringement relates to methods for updating data and software over a computer network that we use in our Castanet products. The complaint also alleges that we have willfully infringed the Novadigm Patent and seeks up to triple damages under the United States Patent Act. On May 2, 1997, we filed our answer to Novadigm's complaint and filed a counterclaim against Novadigm. Litigation is subject to inherent uncertainties. In addition, cases like this generally involve issues of law that are evolving, presenting further uncertainty. Our defense of this litigation, regardless of the merits of the complaint, has been, and will likely continue to be, time-consuming, costly and a diversion for our technical and management personnel. In addition, publicity related to this litigation has in the past, and will likely in the future, have a negative impact on the sale of our Castanet products. A failure to prevail in the litigation could result in: - Our paying monetary damages, which could be tripled if the infringement is found to have been willful; - The issuance of a preliminary or permanent injunction requiring us to stop selling Castanet in its current form; - Our having to redesign Castanet, which could be costly and time-consuming and could substantially delay Castanet shipments, assuming that a redesign is feasible; - Our having to reimburse Novadigm for some or all of its attorneys' fees; - Our having to obtain from Novadigm a license to its patent, which license might not be made available to us on reasonable terms, particularly because Novadigm is a competitor; or - Our having to indemnify our customers against any losses they may incur due to the alleged infringement. Any of these results would seriously harm our business and operating results. Furthermore, we expect to continue to incur substantial costs in defending against this litigation and these costs could increase significantly if our dispute goes to trial. It is possible that these costs could substantially exceed our expectations in future periods. For a more detailed description of this litigation please see "Business -- Legal Proceedings." 8 10 OUR MARKETS ARE HIGHLY COMPETITIVE Our markets are new, rapidly evolving and highly competitive, and we expect this competition to persist and intensify in the future. Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter current or potential competition from a number of sources, including: - Sellers of enterprise-wide management systems, which include electronic software distribution, Tivoli, Computer Associates, Inc. and BMC Software, Inc.; - Companies like BackWeb Technologies, Inc., Novadigm, and Sterling Commerce, Inc., through its subsidiary XcelleNet, Inc., which market products that support the distribution of software applications; and - Desktop software management suites, like Microsoft's SMS and Intel's LanDesk. In addition, we compete with various methods of application distribution and management, including the web browser, and with application server vendors and others that have introduced software distribution capabilities into their products. As new participants enter the Internet services management market, we will face increased competition. In addition, potential competitors may bundle their products or incorporate an Internet services management component into existing products in a manner that discourages users from purchasing our products. For example, we expect that future releases of Microsoft's Windows operating systems, which manage the programs on a computer, will include components addressing Internet services management functions. Furthermore, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. We may not be able to maintain a competitive position against current or future competitors. Some of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have more extensive customer bases and broader customer relationships that they could leverage, including relationships with many of our current and potential customers. These companies also have significantly more established customer support and professional services organizations than we do. In addition, these companies may adopt aggressive pricing policies. PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of resources and could seriously harm our business and operating results. In addition, we sell our products internationally, and the laws of many countries do not protect our proprietary rights as well as the laws of the United States. Furthermore, our competitors could independently develop similar technology. WE MAY BE FOUND TO INFRINGE PROPRIETARY RIGHTS OF OTHERS Other companies, including our competitors, may obtain patents or other proprietary rights that would prevent, or limit or interfere with our ability to make, use or sell our products. As a result, we may be found to infringe on the proprietary rights of others. Furthermore, companies in the software market are increasingly bringing suits alleging infringement of their proprietary rights, particularly patent rights. Any parties asserting rights against us would force us to defend ourselves or our customers against alleged 9 11 infringement of intellectual property rights. We could incur substantial costs to defend any litigation, and intellectual property litigation could force us to do one or more of the following: - Cease selling, incorporating or using products or services that incorporate the challenged intellectual property; - Obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology; and - Redesign those products or services that incorporate the relevant technology. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed. Currently, we are engaged in litigation with Novadigm concerning the alleged infringement by us of a patent held by Novadigm. For a more detailed description of this litigation, please see "Business -- Legal Proceedings." WE DEPEND UPON THIRD-PARTY DISTRIBUTION RELATIONSHIPS AND NEED TO DEVELOP NEW RELATIONSHIPS Our sales strategy requires that we establish multiple indirect marketing channels in the United States and internationally through resellers and systems integrators, and that we increase the number of customers licensing our products through these channels. As a result, we depend upon third-party distribution relationships, including our relationship with Tivoli, and need to develop new relationships. We have a limited number of agreements with companies in these channels, and we may not be able to increase our number of distribution relationships or maintain our existing relationships. For example, Netscape, a reseller of our products, accounted for $1.0 million, or approximately 18% of our revenues in 1997, and $3.8 million, or approximately 22% of our revenues in 1998. Netscape is no longer an active reseller of our products, and we do not expect material revenues from Netscape in the future. Our current agreements with our channel partners do not prevent these companies from selling products of other companies, including products that may compete with our products, and do not generally require these companies to purchase minimum quantities of our products. These distributors could give higher priority to the products of other companies or to their own products, than they give to our products. In addition, sales through these channels generally have a lower price than direct sales. As a result, while the loss of, or significant reduction in sales volume to any of our current or future distribution partners could seriously harm our revenues and operating results, a significant increase in sales through these channels could also negatively impact our gross margins. For additional information regarding our third-party distribution relationships please see "Business -- Sales, Marketing and Distribution." WE NEED TO DEVELOP AND EXPAND OUR SALES, MARKETING AND DISTRIBUTION CAPABILITIES We need to expand our marketing and direct sales operations in order to increase market awareness of our products, market Castanet to a greater number of enterprises and generate increased revenues. However, competition for qualified sales personnel is intense. Our products and services require a sophisticated sales effort targeted at senior management of our prospective customers. New hires will require extensive training and typically take at least six months or more to achieve full productivity. Our recent hires may not be as productive as necessary, and we may not be able to hire enough qualified individuals in the future. In addition, we have limited experience marketing our products broadly to a large number of potential customers. For additional information regarding our direct sales operations please see "Business -- Sales, Marketing and Distribution." WE NEED TO EXPAND OUR PROFESSIONAL SERVICES We may not be able to attract, train or retain the number of highly qualified services personnel that our business needs. We believe that growth in our product sales depends on our ability to provide our customers with professional services and to educate third-party resellers and consultants on how to provide similar services. As a result, we plan to increase the number of our services personnel to meet 10 12 these needs. However, competition for qualified services personnel is intense. For additional information regarding our professional services please see "Business -- Customer Support and Training." We expect our service revenues to increase in dollar amount as we continue to provide support, consulting and training services that complement our products and as our installed base of customers grows. This could negatively impact our gross margin because margins on revenues derived from services are generally lower than margins on revenues derived from the license of Castanet. EXPANDING INTERNATIONALLY IS EXPENSIVE, WE MAY RECEIVE NO BENEFIT FROM OUR EXPANSION AND OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO GOVERNMENTAL REGULATION We plan to increase our international sales force and expand our operations abroad. However, we may not be successful in increasing our sales to new or current international customers. In addition, our international business activities are subject to a variety of risks, including the adoption of laws, actions by third parties and political and economic conditions that could restrict or eliminate our ability to do business in foreign jurisdictions. Although we currently transact business in U.S. dollars, if we transact business in foreign currencies in the future, we will become subject to the risks associated with transacting in foreign currencies, including potential negative effects of exchange rate fluctuations. To date, we have not adopted a hedging program to protect us from risks associated with foreign currency fluctuations. For additional information on our foreign currency risks, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Qualitative and Quantitative Disclosure about Market Risk." Governmental regulation and requirements influence our sales internationally. For example, export, and in some cases, import clearances must be obtained before Castanet can be distributed internationally. Current or new government laws and regulations, or the application of existing laws and regulations, including those related to property ownership, content and taxation, could expose us to significant liabilities, significantly slow our growth or otherwise seriously harm our business and operating results. WE MUST MANAGE OUR GROWTH AND EXPANSION Our historical growth has placed, and any further growth is likely to continue to place, a significant strain on our resources. Any failure to manage growth effectively could seriously harm our business and operating results. We have grown from 20 employees at December 31, 1996 to 145 employees at December 31, 1998. We have also opened seven sales offices and have significantly expanded our operations. To be successful, we will need to implement additional management information systems, improve our operating, administrative, financial and accounting systems and controls, train new employees and maintain close coordination among our executive, engineering, accounting, finance, marketing, sales and operations organizations. In addition, our growth has resulted, and any future growth will result, in increased responsibilities for management personnel. WE MUST RETAIN AND ATTRACT KEY PERSONNEL Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel, including our President and Chief Executive Officer, Kim Polese, our Executive Vice President, Worldwide Sales and Chief Operating Officer, Steven P. Williams and our Chief Technical Officer, Arthur van Hoff. We may not be successful in attracting, assimilating or retaining qualified personnel in the future. None of our senior management or other key personnel is bound by an employment agreement. If we lose one or more of these key employees, our business and operating results could be seriously harmed. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. Like other companies in the San Francisco Bay Area, we face intense competition for qualified personnel. For a more detailed description of our management personnel, please see "Management." 11 13 WE RELY ON THIRD-PARTY SOFTWARE AND APPLICATIONS We integrate third-party security and encryption software and digital certificates as a component of our software. There are inherent limitations in the use and capabilities of much of the technology that we license from third parties. Furthermore, this technology is relatively new and is highly complex. As a result, we face a number of challenges in integrating these technologies into Castanet. We would be seriously harmed if the providers from whom we license software ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards, third-party product introductions and technological changes. We use third-party digital certificates to verify the identity of the sender of data over the Internet. As digital certificate technology evolves we will be required to make changes to our software so that it can continue to work with these digital certificates. In addition, the third-party software may not continue to be available to us on commercially reasonable terms or at all. The loss of, or inability to maintain or obtain this software, could result in shipment delays or reductions. Furthermore, we might be forced to limit the features available in our current or future product offerings. Either alternative could seriously harm our business and operating results. Almost all of our products are written in Java and require a Java virtual machine in order to operate. Although we currently ship almost all of our products with implementations of Java virtual machines made available free of charge by Sun Microsystems, Inc., Sun may not continue to make these implementations available at commercially reasonable terms or at all. Furthermore, if Sun were to make significant changes to the Java language or its Java virtual machine implementations, or fail to correct defects and limitations in these products, our ability to continue to improve and ship our products could be impaired. In the future, our customers may also require the ability to deploy our products on platforms for which technically acceptable Java implementations either do not exist or are not available on commercially reasonable terms. Our customers may also use particular implementations of the Java virtual machine that may not be technically or commercially acceptable for integration into our products. SOFTWARE DEFECTS IN CASTANET WOULD HARM OUR BUSINESS Complex software products like ours often contain errors or defects, including errors relating to security, particularly when first introduced or when new versions or enhancements are released. In the past, we have discovered defects in our products and provided product updates to our customers to address these defects. Despite internal testing and testing by current and potential customers, Castanet and other future products may contain serious defects, including security breaches and Year 2000 errors. These defects or errors in current or future products, including Castanet 4.0, which was recently released, could result in lost revenues or a delay in market acceptance, which would seriously harm our business and operating results operations. Castanet extensively utilizes digital certificates and other complex technology. Our use of this technology has in the past and may in the future result in product behavior problems which may not be anticipated by us or our customers. For example, most versions of Castanet shipped before Castanet 4.0 contain digital certificates that cause Castanet and any applications being delivered with Castanet to stop running when the certificate used expires. We have developed an update which avoids this problem and are in the process of notifying customers of the issue and distributing the update. It is possible that we may not be able to identify all affected customers and provide them with the update. Customers that do not install the update will experience this problem with respect to Castanet itself on June 24, 1999, and, with respect to any applications they have deployed with Castanet and signed with a certificate, on the date of expiration of the certificate they elected to use. Since many of our customers use our products for business-critical applications, errors, defects or other performance problems could result in financial or other damage to our customers and could significantly impair their operations. Our customers could seek damages for losses related to any of these issues. Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate our 12 14 limitation of liability provisions. For example, we could be subject to claims for losses by customers that we are unable to identify and notify and, as a result, do not install our update that avoids the digital certificate problem. We have not experienced any product liability claims to date. However, a product liability claim brought against us, even if not successful, would likely be time consuming and costly to defend and could adversely affect our marketing efforts. YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS We are in the process of assessing any Year 2000 issues with the computer communications, software and security systems that we use to deliver and manage our products and to manage our internal operations. If our systems do not operate properly with respect to date calculations involving the Year 2000 and subsequent dates, we could incur unanticipated expenses to remedy any problems, which could seriously harm our business. Customers' purchasing plans could be affected by Year 2000 issues if they need to expend significant resources to correct their existing systems. This situation may result in reduced funds available to implement new systems based upon our products. As a result, some customers may defer the license of our products until after the Year 2000. A decrease in demand for our products due to customers' Year 2000 issues would seriously harm our business and operating results. We have identified one Year 2000 date-related limitation in earlier versions of Castanet. Versions of Castanet before 3.2 display date-related data to the user in a manner that uses only two digits to represent a year. A two-digit display of the Year 2000 could cause a user to believe the year represented was 1900 instead of 2000. This limitation does not affect either computation of data in our products or operation of the products. All versions of Castanet currently being shipped use four digits for the display of date data. Despite our testing and correcting, our products, including Castanet 4.0, may contain errors or faults with respect to the Year 2000. Our efforts to address Year 2000 issues are described in more detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN We expect the net proceeds from this offering and borrowings under our credit facility to be sufficient to meet our working capital and capital expenditure needs for at least twelve months. After that, we may need to raise additional funds, and additional financing may not be available on favorable terms, if at all. This could seriously harm our business and operating results. Furthermore, if we issue additional equity securities, stockholders may experience dilution, and the new equity securities could have rights senior to those of existing holders of our common stock. If we cannot raise funds, if needed, on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. For a discussion regarding our use of proceeds from this offering, dilution or our working capital, please see "Use of Proceeds," "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." WE ARE CONTROLLED BY EXISTING STOCKHOLDERS On completion of this offering, executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately 40.8% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could have the effect of delaying or preventing a third party from acquiring control over us. We plan to reserve up to 6.5% of the shares offered in this offering under a directed share program for selected directors, suppliers, customers and others who have a relationship with us under which these persons would be able to purchase shares in this offering at the initial public offering price. For information regarding the 13 15 ownership of our outstanding stock by our executive officers and directors and their affiliates, please see "Principal and Selling Stockholders." WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For information regarding these provisions, please see "Description of Capital Stock." RISKS RELATED TO OUR INDUSTRY WE FACE CHALLENGES STEMMING FROM OUR EMERGING MARKETS The market for Internet services management software has only recently begun to develop, is rapidly evolving and will likely have an increasing number of competitors. This market may not continue to develop and may not grow. If the Internet services management market fails to develop, or develops more slowly than expected, our business and operating results would be seriously harmed. Furthermore, in order to be successful in this emerging market, we must be able to differentiate ourself from our competitors through our product and service offerings and brand name recognition. Expanding our product and service offerings and stimulating brand name recognition will also require significant additional expenses and development, operations and management resources. We may not be successful in differentiating ourself or achieving widespread market acceptance of our products and services. Our failure to stimulate brand name recognition or to generate satisfactory revenues from these expanded products or services to offset related increased costs could seriously harm our business and operating results. Furthermore, enterprises that have already invested substantial resources in other methods of deploying and managing their applications and services may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems. We cannot be certain that a viable market for our products will emerge or be sustainable. WE DEPEND ON CONTINUED USE OF THE INTERNET AND GROWTH OF ELECTRONIC BUSINESS Our future revenues and profits, if any, substantially depend upon the widespread acceptance and use of the Internet as an effective medium of business and communication by our target customers. Rapid growth in the use of and interest in the Internet has occurred only recently. As a result, acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, and continue to use, the Internet and other online services as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. In addition, the Internet may not be accepted as a long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the necessary speed, data capacity, security and hardware necessary for reliable Internet access and services. To the extent that the Internet continues to experience increased numbers of users, increased frequency of use or increased bandwidth requirements of users, the Internet infrastructure may not be able to support the demands placed on it and the performance or reliability of the Internet could be adversely affected. In addition, the increased use of the Internet for business and communication might be limited due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Furthermore, critical issues concerning the Internet, including security, reliability, data corruption, cost, ease of use, accessibility, quality and speed of service, remain unresolved and could adversely affect the use of the Internet for business applications. Changes in or insufficient availability of telecommunications services 14 16 that support the Internet also could result in slower response times and adversely affect usage of the Internet generally. WE MUST RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS The markets for our Internet services management solutions are marked by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. New products based on new technologies or new industry standards can quickly render existing products obsolete and unmarketable. Any delays in our ability to develop and release enhanced or new products could seriously harm our business and operating results. Our technology is complex, and new products and product enhancements can require long development and testing periods. In addition, we may not be able to timely conform to emerging standards. We also may not be successful in developing and marketing new products or product enhancements that respond to technological change, evolving industry standards or customer requirements. Our failure to conform to prevailing standards could have a negative effect on our business and operating results. RISKS RELATED TO THIS OFFERING NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND OUR STOCK PRICE MAY FLUCTUATE AFTER THIS OFFERING An active public market for our common stock may not develop or be sustained after this offering. Although the initial public offering price will be determined based on several factors, the market price for our common stock will vary from the initial offering price after this offering. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including: - Quarterly variations in operating results; - Changes in financial estimates by securities analysts; - Announcements by us or our competitors of new products, significant contracts, acquisitions or strategic relationships; - Additions or departures of key personnel; - Any future sales of our common stock or other securities; and - Stock market price and volume fluctuations, which are particularly common among securities of Internet-related companies. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results. FUTURE SALES OF SHARES COULD AFFECT OUR STOCK PRICE If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. Based on shares outstanding as of March 31, 1999, upon completion of this offering, we will have outstanding 22,745,775 shares of common stock. Other than the shares of common stock sold in this offering, no shares will be eligible for sale in the public market immediately. Our stockholders will be subject to agreements with the underwriters or us that restrict their ability to transfer their stock for 180 days from the date of this prospectus. After these agreements expire, an additional 18,745,775 shares will be eligible for sale in the public market. For a detailed discussion of the shares eligible for future sale, please see "Shares Eligible for Future Sale." 15 17 NEW STOCKHOLDERS WILL INCUR SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING The initial public offering price is expected to be substantially higher than the book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate substantial dilution. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering. For a discussion regarding dilution in this offering, please see "Dilution." WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING We plan to use the proceeds from this offering for general corporate purposes. Therefore, we will have broad discretion as to how we will spend the proceeds, and stockholders may not agree with the ways in which we use the proceeds. We may not be successful in investing the proceeds from this offering, in our operations or external investments, to yield a favorable return. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology; for instance, may, will, should, expect, plan, anticipate, believe, estimate, predict, potential or continue, the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the Risk Factors section. These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results or to changes in our expectations. 16 18 USE OF PROCEEDS Our net proceeds from the sale of the 3,548,000 shares of common stock we are offering are estimated to be $45.1 million, assuming an initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $47.5 million. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. We expect to use $811,000 of the net proceeds to repay equipment advances outstanding under a credit facility that currently bears interest at 7.75% per year and to use the balance for general corporate purposes, including working capital. A portion of the net proceeds may also be used for the acquisition of businesses, products and technologies that are complementary to ours. We have no current plans, agreements or commitments for acquisitions and are not currently engaged in any negotiations for any acquisition. Pending these uses, we will invest the net proceeds of this offering in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY We have not paid any cash dividends since inception and do not intend to pay any cash dividends in the immediate future. In addition, the terms of our credit agreement prohibit the payment of dividends on our capital stock. 17 19 CAPITALIZATION The following table presents our capitalization as of December 31, 1998 (1) on an actual basis (2) on a pro forma basis, after giving effect to the conversion of all outstanding shares of preferred stock into common stock and (3) as adjusted to reflect our receipt of the estimated net proceeds from our sale of 3,548,000 shares of common stock in this offering at an assumed initial offering price of $14.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, the filing of a new certificate of incorporation after the closing of this offering and the application of our proceeds from this offering:
DECEMBER 31, 1998 ------------------------------------ ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) Long-term liabilities, less current portion(1).............. $ 747 $ 747 $ 95 -------- -------- -------- Redeemable convertible preferred stock, $.0001 par value, 15,000,000 shares authorized, 5,753,566 shares outstanding actual; 15,000,000 shares authorized, no shares outstanding pro forma; 10,000,000 shares authorized, no shares outstanding as adjusted............................ 18,953 -- -- -------- -------- -------- Stockholders' equity (net capital deficiency): Common Stock, $.0001 par value, 30,000,000 shares authorized, 13,052,262 shares outstanding actual; 30,000,000 shares authorized, 18,805,828 shares outstanding pro forma; 80,000,000 shares authorized, 22,353,828 shares outstanding as adjusted(2)........... 1 2 2 Additional paid-in capital................................ 2,182 21,134 66,229 Note receivable from officer.............................. (160) (160) (160) Deferred compensation..................................... (1,116) (1,116) (1,116) Translation adjustment.................................... (6) (6) (6) Accumulated deficit....................................... (14,644) (14,644) (14,644) -------- -------- -------- Total stockholders' equity (net capital deficiency).... (13,743) 5,210 50,305 -------- -------- -------- Total capitalization.............................. $ 5,957 $ 5,957 $ 50,400 ======== ======== ========
- ------------------------- (1) See Notes 3 and 4 of Notes to Consolidated Financial Statements for a description of our capital leases and bank arrangements. (2) The share numbers exclude: - 2,192,568 shares of common stock issuable upon exercise of stock options outstanding as of December 31, 1998 at a weighted average exercise price of $3.16 per share; - 1,229,773 shares of common stock available for issuance under our 1996 Stock Plan; - 16,865 shares of common stock issuable upon the exercise of a warrant outstanding as of December 31, 1998 at an exercise price of $1.48 per share; - 1,250,000 shares of common stock available for issuance under our 1999 Omnibus Equity Incentive Plan; - 500,000 shares of common stock available for issuance under our 1999 employee stock purchase plan; and - 150,000 shares of common stock available for issuance under our 1999 Non-Employee Directors Option Plan. Between December 31, 1998 and April 19, 1999, we issued options to purchase 1,253,500 shares of our common stock at exercise prices ranging from $10.00 per share to $15.00 per share. See "Management -- Employee Benefit Plans," and Notes 6 and 9 of "Notes to Consolidated Financial Statements" for a description of our equity plans. 18 20 DILUTION Our pro forma net tangible book value as of December 31, 1998 was $5.2 million, or approximately $.28 per share. Net tangible book value per share represents the amount of stockholders' equity, less intangible assets, divided by 18,805,828 shares of common stock outstanding after giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock upon completion of this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to our sale of 3,548,000 shares of common stock in this offering at an assumed initial offering price of $14.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our net tangible book value as of December 31, 1998 would have been $50.3 million or $2.25 per share. This represents an immediate increase in net tangible book value of $1.97 per share to existing stockholders and an immediate dilution in net tangible book value of $11.75 per share to purchasers of common stock in the offering, as illustrated in the following table: Assumed initial public offering price per share............. $14.00 Pro forma net tangible book value per share as of December 31, 1998.................................................. $ .28 Increase per share attributable to new investors............ 1.97 ----- Pro forma net tangible book value per share after the offering.................................................. 2.25 ------ Dilution per share to new investors......................... $11.75 ======
The following table presents on a pro forma basis as of December 31, 1998, after giving effect to the conversion of all outstanding shares of preferred stock into common stock upon completion of this offering, the differences between the existing stockholders and the purchasers of shares in the offering (at the assumed initial offering price of $14.00 per share) with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders.......................... 18,805,828 84.1% $19,727,000 28.4% $ 1.05 New stockholders............................... 3,548,000 15.9 49,672,000 71.6 ---------- ----- ----------- ----- Totals............................... 22,353,828 100.0% $69,399,000 100.0% ========== ===== =========== =====
The following table indicates the effect of sales by selling stockholders on existing and new stockholders:
SHARES HELD ASSUMING SHARES HELD BEFORE THE SHARES HELD AFTER THE EXERCISE OF OVER- OFFERING OFFERING ALLOTMENT OPTION ----------------------- --------------------- --------------------- NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT ----------- -------- ---------- ------- ---------- ------- Existing stockholders................ 18,805,828 100.0% 18,353,828 82.1% 17,941,828 79.6% New stockholders..................... -- 0 4,000,000 17.9 4,600,000 20.4 ---------- ----- ---------- ----- ---------- ----- Total...................... 18,805,828 100.0% 22,353,828 100.0% 22,541,828 100.0% ========== ===== ========== ===== ========== =====
For a description of the stock owned by the selling stockholders see "Principal and Selling Stockholders." As of December 31, 1998, there were options outstanding to purchase a total of 2,192,568 shares of common stock at a weighted average exercise price of $3.16 per share. In addition, as of December 31, 1998, there was a warrant outstanding to purchase 16,865 shares of common stock at an exercise price of $1.48 per share. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. For a description of our equity plans, please see "Management -- Employee Benefit Plans" and Note 6 of Notes to Consolidated Financial Statements. 19 21 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of operations data for the inception period ended December 31, 1996 and the fiscal years ended 1997 and 1998, and the consolidated balance sheet data at December 31, 1997 and 1998 are derived from audited consolidated financial statements included elsewhere in this prospectus that have been audited by Ernst & Young LLP, independent auditors. The consolidated balance sheet data at December 31, 1996 are derived from audited consolidated financial statements not included in this prospectus. Historical results are not necessarily indicative of future results. The pro forma consolidated balance sheet data as of December 31, 1998 is unaudited and reflects the assumed conversion of all outstanding shares of preferred stock into common stock upon the consummation of this offering.
PERIOD FROM FEBRUARY 21, 1996 (INCEPTION) TO YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------ 1996 1997 1998 ----------------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License................................................... $ -- $ 5,011 $13,901 Service................................................... -- 552 3,184 ------- ------- ------- Total revenues.................................... -- 5,563 17,085 Cost of revenues: License................................................... -- 13 75 Service................................................... -- 621 1,964 ------- ------- ------- Total cost of revenues............................ -- 634 2,039 ------- ------- ------- Gross profit................................................ -- 4,929 15,046 ------- ------- ------- Operating expenses: Research and development.................................. 515 2,410 5,773 Sales and marketing....................................... 473 8,054 12,371 General and administrative................................ 322 2,367 2,779 Amortization of deferred compensation..................... -- -- 251 ------- ------- ------- Total operating expenses.......................... 1,310 12,831 21,174 ------- ------- ------- Loss from operations........................................ (1,310) (7,902) (6,128) Interest income, net........................................ 65 338 488 ------- ------- ------- Loss before income taxes.................................... (1,245) (7,564) (5,640) Provision for income taxes.................................. -- 154 41 ------- ------- ------- Net loss.................................................... $(1,245) $(7,718) $(5,681) ======= ======= ======= Basic and diluted net loss per share........................ $ (.81) $ (1.57) $ (.59) ======= ======= ======= Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share............ 1,528 4,912 9,606 ======= ======= ======= Pro forma basic and diluted net loss per share (unaudited)............................................... $ (.37) ======= Shares used in computing pro forma basic and diluted net loss per share (unaudited)................................ 15,359 =======
PRO FORMA AS DECEMBER 31, OF --------------------------------------- DECEMBER 31, 1996 1997 1998 1998 ----------------- ------- ------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.... $ 2,811 $14,402 $ 7,825 $ 7,825 Working capital...................................... 2,464 8,036 2,912 2,912 Total assets......................................... 3,156 21,898 14,862 14,862 Long-term portion of capital lease obligations and equipment advances, and other long-term liabilities........................................ -- 211 747 747 Redeemable convertible preferred stock............... 3,963 18,953 18,953 -- Accumulated deficit.................................. (1,245) (8,963) (14,644) (14,644) Total stockholders' equity (net capital deficiency)........................................ (1,235) (8,471) (13,743) 5,210
20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes appearing elsewhere in this prospectus. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed below and elsewhere is this prospectus, particularly in "Risk Factors." OVERVIEW Marimba is a leading provider of Internet-based software management solutions that enable companies to expand their market reach, streamline business processes and strengthen relationships with customers, business partners and employees. Our Castanet product family provides an efficient and reliable way for enterprises to distribute, update and manage applications and related data over corporate intranets, extranets and the Internet. We were incorporated in February 1996 and began operations in August 1996. During the period from February 1996 through December 31, 1996, we were a development stage enterprise and had no revenues. Our operating activities during this period related primarily to developing our products, building our corporate infrastructure and raising capital. In January 1997, we released our first version of Castanet and, to date, have derived substantially all our revenues from the license of Castanet and related services. We licensed Castanet in early 1997 to enterprises primarily for pilot programs that involved limited deployments. In 1997, we grew our organization by hiring personnel in key areas, particularly sales, research and development and marketing. During 1998, we continued to develop and market our Castanet products and enhanced the core Castanet infrastructure with products that provided greater centralized management control and the ability to distribute applications written in leading programming languages. Also in 1998, we sold several licenses of Castanet to repeat customers for larger scale production deployments. During this time period, we continued to make substantial investments in our internal infrastructure by hiring employees throughout the organization. In March 1999 we released Castanet 4.0, which provides enhanced Internet services management capabilities. Revenues to date have been derived primarily from the license of our Castanet products and to a lesser extent from maintenance and support, consulting and training services. Customers who license Castanet generally purchase maintenance contracts, typically covering a 12-month period. Additionally, customers may purchase consulting, which is customarily billed by us at a fixed daily rate plus out-of-pocket expenses. We also offer training services that are billed on a per student or per class session basis. We recognize software license revenue in accordance with Statement of Position 97-2 "Software Revenue Recognition," as amended by Statement of Position 98-4. These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and are effective for our transactions entered into after January 1, 1998. The application of SOP 97-2 has not had a material impact on our results of operations. In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9 amends SOP 97-2 and SOP 98-4 extending the deferral of the application of provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. We have not yet determined the effect of the final adoption of SOP 98-9 on our financial condition or operating results. However, Marimba believes that SOP 98-9 may require more revenue to be deferred for some types of transactions. 21 23 License revenues are comprised of perpetual or multiyear license fees which are primarily derived from contracts with corporate customers and resellers. We recognize license revenues after execution of a license agreement or receipt of a definitive purchase order and delivery of the product to end-user customers, provided that there are no uncertainties surrounding product acceptance, the license fees are fixed and determinable, collectibility is probable and we have no remaining obligations. Revenues on arrangements with customers who are not the ultimate users, primarily resellers, are not recognized until the software is sold through to the end user. If the fee due from the customer is not fixed or determinable, revenues are recognized as payments become due from the customer. If collectibility is not considered probable, revenues are recognized when the fee is collected. Advance payments are recorded as deferred revenue until the products are delivered, services are provided, or obligations are met. Service revenues are comprised of revenues from maintenance agreements, consulting and training fees. Revenues from maintenance agreements are recognized on a straight-line basis over the life of the related agreement, which is typically one year. We recognize service revenues from training and consulting upon completion of the work to be performed. We market our products worldwide through a combination of a direct sales force, resellers, system integrators and distributors. Tivoli has been a reseller of our products and accounted for $3.1 million, or approximately 18% of our revenues in 1998. This includes $1.9 million, or approximately 40% of our revenues, in the third quarter of 1998 and $1.1 million, or approximately 19% of our revenues, in the fourth quarter of 1998. Our reseller agreement with Tivoli provides for the resale of our products at substantial discounts from list price. Consequently, the gross margin on these sales is generally lower than the gross margin on our direct sales. We have an original equipment manufacturer agreement with Tivoli under which Tivoli is building upon the Castanet infrastructure to develop a product called Cross-Site. Any revenues from Tivoli under this agreement will be from per seat royalty payments on sales of Cross-Site that contain the Castanet infrastructure. The per seat payments under this agreement will be less than the per seat payments we currently have under our reseller agreement with Tivoli. We expect to generate revenues from royalties on sales of Cross-Site beginning in 1999 and expect that revenues from the resale of Castanet under the Tivoli reseller agreement will rapidly decrease and become insignificant. Any failure of Cross-Site to achieve widespread market acceptance could significantly harm our business and operating results. We entered into a reseller agreement with Netscape in July 1997. Sales by Netscape accounted for $1.0 million, or approximately 18% of our revenues in 1997, and $3.8 million, or approximately 22% of our revenues in 1998. A majority of the $3.8 million of 1998 revenues was recognized in the first half of 1998, with only $1.3 million in revenue recognized in the second half of 1998. Netscape is no longer an active reseller, and we do not expect any material revenues from Netscape in the future. In 1997 and 1998, revenues attributable to customers outside of North America accounted for approximately 22% and 7% of our total revenues. We plan to expand our international operations significantly, particularly in Europe, because we believe international markets represent a significant growth opportunity. The expansion of our international operations will be subject to a variety of risks that could significantly harm our business and results of operations. Despite our revenue growth, we have incurred significant losses since inception and, as of December 31, 1998, we had an accumulated deficit of approximately $14.6 million. We believe our success depends on further increasing our customer base and on growth in the emerging Internet services management market. Accordingly, we intend to continue to invest heavily in sales, marketing and research and development. Furthermore, we expect to continue to incur substantial operating losses at least through 1999, and our expected increase in operating expenses will require significant increases in revenues before we become profitable. 22 24 In view of the rapidly changing nature of our business and our limited operating history, we believe that period-to-period comparisons of revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Additionally, despite our sequential quarterly revenue growth during 1998, we do not believe that historical growth rates are necessarily sustainable or indicative of future growth. RESULTS OF OPERATIONS The following table presents selected financial data for the periods indicated as a percentage of total revenues. Data for the 1996 inception period is not presented because we had no revenues during that period.
YEAR ENDED DECEMBER 31, ----------------- 1997 1998 ------ ----- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License................................................... 90.1% 81.4% Service................................................... 9.9 18.6 ------ ----- Total revenues.............................................. 100.0 100.0 Cost of revenues: License................................................... 0.2 0.4 Service................................................... 11.2 11.5 ------ ----- Total cost of revenues...................................... 11.4 11.9 ------ ----- Gross profit................................................ 88.6 88.1 Operating expenses: Research and development.................................. 43.3 33.8 Sales and marketing....................................... 144.8 72.4 General and administrative................................ 42.5 16.3 Amortization of deferred compensation..................... -- 1.5 ------ ----- Total operating expenses.................................... 230.6 124.0 ------ ----- Loss from operations........................................ (142.0) (35.9) Interest income, net........................................ 6.1 2.8 ------ ----- Loss before income taxes.................................... (135.9) (33.1) Provision for income taxes.................................. (2.8) (0.2) ------ ----- Net loss.................................................... (138.7)% (33.3)% ====== =====
1996 INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1997 AND 1998 REVENUES Total revenues increased $11.5 million, or 207%, from $5.6 million in 1997 to $17.1 million in 1998. We had no revenues during the 1996 inception period. License Revenues. Substantially all license revenues have been derived from sales of our Castanet products and increased $8.9 million, or 177%, from $5.0 million in 1997 to $13.9 million in 1998. We attribute the increase in license revenues from 1997 to 1998 to: - growth in our customer base; - additional sales to existing customers; and - an increase in the average contract amount of executed license agreements. 23 25 Service Revenues. Service revenues include maintenance and support, consulting and training. Service revenues increased $2.6 million, or 477%, from $552,000 in 1997 to $3.2 million in 1998. As a percentage of total revenues, service revenues increased from 10% of total revenues in 1997 to 19% of total revenues in 1998. The increase in service revenues was due primarily to increased revenues from customer maintenance contracts. Also, we increased our consulting service revenues as customers elected to utilize our consulting organization. During 1999, we expect service revenues to increase in absolute amount and as a percentage of total revenues. An increased shift in our revenue mix toward services would negatively impact our gross margins because service revenues have higher costs and therefore lower margins than license revenues. COSTS OF REVENUES Cost of License Revenues. Cost of license revenues consists primarily of the fees for third-party software products integrated into our products. Cost of license revenues increased from $13,000 in 1997 to $75,000 in 1998. We had no cost of license revenues in 1996. The increase from 1997 to 1998 was due to a third-party software product that we licensed on September 30, 1997 and embedded in Castanet. Therefore, in 1997, cost of license revenues includes costs associated with this license only for the fourth quarter, whereas 1998 includes a full year of these costs. We expect cost of license revenues to increase in absolute amount during 1999, but to remain a relatively small percentage of total revenues. Cost of Service Revenues. Cost of service revenues includes: - salaries and related expenses of our customer support organization; - salaries and related expenses of our consultants for billable consulting engagements; - cost of third parties contracted to provide consulting services to our customers; and - an allocation of our facilities and depreciation expenses. Cost of service revenues increased from $621,000 in 1997 to $2.0 million in 1998, representing 113% and 62% of service revenue. The increase in absolute dollars of cost of service revenues from 1997 to 1998 was due primarily to growth in our customer support organization and an increase in consulting costs commensurate with the increase in consulting revenues. Our customer support organization had no employees at January 1, 1997 and grew to 12 employees at both December 31, 1997 and December 31, 1998. We had no cost of service revenues in 1996. We expect our cost of service revenues to increase as we continue to expand our customer support and consulting organizations. Since service revenues provide lower gross margins than license revenues, this expansion would negatively impact our gross margins if our license revenues do not significantly increase. OPERATING EXPENSES Research and Development. Research and development expenses, which are expensed as incurred, consist primarily of: - salaries and related costs of our engineering organization; - fees paid to third-party consultants; and - an allocation of our facilities and depreciation expenses. We believe that our success is dependent in large part on continued enhancement of our current products and the ability to develop new, technologically advanced products that meet the sophisticated requirements of our customers. Accordingly, we have increased our investment in research and development in each of the periods since inception. Research and development expenses increased from $515,000 in the 1996 inception period to $2.4 million in 1997 and $5.8 million in 1998. The increases in research and development expenses were due to significant increases in engineering personnel and related 24 26 costs, as well as increases in third-party consulting costs. We expect research and development expenses to increase in absolute amount in 1999. Sales and Marketing. Sales and marketing expenses consist primarily of: - salaries and related costs of our sales and marketing organizations; - sales commissions; - costs of our marketing programs, including public relations, advertising, trade shows, collateral sales materials, our customer advisory council and seminars; - rent and facilities costs associated with our regional and international sales offices; and - an allocation of our facilities and depreciation expenses. We have significantly increased our sales and marketing expenses since the 1996 inception period. Sales and marketing expenses increased from $473,000 in the 1996 inception period to $8.1 million in 1997 and $12.4 million in 1998. The increases in sales and marketing expenses are due primarily to significant growth in our sales and marketing organizations, an increase in sales commissions as sales have increased, an increase in the number of regional and international sales offices and expansion of our marketing programs. We increased the number of sales and marketing personnel from six employees at December 31, 1996 to 45 employees at December 31, 1997 and 65 employees at December 31, 1998. Marimba also increased the number of sales offices from one at December 31, 1996 to two at December 31, 1997 and to seven at December 31, 1998. Sales commission expense increased by 54% from 1997 to 1998. There was no sales commission expense in 1996. We expect to continue to invest heavily in sales and marketing in order to grow revenues and expand our brand awareness. Consequently, we expect to increase the absolute dollar amount of sales and marketing expenses in 1999. General and Administrative. General and administrative expenses consist primarily of: - costs of our finance, human resources and legal services organizations; - third-party legal and other professional services fees; and - an allocation of our facilities and depreciation expenses. General and administrative expenses increased from $322,000 in the 1996 inception period to $2.4 million in 1997 and $2.8 million in 1998. We attribute the increases in general and administrative expenses to growth of our administrative organizations in support of overall growth. We increased our general and administrative personnel from 13 at December 31, 1997 to 21 at December 31, 1998. We expect the absolute dollar amount of general and administrative expenses to increase in 1999. Additionally, we have incurred significant outside legal costs in defense of Novadigm's complaint against us alleging patent infringement filed in March 1997. We expect to incur significant additional costs related to this complaint in the future, and these costs will increase substantially if we go to trial. A trial is currently scheduled for September 1999. Deferred Compensation. We recorded deferred compensation of approximately $1.4 million in 1998, representing the difference between the exercise prices of options granted to acquire 940,500 shares of common stock during 1998 and the deemed fair value for financial reporting purposes of our common stock on the grant dates. We amortized deferred compensation expense of $251,000 during fiscal 1998. This compensation expense relates to options awarded to individuals in all operating expense categories. Total deferred compensation at December 31, 1998 of $1.1 million is being amortized over the vesting periods of the options on a graded vesting method. The amortization of deferred compensation recorded will approximate $592,000 for 1999, $310,000 for 2000, $159,000 for 2001 and $55,000 for 2002. 25 27 INTEREST INCOME, NET Interest income, net consists primarily of interest earned on our cash, cash equivalents and short term investments offset by interest expenses associated with our capital leases and equipment advances. Interest income, net increased from $65,000 in the 1996 inception period to $338,000 in 1997 and $488,000 in 1998. The increases in interest income, net relate primarily to increased invested cash balances from our equity financings in August 1996 and August 1997. PROVISION FOR INCOME TAXES Our provision for income taxes for the years ended December 31, 1997 and 1998 consists entirely of foreign withholding taxes. No provision for federal or state income taxes has been recorded because we experienced net losses from inception through 1998. As of December 31, 1998, we had federal net operating loss carryforwards of approximately $11.1 million. We also had a federal research and development tax credit carryforward of approximately $400,000 at that date. The net operating loss and credit carryforwards will expire at various dates beginning in 2011 through 2018, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations contained in the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss and credits before utilization. 26 28 QUARTERLY RESULTS OF OPERATIONS The following table presents our unaudited quarterly operating results for the four quarters of 1998. You should read the following table together with our Consolidated Financial Statements and related Notes in this prospectus. We have prepared this unaudited information on the same basis as the audited Consolidated Financial Statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. You should not draw any conclusions about our future results from the operating results for any quarter.
THREE MONTHS ENDED ---------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 --------- -------- --------- -------- (IN THOUSANDS) Revenues: License..................................... $ 2,491 $ 3,155 $ 3,804 $ 4,451 Service..................................... 519 526 929 1,210 ------- ------- ------- ------- Total revenues................................ 3,010 3,681 4,733 5,661 Cost of revenues: License..................................... 17 16 16 26 Service..................................... 488 396 482 598 ------- ------- ------- ------- Total cost of revenues........................ 505 412 498 624 ------- ------- ------- ------- Gross profit.................................. 2,505 3,269 4,235 5,037 Operating expenses: Research and development.................... 1,211 1,311 1,545 1,706 Sales and marketing......................... 2,082 2,715 3,638 3,936 General and administrative.................. 750 527 596 906 Amortization of deferred compensation............................. -- -- 73 178 ------- ------- ------- ------- Total operating expenses...................... 4,043 4,553 5,852 6,726 ------- ------- ------- ------- Loss from operations.......................... (1,538) (1,284) (1,617) (1,689) Interest income, net.......................... 149 128 125 86 ------- ------- ------- ------- Loss before income taxes...................... (1,389) (1,156) (1,492) (1,603) Provision for income taxes.................... -- -- (4) (37) ------- ------- ------- ------- Net loss...................................... $(1,389) $(1,156) $(1,496) $(1,640) ======= ======= ======= =======
Revenues grew in each quarter of 1998 as demand for our products and services increased. Commensurate with revenue growth, cost of license revenues and cost of service revenues have generally increased from quarter to quarter. Cost of service revenues was higher in the quarter ended March 31, 1998 relative to the following two quarters due to travel, facilities rental and equipment costs associated with providing an off-site training course. From inception, we have increased the level of spending throughout the organization. We intend to increase our sales and marketing, research and development and general and administrative expenses. We anticipate that these expenses could significantly precede any revenues generated by the increased spending. If we do not experience significantly increased revenues from these efforts, our business and operating results would be seriously harmed. General and administrative expenses were higher in the first and fourth quarters of 1998 than in the second and third quarters of 1998 primarily due to higher legal expenses incurred in defense of 27 29 Novadigm's complaint against us alleging patent infringement. We expect to incur significant additional costs related to this complaint in the future, and these costs will substantially increase if we go to trial. Our quarterly operating results have fluctuated significantly and we expect that future operating results will be subject to similar fluctuations. In the past a significant portion of our sales have been realized near the end of the quarter. Accordingly, a delay in an anticipated sale past the end of a particular quarter could negatively impact our results of operations for that quarter. In addition, we generally expect that revenues in the first quarter of each year will be lower than the fourth quarter of the preceding year. We believe this trend will be primarily due to the annual nature of budgetary, purchasing and sales cycles. RECENT DEVELOPMENTS For the three months ended March 31, 1999, we had total revenues of $6.1 million. Total revenues were comprised of $4.5 million from license revenues and $1.6 million from service revenues. Our net loss for the three months ended March 31, 1999 was $1.6 million. Revenues increased due to sales from new and existing customers that closed during the quarter. We also increased operating expenses during the quarter as we continued to expand our organization in all operating areas. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations primarily through the private placement of our equity securities through which we have raised net proceeds of approximately $19.0 million. We have also financed our operations through equipment lease financing and bank borrowings. At December 31, 1998, our principal sources of liquidity included approximately $7.8 million of cash, cash equivalents and short term investments and a credit facility with a bank. This credit facility provides us up to $6.5 million in total borrowings, of which $4.0 million of borrowings are available for loans of up to 80% of our eligible accounts receivable, $1.0 million is available under a non-formula based advance and $1.5 million is available for equipment advances. As of December 31, 1998, we had $811,000 in outstanding borrowings for equipment advances. Borrowings under this credit facility are provided at the bank's prime rate and are secured by substantially all of our assets. The credit facility requires Marimba to maintain a minimum liquidity ratio of not less than 1.50 to 1.00. The minimum liquidity ratio is defined as the sum of unrestricted cash and cash equivalents divided by the aggregate amount of equipment advances outstanding under the credit facility. We were in compliance with the minimum liquidity ratio as of December 31, 1998 and February 28, 1999. The credit facility also requires Marimba to maintain minimum tangible net worth of at least $10 million. Tangible net worth is defined as our tangible assets less total liabilities, plus deferred revenue. As of December 31, 1998, we were in compliance with the minimum tangible net worth requirement. However, as of February 28, 1999, Marimba's tangible net worth was less than the required $10 million. The bank granted us a waiver of this covenant for February 28, 1999. Furthermore, we expect to be in compliance with this requirement at March 31, 1999 and for the duration of the credit facility which expires on May 26, 1999. We intend to repay this credit facility using a portion of the net proceeds from this offering. Cash used in operations increased from $877,000 in the 1996 inception period to $1.5 million in 1997 and $6.1 million in 1998 primarily due to our net losses which were partially offset by increases in deferred revenues and accounts receivable in 1997 and decreases in deferred revenues and accounts receivable in 1998. Cash used in investing activities increased from $285,000 in the 1996 inception period to $2.7 million in 1997 and $5.4 million in 1998. We have made substantial investments in computer 28 30 equipment, computer software, office furniture and leasehold improvements. In addition, cash used in investing activities during 1998 included net purchases of short-term investments of $4.1 million. Net cash provided by financing activities was $4.0 million in the 1996 inception period, $15.8 million in 1997 and $861,000 in 1998. Net cash from financing activities during the 1996 inception period resulted primarily from the sale of preferred stock. Net cash from financing activities during 1997 resulted primarily from the sale of preferred stock and from the sale of common stock issued upon exercise of stock options. During 1998, net cash from financing activities resulted primarily from the sale of common stock issued upon exercise of stock options and proceeds from equipment advances. We expect to fund future operating expenses from revenues received from the sale of our products and services and the proceeds of this offering. We currently anticipate that the net proceeds from this offering, together with our current cash, cash equivalents, short-term investments and credit facility, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, we may need to raise additional funds in future periods through public or private financings, or other arrangements to fund our operations and potential acquisitions, if any, over a long-term basis until we achieve profitability, if ever. Any additional financings, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to our common stock. YEAR 2000 COMPLIANCE BACKGROUND OF YEAR 2000 ISSUES Many currently installed computer and communications systems and software products are unable to distinguish 21st century dates from 20th century dates. This situation could result in system failures or miscalculations causing disruptions in the operations of any business. As a result, many companies' software and computer and communications systems may need to be upgraded or replaced to comply with these Year 2000 requirements. CUSTOMER REPRESENTATIONS AND WARRANTIES We generally represent and warrant to our customers that the occurrence of the date January 1, 2000 and any related leap-year issues will not cause our products to fail to operate properly. In some cases, this warranty includes representations regarding the ability of our product to store, display, calculate, compute and otherwise process date-related data. Our warranty generally applies only to our products and excludes failures resulting from the combination of our products with other software or hardware or from the use of our software in a manner not in accordance with the related documentation. If we breach this warranty, remedies in most cases include commercially reasonable efforts to replace the software and to advise the customer how to achieve substantially the same functionality through different procedures, as well as payment of money damages, subject to limitations. OUR PRODUCT TESTING AND LICENSING We have tested all of our products for Year 2000 compliance. We derived our testing method from our review and analysis of the Year 2000 testing practices of other software vendors, relevant industry Year 2000 compliance standards and the specific functionality and operating environment of our products. The tests are run on all supported platforms for each release and include testing for date calculation and internal storage of date information with test numbers starting in 1999 and going over the 29 31 Year 2000 boundary. Based on these tests, we believe our products to be Year 2000 compliant with respect to date calculations and internal storage of date information. We have identified one Year 2000 date-related limitation in earlier versions of Castanet. Versions of Castanet before version 3.2 display date information to the user in a manner that uses only two digits to represent a year. A two-digit display of the Year 2000 could cause a user to believe the year represented was the Year 1900 instead of the Year 2000. This limitation does not affect either computation of data in our products or operation of the products. All versions of Castanet currently being shipped use four digits for the display of date data. INTERACTION OF OUR PRODUCTS WITH THIRD-PARTY SOFTWARE Our products contain, operate with and depend on third-party code that we may not be able to independently verify is Year 2000 compliant. Substantially all of our products interface with and depend on Sun's JVM (Java Virtual Machine). Sun has indicated that the version of the JVM on which Castanet 3.0, Castanet 4.0, and all later versions depend, is Year 2000 compliant, but Sun has made no similar statement regarding earlier versions of the JVM. Our products also contain and depend on software licensed to us from RSA Data Security, Inc., Netscape, VeriSign, Inc. and Phaos Technology Corporation. Although each of those companies has made representations that the licensed code is Year 2000 compliant, we may not be able to verify this by independent testing. Finally, our products also interact with external sources including as other software programs and operating systems which may not be Year 2000 compliant or which may not provide date data to our products in a manner that is Year 2000 compliant. Any interaction with third-party software which is not Year 2000 compliant could cause our products to fail to properly operate or to properly process date information. OUR INTERNAL SYSTEMS Although we do not have a formal contingency plan to address Year 2000 issues, we are in the preliminary stages of assessing our internal risks associated with the Year 2000 issue. We are working internally and with third-party vendors to assure that we are prepared for the Year 2000. We have inventoried our internal software and hardware systems, as well as products and services provided by third-party vendors. These systems include those related to product delivery, customer service, internal and external communications, accounting and payroll, which we consider critical areas of our business. We are seeking vendor certification for all third-party systems and plan to develop a detailed risk assessment and action plan that will include testing of both critical systems and systems for which no certification has been obtained. The identification, certification and risk assessment phases of our Year 2000 project are expected to be completed by the end of April 1999. Subsequent phases will include our own tests, tests conducted by third-party consultants and the development of contingency plans and/or corrective solutions for systems which have been identified to be noncompliant. We expect these phases will continue through the first half of 1999. COSTS OF ADDRESSING YEAR 2000 COMPLIANCE To date, our costs to address Year 2000 compliance have not been significant. Based on our preliminary evaluations, we do not believe we will incur significant operating expenses or be required to invest heavily in computer system improvements to be Year 2000 compliant. Although we have not yet developed an exact estimate of these costs, we expect the total costs to be less than $100,000. However, significant uncertainty exists concerning the potential costs and effects associated with Year 2000 compliance. Any Year 2000 compliance problem experienced by us or our customers could decrease demand for our products which could seriously harm our business and operating results. 30 32 RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize selected costs related to internal-use software once specified criteria have been met. We expect that the adoption of SOP No. 98-1 will not have a material impact on our financial position or operating results. We will be required to implement SOP No. 98-1 for the year ending December 31, 1999. In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. We expect that the adoption of SOP No. 98-5 will not have a material impact on our financial position or results of operations. We will be required to implement SOP No. 98-5 for the year ending December 31, 1999. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because we do not currently hold any derivative instruments and do not engage in hedging activities, we expect that the adoption of SFAS No. 133 will not have a material impact on our financial position or results of operations. We will be required to implement SFAS No. 133 for the year ending December 31, 2000. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We develop products in the United States and sell in North America, Asia and Europe. As a result, our financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required. Our investment policy requires us to invest funds in excess of current operating requirements in: - obligations of the U.S. government and its agencies; - investment grade state and local government obligations; - securities of U.S. corporations rated A1 or AA by Standard and Poors or the Moody's equivalent; and - money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks meeting particular credit rating and net worth requirements with maturities of less than two years. At December 31, 1998, our cash and cash equivalents consisted primarily of demand deposits and money market funds held by large institutions in the U.S. and our short-term investments were invested in corporate debt and equity securities maturing in less than one year. 31 33 BUSINESS OVERVIEW Marimba is a leading provider of Internet-based software management solutions that enable companies to expand their market reach, streamline business processes and strengthen relationships with customers, business partners and employees. Our Castanet product family provides an efficient and reliable way for enterprises to distribute, update and manage applications and related data over corporate intranets, extranets and the Internet. Our strategy is to extend the Castanet foundation to manage the array of infrastructure, systems and components upon which business applications and services depend. We believe that, by using Castanet, companies are able to leverage the Internet more efficiently by reducing software management costs, delivering greater functionality and improving customer loyalty. Our global customer base spans multiple industry segments including financial services, insurance, retail, manufacturing and telecommunications. Castanet customers include various industry leaders, including Bear Stearns, Charles Schwab, EarthLink, The Home Depot, Intuit, Ingram Micro, Nortel Networks, Seagate Technology and Sun Microsystems. We market our Castanet products worldwide through a combination of a direct sales force, resellers and distributors. INDUSTRY BACKGROUND In today's intensely competitive business environment, companies aggressively seek new ways to leverage information technology for competitive advantage. The Internet has emerged as a crucial business tool, offering the prospect of ubiquitous, easy-to-use and cost-effective connectivity to anyone, anywhere, internal or external to the corporate network. As the commercial use of the Internet grows, companies are delivering increasingly sophisticated services to a rapidly expanding audience. As a result, demands on the Internet infrastructure have grown and the enterprise computing environment is evolving and becoming increasingly complex. Today, companies are extending their enterprises and starting to use the Internet to connect to their business partners and customers in fundamentally new ways. Organizations are leveraging the Internet to deliver services that extend their business processes to networked, mobile and remote employees, customers, suppliers, vendors, distributors and other partners. This emerging use of the Internet by businesses, which is often referred to as "e-business," encompasses business-to-business, business-to-employee and business-to-consumer communications and transactions. As they adopt e-business, companies are integrating, co-locating and redistributing their business processes with those of their strategic partners and customers. By linking these business processes across the extended enterprise, companies are creating a new type of service offering for their strategic partners and customers that requires the ability to deliver business applications and information dynamically. For example, by directly sharing the information and analysis of an inventory management application, companies and their suppliers and distributors can manage supply chain issues in real-time. Alternatively, by providing online applications including financial portfolio management, companies can offer personalized, up-to-date account information that creates immediate value for their customers. When companies are able to offer easy-to-access, compelling, up-to-date applications and information as services, they create closer business relationships, new efficiencies and significant strategic advantages. As a result of these benefits, the e-business market is large and growing rapidly. International Data Corporation, an independent research firm, estimates that e-commerce, the subset of e-business that encompasses the sale of goods and services over the Internet, will grow from $32 billion in 1998 to $426 billion in 2002. In embracing e-business, companies are extending their information technology infrastructure beyond the organization and moving their core business applications and processes to the Internet. Before the commercial adoption of the Internet as a business platform, corporations primarily focused on connecting the physical computing network infrastructure within their own organizations and deploying application software to automate internal business processes. As companies now extend their enterprise 32 34 information technology infrastructure, they face significant new challenges. In an e-business environment where corporate information technology domains are being extended, application availability, security and performance are dependent on the management of a complex, heterogeneous array of systems and services. In addition, the dynamic nature of e-business requires companies to ensure that applications and information are up to date. As companies' e-business services grow, they must be able to rapidly scale their services to thousands, or even millions, of users. These users are often only intermittently connected to the network and may be outside the corporation's control. The public nature of the Internet also exposes the enterprise to heightened security risks. Finally, as e-business applications are increasingly being advertised and delivered as services, organizations and their customers are demanding the same high levels of availability, ease of use and quality of service that they expect from common utilities including electricity and telephone systems. The evolution of enterprise computing to an Internet-based infrastructure is creating enormous complexity for organizations and producing significant challenges, similar to those faced by companies as they moved from mainframe computing to client-server environments. At that time, the need to manage complex client-server environments gave rise to a large market for network and systems management solutions. However, these solutions were not designed for an Internet-based infrastructure. As a result, they do not adequately address challenges including connectivity, management of endpoints outside of the firewall and security requirements of a public network, and massive scalability, all of which are critically important when delivering services across the Internet. These challenges have created the need for a new Internet services management solution that supports e-business services across the extended enterprise. A complete Internet services management solution would provide not only the management of e-business applications on an ongoing basis, but also management of the infrastructure upon which those applications depend. For example, an e-business platform would typically be comprised of a set of business applications, plus a number of components, including web servers, database management systems, application servers and software security systems. A complete Internet services management solution will ultimately enable an information technology department to first deploy and then manage, maintain and monitor this e-business infrastructure across companies, domains and geographies. THE MARIMBA SOLUTION Marimba is a leading provider of Internet-based software management solutions that enable companies to expand their market reach, streamline business processes and strengthen relationships with customers, business partners and employees. Our Internet services management solutions help solve complex deployment and management problems that we believe are not adequately addressed by existing client-server based distribution and management products. An essential foundation of a complete Internet services management solution is the ability to effectively deliver and manage applications and information throughout the extended enterprise. Built from the ground up to provide a robust Internet-based infrastructure, our Castanet software product family provides automated distribution, transparent updates and ongoing management of e-business applications, application-related data, business rules, documents and services throughout the extended enterprise. Our Castanet product family is modular, allowing organizations to plug-in functionality as their e-business requirements expand. In addition, Castanet is designed to provide the reliability, performance and security that organizations require for their business-critical e-business applications and services. As a result, we believe our customers are able to leverage their networks more efficiently and obtain greater functionality from their business applications. 33 35 We believe that the benefits of our Castanet solution will address the Internet services management needs of leading corporations and service providers. Key benefits of this solution include: Reduces Total Cost of Managing the Extended Enterprise. Castanet facilitates the centralized management of the extended enterprise by enabling automated, electronic distribution, installation and updates of applications and related data. In so doing, we believe that Castanet lowers information technology costs by reducing resources previously required to manually distribute and customize software. Castanet can further reduce support costs by removing the burden of software installation and management from the end-user and by automatically synchronizing application versions across multiple users. In addition, by replacing only the applications or data that have changed, Castanet enables rapid and efficient updates, thereby reducing network connection charges and enabling corporations to realize increased benefits from their network bandwidth investment. Increases Efficiency of the Extended Enterprise. Castanet provides organizations with a simple and rapid way to distribute new or updated applications and information across a complex, distributed and heterogeneous computing environment. Through access control and policy management, Castanet enables the collaborative exchange of applications and data among users and across companies. By enabling organizations to extend access to their data and applications across the extended enterprise, we believe that Castanet can increase the efficiency and usefulness of an organization's information and technology assets. Employees, customers, suppliers, vendors and other partners can receive the most recent and relevant data directly, reducing an organization's support requirements. Mobile users can work off-line and receive the latest updates when they connect to the network. By enabling rapid updates, Castanet can reduce the time and frustration often associated with obtaining software and data updates remotely. In addition, because users automatically receive the most current information, organizations can reduce the inefficiency caused by outdated information and applications. Provides Robust Infrastructure for Mission-Critical Applications. Castanet enables companies to distribute and update business-critical applications throughout the extended enterprise in a reliable and efficient manner. When corporations transmit sensitive e-business applications and data across public or private networks, precautions must be taken to authenticate user identity, verify application and data integrity, and protect data confidentiality. Castanet provides comprehensive security functionality, including digital certificates, encryption and end-user access control. Castanet can rapidly scale to allow organizations to distribute applications and upgrades to large numbers of users in geographically dispersed locations. We believe this architecture helps organizations improve application performance and reduce network traffic. If a download is interrupted, Castanet can automatically restart at the point of interruption when it reconnects without corrupting the original application or file. Enhances Customer Relationships. As corporations extend their enterprise to customers, business partners and employees worldwide, it is becoming increasingly important to deliver personalized services, content and user interfaces to individual customers or target groups. Castanet enables the tailoring of services through automatic identification of target user groups, or through server extensions which allow the automated selection of code and content. In addition, Castanet provides the ability to create and package custom user interfaces. Using the customization and branding functions available with Castanet, information technology and operational managers can define and enforce consistent application configurations and branding across the extended enterprise. We believe that each of these capabilities allows companies to strengthen their brand and offer more compelling Internet-based services resulting in increased customer loyalty. STRATEGY Our objective is to become the leading provider of Internet services management solutions. We are pioneering this new and emerging market and have established a foundation upon which we can build to 34 36 address the growing needs of the extended enterprise. The key elements of our strategy to achieve our objective are: Extend Technological Leadership Position. We are the first company to provide an integrated product suite that has been designed from the ground up to provide e-business application distribution and management solutions across the extended enterprise. We believe that our application distribution and management solutions provide us with a first mover advantage and an essential foundation for a comprehensive Internet services management solution. We intend to advance our technological leadership by investing significant resources in research and development. In addition, by implementing and actively promoting new industry standards, we intend to facilitate widespread adoption of Castanet by enterprises conducting e-business. Target Companies and Service Providers Conducting E-business. We intend to expand adoption of Castanet by focusing our efforts on selling to large companies in industry sectors where the deployment of e-business solutions provides a key competitive advantage. While many large companies are now engaging in some form of e-business, we believe that Castanet is particularly attractive to companies in industry sectors including financial services, insurance, health care, manufacturing, retail, technology and telecommunications given their sophisticated technological needs. We believe that our experience in successfully providing Castanet solutions to industry-leading companies provides us a competitive advantage in selling Castanet to potential customers. Castanet provides an enabling infrastructure for application service providers and Internet service providers to distribute and remotely manage applications services simply, efficiently and at a low cost. Expand Worldwide Sales. We believe that international markets represent a significant growth opportunity as organizations seek global e-business solutions. We currently have a direct sales presence in North America and Europe. In the Asia/Pacific region, we sell our Castanet products through third- party distributors. We intend to expand our direct sales force and to establish additional sales offices domestically and internationally. In addition, we plan to complement our current distribution channels with selected resellers, system integrators and joint marketing partners to expand our market reach. Expand Professional Services. We believe that our experienced team of consultants, support engineers and training staff provide a key competitive advantage in the sale of the Castanet solution. We intend to expand this team and continue to invest in the advanced level of training required to provide superior service to our customer base. In addition, we believe that the complex and strategic nature of Internet services management software provides us with a significant opportunity to provide consulting services to customers to help them successfully develop, deploy and maintain their e-business applications. Each of the elements of our strategy are ongoing efforts and we do not have specific implementation dates. 35 37 CASTANET PRODUCT FAMILY The Castanet product family provides a robust framework to distribute, update and manage applications and related data over corporate intranets, extranets and the Internet to multiple endpoints, including servers, desktops and mobile systems. Designed upon an open, extensible architecture, our Castanet products automatically recover from transmission errors, provide a variety of security features, reduce network connection time, allow personalization and are rapidly scalable to a large number of users in geographically dispersed locations. The Castanet product family is modular, allowing organizations to add functionality as their e-business management requirements expand. Each generation of Castanet has introduced additional functionality including Castanet 4.0, released in March 1999, which added the Castanet Inventory Suite and Castanet Subscription Suite. The Castanet product family is summarized below:
- -------------------------------------------------------------------------------------------------------- CASTANET PRODUCT FAMILY BENEFITS - -------------------------------------------------------------------------------------------------------- CASTANET INFRASTRUCTURE SUITE: - Supports multiple applications across heterogeneous computing environments, in one The Infrastructure Suite provides the foundation integrated solution upon which all other Castanet product suites are built. It provides the components necessary to - Provides security features to authenticate users distribute, manage and maintain applications and help protect data integrity and across intranets, extranets and the Internet. confidentiality - Provides bandwidth efficiency, lowering network connection costs - Supports mobile and remote users, who may be only intermittently connected to the network - Supports personalization, making it easy to install and manage appropriate application versions for each user - Rapidly scales to a large number of users in geographically dispersed locations - Utilizes open standards and extends to meet changing user requirements - -------------------------------------------------------------------------------------------------------- CASTANET PRODUCTION SUITE: - Automates the application publishing process The Production Suite provides the ability to - Provides easy-to-use interfaces for defining the package and publish custom or off-the-shelf way applications are configured applications, files and documents for distribution by the Castanet Infrastructure - Reduces software and platform dependencies Suite. - Provides the ability to customize the application installation process to shield end users from software installation complexities - -------------------------------------------------------------------------------------------------------- CASTANET MANAGEMENT SUITE: - Helps trouble-shoot and test Castanet deployments The Management Suite provides comprehensive solutions for the management, deployment and - Streamlines application rollouts across multiple maintenance of enterprise-wide Castanet organizations installations. The suite permits centralized monitoring and control of local and remote - Provides usage reports and log files Castanet servers and clients. Optional extensions to the Management Suite also provide extensive - Strengthens brand awareness by allowing client customization and branding capabilities. information technology managers and business organizations to customize user interfaces - --------------------------------------------------------------------------------------------------------
36 38
- -------------------------------------------------------------------------------------------------------- CASTANET PRODUCT FAMILY BENEFITS - -------------------------------------------------------------------------------------------------------- CASTANET INVENTORY SUITE: - Automates collection of inventory information, including application, network, computer The Inventory Suite simplifies the discovery, hardware and operating system information tracking and management of the desktop, server and portable computing resources within the - Supports intermittently connected computing enterprise. By providing database integration and resources, providing network managers with reporting capabilities, the suite is designed to greater inventory accuracy and administrative allow administrators to generate up to date control information on machines within their domains of control, even if they are only connected - Provides the ability to view inventory intermittently to a network. information and perform searches - Supports relational database storage for enterprise-wide access, data consolidation and reporting - Enables customization of inventory parameters and schedules - -------------------------------------------------------------------------------------------------------- CASTANET SUBSCRIPTION SUITE: - Streamlines definition of enterprise-wide The Subscription Suite is designed to provide application subscription policies based on user corporate information technology managers with profiles the ability to use existing profile information to define, distribute and enforce a centralized - Automates distribution and enforcement of subscription policy that determines which enterprise-wide application subscription policies applications should be made available, installed or deleted from a user's machine. - Integrates with user profile information from multiple sources - Supports multiple application subscription modes, from notification of availability to automatic installation - Enables customization of subscription parameters and schedules - --------------------------------------------------------------------------------------------------------
We generally license the Castanet Infrastructure Suite on a per user basis with the total fee determined, in part, by the number of end-users who can obtain updates using Castanet. The license terms also vary depending on the number of applications to be deployed with Castanet and whether the computer receiving updates is a server or client computer. Separate licenses are available for the right to customize the user interface of the client component of Castanet and to distribute the client and/or server components of the system to customers, partners or others outside of the customer's own organization. The Castanet Management and the Production Suites are generally licensed on a per user basis, based on the number of individual systems administrators who will use the components of the suites. We intend to license the Castanet Inventory Suite in a manner similar to the Castanet Infrastructure Suite and we intend to license the Castanet Subscription Suite in a manner similar to the Castanet Management and Production Suites. 37 39 ARCHITECTURE The Castanet infrastructure is designed to distribute software and data efficiently over networks based upon TCP/IP (Transmission Control Protocol/Internet Protocol), the basic communication protocol of the Internet. Castanet packages an application as a channel and publishes the application to a transmitter, which then distributes the channel and subsequent updates across a network to tuners on client computers. The fundamental components of the architecture are illustrated below: LOGO Channel. A channel is the application and/or related data that is distributed using Castanet. For example, a channel could consist of a stock-trading application written in Java or a shrink-wrapped application, including Microsoft Word and related documents. Each channel has an associated list of properties that describes its features, including application type, author, copyright notice, update schedule and entry point. Castanet's application packager prepares the channel for distribution and inserts a channel adapter that installs and launches the application in a platform and application specific manner. The application packager is designed to accommodate a range of application types, including Java applets, Java Beans, Visual Basic, C, C++ and shrink-wrapped applications. Using OSD (Open Software Description), a format for describing the way software programs relate to one another, the application packager creates a description of the installation process which is based on XML (eXtensible Markup Language), a format commonly used on the Internet to describe data and documents. Using this technology, both shrink-wrapped and custom applications can be installed, updated and repaired without requiring changes to the original application and without relying on the original application installer. After the application is packaged as a channel, it is published to the transmitter for distribution over the network. Transmitter. The transmitter is the server component of Castanet. It distributes channels and subsequent updates to the tuner, the Castanet client. The tuner and transmitter communicate using the Castanet protocol which is designed to minimize bandwidth requirements for updates over HTTP (Hyper-Text Transfer Protocol), the protocol used to distribute web pages. The Castanet protocol uses compression technology that compresses data and applications, and differential updating which identifies changes in code and updates only the changed portion. All updates are transactional, interruptible and atomic, which means that channels on the tuner are always in a functional state even if the most recent update failed or was interrupted. In addition, interrupted downloads can be restarted automatically at the point of interruption. Castanet provides functionality to identify and verify each channel resource and installed applications. Additional transmitter features include replication, personalization, client feedback, bandwidth management and policy administration. Castanet implements user authentication and 38 40 access control using passwords or client-side certificates and by leveraging directory services, including LDAP (Lightweight Directory Access Protocol), or Microsoft's Active Directory. Tuner. The tuner is the client component of Castanet. The tuner subscribes to channels located on the transmitter and downloads, installs and receives updates of each channel. Once received from a transmitter, channels are stored locally on the tuner, making the downloaded channel resources instantly accessible regardless of whether the user is connected to the network. The tuner is typically configured to run in the background and can manage multiple channels simultaneously without end-user interaction, updating them as necessary to present the user with the most recent version. In addition, the tuner's user interface can be customized to include the brand, logo and other look and feel elements desired by the customer. The tuner provides a comprehensive set of features for modem support, bandwidth management, security controls, certificate management, update scheduling and support for corporate network security mechanisms. The Castanet distribution architecture can be scaled rapidly to a large number of end users using replication and caching technology. The illustration below describes an example of how applications can be deployed globally to multiple end users: LOGO Using the Castanet protocol, tuners can be redirected automatically to additional transmitters, serving as repeaters, in order to reduce the load on the main transmitter and to make more efficient use of available bandwidth. By adding repeaters, it is possible to provide faster download times and to service thousands of simultaneous downloads. Repeaters can be added and removed dynamically without disrupting the overall service, allowing for a high level of scalability, improved service quality and availability. In addition, the use of a caching proxy server, which stores frequently accessed files on a local disk, can improve the efficiency of downloads through corporate network security barriers in an intranet or network into the enterprise. In addition to the basic Castanet components, a variety of Castanet features are available for reporting downloads, staging updates, application signing, resource planning, certificate management, license installation, transmitter administration, tuner administration and deploying tuner updates. All of these features are distributed as Castanet channels, and together with the basic infrastructure compo- 39 41 nents, provide all the necessary functionality to distribute, manage and maintain mission critical applications and services. Where appropriate, we provide programming interfaces and software development kits for customized extensions, allowing customers to tailor the Castanet solution to their specific needs, or to embed the Castanet technology into existing applications. TECHNOLOGY We believe that our investment in engineering has resulted in technology that provides us with a strategic advantage. Castanet has been built from the ground up to provide a robust Internet-based solution. Castanet provides a lightweight, cross-platform and easy-to-deploy solution that helps solve complex application deployment and management problems which we believe are not addressed adequately by existing client-server distribution and management tools. Castanet makes extensive use of a broad range of technologies, including Java, TCP/IP, HTTP, LDAP, XML, SSL (Secure Socket Layer), a protocol for secure transmissions over the Internet, and various digital security technologies. In addition, we have worked with partners to submit several standards proposals to the World Wide Web Consortium, including the OSD format jointly developed with Microsoft and the DRP protocol (HTTP Distribution and Replication Protocol), a protocol which efficiently distributes data on the Internet, jointly developed with Netscape, Sun Microsystems, Novell, Inc. and @Home Network. The Castanet protocol is designed to distribute applications and data to multiple intermittently connected endpoints. The protocol is layered on HTTP so that it can be used from within most secure corporate intranets and networks by tunneling through an HTTP proxy server. When the user is on line, the tuner initiates update requests either when requested by the user or automatically using a predefined update schedule. When an update request is received, the transmitter quickly determines which files in the channel have changed, and if a change has occurred, Castanet determines exactly which bytes within those files have changed. The tuner then downloads the resulting changes, and compression algorithms are used to further reduce the total download overhead. The efficiency of the Castanet protocol makes it possible to distribute frequent updates to large applications and application files with relatively low bandwidth utilization. The protocol also provides features for user authentication, personalization of content, the distribution of events and data from the tuner to the transmitter and the automatic redirection of requests to repeaters. Our OSD-based software installation technology provides a cross-platform framework for installing, updating, and verifying applications in an operating system specific manner. Applications are delivered with an OSD file that defines the platforms on which the software runs, as well as the libraries and resources it requires. In addition, the OSD file contains platform specific extensions that define the exact installation requirements. For example, on the Microsoft Windows platform, the OSD file describes exactly which files need to be installed, which libraries that contain application code need to be updated, which registry entries need to be set and which system scripts need to be updated. Once an application is installed, the OSD file can be used to upgrade, verify and uninstall the application. OSD files are generated automatically using an installation capture technology, which eliminates the use of the original application installer. Information technology managers can customize the OSD script to control the level of user involvement in the resulting installation. We have invested significant resources in developing Castanet's security implementation. Castanet's security features currently include end user authentication, digital certificates to verify application authenticity and SSL communications to help protect the integrity and confidentiality of data transmitted via Castanet. We offer a standard 40-bit encryption implementation for international use and a 128-bit encryption implementation for domestic use only. Our security implementation represents a combination of software written by us and security code licensed to us by various vendors, including encryption modules licensed from RSA Data Security and an SSL implementation from Netscape. To 40 42 further enhance the breadth of our security offerings, we also recently licensed a Java-based security implementation. We also have an arrangement with VeriSign for the provision of digital certificates specifically for Castanet products. See "Risk Factors -- We Rely on Third-Party Software and Applications." Most of our products are implemented using Sun Microsystems' Java programming language. As a result, we believe that our products are extremely portable, easy to internationalize, easily reconfigured and efficient. The use of Java has proven to be a major advantage in developing portable components without significantly increasing the engineering overhead as additional platform support is required. We believe that our use of and expertise in Java provides us a competitive advantage. See "Risk Factors -- We Rely on Third-Party Software and Applications." CUSTOMERS Our customer base spans multiple industry segments including financial services, government, insurance, retail, manufacturing and telecommunications. The following is a representative list of companies that have purchased over $100,000 of Castanet products and services. We do not intend the identification of these customers to imply that these customers are actively endorsing or promoting our products. American Management Systems Arthur Andersen Bear Stearns & Co. Caterpillar Charles Schwab Cisco Systems Daimler Chrysler EarthLink Network Edward Jones Encanto Networks Fireman's Fund Ford Motor Company Fujitsu GE Medical Systems Guardian Life Insurance H&R Block Hitachi IT The Home Depot Ingram Micro Instinet Intuit Itochu MECA Software Merck & Co. Mitchell International Morgan Stanley Dean Witter & Co. Samsung SDS Seagate Technology SegaSoft Networks Sony Marketing Sun Microsystems SBC Warburg Dillon Read The Thompson Financial Company Toshiba US WEST Wausau Insurance The following examples span intranet, extranet and Internet e-business applications, and illustrate how organizations are relying on Castanet to provide a management infrastructure for business-to-employee, business-to-business, and business-to-customer networked communications and transactions. Business-to-Employee (Intranet Applications). The Home Depot and Cytec sought to lower cost of operations, automate application installation and maintenance and improve controlled access to information within their intranet environments. These organizations are utilizing Castanet to distribute, manage and maintain critical line-of-business applications to their employees, whether they reside in headquarter locations, remote offices or field locations. The Home Depot selected Castanet to automate deployment of its custom design applications to 760 stores worldwide. Cytec relies on Castanet to manage its supply chain application accessed daily by hundreds of employees in North America. Business-to-Business (Extranet Applications). Seagate Technology and Ingram Micro rely on Castanet's built-in security, bandwidth efficiency, personalization features and support for disconnected use for combined intranet and extranet applications. Seagate Technology is utilizing Castanet to deliver and update business applications, including sales forecasting and pricing information to its internal sales management, mobile sales force and external OEM and distributor partners. Ingram Micro is utilizing Castanet to deploy and maintain electronic commerce services to its network of resellers. Business-to-Customer (Internet Applications). Intuit and OnSale were challenged with providing Internet applications to a large number of end users where bandwidth efficiency, cross platform support and incremental, transactional updates are key. Intuit embedded Castanet into its Quicken 99 personal finance software to enable its installed base of 10.5 million online users to receive software and information updates transparently. OnSale, a leading Internet auction retailer with over one million 41 43 registered users, built its BidWatch application on Castanet's infrastructure in order to collect and display real-time bid information for up to 1,000 simultaneously active users. Many of our customers have gained measurable cost saving benefits through their deployment of Castanet. We engaged the Hurwitz Group, an industry analyst and research firm, to work with us to assess the amount of time required for Castanet to pay for itself, or achieve a break-even return on investment for selected customers. The net payback period represents the total amount of anticipated time needed for the organization to recoup its initial investment in terms of monthly cost savings. The cost savings include both reductions in costs that the customer has achieved or expects to achieve, as well as anticipated costs that the customer expects to avoid, by deploying Castanet. These cost saving data are based on data provided by the customers, and have not been independently verified. The following examples demonstrate the expected payback period for Castanet in three diverse customer deployments.
- ------------------------------------------------------------------------------------------------------------ USE OF INITIAL ESTIMATED MONTHLY NET PAYBACK CUSTOMER CASTANET INVESTMENT COST SAVINGS PERIOD(1) - ------------------------------------------------------------------------------------------------------------ Major Distribute and manage sales $ 200,000 People savings: $ 21,000 2 months Manufacturer productivity applications Hardware savings: $ 5,000 to its remote/mobile sales Network bandwidth force and channel partners. utilization savings: $121,800 Total: $147,800 - ------------------------------------------------------------------------------------------------------------ Computer Equipment Distribute all internal $1,000,000 People savings: $165,000 4 months Manufacturer business applications to Hardware savings: $122,000 employees connected to Total: $287,000 worldwide corporate network. - ------------------------------------------------------------------------------------------------------------ Major Retail Distribute, update and $2,000,000 People savings: $ 86,000 12 months Corporation manage Windows applications Hardware savings: $ 25,000 over T1 lines to global Support call retail network. savings: $ 60,000 Total: $171,000 - ------------------------------------------------------------------------------------------------------------
SALES, MARKETING AND DISTRIBUTION We market our Castanet products worldwide through a combination of a direct sales force, resellers and distributors. Our worldwide direct sales, marketing and business development organizations consisted of 72 individuals as of March 31, 1999, 43 of whom were located at our Mountain View, California headquarters, 23 in regional offices located in California, Georgia, Illinois, Michigan, New York and Texas and six in our European office in the United Kingdom. Our sales, marketing and distribution approaches are designed to help customers understand both the business and technical benefits of the products. We have built an experienced consulting services organization to facilitate the successful deployment of our products. We intend to expand our consulting services organization and direct sales force and to establish additional sales offices domestically and internationally. Competition for sales personnel is intense, and we may not be able to attract, assimilate or retain additional qualified personnel in the future. See "Risk Factors -- We Need to Develop and Expand Our Sales, Marketing and Distribution Capabilities." We conduct a variety of marketing programs worldwide to educate our target market, create awareness and generate leads for our Castanet solutions. To achieve these goals, we have engaged in marketing activities including e-business seminars, direct mailings, print and online advertising campaigns and trade shows. These programs are targeted at key information technology executives as well as vice presidents of marketing and general managers of business units. In addition, we conduct comprehensive public relations programs that include establishing and maintaining relationships with key trade press, business press and industry analysts as well as an active executive speakers' bureau. We have established and enforced consistent branding guidelines for all of our channel partners in order to solidify our market position. We have also initiated a 42 44 customer advisory council which provides a communication channel for regular feedback from key customers to facilitate the design of products that meet the expanding requirements of our target market. Tivoli has been a reseller of our products since 1997. We also have an original equipment manufacturer agreement with Tivoli under which Tivoli is building upon the Castanet infrastructure to develop a product called Cross-Site. Any revenues from Tivoli under this original equipment manufacturer agreement will be from per seat royalty payments on sales of Cross-Site that contain the Castanet infrastructure. We expect Tivoli to release Cross-Site in 1999. However, the release of Cross-Site could be subject to significant delay. Furthermore, because Cross-Site is a new product, Tivoli might fail to successfully market and sell Cross-Site, and the level of demand for Cross-Site is uncertain. Our reseller agreement with Tivoli expires upon the earlier of May 1, 1999 or written notice provided to us by Tivoli. If the release of Cross-Site is delayed beyond May 1, 1999, Tivoli would no longer resell our Castanet product unless we and Tivoli extended the term of the reseller agreement. Furthermore, it is possible for Tivoli to terminate the reseller agreement before the release of Cross-Site. For a more detailed description of the risks of our relationship with Tivoli, see "Risk Factors -- We Depend on Our Relationship with Tivoli." Netscape, a reseller of our products, accounted for $1.0 million, or approximately 18%, of our revenues in 1997, and $3.8 million, or approximately 22% of our revenues in 1998. A majority of the $3.8 million of 1998 revenues was recognized in the first half of 1998, with only $1.3 million in revenues recognized in the second half of 1998. Netscape is no longer an active reseller, and we do not expect material revenues from Netscape in the future. Markets outside the United States are currently served by our direct sales office in the United Kingdom as well as independent distributors and resellers covering countries in Europe and Asia. Our distributors purchase our Castanet products at discounts from end-user list prices. Sales under the agreements are denominated in U.S. dollars. Foreign sales are subject to risks, including exchange rate fluctuations, internal monetary conditions, tariffs, import licenses, trade policies and domestic and foreign tax policies. For more information on risks related to foreign sales see "Risk Factors -- Expanding Internationally Is Expensive, We May Receive No Benefit from Our Expansion and Our International Operations are Subject to Governmental Regulation." We may not be able to enter into agreements or establish relationships with desired distribution partners on a timely basis, or at all, and our distribution partners may not devote adequate resources to selling our products. For more information on risks related to third-party distribution channels see "Risk Factors -- We Need to Develop and Expand Our Sales, Marketing and Distribution Capabilities." CUSTOMER SUPPORT AND TRAINING Our customer support and training organization consisted of 15 employees as of March 31, 1999. We offer a variety of customer support services to meet specific needs including an option to purchase support on a per-question basis or an annual subscription service that provides customers with the latest product updates as they become available. In addition, we also offer the following annual service packages: Bronze Service. This service provides customers with technical assistance on installation and basic product questions via e-mail and/or telephone, as well as access to our customer support engineers. With this service, customers also receive the latest product updates as they become available. Silver Service. This program includes all the features of the Bronze Service offering with the addition of coverage 24 hours a day, every day of the week. Gold Service. Designed for mission-critical applications, the Gold Service program provides customers with all the features of the Silver Service plus early access to product beta releases and proactive support from designated technical account managers. 43 45 Customers that license our products typically engage our professional services organization to assist with support, training and consulting. We believe that growth in our product sales depends on our ability to provide our customers with these services and to educate third-party resellers and consultants on how to provide similar services. As a result, we plan to increase the number of our service personnel to meet these needs. Please see "Risk Factors -- We Need to Expand Our Professional Services." RESEARCH AND DEVELOPMENT As of March 31, 1999, our engineering organization was comprised of 51 employees responsible for product development, quality assurance, documentation, localization and porting. Our development organization is divided into four groups: infrastructure and production tools, management tools, applications and advanced development. - The infrastructure and production tools group is focused on enhancing the functionality, reliability, performance and flexibility of our products and expanding the ability of Castanet to operate with leading operating systems. - Our management tools group is focused on developing enterprise-level products that address additional Internet services management functions to complement our current product family, and to expand our coverage of the Internet services management market. These products are being developed to add functionality to our existing product family by allowing customers to collect system and application inventory information, control subscription and configuration and monitor the status of endpoints. - The applications group focuses on developing solutions including document management to end users and bi-directional data management between remote offices and stores, to address specific enterprise problems that will directly benefit and leverage our product line. - Our advanced development group defines architecture and engages in speculative and forward-looking engineering with the intention that the results may become products in the future. These four development groups are supported by the quality assurance, documentation, localization and porting groups. The quality assurance group implements a process designed to identify software defects through the entire development cycle. The documentation group is responsible for end user, administrator and developer documentation for our products. The localization group is responsible for internationalizing our products while in development as well as performing the language-specific localization after the English version is produced. The porting group is responsible for any changes to the source code required to allow a product to run on platforms other than the two core development platforms of Solaris and Windows. We believe that our software development team and core technologies represent a significant competitive advantage. The software development team includes a number of key members from the engineering team that developed the Java programming language and Java virtual machines at Sun Microsystems. A technically skilled, quality oriented and highly productive development organization will be a key component of the success of new product offerings. We must attract and retain highly qualified employees to further our research and development efforts. Our business and operating results could be seriously harmed if we are not able to hire and retain the required number of individuals. Research and development expenses were $2.4 million in 1997 and $5.8 million in 1998. To date, substantially all software development costs have been expensed as incurred and developed by our employees. We believe that significant investments in research and development are required to remain competitive. As a consequence, we intend to continue to increase the absolute amount of our research and development expenditures in the future. For more information on our research and development 44 46 expenses, see 'Management's Discussion and Analysis of Financial Condition and Results of Operations." We cannot be sure that existing and future development efforts will be completed within our anticipated schedules or that they will have the features to make them successful. Future delays or problems in the development of product enhancements or new products could seriously harm our business and operating results. Furthermore, despite our testing and testing by our customers, errors might be found in our products, which we are unable to successfully correct in a timely and cost-effective manner. If we are not able to develop new products, enhancements to existing products or correct errors on a timely and cost-effective basis, or if these new products or enhancements do not have the features necessary to make them successful, our business and operating results will be seriously harmed. Furthermore, we currently license externally developed technology and will continue to evaluate externally developed technologies for integration into our product lines. See "Risk Factors -- Our Success Depends on Our Castanet Product Family and New Product Development," "-- Software Defects in Castanet Would Harm Our Business" and "-- We Must Respond to Rapid Technological Change and Evolving Industry Standards." COMPETITION The market for Internet services management solutions is new, intensely competitive and rapidly evolving. We expect competition to continue to increase both from existing competitors and new market entrants. We believe that our ability to compete depends on many factors both within and beyond our control, including: - the ease of use, performance, features, price and reliability of our solutions as compared to those of our competitors; - the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors; - the quality of our customer service; and - the effectiveness of our sales and marketing efforts. We encounter current or potential competition from a number of different sources, including sellers of enterprise-wide management systems, which include electronic software distribution, including Tivoli, Computer Associates and BMC Software; companies such as BackWeb, Novadigm, and Sterling Commerce, through its subsidiary XcelleNet, which market products that support the distribution of software applications; and desktop software management suites, such as Microsoft's SMS and Intel's LanDesk. In addition, we compete with various methods of application distribution and management, including the web browser, and with application server vendors and others which have introduced software distribution capabilities into their products. Some of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have broader customer relationships that could be leveraged, including relationships with many of our customers. These companies also have more established customer support and professional services organizations than we do. In addition, these companies may adopt aggressive pricing policies. As a result, we may not be able to maintain a competitive position against current or future competitors. As new participants enter the Internet services management market, we will face increased competition. Potential competitors may bundle their products or incorporate an Internet services management component into existing products in a manner that discourages users from purchasing our products. Furthermore, it is possible that new competitors or alliances among competitors may emerge 45 47 and rapidly acquire significant market share. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. PROPRIETARY RIGHTS AND LICENSING Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of patent, trademark, trade secret, and copyright law and contractual restrictions to protect the proprietary aspects of our technology. We presently have three U.S. patent applications, and several trademark registrations and applications in the United States and some foreign countries. Our patent and trademark applications might not result in the issuance of any valid patents or trademarks. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software under signed license agreements, which impose restrictions on the licensee's ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, we sell our products internationally. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business operating results. Our success and ability to compete are also dependent on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed. Currently, we are engaged in litigation with Novadigm concerning the alleged infringement by us of a patent held by Novadigm which is described in detail in this section under "Legal Proceedings." LEGAL PROCEEDINGS On March 3, 1997, Novadigm filed a complaint against us in the United States District Court for the Northern District of California, alleging infringement by us of a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm Patent"). Novadigm alleges that our infringement relates to certain methods for updating data and software over a computer network that we use in our Castanet products. Novadigm later identified claims 1, 4, 5, 23, 24, 25, 31, 33 and 34 of the Novadigm Patent as being infringed. In its complaint, Novadigm requests preliminary and permanent injunctions prohibiting us and other specified persons from making, using or selling any infringing products, and claims damages, costs and attorneys' fees. The complaint also alleges that we have willfully infringed the Novadigm Patent and seeks up to triple damages under the United States Patent Act. On May 2, 1997, we filed our answer to Novadigm's complaint and filed a counterclaim against Novadigm. Our answer denies Novadigm's allegations and asserts defenses to Novadigm's claim. Our counterclaim seeks a declaratory judgment that we do not infringe the Novadigm Patent and that the Novadigm Patent is invalid and unenforceable. On October 3, 1997, we received an opinion from outside patent opinion counsel, Blakely, Sokoloff, Taylor & Zafman, LLP, that Castanet 1.0 did not infringe the Novadigm Patent. Blakely, Sokoloff, Taylor & Zafman, LLP does not serve as our patent litigation counsel in this lawsuit and has not advised us since October 3, 1997. Since then, we have released three new major versions of Castanet. Although we do not believe that any changes to Castanet made in the newer versions cause Castanet to infringe any claim of the Novadigm Patent, the opinion of Blakely, 46 48 Sokoloff, Taylor & Zafman, LLP did not address the three new versions of Castanet that we have released since October 3, 1997. On August 25, 1997 and January 26, 1998, we filed motions for summary adjudication asking the court to rule that one of the relevant claims of the Novadigm Patent is invalid because it was anticipated by two prior art references. In response to each motion, Novadigm argued that the motion was premature because it pre-dated the court's claim construction proceedings, because only limited discovery had been taken, and because our motion failed to demonstrate that we were entitled to summary adjudication. The court denied our motions in part because (1) discovery was ongoing, (2) the court had not had an opportunity to construe the relevant language in the Novadigm Patent and (3) the court found there were triable issues of fact as to the disclosures in those references. The court stated that we could re-file our motions once discovery has been substantially completed and after it had held a claims construction hearing. On December 17, 1998, the court held a claims construction hearing on the appropriate interpretation of certain terms in the Novadigm Patent, and on December 28, 1998, the court issued an order defining those terms. On January 19, 1999, Novadigm detailed its position as to why Castanet Version 1.1 infringes the asserted claims of the Novadigm Patent and contended that the alleged comparison of file level and channel level checksums in non-optimized updating and the comparison of channel level checksums and their associated update commands in optimized updating infringes the claims of the Novadigm Patent. Novadigm's claim is not limited to Version 1.1, and Novadigm has also stated that it believes that all or some code from subsequent versions of Castanet work substantially the same way. We do not believe that Novadigm accurately states the functionality of Castanet Version 1.1 or establishes that Castanet Version 1.1 infringes the Novadigm Patent. We also do not believe that the relevant portions of other versions of Castanet work in substantially the same way or infringe on any claim of the Novadigm Patent. However, it is possible that Novadigm may allege additional ways in which Castanet infringes claims of the Novadigm Patent in the future. To date, both parties have conducted substantial discovery. We expect that in the first half of 1999, the parties will complete discovery, including the exchange of expert reports. If the court does not enter judgment based on any dispositive motions, a jury trial of this action is currently scheduled to begin in September 1999. We believe that we have strong defenses against Novadigm's lawsuit. Accordingly, we intend to defend this suit vigorously. However, we may not prevail in this litigation. Litigation is subject to inherent uncertainties, especially in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. In addition, cases similar to this involve issues of law that are evolving, presenting further uncertainty. Our defense of this litigation, regardless of the merits of the complaint, has been, and will likely continue to be, time-consuming, costly and a diversion for our technical and management personnel. In addition, publicity related to this litigation has in the past, and will likely in the future, have a negative impact on the sale of our Castanet products. A failure to prevail in the litigation could result in: - our paying monetary damages, which could be tripled if the infringement is found to have been willful, and which may include paying an ongoing royalty to Novadigm for the sales of Castanet products or paying lost profits to Novadigm for particular sales in which we competed with Novadigm and closed a sale; - the issuance of a preliminary or permanent injunction requiring us to stop selling Castanet in its current form; 47 49 - our having to redesign Castanet, which could be costly and time consuming and could substantially delay Castanet shipments, assuming that a redesign is feasible; - our having to reimburse Novadigm for some or all of its attorneys' fees; - our having to obtain from Novadigm a license to its patent, which license might not be made available to us on reasonable terms, particularly because Novadigm is a competitor; or - our having to indemnify our customers against any losses they may incur due to the alleged infringement. Any of these results would seriously harm our business and operating results. Furthermore, we expect to continue to incur substantial costs in defending against this litigation and these costs could increase significantly if our dispute goes to trial. It is possible that these costs could substantially exceed our expectations in future periods. EMPLOYEES At March 31, 1999, we had a total of 162 employees, 156 of whom were based in the United States and 6 of whom were based in the United Kingdom. Of the total, 51 were in research and development, 72 were engaged in sales, marketing and business development, 15 were engaged in customer support and training, and 24 were in administration and finance. None of our employees is subject to a collective bargaining agreement and we believe that our relations with our employees are good. FACILITIES Our principal administrative, sales, marketing, and research and development facility occupies approximately 47,500 square feet in Mountain View, California under a lease which expires in April 2000. We also have regional offices located in California, Georgia, Illinois, Michigan, New York and Texas and a European office in the United Kingdom. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. 48 50 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS Our executive officers, key employees and directors, and their ages as of April 1, 1999, are as follows:
NAME AGE POSITION ---- --- -------- Kim K. Polese............... 37 President, Chief Executive Officer and Director Arthur A. van Hoff.......... 36 Chief Technology Officer and Director Steven P. Williams.......... 36 Executive Vice President, Worldwide Sales and Chief Operating Officer Fred M. Gerson.............. 48 Vice President, Finance and Chief Financial Officer Thomas E. Banahan........... 40 Vice President, Business Development Robert E. Currie............ 31 Vice President, Engineering Jacqueline Ross............. 41 Vice President, Marketing Jonathan Payne.............. 34 Senior Engineer Sami Shaio.................. 35 Senior Engineer Aneel Bhusri................ 33 Director Raymond J. Lane............. 52 Director Douglas J. Mackenzie........ 39 Director Stratton D. Sclavos......... 37 Director
- --------------- Kim K. Polese, a founder of Marimba, has served as President, Chief Executive Officer and a director of Marimba since our inception in February 1996. Before co-founding Marimba, Ms. Polese served in several marketing positions at Sun Microsystems, an enterprise networking company, from January 1989 until January 1996, most recently as Senior Product Manager. From January 1986 to December 1988, Ms. Polese was a Technical Support Engineer for Intellicorp, Inc., an expert systems software company. Ms. Polese received her B.A. in Biophysics from the University of California at Berkeley. Arthur A. van Hoff, a founder of Marimba, has served as Chief Technology Officer and a director of Marimba since our inception in February 1996. Before co-founding Marimba, from February 1993 until February 1996, Mr. van Hoff held various engineering positions at Sun Microsystems, most recently as Senior Staff Engineer. Mr. van Hoff received his M. Phil. in Computer Science from Strathclyde University in Glasgow, Scotland and a postgraduate degree in Computer Science from Hogere Informatica Opleiding in Enschede, Holland. Steven P. Williams has served as Marimba's Executive Vice President, Worldwide Sales and Chief Operating Officer since April 1999 and as our Vice President, Worldwide Sales since November 1996. Before joining Marimba, Mr. Williams served as Vice President, Western Sales from March 1996 to November 1996 and before that as Director, Western Sales from March 1992 to March 1996, for Tivoli, a systems management software company. Mr. Williams received his B.S. in Electrical Engineering from California Polytechnic State University, San Luis Obispo. Fred M. Gerson has served as Marimba's Vice President, Finance and Chief Financial Officer since October 1997. Before joining Marimba, Mr. Gerson served as Vice President and Chief Financial Officer for Maxis, Inc., a consumer entertainment software company, from November 1994 to October 1997, and from November 1992 to November 1994, he served as Vice President and Chief Financial Officer of Farallon Computing, Inc. (currently Netopia, Inc.), a communications software and hardware company. Mr. Gerson received his B.A. in Economics from City University of New York-Brooklyn College and his M.B.A. from New York University. 49 51 Thomas E. Banahan has served as Marimba's Vice President, Business Development since December 1996. Mr. Banahan was Vice President, Worldwide Sales of Spyglass, Inc., an Internet software and service provider, from August 1994 to November 1996, and from March 1988 to July 1994, he was a Vice President of Sales of Comdisco, Inc., a technology services company. Mr. Banahan received his B.A. in Business Economics from the University of California, Santa Barbara. Robert E. Currie has served as Marimba's Vice President, Engineering since August 1996. From December 1988 to January 1995, Mr. Currie held various engineering positions at Digidesign, Inc., a digital audio technology company (currently a division of Avid Technology), most recently as Vice President, Software Engineering. Mr. Currie received his B.S. in Electrical Engineering and Computer Science from the University of California at Berkeley. Jacqueline Ross has served as Marimba's Vice President, Marketing since August 1998. From June 1996 to July 1998, Ms. Ross served as Vice President, Marketing for Check Point Software Technologies, Ltd., a provider of secure enterprise networking solutions. From January 1995 to May 1996, Ms. Ross was Vice President, Marketing of Cambio Networks Inc., an enterprise management software company, and before that served as the Director of Field Marketing at Hughes LAN Systems, a hardware vendor, from July 1991 to December 1994. Ms. Ross received her B.A. and B.B.A. from Kent State University and her M.B.A. from Stanford University. Jonathan Payne, a founder of Marimba, has served as a Senior Engineer for Marimba since our inception in February 1996. Before co-founding Marimba, Mr. Payne was a Senior Engineer at Starwave Corporation, an Internet services company, from February 1995 to February 1996. From June 1988 until February 1995, Mr. Payne served in various engineering positions at Sun Microsystems. Mr. Payne received his B.A. in Cognitive Science from the University of Rochester. Sami Shaio, a founder of Marimba, has served as a Senior Engineer of Marimba since our inception in February 1996. Before co-founding Marimba, from May 1989 until February 1996, Mr. Shaio held various engineering positions at Sun Microsystems, most recently as Senior Staff Engineer. Mr. Shaio received his A.B. and A.M. in Linguistics, as well as his B.S. in Computer Science, from Stanford University. Mr. Shaio received his M.S. in Computer Science from the University of Michigan. Aneel Bhusri has served as a director of Marimba since February 1999. Mr. Bhusri has been a General Partner at Greylock Management Corporation, a national venture capital firm, since April 1999. Mr. Bhusri has served as the Vice Chairman of PeopleSoft since March 1999. Before his current position at PeopleSoft, Mr. Bhusri served as the Senior Vice President of Product Strategy, Business Development and Marketing for PeopleSoft, an enterprise software company from April 1997 to March 1999. Before this position at PeopleSoft, Mr. Bhusri served as Senior Vice President of Product Strategy from November 1995 to April 1997. From April 1995 to November 1995, Mr. Bhusri served as Vice President of Product Strategy and from August 1993 to April 1995 as Director of Product Strategy. Before joining PeopleSoft, Mr. Bhusri was an associate at Norwest Venture Capital from June 1992 to March 1993. From 1988 to 1991, he was a financial analyst in Morgan Stanley's Corporate Finance Department. Mr. Bhusri received his B.S. in Electrical Engineering and his B.A. in Economics from Brown University, and his M.B.A. from Stanford University. Raymond J. Lane has served as a director of Marimba since October 1997. Mr. Lane has been the President and Chief Operating Officer of Oracle Corporation, a database software company, since January 1997. Before his position as President and Chief Operating Officer, Mr. Lane served as the Executive Vice President of Worldwide Operations for Oracle from October 1993 to January 1997, and has been a Director of Oracle since June 1995. Mr. Lane served as a Senior Vice President of Oracle USA from June 1992 to October 1993. Before joining Oracle, Mr. Lane served as Senior Vice President and Managing Partner of the Worldwide Information Technology Group at Booz, Allen & Hamilton, a management consulting firm, from July 1986 to May 1992. He served on the Booz, Allen & Hamilton 50 52 Executive Committee and its Board of Directors from April 1987 to May 1992. Mr. Lane is also a member of the Board of Trustees of Carnegie Mellon University. Mr. Lane received his B.S. in Math from West Virginia University. Douglas J. Mackenzie has served as a director of Marimba since August 1996. Since June 1989, Mr. Mackenzie has been employed with Kleiner Perkins Caufield & Byers, a venture capital firm, of which he has been a General Partner since 1994. Before joining Kleiner Perkins, Mr. Mackenzie held senior level sales, marketing, and operations positions in Eczel Corporation, a reseller of microcomputer products, from October 1983 to August 1987. From March 1982 to October 1983, Mr. Mackenzie served as a management consultant at Booz, Allen & Hamilton. Mr. Mackenzie serves as a director of Visio Corporation, a business drawing and diagramming software company, as well as several private technology-based companies. Mr. Mackenzie received his A.B. in Economics and his M.S. in Industrial Engineering from Stanford University and his M.B.A. from Harvard University. Stratton D. Sclavos has served as a director of Marimba since February 1999. Mr. Sclavos has been the President, Chief Executive Officer and a director of VeriSign since he joined VeriSign in July 1995. From October 1993 to June 1995, Mr. Sclavos was Vice President, Worldwide Marketing and Sales of Taligent, Inc., a software development company that was a joint venture among Apple Computer, Inc., IBM and Hewlett-Packard. From May 1992 to September 1993, Mr. Sclavos was Vice President of Worldwide Sales and Business Development of GO Corporation, a pen-based computer company. Mr. Sclavos is also a director and a member of the compensation committee of Network Solutions, Inc. Mr. Sclavos received his B.S. degree in Electrical and Computer Engineering from the University of California, Davis. BOARD COMMITTEES The board of directors has a compensation committee and an audit committee. Compensation Committee. The compensation committee of the board of directors reviews and makes recommendations to the board regarding all forms of compensation provided to the executive officers and directors of Marimba and our subsidiary including stock compensation and loans. In addition, the compensation committee reviews and makes recommendations on bonus and stock compensation arrangements for all of our employees. As part of these responsibilities the compensation committee also administers our 1996 Stock Plan, 1999 Omnibus Equity Incentive Plan and 1999 employee stock purchase plan. The current members of the compensation committee are Messrs. Lane and Mackenzie. Audit Committee. The audit committee of the board of directors reviews and monitors our corporate financial reporting and our internal and external audits, including our internal audit and control functions, the results and scope of the annual audit and other services provided by our independent auditors and our compliance with legal matters that have a significant impact on our financial reports. The audit committee also consults with management and our independent auditors before the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the audit committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, our independent auditors. The current members of the audit committee are Messrs. Bhusri, Mackenzie and Sclavos. DIRECTOR COMPENSATION Most directors who are not our employees have received grants of options to purchase shares of our common stock. Upon and following this offering, non-employee directors will receive automatic option grants under our 1999 Non-Employee Directors Option Plan. 51 53 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of the board of directors currently consists of Messrs. Lane and Mackenzie. No interlocking relationship exists between any member of our board of directors or our compensation committee and any member of the board of directors or compensation committee of any other company, and no interlocking relationship has existed in the past. INDEMNIFICATION Our Third Amended and Restated Certificate of Incorporation, to be effective after the closing of this offering, includes a provision that eliminates the personal liability of our directors and officers for monetary damages for breach of fiduciary duty as a director or officer, except for liability: - for any breach of the director's or officer's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - under Section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or - for any transaction from which the director or officer derived an improper personal benefit. These provisions are permitted under Delaware law. Our bylaws provide that: - we must indemnify our directors and officers to the fullest extent permitted by Delaware law, subject to very limited exceptions; - we may indemnify our other employees and agents to the same extent that we indemnified our officers and directors; and - we must advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions. We have also entered into indemnification agreements with our officers and directors containing provisions that may require us to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature, to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. 52 54 EXECUTIVE COMPENSATION The following table presents compensation information for 1998 paid by us for services by our chief executive officer and our four other highest-paid executive officers whose total salary and bonus for the fiscal year exceeded $100,000: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($) --------------------------- --------- -------- ------------ --------------- Kim K. Polese............................ $130,000 -- -- $930(1) President and Chief Executive Officer Steven P. Williams(2).................... 125,000 125,000 50,000 -- Executive Vice President, Worldwide Sales and Chief Operating Officer Thomas E. Banahan........................ 125,000 $100,000 -- -- Vice President, Business Development Robert E. Currie......................... 137,000 -- 70,000 -- Vice President, Engineering Fred M. Gerson........................... 165,000 -- -- -- Vice President, Finance and Chief Financial Officer
- ------------------------- (1) Represents premiums paid by us for term life insurance. (2) Mr. Williams was our Vice President, Worldwide Sales during 1998. 53 55 The following table designates each grant of stock options during 1998 to our chief executive officer and our four other highest-paid executive officers. No stock appreciation rights were granted to these individuals during 1998. The figures representing percentages of total options granted to employees in the last fiscal year are based on a total of 2,017,800 option shares granted to our employees under our 1996 Stock Plan during 1998. The exercise price of each option granted is equal to the fair market value of our common stock as valued by our board of directors on the date of grant. The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. We may also finance the option exercise by lending the optionee sufficient funds to pay the exercise price for the purchased shares. The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed according to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable value at 5% and 10% appreciation is calculated by assuming that the exercise price on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------------------------------------------- VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF SECURITIES STOCK PRICE UNDERLYING % OF TOTAL APPRECIATION FOR OPTIONS OPTIONS GRANTED EXERCISE OPTION TERM GRANTED TO EMPLOYEES PRICE EXPIRATION --------------------- NAME (#)(1) IN FISCAL YEAR ($/SH) DATE 5% 10% ---- ---------- --------------- --------- ---------- --------- --------- Kim K. Polese............... -- -- -- -- -- -- Steven P. Williams.......... 50,000 2.5 8.50 12/17/08 267,280 677,341 Thomas E. Banahan........... -- -- -- -- -- -- Robert E. Currie............ 50,000 2.5% $3.00 08/27/08 $ 94,334 $239,061 20,000 1.0 1.00 01/06/08 12,578 31,875 Fred M. Gerson.............. -- -- -- -- -- --
- ------------------------- (1) Each of the options listed in the table is immediately exercisable. The shares purchased under the options may be repurchased by us at the original exercise price paid per share if the optionee ceases service with us before vesting in these shares. For Mr. Currie's option covering 50,000 shares and Mr. Williams' option covering 50,000 shares, the repurchase right lapses and the optionee vests as to 25% of the option shares upon completion of 12 months of service from the vesting start date, and the balance of the option shares vests in a series of equal monthly installments over the next three years of service. For Mr. Currie's option covering 20,000 shares, the repurchase right lapses and he vests as to 33 1/3% of the option shares upon completion of 12 months of service from the vesting start date, and the balance of the option shares vests in a series of equal monthly installments over the next two years of service. The option shares will fully vest if Marimba is acquired in a merger or asset sale, unless our repurchase right with respect to the unvested option shares is transferred to the acquiring entity. Each of the options has a ten-year term, but the term may end earlier if the optionee ceases service with Marimba. 54 56 On April 19, 1999, our board of directors granted to the following executive officers options to purchase shares of our common stock at an exercise price per share of $15.00: Mr. Williams received an option to purchase 300,000 shares; Mr. Currie received an option to purchase 100,000 shares; and Mr. Gerson received an option to purchase 50,000 option shares. The following table presents for our chief executive officer and our four other highest-paid executive officers the number and value of securities underlying unexercised options that are held by these executive officers as of December 31, 1998. No options or stock appreciation rights were exercised by these executive officers in 1998, and no stock appreciation rights were outstanding at the end of that year. Each of the options listed in the table is immediately exercisable. The shares purchased under the options may be repurchased by us at the original exercise price paid per share if the optionee ceases service with us before vesting in these shares. The heading Vested refers to shares that are no longer subject to our repurchase right; the heading Unvested refers to shares subject to our repurchase right as of December 31, 1998. The figures in the "value of unexercised in-the-money options at fiscal year end" column are based on the fair market value of our common stock at the end of 1998 of $8.50 per share, less the exercise price payable for these shares. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED OPTIONS UNEXERCISED AT FISCAL YEAR IN-THE-MONEY OPTIONS END(#) AT FISCAL YEAR END($) ---------------------- ---------------------- NAME VESTED UNVESTED VESTED UNVESTED ---- -------- ---------- --------- --------- Kim K. Polese................................. -- -- -- -- Steven P. Williams............................ 19,444 80,556 155,552 244,448 Thomas E. Banahan............................. -- -- -- -- Robert E. Currie.............................. 6,667 63,333 $ 50,003 $374,998 Fred M. Gerson................................ -- -- -- --
- ------------------------- EMPLOYEE BENEFIT PLANS 1999 OMNIBUS EQUITY INCENTIVE PLAN Our 1999 Omnibus Equity Incentive Plan was adopted by our board of directors on February 2, 1999. We will also seek stockholder approval of this plan. We have reserved 1,250,000 shares of our common stock for issuance under the 1999 Omnibus Equity Incentive Plan. As of January 1 of each year, starting in 2000, the number of shares reserved for issuance under our 1999 Omnibus Equity Incentive Plan will be increased automatically by 4% of the total number of shares of common stock then outstanding or, if less, 1,250,000 shares. No options have yet been granted under the 1999 Omnibus Equity Incentive Plan. Under the 1999 Omnibus Equity Incentive Plan, the individuals eligible to receive awards are: - employees; - non-employee members of the board of directors; and - consultants. The types of awards that may be made under the 1999 Omnibus Equity Incentive Plan are: - options to purchase shares of common stock; - stock appreciation rights; 55 57 - restricted shares; and - stock units. Options may be incentive stock options that qualify for favorable tax treatment for the optionee under Section 422 of the Internal Revenue Code of 1986 or nonstatutory stock options not designed to qualify for favorable tax treatment. With limited restrictions, if shares awarded under the 1999 Omnibus Equity Incentive Plan are forfeited, those shares will again become available for new awards under the 1999 Omnibus Equity Incentive Plan. The compensation committee of our board of directors administers the 1999 Omnibus Equity Incentive Plan. The committee has complete discretion to make all decisions relating to the interpretation and operation of our 1999 Omnibus Equity Incentive Plan. The committee has the discretion to determine which eligible individuals are to receive any award, and to determine the type, number, vesting requirements and other features and conditions of each award. The exercise price for incentive stock options granted under the 1999 Omnibus Equity Incentive Plan may not be less than 100% of the fair market value of our common stock on the option grant date. The exercise price for non-statutory options granted under the 1999 Omnibus Equity Incentive Plan may not be less than 85% of the fair market value of our common stock on the option grant date. Our 1999 Omnibus Equity Incentive Plan provides that no participant may receive options or stock appreciation rights covering more than 100,000 shares in the same year, except that a newly hired employee may receive options or stock appreciation rights covering up to 300,000 shares in the first year of employment. The exercise price may be paid with: - cash; - outstanding shares of common stock; - the cashless exercise method through a designated broker; - a pledge of shares to a broker; or - a promissory note. The purchase price for newly issued restricted shares awarded under the 1999 Omnibus Equity Incentive Plan may be paid with: - cash; - a promissory note; or - the rendering of past services. The committee may reprice options and may modify, extend or assume outstanding options and stock appreciation rights. The committee may accept the cancellation of outstanding options or stock appreciation rights in return for the grant of new options or stock appreciation rights. The new option or right may have the same or a different number of shares and the same or a different exercise price. If a change in control of Marimba occurs, an option or other award under the 1999 Omnibus Equity Incentive Plan will become fully exercisable and fully vested if the option or award is not assumed by the surviving corporation or its parent or if the surviving corporation or its parent does not substitute comparable awards for the awards granted under the 1999 Omnibus Equity Incentive Plan. A change in control includes: - a merger or consolidation of Marimba after which our then-current stockholders own less than 50% of the surviving corporation; - a sale of all or substantially all of our assets; 56 58 - a proxy contest that results in replacement of more than one-half of our directors over a 24-month period; or - an acquisition of 50% or more of our outstanding stock by a person other than a person related to Marimba, including a corporation owned by our stockholders. If a merger or other reorganization occurs, the agreement of merger or reorganization may provide that outstanding options and other awards under the 1999 Omnibus Equity Incentive Plan shall be assumed by the surviving corporation or its parent, shall be continued by Marimba if it is the surviving corporation, shall have accelerated vesting and then expire early, or shall be cancelled for a cash payment. Our board of directors may amend or terminate the 1999 Omnibus Equity Incentive Plan at any time. If our board amends the plan, stockholder approval of the amendment will be sought only if required by an applicable law. The 1999 Omnibus Equity Incentive Plan will continue in effect indefinitely unless the board decides to terminate the plan earlier. 1999 EMPLOYEE STOCK PURCHASE PLAN Our board of directors adopted our employee stock purchase plan on February 2, 1999. We will also seek stockholder approval of this plan. We have reserved 500,000 shares of our common stock for issuance under our 1999 employee stock purchase plan. As of January 1 each year, starting in 2000, the number of shares reserved for issuance under our 1999 employee stock purchase plan will be increased automatically by 2% of the total number of shares of common stock then outstanding or, if less, 500,000 shares. Our 1999 employee stock purchase plan is intended to qualify under Section 423 of the Internal Revenue Code. Eligible employees may begin participating in the 1999 employee stock purchase plan at the start of an offering period. Each offering period lasts 24 months. Two overlapping offering periods will start on May 1 and November 1 of each calendar year. However, the first offering period will start on the effective date of this offering and end on April 30, 2001. Purchases of our common stock will occur on April 30 and October 31 of each calendar year during an offering period. Our 1999 employee stock purchase plan will be administered by the compensation committee of our board of directors. Each of our employees is eligible to participate if he is employed by us for more than 20 hours per week and for more than five months per year. Our 1999 employee stock purchase plan permits each eligible employee to purchase common stock through payroll deductions. Each employee's payroll deductions may not exceed 10% of the employee's cash compensation. The initial period during which payroll deductions may be contributed will begin on the effective date of this offering and end on October 31, 1999. Each participant may purchase up to 500 shares on any purchase date. The price of each share of common stock purchased under our 1999 employee stock purchase plan will be 85% of the lower of: - the fair market value per share of our common stock on the date immediately before the first date of the applicable offering period; or - the fair market value per share of our common stock on the purchase date. In the case of the first offering period, the price per share under the plan will be 85% of the lower of: - the price offered to the public in this offering; or - the fair market value per share of our common stock on the purchase date. Employees may end their participation in the 1999 employee stock purchase plan at any time. Participation ends automatically upon termination of employment with Marimba. 57 59 If a change in control of Marimba occurs, our 1999 employee stock purchase plan will end, and shares will be purchased with the payroll deductions accumulated to date by participating employees, unless this plan is assumed by the surviving corporation or its parent. Our board of directors may amend or terminate the 1999 employee stock purchase plan at any time. If our board of directors increases the number of shares of common stock reserved for issuance under the 1999 employee stock purchase plan, it must seek the approval of our stockholders. 1999 NON-EMPLOYEE DIRECTORS OPTION PLAN Our board of directors adopted our 1999 Non-Employee Directors Option Plan on February 2, 1999. We will also seek stockholder approval of this plan. Only the non-employee members of our board of directors will be eligible for automatic option grants under this plan. We have reserved 150,000 shares of our common stock for issuance under our 1999 Non-Employee Directors Option Plan. As of January 1 each year, starting in 2000, the number of shares reserved for issuance under our 1999 Non-Employee Directors Option Plan will be increased automatically to restore the total number of shares available under this plan to 150,000 shares. No shares have yet been issued under our 1999 Non-Employee Directors Option Plan. The compensation committee of our board of directors will make any administrative determinations under our 1999 Non-Employee Directors Option Plan. No discretionary decisions will be made by the compensation committee under this plan. The exercise price for options granted under our 1999 Non-Employee Directors Option Plan may be paid in cash or in outstanding shares of our common stock. Options may also be exercised on a cashless basis through the same-day sale of the purchased shares. Each individual who became a member of our board of directors as a non-employee director before 1999 will receive a fully vested option for 7,500 shares of our common stock on the effective date of this offering. The exercise price of this option will be the initial price offered to the public in this offering. Each individual who first joins our board of directors as a non-employee director after the effective date of this offering will receive at that time a fully vested option for 15,000 shares of our common stock. In addition, at each of our annual stockholders meetings, beginning in 2000, each non-employee director who will continue to be a director after that meeting will automatically be granted at that meeting a fully vested option for 7,500 shares of our common stock. However, any non-employee director who receives an option for 15,000 shares under this plan will first become eligible to receive the annual option for 7,500 shares at the annual meeting that occurs at any time during the year that is two calendar years after the year in which he received the option for 15,000 shares. For example, if a director received the option for 15,000 shares at any time in 1999, the director will first become eligible to receive the option for 7,500 shares at the annual stockholders meeting occurring in 2001. The exercise price of each option will be equal to the fair market value of our common stock on the option grant date. Our board of directors may amend or modify the 1999 Non-Employee Directors Option Plan at any time. The 1999 Non-Employee Directors Option Plan will terminate on February 1, 2009, unless our board of directors decides to terminate the plan sooner. CHANGE OF CONTROL ARRANGEMENTS We granted to Mr. Gerson options to purchase an aggregate of 300,000 shares of our common stock at an exercise price of $.50 per share. The first option for 250,000 shares vested as to one-third of the shares subject to the option on the first anniversary of Mr. Gerson's employment start date and the remainder vests in equal monthly installments for twenty-four months. The second option for 50,000 shares vests in equal monthly installments for thirty-six months commencing November 3, 1998. If there is a merger or asset sale of Marimba after the first twelve months of Mr. Gerson's employment and Mr. Gerson is constructively terminated within twelve months of the merger or asset 58 60 sale, Mr. Gerson will vest in 50% of the remaining unvested shares subject to both options. Following the acceleration of both options, the remaining unvested shares subject to these options will vest in accordance with the original vesting schedules, as if the remaining shares were the only shares subject to the options. All options and other awards granted under our 1996 Stock Plan and our 1999 Omnibus Equity Incentive Plan, including options granted to our executive officers, will become fully vested if a change in control of Marimba occurs, unless the options or awards are assumed by the surviving corporation or its parent or if the surviving corporation or its parent substitutes comparable options or awards for options or awards granted under our plans. 59 61 CERTAIN TRANSACTIONS Since our incorporation in February 1996, we have issued and sold securities to the following persons who are our executive officers, directors or principal stockholders. The per share purchase price for our Series A preferred stock was $1.4824 and the per share purchase price for our Series B preferred stock was $5.0072. For more detail on shares held by these purchasers see "Principal and Selling Stockholders."
SERIES A SERIES B PREFERRED PREFERRED COMMON INVESTOR(1) STOCK STOCK STOCK ----------- --------- --------- --------- Kim K. Polese(1)........................................... -- -- 2,500,000 Arthur A. van Hoff(1)...................................... -- -- 2,500,000 Steven P. Williams......................................... 67,458 -- 316,000 Thomas E. Banahan.......................................... -- -- 316,000 Robert E. Currie........................................... -- -- 300,000 Fred M. Gerson............................................. -- -- 300,000 Jonathan Payne(1).......................................... -- -- 2,500,000 Sami Shaio(1).............................................. -- -- 2,500,000 Raymond J. Lane............................................ -- 19,971 -- Kleiner Perkins Caufield & Byers(2)........................ 2,698,412 199,712 --
- ------------------------- (1) Each of Kim K. Polese, Arthur A. van Hoff, Jonathan Payne and Sami Shaio, our founders, entered into a Restricted Common Stock Purchase Agreement, dated February 21, 1996, with us. The per share purchase price for these shares of common stock was $.001. (2) Kleiner Perkins Caufield & Byers includes the following entities managed by Kleiner Perkins: KPCB Java Fund, L.P., KPCB Information Sciences Zaibatsu Fund II, L.P., Kleiner Perkins Caufield & Byers VIII, L.P and KPCB VIII Founders Fund, L.P. Douglas J. Mackenzie, a director of Marimba, is a general partner of Kleiner Perkins. In addition, we have granted options to some of our executive officers. See "Management -- Executive Compensation." SERIES A FINANCING On August 8, 1996, we issued an aggregate of 2,698,412 shares of Series A preferred stock at a per share purchase price of $1.4824 to three investors, each of which is an entity affiliated with Kleiner Perkins, one of our principal stockholders. Douglas J. Mackenzie, a member of our board of directors, is a general partner of Kleiner Perkins. On January 28, 1997, we issued 67,458 shares of Series A preferred stock at a per share purchase price of $1.4824 to Steven P. Williams, our Executive Vice President, Worldwide Sales and Chief Operating Officer. SERIES B FINANCING On August 25 and 28, 1997, we issued an aggregate of 2,895,829 shares of Series B preferred stock at a per share purchase price of $5.0072 to ten investors, including entities affiliated with Kleiner Perkins. On September 23, October 23 and November 21, 1997, we issued an aggregate of 71,896 shares of Series B preferred stock at a per share purchase price of $5.0072 to four investors. On October 7, 1997, we issued 19,971 shares of Series B preferred stock at a per share purchase price of $5.0072 to Raymond J. Lane, a member of our board of directors. 60 62 LOANS FROM DIRECTORS AND EXECUTIVE OFFICERS Each of our founders, Kim K. Polese, Arthur A. van Hoff, Jonathan Payne, and Sami Shaio, provided a short-term loan to us in return for a promissory note, dated March 7, 1996, issued to each founder. Each note was in the principal sum of $12,500 and accrued simple interest at the rate of 5.32% per year. In addition, Mr. Shaio loaned an additional $14,000 to us in return for a promissory note, dated July 17, 1996, which accrued simple interest at the rate of 5.32% per year. We repaid each of these loans in August 1996. LOAN TO EXECUTIVE OFFICER On November 11, 1997, we loaned $149,970 to Fred M. Gerson, secured by a stock pledge agreement, in connection with his purchase of 300,000 shares of our common stock. This note accrued interest at the rate of 5.69% per year. The principal balance of this note and accrued interest was paid in full in January 1999. See "Executive Compensation -- Change of Control Arrangements." STOCK OPTION GRANTS TO DIRECTORS On September 18, 1997, we granted to Raymond J. Lane an option to purchase 75,000 shares of common stock at a per share exercise price of $.50 under our 1996 Stock Plan. Mr. Lane's option is subject to three-year vesting, in which he becomes vested in 33 1/3% of the option shares upon completion of 12 months of service and in the balance of the option shares in a series of equal monthly installments upon the completion of each of the next 24 months of service. On February 2, 1999, we granted to each of Aneel Bhusri and Stratton D. Sclavos an option to purchase 20,000 shares of common stock at a per share exercise price of $10.00 under our 1996 Stock Plan. Messrs. Bhusri's and Sclavos' options were fully vested upon grant. INDEMNIFICATION We have entered into an indemnification agreement with each of our officers and directors. See "Management -- Indemnification" for a description of the indemnification available to our officers and directors under our Third Amended and Restated Certificate of Incorporation, to be effective after the closing of this offering and our bylaws. ------------------------ We believe that the transactions above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions, including loans between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of the board of directors, including a majority of the independent and disinterested outside directors on the board of directors, and will continue to be on terms no less favorable to us than could be obtained from unaffiliated third parties. 61 63 PRINCIPAL AND SELLING STOCKHOLDERS The following table presents selected information regarding beneficial ownership of our outstanding common stock as of March 31, 1999 and as adjusted to reflect the sale of the common stock being sold in this offering for: (1) each of our directors, our chief executive officer and our four other highest-paid executive officers; (2) all of our directors and executive officers as a group; and (3) each other person known by us to own beneficially more than 5% of our common stock. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Common stock subject to options exercisable within 60 days of March 31, 1999 are deemed outstanding for purposes of computing the percentage ownership of the person holding the option but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except where indicated, and subject to community property laws where applicable, we believe that the persons in the table below have sole voting and investment power with respect to all common stock shown as beneficially owned by them. Unless otherwise indicated, the address of each holder of more than 5% of our common stock listed in the table is c/o Marimba, Inc., 440 Clyde Ave., Mountain View, CA 94043.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED BEFORE THE OFFERING SHARES AFTER THE OFFERING NAME AND ADDRESS OF ------------------- BEING ------------------- BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT ------------------- --------- ------- ------- --------- ------- Kim K. Polese............................... 2,486,072 12.9% 124,300 2,361,772 10.4% Steven P. Williams(1)(2).................... 483,458 2.5 -- 483,458 2.1 Thomas E. Banahan........................... 316,000 1.6 -- 316,000 1.4 Robert E. Currie(1)......................... 370,000 1.9 -- 370,000 1.6 Fred M. Gerson(3)........................... 300,000 1.6 -- 300,000 1.3 Arthur A. van Hoff.......................... 2,480,000 12.9 124,000 2,356,000 10.4 Aneel Bhusri(1)............................. 20,000 0.1 -- 20,000 .09 Raymond J. Lane(1).......................... 94,971 0.5 -- 94,971 .42 Douglas J. Mackenzie(4)..................... 2,898,124 15.1 -- 2,898,124 12.7 c/o Kleiner Perkins Caufield & Byers 2750 Sand Hill Road Menlo Park, CA 94025 Stratton D. Sclavos(1)...................... 20,000 0.1 -- 20,000 .09 OTHER 5% STOCKHOLDERS Jonathan Payne(5)........................... 2,476,000 12.9 123,700 2,352,300 10.3 Sami Shaio.................................. 2,439,200 12.7 80,000 2,359,200 10.4 Entities affiliated with Kleiner Perkins Caufield & Byers.......................... 2,898,124 15.1 -- 2,898,124 12.7 2750 Sand Hill Road Menlo Park, CA 94025 All directors and executive officers as a group (11 persons)(6)..................... 9,768,625 49.4 248,300 9,520,325 40.8
62 64 - ------------------------- (1) The following table indicates those people whose total number of beneficially owned shares include shares subject to options exercisable within 60 days of March 31, 1999:
Shares Subject to Options ------------------------- Robert E. Currie............................................ 70,000 Steven P. Williams.......................................... 100,000 Aneel Bhusri................................................ 20,000 Raymond J. Lane............................................. 75,000 Stratton D. Sclavos......................................... 20,000
(2) Includes 1,500 shares held as custodian for Zachary P. Williams and 1,500 shares held as custodian for Natalia J. Williams. (3) Includes 5,000 shares held as custodian for Stacey B. Gerson and 5,000 shares held as custodian for Hilary I. Gerson. Mr. Gerson disclaims beneficial ownership of these shares. (4) Represents 1,988,745, 72,453, 76,131 and 760,795 shares of common stock held of record by KPCB Java Fund, L.P., KPCB Information Sciences Zaibatsu Fund II, L.P., KPCB VIII Founders Fund, L.P., and Kleiner Perkins Caufield & Byers VIII, L.P. Mr. Mackenzie, a director of Marimba, is a general partner of Kleiner Perkins. Mr. Mackenzie disclaims beneficial ownership of shares held by Kleiner Perkins except to the extent of his pecuniary interest arising from his interest in Kleiner Perkins. (5) Includes 1,538 shares held as custodian for Madeline M. Payne. (6) Includes 585,000 shares subject to options which are exercisable within 60 days of March 31, 1999, 5,000 shares held by Mr. Gerson as custodian for Stacey B. Gerson and 5,000 shares held as custodian for Hilary I. Gerson, and 1,500 shares held by Mr. Williams as custodian for Zachary P. Williams and 1,500 shares held as custodian for Natalia J. Williams. If the underwriters' over-allotment option is exercised, up to an additional 412,000 shares may be sold by selling stockholders as follows: Kim K. Polese 124,300; Arthur A. van Hoff 124,000; Jonathan Payne 123,700; and Sami Shaio 40,000. On April 19, 1999, our board of directors granted to the following executive officers options to purchase shares of our common stock at an exercise price per share of $15.00: Mr. Williams received an option to purchase 300,000 shares; Mr. Currie received an option to purchase 100,000 shares and Mr. Gerson received an option to purchase 50,000 shares. 63 65 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 80,000,000 shares of common stock, and 10,000,000 shares of undesignated preferred stock, after giving effect to the amendment of our Second Amended and Restated Certificate of Incorporation to delete references to Series A preferred stock and Series B preferred stock following conversion of our preferred stock into common stock upon the closing of this offering. The following is a summary description of our capital stock. Our bylaws and our Third Amended and Restated Certificate of Incorporation, to be effective after the closing of this offering, provide further information about our capital stock. COMMON STOCK As of March 31, 1999, there were 13,444,209 shares of common stock outstanding that were held of record by approximately 187 stockholders. There will be 22,745,775 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and assuming no exercise after March 31, 1999 of outstanding options, after giving effect to the sale of the shares of common stock to the public offered in this prospectus and the conversion of our preferred stock into common stock at a one-to-one ratio. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock do not have cumulative voting rights, and, therefore, holders of the remaining shares voting for the election of directors can elect all of the directors. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of funds legally available. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of Marimba, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. PREFERRED STOCK Upon filing our Third Amended and Restated Certificate of Incorporation after the closing of this offering, we will authorize 10,000,000 shares of preferred stock. The board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and related restrictions, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of the series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. At present, we have no plans to issue any of our preferred stock. WARRANTS Immediately following the closing of this offering, there will be an outstanding warrant to purchase a total of 16,865 shares of common stock at $1.48 per share. This warrant expires on January 31, 2004. 64 66 ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CERTIFICATE OF INCORPORATION AND BYLAWS Upon filing after the closing of this offering, our Third Amended and Restated Certificate of Incorporation will provide that, all stockholder actions must be effected at a duly called meeting and not by a consent in writing. The bylaws provide that, except as otherwise required by law or by our Third Amended and Restated Certificate of Incorporation, special meetings of the stockholders can only be called by a resolution adopted by a majority of the board of directors, or by the president or at the request of stockholders holding at least 30% of our capital stock. These provisions of our Third Amended and Restated Certificate of Incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. DELAWARE TAKEOVER STATUTE We are subject to Section 203 of the Delaware General Corporation Law, which, subject to limited exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: - before this date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or after this date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; - subject to limited exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; 65 67 - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by this entity or person. REGISTRATION RIGHTS After this offering, the holders of 15,181,300 shares of common stock will be entitled to rights with respect to the registration of these shares under the Securities Act. Under the terms of the agreement between us and the holders of these registrable securities, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of registration and are entitled to include their shares of common stock in the registration. Holders of 5,753,566 shares of the registrable securities are also entitled to specified demand registration rights under which they may require us to file a registration statement under the Securities Act at our expense with respect to our shares of common stock, and we are required to use our best efforts to effect this registration. Further, the holders of these demand rights may require us to file additional registration statements on Form S-3. All of these registration rights are subject to conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in the registration and our right not to effect a requested registration within six months following the initial offering of our securities, including this offering. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. 66 68 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 22,745,775 shares of common stock outstanding, assuming no exercise of options after March 31, 1999. Of these shares, the 4,000,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by persons that directly or indirectly control, or are controlled by, or are under common control with us, may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining 18,745,775 shares of common stock are deemed restricted shares under Rule 144. The number of shares of common stock available for sale in the public market is limited by restrictions under the Securities Act and lock-up agreements under which the holders of the shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. On the date of this prospectus, no shares other than the 4,000,000 shares being sold in this offering will be eligible for sale. Beginning 180 days after the date of this prospectus, or earlier with the consent of Morgan Stanley & Co. Incorporated, 18,745,775 restricted shares will become available for sale in the public market subject to the limitations of Rule 144 of the Securities Act. In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after this offering, a person, or persons whose shares are aggregated, who has beneficially owned restricted shares for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three-month period a number of shares of common stock that does not exceed the greater of 1% of the then-outstanding shares of our common stock, approximately 227,458 shares after giving effect to this offering, and the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding this sale. Sales under Rule 144 of the Securities Act are subject to restrictions relating to manner of sale, notice and the availability of current public information about us. A person who is not our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell these shares immediately following this offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144 of the Securities Act. However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 of the Securities Act before effecting a transfer of these shares. Before this offering, there has been no public market for our common stock and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional common stock will have on the market price of our common stock. Nevertheless, sales of substantial amounts of these shares in the public market, or the perception that these sales could occur, could adversely affect the market price of the common stock and could impair our future ability to raise capital through an offering of our equity securities. OPTIONS As of March 31, 1999, options to purchase a total of 1,943,065 shares of common stock under the 1996 Stock Plan were outstanding and exercisable. All of the shares subject to options are subject to lock-up agreements. See "Lock-up Agreements." An additional 1,087,329 shares of common stock were available as of March 31, 1999 for future option grants or direct issuances under the 1996 Stock Plan. However, as of the date of this offering, our 1996 Stock Plan terminates and no future options will be granted under this plan. In addition, in February, 1999, 1,250,000 shares were reserved for issuance under our 1999 Omnibus Equity Incentive Plan, 500,000 shares were reserved for issuance under our 1999 employee stock purchase plan and 150,000 shares were reserved for issuance under our 1999 Non- 67 69 Employee Directors Option Plan. See "Management -- Employee Benefit Plans -- 1999 Omnibus Equity Incentive Plan," "-- 1999 employee stock purchase plan," and "-- 1999 Non-Employee Directors Option Plan" and Notes 6 and 9 of Notes to Consolidated Financial Statements. Rule 701 under the Securities Act provides that shares of common stock acquired on the exercise of outstanding options may be resold by persons other than our affiliates, beginning 90 days after the date of this prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days after the date of this prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options and common stock issued or issuable under our 1996 Stock Plan. We expect to file the registration statement covering shares offered under the 1996 Stock Plan and the 1999 employee stock purchase plan and 1999 Omnibus Equity Incentive Plan approximately 30 days after the closing of this offering. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to the lock-up agreements, if applicable. 68 70 UNDERWRITERS Under the terms and subject to conditions contained in an underwriting agreement, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, BT Alex. Brown Incorporated and Hambrecht & Quist LLC are acting as representatives, have severally agreed to purchase, and Marimba and the selling stockholders have agreed to sell to the underwriters, severally, the respective number of shares of our common stock indicated opposite the names of the underwriters below:
NUMBER NAME OF SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... Credit Suisse First Boston Corporation...................... BT Alex. Brown Incorporated................................. Hambrecht & Quist LLC....................................... --------- Total............................................. 4,000,000 =========
The underwriters and the representatives are collectively referred to as the underwriters and the representatives. The underwriters are offering the shares of common stock subject to their acceptance of the shares from Marimba and the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of our common stock offered by us in this offering are subject to the approval of legal matters by their counsel. The underwriters are obligated to take and pay for all of the shares of common stock offered by us in this offering, other than those covered by the over-allotment option described below, if any of those shares are taken. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price on the cover page of the prospectus and part to selected dealers at a price that represents a concession not in excess of $ per share under the public offering price. Any underwriter may allow, and these dealers may reallow, a concession not in excess of $ per share to other underwriters or to some dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives. Marimba and the selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 600,000 additional shares of common stock at the public offering price on the cover page of the prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock being offered. To the extent the option is exercised, each underwriter will become obligated, subject to limited conditions, to purchase approximately the same percentage of these additional shares of common stock as the number next to the underwriter's name in the preceding table bears to the total number of shares of common stock next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public for this offering would be $ , the total underwriters' discounts and commissions would be $ , the total proceeds to Marimba would be $ and the total proceeds to the selling stockholders would be $ . The underwriters have informed Marimba that each principal underwriter in this offering may, subject to the approval of Morgan Stanley & Co. Incorporated, sell to discretionary accounts over which the principal underwriter exercises discretionary authority. The underwriters have further informed 69 71 Marimba that they estimate that these sales will not exceed in the aggregate five percent of the total number of shares of common stock offered by them. Marimba has applied to list the common stock on the Nasdaq National Market under the symbol "MRBA." At the request of Marimba, the underwriters will reserve up to 260,000 shares of common stock to be offered for sale, at the initial public offering price, to directors, officers, employees, business associates and related persons of Marimba. The number of shares of common stock available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares being offered. Marimba, our selling stockholders, directors, executive officers, and substantially all of our other stockholders and optionholders have each agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, he will not, during the period ending 180 days after the date of this prospectus: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or transfer or dispose of, directly or indirectly, any shares of common stock; or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or similar arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; whether any transaction described above is to be settled by delivery of common stock or other securities, in cash or by alternative payment. The restrictions described in the previous paragraph do not apply to: - the sale of shares to the underwriters; - the issuance by Marimba of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing; - transactions by any person other than Marimba relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares; - the granting of stock options under the existing Marimba employee benefit plans, provided that these options do not become exercisable and do not vest during this 180-day period; or - gifts, distributions or transfers to trusts, provided that transferees in transactions described in this clause enter into lock-up agreements similar to those described in the previous paragraph. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may agree to sell or allot more shares than the 4,000,000 shares of common stock Marimba and the selling stockholders have agreed to sell them. This over-allotment would create a short position in the common stock for the underwriters' account. To cover any over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering, if the syndicate repurchases previously distributed common stock in transactions to cover syndicate short positions, in stabilization transactions or in other transactions. Any of these activities may stabilize or maintain the market price of the common stock 70 72 above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. Marimba, the selling stockholders and the underwriters have agreed to indemnify each other against some liabilities, including liabilities under the Securities Act. In October 1997, Marimba sold 2,987,696 shares of Series B preferred stock. An affiliate of Hambrecht & Quist LLC, one of the underwriters in this offering, purchased 39,943 shares of Series B preferred stock, which are convertible into 39,943 shares of common stock, on the same terms as the other purchasers of Series B preferred stock. PRICING OF THE OFFERING Before this offering, there has been no public market for the shares of common stock. The initial public offering price will be determined by negotiations between Marimba and the representatives. Among the factors to be considered in determining the initial public offering price will be: - the future prospects of Marimba and its industry in general; - sales, earnings and selected other financial operating information of Marimba in recent periods; and - the price-earnings ratios, price-sales ratios, market prices of securities and financial and operating information of companies engaged in activities similar to those of Marimba. The estimated public offering price range presented on the cover page of this prospectus is subject to change as a result of market conditions and changes in the factors listed above. LEGAL MATTERS The validity of the common stock being offered will be passed upon for Marimba by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California and for the underwriters by Fenwick & West LLP, Palo Alto, California. As of the date of this prospectus, members and employees of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, beneficially owned an aggregate of 23,610 shares of our common stock. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 1997 and 1998, for the period from February 21, 1996 (inception) to December 31, 1996, and for each of the years in the two-year period ended December 31, 1998 as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon the authority of such firm as experts in accounting and auditing. 71 73 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock being offered. This prospectus does not contain all of the information presented in the registration statement and the exhibits to the registration statement. For further information with respect to Marimba and our common stock we are offering, reference is made to the registration statement and the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document referred to may be only summaries of these documents. The exhibits to this registration statement should be referenced for the complete contents of these contracts and documents. Each statement is qualified in all respects by reference to the exhibit. The registration statement, including the exhibits, may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part may be obtained from this office after payment of fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the Commission. The address of the site is http://www.sec.gov. 72 74 MARIMBA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Financial Statements Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations and Comprehensive Loss................................................... F-4 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Net Capital Deficiency)............................................ F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 75 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Marimba, Inc. We have audited the accompanying consolidated balance sheets of Marimba, Inc. as of December 31, 1997 and 1998, and the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity (net capital deficiency), and cash flows for the period from inception (February 21, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marimba, Inc. at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for the period from inception (February 21, 1996) to December 31, 1996 and for the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California January 13, 1999 F-2 76 MARIMBA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE DATA)
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT ------------------- DECEMBER 31, 1997 1998 1998 ------- -------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................. $14,402 $ 3,700 Short-term investments................................. -- 4,125 Accounts receivable, net of allowances of $49 and $70 at December 31, 1997 and 1998........................ 4,591 2,585 Unbilled receivables................................... -- 1,036 Prepaid expenses and other current assets.............. 248 371 ------- -------- Total current assets.............................. 19,241 11,817 Property and equipment, net................................. 2,401 2,747 Other assets................................................ 256 298 ------- -------- $21,898 $ 14,862 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Accounts payable and accrued liabilities............... $ 1,940 $ 1,396 Accrued compensation................................... 1,535 1,704 Current portion of capital lease obligations and equipment advances................................... 133 286 Deferred revenue....................................... 7,597 5,519 ------- -------- Total current liabilities......................... 11,205 8,905 Long-term portion of capital lease obligations and equipment advances, and other long-term liabilities................. 211 747 Commitments and contingencies Redeemable convertible preferred stock, 15,000 shares authorized at December 31, 1997 and 1998, $.0001 par value, issuable in series: Series A redeemable convertible preferred stock, 2,800 shares designated; 2,766 shares issued and outstanding at December 31, 1997 and 1998 and none pro forma (liquidation preference at December 31, 1998 of $4,100)...................................... 4,055 4,055 $ -- Series B redeemable convertible preferred stock, 3,050 shares designated; 2,987 shares issued and outstanding at December 31, 1997 and 1998 and none pro forma (liquidation preference at December 31, 1998 of $14,960)..................................... 14,898 14,898 -- Stockholders' equity (net capital deficiency): Common stock, 30,000 shares authorized, $.0001 par value; 13,067 and 13,053 shares issued and outstanding at December 31, 1997 and 1998, and 18,806 shares issued and outstanding pro forma.............. 2 2 2 Additional paid-in capital............................. 640 2,181 21,134 Note receivable from officer........................... (150) (160) (160) Deferred compensation.................................. -- (1,116) (1,116) Cumulative translation adjustment...................... -- (6) (6) Accumulated deficit.................................... (8,963) (14,644) (14,644) ------- -------- -------- Stockholders' equity (net capital deficiency)..... (8,471) (13,743) $ 5,210 ------- -------- ======== $21,898 $ 14,862 ======= ========
See accompanying notes. F-3 77 MARIMBA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM INCEPTION (FEBRUARY 21, YEAR ENDED 1996) TO DECEMBER 31, DECEMBER 31, ------------------ 1996 1997 1998 ------------- ------- ------- Revenues: License.............................................. $ -- $ 5,011 $13,901 Service.............................................. -- 552 3,184 ------- ------- ------- Total revenues............................................ -- 5,563 17,085 Cost of revenues: License.............................................. -- 13 75 Service.............................................. -- 621 1,964 ------- ------- ------- Total cost of revenues.................................... -- 634 2,039 ------- ------- ------- Gross profit.............................................. -- 4,929 15,046 Operating expenses: Research and development............................. 515 2,410 5,773 Sales and marketing.................................. 473 8,054 12,371 General and administrative........................... 322 2,367 2,779 Amortization of deferred compensation................ -- -- 251 ------- ------- ------- Total operating expenses.................................. 1,310 12,831 21,174 ------- ------- ------- Loss from operations...................................... (1,310) (7,902) (6,128) Interest income........................................... 66 350 518 Interest expense.......................................... (1) (12) (30) ------- ------- ------- Loss before income taxes.................................. (1,245) (7,564) (5,640) Provision for income taxes................................ -- 154 41 ------- ------- ------- Net loss.................................................. (1,245) (7,718) (5,681) Other comprehensive loss: Translation adjustment............................... -- -- (6) ------- ------- ------- Comprehensive loss........................................ $(1,245) $(7,718) $(5,687) ======= ======= ======= Basic and diluted net loss per share...................... $ (.81) $ (1.57) $ (.59) ======= ======= ======= Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share....... 1,528 4,912 9,606 ======= ======= ======= Pro forma basic and diluted net loss per share (unaudited)............................................. $ (.37) ======= Shares used in computing pro forma basic and diluted net loss per share (unaudited).............................. 15,359 =======
See accompanying notes. F-4 78 MARIMBA, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (IN THOUSANDS)
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) REDEEMABLE -------------------------------------------------------- CONVERTIBLE NOTE PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ---------------- --------------- PAID-IN FROM DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER COMPENSATION ------ ------- ------ ------ ---------- ---------- ------------ Issuance of common stock to founders............................ -- $ -- 10,000 $ 1 $ 9 $ -- $ -- Issuance of Series A redeemable convertible preferred stock to investors, net of issuance costs of $38................................. 2,699 3,963 -- -- -- -- -- Net loss............................. -- -- -- -- -- -- -- ----- ------- ------ ------ ------ ----- ------- Balances at December 31, 1996........ 2,699 3,963 10,000 1 9 -- -- Issuance of Series A redeemable convertible preferred stock to officer, net of issuance costs of $8.................................. 67 92 -- -- -- -- -- Issuance of Series B redeemable convertible preferred stock to investors, net of issuance costs of $62................................. 2,987 14,898 -- -- -- -- -- Issuance of common stock upon exercise of stock options........... -- -- 2,850 1 494 -- -- Issuance of common stock for services............................ -- -- 67 -- 10 -- -- Issuance of common stock upon exercise of stock options by an officer in exchange for a note receivable.......................... -- -- 300 -- 150 (150) -- Repurchases of common stock.......... -- -- (150) -- (23) -- -- Net loss............................. -- -- -- -- -- -- ----- ------- ------ ------ ------ ----- ------- Balances at December 31, 1997........ 5,753 18,953 13,067 2 640 (150) -- Issuance of common stock upon exercise of stock options........... -- -- 239 -- 230 -- -- Repurchases of common stock.......... -- -- (253) -- (56) -- -- Translation adjustment............... -- -- -- -- -- -- Interest on note receivable from an officer............................. -- -- -- -- (10) -- Deferred compensation................ -- -- -- -- 1,367 -- (1,367) Amortization of deferred compensation........................ -- -- -- -- -- -- 251 Net loss............................. -- -- -- -- -- -- -- ----- ------- ------ ------ ------ ----- ------- Balances at December 31, 1998........ 5,753 $18,953 13,053 $ 2 $2,181 $(160) $(1,116) ===== ======= ====== ====== ====== ===== ======= STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) ----------------------------------------- STOCKHOLDERS' CUMULATIVE EQUITY TRANSLATION ACCUMULATED (NET CAPITAL ADJUSTMENT DEFICIT DEFICIENCY) ----------- ----------- ------------- Issuance of common stock to founders............................ $-- $ -- $ 10 Issuance of Series A redeemable convertible preferred stock to investors, net of issuance costs of $38................................. -- -- -- Net loss............................. -- (1,245) (1,245) --- -------- -------- Balances at December 31, 1996........ -- (1,245) (1,235) Issuance of Series A redeemable convertible preferred stock to officer, net of issuance costs of $8.................................. -- -- -- Issuance of Series B redeemable convertible preferred stock to investors, net of issuance costs of $62................................. -- -- Issuance of common stock upon exercise of stock options........... -- -- 495 Issuance of common stock for services............................ -- -- 10 Issuance of common stock upon exercise of stock options by an officer in exchange for a note receivable.......................... -- -- -- Repurchases of common stock.......... -- -- (23) Net loss............................. -- (7,718) (7,718) --- -------- -------- Balances at December 31, 1997........ -- (8,963) (8,471) Issuance of common stock upon exercise of stock options........... -- -- 230 Repurchases of common stock.......... -- -- (56) Translation adjustment............... (6) -- (6) Interest on note receivable from an officer............................. -- -- (10) Deferred compensation................ -- -- -- Amortization of deferred compensation........................ -- -- 251 Net loss............................. -- (5,681) (5,681) --- -------- -------- Balances at December 31, 1998........ $(6) $(14,644) $(13,743) === ======== ========
See accompanying notes. F-5 79 MARIMBA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM INCEPTION (FEBRUARY 21, YEAR ENDED 1996) TO DECEMBER 31, DECEMBER 31, ------------------ 1996 1997 1998 ------------- ------- ------- OPERATING ACTIVITIES Net loss................................................... $(1,245) $(7,718) $(5,681) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 21 336 934 Amortization of deferred compensation................. -- -- 251 Other................................................. -- -- (16) Changes in operating assets and liabilities: Accounts receivable, net............................ (50) (4,541) 2,006 Unbilled receivables................................ -- -- (1,036) Prepaid expenses and other current assets........... (31) (218) (123) Accounts payable and accrued liabilities............ 228 1,712 (544) Accrued compensation................................ -- 1,535 169 Deferred revenue.................................... 200 7,397 (2,078) Other liabilities................................... -- 34 2 ------- ------- ------- Net cash used in operating activities............ (877) (1,463) (6,116) ------- ------- ------- INVESTING ACTIVITIES Capital expenditures....................................... (278) (2,479) (1,280) Other assets............................................... (7) (250) (42) Purchases of short-term investments........................ -- -- (7,125) Sales of short-term investments............................ -- -- 3,000 ------- ------- ------- Net cash used in investing activities............ (285) (2,729) (5,447) ------- ------- ------- FINANCING ACTIVITIES Proceeds from issuance of redeemable convertible preferred stock.................................................... 3,963 14,990 -- Proceeds from issuance of common stock, net of repurchases.............................................. 10 482 174 Proceeds from sale and lease back and equipment advances... -- 378 811 Principal payments under capital lease obligations......... -- (67) (124) ------- ------- ------- Net cash from financing activities............... 3,973 15,783 861 ------- ------- ------- Net increase (decrease) in cash and cash equivalents....... 2,811 11,591 (10,702) Cash and cash equivalents at beginning of period........... -- 2,811 14,402 ------- ------- ------- Cash and cash equivalents at end of period................. $ 2,811 $14,402 $ 3,700 ======= ======= ======= Supplemental disclosure of cash flow information Interest paid.............................................. $ 1 $ 12 $ 30 ======= ======= ======= Income taxes paid.......................................... $ -- $ 154 $ 41 ======= ======= ======= Supplemental disclosure of noncash financing activities Common stock issued in exchange for note receivable from officer.................................................. $ -- $ 150 $ -- ======= ======= =======
See accompanying notes. F-6 80 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Marimba was incorporated in Delaware on February 21, 1996. Marimba develops and markets Internet-based software management solutions ("Castanet Products"), that distribute, update, and manage applications and related data over corporate intranets, extranets and the Internet. Marimba markets its products worldwide through a combination of a direct sales force and OEM/distributor partners. Substantially all of Marimba's license revenues are derived from sales of the Castanet Products. The Castanet Products are the subject of a patent lawsuit. Marimba believes that it has strong defenses against the lawsuit. However, the failure of Marimba to prevail could have a material adverse effect on Marimba's results of operations and financial condition. Currently, no reasonable estimate can be made of the possible loss or range of loss that may arise from this lawsuit. See Note 8. The consolidated financial statements include the accounts of Marimba and its wholly owned subsidiary in the United Kingdom. Intercompany accounts and transactions have been eliminated in consolidation. Marimba has incurred operating losses to date and had an accumulated deficit of $14,644,000 at December 31, 1998. Marimba's activities have been primarily financed through private placements of equity securities. Marimba may need to raise additional capital through the issuance of debt or equity securities. Such financing may not be available on terms satisfactory to Marimba, if at all. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Revenue Recognition License revenues are comprised of perpetual or multiyear license fees which are primarily derived from contracts with corporate customers and resellers. Such revenues are recognized after execution of a license agreement or receipt of a definitive purchase order, and delivery of the product to end-user customers, provided that there are no uncertainties surrounding product acceptance, the license fees are fixed and determinable, collectibility is probable and Marimba has no remaining obligations. Revenue on arrangements with customers who are not the ultimate users (primarily resellers) is not recognized until the product is delivered to the end user. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Advance payments are recorded as deferred revenue until the products are shipped, services are provided, or obligations are met. Marimba's products do not require significant customization. Service revenues are comprised of revenue from maintenance agreements, consulting and training fees. Software maintenance agreements provide technical support and the right to unspecified upgrades on an if-and-when available basis. Revenue from maintenance agreements is deferred and recognized on a straight-line basis over the life of the related agreement, which is typically one year. Service revenues from training and consulting are recognized upon completion of the work to be performed. F-7 81 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition (continued) In October 1997, the Accounting Standards Executive Committee issued Statement of Position 97-2 ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9, "Software Revenue Recognition." These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2, as amended by SOP 98-4, is effective for Marimba's transactions entered into subsequent to January 1, 1998. The application of SOP 97-2 and SOP 98-4 has not had a material impact on Marimba's results of operations. SOP 98-9 amends SOP 97-2 and 98-4, extending the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Marimba has not yet determined the effect of the final adoption of SOP 98-9 on its financial condition or results of operations. However, SOP 98-9 may require more revenue to be deferred for certain types of transactions. Unbilled receivables consist of contractually obligated amounts not yet billable by the Company. Research and Development Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility, which, for Marimba, is established upon completion of a working model. Costs incurred by Marimba between completion of the working model and the point at which the product is ready for general release have been insignificant. Therefore, through December 31, 1998, all research and development costs have been expensed as incurred. Cash, Cash Equivalents and Short-Term Investments Cash equivalents consist of financial instruments which are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Marimba's cash and cash equivalents as of December 31, 1998 consist primarily of demand deposits and money market funds held by large financial institutions in the United States. The carrying value of cash and cash equivalents approximates fair value at December 31, 1997 and 1998. Marimba classifies, at the date of acquisition, its marketable securities into available-for-sale categories in accordance with the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Currently, Marimba classifies its securities as available-for-sale which are reported at fair market value with the related unrealized gains and losses included in stockholders' equity. Unrealized gains and losses were not material for all periods presented. Realized gains and losses and declines in value of securities judged to be other than temporary are included in interest income. Interest and dividends on all securities are included in interest income. Investments with maturities between three and twelve months are considered short-term investments. Short-term investments consist of corporate notes and market auction rate preferred stocks. F-8 82 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash, Cash Equivalents and Short-Term Investments (continued) The cost (which approximates fair value) of Marimba's investments at December 31, 1998 consisted of commercial paper ($500,000), corporate notes ($1,025,000) and market auction rate preferred stock ($3,100,000). The following is a reconciliation of Marimba's cash, cash equivalents and short-term investments to the balance sheet classifications:
DECEMBER 31, ----------------- 1997 1998 ------- ------ (IN THOUSANDS) Amounts included in cash and cash equivalents........ $ -- $ 500 Short-term investments............................... -- 4,125 ------- ------ Total investments.......................... -- 4,625 Money market fund.................................... 14,402 2,689 Demand deposits...................................... -- 511 ------- ------ Total cash, cash equivalents and short-term investments............................. $14,402 $7,825 ======= ======
Property and Equipment Marimba records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the term of the lease. Accounting for Stock-Based Compensation Marimba has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related interpretations in accounting for its employee stock options because, as discussed in Note 6, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB Opinion No. 25, when the exercise price of Marimba's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. See pro forma disclosures of applying FAS 123 included in Note 6. Comprehensive Loss In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. Marimba adopted FAS 130 in the year ended December 31, 1998. F-9 83 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentrations of Credit Risk and Other Risks Financial instruments that subject Marimba to credit risk consist primarily of uninsured cash, cash equivalents and short-term investment balances held at commercial banks and institutions primarily in the United States and trade receivables from Marimba's customers. Marimba sells to customers in many different industries. Marimba extends reasonably short credit terms in most instances and performs ongoing credit evaluations but does not require collateral. Marimba provides reserves for potential credit losses, and such losses have been within management's expectations. To date, Marimba's write-offs of bad debts have not been significant. During the years ended December 31, 1997 and 1998, Marimba added approximately $50,000 and $75,000 to its bad debt reserves. Total write-offs of uncollectible accounts were $1,000 and $54,000 in these periods. Revenues from one reseller represented 18% and 22% of total revenues for the years ended December 31, 1997 and 1998. However, as of December 31, 1998 this customer will no longer be an active reseller of our products. The same reseller accounted for 57% of accounts receivable at December 31, 1997. Sales to another reseller represented 18% of total revenues for the year ended December 31, 1998. Two other customers accounted for 48% and 16% of the combined accounts receivable and unbilled receivables accounts at December 31, 1998. Segment Information In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 changes the way companies report selected segment information in annual financial statements and requires companies to report selected segment information in interim financial reports to stockholders. FAS 131 is effective beginning in Marimba's year ended December 31, 1998. Marimba operates solely in one segment, the development and marketing of network application software, and therefore there is no impact to Marimba's financial statements of adopting FAS 131. For the years ended December 31, 1997 and 1998, sales to customers outside the United States were $1,199,000 and $1,265,000. The majority of these sales were to customers in Asia. Net Loss Per Share Basic and diluted net loss per common share are presented in conformity with FAS No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of Marimba's initial public offering must be included in the calculation of basic and diluted net loss per common share as if they had been outstanding for all periods presented. To date, Marimba has not had any issuances or grants for nominal consideration. In accordance with FAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma basic and diluted net loss per share, as presented in the statements of operations, has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of the redeemable convertible preferred stock (using the if-converted method) from the original date of issuance. F-10 84 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Loss Per Share (continued) The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share:
PERIOD FROM INCEPTION YEAR ENDED (FEBRUARY 21, 1996) DECEMBER 31, TO ----------------- DECEMBER 31, 1996 1997 1998 ------------------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss........................................... $(1,245) $(7,718) $(5,681) ======= ======= ======= Basic and diluted: Weighted-average shares of common stock outstanding................................. 10,000 11,474 13,081 Less weighted-average shares subject to repurchase.................................. (8,472) (6,562) (3,475) ------- ------- ------- Weighted-average shares used in computing basic and diluted net loss per common share....................................... 1,528 4,912 9,606 ------- ------- ------- Basic and diluted net loss per common share... $ (.81) $ (1.57) $ (.59) ======= ======= ======= Pro forma: Shares used above............................. 9,606 Pro forma adjustment to reflect weighted-average effect of the assumed conversion of redeemable convertible preferred stock (unaudited)................. 5,753 ------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)...... 15,359 ------- Pro forma basic and diluted net loss per share (unaudited)................................. $ (.37) =======
Marimba has excluded all redeemable convertible preferred stock, warrants, outstanding stock options and shares subject to repurchase by Marimba from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. Weighted-average options and warrants outstanding to purchase 375,000, 1,261,000, and 1,483,000 shares of common and redeemable convertible preferred stock for the years ended December 31, 1996, 1997, and 1998, were not included in the computation of diluted net loss per share because the effect would be antidilutive. Such securities, had they been dilutive, would have been included in the computation of diluted net loss per share using the treasury stock method. Unaudited Pro Forma Stockholders' Equity If the offering contemplated by this prospectus is consummated, all of the redeemable convertible preferred stock outstanding will automatically be converted into common stock. Unaudited pro forma stockholders' equity at December 31, 1998, as adjusted for the assumed conversion of redeemable F-11 85 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Unaudited Pro Forma Stockholders' Equity (continued) convertible preferred stock based on the shares of redeemable convertible preferred stock outstanding at December 31, 1998, is disclosed on the balance sheet. Recent Accounting Pronouncements In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). Marimba is required to adopt FAS 133 for the year ending December 31, 2000. FAS 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because Marimba currently holds no derivative financial instruments and does not currently engage in hedging activities, adoption of FAS 133 is expected to have no material impact on Marimba's financial condition or results of operations. In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize certain costs related to internal use software once certain criteria have been met. Marimba is required to implement SOP 98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact on Marimba's financial condition or results of operations. 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ----------------- 1997 1998 ------ ------- (IN THOUSANDS) Furniture and equipment...................... $1,191 $ 759 Computer equipment........................... 1,440 3,036 Leasehold improvements....................... 125 241 ------ ------- 2,756 4,036 Accumulated depreciation and amortization.... (355) (1,289) ------ ------- Property and equipment, net.................. $2,401 $ 2,747 ====== =======
Property and equipment at December 31, 1997 and 1998 includes assets under capitalized leases of approximately $378,000. Accumulated amortization related to leased assets was approximately $223,000 and $280,000 at December 31, 1997 and 1998. 3. LEASES AND COMMITMENTS In January 1997, as part of a sale-leaseback transaction, Marimba entered into a $500,000 capital lease line of credit for financing of equipment, which expired on December 31, 1997. Marimba borrowed $378,000 under the line of credit. This amount bears interest at a rate of 3.5% and is collateralized by the equipment purchased. Under the terms of the master lease agreement, Marimba will have the option to purchase the leased equipment at a negotiated price at the end of the 36-month lease term. In connection F-12 86 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LEASES AND COMMITMENTS (CONTINUED) with the capital lease, Marimba issued a warrant that entitles the holder to purchase 16,865 shares of Series A redeemable convertible preferred stock (see Note 6). Marimba leases its office facilities under various noncancelable operating lease agreements. Marimba's primary facility lease expires in 2000. As of December 31, 1998, future minimum lease payments under capital leases and noncancelable operating leases are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) Years ending December 31: 1999........................................................ $ 133 $1,370 2000........................................................ 60 517 2001........................................................ -- 140 2002........................................................ -- 148 2003 and thereafter......................................... -- 421 ----- ------ Total minimum lease and principal payments........ 193 $2,596 ====== Amount representing interest................................ (6) ----- Present value of future payments............................ 187 Current portion of capital lease obligations................ (127) ----- Noncurrent portion.......................................... $ 60 =====
Rent expense under operating leases totaled approximately $61,000, $375,000, and $1,245,000 for the years ended December 31, 1996, 1997, and 1998. 4. BANK ARRANGEMENTS In May 1998, Marimba entered into a credit agreement with a bank which provides for revolving credit loans, letters of credit, and nonformula and equipment advance facilities aggregating up to $6,500,000. The loans and advances are secured by substantially all of Marimba's assets. All of the credit facilities bear interest at a rate equal to the prime rate (7.75% at December 31, 1998). The credit agreement contains certain financial and reporting covenants, including a restriction on the payment of dividends. Marimba was in compliance with these covenants at December 31, 1998. The amount available under the revolving credit facility is limited to the lower of $4,000,000 and an amount equal to 80% of eligible accounts receivable, which available amount is reduced by the amount of outstanding letters of credit. Under the agreement, letters of credit can be drawn up to an amount not to exceed $500,000. As of December 31, 1998, no revolving credit loans had been borrowed or letters of credit issued. Marimba may borrow up to $1,000,000 under the nonformula-based advance. As of December 31, 1998, no amounts have been borrowed under this facility. The equipment advance facility provides Marimba with the ability to borrow up to $1,500,000. Principal and interest are due in monthly installments beginning in June 1999 and ending in May 2002. As of December 31, 1998, Marimba had $811,000 of outstanding borrowings under the facility. The fair F-13 87 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. BANK ARRANGEMENTS (CONTINUED) value of the equipment advance is estimated based on current interest rates available to Marimba for debt instruments with similar terms, degrees of risk, and remaining maturities. The carrying value of the equipment advance approximates its fair value. Principal payments under this equipment advance are as follows (in thousands): 1999........................................................ $ 159 2000........................................................ 270 2001........................................................ 270 2002........................................................ 112 ----- Total payments.................................... 811 Less current portion........................................ (159) ----- Long-term portion........................................... $ 652 =====
5. PREFERRED STOCK Marimba is authorized to issue up to 15,000,000 shares of preferred stock, issuable in series, with the rights and preferences of each designated series to be determined by Marimba's Board of Directors. To date, 2,800,000 and 3,050,000 shares have been designated as Series A and Series B redeemable convertible preferred stock (the "Series A and Series B preferred stock"). Each share of Series A and Series B preferred stock is convertible, at the option of the holder, into one share of common stock, subject to certain adjustments for dilutive issuances. Outstanding shares of convertible preferred stock automatically convert into common stock upon the closing of an underwritten public offering of common stock under the Securities Act of 1933 in which Marimba receives at least $12,500,000 in gross proceeds and the price per share is at least $7.51. Series A and Series B preferred stockholders are entitled to noncumulative dividends of $.12 and $.40 per share. Dividends will be paid only when declared by the Board of Directors out of legally available funds. No dividends have been declared as of December 31, 1998. Series A and Series B preferred stockholders are entitled to receive, upon a liquidating event, an amount per share equal to the issuance price, plus all declared but unpaid dividends. Thereafter, the remaining assets and funds, if any, shall be distributed among the holders of Series A and Series B preferred stock and common stock pro rata based on the number of shares of common stock held by each (assuming conversion of all such Series A and Series B preferred stock). If any assets remain after the holders of Series A and Series B preferred stock have received an aggregate of $4.45 and $7.51 per share, the remaining assets will be distributed to the holders of the common stock pro rata based on the number of shares of common stock held by each. On or at any time after August 15, 2003, Marimba shall, upon written request from the holders of a majority of the then outstanding shares of Series A and Series B preferred stock, redeem in whole or in part the Series A and Series B preferred stock by paying in cash a sum equal to the original issuance prices of $1.48 and $5.01 per share. Series A and Series B preferred stockholders have voting rights equal to the common shares issuable upon conversion of the Series A and Series B preferred stock. F-14 88 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. STOCKHOLDERS' EQUITY Common Stock In February 1996, Marimba issued and sold an aggregate of 10,000,000 shares of its common stock to the founders of Marimba under Restricted Common Stock Purchase Agreements. The stock vests ratably over a period of three years. As of December 31, 1998, 556,000 shares are subject to repurchase. At December 31, 1998, Marimba has reserved 5,770,000 shares of its common stock for issuance upon conversion of its Series A and Series B preferred stock and conversion of preferred shares issued upon exercise of outstanding warrants and 3,422,341 shares of common stock for issuances upon exercise of options then outstanding and available for grant under Marimba's 1996 Stock Option Plan. In November 1997, Marimba granted 300,000 options to purchase common stock under Marimba's 1996 Stock Option Plan to an officer of Marimba who immediately exercised the options in exchange for a full recourse note receivable of $150,000. This note, which bears interest at 5.69%, was collateralized by certain personal assets of the officer and was paid in full on January 8, 1999. These shares are subject to a right of repurchase that lapses over three years. 1996 Stock Option Plan In November 1996, the Board of Directors adopted the 1996 Stock Option Plan (the "1996 Plan") for issuance of common stock to eligible participants. Incentive stock options and nonstatutory stock options may be granted under the 1996 Plan at prices not less than 100% and 85% of the fair value on the date of grant. Options expire after 10 years. Options under the plan are immediately exercisable; however, shares issued are subject to Marimba's right to repurchase such shares at the original issuance price, which right lapses in a series of installments measured from the vesting commencement date of the option. As of December 31, 1998, 1,174,000 shares are subject to repurchase. Options generally vest and the repurchase rights lapse ratably over a period of three or four years from the date of grant. Pro forma information regarding net loss and net loss per share is required by FAS 123, and has been determined as if Marimba had accounted for its employee stock options under the fair value method of that Statement. The fair value of options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions: risk-free interest rate of 6%, 6% and 5% in 1996, 1997 and 1998, and an expected life of four years and no dividends for all years presented. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options using a graded vesting method. The effects of applying FAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net loss for future years. F-15 89 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) 1996 Stock Option Plan (continued)
PERIOD FROM INCEPTION (FEBRUARY 21, YEARS ENDED 1996) TO DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 ------------- ------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss: As reported.................................. $(1,245) $(7,718) $(5,681) ======= ======= ======= Pro forma.................................... $(1,249) $(7,771) $(6,123) ======= ======= ======= Pro forma basic and diluted net loss per share: As reported.................................. $ (.37) ======= Pro forma.................................... $ (.40) =======
Activity under the 1996 Stock Option Plan was as follows:
OPTIONS OUTSTANDING --------------------------------------------- SHARES NUMBER PRICE WEIGHTED- AVAILABLE OF PER AVERAGE FOR GRANT SHARES SHARE EXERCISE PRICE ---------- ---------- ------------- -------------- Authorized........................ 3,174,603 -- -- -- Granted........................... (1,499,000) 1,499,000 $ .15 $ .15 ---------- ---------- Balance at December 31, 1996...... 1,675,603 1,499,000 $ .15 $ .15 Authorized........................ 2,000,000 -- -- -- Granted........................... (2,529,610) 2,529,610 $ .15 - $ .75 $ .31 Exercised......................... -- (3,217,110) $ .15 - $ .50 $ .20 Repurchased....................... 150,000 -- -- -- Canceled.......................... 17,000 (17,000) $ .15 - $ .75 $ .68 ---------- ---------- Balance at December 31, 1997...... 1,312,993 794,500 $ .15 - $ .75 $ .41 Authorized........................ 1,300,000 -- -- -- Granted........................... (2,017,800) 2,017,800 $1.00 - $8.50 $3.54 Exercised......................... -- (238,569) $ .50 - $2.00 $ .96 Repurchased....................... 253,417 -- -- -- Canceled.......................... 381,163 (381,163) $ .15 - $3.50 $ .84 ---------- ---------- Balance at December 31, 1998...... 1,229,773 2,192,568 $ .15 - $8.50 $3.16 ========== ==========
F-16 90 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) 1996 Stock Option Plan (continued)
OPTIONS OUTSTANDING AND EXERCISABLE ---------------------------------------- WEIGHTED- AVERAGE NUMBER WEIGHTED- REMAINING OF AVERAGE CONTRACTUAL EXERCISE PRICE RANGE SHARES EXERCISE PRICE LIFE - -------------------- --------- -------------- ----------- (IN YEARS) $.15 72,000 $ .15 7.94 $ .50 - $ .75 341,500 $ .54 8.77 $1.00 - $1.50 255,818 $1.35 9.13 $1.75 - $2.00 132,000 $1.83 9.34 $3.00 - $3.50 1,042,000 $3.14 9.67 $7.00 - $8.50 349,250 $8.21 9.94 --------- 2,192,568 $3.16 9.43 =========
At December 31, 1997, options to purchase 14,249 shares of common stock were vested at a weighted-average exercise price of $.18 per share. At December 31, 1998, outstanding options to purchase 188,289 outstanding shares of common stock were vested at a weighted-average exercise price of $.57 per share. The weighted-average fair value of options granted during 1996, 1997 and 1998 with an exercise price equal to the fair value of Marimba's common stock on the date of grant was $.03, $.06 and $.73. The weighted-average fair value of options granted during 1998 with an exercise price below the deemed fair value of Marimba's common stock on the date of grant was $2.07. In connection with the grant of certain share options to employees through December 31, 1998, Marimba recorded deferred compensation of approximately $1,367,000 for the aggregate differences between the exercise prices of options at their dates of grant and the deemed fair value for accounting purposes of the common shares subject to such options. Such amount is included as a reduction of stockholders' equity and is being amortized on a graded vesting method. The compensation expense of $251,000 in 1998 relates to options awarded to employees in all operating expense categories. This amount has not been separately allocated to these categories. Warrants In January 1997, in connection with the sale-leaseback transaction, Marimba issued a warrant that entitles the holder to purchase 16,865 shares of Series A redeemable convertible preferred stock at an exercise price of $1.48 per share. This warrant is exercisable through the earlier of the effective date of a merger of Marimba or January 31, 2004. Marimba determined that the value of the warrant was immaterial. 7. INCOME TAXES Marimba's provision for income taxes for the years ended December 31, 1997 and 1998 consists entirely of foreign withholding taxes. F-17 91 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES (CONTINUED) As of December 31, 1998, Marimba had federal net operating loss carryforwards of approximately $11,100,000. Marimba also had federal research and development tax credit carryforwards of approximately $400,000. The net operating loss and credit carryforwards will expire at various dates beginning on 2011 through 2018, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. Significant components of Marimba's deferred tax assets are as follows:
DECEMBER 31, ------------------ 1997 1998 ------- ------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforwards.......................... $ 3,300 $ 4,400 Research credit carryforwards............................. 200 600 Deferred revenue.......................................... 100 900 Other..................................................... -- 200 ------- ------- Total deferred tax assets......................... 3,600 6,100 Valuation allowance......................................... (3,600) (6,100) ------- ------- Net deferred tax assets..................................... $ -- $ -- ======= =======
The valuation allowance for deferred tax assets increased by approximately $3,100,000 in the year ended December 31, 1997. 8. LEGAL MATTERS On March 3, 1997, Novadigm, Inc. filed a complaint against Marimba in the United States District Court for the Northern District of California, alleging infringement of a patent held by Novadigm. Novadigm alleges that Marimba's infringement relates to certain methods for updating data and software over a computer network used in the Castanet products. In its complaint, Novadigm requests preliminary and permanent injunctions prohibiting Marimba and other specified persons from making, using or selling any infringing products, as well as damages, costs, and attorneys' fees. The complaint also alleges that Marimba has willfully infringed Novadigm's Patent, and seeks up to triple damages pursuant to the United States Patent Act. To date, both parties have conducted substantial discovery. If the court does not enter judgment based on any dispositive motions, a jury trial of this action is currently scheduled to begin in September 1999. Marimba believes that it has strong defenses against Novadigm's lawsuit. Accordingly, Marimba intends to defend this suit vigorously. However, Marimba may not prevail in this litigation. Litigation is subject to inherent uncertainties, especially in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. In addition, cases such as this are likely to involve issues of law that are evolving, presenting further uncertainty. Marimba's defense of this litigation, regardless of the merits of the complaint, has been, and will likely continue to be, time-consuming, costly and a diversion for Marimba's technical and management personnel. However, the F-18 92 MARIMBA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. LEGAL MATTERS (CONTINUED) failure of Marimba to prevail in this litigation could have a material adverse effect on the Company's results of operations and financial condition. 9. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED) 1999 Employee Stock Purchase Plan On February 2, 1999, the Board of Directors approved the adoption of Marimba's 1999 employee stock purchase plan (the "1999 Purchase Plan"), subject to stockholder approval. A total of 500,000 shares of common stock has been reserved for issuance under the 1999 Purchase Plan, plus, commencing on January 1, 2000, annual increases equal to the lesser of 500,000 shares, 2% of the outstanding common shares on such date or a lesser amount determined by the Board of Directors. The 1999 Purchase Plan permits eligible employees to acquire shares of Marimba's common stock through periodic payroll deductions of up to 15% of base cash compensation. No more than 500 shares may be purchased by each employee on any purchase date. Each offering period will have a maximum duration of 24 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of Marimba's common stock on the first day of the applicable offering period or on the last day of the respective purchase period. The initial offering period will commence on the effectiveness of the initial public offering and will end on April 30, 2001. 1999 Omnibus Equity Incentive Plan On February 2, 1999, the Board of Directors approved the adoption of Marimba's 1999 Omnibus Equity Incentive Plan (the "1999 Omnibus Plan"), subject to stockholder approval. A total of 1,250,000 shares of common stock have been reserved for issuance to eligible participants under the 1999 Omnibus Plan. The types of awards that may be made under the 1999 Omnibus Plan are options to purchase shares of common stock, stock appreciation rights, restricted shares and stock units. Any shares not yet issued under Marimba's 1996 Stock Plan as of the date of Marimba's initial public offering will be available for grant under the 1999 Omnibus Plan. The exercise price for incentive stock options may not be less than 100% of the fair market value of Marimba's common stock on the date of grant (85% for nonstatutory options). In the event of a change in control of Marimba, an option or award under the 1999 Omnibus Plan will become fully exercisable and fully vested if the option or award is not assumed by the surviving corporation or the surviving corporation does not substitute comparable awards for the awards granted under the 1999 Omnibus Plan. 1999 Non-Employee Directors Option Plan On February 2, 1999, the Board of Directors approved the adoption of Marimba's Non-Employee Directors Option Plan (the "1999 Directors Plan"), subject to stockholder approval. A total of 150,000 shares of common stock have been reserved per issuance to non-employee members of the Board. Commencing January 1, 2000, the number of shares reserved per issuance will be increased automatically to restore the total number of shares available under this plan to 150,000 shares. F-19 93 LOGO Until , 1999, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table presents the costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fees. SEC Registration fee........................................ $ 20,461 NASD fee.................................................... 7,860 Nasdaq National Market listing fee.......................... 50,000 Printing and engraving expenses............................. 250,000 Legal fees and expenses..................................... 350,000 Accounting fees and expenses................................ 200,000 Blue sky fees and expenses.................................. 10,000 Custodian and transfer agent fees........................... 10,000 Miscellaneous fees and expenses............................. 201,679 ---------- Total............................................. $1,100,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit indemnification under limited circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VII, Section 6, of our bylaws provides for mandatory indemnification of our directors and officers and permissible indemnification of employees to the maximum extent permitted by the Delaware General Corporation Law. Our Certificate of Incorporation provides that, under Delaware law, our officers and directors shall not be liable for monetary damages for breach of the officers' or directors' fiduciary duty as officers or directors to us and our stockholders. This provision in the Certificate of Incorporation does not eliminate the officers' or directors' fiduciary duty, and in appropriate circumstances, equitable remedies like injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each officer or director will continue to be subject to liability for breach of the officer's or director's duty of loyalty to us for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the officer or director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect an officer's or director's responsibilities under any other law, like the federal securities laws or state or federal environmental laws. We have entered into indemnification agreements with our officers and directors, a form of which is attached as Exhibit 10.1 and incorporated by reference. The indemnification agreements provide our officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section 9 of the underwriting agreement contained in Exhibit 1.1 to this prospectus, indemnifying officers and directors of ours against limited liabilities. II-1 95 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since inception, we have issued and sold the following securities: 1. We granted direct issuances or stock options to purchase 6,259,910 shares of our common stock at exercise prices ranging from $.15 to $13.00 per share to employees, consultants, directors and other service providers under our 1996 Stock Plan. 2. From inception through March 31, 1999, we issued and sold an aggregate of 3,855,682 shares of our common stock to employees, consultants, directors and other service providers for aggregate consideration of approximately $1,640,242 under direct issuances or exercises of options granted under our 1996 Stock Plan. 3. In February 1996, we issued and sold an aggregate of 10,000,000 shares of our common stock (which numbers reflect the one for two and one-half stock split effected August 8, 1996) to each of Kim K. Polese, Arthur A. van Hoff, Jonathan Payne and Sami Shaio, our founders, for aggregate consideration of $10,000 under Restricted Common Stock Purchase Agreements. 4. In August 1996 and January 1997, we issued and sold an aggregate of 2,765,870 shares of our Series A Preferred Stock for an aggregate purchase price of approximately $4,100,125. 5. In February 1997, we issued a warrant to purchase 16,865 shares of our Series A Preferred Stock at an exercise price of $1.4824 per share. 6. In August, September, October and November 1997, we issued and sold 2,987,696 shares of our Series B Preferred Stock for an aggregate purchase price of approximately $14,959,991. The sale of the above securities was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or transactions under compensation benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution and appropriate legends were affixed to the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of the Registrant. 3.2** Certificate of Correction to Amended and Restated Certificate of Incorporation. 3.3** Form of Third Amended and Restated Certificate of Incorporation to be filed upon the closing of the offering made pursuant to this Registration Statement. 3.4** Bylaws of the Registrant. 3.5** Amended and Restated Bylaws of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5. 4.2** Form of Registrant's Common Stock certificate. 4.3** Amended and Restated Investors' Rights Agreement dated August 25, 1997.
II-2 96
EXHIBIT NO. DESCRIPTION ------- ----------- 4.4** Form of Amendment and Waiver of Registration Rights under the Amended and Restated Investors' Rights Agreement. 4.5** Warrant to purchase shares of Series A Preferred Stock of the Registrant issued to Lighthouse Capital Partners II, L.P. 5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. 10.1** Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2** 1999 Omnibus Equity Incentive Plan and forms of agreements thereunder. 10.3** Employee Stock Purchase Plan. 10.4** 1999 Non-Employee Directors Option Plan. 10.5 Assignment and Assumption of Sublease between Quickturn Design Systems, Inc. and ilicon, Inc. dated January 31, 1999. 10.6** Loan and Security Agreement between the Registrant and Silicon Valley Bank dated May 27, 1998. 10.7**+ Original Equipment Manufacturer Agreement between Tivoli Systems Subsidiary, Inc. and the Registrant dated March 6, 1998. 10.8**+ Amendment No. 1 to Original Equipment Manufacturer Agreement between Tivoli Systems, Inc. and the Registrant dated February 8, 1999. 10.9**+ Reseller Agreement between Tivoli Systems Subsidiary, Inc. and the Registrant dated August 14, 1997. 10.10**+ Amendment No. 1 to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated June 1, 1998. 10.11** Amendment No. 2 to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated June 30, 1998. 10.12** Reseller License Guide to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated November 23, 1998. 10.13+ Pricing Guide to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated November 23, 1998. 10.14** Amendment No. 3 to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated February 9, 1999. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2** Consent of Counsel. Reference is made to Exhibit 5.1. 24.1** Power of Attorney. 27.1** Financial Data Schedule. 99.1** Order of the United States District Court for the Northern District of California, San Jose Division dated December 28, 1998. 99.2 Consent of the Hurwitz Group. 99.3** Consent of Blakely, Sokoloff, Taylor & Zafman, LLP.
- ------------------------- ** Previously filed. + Confidential treatment requested. (b) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the information required to be presented in them is not applicable or is shown in the consolidated financial statements or related notes. II-3 97 ITEM 17. UNDERTAKINGS We undertake to provide to the underwriters at the closing specified in the underwriting agreement, certificates in the denominations and registered in the names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant under the Delaware General Corporation Law, the Certificate of Incorporation or our bylaws, the underwriting agreement, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against these liabilities, other than the payment by us of expenses incurred or paid by a director, officer, or controlling person of ours in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities being registered in this offering, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether this indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of this issue. We undertake that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered, and the offering of these securities at that time shall be deemed to be the initial bona fide offering. II-4 98 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 4 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Mountain View, State of California, on this 20th day of April, 1999. MARIMBA, INC. By: /s/ KIM K. POLESE --------------------------------------- Kim K. Polese President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ KIM K. POLESE President, Chief Executive Officer (Principal April 20, 1999 - ------------------------------------------ Executive Officer) and Director Kim K. Polese /s/ FRED M. GERSON Vice President, Finance and Chief Financial April 20, 1999 - ------------------------------------------ Officer (Principal Financial and Accounting Fred M. Gerson Officer) /s/ ARTHUR A. VAN HOFF* Chief Technology Officer and Director April 20, 1999 - ------------------------------------------ Arthur A. van Hoff /s/ RAYMOND J. LANE* Director April 20, 1999 - ------------------------------------------ Raymond J. Lane /s/ DOUGLAS J. MACKENZIE* Director April 20, 1999 - ------------------------------------------ Douglas J. Mackenzie /s/ ANEEL BHUSRI* Director April 20, 1999 - ------------------------------------------ Aneel Bhusri /s/ STRATTON D. SCLAVOS* Director April 20, 1999 - ------------------------------------------ Stratton D. Sclavos *By: /s/ KIM K. POLESE -------------------------------------- Kim K. Polese Attorney-in-Fact *By: /s/ FRED M. GERSON -------------------------------------- Fred M. Gerson Attorney-in-Fact
II-5 99 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Certificate of Incorporation of the Registrant. 3.2** Certificate of Correction to Amended and Restated Certificate of Incorporation. 3.3** Form of Third Amended and Restated Certificate of Incorporation to be filed upon the closing of the offering made pursuant to this Registration Statement. 3.4** Bylaws of the Registrant. 3.5** Amended and Restated Bylaws of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5. 4.2** Form of Registrant's Common Stock certificate. 4.3** Amended and Restated Investors' Rights Agreement dated August 25, 1997. 4.4** Form of Amendment and Waiver of Registration Rights under the Amended and Restated Investors' Rights Agreement. 4.5** Warrant to purchase shares of Series A Preferred Stock of the Registrant issued to Lighthouse Capital Partners II, L.P. 5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. 10.1** Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2** 1999 Omnibus Equity Incentive Plan and forms of agreements thereunder. 10.3** Employee Stock Purchase Plan. 10.4** 1999 Non-Employee Directors Option Plan. 10.5 Assignment and Assumption of Sublease between Quickturn Design Systems, Inc. and ilicon, Inc. dated January 31, 1999. 10.6** Loan and Security Agreement between the Registrant and Silicon Valley Bank dated May 27, 1998. 10.7**+ Original Equipment Manufacturer Agreement between Tivoli Systems Subsidiary, Inc. and the Registrant dated March 6, 1998. 10.8**+ Amendment No. 1 to Original Equipment Manufacturer Agreement between Tivoli Systems, Inc. and the Registrant dated February 8, 1999. 10.9**+ Reseller Agreement between Tivoli Systems Subsidiary, Inc. and the Registrant dated August 14, 1997. 10.10**+ Amendment No. 1 to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated June 1, 1998. 10.11** Amendment No. 2 to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated June 30, 1998. 10.12** Reseller License Guide to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated November 23, 1998. 10.13+ Pricing Guide to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated November 23, 1998. 10.14** Amendment No. 3 to Reseller Agreement between Tivoli Systems, Inc. and the Registrant dated February 9, 1999. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2** Consent of Counsel. Reference is made to Exhibit 5.1.
100
EXHIBIT NO. DESCRIPTION ------- ----------- 24.1** Power of Attorney. 27.1** Financial Data Schedule. 99.1** Order of the United States District Court for the Northern District of California, San Jose Division dated December 28, 1998. 99.2 Consent of the Hurwitz Group. 99.3** Consent of Blakely, Sokoloff, Taylor & Zafman, LLP.
- ------------------------- ** Previously filed. + Confidential treatment requested. EX-10.5 2 ASSIGNMENT AND ASSUMPTION OF SUBLEASE 1 EXHIBIT 10.5 ASSIGNMENT AND ASSUMPTION OF SUBLEASE 440 Clyde Avenue Mountain View, California THIS ASSIGNMENT AND ASSUMPTION OF SUBLEASE (this "Assignment") is made and entered into on January 31, 1999, by and between QUICKTURN DESIGN SYSTEMS, INC., a Delaware Corporation ("Quickturn"), and ilicon, INC., a California corporation ("ilicon"). RECITALS: A. ilicon and Quickturn are parties to (1) a Standard Industrial/ Commercial Single-Tenant Lease-Net with First Addendum and Second Addendum dated March 17, 1993, pursuant to which ilicon, as Lessor, leased to Quickturn, as Lessee, and Quickturn leased from ilicon, a portion of the real property commonly known as 440 Clyde Avenue, Mountain View, California, consisting of the first floor of the two story building and the one story building located at 440 Clyde Avenue, Mountain View, California, and (2) a Standard Industrial/ Commercial Single-Tenant Lease-Net with First Addendum and Second Addendum dated March 17, 1993, pursuant to which ilicon, as Lessor, leased to Quickturn, as Lessee, and Quickturn leased from ilicon, a portion of the real property commonly known as 440 Clyde Avenue, Mountain View, California, consisting of the second floor of the two story building located at 440 Clyde Avenue, Mountain View, California. Said Leases are referred to herein as the "440 Clyde Avenue Leases." The two story building and the one story building at 440 Clyde Avenue, Mountain View, California are referred to herein as the "440 Clyde Avenue Premises." B. Quickturn has subleased the 440 Clyde Avenue Premises to Marimba, Inc., a Delaware corporation ("Marimba") pursuant to a Sublease dated September 26, 1997 between Quickturn, as Sublessor, and Marimba, as Sublessee (the "Marimba Sublease"). A true and complete copy of the Marimba Sublease and all amendments thereto is attached hereto as Exhibit "A." C. ilicon and Quickturn are parties to an Agreement Terminating Leases dated as of January 15, 1999 (the "Termination Agreement") pursuant to which ilicon and Quickturn have agreed to a mutual termination of the 440 Clyde Avenue Leases and the Lease of 441 Logue Avenue effective as of 11:59 p.m. on January 31, 1999, subject to the conditions precedent set forth therein. ilicon has 2 elected to continue the Marimba Sublease in effect as a direct lease between ilicon and Marimba following the termination of the 440 Clyde Avenue Leases. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption of Marimba Sublease. Quickturn hereby assigns to ilicon all of Quickturn's right, title and interest in, to and under the Marimba Sublease effective as of 11:59 p.m. on January 31, 1999 (the "Effective Date"), and ilicon hereby accepts such assignment and agrees to perform all of the covenants, agreements, and obligations of Quickturn, as Sublessor, under the Marimba Sublease from and after the Effective Date. Quickturn agrees that ilicon shall collect the installment of rent and other charges for the month of February 1999 payable by Marimba as the Sublessee under the Marimba Sublease and all subsequent installments of rent and other charges payable by Marimba. Quickturn hereby represents and warrants to ilicon that the Marimba Sublease is in full force and effect and that Quickturn has neither given nor received any notice of default thereunder. Quickturn shall deliver to ilicon concurrently with the execution and delivery of this Assignment the original fully executed copy of the Marimba Sublease. 2. Conditions Precedent. This Assignment is subject to the satisfaction, prior to January 31, 1999, of the conditions precedent set forth in Paragraph 2 of the Termination Agreement. If said conditions precedent are not satisfied prior to January 31, 1999, this Assignment shall be null and void and of no force or effect. 3. Further Assurances. Each party hereto agrees to execute and deliver to the other party such further documents or instruments as may be necessary or appropriate in order to carry out the intentions of the parties as contained in this Assignment. 4. Counterparts. This Assignment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2 3 IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the day and year first above written. "Quickturn" QUICKTURN DESIGN SYSTEMS, INC., a Delaware corporation By: /s/ RAYMOND OSTBY ---------------------------- Its: Vice President --------------------------- "ilicon" ILICON, INC., a California corporation By: /s/ DAVID FLETCHER ---------------------------- Its Attorney in Fact 4 ATTACHMENT A SUBLEASE 1. PARTIES. This Sublease is made and effective this 26th day of September, 1997 ("Effective Date") by and between Quickturn Design Systems, Inc., a Delaware corporation ("Sublessor"), and Marimba, Inc., a Delaware corporation ("Sublessee"). 2. PREMISES. Sublessor hereby leases to Sublessee and Sublessee hereby subleases from Sublessor for the Term (as defined below in Section 3), at the Rent set forth in Section 4 below, and upon all of the conditions set forth herein, that certain property situated in the County of Santa Clara, State of California, commonly known as 440 Clyde Avenue, Mountain View, CA 94040 and described as two (2) joined buildings consisting of approximately Thirty Five Thousand Two Hundred Seventy Three (35,273) rentable square feet and Twelve Thousand Two Hundred (12,200) rentable square feet, respectively, for a total of approximately Forty Seven Thousand Four Hundred Seventy Three (47,473) rentable square feet. (See attached Exhibit A for further description.) 3. TERM. 3.1 TERM. The term of this Sublease shall be for approximately two (2) years and six (6) months (the "Term") commencing on or about November 1, 1997 ("Commencement Date") and ending on April 30, 2000, unless sooner terminated pursuant to any provision herein ("Termination Date"). 3.2 DELAY IN COMMENCEMENT. If for any reason Sublessor cannot deliver possession of the Premises to Sublessee on November 1, 1997, Sublessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this Lease or the obligations of Sublessee hereunder or extend the term of this Sublease. Notwithstanding the foregoing, Sublessee shall not be obligated to pay rent until Sublessor tenders possession of the Premises to Sublessee. If Sublessor has not delivered possession of the Premises by January 1, 1998, Sublessee may, at its option, notify Sublessor in writing on or before January 10, 1998, that Sublessee intends to cancel this Sublease. In the event of such cancellation, the parties shall be discharged from all obligations hereunder. 3.3 EARLY COMMENCEMENT. If Sublessee occupies the Premises prior to November 1, 1997, such occupancy shall be subject to all provisions of this Sublease, such occupancy shall not advance the Termination Date and Sublessee shall pay rent for such period at the initial monthly rates set forth below. 4. RENT; OPERATING EXPENSES AND REAL ESTATE TAXES. 4.1 RENT FOR PREMISES. The Rent is calculated for the Premises as follows: 11/1/1997 through 1/31/1999 $1.95/sq. foot/month NNN 02/1/1999 through 4/30/2000 $2.00/sq. foot/month NNN 5 Sublessee shall pay to Sublessor as rent for the Premises equal monthly payments of Ninety Two Thousand Five Hundred Seventy Two and 35/100 Dollars ($92,572.35), in advance, on the first day of each month for months 1 through 15 of the Term and Ninety Four Thousand Nine Hundred Forty Six and 00/100 Dollars ($94,946.00), in advance, on the first day of each month for months 16 through 30 of the Term (collectively, the "Rent"). Sublessee shall pay to Sublessor on the Effective Date the sum of $92,572.35 as payment for the first month's Rent. Sublessor shall apply any partial Rent payments made by Sublessee on a pro rata basis toward the monthly Rent then due. Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 4.2 OPERATING EXPENSES; REAL ESTATE TAXES. This Sublease is a "triple net" or "NNN" sublease and Sublessee shall be responsible for paying directly for services such as utilities, janitorial costs, all operating expenses and annual increases (including without limitation building and common area maintenance such as parking, landscaping and lighting), costs of insurance, repairs, operations and real property taxes. Sublessee shall have the right to verify all operating expenses. 5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor on the Effective Date an amount equal to two (2) months Rent at the rate of Ninety Four Thousand Nine Hundred Forty Six and 00/100 Dollars ($94,946.00) per month, for a sum total of One Hundred Eighty Nine Eight Hundred Ninety Two and 00/100 Dollars ($189,892.00), as security for Sublessee's faithful performance of its obligations hereunder (the "Security Deposit"). If Sublessee fails to pay Rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Sublease, Sublessor may use, apply or retain all or any portion of the Security Deposit for the payment of any Rent or other charge in default or for the payment of any other sum to which Sublessor may become obligated by reason of Sublessee's default, or to compensate Sublessor for any loss or damage which Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion of the Security Deposit, Sublessee shall, within ten (10) days after its receipt of Sublessor's written demand, deposit cash with Sublessor in an amount sufficient to restore the Security Deposit to the full amount set forth above. Sublessee's failure to do so shall be a material breach of this Sublease. Sublessor shall not be required to keep the Security Deposit separate from its general accounts. If Sublessee performs all of its obligations hereunder, following the Termination Date and after Sublessee has vacated the Premises, Sublessor shall return the Security Deposit (or the portion thereof which has not been applied by Sublessor) to Sublessee (or at Sublessor's option, to the last assignee, if any, of Sublessee's interest in the Sublease). No trust relationship is created herein between Sublessor and Sublessee with respect to the Security Deposit. No payment of interest or other incremental charge shall be payable to Sublessee for Sublessor's use of the Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied by Sublessee only for research and development, office administration, storage and other legal uses approved by the City of Mountain View. 2 6 6.2 COMPLIANCE WITH LAW. (a) SUBLESSOR'S WARRANTY RE COMPLIANCE. As of the Commencement Date, Sublessor warrants to Sublessee that, to the best of Sublessor's knowledge and without independent investigation, the Premises, in their existing state, do not violate any applicable building code regulation or ordinance; provided, however, Sublessor's warranty is given without regard to the use for which Sublessee intends to use the Premises. Sublessor shall rectify promptly, at its sole cost and expense, any violation of such warranty, after written notice from Sublessee. Notwithstanding the foregoing, the Premises may not meet all requirements of the Americans with Disabilities Act ("ADA") and Sublessor makes no warranty nor assumes any liability with respect to ADA compliance. It shall be conclusively deemed that no violation of Sublessor's warranty existed unless written notice to the contrary is received by Sublessor prior to the first anniversary of the Commencement Date. (b) SUBLESSEE'S COMPLIANCE. Except as provided in Section 6.2(a), Sublessee shall, at its sole expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, restrictions of record, and requirements in effect during the Term regulating Sublessee's use of the Premises. Sublessee shall not use or permit the use of the Premises in any manner that will tend to (i) create waste or a nuisance; or (ii) to disturb other tenants of the Premises, if there are multiple tenants in the building containing the Premises. 6.3 CONDITION OF PREMISES; IMPROVEMENTS. (a) "AS IS" CONDITION OF PREMISES. Sublessor shall provide Sublessee with sufficient opportunity to conduct its own review of all operating systems prior to the Commencement Date. Sublessor makes no representation or gives no warranty with respect to the condition of such operating systems. Except as expressly provided in Section 6.2(a) and this Section 6.3, Sublessee hereby accepts (a) the Premises "AS IS" in their condition existing as of the Commencement Date, subject to all applicable zoning, municipal, county and state laws, ordinances, and regulations governing and regulating the use of the Premises; (b) this Sublease subject thereto; and (c) all matters disclosed thereby and in any exhibits attached to this Sublease. Notwithstanding the foregoing, prior to the Commencement Date Sublessor shall clean the carpets and floors at the Premises and replace defective ceiling tiles and light bulbs. All other improvements shall be at Sublessee's sole expense. Sublessee acknowledges that neither Sublessor nor Sublessor's agents have made any representation or warranty as to the suitability of the Premises for the conduct of Sublessee's business. (b) IMPROVEMENTS BY SUBLESSEE. Sublessee shall have the right to modify the building interiors of the Premises with Sublessor's and Master Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed, subject to the appropriate provisions of the Master Lease. To the best of Sublessor's knowledge, there are no permit violations of existing building improvements. 3 7 6.4 SUBLESSEE'S INDEMNIFICATION RE HAZARDOUS SUBSTANCES. Sublessee shall indemnify, defend and hold Sublessor and Master Lessor, and each of their agents, employees and lenders, harmless from and against any and all losses, costs, claims, damages, liabilities and causes of action (including attorney's fees and costs and consultants' fees) arising out of or in any way connected with any hazardous substance located on the Premises immediately subsequent to the Commencement Date or any subsequent presence of hazardous substances on or about the Premises, including the soils and ground waters thereof, caused or permitted by Sublessee. Sublessee's obligations under this provision shall survive the expiration or termination of the Sublease. 6.5 SUBLESSOR'S INDEMNIFICATION RE HAZARDOUS SUBSTANCES. Sublessor shall indemnify, defend and hold Sublessee and Master Lessor, and each of their agents, employees and lenders, harmless from and against any and all losses, costs, claims, damages, liabilities and causes of action (including attorney's fees and costs and consultants' fees) arising out of or in any way connected with any hazardous substance brought onto the Premises by or for Sublessor in violation of any Applicable Law prior to the Commencement Date. Sublessor's obligations under this provision shall survive the expiration or termination of the Sublease. 7. MASTER LEASE. 7.1 MASTER LEASES; CONFLICTS; DEFINITIONS. (a) MASTER LEASES. Sublessor is the lessee of the Premises by virtue of two leases by and between Sublessor and MV440, Inc. ("Master Lessor"). The lease for the first floor of the two-story building consisting of approximately 17,637 square feet and the single story building consisting of approximately 12,200 square feet (for a total of 29,837 square feet) is dated March 17, 1993, as amended by those certain Addenda No. 1 and No. 2 to Master Lease dated March 17, 1993 (collectively the "First Floor Master Lease"), a copy of which is attached hereto as Exhibit B-1 and incorporated herein by reference. The lease for the second floor of the two-story building consisting of approximately 17,636 square feet is dated March 17, 1993, as amended by those certain Addenda No. 1 and No. 2 to Master Lease dated March 17, 1993 (collectively, the "Second Floor Master Lease"), a copy of which is attached hereto as Exhibit B-2 and incorporated herein by reference. The First Floor Master Lease and the Second Floor Master Lease shall be referred to collectively herein as the "Master Lease." (b) CONFLICTS. This Sublease is and shall be at all times subject and subordinate to the Master Lease. The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are expressly changed by this Sublease. In the event of any conflict between the terms of this Sublease and the terms of the Master Lease, as between Sublessor and Sublessee the terms of this Sublease shall control over the Master Lease. In the event of any conflict between the terms of this Sublease and the terms of the Master Lease, as between Master Lessor and Sublessor the terms of the Master Lease shall control over the Sublease. 4 8 (c) DEFINITIONS. The term "Lessor" in the Master Lease shall be deemed in this Sublease to refer to the "Sublessor." The term "Lessee" in the Master Lease shall be deemed in this Sublease to refer to the "Sublessee." Any capitalized terms not defined in this Sublease shall have the meaning ascribed to them by the Master Lease. 7.2 SUBLESSEE'S ASSUMPTION OF OBLIGATIONS. During the Term and for all periods subsequent with respect to obligations which have arisen prior to the Termination Date, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease ("Sublessee's Assumed Obligations"). Sublessee shall hold Sublessor free and harmless of and from all liability, judgments, costs, damages, claims or demands, including reasonable attorney's fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. Notwithstanding the foregoing, Sublessee does not assume any obligations for removal of alterations made by Sublessor prior to the Commencement Date, if such removal is required by Master Lessor at the end of the Lease Term. 7.3 SUBLESSOR'S COMPLIANCE WITH MASTER LEASE. Sublessor represents to Sublessee that as of the Effective Date the Master Lease is in full force and effect and that no default exists on the part of any party to the Master Lease. 8. DEFAULT. 8.1 DEFAULTS BY SUBLESSOR. Master Lessor agrees that unless and until Sublessor materially defaults on the Master Lease, Sublessor may receive, collect and enjoy the rents accruing under this Sublease. However, if Sublessor defaults in the performance of its obligations to Master Lessor, then Master Lessor may, at its option, receive and collect, directly from Sublessee, all rent owing and to be owed under this Sublease; provided, however, Master Lessor agrees that it shall only be entitled to fifty percent (50%) of the Excess Rent. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the rents from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with its obligations hereunder. 8.2 SUBLESSEE'S PAYMENT TO MASTER LESSOR. Sublessor hereby irrevocably authorizes and directs Sublessee, upon receipt of any written notice from the Master Lessor stating that a default exists in the performance of Sublessor under the Master Lease, to pay to Master Lessor the rents due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such rents to Master Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Sublessor to the contrary. Sublessor agrees that it shall have no right or claim against Sublessee for any such rents so paid by Sublessee. 8.3 NO MODIFICATIONS WITHOUT MASTER LESSOR'S CONSENT. No changes or modifications shall be made to this Sublease without the prior written consent of Master Lessor. 5 9 8.4 AGREEMENT NOT TO EXERCISE OPTION TO EXTEND. Sublessor agrees not to exercise its option to extend the Lease. Sublessee agrees that it has no right to exercise the option to extend the Lease. 9. CONSENT OF MASTER LESSOR TO SUBLEASE. 9.1 CONSENT; SUBLESSOR'S OBLIGATION TO PAY COSTS. Sublessor and Sublessee agree to present this executed Sublease to Master Lessor for its written approval. Master Lessor's consent to this Sublease will not release Sublessor from its obligation to pay rent and perform and comply with all of its obligations under the Master Lease. Sublessor agrees that it shall be responsible to pay any and all real estate commissions associated with this Sublease as a cost of sublease. Sublessor also agrees as a cost of sublease to pay the reasonable costs and expenses of Master Lessor for its fees and costs (e.g., attorney's fees) associated with Master Lessor's review and approval of this Sublease. 9.2 NO WAIVER. The acceptance of rent by Master Lessor from Sublessee or any one else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. In the event of any default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor or any one else liable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereon to Master Lessor. 9.3 SUBLESSOR'S CONSENT TO ADDITIONAL SUBLETTING. Sublessor will not unreasonably withhold consent to any assignment or sub-sublease by Sublessee, subject to consent by Master Lessor. 9.4 ATTORNMENT. In the event that Sublessor defaults in its obligations under the Master Lease, then Master Lessor, at its option and without being obligated to do so, may require Sublessee to attorn to Master Lessor, in which case Sublessee shall attorn to Master Lessor and Sublessee shall perform all of the terms and conditions of this Sublease directly to Master Lessor, as if Sublessee and Master Lessor were Lessor and Lessee. In any event, Master Lessor shall allow Sublessee to cure any default by Sublessor within the applicable cure period after due notice to Sublessee of the default. In such event, Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option until the Termination Date. Notwithstanding the foregoing, Master Lessor shall not be liable for any prepaid rents nor any security deposit paid by Sublessee, nor shall it be liable for any other defaults of the Sublessor under the Sublease. Sublessor and Sublessee acknowledge and agree that Rent due and payable to Master Lessor in the case of such Sublessor default, and Sublessee's attornment, shall be the Rent set forth in this Sublease, and not the Rent set forth in the Master Lease. 9.5 MASTER LEASE IN GOOD STANDING. Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no default presently exists under the Master Lease of 6 10 obligations to be performed by Sublessor and that the Master Lease is in full force and effect. 9.6 COPIES OF DEFAULT NOTICES TO SUBLESSEE. In the event that Sublessor defaults under its obligations to be performed under the Master Lease, Master Lessor agrees to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any default of Sublessor described in any notice of default within ten days after service of such notice of default on Sublessee. If such default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. 9.7 CAPITAL IMPROVEMENTS. Master Lessor agrees that any ADA upgrades or roof or HVAC replacement or extensive repairs to the Premises shall made subject to the Section 6, Expenses, Subsection C, Capital Leases and Capital Improvements, of the Second Addendum to Lease. IN WITNESS WHEREOF, the authorized representatives of each of the parties duly execute this Sublease in the County of Santa Clara, California, as of the date first written above. SUBLESSOR: QUICKTURN DESIGN SYSTEMS, INC. By: ------------------------------- Title: ---------------------------- SUBLESSEE: MARIMBA, INC. By: ------------------------------- Title: ---------------------------- 7 11 CONSENT TO SUBLEASE BY MASTER LESSOR The undersigned ("Master Lessor"), as owner of the real property on which the Premises are located and Lessor under the Master Lease, subject to the terms and conditions contained in this Consent, hereby consents to the foregoing Sublease between Quickturn Design Systems, Inc., a Delaware corporation ("Sublessor"), and Marimba, Inc., a Delaware corporation ("Sublessee"), but without thereby releasing Sublessor as Lessee under the Master Lease from any liability or obligation to Master Lessor under the Master Lease, and without waiving the provisions of the Master Lease which require Master Lessor's prior written consent to any subsequent assignment or subletting of the Premises or any portion thereof by Sublessor. Master Lessor expressly confirms and approves Paragraphs 9.5, 9.6, and 9.7 of the Sublease. DATED: September 30, 1997. MV 440, INC., a California corporation By: ------------------------------ Its: Attorney-In-Fact 12 EXHIBIT A [Exhibit A is a map of the property located at 440 Clyde Avenue, Mountain View, California, 94043, which graphically depicts the floorplan of the Registrant's leased space. The floorplan consists of fifty one rooms. In the middle of the plan is a shaded area titled "Training Room." Along the right side of the plan are two shaded areas, one titled "No Access to Sub-Sublessee," and the other is a room titled "Lunchroom." Above the area titled "No Access to Sub-Sublessee" is a caption reading "Emergency Exit" followed by an arrow pointing inside the building. Just above and to the right of the reference to the "Emergency Exit" is a caption reading "Main Building Lobby." Along the left side of the floor plan is a caption reading "To Clyde Avenue" followed by an arrow pointing up the top of the page.] 13 ATTACHMENT B (Exhibit B-1) AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, March 17, 1993, is made by and between MV 440, INC., a California corporation ("LESSOR") and QUICKTURN SYSTEMS. INC., a California corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 440 Clyde Avenue, Mountain View, located in the County of Santa Clara, State of California and generally described as (describe briefly the nature of the property) that improved property referred to as 440 Clyde Avenue, also described as Santa Clara APN# 160-57-009, consisting of approximately 29,837 square feet of office/R&D space located in two buildings, First Floor (17,637 sq. ft.) of the two-story building and one 12,200 sq. ft., single story building ("PREMISES"). See Exhibit "A" attached hereto. (See Paragraph 2 for further provisions.) 1.3 TERM: seven (7) years and zero (0) months ("ORIGINAL TERM") commencing May 1, 1993 ("COMMENCEMENT DATE"), and ending April 30, 2000 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: March 22, 1993 ("EARLY POSSESSION DATE") (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $21,436.50 per month ("BASE RENT"), payable on the first (1st) day of each month commencing May 1, 1993. (See Paragraph 4 for further provisions.) [ ] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $21,436.50 as Base Rent for the period May 1, 1993 through May 31, 1993 1.7 SECURITY DEPOSIT: $50,000.00 ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Office, administration, research and development and all other uses legally permitted by the City of Mountain View. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Cornish & Carey Commercial represents [X] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and Wayne Mascia Associates represents [X] Lessee exclusively ("LESSEE'S BROKER"); [ ] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 50 and a Second Addendum to Lease all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, roof and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3 (a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does 14 not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that unreasonably disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control in violation of any Applicable Law. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the reasonable recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraph 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, PAGE 2 15 doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for more than seven (7) years, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises) 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-quarter times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, content the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one quarter times the amount of such contested lien claim or demand indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations, and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor only if Lessee has requested Lessor's decision on such removal in writing. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. PAGE 3 16 (b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such later amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence or that of its agents, employees, invitees or contractors and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except to the extent caused by the negligence or willful misconduct of Lessor, its agents, employees, contractors or invitees, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, tire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits Involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total 17 cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefore. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate as of the date of the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of negligence or willful misconduct of Lessee. In the event, however, that the damage or destruction was caused by the negligence, or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds for adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. It Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified In Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be the equal monthly amount which, over the number of months remaining before the month in which the applicable tax 18 installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36 which consent shall not be unreasonably withheld or delayed. (b) Deleted. (c) Deleted. (d) Deleted. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) Deleted. (h) Deleted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that unless a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) Deleted. (c) Any matter of thing requiring the consent of the sublessor under the sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by either party in connection with a Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice 19 of Default, and that either party may include the cost of such services and costs in said notice as due and payable to cure said Default. A "DEFAULT" is defined as a failure by either party to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following receipt or written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information, which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of twenty (20) days following receipt of written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors: (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within sixty (60) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not within sixty (60) days; provided; however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee of any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination: (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as It becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined In Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after receipt of notice from Lessor that such amount shall be due, then, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor 20 will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided however that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKERS FEE. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Deleted 15.4 Deleted 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend, and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 It Lessor desires to finance, refinance. or sell the Premises any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of an other provision hereof. 19. INTEREST ON PAST-Due Obligations. Any monetary payment due Lessor hereunder other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Broker that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to the Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail with postage prepaid or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any 21 subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECTS; CHOICE OF LAW. This lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessee under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address has been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice, the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provision of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance ("NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any option to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided however, that, upon written request from Lessor or a Lender or Lessee in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith only if a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to: provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for a Lessor consent pertaining to this Lease for the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessor under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 22 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meanings: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Deleted. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or review this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid, or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provision of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period that remain uncured. 40. MULTIPLE BUILDINGS. If the premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees, and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps, and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Palo Alto Executed at Palo Alto on March 17, 1993 on March 17, 1993 by LESSOR: by LESSEE: MV 440, INC., QUICKTURN SYSTEMS, INC. - ------------------------------- ------------------------------- a California corporation a California corporation - ------------------------------- ------------------------------- By: By: - ------------------------------- ---------------------------- Name Printed: William J. Hurwick Name Printed: Dennis Favero Title: Title: VP/CFO ------------------------- ------------------------- 23 NOTICES TO BE SENT TO: By: _____________________________ Name Printed: William J. Hurwick/WJH Group Name Printed: ___________________ Title: Cornish & Carey Commercial Title: __________________________ Address: 400 Hamilton Avenue Address: ________________________ Palo Alto, CA 94301 ________________________ Tel. No. (415) 688-8550 Fax No. (415) 321-0719 Tel. No. (____) ________ Fax. No. (___) _________ 24 Attachment C (Exhibit B-1) ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET DATED MARCH 17, 1993 BY AND BETWEEN MV 440, INC. ("LESSOR") AND QUICKTURN SYSTEMS, INC. ("LESSEE"), A CALIFORNIA CORPORATION 49. Payment of Direct As additional rent during the term hereof, Expenses: Lessee shall pay to Lessor direct expenses ("Direct Expenses") incurred by Lessor in the operation and maintenance of the Premises (including all direct costs of management for the Project, which shall be fixed at $1,000.00 per month for the term of this Lease), real property taxes, insurance premiums, maintenance contracts for the repair and maintenance of the heating, ventilating and air-conditioning system and landscaping. Lessor estimates that Direct Expenses for the Premises (including the costs of management for the Project applicable to the Premises) during the first calendar year of the Lease term hereunder will be the equivalent of $3,878.81 per month. Accordingly, during the first year of the Lease term, Lessee shall pay to Lessor $3,878.81 per month as additional rent attributable to Direct Expenses. At the commencement of each year of the term hereof, Lessor will notify Lessee of the monthly amount to be paid for Direct Expenses for that year. Lessee shall have the right to audit Lessor's books and records with respect to Direct Expenses within thirty (30) days after receipt from Lessor of the new calculation of Direct Expenses. If the audit discloses that an overpayment was required of Lessee, Lessor, as soon as reasonably practical, shall refund the excess amount overpaid by Lessee. If the audit discloses that Lessee has underpaid the Direct Expenses, Lessee shall pay the excess amount owing to Lessor as soon as reasonably practical. 50. Roof and HVAC Lessor shall be responsible for all roof Warranty; Building maintenance (other than maintenance needed due Systems: to Lessee's negligence) for the period from May 1, 1993 through April 30, 1994. Lessor also shall warrant the HVAC system to be in working order and be responsible for all parts/components replacement for the period from May 1, 1993 through April 30, 1994. Notwithstanding the foregoing, as of the Commencement Date, the Premises shall be in broom-clean condition, and all utilities, HVAC systems, plumbing, electrical (including, without limitation, outlets and light fixtures) and fire and landscape sprinkler systems ("Building Systems") shall be in good working order and repair. Lessor's Lessee's Initials: ____ Initials: _____ 25 Attachment D (Exhibit B-1) SECOND ADDENDUM TO LEASE THIS SECOND ADDENDUM TO LEASE ("Addendum") is dated for reference purposes only as of March 17, 1993, and is made between MV 440, INC., a California corporation ("Lessor") and QUICKTURN SYSTEMS, INC., a California corporation ("Lessee"), to be a part of that certain Standard Industrial/Commercial Single-Tenant Lease-Net of even date herewith between Lessor and Lessee (herein the "Lease Form") concerning 29,837 square feet of space (the "Premises") within two certain buildings ("Buildings") located at 440 Clyde Avenue, Mountain View, California. 1. LESSEE IMPROVEMENTS: The parties acknowledge that, at Lessee's sole cost and expense, Lessee shall construct certain non-structural improvements (the "Lessee Improvements") described in plans and specifications previously approved by Lessor. The Lessee Improvements shall he constructed in accordance with the plans and specifications and in a good and workmanlike manner. 2. ACCEPTANCE OF PREMISES: Notwithstanding anything to the contrary in the Lease, Lessee's acceptance of the Premises or Lessee's submission of a "punch list" to Lessor not later than sixty (60) days after the Commencement Date shall not be deemed a waiver of Lessee's right to have latent defects in the Premises (excluding the Lessee Improvements) repaired at Lessor's sole expense. Lessee shall give notice to Lessor whenever any latent defect (i.e., any defect that could not reasonably have been discovered by Lessee) becomes reasonably apparent, and Lessor shall repair such defect as soon as practicable. Lessor also hereby assigns to Lessee all warranties with respect to the Premises which would reduce Lessee's maintenance obligations hereunder and shall cooperate with Lessee to enforce all such warranties. 3. COMPLIANCE WITH LAWS: At the Commencement Date, the Premises and the project in which the Premises are located ("Project") shall conform to all underwriter's requirements and all rules, regulations, statutes, ordinances, laws and building codes (collectively "Applicable Laws") applicable thereto, including, without limitation, all Applicable Laws governing Hazardous Materials, as defined in the Lease. Lessee shall not be required to construct or to pay the cost of complying with any underwriters requirements or Applicable Laws requiring construction of improvements in the Premises which are properly capitalized under generally accepted accounting principles, unless such compliance is necessitated solely because of Lessee's particular use of the Premises. Lessor represents and warrants that, to the best of its knowledge, there are no covenants, conditions, restrictions or encumbrances ("CC&R's") affecting the Project. 4. USE OF PREMISES: If the Premises should become not reasonably suitable for Lessee's use as a consequence of (i) cessation of utilities or other services; (ii) interference with access to the Premises; or (iii) legal restrictions, so long as items (i) through (iii) do not result from the fault of, or are beyond the control of, Lessor and Lessee, or the presence of any Hazardous Material which does not result from Lessee's use, storage or disposal of such Hazardous Material in or about the Premises, and in any of the foregoing cases the interference with Lessee's use of the Premises persists for one hundred twenty (120) continuous days, then Lessee shall be entitled to terminate this Lease. 26 5. ALTERATIONS, ADDITIONS AND IMPROVEMENTS: Notwithstanding anything to the contrary in the Lease: A. If Lessor has not consented to Lessee's request to construct alterations, utility installations, additions and improvements ("Alterations") in the Premises within three (3) business days after the date of Lessee's written request therefor, Lessor shall be deemed to have consented to the Alteration. B. Lessor shall have no lien or other interest whatsoever in any item of Lessee's trade fixtures and personal property located in the Premises, and shall execute any document reasonably necessary to waive any lien or interest in Lessee's trade fixtures and personal property located at the Premises. C. Upon request, Lessor shall advise Lessee in writing whether it reserves the right to require Lessee to remove any Alterations from the Premises upon termination of the Lease. D. Alterations and Lessee's trade fixtures, furniture, equipment and other personal property installed in the Premises ("Lessee's Property") shall at all times be and remain Lessee's Property, and Lessee shall be entitled to all depreciation, amortization and other tax benefits with respect thereto. Except for Alterations which cannot be removed without structural injury to the Premises, at any time Lessee may remove Lessee's Property from the Premises, provided Lessee repairs all damage caused by such removal. 6. EXPENSES: Notwithstanding anything to the contrary in the Lease, in no event shall Lessee have any obligation to perform, to pay directly, or to reimburse Lessor for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, commissions, charges, disbursements, attorneys' fees, experts' fees, costs and expenses (collectively "Costs"): A. LOSSES CAUSED BY OTHERS, CONSTRUCTION DEFECTS AND FAILURE TO BUILD IN COMPLIANCE WITH LAW: Costs to correct any construction defect in the Premises (other than in the Lessee Improvements) or the Project, or Costs arising out of a failure to construct the Building or common areas in accordance with all Applicable Laws and private restrictions. B. CASUALTIES, CONDEMNATIONS AND INSURANCE COSTS: Costs occasioned by fire, acts of God, or other casualties or by the exercise of the power of eminent domain or Costs for insurance coverage not customarily paid by tenants of similar projects in the vicinity of the Premises and/or co-insurance payments. C. CAPITAL LEASES AND CAPITAL IMPROVEMENTS: Lease payments and other Direct Expenses to acquire, install or replace capital machinery and equipment (such as air conditioners, elevators, and the like), and Costs which would properly be capitalized under generally accepted accounting principles and which relate to repairs, alterations, improvements, equipment and tools to the extent that Lessee's share of the total Cost of such capital item exceed (i) the reduction in other expenses payable by Lessee under the Lease which results from the capital repair or installation of the capital item; or (ii) in any year, the annual amortized cost of 2 27 the item based on its useful life determined in accordance with generally accepted accounting principles. D. STRUCTURAL REPAIRS: Costs relating to the replacement of the structural elements of the Building and Project. E. REIMBURSABLE EXPENSES: Costs for which Lessor has a right of reimbursement from others or Costs which Lessee pays directly to a third person. F. RESERVES: Depreciation, amortization or other expense reserves. G. MORTGAGES: Interest, charges and fees incurred on debt, payments on mortgagees and rent under ground leases. H. HAZARDOUS MATERIALS: Costs incurred to investigate the presence of any Hazardous Material, Costs to respond to any claim of Hazardous Material contamination or damage, Costs to remove any Hazardous Material from the Project or to remediate any Hazardous Material contamination and any judgments or other Costs incurred in connection with any Hazardous Material exposure or release, except to the extent the Cost is caused by the storage, use or disposal of the Hazardous Material in question by Lessee. (Lessee shall have no liability to Lessor or any of its officers, agents, partners or tenants as a consequence of the presence of Hazardous Materials in or about the Premises that were not used, stored, treated or disposed of in or about the Premises in violation of Applicable Law by Lessee or Lessee's agents, employees or contractors.) I. REAL ESTATE TAXES: Taxes, assessments, all other governmental levies, and any increases in the foregoing occasioned by or relating to a voluntary or involuntary change of ownership or other conveyance of the Premises. 7. SURRENDER: Notwithstanding anything to the contrary in the Lease, Lessee's obligations to surrender the Premises shall be fulfilled if Lessee surrenders possession of the Premises in the condition existing at the commencement of the Lease, except for ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Lessee in or about the Premises), and Alterations concerning which Lessor has not reserved the right to require removal, or if it has reserved the right the require removal, it does not elect to have Lessee remove from the Premises at the end of the term. 8. INDEMNITY: Notwithstanding anything to the contrary in the Lease, Lessor shall not be released from, and shall indemnify, defend, protect, and hold harmless Lessee from, all damages, liabilities, judgments, actions, claims, attorneys' fees, consultants' fees, payments, costs and expenses arising from the negligence or willful misconduct of Lessor or its employees, agents, contractors or invitees, Lessor's violation of Applicable Law, or a breach of Lessor's obligations or representations under this Lease. 9. ASSIGNMENT AND SUBLETTING: Lessee may, without Lessor's prior written consent, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, franchise, division or corporation controlled or under common control with Lessee; (ii) a successor corporation related to Lessee by merger, consolidation, non-bankruptcy reorganization, or government action; or 3 28 (iii) a purchaser of substantially all of Lessee's assets located at the Premises, so long as the purchaser, at the time of the purchase, has a net worth substantially the same as that of Lessee as of the date of its execution of the Lease. For the purpose of the Lease, sale of Lessee's capital stock through any public exchange shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. 10. RULES AND REGULATIONS: Lessor shall not require Lessee's compliance with any rule or regulation applicable to the Premises that unreasonably interferes with Lessee's use of the Premises or materially changes Lessee's rights under the Lease. 11. DEFAULT AND LATE CHARGE: Notwithstanding anything to the contrary in the Lease, Lessee shall not be deemed to be in default, Lessor shall not be entitled to cure any breach by Lessee under the Lease, nor shall any late charge or interest be imposed, on account of (i) Lessee's failure to pay money to Lessor, unless Lessee's failure to pay continues for five (5) days after Lessee's actual receipt of written notice of delinquency; or (ii) Lessee's failure to perform any covenant of this Lease (other than a covenant to pay money to Lessor), unless Lessee's failure to perform such covenant continues after Lessee's actual receipt of written notice for a period of thirty (30) days or such longer time as may reasonably be required to cure the default. Further, Lessee shall not be in default of this Lease solely because (a) it abandons or vacates the Premises; or (b) as a consequence of the filing of an involuntary bankruptcy petition, the appointment of a receiver, the attachment of any interest in the Lease or of Lessee's other assets or the exercise by any third party of any other remedy with respect to Lessee, Lessee's interest in this Lease or Lessee's other assets, unless the petition, receiver, attachment or other remedy is not discharged within sixty (60) days. 12. LESSOR'S ENTRY: Notwithstanding anything to the contrary in the Lease, Lessor and Lessor's agents, except in the case of emergency, shall provide Lessee with twenty-four (24) hours' notice prior to entry of the Premises. Such entry by Lessor and Lessor's agents shall not impair Lessee's operations more than reasonably necessary, and Lessor and Lessor's agents shall be accompanied at all times by an employee of Lessor. 13. APPROVALS: Whenever the Lease requires an approval, consent, designation, determination or judgment by either Lessor or Lessee, such approval. consent, designation, determination or judgment (including, without limiting the generality of the foregoing, those required in connection with assignment and subletting) shall not be unreasonably withheld or delayed and in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. 14. REASONABLE EXPENDITURES: Any expenditure by a party permitted or required under the Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred, and shall be substantiated by documentary evidence available for inspection and review by the other party or its representative during normal business hours. 4 29 15. OPTION TO EXTEND: Notwithstanding anything to the contrary in the Lease: A. GRANT OF OPTION: Lessor hereby grants to Lessee one option(s) (the "Option(s)" to extend the term of the Lease, each for an additional term five (5) years, commencing on May 1, 2000, upon the terms and conditions set forth in this Paragraph 15. B. EXERCISE OF OPTION: Lessee shall exercise such option by giving Lessor written notice of its intention not less than twelve (12) months prior to the expiration of the then-existing term of this Lease. C. EXTENDED TERM RENT: If this Option is exercised, the basic rent for the Premises shall be ninety-five percent (95%) of the then-current fair market monthly rent ("Fair Market Rent") for the Premises as of the commencement date of the applicable extended term, as determined by the agreement of the parties, or, if the parties cannot agree, then the Fair Market Rent shall be determined by three appraisers selected and governed by the Rules of the American Arbitration Association. All other terms and conditions contained in the Lease and this Addendum, as the same may be amended from time to time by the parties in accordance with the provisions of the Lease, shall remain in full force and effect and shall apply during the Option term. D. RESCISSION: Notwithstanding anything to the contrary contained in this paragraph, if the basic rent during the Option period is determined by appraisal and if Lessee does not, in its discretion, approve the rental amount established by such appraisal, Lessee may rescind its exercise of the Option not later than six (6) months prior to the last day of the Term by giving Lessor written notice of such election to rescind. If Lessee timely rescinds its exercise of the Option, then Lessee shall pay all costs and expenses of the appraisal. 16. DAMAGE AND DESTRUCTION OF PREMISES: Notwithstanding anything to the contrary contained in the Lease: A. Lessor shall not have the right to terminate the Lease if damage to or destruction of the Premises or the building in which the Premises is located, or both, results from a casualty ordinarily covered by insurance required to be carried by Lessor under the Lease. B. In the event of damage to the Premises which is not required to be covered by insurance, and is not covered by insurance actually carried, Lessor shall not have the right to terminate the Lease (i) if the damage is relatively minor (e.g., repair or restoration would take fewer than sixty (60) days or it would cost less than ten percent (10%) of the replacement cost of the Premises) or (ii) if Lessee agrees to pay the cost of repair in excess of ten percent (10%) of the then replacement cost of the Premises. C. If the Premises are damaged by any peril ant Lessor does not elect to terminate the Lease or is not entitled to terminate the Lease pursuant to its terms, then as soon as reasonably practicable, Lessor shall furnish Lessee with a written opinion of Lessor's architect or construction consultant as to when the restoration work required of Lessor may be completed. Lessee shall have the option to terminate the Lease in the event any of the following occurs, which option may be exercised by delivery to Lessor of a written notice of election to terminate within thirty (30) days after Lessee receives from Lessor the estimate of the time needed to 5 30 complete such restoration: (i) the Premises, with reasonable diligence, cannot be fully repaired by Lessor within one hundred twenty (120) days after the damage or destruction; or (ii) if the Premises are damaged by any peril within twelve (12) months of the last day of term, and cannot be substantially restored within sixty (60) days after the date of such damage. D. If the Lease is not terminated by Lessor or Lessee as provided herein, Lesser shall restore the Premises and all tenant improvements installed by Lessor to the condition in which they existed immediately prior to the casualty. 17. TAXES AND ASSESSMENTS: Notwithstanding anything to the contrary contained in the Lease, if any assessments are levied against the Project or Premises, Lessor may elect to either pay the assessment in full or allow the assessment to go to bond and pay it in installments. In either case, however, Lessee shall only be obligated to pay to Lessor with regard to such assessment, a sum equal to that which would have been payable by Lessee with respect to installments of principal and interest which would have become due during the Lease term had Lessor allowed the assessment to go to bond. 18. LESSEE'S RIGHT TO BRING TAX PROCEEDING: Lessee shall have the right to contest, in good faith, the validity or the amount of any tax or assessment levied against the entire demised premises by such appellate or other proceedings as may be appropriate in the jurisdiction, and may defer payment of such obligation, pay same under protest, or take such steps as Lessee may deem appropriate. Lessor shall cooperate in the institution and prosecution of any such proceedings, including permitting the action to be brought in the name of the Lessor, and will execute any documents required therefor. The expense of such proceedings shall be borne by the Lessee and any refunds or rebates secured shall belong to the Lessee. 19. LESSOR'S REPRESENTATIONS: To the best of Lessor's knowledge: (i) the Premises and the operations conducted thereon prior to the Commencement Date are in compliance with all Applicable Laws regarding Hazardous Materials; and (ii) handling, transportation, storage, treatment, disposal, release or use of Hazardous Materials that has occurred on or about the Premises or the Project or the soil, groundwater or surface water thereof prior to the Commencement Date have been in compliance with all Applicable Laws. Also to the best of Lessor's knowledge, no litigation has been brought or threatened, nor any settlements reached with any governmental or private party, concerning the actual or alleged presence or Hazardous Materials on or about the Premises or Project, or the soil, groundwater or surface water thereof, nor has Lessor received any notice of any violation or alleged violation of any Applicable Laws, pending claims or pending investigations with respect to the presence of Hazardous Materials on or about the Premises or Project, or the soil, groundwater or surface water thereof. Lessee, its agents, employees, contractors, officers, directors, shareholders, successors or assigns shall not be responsible for, and Lessor shall indemnify, defend with counsel reasonably acceptable to Lessee and hold Lessee harmless against, (i) any claim, remediation obligation, investigation obligation, liability, cause of action, penalty, attorneys' fee, consultants' cost, expense or damage owing or alleged to be owing with respect to any Hazardous Materials present on or about the Premises or the Project, or the soil, groundwater or surface water thereof; or (ii) the removal, investigation, monitoring or remediation of any Hazardous Material present on or about the Premises or the Project, or the soil, groundwater or surface water thereof with respect to the Premises or the Project and caused by any source, including third parties, other than Lessee, prior 6 31 the Commencement Date. Lessor's representations under this Paragraph shall survive the termination of the Lease. 20. RECOGNITION: Lessor hereby represents that as of the date of both parties' execution of the Lease, there is no loan, mortgage, deed of trust or ground lease affecting the Premises or Project other than a first deed of trust in favor of Home Savings & Loan ("Lender"). As a condition to Lessee's obligations under this Lease, Lessor, within a reasonable period of time after the date of execution of this Lease by both parties, but in any event not later than ninety (90) days after that execution date, shall provide Lessee with a recognition and non-disturbance agreement, in form reasonably satisfactory to Lender, Lessor and Lessee, from Lender providing for recognition of Lessee's interests hereunder in the event of a foreclosure of Lender's security interest. 21. CAPITAL IMPROVEMENTS: Any replacement or repair by Lessor of any items of a capital nature located within the Premises shall be of Substantially the same quality as the item to be repaired or replaced. 22. EXCESS RENTS: Notwithstanding anything to the contrary in the Lease, if Lessee enters a permissible assignment or sublet pursuant to the Lease as amended by Paragraph 9 of this Second Addendum, Lessee shall deliver to Lessor fifty percent (50%) of any consideration payable to Lessee thereunder in excess of the Rent payable by Lessee under the Lease, after deducting therefrom all reasonable costs necessary to effect the assignment or sublet, including, without limitation, brokerage and attorneys' fees, advertising costs, redecorating costs, and the cost to Lessee of the installation of the Lessee Improvements in the Premises. 23. EFFECT OF SECOND ADDENDUM: In the event of any inconsistency between this Second Addendum and/or the Exhibits hereto and the Lease Form, and any of the other addenda, riders, exhibits, rules, regulations, covenants, attachments, conditions, and restrictions referred to in the Lease Form and the Addendum, the terms of this Second Addendum and the Exhibits hereto shall prevail. As used herein, the term "Lease" shall mean the Lease Form, the Addendum, this Second Addendum and all addenda, riders, exhibits, rules, regulations, covenants, conditions and restrictions referred to in the Lease Form or this Addendum. 7 32 LESSOR: LESSEE: MV 440, INC., QUICKTURN SYSTEMS, INC. a California corporation a California corporation By: /s/ William J. Hurwick By: /s/ Dennis Favero ------------------------------- ------------------------------ Printed Printed Name: William J. Hurwick Name: Dennis Favero ----------------------------- ---------------------------- Title: Title: VP/CFO ---------------------------- --------------------------- Date: 3/17/93 Date: 3/17/93 ------------------------------- ---------------------------- 8 33 Attachment E (Exhibit B-2) AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, March 17, 1993, is made by and between MV 440, INC,. a California corporation ("LESSOR") and QUICKTURN SYSTEMS. INC., a California corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 440 Clyde Avenue, Mountain View, located in the County of Santa Clara, State of California and generally described as (describe briefly the nature of the property) that improved property referred to as 440 Clyde Avenue, also described as APN# 160-57-009, consisting of the second floor of a two-story building, which is approximately 17,636 square feet of office/R&D space ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: six (6) years and four (4) months ("ORIGINAL TERM") commencing January 1, 1994 ("COMMENCEMENT DATE"), and ending April 30, 2000 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: N/A ("Early Possession Date") (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $12,663.50 per month ("BASE RENT"), payable on the first (1st) day of each month commencing January 1, 1994. (See Paragraph 4 for further provisions.) [X] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: N/A 1.7 SECURITY DEPOSIT: N/A ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Office, administration, research and development and all other uses legally permitted by City of Mountain View. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Cornish & Carey Commercial represents [X] Lessor exclusively ("LESSOR'S BROKER"); [ ] both LESSOR and LESSEE, and Wayne Mascia Associates represents [X] Lessee exclusively ("LESSEE'S BROKER"); [ ] both LESSEE and LESSOR. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 50 and a Second Addendum to Lease all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, roof and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3 (a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does 34 not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that unreasonably disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control in violation of any Applicable Law. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the reasonable recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraph 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, PAGE 2 35 doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for more than seven (7) years, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises) 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-quarter times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, content the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one quarter times the amount of such contested lien claim or demand indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations, and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor only if Lessee has requested Lessor's decision on such removal in writing. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. PAGE 3 36 (b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such later amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence or that of its agents, employees, invitees or contractors and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except to the extent caused by the negligence or willful misconduct of Lessor, its agents, employees, contractors or invitees, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, tire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits Involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total PAGE 4 37 cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefore. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate as of the date of the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of negligence or willful misconduct of Lessee. In the event, however, that the damage or destruction was caused by the negligence, or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds for adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. It Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified In Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be the equal monthly amount which, over the number of months remaining before the month in which the applicable tax PAGE 5 38 installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36 which consent shall not be unreasonably withheld or delayed. (b) Deleted. (c) Deleted. (d) Deleted. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) Deleted. (h) Deleted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that unless a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) Deleted. (c) Any matter of thing requiring the consent of the sublessor under the sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by either party in connection with a Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice PAGE 6 39 of Default, and that either party may include the cost of such services and costs in said notice as due and payable to cure said Default. A "DEFAULT" is defined as a failure by either party to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following receipt or written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information, which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of twenty (20) days following receipt of written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors: (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within sixty (60) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not within sixty (60) days; provided; however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee of any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a guarantor's breach of its guaranty obligation on an anticipatory breach basis and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination: (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as It becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined In Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after receipt of notice from Lessor that such amount shall be due, then, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor Page 7 40 will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided however that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKERS FEE. 15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Deleted 15.4 Deleted 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend, and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 It Lessor desires to finance, refinance. or sell the Premises any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of an other provision hereof. 19. INTEREST ON PAST-Due Obligations. Any monetary payment due Lessor hereunder other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Broker that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to the Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail with postage prepaid or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any PAGE 8 41 subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECTS; CHOICE OF LAW. This lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessee under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address has been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice, the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provision of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance ("NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any option to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided however, that, upon written request from Lessor or a Lender or Lessee in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith only if a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to: provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for a Lessor consent pertaining to this Lease for the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessor under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give (a) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. PAGE 9 42 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meanings: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Deleted. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or review this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid, or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provision of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due or (ii) Lessor gives to Lessee three or more notices of Default under Paragraph 13.1 during any twelve month period that remain uncured. 40. MULTIPLE BUILDINGS. If the premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees, and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps, and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at Palo Alto Executed at Palo Alto on March 17, 1993 on March 17, 1993 by LESSOR: by LESSEE: MV 440, INC., QUICKTURN SYSTEMS, INC. - ------------------------------- ------------------------------- a California corporation a California corporation - ------------------------------- ------------------------------- By: By: ---------------------------- ----------------------------- Name Printed: William J. Hurwick Name Printed: Dennis Favero Title: Title: VP/CFO ------------------------- --------------------------- PAGE 10 43 NOTICES TO BE SENT TO: By: ------------------------------- Name Printed: William J. Hurwick/WJH Group Name Printed: ---------------------- Title: Cornish & Carey Commercial Title: ----------------------------- Address: 400 Hamilton Avenue Address: --------------------------- Palo Alto, CA 94301 Tel. No. (415) 688-8550 Fax No. Tel. No. (____) ________ Fax. No. (415) 321-0719 (___)__________ PAGE 11 44 Attachment F (Exhibit B-2) ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET DATED MARCH 17, 1993 BY AND BETWEEN MV 440, INC. ("LESSOR") AND QUICKTURN SYSTEMS, INC. ("LESSEE"), A CALIFORNIA CORPORATION 49. Payment of Direct As additional rent during the term hereof, Expenses: Lessee shall pay to Lessor direct expenses ("Direct Expenses") incurred by Lessor in the operation and maintenance of the Premises (including all direct costs of management for the Project, which shall be fixed at $1,000.00 per month for the term of this Lease), real property taxes, insurance premiums, maintenance contracts for the repair and maintenance of the heating, ventilating and air-conditioning system and landscaping. Lessor estimates that Direct Expenses for the Premises (including the costs of management for the Project applicable to the Premises) during the first calendar year of the Lease term hereunder will be the equivalent of $3,878.81 per month. Accordingly, during the first year of the Lease term, Lessee shall pay to Lessor $3,878.81 per month as additional rent attributable to Direct Expenses. At the commencement of each year of the term hereof, Lessor will notify Lessee of the monthly amount to be paid for Direct Expenses for that year. Lessee shall have the right to audit Lessor's books and records with respect to Direct Expenses within thirty (30) days after receipt from Lessor of the new calculation of Direct Expenses. If the audit discloses that an overpayment was required of Lessee, Lessor, as soon as reasonably practical, shall refund the excess amount overpaid by Lessee. If the audit discloses that Lessee has underpaid the Direct Expenses, Lessee shall pay the excess amount owing to Lessor as soon as reasonably practical. 50. Roof and HVAC Lessor shall be responsible for all roof Warranty; Building maintenance (other than maintenance needed due Systems: to Lessee's negligence) for the period from May 1, 1993 through April 30, 1994. Lessor also shall warrant the HVAC system to be in working order and be responsible for all parts/components replacement for the period from May 1, 1993 through April 30, 1994. Notwithstanding the foregoing, as of the Commencement Date, the Premises shall be in broom-clean condition, and all utilities, HVAC systems, plumbing, electrical (including, without limitation, outlets and light fixtures) and fire and landscape sprinkler systems ("Building Systems") shall be in good working order and repair. Lessor's Lessee's Initials: ____ Initials: _____ 45 Attachment G (Exhibit B-2) SECOND ADDENDUM TO LEASE THIS SECOND ADDENDUM TO LEASE ("Addendum") is dated for reference purposes only as of March 17, 1993, and is made between MV 440, INC., a California corporation ("Lessor") and QUICKTURN SYSTEMS, INC., a California corporation ("Lessee"), to be a part of that certain Standard Industrial/Commercial Single-Tenant Lease-Net of even date herewith between Lessor and Lessee (herein the Please Form "Lease Form") concerning 17,636 square feet of space (the "Premises") located on the second floor of the two-story building ("Building") located at 440 Clyde Avenue, Mountain View, California. 1. LESSEE IMPROVEMENTS: The parties acknowledge that, at Lessee's sole cost and expense, Lessee shall construct certain non-structural improvements (the "Lessee Improvements") described in plans and specifications previously approved by Lessor. The Lessee Improvements shall be constructed in accordance with the plans and specifications and in a good and workmanlike manner. 2. ACCEPTANCE OF PREMISES: Notwithstanding anything to the contrary in the Lease, Lessee's sole acceptance of the Premises or Lessee's submission of a "punch list" to Lessor not later than sixty (60) days after the Commencement Date shall not be deemed a waiver of Lessee's right to have latent defects in the Premises (excluding the Lessee Improvements) repaired at Lessor's sole expense. Lessee shall give notice to Lessor whenever any latent defect (i.e., any defect that could not reasonably have been discovered by Lessee) becomes reasonably apparent, and Lessor shall repair such defect as soon as practicable. Lessor also hereby assigns to Lessee all warranties with respect to the Premises which would reduce Lessee's maintenance obligations hereunder and shall cooperate with Lessee to enforce all such warranties. 3. COMPLIANCE WITH LAWS: At the Commencement Date, the Premises and the project in which the Premises are located ("Project") shall conform to all underwriter's requirements and all rules, regulations, statutes, ordinances, laws and building codes (collectively "Applicable Laws") applicable thereto, including, without limitation, all Applicable Laws governing Hazardous Materials, as defined in the Lease. Lessee shall not be required to construct or to pay the cost of complying with any underwriters requirements or Applicable Laws requiring construction of improvements in the Premises which are properly capitalized under generally accepted accounting principles, unless such compliance is necessitated solely because of Lessee's particular use of the Premises. Lessor represents and warrants that, to the best of its knowledge, there are no covenants, conditions, restrictions or encumbrances ("CC&R's") affecting the Project. 4. USE OF PREMISES: If the Premises should become not reasonably suitable for Lessee's use as a consequence of (i) cessation of utilities or other services; (ii) interference with access to the Premises; or (iii) legal restrictions, so long as items (i) through (iii) do not result from the fault of, or are beyond the control of, Lessor and Lessee, or the presence of any Hazardous Material which does not result form Lessee's use, storage or disposal of such Hazardous Material in or about the Premises, and in any of the foregoing cases the interference with Lessee's use of the Premises persists for one hundred twenty (120) continuous days, then Lessee shall be entitled to terminate this Lease. 46 5. ALTERATIONS, ADDITIONS AND IMPROVEMENTS: Notwithstanding anything to the contrary in the Lease: A. If Lessor has not consented to Lessee's request to construct alterations, utility installations, additions and improvements ("Alterations") in the Premises within three (3) business days after the date of Lessee's written request therefor, Lessor shall be deemed to have consented to the Alteration. B. Lessor shall have no lien or other interest whatsoever in any item of Lessee's trade fixtures and personal property located in the Premises, and shall execute any document reasonably necessary to waive any lien or interest in Lessee's trade fixtures and personal property located at the Premises. C. Upon request, Lessor shall advise Lessee in writing whether it reserves the right to require Lessee to remove any Alterations from the Premises upon termination of the Lease. D. Alterations and Lessee's trade fixtures, furniture, equipment and other personal property installed in the Premises ("Lessee's Property") shall at all times be and remain Lessee's Property, and Lessee shall be entitled to all depreciation, amortization and other tax benefits with respect thereto. Except for Alterations which cannot be removed without structural injury to the Premises, at any time Lessee may remove Lessee's Property from the Premises, provided Lessee repairs all damage caused by such removal. 6. EXPENSES: Notwithstanding anything to the contrary in the Lease, in no event shall Lessee have any obligation to perform, to pay directly, or to reimburse Lessor for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, commissions, charges, disbursements, attorneys' fees, experts' fees, costs and expenses (collectively "Costs"): A. Losses Caused By Others, Construction Defects and Failure to Build In Compliance With Law: Costs to correct any construction defect in the Premises (other than in the Lessee Improvements) or the Project, or Costs arising out of a failure to construct the Building or common areas in accordance with all Applicable Laws and private restrictions. B. Casualties, Condemnations and Insurance Costs: Costs occasioned by fire, acts of God, or other casualties or by the exercise of the power of eminent domain or Costs for insurance coverage not customarily paid by tenants of similar projects in the vicinity of the Premises and/or co-insurance payments. C. Capital Leases and Capital Improvements: Lease payments and other Direct Expenses to acquire, install or replace capital machinery and equipment (such as air conditioners, elevators, and the like), and Costs which would properly be capitalized under generally accepted accounting principles and which relate to repairs, alterations, improvements, equipment and tools to the extent that Lessee's share of the total Cost of such capital item exceed (i) the reduction in other expenses payable by Lessee under the Lease which results from the capital repair or installation of the capital item; or (ii) in any year, the annual amortized cost of 2 47 the item based on its useful life determined in accordance with generally accepted accounting principles. D. Structural Repairs: Costs relating to the replacement of the structural elements of the Building and Project. E. Reimbursable Expenses: Costs for which Lessor has a right of reimbursement from others or Costs which Lessee pays directly to a third person. F. Reserves: Depreciation, amortization or other expense reserves. G. Mortgages: Interest, charges and fees incurred on debt, payments on mortgages and rent under ground leases. H. Hazardous Materials: Costs incurred to investigate the presence of any Hazardous Materials, Costs to respond to any claim of Hazardous Material contamination or damage, Costs to remove any Hazardous Material from the Project or to remediate any Hazardous Material contamination and any judgments or other Costs incurred in connection with any Hazardous Material exposure or release, except to the extent the Cost is caused by the storage, use or disposal of the Hazardous Material in question by Lessee. (Lessee shall have no liability to Lessor or any of its officers, agents, partners or tenants as a consequence of the presence of Hazardous Materials in or about the Premises that were not used, stored, treated or disposed of in or about the Premises in violation of Applicable Law by Lessee or Lessee's agents, employees or contractors.) I. Real Estate Taxes: Taxes, assessments, all other governmental levies, and any increases in the foregoing occasioned by or relating to a voluntary or involuntary change of ownership or other conveyance of the Premises. 7. SURRENDER: Notwithstanding anything to the contrary in the Lease, Lessee's obligations to surrender the Premises shall be fulfilled if Lessee surrenders possession of the Premises in the condition existing at the commencement of the Lease, except for ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Materials (other than those stored, used or disposed of by Lessee in or about the Premises), and alterations concerning which Lessor has not reserved the right to require removal, or if it has reserved the right of removal, it does not elect to have Lessee remove from the Premises at the end of the term. 8. INDEMNITY: Notwithstanding anything to the contrary in the Lease, Lessor shall not be released from, and shall indemnify, defend, protect, and hold harmless Lessee from, all damages, liabilities, judgments, actions, claims, attorneys' fees, consultants' fees, payments, costs and expenses arising from the negligence or willful misconduct of Lessor or its employees, agents, contractors or invitees, Lessor's violation of Applicable Law, or a breach of Lessor's obligations or representations under this Lease. 9. ASSIGNMENT AND SUBLETTING: Lessee may, without Lessor's prior written consent, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, franchisee, division or corporation controlled or under common control with Lessee; (ii) a successor corporation related to Lessee by merger, consolidation, non-bankruptcy reorganization, or government 3 48 action; or (iii) a purchaser of substantially all of Lessee's assets located at the Premises, so long as the purchaser, at the time of the purchase, has a net worth substantially the same as that of Lessee as of the date of its execution of the Lease. For the purpose of the Lease, sale of Lessee's capital stock through any public exchange shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. 10. RULES AND REGULATIONS: Lessor shall not require Lessee's compliance with any rule or regulation applicable to the Premises that unreasonably interferes with Lessee's use of the Premises or materially changes Lessee's rights under the Lease. 11. DEFAULT AND LATE CHARGE: Notwithstanding anything to the contrary in the Lease, Lessee shall not be deemed to be in default, Lessor shall not be entitled to cure any breach by Lessee under the Lease, nor shall any late charge or interest be imposed, on account of (i) Lessee's failure to pay money to Lessor, unless Lessee's failure to pay continues for five (5) days after Lessee's actual receipt of written notice of delinquency; or (ii) Lessee's failure to perform any covenant of this Lease (other than a covenant to pay money to Lessor), unless Lessee's failure to perform such covenant continues after Lessee's actual receipt of written notice for a period of thirty (30) days or such longer time as may reasonably be required to cure the default. Further, Lessee shall not be in default of this Lease solely because (a) it abandons or vacates the Premises; or (b) as a consequence of the filing of an involuntary bankruptcy petition, the appointment of a receiver, the attachment of any interest in the Lease or of Lessee's other assets or the exercise by any third party of any other remedy with respect to Lessee, Lessee's interest in this Lease or Lessee's other assets, unless the petition, receiver, attachment or other remedy is not discharged within sixty (60) days. 12. LESSOR'S ENTRY: Notwithstanding anything to the contrary in the Lease, Lessor and Lessor's agents, except in the case of emergency, shall provide Lessee with twenty-four (24) hours' notice prior to entry of the Premises. Such entry by Lessor and Lessor's agents shall not impair Lessee's operations more than reasonably necessary, and Lessor and Lessor's agents shall be accompanied at all times by an employee of Lessee. 13. APPROVALS: Whenever the Lease requires an approval, consent, designation, determination or judgment by either Lessor or Lessee, such approval, consent, designation, determination or judgment (including, without limiting the generality of the foregoing, those required in connection with assignment and subletting) shall not be unreasonably withheld or delayed and in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. 14. REASONABLE EXPENDITURES: Any expenditure by a party permitted or required under the Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred, and shall be substantiated by documentary evidence available for inspection and review by the other party or its representative during normal business hours. 15. OPTION TO EXTEND: Notwithstanding anything to the contrary in the Lease: 4 49 A. Grant of Option: Lessor hereby grants to Lessee one option(s) (the "Option(s)") to extend the term of the Lease, each for an additional term five (5) years, commencing on May 1, 2000, upon the terms and conditions set forth in this Paragraph 15. B. Exercise of Option: Lessee shall exercise such option by giving Lessor written notice of its intention not less than twelve (12) months prior to the expiration of the then-existing term of the Lease. C. Extended Term Rent: If this Option is exercised, the basic rent for the Premises shall be ninety-five percent (95%) of the then-current fair market monthly rent ("Fair Market Rent") for the Premises as of the commencement date of the applicable extended term, as determined by the agreement of the parties, or, if the parties cannot agree, then the Fair Market Rent shall be determined by three appraisers selected and governed by the Rules of the American Arbitration Association. All other terms and conditions contained in the Lease and this Addendum, as the same may be amended from time to time by the parties in accordance with the provisions of the Lease, shall remain in full force and effect and shall apply during the Option term. D. Rescission: Notwithstanding anything to the contrary contained in this paragraph, if the basic rent during the Option period is determined by appraisal and if Lessee does not, in its discretion, approve the rental amount established by such appraisal, Lessee may rescind its exercise of the Option not later than six (6) months prior to the last day of the Term by giving Lessor written notice of such election to rescind. If Lessee timely rescinds its exercise of the Option, then Lessee shall pay all costs and expenses of the appraisal. 16. DAMAGE AND DESTRUCTION OF PREMISES: Notwithstanding anything to the contrary contained in the Lease: A. Lessor shall not have the right to terminate the Lease if damage to or destruction of the Premises or the building in which the Premises is located, or both, results from a casualty ordinarily covered by insurance required to be carried by Lessor under the Lease. B. In the event of damaged to the Premises which is not required to be covered by insurance, and is not covered by insurance actually carried, Lessor shall not have the right to terminate the Lease (i) if the damage is relatively minor (e.g., repair or restoration would take fewer than sixty (60) days or it would cost less than ten percent (10%) of the replacement cost of the Premises) or (ii) if Lessee agrees to pay the cost of repair in excess of ten percent (10%) of the then replacement cost of the Premises. C. If the Premises are damaged by any peril and Lessor does not elect to terminate the Lease or is not entitled to terminate the Lease pursuant to its terms, then as soon as reasonably practicable, Lessor shall furnish Lessee with a written opinion of Lessor's architect or construction consultant as to when the restoration work required of Lessor may be completed. Lessee shall have the option to terminate the Lease in the event any of the following occurs, which option may be exercised by delivery to Lessor of a written notice of election to terminate within thirty (30) days after Lessee receives from Lessor the estimate of the time needed to complete such restoration: (i) the Premises, with reasonable diligence, cannot be fully repaired 5 50 by Lessor within one hundred twenty (120) days after the damage or destruction; or (ii) if the Premises are damaged by any peril within twelve (12) months of the last day of term, and cannot be substantially restored within sixty (60) days after the date of such damage. D. If the Lease is not terminated by Lessor or Lessee as provided herein, Lessor shall restore the Premises and all tenant improvements installed by Lessor to the condition in which they existed immediately prior to the casualty. 17. TAXES AND ASSESSMENTS: Notwithstanding anything to the contrary contained in the Lease, if any assessments are levied against the Project or Premises, Lessor may elect to either pay the assessment in full or allow the assessment to go to bond and pay it in installments. In either case, however, Lessee shall only be obligated to pay to Lessor with regard to such assessment, a sum equal to that which would have been payable by Lessee with respect to installments of principal and interest which would have become due during the Lease term had Lessor allowed the assessment to go to bond. 18. LESSEE'S RIGHT TO BRING TAX PROCEEDING: Lessee shall have the right to consent, in good faith, the validity or the amount of any tax or assessment levied against the entire demised premises by such appellate or other proceedings as may be appropriate in the jurisdiction, and may defer payment of such obligation, pay same under protest, or take such steps as Lessee may deem appropriate. Lessor shall cooperate in the institution and prosecution of any such proceedings, including permitting the action to be brought in the name of the Lessor, and will execute any documents required therefor. The expense of such proceedings shall be borne by the Lessee and any refunds or rebates secured shall belong to the Lessee. 19. LESSOR'S REPRESENTATIONS: To the best of Lessor's knowledge: (i) the Premises and the operations conducted thereon prior to the Commencement Date are in compliance with all Applicable Laws regarding Hazardous Materials; and (ii) handling, transportation, storage, treatment, disposal, release or use of Hazardous Materials that has occurred on or about the Premises or the Project or the soil, groundwater or surface water thereof prior to the Commencement Date have been in compliance with all Applicable Laws. Also to the best of Lessor's knowledge, no litigation has been brought or threatened, nor any settlements reached with any governmental or private party, concerning the actual or alleged presence or Hazardous Materials on or about the Premises or Project, or the soil, groundwater or surface water thereof, nor has Lessor received any notice of any violation or alleged violation of any Applicable Laws, pending claims or pending investigations with respect to the presence of Hazardous Materials on or about the Premises or Project, or the soil, groundwater or surface water thereof. Lessee, its agents, employees, contractors, officers, directors, shareholders, successors or assigns shall not be responsible for, and Lessor shall indemnify, defend with counsel reasonably acceptable to Lessee and hold Lessee harmless against, (i) any claim, remediation obligation, investigation obligation, liability, cause of action, penalty, attorneys' fee, consultants' cost, expense or damage owing or alleged to be owing with respect to any Hazardous Material present on or about the Premises or the Project, or the soil, groundwater or surface water thereof; or (ii) the removal, investigation, monitoring or remediation of any Hazardous Material present on or about the Premises or the Project, or the soil, groundwater or surface water thereof with respect to the Premises or the Project and caused by any source, including third parties, other than Lessee, prior 6 51 the Commencement Date. Lessor's representations under this Paragraph shall survive the termination of the Lease. 20. RECOGNITION: Lessor hereby represents that as of the date of both parties' execution of the Lease, there is no loan, mortgage, deed of trust or ground lease affecting the Premises or Project other than a first deed of trust in favor of Home Savings & Loan ("Lender"). As a condition to Lessee's obligations under this Lease, Lessor, within a reasonable period of time after the date of execution of this Lease by both parties, but in any event not later than ninety (90) days after that execution date, shall provide Lessee with a recognition and non-disturbance agreement, in form reasonably satisfactory to Lender, Lessor and Lessee, from Lender providing for recognition of Lessee's interests hereunder in the event of a foreclosure of Lender's security interest. LESSOR: LESSEE: MV 440, INC., QUICKTURN SYSTEMS, INC. a California corporation a California corporation By: /s/ William J. Hurwick By: /s/ Dennis Favero ------------------------------- ------------------------------ Printed Printed Name: William J. Hurwick Name: Dennis Favero ----------------------------- ---------------------------- Title: Title: VP/CFO ---------------------------- --------------------------- Date: 3/17/93 Date: 3/17/93 ------------------------------- ---------------------------- 7 EX-10.13 3 PRICING GUIDE TO RESELLER AGREEMENT 1 EXHIBIT 10.13 PRICING INTRODUCTION The following pricing guide is intended to help select the correct product, configuration, and pricing to meet the different needs of your customer. Marimba uses a concept called value based pricing. A Licensee who receives more value from Castanet will pay more than those where the value of Castanet is less. "Value" is determined by the number of Applications, the number of Endpoints deployed, and whether the Tuner is customized to the Licensee's specific needs. For the Infrastructure Suite, there are two primary pricing models to work from: Enterprise pricing and Internet pricing. INFRASTRUCTURE SUITE PRICING MODELS ENTERPRISE PRICING: The Enterprise pricing model refers to any use of Castanet in a business to business application. The Endpoints for distribution are known to the Licensee and can include employees, customers, business partners, etc. Examples include all intra-company uses and other business to business uses such as car manufacturer to supplier or car dealer, or an airline to its travel agents. Most sales opportunities will be priced based on Enterprise pricing; thus this pricing should be discussed first as a matter of practice. While there are many indexes upon which to determine value for the Enterprise, Marimba has chosen scalability and the ability to customize as the value indexes for pricing for the Enterprise. Enterprise pricing is based first on the number of access licenses required, and second, on whether the Licensee will customize the Tuner for use by third-parties. Scalability: Access licenses are the basic building block for determining pricing. Any computer ("Endpoint") receiving updates from Castanet must be licensed with an access license. One benefit of this pricing is that there is no pricing impact of architecture decisions on how to install Castanet Enterprise Transmitters. These servers (Transmitters) do not receive Castanet updates as Endpoints and thus are not charged for. The cost is placed on the Endpoint access license and not the support infrastructure. There are two primary categories of access licenses: User Access License (UAL) and Application Access License (AAL). User Access Licenses: A User Access License permits use of the Castanet Infrastructure Suite to deploy and manage applications or other data for use by one user on one Endpoint. Application Access Licenses: An Application Access License permits use of the Castanet Infrastructure Suite to deploy and manage a Single Application for use by one user on one Endpoint. A "Single Application" is one Castanet channel containing data or an application with one specific purpose or related set of functionality. By way of example only, a word-processor and a spreadsheet program would not constitute a Single Application even if both were run as a single Castanet channel or were incorporated into the same general suite of applications. The name and primary function of each Single Application must be designated in the Order Form. Page 1 2 With both UALs and AALs, an additional license is required for each individual user of an Endpoint. The concept of Access Licenses also applies to computer servers which act as Endpoints. Castanet Server Access License (SAL): A Server Access License permits use of the Castanet Infrastructure Suite to deploy and manage applications or other data on one Endpoint computer server. An Endpoint computer server licensed with an SAL may not deploy or manage applications or other data on Endpoints for which Licensee has not purchased an Access License. Some examples of Endpoint computer servers are Database Servers, Web Servers, Production Line Servers, File Servers and Point of Sale Servers. Castanet Server Application Access License (SAAL): A Server Application Access License permits use of the Castanet Infrastructure Suite to deploy and manage a Single Application on one Endpoint computer server. An Endpoint computer server licensed with an SAAL may not deploy or manage applications or other data on Endpoints for which Licensee has not purchased an Access License. A "Single Application" is defined above. The Ability to Customize: There is significant value in customizing the Tuner and thereafter distributing the customized Tuner to employees or third parties, and therefore, the Licensee must pay a premium for such usage. If the Licensee has a need to customize the Tuner for internal deployment, they must purchase a Tuner Customization Kit. If the deployment will be external, the Licensee is required to customize the Tuner and must purchase a Custom Redistribution License. Page 3 of this guide provides examples of when you would need either of these licenses. INTERNET PRICING: The Internet pricing model may only be used when the Endpoint is unknown and uncontrolled by the Licensee. Examples include a news service and its readers or a stock price tracker and its users. To qualify for an Internet Edition Transmitter, a channel: 1. Must be on a publicly available Transmitter. That is, any Internet user can access the Transmitter and its channels. 2. Must not require identification or registration of any kind. 3. Must not require payment for access to or use of the channels. Infrastructure Suite - Internet Edition (NET): Internet pricing is based upon the number of Castanet Internet Edition Transmitters required to serve the user base. An Internet Edition Transmitter is governed by the computing hardware and the bandwidth of the network connection and not limited by the Transmitter software. Infrastructure Suite - Internet Single Application Edition (ISA): This is similar to the Infrastructure Suite - Internet Single Edition except that the Internet Single Application Edition Transmitter may make only one Single Application available through the Internet. MANAGEMENT AND PRODUCTION SUITE PRICING MODEL: Page 2 3 MANAGEMENT SUITE PRICING: The Management Suite pricing model is per "User". Each "User" who has any access to any of the components of the Management Suite must have a separate license. PRODUCTION SUITE PRICING: The Production Suite pricing model is per "User". Each "User" who has any access to any of the components of the Production Suite must have a separate license. Page 3 4 ISSUE #1 SELLING REQUIREMENTS What products are required when selling a Castanet solution? Employee/Non-Employee REQUIRED: Infrastructure Suite and Management Suite A Management Suite (CMS) must be part of every CIS order. This is because the Tuner Packager (part of the CMS) is required to generate a Tuner that updates from the Licensee's own Transmitter, thus providing full control of when updates occur. ISSUE #2 DISTRIBUTING TUNERS What does the Licensee need in order to distribute Tuners? To: Employee To: Non-Employee REQUIRED: REQUIRED: nothing CRL (Custom Redistribution License) In other words, if your customer is going to be deploying Tuners outside of their organization, they need a CRL. In addition, it is important to note that the Licensee is required to re-brand the Tuner when deploying to non-employees (see below for further explanation). ISSUE #3 BRANDING TUNERS To: Employee To: Non-Employee REQUIRED: REQUIRED: nothing CRL (Custom Redistribution OPTIONAL: License) Tuner Customization Kit Page 4 5 What is the CUSTOM REDISTRIBUTION LICENSE or CRL? The CRL consists of A. a written CRL license which permits a customer to redistribute a Tuner to non-employees (sometimes referred to as "third-parties") and B. the Tuner Customization Kit. A. What is in the CRL license? 1. a license grant which permits distribution of customized Tuners, 2. user interface branding guidelines 3. additional provisions which protect Marimba from any liability which might arise from distribution of the Tuner For example, if the customer is a brokerage house distributing a trading application as a channel in the Tuner, we need to protect Marimba from any potential liability arising from failure of that application, such as if it fails to properly execute trades. B. What is the Tuner Customization Kit? 1. a set of documentation which provides "how to" technical guidance on how to customize or "brand" the user interface of the Tuner. 2. additional Castanet software components which are used when publishing the customized Tuner. The Tuner Customization Kit is included with the CRL and is available for sale separately to customers who do not need a CRL because they are deploying Tuners only to employees. Branding Guidelines are required with the CRL, what are they? The CRL license contains user interface requirements (sometimes referred to as "branding guidelines") which require that certain changes be made to the user interface of the Tuner before it may be deployed to a non-employee. These user interface requirements are necessary so that users of the Tuner know who provided the software they are using and who to call when they have trouble with their application. (For example, if the brokerage house customer has trouble launching their application, that customer will know to call the brokerage house and not Marimba.) In addition, the branding guidelines serve to protect Marimba's own branding and user-interface quality. Is the CRL a term license? Yes. A CRL limits the time the licensee can redistribute tuners to third-party endpoints for a three year term. After expiration of the term, the customer either needs to renew the CRL or cease distribution of additional Tuners to third-parties. Termination of the CRL will not affect any Tuners which have already been deployed by the customer. Page 5 6 MARIMBA PRICE LIST NOTES ================================================================================ INFRASTRUCTURE SUITES ================================================================================ Enterprise Editions: All business to business applications of Castanet are to be priced under the Enterprise pricing model. Some examples of business to business applications are: A supplier to a business customer, a car manufacturer to car dealer, and all intra-company uses. Internet Editions: Use the Internet pricing model only if the Licensee's channel: 1. Is made publicly available (i.e., any Internet user can access the Transmitter and its channels) 2. Does not require identification or registration of any kind 3. Does not require payment for access to or use of the channels ENTERPRISE EDITIONS CASTANET INFRASTRUCTURE SUITE - USER ACCESS LICENSE (CIS-UAL-3.2-U): Components include: o Castanet Enterprise Transmitter o Castanet Tuner o Transmitter Administrator o Publisher o Channel Copier o License Installer o Certificate Manager o Gateway o Proxy NOTE: Includes the right to install and deploy as many copies of the Castanet Infrastructure Suite components (for use only by Licensee's employees) as necessary to support the purchased Access Licenses. SUPPORTED PLATFORMS: Windows 95 (except for Proxy and Gateway), Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. PRE-REQUISITES: Castanet Management Suite US MINIMUM ORDER REQUIREMENTS: First order must be for a minimum of 200 User Access Licenses. CASTANET INFRASTRUCTURE SUITE - APPLICATION ACCESS LICENSE (CIS-AAL-3.2-U): Components include: o Castanet Enterprise Transmitter o Castanet Tuner o Transmitter Administrator o Publisher o Channel Copier o License Installer o Certificate Manager o Gateway o Proxy Page 6 7 NOTE: Includes the right to install and deploy as many copies of the Castanet Infrastructure Suite components (for use only by Licensee's employees) as necessary to support the purchased Access Licenses. SUPPORTED PLATFORMS: Windows 95 (except for Proxy and Gateway), Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. PRE-REQUISITES: Castanet Management Suite US MINIMUM ORDER REQUIREMENTS: First order must be for a minimum of 500 Application Access Licenses. CASTANET INFRASTRUCTURE SUITE - SERVER ACCESS LICENSE (CIS-SAL-3.2-U): Components include: o Castanet Enterprise Transmitter o Castanet Tuner o Transmitter Administrator o Publisher o Channel Copier o License Installer o Certificate Manager o Gateway o Proxy NOTE: Includes the right to install and deploy as many copies of the Castanet Infrastructure Suite components (for use only by Licensee's employees) as necessary to support the purchased Access Licenses. A Server Access License permits use of the Castanet Infrastructure Suite to deploy and manage applications or other data to one Endpoint computer server. An Endpoint computer server licensed with an SAL may not deploy or manage applications or other data on Endpoints for which Licensee has not purchased an Access License. Some examples of Endpoint computer servers are Database Servers, Web Servers, Production Line Servers, File Servers and Point of Sale Servers. SUPPORTED PLATFORMS: Windows 95 (except for Proxy and Gateway), Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. PRE-REQUISITES: Castanet Management Suite US MINIMUM ORDER REQUIREMENTS: First order must be for a minimum of 20 Server Access Licenses. CASTANET INFRASTRUCTURE SUITE - SERVER APPLICATION ACCESS LICENSE (CIS-SAAL-3.2-U): Components include: o Castanet Enterprise Transmitter o Castanet Tuner o Transmitter Administrator o Publisher o Channel Copier o License Installer o Certificate Manager o Gateway o Proxy NOTE: Includes the right to install and deploy as many copies of the Castanet Infrastructure Suite components (for use by Licensee's employees) as necessary to support the purchased Access Licenses. A Server Access License permits use of the Castanet Infrastructure Suite to deploy and manage a Single Application on one Endpoint computer server. An Endpoint computer server licensed with an SAAL may not deploy or manage applications or other data on Endpoints for which Licensee has not purchased an Access License. Some examples of Endpoint computer Page 7 8 servers are Database Servers, Web Servers, Production Line Servers, File Servers and Point of Sale Servers. SUPPORTED PLATFORMS: Windows 95 (except for Proxy and Gateway), Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. PRE-REQUISITES: Castanet Management Suite US MINIMUM ORDER REQUIREMENTS: First order must be for a minimum of 20 Server Application Access Licenses. INTERNET EDITIONS CASTANET INFRASTRUCTURE SUITE - INTERNET EDITION (CIS-NET-3.2-U): Components include; o One Castanet Internet Edition Transmitter o Castanet Tuner o Transmitter Administrator o Publisher o Channel Copier o License Installer o Certificate Manager o Gateway o Proxy NOTE: This Suite includes one Castanet Internet Edition Transmitter. However, the Licensee may make as many copies of the Proxy and Gateway components as necessary to support the use of the Internet Edition Transmitter. The users of the application must be "unknown" and this must not represent a business-to-business relationship. In addition, the Applications published on this Transmitter must be publicly available, not require any kind of access control, and be free to users. Reporting of the internet address to Marimba is required. SUPPORTED PLATFORMS: Windows 95 (except for Proxy and Gateway), Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. CASTANET INFRASTRUCTURE SUITE - INTERNET SINGLE APPLICATION EDITION (CIS-ISA-3.2-U) includes: Components include: o One Castanet Internet Transmitter o Transmitter Administrator o Publisher o Channel Copier o License Installer o Certificate Manager o Gateway o Proxy NOTE: This Suite includes one Castanet Internet Edition Transmitter to serve the Internet with respect to a Single Application; however, the Licensee may make as many copies of the Proxy and Gateway components as necessary to support the use of the Internet Single Application Edition Transmitter. The users of the application must be "unknown" and this must not represent a business-to-business relationship. In addition, the Application published on this Transmitter must be publicly available, not require any kind of access control, and be free to users. Reporting of the internet address to Marimba is required, and the name and primary functionality of the Single Application must be designated in the Order Form. SUPPORTED PLATFORMS: Windows 95 (except for Proxy and Gateway), Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* Page 8 9 PRODUCT STATUS: Shipping, *Will ship when available. Page 9 10 ================================================================================ MANAGEMENT AND PRODUCTION SUITES ================================================================================ CASTANET MANAGEMENT SUITE (CMS-3.2-U): Components include: o Tuner Packager o Channel Copier o Transmitter Administrator Pro o Transmitter Reporter NOTE: This Suite is licensed on a per "User" basis; any employee with access to the software is a "User". Administrators who wish to package Tuners, copy channels, create administrative reports or perform administration of a Transmitter would each use one Suite. IMPORTANT: The Tuner Packager may only be used to package Tuners for distribution to Licensee's employees. (A Custom Redistribution License would be needed to distribute a packaged Tuner to third parties) SUPPORTED PLATFORMS: Windows 95, Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Licensee must accept partial shipments. *Will ship when available PRE-REQUISITES: Must have purchased a Castanet Infrastructure Suite CASTANET PRODUCTION SUITE (CPS-3.2-U): Components include: o Publisher o Application Packager o Application Packager for Microsoft Windows(TM) Applications o Application Packager for Microsoft Visual Basic(TM) Applications o File Packager NOTE: This Suite is licensed on a per "User" basis; any employee with access to the software is a "User". Developers who wish to create and publish Channels for either Java or native code would each use one Suite. SUPPORTED PLATFORMS: Windows 95, Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* (except for the Packager for Windows(TM) and Visual Basic(TM) Applications) PRODUCT STATUS: Licensee must accept partial shipments. *Will ship when available PRE-REQUISITES: Must have purchased a Castanet Infrastructure Suite Page 10 11 ================================================================================ REDISTRIBUTION LICENSES ================================================================================ CASTANET CUSTOM REDISTRIBUTION LICENSE (CRL-3.2-U): Includes: o Tuner Customization Guide o License to modify the Castanet-branded UI and redistribute a customized or packaged Tuner to Endpoints who are not employees. o Available only pursuant to a special separate written Marimba License Agreement. o For 3 year term only NOTE: Licensee must adhere to certain important branding and end-user licensing guidelines when redistributing customized Tuners. SUPPORTED PLATFORMS: N/A PRODUCT STATUS: Shipping PRE-REQUISITES: Must have purchased a Castanet Infrastructure Suite, Castanet Management Suite, and Maintenance. CASTANET REPEATER REDISTRIBUTION LICENSE (RRL-3.2-U): o Allows Licensee to redistribute one limited Transmitter outside its firewall. o Available only pursuant to a special separate written Marimba License Agreement. NOTE: This limited Transmitter is for use on third-party premises to replicate Castanet channels from the Licensee's organization to Tuners within the third-party domain. The RRL provides third-party control over deployed applications and reduces third-party cross-firewall traffic. The Castanet Repeater Redistribution License is not available for Internet Edition Transmitters. SUPPORTED PLATFORMS: Windows 95, Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. PRE-REQUISITES: Must have purchased a Castanet Infrastructure Suite Page 11 12 ================================================================================ OTHER PRODUCTS ================================================================================ CASTANET TUNER CUSTOMIZATION KIT (TCK-3.2-U): Includes: o Tuner Customization Guide o License to modify the Castanet-branded UI for internal use only. o Available only pursuant to a special separate written Marimba License Agreement. NOTE: Licensee must adhere to certain important branding and end-user licensing guidelines when redistributing customized Tuners. SUPPORTED PLATFORMS: N/A PRODUCT STATUS: Shipping PRE-REQUISITES: Must have purchased a Castanet Infrastructure Suite, Castanet Management Suite, and Bronze/Silver/Gold Maintenance. CASTANET MEDIA KIT (MED-CAST-3.2-U): o Media and documentation for Castanet SUPPORTED PLATFORMS: Windows 95, Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. CASTANET QUICKSTART PAK (NON-PRODUCTION KIT) (QKS-3.2-U): Components include: o One Infrastructure Suite License o License for One Developer and Ten User Access Licenses (Non-production use only) o One Production Suite License o One Management Suite License o Five Technical Support Incidents o License term is for one year. No Maintenance or upgrades available. NOTE: Licensee may use only for development (pre-production) purposes. The Licensee cannot extend this license or upgrade it for use in full production. SUPPORTED PLATFORMS: Windows 95, Windows NT 4.0, and Solaris 2.6 and 2.5.1, HP-UX, AIX* PRODUCT STATUS: Shipping, *Will ship when available. US MINIMUM ORDER REQUIREMENT: None. Page 12 13 ================================================================================ SDK ================================================================================ CASTANET UPDATENOW SDK (UPDSDK-3.2-U): Components include: o Technical documentation, examples, UpdateNow SDK libraries o Unlimited number of developers o Limit to embed SDK in only one application o One year development only license for UpdateNow SDK for Java and C implementations o Includes Maintenance for one year o One year term only for use of SDK and distribution of SDK enabled copies to third parties NOTE: Licensee may only use the UpdateNow SDK for development of one application. Licensee must purchase Castanet UpdateNow SDK AALs (rather than Infrastructure Suite - User Access Licenses or Application Access Licenses) in order to distribute the application developed. SUPPORTED PLATFORMS: Windows 95 and Windows NT 4.0 (Native and Java), and Solaris 2.6 and 2.5.1(Java only), HP-UX, AIX* PRODUCT STATUS: Shipping PRE-REQUISITES: Must have purchased a QuickStart Pak (for Pilot use) or an SDK AAL (as opposed to a regular AAL or UAL to distribute each program). Page 13 14 BELOW ARE THE MINIMUM ORDER GUIDELINES WHEN A CUSTOMER BUYS DIRECT FROM MARIMBA. SHOULD YOUR CUSTOMER NEED TO PURCHASE LOWER QUANTITIES, PLEASE CALL YOUR MARIMBA CHANNEL REP. NOTES: o Initial purchase of the Castanet Infrastructure Suite - User Access Licenses must be purchased in blocks of 200 UALs at a time. Additional purchases must be in blocks of 100 UALs. o Initial purchase of the Castanet Infrastructure Suite - Server Access Licenses must be purchased in blocks of 20 Licenses at a time. Additional purchases must be in blocks of 5 Server Licenses. o Initial minimum purchase requirements apply to the entire order and therefore it is only necessary to fulfill one (i.e. Server or UAL) of the US Minimum Order requirements per order. o Initial purchase of the Castanet Infrastructure Suite - Application Access Licenses must be purchased in of 500 Access Licenses at a time. Additional purchases must be in blocks of 100 Application Access Licenses. o Initial purchase of the Castanet Infrastructure Suite - Server Application Access Licenses must be purchased in blocks of 20 SAALs at a time. Additional purchases must be in blocks of 5 SAALs. SHIPPING Licensee must accept partial shipments and is responsible for all costs incurred from shipping taxes and any customs fees. Page 14 15 GLOSSARY Application Access License (AAL): An Application Access License permits use of the Castanet Infrastructure Suite to deploy and manage a Single Application for use by one user on one Endpoint. A separate AAL is required for each individual user of an Endpoint computer. Castanet Custom Redistribution License (CRL): The Castanet Custom Redistribution License consists of three parts: (1) technical documentation which explains how to configure the UI of the Tuner, and (2) a paper license which allows the Licensee to redistribute modified or configured Tuners to Endpoints which are not operated by employees, and (3) templates for Channel Manager and graphics. Licensee must adhere to certain important branding and end-user licensing guidelines when redistributing customized Tuners. Remember: the right to redistribute a standard Tuner will expire in 3 years. Castanet Tuner Customization Kit (TCK): The Tuner Customization Kit consists of three parts: (1) technical documentation which explains how to configure the UI of the Tuner, (2) a paper license which allows the Licensee to deploy modified or configured Tuners to Endpoints which are operated by employees, and (3) templates for Channel Manager and graphics. Licensee must adhere to certain important branding and end-user licensing guidelines when deploying customized Tuners. Repeater Redistribution License (RRL): Repeaters are limited functionality Transmitters which may be redistributed by Licensee. They are limited because they may only be used to repeat or re-transmit data received by the Repeater directly from Licensee. They are used to replicate and redirect Castanet channels to Tuners as well as to allow Castanet to scale. Repeaters are not available for Internet Edition Transmitters. Licensee needs a Repeater only when they want to place a transmitter on some third-party's premises. Castanet Gateway: The Castanet Transmitter Gateway allows a Transmitter and HTTP web server to share the same port. Castanet Infrastructure Suite: The Castanet Infrastructure Suite consists of a Castanet Enterprise Transmitter, a Castanet Tuner, and other related Castanet software components. Licensee may make as many copies (for use by employees only) of the components of the Castanet Infrastructure Suite. Castanet Management Suite (CMS): This Suite includes a set of components that are licensed per "User". Administrators (aka "Users") who wish to package Tuners, Copy Channels, Create Administrative Reports or perform administration of a Transmitter would use this Suite. Castanet Production Suite (CPS): This Suite includes a set of components that are licensed per "User". Developers (aka "Users") who wish to publish and create Channels in either Java or native code would use this Suite. Castanet Proxy: The Castanet Proxy runs on a company's Internet firewall machine and reduces the load on the firewall. The Proxy caches frequently requested channel files while allowing Tuners within the company to continue communicating with Transmitters. Endpoint: "Endpoint" means any computer or other device executing a Castanet Tuner or other software capable of operating with a Castanet Enterprise Transmitter. Remember: A separate Access License is required for each individual user of an Endpoint. Enterprise Transmitter: The Castanet Enterprise Transmitter is software that runs on a computer server and serves Castanet channels to Tuners. Page 15 16 Internet Edition Transmitter: The Castanet Internet Edition Transmitter is software that runs on a computer server and serves Castanet channels to Tuners on the general Internet. Such channels must be accessible by any Internet user, not require identification or registration of any kind, and not require payment for access to or use of the channels. Unlike the Enterprise Transmitter, the Licensee must pay Marimba for each copy of the Castanet Internet Edition Transmitter it needs to support its channels. If the Licensee purchases the Castanet Infrastructure Suite-Internet Single Application Edition, then it may only make a Single Application generally available through the Internet. Castanet QuickStart Pak: QuickStart Pak is a non-production version of Castanet that is geared toward developers looking for a supported evaluation experience. Server Access License (SAL): A Server Access License permits use of the Castanet Infrastructure Suite to deploy and manage applications or other data on one Endpoint computer server. An Endpoint computer server licensed with an SAL may not deploy or manage applications or other data on Endpoints for which Licensee has not purchased an Access License. Examples of Endpoint computer servers include factory process controllers, Point of Sale servers, database servers, workgroup servers, etc. Server Application Access License (SAAL): A Server Application Access License permits use of the Castanet Infrastructure Suite to deploy and manage a Single Application on one Endpoint computer server. An Endpoint computer server licensed with an SAAL may not deploy or manage applications or other data on Endpoints for which Licensee has not purchased an Access License. Single Application: . A "Single Application" is one Castanet channel containing data or an application with one specific purpose or related set of functionality. By way of example only, a word-processor and a spreadsheet program would not constitute a Single Application even if both were run as a single Castanet channel or were incorporated into the same general suite of applications. The name of each Single Application and its primary function must be designated in the Order Form or ELA. UpdateNow SDK: A Licensee who is interested in embedding Castanet capabilities directly into their application should be directed to the UpdateNow SDK. The UpdateNow SDK is a development kit which includes technical documentation, examples, and an UpdateNow library. The library is available as Java class files or as a Windows DLL (dynamic link library). Once the library is integrated into a C/C++ or Java application, that program then inherits tuner-like functionality and works directly with the Transmitters. (The same Transmitter can also communicate with Castanet Tuners.) The UpdateNow SDK is available as a 32-bit Windows DLL as well as a Java library. Memory and hard-disk requirements will depend on the application. A Licensee must purchase a separate UpdateNow SDK for each program into which the SDK is embedded. At the time of purchase in addition to buying the UpdateNow SDK, a Licensee must purchase either a QuickStart Pak (for Pilot use) or the minimum number of SDK AALs (as opposed to a regular AAL or UAL) to distribute each program. A separate SDK AAL is required for each copy of an SDK enabled application which is either being used by the Licensee or distributed by the Licensee to third parties. The SDK is licensed on a one year term basis only, which means the Licensee may not continue to use the SDK itself or distribute the SDK enabled applications beyond the expiration of the term. User Access License (UAL): A User Access License permits use of the Castanet Infrastructure Suite to deploy and manage applications or other data for use by one user on one Endpoint. Page 16 17 SUMMARY OF CHANGES IN THE MARIMBA 3.2 PRICE LIST 1. Effective with the Castanet 3.2 release, Bongo will no longer be offered as part of the Production Suite, QuickStart Pak or as a standalone product. Instead it will be publicly available at www.freebongo.org. This public site will contain the source and object code for Bongo and its Widget Set. In this way, Bongo will evolve according to the needs of the developer community, making it an even more powerful GUI-building tool. 2. The Castanet Customization License name has been changed to the Tuner Customization Kit The new part number is TCK-3.2. This change was made in order to avoid confusion between the Customization License and the Custom Redistribution License. In addition, the TCK is considered to be a "kit" not a "license" and thus we felt a name change could best describe the product. 3. Given cost increases in providing top-quality services, the following prices are in effect: o Pricing for US Castanet Architectural Design Services has been changed to [$***]+. o Pricing for US Castanet Implementation Services has been changed to [$***]+. o Pricing for US Onsite Training has been changed to [$***]+. 4. To simplify the licensing of Castanet, the Standard Redistribution License is no longer available as a product from Marimba, Inc. - -------- + CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 17 18
PRICE LIST VERSION 3.2 A EFFECTIVE NOVEMBER 23, 1998 WORLDWIDE RESELLERS MARIMBA, INC. VERSION PART NUMBER PRICE* DOMESTIC ENTERPRISE LICENSES CASTANET INFRASTRUCTURE SUITE-USER ACCESS LICENSE Castanet Infrastructure Suite-User Access License 3.2 CIS-UAL-3.2-U [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-SERVER ACCESS LICENSE Castanet Infrastructure Suite-Server Access License 3.2 CIS-SAL-3.2-U [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-APPLICATION ACCESS LICENSE Castanet Infrastructure Suite-Application Access License 3.2 CIS-AAL-3.2-U [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-SERVER APPLICATION ACCESS LICENSE Castanet Infrastructure Suite-Server Application Access License 3.2 CIS-SAAL-3.2-U [$ ***]* ------ INTERNET LICENSES Castanet Infrastructure Suite-Internet Edition 3.2 CIS-NET-3.2-U [$ ***]* ------ Castanet Infrastructure Suite- Internet Single Application Edition 3.2 CIS-ISA-3.2-U [$ ***]* ------ CASTANET MANAGEMENT SUITE Castanet Management Suite 3.2 CMS-3.2-U [$ ***]* ------ CASTANET PRODUCTION SUITE Castanet Production Suite 3.2 CPS-3.2-U [$ ***]* ------ CASTANET CUSTOMIZATION Castanet Tuner Customization Kit 3.2 CRL-3.2-U [$ ***]* Must obtain a ------ signed Marimba Enterprise License Agreement Castanet Customization License 3.2 TCK-3.2-U [$ ***]* Must obtain a ------ signed Marimba Enterprise CASTANET QUICKSTART PAK License Castanet QuickStart Pak 3.2 QKS-3.2-U [$ ***]* Agreement ------ CASTANET REPEATER REDISTRIBUTION LICENSE Castanet Repeater Redistribution License 3.2 RRL-3.2-U [$ ***]* Must obtain a ------ signed Marimba Enterprise License Agreement CASTANET MEDIA KIT Castanet Media Kit 3.2 MED-CAST-3.2-U [$ ***]* ------
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 19
PRICE LIST VERSION 3.2 A EFFECTIVE NOVEMBER 23, 1998 WORLDWIDE RESELLERS MARIMBA, INC. VERSION PART NUMBER PRICE* DOMESTIC MAINTENANCE SUBSCRIPTION SERVICE Subscription Service SUBSCRIPTION-U [*% of PRODUCT PRICE]* ------ BRONZE SERVICE (MINIMUM $5,000) Bronze Service BRONZE-U [*% of PRODUCT PRICE]* ------ Bronze Extra Point of Contact BRZ-POC-U [$ ***]* ------ SILVER SERVICE (MINIMUM $25,000) Silver Service SILVER-U [*% of PRODUCT PRICE]* ------ Silver Extra Point of Contact SLV-POC-U [$ ***]* ------ GOLD SERVICE (MINIMUM $150,000) Gold Service GOLD-U [*% of PRODUCT PRICE]* ------ Gold Extra Point of Contact GLD-POC-U [$ ***]* ------ SUPPORT AND SERVICES MARIMBA CONSULTING SERVICES 1 Day of Castanet Implementation Services CON-IMP-U [$ ***]* (Plus Expenses) ------ 1 Day of Architectural Design Services CON-ARC-U [$ ***]* (Plus Expenses) ------ MARIMBA PAY PER CASE SUPPORT Pay-Per-Case 10 Pak PPC-10-U [$ ***]* ------ Pay-Per-Case 1 Call for Tuner only PPC-TU-U [$ ***]* ------ Pay-Per-Case 1 Call PPC-1-U [$ ***]* ------ Pay-Per-Case 3 Call PPC-3-U [$ ***]* ------ TRAINING Castanet 3.x Upgrade Training Kit UPG-TNG-3.2-U [$ ***]* ------ 1 Day of Training TNG-U [$ ***]* ------ On-site Training Per day for up to 12 students TNG-ONSTE-U [$ ***]* (Plus Expenses) ------
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 20
PRICE LIST VERSION 3.2 A EFFECTIVE NOVEMBER 23, 1998 WORLDWIDE RESELLERS MARIMBA, INC. VERSION PART NUMBER PRICE* INTERNATIONAL (NON-U.S.) CASTANET INFRASTRUCTURE SUITE-USER ACCESS LICENSE (INTL VERSION) Castanet Infrastructure Suite-User Access License (Intl Version) 3.2 CIS-UAL-3.2-I [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-SERVER ACCESS LICENSE (INTL VERSION) Castanet Server Access License (Intl Version) 3.2 CIS-SAL-3.2-I [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-APPLICATION ACCESS LICENSE (INTL VERSION) Castanet Infrastructure Suite-Application Access License (Intl Version) 3.2 CIS-AAL-3.2-I [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-SERVER APPLICATION ACCESS LICENSE (INTL VERSION) Castanet Server Application Access License (Intl Version) 3.2 CIS-SAAL-3.2-I [$ ***]* ------ CASTANET INFRASTRUCTURE SUITE-INTERNET EDITION (INTL VERSION) Castanet Infrastructure Suite-Internet Edition (Intl Version) 3.2 CIS-NET-3.2-I [$ ***]* ------ Castanet Infrastructure Suite-Internet Single Application Edition (Intl Version) 3.2 CIS-ISA-3.2-I [$ ***]* ------ CASTANET MANAGEMENT SUITE-(INTL VERSION) Castanet Management Suite-(Intl Version) 3.2 CMS-3.2-I [$ ***]* ------ CASTANET PRODUCTION SUITE-(INTL VERSION) Castanet Production Suite-(Intl Version) 3.2 CPS-3.2-I [$ ***]* ------ CASTANET CUSTOMIZATION (INTL VERSION) Castanet Custom Redistribution License (Intl Version) 3.2 CRL-3.2-I [$ ***]* Must obtain a ------ Marimba Enterprise License Agreement Castanet Tuner Customization Kit (Intl Version) 3.2 TCK-3.2-I [$ ***]* Must obtain a ------ Marimba Enterprise License Agreement CASTANET QUICKSTART PAK (INTL VERSION) Castanet QuickStart Pak (Intl Version) 3.2 QKS-3.2-I [$ ***]* ------ CASTANET REPEATER REDISTRIBUTION LICENSE (INTL VERSION) Castanet Repeater Redistribution License (Intl Version) 3.2 RRL-3.2-I [$ ***]* Must obtain a ------ Marimba Enterprise License Agreement CASTANET MEDIA KIT (INTL VERSION) Castanet Media Kit (Intl Version) 3.2 MED-CAST-3.2-I [$ ***]* ------
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 21
PRICE LIST VERSION 3.2 A EFFECTIVE NOVEMBER 23, 1998 WORLDWIDE RESELLERS MARIMBA, INC. VERSION PART NUMBER PRICE* INTERNATIONAL MAINTENANCE SUBSCRIPTION SERVICE Subscription Service SUBSCRIPTION-I [*% of PRODUCT PRICE]* ------ BRONZE SERVICE (MINIMUM $5,000) Bronze Service BRONZE-I [*% of PRODUCT PRICE]* ------ Bronze Extra Point of Contact BRZ-POC-I [$ ***]* ------ SILVER SERVICE (MINIMUM $25,000) Silver Service SILVER-I [*% of PRODUCT PRICE]* ------ Silver Extra Point of Contact SLV-POC-I [$ ***]* ------ GOLD SERVICE (MINIMUM $150,000) Gold Service GOLD-I [*% of PRODUCT PRICE]* ------ Gold Extra Point of Contact GLD-POC-I [$ ***]* ------ SUPPORT AND SERVICES MARIMBA CONSULTING SERVICES 1 Day of Castanet Implementation Services CON-IMP-I [$ ***]* (Plus Expenses) ------ 1 Day of Architectural Design Services CON-ARC-I [$ ***]* (Plus Expenses) ------ TRAINING Castanet 3.0 Upgrade Training Kit UPG-TNG-3.2-I [$ ***]* ------ 1 Day of Training TNG-I [$ ***]* ------ On-site Training Per day for up to 12 students TNG-ONSTE-I [$ ***]* (Plus Expenses) ------
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 22
PRICE LIST VERSION 3.2 A EFFECTIVE NOVEMBER 23, 1998 WORLDWIDE RESELLERS MARIMBA, INC. VERSION PART NUMBER PRICE* SDK - SOLD BY SPECIAL AGREEMENT ONLY CASTANET UPDATENOW SDK Castanet UpdateNow SDK 3.2 UPDSDK-3.2-U Contact Marimba for Price UPDATENOW SDK AAL Castanet UpdateNow SDK AAL UNITS 10,000 to 14,999 3.2 UP-AAL-1-3.2-U Contact Marimba for Price 15,000 to 24,999 3.2 UP-AAL-2-3.2-U Contact Marimba for Price 25,000 to 49,999 3.2 UP-AAL-3-3.2-U Contact Marimba for Price 50,000 to 99,999 3.2 UP-AAL-4-3.2-U Contact Marimba for Price 100,000 to 249,999 3.2 UP-AAL-5-3.2-U Contact Marimba for Price 250,000 to 499,999 3.2 UP-AAL-6-3.2-U Contact Marimba for Price 500,000 to 749,999 3.2 UP-AAL-7-3.2-U Contact Marimba for Price 750,000 to 999,999 3.2 UP-AAL-8-3.2-U Contact Marimba for Price 1,000,000 to 4,999,999 3.2 UP-AAL-9-3.2-U Contact Marimba for Price 5,000,000 or more 3.2 UP-AAL-10-3.2-U Contact Marimba for Price
* CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated January 13, 1999, in Amendment No. 4 to the Registration Statement (Form S-1) and related Prospectus of Marimba, Inc. for the registration of 4,600,000 shares of its common stock. /s/ Ernst & Young LLP Palo Alto, California April 19, 1999 EX-99.2 5 CONSENT OF THE HURWITZ GROUP 1 Exhibit 99.2 March 24, 1999 Mr. Steven Foote Hurwitz Group 11 Speen Street Framingham, MA 01701 Dear Mr. Foote: As you may or may not be aware, Marimba, Inc. (the "Company"), our client, is proposing an initial public offering of its Common Stock ("IPO"). In connection with the IPO, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (the "SEC"), containing certain information from the report you prepared for the Company assessing the break-even return on investment for certain of the Company's customers. In response to SEC comments to the registration statement, the Company is hereby requesting your consent to reference selected portions of your report in their registration statement and to file such consent as an amendment to the registration statement. The relevant portions of the report are attached for your review. 2 Page 2 To acknowledge your consent to the foregoing, please execute the signature block below and fax this letter back to me at (650) 321-2800. The Company is filing an amendment to its registration statement on Wednesday, March 31, 1999 with its responses to the SEC comments and would therefore appreciate your feedback on this matter by the end of the week if possible. We appreciate your immediate attention to this matter. If you have any questions or would like additional information, please call me at (650) 463-5373. Best Regards, /s/ AMY S. COHEN ---------------- Amy S. Cohen ACKNOWLEDGED AND CONSENTED: - -------------------------- HURWITZ GROUP By: /s/ STEVEN D. FOOTE ---------------------------------- Signature Steven D. Foote - ------------------------------------- Please print name Senior Vice President - ------------------------------------- Title, if applicable 3/26/99 - ------------------------------------- Date 3 EXHIBIT A 4 EXHIBIT A Many of our customers have gained measurable cost saving benefits through their deployment of Castanet. We engaged the Hurwitz Group, an industry analyst and research firm, to work with us to assess the amount of time required for Castanet to pay for itself, or achieve a break-even return on investment for selected customers. The cost savings include both reductions in costs that the customer has achieved or expects to achieve, as well as anticipated costs that the customer expects to avoid, by deploying Castanet. These cost saving data are based on data provided by the customers, and have not been independently verified. The following examples demonstrate the expected payback period for Castanet in three diverse customer deployments.
- -------------------------------------------------------------------------------------------------------------- Initial Net Payback Customer Use of Castanet Investment Estimated Monthly Cost-Savings Period - -------------------------------------------------------------------------------------------------------------- Major Distribute and manage $200,000 People savings: $ 21,000 2 months Manufacturer sales productivity Hardware savings: $ 5,000 applications to its Network bandwidth remote/mobile sales force utilization savings: $121,800 and channel partners -------- Total: $147,800 - -------------------------------------------------------------------------------------------------------------- Computer Distribute all internal $1,000,000 People savings: $165,000 4 months Equipment business applications to Hardware savings: $122,000 Manufacturer employees connected to -------- worldwide corporate Total: $287,000 network. - -------------------------------------------------------------------------------------------------------------- Major Retail Distribute, update and $2,000,000 People savings: $ 86,000 12 months Corporation manage Windows Hardware savings: $ 25,000 applications over T1 lines Support call savings: $ 60,000 to global retail network. -------- Total: $171,000 - --------------------------------------------------------------------------------------------------------------
(1) Represents the total amount of anticipated time needed for the organization to recoup initial investment in terms of monthly cost savings. -----END PRIVACY-ENHANCED MESSAGE-----